form10q07428007_05062016.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016
or
 
o 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:  0-8445
 
BIGLARI HOLDINGS INC.
(Exact name of registrant as specified in its charter)

INDIANA
37-0684070
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

17802 IH 10 West, Suite 400
San Antonio, Texas
78257
(Address of principal executive offices)
(Zip Code)

(210) 344-3400
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes x     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer ¨
Accelerated filer x
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o    No x
 
As of May 3, 2016, 2,066,864 shares of the registrant’s Common Stock, $.50 stated value, were outstanding.
 
 
BIGLARI HOLDINGS INC.
INDEX

 
    
   
Page No.
  
     
 
 
1
 
2
 
3
 
4
 
5
 
6
19
26
26
     
 
     
27
27
27
27
28
28
28
29

 
PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

BIGLARI HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS
 (dollars in thousands)
 
   
March 31,
2016
    
December 31,
2015
  
   
(Unaudited)
        
Assets
            
Current assets:
            
Cash and cash equivalents
   $ 56,581     $ 56,523  
Investments
     23,340       23,750  
Receivables
     9,997       17,716  
Inventories
     7,389       7,593  
Deferred taxes
     14,555       13,263  
Other current assets
     8,354       7,255  
Total current assets
     120,216       126,100  
Property and equipment
     328,093       332,324  
Goodwill
     40,049       40,022  
Other intangible assets
     21,690       21,673  
Investment partnerships
     546,482       471,689  
Other assets
     9,770       8,534  
Total assets
   $ 1,066,300     $ 1,000,342  
                 
Liabilities and shareholders’ equity
                
Liabilities
                
Current liabilities:
                
Accounts payable
   $ 35,645     $ 34,649  
Accrued expenses
     74,853       74,429  
Current portion of notes payable and other borrowings
     7,550       7,789  
Total current liabilities
     118,048       116,867  
Long-term notes payable and other borrowings
     292,959       296,062  
Deferred taxes
     152,613       125,130  
Other liabilities
     10,999       10,911  
Total liabilities
     574,619       548,970  
                 
Shareholders’ equity
                
Common stock - 2,066,864 and 2,066,691 shares outstanding
     1,071       1,071  
Additional paid-in capital
     391,848       391,853  
Retained earnings
     467,145       415,982  
Accumulated other comprehensive loss
     (3,604 )     (3,679 )
Treasury stock, at cost
     (364,779 )     (353,855 )
Biglari Holdings Inc. shareholders’ equity
     491,681       451,372  
Total liabilities and shareholders’ equity
   $ 1,066,300     $ 1,000,342  
 
See accompanying Notes to Consolidated Financial Statements.
 
 
BIGLARI HOLDINGS INC.

CONSOLIDATED STATEMENTS OF EARNINGS
 (dollars in thousands except per-share amounts)

   
First Quarter
  
   
2016
    
2015
  
   
(Unaudited)
  
Revenues
            
Restaurant operations
   $ 200,295     $ 196,736  
Insurance premiums and other
     5,499       3,654  
Media advertising and other
     2,448       5,438  
      208,242       205,828  
Cost and expenses
                
Restaurant cost of sales
     155,737       154,761  
Insurance losses and underwriting expenses
     4,158       2,963  
Media cost of sales
     5,019       9,418  
Selling, general and administrative
     30,310       32,458  
Depreciation and amortization
     6,047       6,544  
      201,271       206,144  
Other income (expenses)
                
Interest and dividends
     -       5  
Interest expense
     (2,922 )     (3,006 )
Interest on obligations under leases
     (2,281 )     (2,475 )
Investment partnership gains
     78,973       22,965  
Total other income
     73,770       17,489  
                 
Earnings before income taxes
     80,741       17,173  
Income tax expense
     29,578       7,190  
                 
Net earnings
   $ 51,163     $ 9,983  
Earnings per share
                
Basic earnings per common share
   $ 41.20     $ 5.36  
Diluted earnings per common share
   $ 41.16     $ 5.36  
                 
Weighted average shares and equivalents
                
Basic
     1,241,733       1,861,572  
Diluted
     1,242,938       1,864,125  
 
See accompanying Notes to Consolidated Financial Statements.
 
BIGLARI HOLDINGS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
 
   
First Quarter
  
   
2016
    
2015
  
   
(Unaudited)
  
Net earnings
   $ 51,163     $ 9,983  
Other comprehensive income:
                
Net change in unrealized gains and losses on investments
     (401 )     (417 )
Applicable income taxes
     145       154  
Foreign currency translation
     331       63  
Other comprehensive income (loss), net
     75       (200 )
Total comprehensive income
   $ 51,238     $ 9,783  
 
See accompanying Notes to Consolidated Financial Statements.
 
 
BIGLARI HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

   
First Three Months
  
   
2016
    
2015
  
   
(Unaudited)
  
Operating activities
            
Net earnings
   $ 51,163     $ 9,983  
Adjustments to reconcile net earnings to operating cash flows:
                
Depreciation and amortization
     6,047       6,544  
Provision for deferred income taxes
     26,307       7,673  
Asset impairments and other non-cash expenses
     415       309  
Loss on disposal of assets
     265       202  
Investment partnership gains
     (78,973 )     (22,965 )
Distributions from investment partnerships
     4,750       -  
Changes in receivables and inventories
     7,923       1,975  
Changes in other assets
     (2,085 )     (2,203 )
Changes in accounts payable and accrued expenses
     1,443       (1,759 )
Net cash provided by (used in) operating activities
     17,255       (241 )
Investing activities
                
Additions of property and equipment
     (2,859 )     (3,487 )
Proceeds from property and equipment disposals
     854       2  
Purchases of investments
     (24,472 )     (11,494 )
Redemptions of fixed maturity securities
     12,989       500  
Net cash used in investing activities
     (13,488 )     (14,479 )
Financing activities
                
Payments on revolving credit facility
     (96 )     (25 )
Principal payments on long-term debt
     (2,201 )     (550 )
Principal payments on direct financing lease obligations
     (1,461 )     (1,585 )
Proceeds form exercise of stock options
     1       3  
Net cash used in financing activities
     (3,757 )     (2,157 )
Effect of exchange rate changes on cash
     48       (5 )
Increase (decrease) in cash and cash equivalents
     58       (16,882 )
Cash and cash equivalents at beginning of year
     56,523       129,669  
Cash and cash equivalents at end of first quarter
   $ 56,581     $ 112,787  
 
See accompanying Notes to Consolidated Financial Statements.
 
 
BIGLARI HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(dollars in thousands)
 
   
Common Stock
    
Additional Paid-In Capital
    
Retained Earnings
    
Accumulated Other Comprehensive Income (Loss)
    
Treasury Stock
    
Total
  
Balance at December 31, 2015
   $ 1,071     $ 391,853     $ 415,982     $ (3,679 )   $ (353,855 )   $ 451,372  
Net earnings
                     51,163                       51,163  
Other comprehensive income, net
                             75               75  
Adjustment to treasury stock for holdings in investment partnerships
                                     (10,930 )     (10,930 )
Exercise of stock options
             (5 )                     6       1  
Balance at March 31, 2016
   $ 1,071     $ 391,848     $ 467,145     $ (3,604 )   $ (364,779 )   $ 491,681  
                                                 
                                                 
Balance at December 31, 2014
   $ 1,071     $ 391,877     $ 431,825     $ (783 )   $ (98,439 )   $ 725,551  
Net earnings
                     9,983                       9,983  
Other comprehensive loss, net
                             (200 )             (200 )
Adjustment to treasury stock for holdings in investment partnerships
                                     (4,278 )     (4,278 )
Exercise of stock options
             (1 )                     4       3  
Balance at March 31, 2015
   $ 1,071     $ 391,876     $ 441,808     $ (983 )   $ (102,713 )   $ 731,059  
 
See accompanying Notes to Consolidated Financial Statements.
 
 
BIGLARI HOLDINGS INC.
NOTES TO CONSOLIDATED FINACIAL STATEMENTS (Unaudited)
March 31, 2016
(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, 2015.

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.

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 February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which amends the FASB Accounting Standards Codification.  The objective of the update is to improve financial reporting by increasing transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. It is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments is permitted for all entities. The Company is currently evaluating the impact that this amended guidance will have on its consolidated financial statements and related disclosures.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent deferred tax asset or liability. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early application is permitted. The Company does not believe the adoption of ASU 2015-17 will have a material effect on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The update requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company adopted ASU 2015-03 on January 1, 2016. As of December 31, 2015, the Company reclassified $688 and $2,888 from other current assets and other assets, respectively, to current portion of notes payable and other borrowings and long-term notes payable and other borrowings, respectively, to conform to the current year classification.
 
 
Note 2. New Accounting Standards (continued)

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidations Analysis.  The amendments in this update provide guidance under GAAP about limited partnerships, which will be variable interest entities, unless the limited partners have either substantive kick-out rights or participation rights. It also changes the effect that fees paid to a decision maker or service provider have on the consolidation analysis and amends how variable interests held by related parties affect the consolidation conclusion.  The amendments in this update are effective for the annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Company adopted the provisions of ASU 2015-02 on January 1, 2016 and believes the adoption of this update has no material effect on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern. The amendments in this update provide guidance in GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. In doing so, the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments in this update are effective for the annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is evaluating the effect, if any, on its consolidated financial statements.

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. The Company has not yet selected a transition method nor determined the effect of this guidance on its consolidated financial statements.

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. — 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 Lion Fund, L.P. completed a Rule 10b5-1 Trading Plan purchasing 62,000 shares of the Company’s common stock from December 18, 2014 through April 20, 2015. On July 1, 2015, The Lion Fund II, L.P. completed a tender offer purchasing 616,312 shares of the Company’s common stock. The Lion Fund II, L.P. completed a Rule 10b5-1 Trading Plan purchasing 24,000 shares of the Company’s common stock from January 4, 2016 through February 3, 2016. All of the shares purchased in the Rule 10b5-1 Trading Plans and the tender offer remain legally outstanding. As of March 31, 2016, Mr. Biglari’s beneficial ownership of the Company’s outstanding common stock was approximately 50.6%.

The following table presents a reconciliation of basic and diluted weighted average common shares.
 
   
First Quarter
  
   
2016
    
2015
  
Basic earnings per share:
            
Weighted average common shares  
     1,241,733       1,861,572  
Diluted earnings per share:
                
Weighted average common shares  
     1,241,733       1,861,572  
Dilutive effect of stock awards  
     1,205       2,553  
Weighted average common and incremental shares  
     1,242,938       1,864,125  
                 
Number of share-based awards excluded from the calculation
    -       -  
 

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,
2016
    
December 31, 2015
  
Common stock authorized
    2,500,000       2,500,000  
                 
Common stock issued
    2,142,202       2,142,202  
Treasury stock held by the Company
    (75,338 )     (75,511 )
Outstanding shares
    2,066,864       2,066,691  
Proportional ownership of the Company's common stock in investment partnerships
    (837,645 )     (807,069 )
Net outstanding shares for financial reporting purposes
     1,229,219       1,259,622  
 
Note 4. Investments

Investments consisted of the following.
 
   
March 31,
2016
    
December 31,
2015
  
Cost
  $ 24,825     $ 24,842  
Gross unrealized gains
    20       10  
Gross unrealized losses
     (1,505 )     (1,102 )
Fair value
  $ 23,340     $ 23,750  
 
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.

Note 5.  Investment Partnerships

The Company reports on the limited partnership interests in The Lion Fund, L.P. and The Lion Fund II, L.P. (collectively the “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, 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  
                         
   
Fair Value
    
Company Common Stock
  
Carrying Value
  
Partnership interest at December 31, 2014
   $ 776,899     $ 78,917     $ 697,982  
Investment partnership gains
     25,790       2,825       22,965  
Increase in proportionate share of Company stock held
             4,278       (4,278 )
Partnership interest at March 31, 2015
   $ 802,689     $ 86,020     $ 716,669  

The fair value of the investment partnerships net of deferred taxes is presented below.
 
   
March 31,
2016
    
December 31, 2015
  
Fair value of investment partnerships
   $ 857,312     $ 734,668  
Deferred tax liability related to investment partnerships
     (144,092 )     (115,952 )
Fair value of investment partnerships net of deferred taxes
   $ 713,220     $ 618,716  
 
The Company’s proportionate share of Company stock held by investment partnerships at cost is $343,757 and $332,827 at March 31, 2016 and December 31, 2015, respectively, and is recorded as treasury stock.

The carrying value of the partnership interest approximates fair value adjusted by changes in 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
  
   
2016
    
2015
  
             
Investment partnership gains
   $ 78,973     $ 22,965  
Tax expense
     28,585       7,853  
Contribution to net earnings
   $ 50,388     $ 15,112  

As the general partner of the investment partnerships, Biglari Capital Corp. (“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 over an annual hurdle rate of 6% above the previous high-water mark. Our policy is to accrue an estimated incentive fee throughout the year; however, no fees are reallocated until the end of the calendar year. During the first quarters of 2016 and 2015, the Company accrued incentive fees for Biglari Capital of $2,921 and $4,331, respectively. Our investments in these partnerships are committed on a rolling 5-year basis.
 
 
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, 2016
   $ 186,015     $ 975,987  
Total liabilities as of March 31, 2016
   $ 11,726     $ 173,732  
Revenue for the first quarter ending March 31, 2016
   $ (1,738 )   $ 130,525  
Earnings for the first quarter ending March 31, 2016
   $ (1,771 )   $ 129,285  
Biglari Holdings’ Ownership Interest
     63.4 %     93.5 %
                 
Total assets as of December 31, 2015
   $ 165,996     $ 819,323  
Total liabilities as of December 31, 2015
   $ 409     $ 141,274  
Revenue for the first quarter ending March 31, 2015
   $ 4,787     $ 29,883  
Earnings for the first quarter ending March 31, 2015
   $ 4,758     $ 29,472  
Biglari Holdings’ Ownership Interest
     58.7 %     92.7 %
 
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,
2016
    
December 31, 2015
  
Land 
   $ 162,113     $ 160,697  
Buildings
     156,951       156,909  
Land and leasehold improvements
     164,125       165,042  
Equipment 
     200,314       199,934  
Construction in progress
     3,411       3,478  
  
     686,914       686,060  
Less accumulated depreciation and amortization
     (358,821 )     (353,736 )
Property and equipment, net
   $ 328,093     $ 332,324  
 
Note 7. Goodwill and Other Intangibles

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, 2015
   $ 28,109     $ 11,913     $ 40,022  
Change in foreign exchange rates during first quarter 2016
     27       -       27  
Goodwill at March 31, 2016
   $ 28,136     $ 11,913     $ 40,049  
 
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. The analysis of potential impairment of goodwill requires 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 Intangibles (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 quarter of 2016 or 2015.

Other Intangibles
Other intangibles are composed of the following.
 
   
March 31, 2016
    
December 31, 2015
  
   
Gross carrying amount
    
Accumulated amortization
    
Total
    
Gross carrying amount
    
Accumulated amortization
    
Total
  
Franchise agreement
   $ 5,310     $ (3,186 )   $ 2,124     $ 5,310     $ (3,054 )   $ 2,256  
Other
     810       (676 )     134       810       (667 )     143  
Total
     6,120       (3,862 )     2,258       6,120       (3,721 )     2,399  
Intangible assets with indefinite lives:
                                                
Trade names
     15,876       -       15,876       15,876       -       15,876  
Other assets with indefinite lives
     3,556       -       3,556       3,398       -       3,398  
Total intangible assets
   $ 25,552     $ (3,862 )   $ 21,690     $ 25,394     $ (3,721 )   $ 21,673  
 
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 2016 and 2015 was $141 and $142, respectively. Total annual amortization expense for years 2017 through 2019 will approximate $560 per year.  The Company’s intangible assets with definite lives will fully amortize in 2020.

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
  
   
2016
    
2015
  
Net sales
  $ 195,067     $ 192,170  
Franchise royalties and fees
     4,350       3,656  
Other
     878       910  
    $ 200,295     $ 196,736  
 
 
Note 9. Borrowings

Notes payable and other borrowings include the following.
 
Current portion of notes payable and other borrowings
  
March 31,
2016
    
December 31,
2015
  
Notes payable
  $ 2,200     $ 2,200  
Unamortized original issue discount
    (300 )     (296 )
Unamortized debt issuance costs
    (693 )     (688 )
Obligations under leases
    5,653       5,787  
Western revolver
    690       786  
Total current portion of notes payable and other borrowings
   $ 7,550     $ 7,789  
                 
Long-term notes payable and other borrowings
                
Notes payable
  $ 207,974     $ 210,175  
Unamortized original issue discount
     (1,326 )     (1,403 )
Unamortized debt issuance costs
     (2,713 )     (2,888 )
Obligations under leases
     89,024       90,178  
Total long-term notes payable and other borrowings
   $ 292,959     $ 296,062  
 
ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. As of December 31, 2015, the Company reclassified unamortized debt issuance costs from other assets to notes payable and other borrowings.

Steak n Shake Credit Facility
On March 19, 2014, Steak n Shake and its subsidiaries entered into a new credit agreement. This 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, 2016.

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, 2016, $210,174 was outstanding under the term loan, and no amount was outstanding under the revolver.
 

Note 9. Borrowings (continued)

Steak n Shake had $10,188 in standby letters of credit outstanding as of March 31, 2016 and December 31, 2015.

Western Revolver
As of March 31, 2016, Western has $690 due June 13, 2016.

Interest Rate Swap
During fiscal year 2011, Steak n Shake entered into an interest rate swap agreement which matured on February 15, 2016.  The notional amount of the interest rate swap was $1,000 with a fair value of $2 on December 31, 2015.

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, 2016 and December 31, 2015.  The fair value was determined to be a Level 3 fair value measurement.

Note 10.  Accumulated Other Comprehensive Income

During the first quarters of 2016 and 2015, the changes in the balances of each component of accumulated other comprehensive income, net of tax, were as follows.
 
   
Three months ended March 31, 2016
    
Three months ended March 31, 2015
  
   
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
   $ (2,992 )   $ (687 )   $ (3,679 )   $ (620 )   $ (163 )   $ (783 )
Other comprehensive income
                                                
(loss) before reclassifications
     331       (256 )     75       63       (263 )     (200 )
Ending Balance
   $ (2,661 )   $ (943 )   $ (3,604 )   $ (557 )   $ (426 )   $ (983 )
 
There were no reclassifications made from accumulated other comprehensive income to the consolidated statement of earnings during the first quarters of 2016 and 2015.

Note 11. 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 expense for the first quarter of 2016 was $29,578 compared to $7,190 for the first quarter of 2015.  The variance in income tax expense between 2016 and 2015 is primarily attributable to tax expense on income from investment partnerships.  The tax expense for investment partnership gains was $28,585 and $7,853 during first quarter 2016 and 2015, respectively.

As of March 31, 2016 and December 31, 2015, we had approximately $448 and $413, respectively, of unrecognized tax benefits, which are included in other liabilities in the consolidated balance sheets.


Note 12. 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.
 
In 2013 two shareholders of the Company filed derivative actions putatively on behalf of the Company against the members of our Board of Directors in the United States District Courts for the Southern District of Indiana and the Western District of Texas.  The actions were consolidated in the Southern District of Indiana in 2014.  On March 18, 2015, the United States District Court for the Southern District of Indiana granted a motion to dismiss the derivative actions in favor of the Company.  In addition, the Court issued judgment on all counts in favor of the Company and its directors. 
 
The two shareholders appealed the Southern District of Indiana Court’s March 18, 2015 decision. On February 17, 2016, the United States Court of Appeals for the Seventh Circuit affirmed the decision of the District Court dismissing, in their entirety, all claims made against the Company and its Board of Directors.
 
Note 13. 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.

Interest rate swaps: Interest rate swaps are marked to market each reporting period and are classified within Level 2 of the fair value hierarchy.
 

Note 13. Fair Value of Financial Assets and Liabilities (continued)

As of March 31, 2016 and December 31, 2015, the fair values of financial assets and liabilities were as follows.
 
   
March 31, 2016
    
December 31, 2015
                                                 
   
Level 1
    
Level 2
    
Level 3
    
Total
    
Level 1
    
Level 2
    
Level 3
    
Total
  
Assets
                                                
Cash equivalents
   $ 1,513     $ -     $ -     $ 1,513     $ 700     $ -     $ -     $ 700  
Equity securities:
                                                                
   Insurance
     4,798       -       -       4,798       5,046       -       -       5,046  
Bonds
     -       21,172       -       21,172       -       21,304       -       21,304  
Non-qualified deferred
                                                                
compensation plan investments
     2,286       -       -       2,286       2,203       -       -       2,203  
Total assets at fair value
   $ 8,597     $ 21,172     $ -     $ 29,769     $ 7,949     $ 21,304     $ -     $ 29,253  
                                                                 
Liabilities
                                                                
Interest rate swaps
   $ -     $ -     $ -     $ -     $ -     $ 2     $ -     $ 2  
Total liabilities at fair value
   $ -     $ -     $ -     $ -     $ -     $ 2     $ -     $ 2  

There were no changes in our valuation techniques used to measure fair values on a recurring basis.

Note 14. Related Party Transactions

In 2013 Biglari Holdings entered into the following agreements with Mr. Biglari, its Chairman and Chief Executive Officer:  (i) a Stock Purchase Agreement for the sale of Biglari Capital to Mr. Biglari (the “Biglari Capital Transaction”); (ii) a Shared Services Agreement with Biglari Capital, and (iii) a First Amendment to the Amended and Restated Incentive Bonus Agreement with Mr. Biglari (the “Incentive Agreement Amendment”).  The transactions contemplated thereby were unanimously approved by the independent Governance, Compensation and Nominating Committee of the Board of Directors of the Company (the “Committee”), which retained separate counsel, tax/accounting advisors, an independent compensation consultant, and a financial advisor to assist the Committee in the structuring, evaluation, and negotiation of such transactions.

Shared Services Agreement
Connected with the Biglari Capital Transaction, Biglari Holdings and Biglari Capital entered into the Shared Services Agreement pursuant to which Biglari Holdings provides certain services to Biglari Capital in exchange for a 6% hurdle rate for Biglari Holdings and its subsidiaries (as compared to a 5% hurdle rate for all other limited partners) in order to determine the incentive reallocation to Biglari Capital, as general partner of The Lion Fund, L.P. and The Lion Fund II, L.P., under their respective partnership agreements. The incentive reallocation to Biglari Capital is equal to 25% of the net profits allocated to the limited partners in excess of their applicable hurdle rate above the previous high-water mark. 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.  The Company provided services for Biglari Capital under the Shared Services Agreement costing an aggregate of $301 and $85 for the first quarters of 2016 and 2015, respectively.

Investments in The Lion Fund, L.P. and The Lion Fund II, L.P.
As of March 31, 2016, the Company’s investments in The Lion Fund, L.P. and The Lion Fund II, L.P. had a fair value of $857,312.

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 over an annual hurdle rate of 6% above the previous high-water mark. Our policy is to accrue an estimated incentive fee throughout the year; however, no fees are reallocated until the end of the calendar year. The Company accrued $2,921 and $4,331 in incentive fees for Biglari Capital during the first quarters of 2016 and 2015, respectively.
 
 
Note 14. Related Party Transactions (continued)

Incentive Agreement Amendment
Also in connection with the Biglari Capital Transaction, Biglari Holdings and Mr. Biglari entered into the Incentive Agreement Amendment which amends the Amended and Restated Incentive Bonus Agreement with Mr. Biglari to reflect and give effect to the Biglari Capital Transaction, which excludes earnings by the investment partnerships from the calculation of Mr. Biglari’s incentive bonus.

License Agreement
In 2013 the Company entered into a Trademark License Agreement (the “License Agreement”) with Mr. Biglari. The License Agreement was unanimously approved by the Committee. 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.

“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 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.
 
 
Note 15. Business Segment Reporting

Our reportable business segments are organized in a manner that reflects how management views those business activities. Certain businesses have been grouped together for segment reporting based upon operations.
 
Our restaurant operations includes Steak n Shake and Western. As a result of the acquisitions of Maxim and First Guard, the Company reports segment information for these businesses. Prior to the fourth quarter of 2015, other business activities not specifically identified with reportable business segments were presented in corporate. Such other business activities are now presented in “other” within total operating businesses. Prior periods have been reclassified to conform to the current presentation. We report our earnings from investment partnerships separate from corporate.

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 by segment for the first quarters of 2016 and 2015 were as follows.
 
   
First Quarter
  
   
2016
    
2015
  
Operating Businesses:
            
Restaurant Operations:
            
Steak n Shake
   $ 196,898     $ 193,453  
Western
    3,397       3,283  
Total Restaurant Operations
     200,295       196,736  
First Guard
     5,499       3,654  
Maxim
    2,448       5,438  
    $ 208,242     $ 205,828  

 
Note 15. Business Segment Reporting (continued)

Earnings (losses) before income taxes by segment for the first quarters of 2016 and 2015 were as follows.
 
   
First Quarter
  
   
2016
    
2015
  
Operating Businesses:
            
Restaurant Operations:
            
Steak n Shake
   $ 8,362     $ 6,235  
Western
     586       410  
Total Restaurant Operations
     8,948       6,645  
First Guard
     1,327       660  
Maxim
     (3,515 )     (5,886 )
Other
     125       57  
Total Operating Businesses
     6,885       1,476  
Corporate and Investments:
                
Corporate
     (2,195 )     (4,262 )
Investment partnership gains
     78,973       22,965  
Total Corporate and Investments
     76,778       18,703  
Interest expense on notes payable and other borrowings
     (2,922 )     (3,006 )
    $ 80,741     $ 17,173  
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

(dollars in thousands except per share data)

Overview

Biglari Holdings Inc. (“Biglari Holdings” or the “Company”) 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.

The Lion Fund II, L.P., a private investment partnership of which Mr. Biglari controls the general partner, purchased 24,000 shares of Biglari Holdings common stock from January 4, 2016 through February 3, 2016. Mr. Biglari’s beneficial ownership of the Company’s outstanding common stock is approximately 50.6%.

Net earnings attributable to Biglari Holdings shareholders for the first quarters of 2016 and 2015 are disaggregated in the table that follows.  Amounts are recorded after deducting income taxes.
 
   
First Quarter
  
   
2016
    
2015
  
Operating businesses:
            
Restaurant
   $ 5,478     $ 3,648  
Insurance
     876       436  
Media
     (2,237 )     (3,900 )
Other
     59       (20 )
Total operating businesses
     4,176       164  
Corporate
     (1,589 )     (3,429 )
Investment partnership gains
     50,388       15,112  
Interest expense on notes payable and other borrowings
     (1,812 )     (1,864 )
    $ 51,163     $ 9,983  
 
Our restaurant businesses include Steak n Shake Inc. (“Steak n Shake”) and Western Sizzlin Corporation (“Western”).  As of March 31, 2016, Steak n Shake comprised 417 company-operated restaurants and 147 franchised units. Western comprised 4 company-operated restaurants and 66 franchised units.

Our insurance business is composed of First Guard Insurance Company and its agency, 1st Guard Corporation (collectively “First Guard”), which we acquired on March 19, 2014.  First Guard is a direct underwriter of commercial trucking insurance, selling physical damage and nontrucking liability insurance to truckers.

Our media business is composed of Maxim Inc. (“Maxim”).  We acquired certain assets and liabilities of Maxim on February 27, 2014.  Maxim’s business lies principally in media and licensing.


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Restaurants

Steak n Shake and Western comprise 634 company-operated and franchised restaurants as of March 31, 2016.

   
Steak n Shake
    
Western Sizzlin
        
   
Company- operated
    
Franchised
    
Company-operated
    
Franchised
    
Total
  
Total stores as of December 31, 2014
     417       128       4       68       617  
Net restaurants opened (closed)
     -       1       -       (1 )     -  
Total stores as of March 31, 2015
     417       129       4       67       617  
                                         
Total stores as of December 31, 2015
     417       144       4       66       631  
Net restaurants opened (closed)
     -       3       -       -       3  
Total stores as of March 31, 2016
     417       147       4       66       634  

Earnings of our restaurant operations are summarized below.
 
   
First Quarter
      
   
2016
        
2015
      
Revenue
                    
Net sales
   $ 195,067         $ 192,170      
Franchise royalties and fees
     4,350           3,656      
Other revenue
     878           910      
Total revenue
     200,295           196,736      
                         
Restaurant cost of sales
                        
Cost of food (1)
     53,992   27.7 %     57,111   29.7 %
Restaurant operating costs (1)
     97,232   49.8 %     93,327   48.6 %
Rent (1)
     4,513   2.3 %     4,323   2.2 %
Total cost of sales
     155,737           154,761      
                         
Selling, general and administrative
                        
General and administrative (2)
     13,980   7.0 %     16,408   8.3 %
Marketing (2)
     12,570   6.3 %     9,930   5.0 %
Other expenses (2)
     1,064   0.5 %     360   0.2 %
Total selling, general and administrative
     27,614   13.8 %     26,698   13.6 %
                         
Depreciation and amortization (2)
     5,715   2.9 %     6,157   3.1 %
                         
Interest on obligations under leases
     2,281           2,475      
                         
Earnings before income taxes
     8,948           6,645      
                         
Income tax expense
     3,470           2,997      
                         
Contribution to net earnings
   $ 5,478         $ 3,648      
 
(1) Cost of food, restaurant operating costs and rent expense are expressed as a percentage of net sales.
(2) General and administrative, marketing, other expenses and depreciation and amortization are expressed as a percentage of total revenue.
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Net sales during the first quarter of 2016 was $195,067, representing an increase of $2,897 over the first quarter of 2015.  The increased performance of our restaurant operations was largely driven by Steak n Shake’s same-store sales.  Steak n Shake’s same-store sales during the first quarter 2016 increased 1.8%, whereas customer traffic was flat. The term “same-store sales” refers to the sales of company-operated units open at least 18 months at the beginning of the current period and have remained open through the end of the period.

Franchise royalties and fees during the first quarter of 2016 increased 19.0% compared to those in 2015.  Steak n Shake opened five franchise units, closed one, and repurchased another during the first quarter of 2016.  The increase in sales during the first quarter of 2016 is primarily attributable to the revenue from Steak n Shake units opened during 2015. 

Cost of food in the first quarter of 2016 was $53,992 or 27.7% of net sales, compared to the first quarter in 2015 of $57,111 or 29.7% of net sales.  The decrease as a percent of net sales during the first quarter was primarily attributable to lower beef costs.

Restaurant operating costs during the first quarter of 2016 were $97,232 or 49.8% of net sales, compared to $93,327 or 48.6% of net sales in 2015.  The increased costs were mainly based on higher sales.  Costs as a percent of net sales during the first quarter increased principally due to higher insurance expenses.

Selling, general and administrative expenses during the first quarter of 2016 were $27,614 or 13.8% of total revenues.  The expenses in the first quarter 2015 were $26,698 or 13.6% of total revenues.  General and administrative expenses decreased by $2,428 during the first quarter of 2016 compared to the same period in 2015 primarily due to decreased personnel expenses. Marketing increased by $2,640 in the first quarter of 2016 compared to the same period of 2015 primarily due to an increase in promotional advertising.

Insurance

First Guard is a direct underwriter of commercial trucking insurance, selling physical damage and nontrucking liability insurance to truckers.  Earnings of our insurance business are summarized below.

   
First Quarter
  
   
2016
    
2015
  
Premiums written
   $ 5,361     $ 3,498  
Insurance losses
     2,703       2,168  
Underwriting expenses
     1,455       795  
Pre-tax underwriting gain
     1,203       535  
Other income
                
Commissions
     95       83  
Investment income
     43       73  
Other income (expense)
     (14 )     (31 )
Total other income
     124       125  
Earnings before income taxes
     1,327       660  
Income tax expense
     451       224  
Contribution to net earnings
   $ 876     $ 436  

First Guard’s insurance products are marketed primarily through direct response methods via the Internet or by telephone.  First Guard’s cost-efficient direct response marketing methods enable it to be a low-cost trucking insurer.

Underwriting results in the first quarter of 2016 of First Guard increased significantly from 2015.  Pre-tax underwriting gain was $1,203 in the first quarter of 2016 compared to $535 in 2015. The increase in pre-tax underwriting gain was mainly based on higher premiums written.
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Media

Maxim’s business lies principally in media and licensing.  Earnings of our media operations are summarized below.
 
   
First Quarter
  
   
2016
    
2015
  
Revenue
   $ 2,448     $ 5,438  
Media cost of sales
     5,019       9,418  
General and administrative expenses
     888       1,834  
Depreciation and amortization
     56       72  
Loss before income taxes
     (3,515 )     (5,886 )
Income tax benefit
     (1,278 )     (1,986 )
Contribution to net earnings
   $ (2,237 )   $ (3,900 )
 
On February 27, 2014, we acquired the assets of Maxim.

We acquired Maxim with the idea of transforming the brand. We continue to make investments into the brand, many of which are reflected in the reported expenses. We have been rebuilding Maxim’s media business, both in print and in digital, as well as developing a licensing business. We have been making adjustments in operations to reduce dramatically the high fixed costs inherent in the media business. The magazine developed the Maxim brand, a franchise we are utilizing to build cash-generating businesses, namely licensing royalties related to consumer products, services, and events.
 
We have taken the risk on the belief that the probability for gain in value more than justifies the risk of loss.
 
Investment Partnership Gains

Earnings from our investments in partnerships are summarized below.
 
   
First Quarter
  
   
2016
    
2015
  
Investment partnership gain
   $ 78,973     $ 22,965  
Tax expense
     28,585       7,853  
Contribution to net earnings
   $ 50,388     $ 15,112  
 
The Company recorded after-tax gains from investment partnerships of $50,388 and $15,112 during the first quarters of 2016 and 2015, respectively.  The volatility of the gains and losses during the various periods is attributable to changes in market values of investments held by the investment partnerships.

Certain of the investment partnerships hold the Company’s common stock as investments.  The Company’s pro-rata share of its common stock held by the investment partnerships is recorded as treasury stock even though these shares are legally outstanding.   Gains and losses on Company common stock included in the earnings of these partnerships are eliminated.

Interest Expense

The Company’s interest expense is summarized below.
 
   
First Quarter
  
   
2016
    
2015
  
Interest expense on notes payable and other borrowings
   $ 2,922     $ 3,006  
Tax benefit
     1,110       1,142  
Interest expense net of tax
   $ 1,812     $ 1,864  
 
Interest expense during the first quarter of 2016 was $2,922 compared to $3,006 for the first quarter of 2015.  The outstanding balance under Steak n Shake’s credit facility on March 31, 2016 was $210,174 with a 4.75% interest rate.
 
Corporate

Corporate expenses exclude the activities in the restaurant, insurance, media and other companies. Corporate expenses, net of tax, during the first quarter of 2016 was $1,589 compared to $3,429 for the first quarter of 2015. The decrease in expenses during 2016 was primarily attributable to lower legal expenses.
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Income Tax Expense

Income tax expense for the first quarter of 2016 was $29,578 compared to $7,190 for the first quarter of 2015.  The variance in income tax expense between 2016 and 2015 is primarily attributable to tax expense on income from investment partnerships.  The tax expense for investment partnership gains was $28,585 and $7,853 during 2016 and 2015, respectively.

Financial Condition

Our balance sheet continues to maintain significant liquidity. Our consolidated shareholders’ equity on March 31, 2016 was $491,681 compared to $451,372 on December 31, 2015. Shareholders’ equity increased during the quarter ended March 31, 2016 primarily because of net earnings of $51,163.  The increase from net earnings was offset by an increase in treasury stock of $10,930 attributable to purchases of Biglari Holdings common stock by The Lion Fund II, L.P.

Consolidated cash and investments are summarized below.
 
   
March 31,
2016
    
December 31,
2015
  
Cash and cash equivalents
   $ 56,581     $ 56,523  
Investments
     23,340       23,750  
Fair value of interest in investment partnerships
     857,312       734,668  
Total cash and investments
     937,233       814,941  
Less portion of Company stock held by investment partnerships
     (310,830 )     (262,979 )
Carrying value of cash and investments on balance sheet
   $ 626,403     $ 551,962  
 
Liquidity
Cash provided by operating activities during the first three months of 2016 was $17,255 compared to cash used in operating activities of $241 during 2015. The increase was primarily a result of $9,268 increase in the Company’s working capital accounts and $4,750 of distributions from the investment partnerships. Cash provided by the Company’s working capital accounts increased in the first quarter of 2016 primarily because of collections of receivables relating to Steak n Shake’s third party gift card sales.

Net cash used in investing activities during the first quarter of 2016 of $13,488 primarily consisted of purchases of investments (net of redemptions of fixed maturity securities) of $11,483 and capital expenditures of $2,859. Net cash used in investing activities during the first quarter of 2015 of $14,479 primarily consisted of purchases of investments (net of redemptions of fixed maturity securities) of $10,994 and capital expenditures of $3,487.

Net cash used in financing activities was $3,757 during the first quarter of 2016 as compared to $2,157 during 2015. The increase in cash used in financing activities is primarily due to an additional $1,651 payment of long-term debt made during the first quarter of 2016.

We intend to meet the working capital needs of our operating subsidiaries principally through anticipated cash flows generated from operations, cash on hand, existing credit facilities, and the sale of excess properties and investments. We continually review available financing alternatives.

Steak n Shake Credit Facility
On March 19, 2014, Steak n Shake and its subsidiaries entered into a new credit agreement. This 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.
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

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, according to Steak n Shake’s total leverage ratio, on the unused portion of the revolver.

As of March 31, 2016, the interest rate on the term loan was 4.75%.

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. As of March 31, 2016, we were in compliance with all covenants. 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 on substantially all the assets of Steak n Shake. Biglari Holdings is not a guarantor under the credit facility. At March 31, 2016, $210,174 was outstanding under the term loan, and no amount is outstanding under the revolver.

Steak n Shake had $10,188 in standby letters of credit outstanding as of March 31, 2016 and December 31, 2015.

Western Revolver
As of March 31, 2016, Western has $690 due June 13, 2016.

Interest Rate Swap
During fiscal year 2011, Steak n Shake entered into an interest rate swap agreement, which matured on February 15, 2016.  The notional amount of the interest rate swap was $1,000 with a fair value of $2 on December 31, 2015.

Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain accounting policies require management to make estimates and judgments concerning transactions that will be settled several years in the future. Amounts recognized in our consolidated financial statements from such estimates are necessarily based on numerous assumptions involving varying and potentially significant degrees of judgment and uncertainty. Accordingly, the amounts currently reflected in our consolidated financial statements will likely increase or decrease in the future as additional information becomes available.  There have been no material changes to critical accounting policies previously disclosed in our  annual report on Form 10-K for the year ended December 31, 2015.
 
Effects of Governmental Regulations and Inflation
Most Restaurant operations employees are paid hourly rates related to minimum wage laws. Any increase in the legal minimum wage would directly increase our operating costs. We are also subject to various laws related to zoning, land use, health and safety standards, working conditions, and accessibility standards. Any changes in these laws that require improvements to our restaurants would increase our operating costs.

Inflation in food, labor, fringe benefits, energy costs, transportation costs and other operating costs directly affect our operations.

The federal healthcare reform legislation that became law in March 2010 (known as the Patient Protection and Affordable Care Act [“PPACA”]) mandates menu labeling of certain nutritional aspects of restaurant menu items such as caloric, sugar, sodium, and fat content. Altering our recipes in response to such legislation could increase our costs and/or change the flavor profile of our menu offerings, which could have an adverse impact on our results of operations. Additionally, if our customers perceive our menu items to contain unhealthy caloric, sugar, sodium, or fat content, our results of operations could be further adversely affected.
 
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Additionally, minimum employee health care coverage mandated by state or federal legislation, such as the PPACA, could significantly increase our employee health benefit costs or require us to alter the benefits we provide to our employees. While we are assessing the potential impact the PPACA will have on our business, certain of the mandates in the legislation are not yet effective. If our employee health benefit costs increase, we cannot provide assurance that we will be able to offset these costs through increased revenue or reductions in other costs, which could have an adverse effect on our results of operations and financial condition.

Recently Issued Accounting Pronouncements
For detailed information regarding recently issued accounting pronouncements and the expected impact on our consolidated financial statements, see Note 2, “New Accounting Standards” in the accompanying notes to consolidated financial statements included in Part I, Item 1 of this quarterly report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements
This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In general, forward-looking statements include estimates of future revenues, cash flows, capital expenditures, or other financial items, and assumptions underlying any of the foregoing. Forward-looking statements reflect management’s current expectations regarding future events and use words such as “anticipate,” “believe,” “expect,” “may,” and other similar terminology. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. These forward-looking statements are all based on currently available operating, financial, and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, many beyond our control, including, but not limited to, the risks and uncertainties described in Item 1A, Risk Factors of our annual report on Form 10-K. We undertake no obligation to publicly update or revise them, except as may be required by law.
 
 
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
 
The majority of our investments are conducted through investment partnerships which generally hold common stocks. We also hold marketable securities directly. Through investments in the investment partnerships we hold a concentrated position in the common stock of Cracker Barrel Old Country Store, Inc. A significant decline in the general stock market or in the prices of major investments may produce a large net loss and decrease in our consolidated shareholders’ equity. Decreases in values of equity investments can have a materially adverse effect on our earnings and on consolidated shareholders’ equity.

We prefer to hold equity investments for very long periods of time so we are not troubled by short-term price volatility with respect to our investments. Our interests in the investment partnerships are committed on a rolling 5-year basis, and any distributions upon our withdrawal of funds will be paid out over two years (and may be paid in kind rather than in cash). Market prices for equity securities are subject to fluctuation. Consequently the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. A hypothetical 10% increase or decrease in the market price of our investments would result in a respective increase or decrease in the carrying value of our investments of $56,982 along with a corresponding change in shareholders’ equity of approximately 7%.

Borrowings on Steak n Shake’s credit facility 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%. At March 31, 2016, a hypothetical 100 basis point increase in short-term interest rates would not have a significant impact on our net earnings.

We have had minimal exposure to foreign currency exchange rate fluctuations in the first quarter of 2016.

ITEM 4.
Controls and Procedures
 
Based on an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), our Chief Executive Officer and Controller have concluded that our disclosure controls and procedures were effective as of March 31, 2016.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2016 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
 
 
PART II OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS
 
Information in response to this Item is included in Note 12 to the Consolidated Financial Statements included in Part 1 Item 1 of this Form 10-Q and is incorporated herein by reference.

ITEM 1A.
RISK FACTORS
 
An investment in the common stock of any company involves a degree of risk. Investors should consider carefully the risks and uncertainties described in the Company’s annual report on Form 10−K filed with the SEC, as well as the risks subsequently disclosed in our reports filed with the SEC, before deciding whether to purchase our common stock. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also become important factors that may harm the Company’s business, financial condition, and results of operations. The occurrence of risk factors could harm the Company’s business, financial condition, and results of operations. The trading price of the Company’s common stock could decline due to any of these risks and uncertainties, and stockholders may lose part or all of their investment.

The following material changes in the risk factors previously disclosed in the Company’s Form 10-K for 2015. 

We are a “controlled company” within the meaning of the NYSE rules and may rely on exemptions from certain corporate governance requirements.
Because Mr. Biglari beneficially owns more than 50% of the Company’s outstanding voting stock, we are considered a “controlled company” pursuant to New York Stock Exchange rules. As a result, we may elect not to comply with certain director independence and board committee requirements.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
The following table presents information on purchases of our common stock during the first quarter of 2016 by The Lion Fund II, L.P. and Sardar Biglari, each of whom may be deemed to be an “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended.  On December 17, 2015, The Lion Fund II, L.P. entered into a Rule 10b5-1 Trading Plan (the “Purchase Plan”) pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. Under the Purchase Plan, a broker dealer will make periodic purchases of up to an aggregate of 24,000 shares of the Company’s common stock on behalf of The Lion Fund II, L.P. at prevailing market prices, subject to the terms of the Purchase Plan.  From January 4, 2016 to February 3, 2016 The Lion Fund II, L.P. purchased 24,000 shares under the Purchase Plan.
 
   
(a)
Total Number of Shares Purchased
    
(b)
Average Price Paid per Share
    
(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
    
(d)
Maximum Number of Shares That May Yet Be Purchased Under Plans or Programs
  
                         
January 1, 2016 – Janaury 31, 2016
     20,650     $ 346.92       20,650       3,350  
February 1, 2016 – February 29, 2016
     3,350     $ 385.46       3,350       -  
March 1, 2016 – March 31, 2016
     -     $ -       -       -  
Total
     24,000               24,000          
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
None.
 
 
ITEM 4.
MINE SAFETY DISCLOSURES
 
Not applicable.

ITEM 5.
OTHER INFORMATION
None.

ITEM 6.
EXHIBITS

Exhibit Number
  
Description
     
31.01
  
Certification Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.02
  
Certification Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.01*
  
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101
  
Interactive Data Files.
­­­­­­_________________
*
Furnished herewith.
 
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


       
Date:  May 6, 2016
      
 
  
 
 
   
Biglari Holdings inc.
       
  
  
By:
/s/ Bruce Lewis
     
Bruce Lewis
Controller
 
 
 
29