*Net earnings (loss) per equivalent
Class B share outstanding is one-fifth of the equivalent Class A share or $12.70 and $18.37 for the second quarter and first six
months of 2019, respectively, and $(4.35) and $(5.35) for the second quarter and first six months of 2018, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(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, 2018.
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 the Company. 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 June 30, 2019, Mr. Biglari’s
beneficial ownership was approximately 60.7% of the Company’s outstanding Class A common stock and 55.4% of the Company’s
outstanding Class B common stock.
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 Sizzlin”), 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 June 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13,
Financial Instruments—Credit
Losses: Measurement of Credit Losses on Financial Instruments
. ASU 2016-13 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 ASU 2016-13 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
. In July 2018, the FASB issued ASU 2018-11,
Leases
(Topic 842). We adopted Accounting Standards
Codification (“ASC”) 842 “Leases” on January 1, 2019. Most significantly, ASC 842 requires a lessee to
recognize a liability to make lease payments and an asset with respect to its right to use the underlying asset for the lease
term. We applied ASC 840 to all comparative periods which included a cumulative-effect adjustment of $1,499 to retained earnings
on January 1, 2019. Adoption of ASC 842 also resulted in an increase to total assets and liabilities due to the recording of operating
lease assets of $63,261 and operating lease liabilities of $69,671 as of January 1, 2019 and due to the recording of finance lease
assets of $11,638 and finance lease liabilities of $11,784. The difference between the asset and liability amounts primarily relates
to previously recorded deferred/prepaid rent. The standard had a material impact on our consolidated balance sheets, but did not
have a material impact on our consolidated statements of earnings and statements of cash flow. The most significant impact was
the recognition of right-of-use assets and lease liabilities for operating leases.
Note 2. New Accounting Standards
(continued)
In adopting and applying ASC 842,
we elected the package of practical expedients permitted under the transition guidance within the new standard, which among
other things, allows us to carry forward the historical lease classification. In addition, we elected certain practical
expedients and accounting policies, including an accounting policy election to keep leases with an initial term of 12 months
or less from the balance sheet. We recognize those lease payments in the consolidated statements of earnings on a
straight-line basis over the lease term.
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 shares
authorized, issued and outstanding on June 30, 2019 and December 31, 2018.
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
|
Class A
|
|
|
|
Class B
|
|
|
|
Class A
|
|
|
|
Class B
|
|
Common stock authorized
|
|
|
500,000
|
|
|
|
10,000,000
|
|
|
|
500,000
|
|
|
|
10,000,000
|
|
Common stock issued and outstanding
|
|
|
206,864
|
|
|
|
2,068,640
|
|
|
|
206,864
|
|
|
|
2,068,640
|
|
The
Company has applied the “two-class method” of computing earnings per share as prescribed in ASC 260, “Earnings
Per Share.”
On an equivalent Class A common stock
basis, there were 620,592 shares outstanding as of June 30, 2019 and December 31, 2018. There are no dilutive securities outstanding.
For financial reporting purposes, the
proportional ownership of the Company’s common stock owned by the investment partnerships is excluded in the earnings per
share calculation. After giving effect for the investment partnerships’ proportional ownership of common stock, the equivalent
Class A weighted average number of common shares during the second quarters of 2019 and 2018 were 346,034 and 346,988, respectively.
The equivalent Class A weighted average number of common shares during the first six months of 2019 and 2018 were 346,129 and 349,575,
respectively.
Each Class A common share is entitled
to one vote. Class B common stock possesses economic rights equal to one-fifth (1/5
th
) of such rights of Class A common
stock; however, Class B common stock has no voting rights.
Note 4. Investments
Available for sale investments were
$37,013 and $33,860 as of June 30, 2019 and December 31, 2018, respectively. Investments in equity securities and a related derivative
position of $4,463 are included in investments as of June 30, 2019 and in other current assets as of December 31, 2018. The investments
are 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.
Biglari Capital Corp. is the general
partner of the investment partnerships and is an entity solely owned by Mr. Biglari.
Note 5. Investment Partnerships
(continued)
The fair value and adjustment for Company
common stock held by the investment partnerships to determine the carrying value of our partnership interest is presented below.
|
|
Fair Value
|
|
Company Common Stock
|
|
Carrying Value
|
Partnership interest at December 31, 2018
|
|
$
|
715,102
|
|
|
$
|
157,622
|
|
|
$
|
557,480
|
|
Investment partnership gains
|
|
|
54,374
|
|
|
|
(13,978
|
)
|
|
|
68,352
|
|
Contributions (net of distributions) to investment partnerhips
|
|
|
(2,490
|
)
|
|
|
|
|
|
|
(2,490
|
)
|
Increase in proportionate share of Company stock held
|
|
|
|
|
|
|
1,276
|
|
|
|
(1,276
|
)
|
Partnership interest at June 30, 2019
|
|
$
|
766,986
|
|
|
$
|
144,920
|
|
|
$
|
622,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Company Common Stock
|
|
|
|
Carrying Value
|
|
Partnership interest at December 31, 2017
|
|
$
|
925,279
|
|
|
$
|
359,258
|
|
|
$
|
566,021
|
|
Investment partnership gains (losses)
|
|
|
(128,725
|
)
|
|
|
(123,879
|
)
|
|
|
(4,846
|
)
|
Contributions (net of distributions) to investment partnerships
|
|
|
(7,700
|
)
|
|
|
|
|
|
|
(7,700
|
)
|
Increase in proportionate share of Company stock held
|
|
|
|
|
|
|
18,681
|
|
|
|
(18,681
|
)
|
Partnership interest at June 30, 2018
|
|
$
|
788,854
|
|
|
$
|
254,060
|
|
|
$
|
534,794
|
|
The
carrying value of the investment partnerships net of deferred taxes is presented below.
|
|
June 30,
2019
|
|
December 31, 2018
|
Carrying value of investment partnerships
|
|
$
|
622,066
|
|
|
$
|
557,480
|
|
Deferred tax liability related to investment partnerships
|
|
|
(83,187
|
)
|
|
|
(92,703
|
)
|
Carrying value of investment partnerships net of deferred taxes
|
|
$
|
538,879
|
|
|
$
|
464,777
|
|
The Company’s proportionate share
of Company stock held by investment partnerships at cost is $375,507 and $374,231 at June 30, 2019 and December 31, 2018, 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 (losses) from investment partnerships recorded in the
Company’s consolidated statements of earnings are presented below.
|
|
Second Quarter
|
|
First Six Months
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Gains (losses) on investment partnership
|
|
$
|
34,198
|
|
|
$
|
(8,341
|
)
|
|
$
|
68,352
|
|
|
$
|
(4,846
|
)
|
Tax expense (benefit)
|
|
|
7,944
|
|
|
|
(2,464
|
)
|
|
|
15,861
|
|
|
|
(2,044
|
)
|
Net earnings (loss)
|
|
$
|
26,254
|
|
|
$
|
(5,877
|
)
|
|
$
|
52,491
|
|
|
$
|
(2,802
|
)
|
On December 31 of each year, the general
partner of the investment partnerships will earn an incentive reallocation fee for the Company’s investments equal to 25%
of the net profits above a 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 six months of 2019 or 2018. 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 June 30, 2019
|
|
$
|
106,657
|
|
|
$
|
911,690
|
|
Total liabilities as of June 30, 2019
|
|
$
|
90
|
|
|
$
|
165,787
|
|
Revenue for the first six months of 2019
|
|
$
|
121
|
|
|
$
|
62,499
|
|
Earnings for the first six months of 2019
|
|
$
|
88
|
|
|
$
|
58,068
|
|
Biglari Holdings’ ownership interest as of June 30, 2019
|
|
|
66.1
|
%
|
|
|
93.4
|
%
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2018
|
|
$
|
107,207
|
|
|
$
|
901,750
|
|
Total liabilities as of December 31, 2018
|
|
$
|
447
|
|
|
$
|
202,770
|
|
Revenue for the first six months of 2018
|
|
$
|
(49,773
|
)
|
|
$
|
(99,751
|
)
|
Earnings (loss) for the first six months of 2018
|
|
$
|
(49,805
|
)
|
|
$
|
(104,290
|
)
|
Biglari Holdings’ ownership interest as of June 30, 2018
|
|
|
65.3
|
%
|
|
|
92.2
|
%
|
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.
Transactions with The Lion Fund II, L.P. were as follows.
|
|
Second Quarter
|
|
First Six Months
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Contributions
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40,000
|
|
|
$
|
—
|
|
Distributions
|
|
|
(2,490
|
)
|
|
|
(2,500
|
)
|
|
|
(42,490
|
)
|
|
|
(7,700
|
)
|
|
|
$
|
(2,490
|
)
|
|
$
|
(2,500
|
)
|
|
$
|
(2,490
|
)
|
|
$
|
(7,700
|
)
|
Note 6. Property and Equipment
Property and equipment is composed of
the following.
|
|
June 30,
2019
|
|
December 31, 2018
|
Land
|
|
$
|
151,671
|
|
|
$
|
146,015
|
|
Buildings
|
|
|
145,915
|
|
|
|
142,658
|
|
Land and leasehold improvements
|
|
|
162,839
|
|
|
|
158,938
|
|
Equipment
|
|
|
200,076
|
|
|
|
201,738
|
|
Construction in progress
|
|
|
2,910
|
|
|
|
1,703
|
|
|
|
|
663,411
|
|
|
|
651,052
|
|
Less accumulated depreciation and amortization
|
|
|
(366,717
|
)
|
|
|
(376,336
|
)
|
Property and equipment, net
|
|
$
|
296,694
|
|
|
$
|
274,716
|
|
The Company recorded an impairment to
long-lived assets of $438 and $2,338 in selling, general and administrative expenses in the second quarter and first six months
of 2019, respectively, and no impairment to long-lived assets in the first six months of 2018. The fair value of the long-lived
assets was determined based on Level 2 inputs using a discounted cash flow model and quoted prices for the properties. The fair
value of the assets impaired was not material for any of the applicable periods.
As of June 30, 2019, a total
of 103 Steak n Shake restaurants have been temporarily closed. The Company is actively working to identify
franchise partners for these stores. The Company has recorded impairments of $2,006 during the first six months of
2019 associated with temporarily closed units. Although the Company is committed to the franchise partnership model, future impairments are possible.
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, 2018
|
|
$
|
28,139
|
|
|
$
|
11,913
|
|
|
$
|
40,052
|
|
Change in foreign exchange rates during the first six months of 2019
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
Goodwill at June 30, 2019
|
|
$
|
28,135
|
|
|
$
|
11,913
|
|
|
$
|
40,048
|
|
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. Goodwill impairment occurs when the estimated fair value of goodwill is less than its carrying value. 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 six months of 2019
or 2018.
Other Intangible Assets
Other intangible assets are composed
of the following.
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Total
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Total
|
Franchise agreement
|
|
$
|
5,310
|
|
|
$
|
(4,912
|
)
|
|
$
|
398
|
|
|
$
|
5,310
|
|
|
$
|
(4,647
|
)
|
|
$
|
663
|
|
Other
|
|
|
810
|
|
|
|
(783
|
)
|
|
|
27
|
|
|
|
810
|
|
|
|
(774
|
)
|
|
|
36
|
|
Total
|
|
|
6,120
|
|
|
|
(5,695
|
)
|
|
|
425
|
|
|
|
6,120
|
|
|
|
(5,421
|
)
|
|
|
699
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
15,876
|
|
|
|
—
|
|
|
|
15,876
|
|
|
|
15,876
|
|
|
|
—
|
|
|
|
15,876
|
|
Other assets with indefinite lives
|
|
|
11,471
|
|
|
|
—
|
|
|
|
11,471
|
|
|
|
11,539
|
|
|
|
—
|
|
|
|
11,539
|
|
Total intangible assets
|
|
$
|
33,467
|
|
|
$
|
(5,695
|
)
|
|
$
|
27,772
|
|
|
$
|
33,535
|
|
|
$
|
(5,421
|
)
|
|
$
|
28,114
|
|
Intangible assets subject to amortization
consist of franchise agreements connected with the purchase of Western Sizzlin 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 six months of 2019 and 2018 was $274 and $281, respectively. 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.
|
|
Second Quarter
|
|
First Six Months
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net sales
|
|
$
|
152,062
|
|
|
$
|
191,797
|
|
|
$
|
317,693
|
|
|
$
|
377,368
|
|
Franchise royalties and fees
|
|
|
7,146
|
|
|
|
7,773
|
|
|
|
14,058
|
|
|
|
14,875
|
|
Other
|
|
|
853
|
|
|
|
1,024
|
|
|
|
2,085
|
|
|
|
2,285
|
|
|
|
$
|
160,061
|
|
|
$
|
200,594
|
|
|
$
|
333,836
|
|
|
$
|
394,528
|
|
Note 8. Restaurant Operations Revenues
(continued)
Net sales
Net sales were composed of retail sales
of food through Company-owned stores. Company-owned store revenues are recognized when control of the food items are transferred
to our customers at the point of sale. Sales taxes related to these sales are collected from customers and remitted to the appropriate
taxing authority and are not reflected in the Company’s consolidated statements of earnings as revenue.
Franchise royalties and fees
Franchise royalties and fees are composed
of royalties and fees from Steak n Shake and Western Sizzlin franchisees. Royalty revenues are based on a percentage of franchise
sales and are recognized when the retail food items are purchased by franchise customers. Initial franchise fees received are deferred
when amounts are received and recognized as revenue on a straight-line basis over the term of each respective franchise agreement,
which is typically 20 years.
Our advertising arrangements with franchisees
are reported in franchise royalties and fees.
Gift card revenue
Restaurant operations sells gift cards
to customers which can be redeemed for retail food sales within our stores. Gift cards are recorded as deferred revenue when issued
and are subsequently recorded as net sales upon redemption. Restaurant operations estimates breakage related to gift cards when
the likelihood of redemption is remote. This estimate utilizes historical trends based on the vintage of the gift card. Breakage
on gift cards is recorded as other revenue in proportion to the rate of gift card redemptions by vintage.
Note 9. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses
include the following.
|
|
June 30,
2019
|
|
December 31, 2018
|
Accounts payable
|
|
$
|
31,416
|
|
|
$
|
41,967
|
|
Gift card liability
|
|
|
17,199
|
|
|
|
22,685
|
|
Salaries, wages, and vacation
|
|
|
19,000
|
|
|
|
13,107
|
|
Taxes payable
|
|
|
30,264
|
|
|
|
11,214
|
|
Insurance accruals
|
|
|
13,693
|
|
|
|
12,127
|
|
Deferred revenue
|
|
|
13,657
|
|
|
|
11,681
|
|
Other
|
|
|
5,213
|
|
|
|
4,484
|
|
Accounts payable and accrued expenses
|
|
$
|
130,442
|
|
|
$
|
117,265
|
|
Note 10. Notes Payable and Other
Borrowings
Notes payable and other borrowings include the following.
Current portion of notes payable and other borrowings
|
|
June 30,
2019
|
|
December 31, 2018
|
Notes payable
|
|
$
|
2,200
|
|
|
$
|
2,200
|
|
Unamortized original issue discount and debt issuance costs
|
|
|
(962
|
)
|
|
|
(943
|
)
|
Finance obligations
|
|
|
4,052
|
|
|
|
4,463
|
|
Finance lease liabilities
|
|
|
1,634
|
|
|
|
—
|
|
Total current portion of notes payable and other borrowings
|
|
$
|
6,924
|
|
|
$
|
5,720
|
|
|
|
|
|
|
|
|
|
|
Long-term notes payable and other borrowings
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
180,398
|
|
|
$
|
181,498
|
|
Unamortized original issue discount and debt issuance costs
|
|
|
(748
|
)
|
|
|
(1,234
|
)
|
Finance obligations
|
|
|
75,709
|
|
|
|
59,737
|
|
Finance leases liabilities
|
|
|
10,450
|
|
|
|
—
|
|
Total long-term notes payable and other borrowings
|
|
$
|
265,809
|
|
|
$
|
240,001
|
|
Note 10. Notes Payable and Other
Borrowings
(continued)
Steak n Shake Credit Facility
On March 19, 2014, Steak n Shake and
its subsidiaries entered into a credit agreement which provided for a senior secured term loan facility in an aggregate principal
amount of $220,000. 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.
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.
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%. The interest rate
on the term loan was 6.19% as of June 30, 2019.
The credit agreement includes customary
affirmative and negative covenants and events of default. Steak n Shake’s credit facility contains restrictions on its ability
to pay dividends to Biglari Holdings.
The term loan is secured by first priority
security interests in substantially all the assets of Steak n Shake. Disruptions in debt capital markets that restrict access to
funding when needed could adversely affect the results of operations, liquidity and capital resources of Steak n Shake. Biglari
Holdings is not a guarantor under the credit facility. As of June 30, 2019, $182,598 was outstanding under the term loan.
Note 11. Leases
The Company adopted ASC 842 on January
1, 2019, as discussed in Note 2. Under ASC 842, leases are generally classified as either operating right-of-use assets or
finance lease assets. Right-of-use assets represent the Company's right to use an underlying asset during the lease term. Right-of-use
liabilities represent the Company's obligation to make lease payments arising from the lease. These assets and liabilities are calculated
by using the net present value of fixed lease payments over the lease term. The Company's lease terms include options
to extend or terminate the lease when it is reasonably certain that the option will be exercised. The Company applied
an incremental borrowing rate to determine the present value of lease payments. Finance lease agreements include an interest rate
that is used to determine the present value of future lease payments.
A significant portion of our operating
and finance lease portfolio includes restaurant locations. The Company’s operating leases with a term of 12 months or greater
were recognized as operating right-of-use assets and liabilities and recorded as operating lease assets and operating lease liabilities.
Historical capital leases and certain historical build-to-suit leases were reclassified from obligations under leases to finance
lease assets and liabilities. Finance lease assets are recorded in property and equipment and finance lease liabilities are recorded
in notes payable and other borrowings. Historical sale-and-leaseback transactions in which the Company is deemed to have a continued
interest in the leased asset are recorded as property and equipment and as finance obligations. Finance obligations are recorded
in notes payable and other borrowings.
Operating lease expense and finance
lease depreciation expense are recognized on a straight line basis over the lease term.
Total lease cost consists of the following.
|
|
Second Quarter
2019
|
|
First Six Months
2019
|
Finance lease costs:
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
487
|
|
|
$
|
979
|
|
Interest on lease liabilities
|
|
|
215
|
|
|
|
422
|
|
Operating lease costs *
|
|
|
4,003
|
|
|
|
7,860
|
|
Total lease costs
|
|
$
|
4,705
|
|
|
$
|
9,261
|
|
|
|
|
|
|
|
|
|
|
*Includes short-term leases, variable lease costs and
sublease income, which are immaterial
Note 11. Leases
(continued)
Supplemental cash flow information related to leases is as
follows.
|
|
First Six Months 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Financing cash flows from finance leases
|
|
$
|
797
|
|
Operating cash flows from finance leases
|
|
$
|
422
|
|
Operating cash flows from operating leases
|
|
$
|
8,375
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
Finance lease liabilities
|
|
$
|
1,097
|
|
Operating lease liabilities
|
|
$
|
8,919
|
|
Supplemental balance sheet information related to leases
is as follows.
|
|
June 30,
2019
|
Finance leases:
|
|
|
|
|
Property and equipment, net
|
|
$
|
11,755
|
|
|
|
|
|
|
Current portion of notes payable and other borrowings
|
|
$
|
1,634
|
|
Long-term notes payable and other borrowings
|
|
|
10,450
|
|
Total finance lease liablities
|
|
$
|
12,084
|
|
Weighted-average lease terms and discount rates
are as follows.
|
|
June 30,
2019
|
Weighted-average remaining lease terms:
|
|
|
|
|
Finance leases
|
|
|
8.7 years
|
|
Operating leases
|
|
|
7.3 years
|
|
|
|
|
|
|
Weighted-average discount rates:
|
|
|
|
|
Finance leases
|
|
|
7.1%
|
|
Operating leases
|
|
|
6.9%
|
|
Maturities of lease liabilities as of June 30, 2019 are as
follows.
Year
|
|
Operating Leases
|
|
Finance
Leases
|
2019
|
|
|
$
|
8,439
|
|
|
$
|
1,218
|
|
2020
|
|
|
|
15,797
|
|
|
|
2,377
|
|
2021
|
|
|
|
14,701
|
|
|
|
2,358
|
|
2022
|
|
|
|
12,438
|
|
|
|
1,869
|
|
2023
|
|
|
|
10,588
|
|
|
|
1,669
|
|
After 2023
|
|
|
|
31,397
|
|
|
|
6,815
|
|
Total lease payments
|
|
|
|
93,360
|
|
|
|
16,306
|
|
Less interest
|
|
|
|
21,088
|
|
|
|
4,222
|
|
Total lease liabilities
|
|
|
$
|
72,272
|
|
|
$
|
12,084
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11. Leases
(continued)
On December 31, 2018, obligations under
non-cancelable finance obligations, capital leases, and operating leases (excluding real estate taxes, insurance and maintenance
costs) require the following minimum future rental payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Year
|
|
|
Finance Obligations
|
|
|
|
Capital
Leases
|
|
|
|
Total
|
|
|
|
Operating Property
|
|
|
|
Non-Operating Property
|
|
2019
|
|
$
|
11,114
|
|
|
$
|
55
|
|
|
$
|
11,169
|
|
|
$
|
17,914
|
|
|
$
|
483
|
|
2020
|
|
|
8,040
|
|
|
|
55
|
|
|
|
8,095
|
|
|
|
16,691
|
|
|
|
554
|
|
2021
|
|
|
5,925
|
|
|
|
55
|
|
|
|
5,980
|
|
|
|
16,787
|
|
|
|
578
|
|
2022
|
|
|
2,951
|
|
|
|
5
|
|
|
|
2,956
|
|
|
|
15,603
|
|
|
|
599
|
|
2023
|
|
|
1,587
|
|
|
|
—
|
|
|
|
1,587
|
|
|
|
14,071
|
|
|
|
539
|
|
After 2023
|
|
|
1,673
|
|
|
|
—
|
|
|
|
1,673
|
|
|
|
36,709
|
|
|
|
1,790
|
|
Total minimum future rental payments
|
|
|
31,290
|
|
|
|
170
|
|
|
|
31,460
|
|
|
$
|
117,775
|
|
|
$
|
4,543
|
|
Less amount representing interest
|
|
|
18,004
|
|
|
|
60
|
|
|
|
18,064
|
|
|
|
|
|
|
|
|
|
Total principal obligations under leases
|
|
|
13,286
|
|
|
|
110
|
|
|
|
13,396
|
|
|
|
|
|
|
|
|
|
Less current portion
|
|
|
4,433
|
|
|
|
30
|
|
|
|
4,463
|
|
|
|
|
|
|
|
|
|
Non-current principal obligations under leases
|
|
|
8,853
|
|
|
|
80
|
|
|
|
8,933
|
|
|
|
|
|
|
|
|
|
Residual value at end of lease term
|
|
|
50,744
|
|
|
|
60
|
|
|
|
50,804
|
|
|
|
|
|
|
|
|
|
Obligations under leases
|
|
$
|
59,597
|
|
|
$
|
140
|
|
|
$
|
59,737
|
|
|
|
|
|
|
|
|
|
Note 12. Accumulated Other Comprehensive
Income
During the first six months of 2019
and 2018, the changes in the balances of each component of accumulated other comprehensive income, net of tax, were as follows.
|
|
Six months ended June 30, 2019
|
|
Six months ended June 30, 2018
|
|
|
|
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
|
|
$
|
(2,516
|
)
|
|
$
|
—
|
|
|
$
|
(2,516
|
)
|
|
$
|
(1,462
|
)
|
|
$
|
58
|
|
|
$
|
(1,404
|
)
|
Reclassification to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(earnings) loss
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
(58
|
)
|
Foreign currency translation
|
|
|
(108
|
)
|
|
|
|
|
|
|
(108
|
)
|
|
|
(645
|
)
|
|
|
|
|
|
|
(645
|
)
|
Ending Balance
|
|
$
|
(2,624
|
)
|
|
$
|
—
|
|
|
$
|
(2,624
|
)
|
|
$
|
(2,107
|
)
|
|
$
|
—
|
|
|
$
|
(2,107
|
)
|
During the second quarter of 2019 and
2018, the changes in the balances of each component of accumulated other comprehensive income, net of tax, were as follows.
|
|
Second Quarter 2019
|
|
Second Quarter 2018
|
|
|
|
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
|
|
$
|
(2,820
|
)
|
|
$
|
—
|
|
|
$
|
(2,820
|
)
|
|
$
|
(966
|
)
|
|
$
|
—
|
|
|
$
|
(966
|
)
|
Reclassification to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(earnings) loss
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
Foreign currency translation
|
|
|
196
|
|
|
|
|
|
|
|
196
|
|
|
|
(1,141
|
)
|
|
|
|
|
|
|
(1,141
|
)
|
Ending Balance
|
|
$
|
(2,624
|
)
|
|
$
|
—
|
|
|
$
|
(2,624
|
)
|
|
$
|
(2,107
|
)
|
|
$
|
—
|
|
|
$
|
(2,107
|
)
|
Note 12. Accumulated Other Comprehensive Income
(continued)
There were no reclassifications from
accumulated other comprehensive income to earnings during the second quarters of 2019 and 2018 and first six months of 2019. Reclassifications
made from accumulated other comprehensive income to earnings during the first six months of 2018 were $58.
Note 13. Income Taxes
In determining the quarterly provision
for income taxes, the Company used a discrete effective tax rate method based on statutory tax rates for 2019 and an estimated
annual effective tax rate for 2018. Our periodic effective income tax rate is affected by the relative mix of pre-tax earnings
or losses and underlying income tax rates applicable to the various taxing jurisdictions.
Income tax expense for the second quarter
of 2019 was $5,896 compared to an income tax benefit of $890 for the second quarter of 2018. Income tax expense for the first
six months of 2019 was $7,640 compared to an income tax benefit of $1,687 for the first six months of 2018. The variance
in income taxes between 2019 and 2018 is attributable to taxes on income generated by the investment partnerships.
As of June 30, 2019 and December 31,
2018, we had approximately $352 and $341, respectively, of unrecognized tax benefits, which are included in other liabilities in
the consolidated balance sheets.
Note 14. 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 flow.
On January 29, 2018, a shareholder of
the Company filed a purported class action complaint against the Company and the members of our Board of Directors in the Superior
Court of Hamilton County, Indiana. The shareholder generally alleges claims of breach of fiduciary duty by the members of our Board
of Directors and unjust enrichment to Mr. Biglari as a result of the dual class structure.
On March 26, 2018, a shareholder
of the Company filed a purported class action complaint against the Company and the members of our Board of Directors in the Superior
Court of Hamilton County, Indiana. This shareholder generally alleges claims of breach of fiduciary duty by the members of our
Board of Directors. This shareholder sought to enjoin the shareholder vote on April 26, 2018 to approve the dual class structure.
On April 16, 2018, the shareholders withdrew their motions to enjoin the shareholder vote on April 26, 2018.
On May 17, 2018, the shareholders who
filed the January 29, 2018 complaint and the March 26, 2018 complaint filed a new, consolidated complaint against the Company and
the members of our Board of Directors in the Superior Court of Hamilton County, Indiana. The shareholders generally allege claims
of breach of fiduciary duty by the members of our Board of Directors and unjust enrichment to Mr. Biglari arising out of the dual
class structure. The shareholders seek, for themselves and on behalf of all other shareholders as a class, a declaration that the
defendants breached their duty to the shareholders and the class, and to recover unspecified damages, pre-judgment and post-judgment
interest, and an award of their attorneys’ fees and other costs.
On December 14, 2018, the judge of the
Superior Court of Hamilton County, Indiana issued an order granting the Company’s motion to dismiss the shareholders’
lawsuits. On January 11, 2019, the shareholders filed an appeal of the judge’s order dismissing the lawsuits. The Company
continues to believe the claim is without merit and will defend the appeal vigorously.
On
September 8, 2014, two former restaurant manager employees filed a purported class action lawsuit against Steak n Shake (Drake
v. Steak n Shake). On January 30, 2017, a former restaurant manager employee filed a purported class action lawsuit against Steak
n Shake (Clendenen v. Steak n Shake). The plaintiffs generally allege claims that Steak n Shake improperly classified its managerial
employees as exempt. On February 28, 2019, a jury returned a verdict in the Drake case against Steak
n Shake. The Company agreed to settle both cases for $8,350 and the Court approved the terms of the settlement on July 26, 2019.
Note 15. Fair Value of Financial Assets
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 recorded at fair value in the consolidated balance
sheets:
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 1 or Level 2 of the fair value hierarchy depending on the instrument.
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 publicly
traded securities, each of which 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.
Note 15. Fair Value of Financial Assets
(continued)
As of June 30, 2019 and December 31,
2018, the fair values of financial assets were as follows.
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
10,118
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,118
|
|
|
$
|
21,448
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,448
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer goods
|
|
|
—
|
|
|
|
6,421
|
|
|
|
—
|
|
|
|
6,421
|
|
|
|
1,708
|
|
|
|
4,100
|
|
|
|
—
|
|
|
|
5,808
|
|
Bonds
|
|
|
35,557
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,557
|
|
|
|
32,404
|
|
|
|
—
|
|
|
|
—
|
|
|
|
32,404
|
|
Options on equity securities
|
|
|
—
|
|
|
|
2,142
|
|
|
|
—
|
|
|
|
2,142
|
|
|
|
—
|
|
|
|
2,755
|
|
|
|
—
|
|
|
|
2,755
|
|
Non-qualified deferred compensation plan
investments
|
|
|
2,057
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,057
|
|
|
|
2,149
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,149
|
|
Total assets at fair value
|
|
$
|
47,732
|
|
|
$
|
8,563
|
|
|
$
|
—
|
|
|
$
|
56,295
|
|
|
$
|
57,709
|
|
|
$
|
6,855
|
|
|
$
|
—
|
|
|
$
|
64,564
|
|
There were no changes in our valuation
techniques used to measure fair values on a recurring basis.
Note 16. Related Party Transactions
Services Agreement
During 2017, the Company entered into
a services agreement with Biglari Enterprises LLC and Biglari Capital Corp. (collectively, the “Biglari Entities”) under
which the Biglari Entities provide business and administrative related services to the Company. The Biglari Entities are owned
by Mr. Biglari. The services agreement has a five-year term, effective on October 1, 2017. The fixed fee is $700 per month for
the first year with adjustments in years two through five. The monthly fee will remain at $700 during 2019. The Company paid Biglari
Enterprises $4,200 in service fees during the first six months of 2019 and 2018. The services agreement does not alter the hurdle
rate connected with the incentive reallocation paid to Biglari Capital Corp. by the Company.
License Agreement
During 2013,
the Company entered into a Trademark License Agreement (the “License Agreement”) with Mr. Biglari. The Company and its
subsidiaries paid no royalties to Mr. Biglari under the License Agreement during its term. The License Agreement was terminated
on March 26, 2019.
Incentive Agreement Amendment
The Incentive Agreement was amended
on March 26, 2019 to remove the annual limitation on Mr. Biglari’s incentive compensation, as well as the requirement
of Mr. Biglari to use 30% of his incentive payments to purchase shares of the Company. In connection with the amendment, the change
of control and severance provisions contained in the Incentive Agreement were eliminated and the License Agreement was terminated.
The amendment is effective in 2019.
Note 17. Business Segment Reporting
Our reportable business segments are
organized in a manner that reflects how management views those business activities. Our restaurant operations include Steak n Shake
and Western Sizzlin. The Company also reports segment information for First Guard and Maxim. 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.
Note 17. Business Segment Reporting
(continued)
Revenue for the second quarters and
first six months of 2019 and 2018 were as follows.
|
|
Revenue
|
|
|
Second Quarter
|
|
First Six Months
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Operating Businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steak n Shake
|
|
$
|
156,006
|
|
|
$
|
196,578
|
|
|
$
|
326,117
|
|
|
$
|
386,871
|
|
Western Sizzlin
|
|
|
4,055
|
|
|
|
4,016
|
|
|
|
7,719
|
|
|
|
7,657
|
|
Total Restaurant Operations
|
|
|
160,061
|
|
|
|
200,594
|
|
|
|
333,836
|
|
|
|
394,528
|
|
First Guard
|
|
|
7,417
|
|
|
|
6,745
|
|
|
|
14,624
|
|
|
|
13,292
|
|
Maxim
|
|
|
865
|
|
|
|
1,400
|
|
|
|
1,742
|
|
|
|
3,144
|
|
|
|
$
|
168,343
|
|
|
$
|
208,739
|
|
|
$
|
350,202
|
|
|
$
|
410,964
|
|
Earnings (losses) before income taxes
for the second quarters and first six months of 2019 and 2018 were as follows.
|
|
Earnings (Losses) Before Income Taxes
|
|
|
Second Quarter
|
|
First Six Months
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Operating Businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steak n Shake
|
|
$
|
(3,057
|
)
|
|
$
|
2,659
|
|
|
$
|
(21,915
|
)
|
|
$
|
1,667
|
|
Western Sizzlin
|
|
|
506
|
|
|
|
674
|
|
|
|
889
|
|
|
|
1,048
|
|
Total Restaurant Operations
|
|
|
(2,551
|
)
|
|
|
3,333
|
|
|
|
(21,026
|
)
|
|
|
2,715
|
|
First Guard
|
|
|
1,850
|
|
|
|
2,301
|
|
|
|
3,394
|
|
|
|
2,811
|
|
Maxim
|
|
|
176
|
|
|
|
16
|
|
|
|
64
|
|
|
|
(201
|
)
|
Other
|
|
|
114
|
|
|
|
164
|
|
|
|
253
|
|
|
|
303
|
|
Total Operating Businesses
|
|
|
(411
|
)
|
|
|
5,814
|
|
|
|
(17,315
|
)
|
|
|
5,628
|
|
Corporate and Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
(2,767
|
)
|
|
|
(3,004
|
)
|
|
|
(5,397
|
)
|
|
|
(6,170
|
)
|
Investment partnership gains (losses)
|
|
|
34,198
|
|
|
|
(8,341
|
)
|
|
|
68,352
|
|
|
|
(4,846
|
)
|
Total Corporate and Investments
|
|
|
31,431
|
|
|
|
(11,345
|
)
|
|
|
62,955
|
|
|
|
(11,016
|
)
|
Interest expense on notes payable and other borrowings
|
|
|
(3,150
|
)
|
|
|
(2,898
|
)
|
|
|
(6,208
|
)
|
|
|
(5,652
|
)
|
|
|
$
|
27,870
|
|
|
$
|
(8,429
|
)
|
|
$
|
39,432
|
|
|
$
|
(11,040
|
)
|