*Net earnings (loss) per equivalent Class B
share outstanding are one-fifth of the equivalent Class A share or $(80.07) for the first quarter of 2020 and $5.67 for the first
quarter of 2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(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, 2019.
Biglari Holdings is a holding company owning
subsidiaries engaged in a number of diverse business activities, including property and casualty insurance, media and licensing,
restaurants, and oil and gas. 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 investment and capital allocation decisions
are made for the Company and its subsidiaries by Mr. Biglari.
As of March 31, 2020, Mr. Biglari’s beneficial
ownership was approximately 64.4% of the Company’s outstanding Class A common stock and 55.4% of the Company’s outstanding
Class B common stock.
The novel coronavirus (“COVID-19”)
was declared a pandemic by the World Health Organization, which caused governments to contain its spread, thereby significantly
affecting our operating businesses beginning in March and will likely adversely affect nearly all of our operations in the second
quarter. The risks and uncertainties resulting from the pandemic that may affect our future earnings, cash flows and financial
condition include the nature and duration of the curtailment or closure and the long-term effect on the demand for our products
and services.
Business Acquisition
On March 9, 2020, Biglari Holdings
acquired the stock of Southern Pioneer Property & Casualty Insurance Company, and its agency, Southern Pioneer Insurance
Agency, Inc. (collectively “Southern Pioneer”). Southern Pioneer underwrites specialty insurance products
including garage liability insurance, commercial property coverage for auto dealers as well as homeowners, dwelling fire
insurance and credit-related insurance coverages. The financial results for Southern Pioneer from the acquisition date to the
end of the first quarter are included in the Company’s consolidated financial statements. The acquisition date fair
values of assets and liabilities of Southern Pioneer are provisional and subject to revision as the related valuations are
completed. Pro-forma financial information of Southern Pioneer is not material.
On September 9, 2019, a wholly-owned subsidiary
of the Company, Southern Oil Company, acquired the stock of Southern Oil of Louisiana Inc. (collectively “Southern Oil”).
Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of the Gulf of Mexico. Pro-forma
financial information of Southern Oil is not material.
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”), Southern Oil, First Guard Insurance Company
(“First Guard”), and Southern Pioneer. Intercompany accounts and transactions have been eliminated in consolidation.
Note 2. New Accounting Standards
In June 2016, the Financial Accounting Standards
Board 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 requires 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. The Company adopted ASU 2016-13 effective January 1, 2020. The impact of this standard is not material to the Company’s
financial statements and related disclosures.
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 March 31, 2020 and December 31, 2019.
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
|
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 March 31, 2020 and December 31, 2019. 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 first quarters of 2020 and 2019 were 344,391 and 346,223, respectively.
Note 4. Investments
Available for sale investments were $76,789
and $40,393 as of March 31, 2020 and December 31, 2019, respectively. Investments in equity securities and a related derivative
position of $4,463 are also included in investments. The investments are recorded at fair value. The fair value of investments
acquired with Southern Pioneer was $36,876.
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. (“Biglari Capital”)
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, 2019
|
|
$
|
666,123
|
|
|
$
|
160,581
|
|
|
$
|
505,542
|
|
Investment partnership gains (losses)
|
|
|
(261,708
|
)
|
|
|
(85,966
|
)
|
|
|
(175,742
|
)
|
Contributions (net of distributions) to investment partnerhips
|
|
|
(12,200
|
)
|
|
|
|
|
|
|
(12,200
|
)
|
Increase in proportionate share of Company stock held
|
|
|
|
|
|
|
(1,089
|
)
|
|
|
1,089
|
|
Partnership interest at March 31, 2020
|
|
$
|
392,215
|
|
|
$
|
73,526
|
|
|
$
|
318,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Company Common Stock
|
|
|
|
Carrying Value
|
|
Partnership interest at December 31, 2018
|
|
$
|
715,102
|
|
|
$
|
157,622
|
|
|
$
|
557,480
|
|
Investment partnership gains
|
|
|
73,096
|
|
|
|
38,942
|
|
|
|
34,154
|
|
Increase in proportionate share of Company stock held
|
|
|
|
|
|
|
114
|
|
|
|
(114
|
)
|
Partnership interest at March 31, 2019
|
|
$
|
788,198
|
|
|
$
|
196,678
|
|
|
$
|
591,520
|
|
The carrying value of the investment partnerships
net of deferred taxes is presented below.
|
|
March 31,
2020
|
|
December 31,
2019
|
Carrying value of investment partnerships
|
|
$
|
318,689
|
|
|
$
|
505,542
|
|
Deferred tax liability related to investment partnerships
|
|
|
(17,893
|
)
|
|
|
(56,518
|
)
|
Carrying value of investment partnerships net of deferred taxes
|
|
$
|
300,796
|
|
|
$
|
449,024
|
|
The Company’s proportionate share of
Company stock held by investment partnerships at cost is $373,768 and $374,857 at March 31, 2020 and December 31, 2019, 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.
|
|
|
First Quarter
|
|
|
|
|
2020
|
|
|
|
2019
|
|
Gains (losses) on investment partnership
|
|
$
|
(175,742
|
)
|
|
$
|
34,154
|
|
Tax expense (benefit)
|
|
|
(41,383
|
)
|
|
|
7,917
|
|
Net earnings (loss)
|
|
$
|
(134,359
|
)
|
|
$
|
26,237
|
|
On December 31 of each year, the general partner
of the investment partnerships, Biglari Capital, will earn an incentive reallocation fee for the Company’s investments equal
to 25% of the net profits above an annual hurdle rate of 6% over the previous high-water mark. Our policy is to accrue an
estimated incentive fee throughout the year. The total incentive reallocation from Biglari Holdings to Biglari Capital includes
gains on the Company’s common stock. Gains and losses on the Company’s common stock and the related incentive reallocations
are eliminated in our financial statements. Our investments in these partnerships are committed on a rolling 5-year basis.
There were no incentive reallocations from Biglari Holdings to
Biglari Capital during the first quarters of 2020 and 2019.
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, 2020
|
|
$
|
71,735
|
|
|
$
|
393,855
|
|
Total liabilities as of March 31, 2020
|
|
$
|
682
|
|
|
$
|
27,384
|
|
Revenue for the first quarter ended March 31, 2020
|
|
$
|
(45,894
|
)
|
|
$
|
(248,460
|
)
|
Earnings for the first quarter ended March 31, 2020
|
|
$
|
(45,910
|
)
|
|
$
|
(249,573
|
)
|
Biglari Holdings’ ownership interest as of March 31, 2020
|
|
|
66.1
|
%
|
|
|
93.1
|
%
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2019
|
|
$
|
117,135
|
|
|
$
|
758,663
|
|
Total liabilities as of December 31, 2019
|
|
$
|
158
|
|
|
$
|
114,639
|
|
Revenue for the first quarter ended March 31, 2019
|
|
$
|
19,764
|
|
|
$
|
67,550
|
|
Earnings for the first quarter ended March 31, 2019
|
|
$
|
19,748
|
|
|
$
|
65,102
|
|
Biglari Holdings’ ownership interest as of March 31, 2019
|
|
|
66.1
|
%
|
|
|
92.2
|
%
|
Revenue in the above summarized financial information
of the investment partnerships includes investment income and unrealized gains and losses on investments.
Note 6. Property and Equipment
Property and equipment is composed of the following.
|
|
March 31,
2020
|
|
December 31,
2019
|
Land
|
|
$
|
150,345
|
|
|
$
|
150,147
|
|
Buildings
|
|
|
140,480
|
|
|
|
144,243
|
|
Land and leasehold improvements
|
|
|
150,861
|
|
|
|
157,141
|
|
Equipment
|
|
|
196,654
|
|
|
|
196,264
|
|
Oil and gas properties
|
|
|
78,435
|
|
|
|
77,475
|
|
Construction in progress
|
|
|
3,737
|
|
|
|
3,789
|
|
|
|
|
720,512
|
|
|
|
729,059
|
|
Less accumulated depreciation and amortization
|
|
|
(382,887
|
)
|
|
|
(378,432
|
)
|
Property and equipment, net
|
|
$
|
337,625
|
|
|
$
|
350,627
|
|
Depletion expense related to oil and gas properties
was $4,737 during the first quarter of 2020 and is included in depreciation and amortization within the consolidated statement
of earnings.
The COVID-19 pandemic had an adverse effect
on our restaurant operations, thereby resulting in the evaluation of company-operated restaurants for recoverability. Consequently,
the Company recorded impairment charges of $10,300 for the first quarter of 2020 because of the decision to permanently close
51 Steak n Shake restaurants as well as the expected impact of the COVID-19 pandemic on the future operating performance of other
company-operated restaurants. The Company recorded an impairment to long-lived assets of $1,900 in the first quarter of 2019 primarily
related to Steak n Shake closed stores. The fair value of the long-lived assets was determined based on Level 3 inputs using a
discounted cash flow model.
The COVID-19 pandemic has caused oil demand
to significantly decrease, creating oversupplied markets, and resulting in lower commodity prices and margins. The Company evaluated
the potential impact on its oil and gas properties, but concluded they were not impaired during the first quarter of 2020. However,
protracted low commodity prices may require impairments in future periods.
The duration and extent of the COVID-19 pandemic
cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic may lead to future impairment
of long-lived assets including right of use assets. In addition, significant estimates and assumptions used in the evaluation
of long-lived assets for impairment may be subject to significant adjustments in future periods.
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. The Company purchased Southern Pioneer
on March 9, 2020. The preliminary purchase price allocation reflects goodwill of $11,865.
A reconciliation of the change in the carrying
value of goodwill is as follows.
|
|
|
|
March 31, 2020
|
Balance at beginning of year
|
|
|
|
$
|
40,040
|
|
Goodwill from acquisition
|
|
|
|
|
11,865
|
|
Change in foreign exchange rates during the first quarter of 2020
|
|
|
|
|
(11
|
)
|
Balance at end of period
|
|
|
|
$
|
51,894
|
|
We evaluate 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 quarters of 2020 or 2019.
In
response to the adverse effects of the COVID-19 pandemic, we considered whether goodwill needed to be evaluated for impairment
as of March 31, 2020, specifically related to goodwill for certain restaurant reporting units. Making estimates of the fair
value of reporting units at this time are significantly affected by assumptions on the severity, duration and long-term effects
of the pandemic on the reporting unit’s operations. We considered the available facts and made qualitative assessments
and judgments for what we believed represent reasonably possible outcomes. Although the fair values of certain of these reporting
units declined since the time that the most recent annual impairment tests were conducted, we concluded it is more likely than
not that goodwill was not impaired as of March 31, 2020. However, COVID-19 pandemic events will continue to evolve and the
negative effects on our operations could prove to be worse than we currently estimate and lead us to record goodwill or indefinite-lived
asset impairment charges prior to the next annual impairment review.
Other Intangible Assets
Other intangible assets are composed of the
following.
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Total
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Total
|
Franchise agreement
|
|
$
|
5,310
|
|
|
$
|
(5,310
|
)
|
|
$
|
—
|
|
|
$
|
5,310
|
|
|
$
|
(5,178
|
)
|
|
$
|
132
|
|
Other
|
|
|
810
|
|
|
|
(796
|
)
|
|
|
14
|
|
|
|
810
|
|
|
|
(792
|
)
|
|
|
18
|
|
Total
|
|
|
6,120
|
|
|
|
(6,106
|
)
|
|
|
14
|
|
|
|
6,120
|
|
|
|
(5,970
|
)
|
|
|
150
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
15,876
|
|
|
|
—
|
|
|
|
15,876
|
|
|
|
15,876
|
|
|
|
—
|
|
|
|
15,876
|
|
Other assets with indefinite lives
|
|
|
10,996
|
|
|
|
—
|
|
|
|
10,996
|
|
|
|
11,323
|
|
|
|
—
|
|
|
|
11,323
|
|
Total intangible assets
|
|
$
|
32,992
|
|
|
$
|
(6,106
|
)
|
|
$
|
26,886
|
|
|
$
|
33,319
|
|
|
$
|
(5,970
|
)
|
|
$
|
27,349
|
|
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 quarters of 2020 and 2019 was $136 and $137, 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.
|
|
First Quarter
|
|
|
2020
|
|
2019
|
Net sales
|
|
$
|
104,728
|
|
|
$
|
165,631
|
|
Franchise royalties and fees
|
|
|
5,211
|
|
|
|
6,654
|
|
Franchise partner fees
|
|
|
3,344
|
|
|
|
258
|
|
Other
|
|
|
861
|
|
|
|
1,232
|
|
|
|
$
|
114,144
|
|
|
$
|
173,775
|
|
Net sales
Net sales are composed of retail sales of food
through company-operated stores. Company-operated store revenues are recognized, net of discounts and sales taxes, when our obligation
to perform is satisfied 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. Royalties are based upon a percentage of sales of the franchise
restaurant and are recognized as earned. Franchise royalties are billed on a monthly basis. Initial franchise fees when a new restaurant
opens or at the start of a new franchise term are recorded as deferred revenue when received and recognized as revenue over the
term of the franchise agreement. Our advertising arrangements with franchisees are reported in franchise royalties and fees.
Franchise partner fees
Steak n Shake is in the process of
transitioning company-operated restaurants to franchise
partners. The franchise agreement stipulates that the franchisee make an upfront investment totaling ten thousand
dollars. Potential franchise partners are screened based on entrepreneurial attitude and ability, but they become franchise
partners based on achievement. Each must meet the gold standard in service. Franchise partners are required to be hands-on
operators. We limit a franchisee to a single location. As the franchisor Steak n Shake assesses a fee of up to 15% of sales
as well as 50% of profits.
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.
|
|
March 31,
2020
|
|
December 31,
2019
|
Accounts payable
|
|
$
|
36,289
|
|
|
$
|
32,626
|
|
Gift card liability
|
|
|
17,063
|
|
|
|
20,745
|
|
Salaries, wages, and vacation
|
|
|
5,328
|
|
|
|
10,667
|
|
Taxes payable
|
|
|
20,030
|
|
|
|
29,275
|
|
Self-insurance accruals
|
|
|
21,442
|
|
|
|
11,070
|
|
Deferred revenue
|
|
|
25,395
|
|
|
|
10,454
|
|
Other
|
|
|
8,293
|
|
|
|
6,242
|
|
Accounts payable and accrued expenses
|
|
$
|
133,840
|
|
|
$
|
121,079
|
|
Note 10. Notes Payable and Other Borrowings
Notes payable and other borrowings include the following.
Current portion of notes payable and other borrowings
|
|
March 31,
2020
|
|
December 31,
2019
|
Notes payable
|
|
$
|
159,219
|
|
|
$
|
2,200
|
|
Unamortized original issue discount and debt issuance costs
|
|
|
(986
|
)
|
|
|
(982
|
)
|
Western Sizzlin revolver
|
|
|
50
|
|
|
|
—
|
|
Finance obligations
|
|
|
4,800
|
|
|
|
4,252
|
|
Finance lease liabilities
|
|
|
1,549
|
|
|
|
1,633
|
|
Total current portion of notes payable and other borrowings
|
|
$
|
164,632
|
|
|
$
|
7,103
|
|
|
|
|
|
|
|
|
|
|
Long-term notes payable and other borrowings
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
—
|
|
|
$
|
179,298
|
|
Unamortized original issue discount and debt issuance costs
|
|
|
—
|
|
|
|
(252
|
)
|
Finance obligations
|
|
|
73,309
|
|
|
|
74,497
|
|
Finance leases liabilities
|
|
|
7,257
|
|
|
|
9,639
|
|
Total long-term notes payable and other borrowings
|
|
$
|
80,566
|
|
|
$
|
263,182
|
|
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. As of March 31, 2020, $159,219 was outstanding. The Company is evaluating
refinancing options. Alternative financing may not be available on terms commensurate with its current financing arrangement. In
addition, the duration of the pandemic could have a material adverse effect on financing options or Steak n Shake’s ability
to comply with the terms of its credit agreement. Biglari Holdings is not a guarantor under the credit facility.
The term loan amortizes in equal quarterly
installments at an annual rate of 1.0% 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.
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 5.36% as of March 31, 2020.
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.
The fair value of long-term debt, excluding
capitalized lease obligations, was approximately $80,000 at March 31, 2020. The fair value of our debt was estimated based on quoted
market prices. The fair value was determined to be a Level 3 fair value measurement.
The Company retired $21,729 of debt on
February 18, 2020.
Western Sizzlin Revolver
Western Sizzlin had $50 and $0 of debt outstanding
under its revolver as of March 31, 2020 and December 31, 2019, respectively.
Note 11. Leased Assets and Lease Commitments
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.
|
|
First Quarter
|
|
|
|
2020
|
|
|
2019
|
|
Finance lease costs:
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
479
|
|
|
$
|
492
|
|
Interest on lease liabilities
|
|
|
178
|
|
|
|
207
|
|
Operating lease costs *
|
|
|
3,736
|
|
|
|
3,857
|
|
Total lease costs
|
|
$
|
4,393
|
|
|
$
|
4,556
|
|
|
|
|
|
|
|
|
|
|
*Includes short-term leases, variable lease costs and sublease income, which are immaterial
|
Supplemental cash flow information related to leases is as follows.
|
|
|
First Quarter
|
|
|
|
2020
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Financing cash flows from finance leases
|
|
$
|
413
|
|
|
$
|
402
|
|
Operating cash flows from finance leases
|
|
$
|
171
|
|
|
$
|
207
|
|
Operating cash flows from operating leases
|
|
$
|
3,993
|
|
|
$
|
4,191
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Finance lease liabilities
|
|
$
|
—
|
|
|
$
|
1,097
|
|
Operating lease liabilities
|
|
$
|
73
|
|
|
$
|
5,570
|
|
Supplemental balance sheet information related to leases is as follows.
|
|
March 31,
2020
|
|
December 31,
2019
|
Finance leases:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
7,177
|
|
|
$
|
10,783
|
|
|
|
|
|
|
|
|
|
|
Current portion of notes payable and other borrowings
|
|
$
|
1,549
|
|
|
$
|
1,633
|
|
Long-term notes payable and other borrowings
|
|
|
7,257
|
|
|
|
9,639
|
|
Total finance lease liablities
|
|
$
|
8,806
|
|
|
$
|
11,272
|
|
Weighted-average lease terms and discount rates are as follows.
|
|
March 31,
2020
|
Weighted-average remaining lease terms:
|
|
|
Finance leases
|
|
6.3 years
|
Operating leases
|
|
6.0 years
|
|
|
|
Weighted-average discount rates:
|
|
|
Finance leases
|
|
7.1%
|
Operating leases
|
|
6.9%
|
Note 11. Leased Assets and Lease Commitments (continued)
Maturities of lease liabilities as of March 31, 2020 are as follows.
Year
|
|
Operating Leases
|
|
Finance Leases
|
|
2020
|
|
|
$
|
11,664
|
|
|
$
|
1,587
|
|
|
2021
|
|
|
|
14,945
|
|
|
|
2,116
|
|
|
2022
|
|
|
|
12,850
|
|
|
|
1,618
|
|
|
2023
|
|
|
|
11,027
|
|
|
|
1,410
|
|
|
2024
|
|
|
|
8,884
|
|
|
|
1,374
|
|
|
After 2024
|
|
|
|
17,007
|
|
|
|
2,756
|
|
|
Total lease payments
|
|
|
|
76,377
|
|
|
|
10,861
|
|
|
Less interest
|
|
|
|
14,294
|
|
|
|
2,055
|
|
|
Total lease liabilities
|
|
|
$
|
62,083
|
|
|
$
|
8,806
|
|
Note 12. Accumulated Other Comprehensive
Income
During the first quarters of 2020 and 2019,
accumulated other comprehensive losses decreased by $312 and $304, respectively, due to changes in foreign currency translation
adjustments. As of March 31, 2020 and 2019, the balances in accumulated comprehensive loss were $3,122 and $2,820, respectively.
There were no reclassifications from accumulated other comprehensive income to earnings during the first quarters of 2020 and 2019.
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 the first quarters of 2020
and 2019. 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 benefit for the first quarter of
2020 was $43,830 compared to an income tax expense of $1,744 for the first quarter of 2019. The variance in income taxes
between 2020 and 2019 is attributable to taxes on income generated by the investment partnerships. Investment partnership pretax
losses were $175,742 during the first quarter of 2020, compared to pretax gains of $34,154 during the first quarter of 2019.
As of March 31, 2020 and December 31, 2019,
we had $348 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 shareholder withdrew the motion 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, including the ability to vote the Company’s shares that are eliminated for financial reporting purposes. 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.
Note 14. Commitments and Contingencies
(continued)
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. On December 4, 2019,
the Indiana Court of Appeals issued a unanimous decision affirming the trial court’s decision to dismiss the shareholder
litigation. On January 20, 2020, the shareholders filed a petition to transfer with the Indiana Supreme Court seeking review
of the decision of the Court of Appeals. The Company opposed the petition. On April 7, 2020, the Indiana Supreme Court
denied the petition to transfer. All of the cases referenced above are completed and each case was concluded in the Company’s
favor.
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 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 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 Levels 1 and 2 of the fair value hierarchy
depending on the instrument.
Note 15. Fair Value of Financial Assets (continued)
As of March 31, 2020 and December 31, 2019,
the fair values of financial assets were as follows.
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
23,138
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,138
|
|
|
$
|
43,095
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,095
|
|
Equity securities
|
|
|
5,605
|
|
|
|
5,714
|
|
|
|
—
|
|
|
|
11,319
|
|
|
|
25
|
|
|
|
6,397
|
|
|
|
—
|
|
|
|
6,422
|
|
Bonds
|
|
|
49,518
|
|
|
|
2,500
|
|
|
|
—
|
|
|
|
52,018
|
|
|
|
38,911
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38,911
|
|
Options on equity securities
|
|
|
—
|
|
|
|
2,849
|
|
|
|
—
|
|
|
|
2,849
|
|
|
|
—
|
|
|
|
2,166
|
|
|
|
—
|
|
|
|
2,166
|
|
Non-qualified deferred compensation plan
investments
|
|
|
1,541
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,541
|
|
|
|
2,175
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,175
|
|
Total assets at fair value
|
|
$
|
79,802
|
|
|
$
|
11,063
|
|
|
$
|
—
|
|
|
$
|
90,865
|
|
|
$
|
84,206
|
|
|
$
|
8,563
|
|
|
$
|
—
|
|
|
$
|
92,769
|
|
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 services to the Company. The services agreement has a five-year term, effective on October 1, 2017.
The fixed fee of $700 per month can be adjusted annually. The monthly fee will remain at $700 during 2020. The Company paid Biglari
Enterprises $2,100 in service fees during the first quarter of 2020 and 2019. The services agreement does not alter the hurdle
rate connected with the incentive reallocation paid to Biglari Capital Corp. The Biglari Entities are owned by Mr. Biglari.
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
became 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. Our insurance operations include First Guard and Southern Pioneer. The Company also reports segment information for Maxim
and Southern Oil. Other business activities not specifically identified with reportable business segments are presented in corporate.
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)
A disaggregation of our consolidated data for
the first quarter of 2020 and 2019 is presented in the tables which follow.
|
|
Revenue
|
|
|
First Quarter
|
|
|
|
|
2020
|
|
|
|
2019
|
|
Operating Businesses:
|
|
|
|
|
|
|
|
|
Restaurant Operations:
|
|
|
|
|
|
|
|
|
Steak n Shake
|
|
$
|
111,113
|
|
|
$
|
170,111
|
|
Western Sizzlin
|
|
|
3,031
|
|
|
|
3,664
|
|
Total Restaurant Operations
|
|
|
114,144
|
|
|
|
173,775
|
|
|
|
|
|
|
|
|
|
|
Insurance Operations:
|
|
|
|
|
|
|
|
|
First Guard
|
|
|
7,884
|
|
|
|
7,207
|
|
Southern Pioneer
|
|
|
1,790
|
|
|
|
—
|
|
Total Insurance Operations
|
|
|
9,674
|
|
|
|
7,207
|
|
|
|
|
|
|
|
|
|
|
Southern Oil
|
|
|
11,374
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Maxim
|
|
|
508
|
|
|
|
877
|
|
|
|
$
|
135,700
|
|
|
$
|
181,859
|
|
|
|
Earnings (Losses) Before Income Taxes
|
|
|
First Quarter
|
|
|
|
|
2020
|
|
|
|
2019
|
|
Operating Businesses:
|
|
|
|
|
|
|
|
|
Restaurant Operations:
|
|
|
|
|
|
|
|
|
Steak n Shake
|
|
$
|
(10,937
|
)
|
|
$
|
(18,858
|
)
|
Western Sizzlin
|
|
|
37
|
|
|
|
383
|
|
Total Restaurant Operations
|
|
|
(10,900
|
)
|
|
|
(18,475
|
)
|
|
|
|
|
|
|
|
|
|
Insurance Operations:
|
|
|
|
|
|
|
|
|
First Guard
|
|
|
2,441
|
|
|
|
1,544
|
|
Southern Pioneer
|
|
|
472
|
|
|
|
—
|
|
Total Insurance Operations
|
|
|
2,913
|
|
|
|
1,544
|
|
|
|
|
|
|
|
|
|
|
Southern Oil
|
|
|
2,470
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Maxim
|
|
|
(32
|
)
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
Total Operating Businesses
|
|
|
(5,549
|
)
|
|
|
(17,043
|
)
|
Corporate and Investments:
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
(2,296
|
)
|
|
|
(2,491
|
)
|
Investment partnership gains (losses)
|
|
|
(175,742
|
)
|
|
|
34,154
|
|
Total Corporate and Investments
|
|
|
(178,038
|
)
|
|
|
31,663
|
|
|
|
|
|
|
|
|
|
|
Interest expense on notes payable and debt extinguishment gains
|
|
|
1,872
|
|
|
|
(3,058
|
)
|
|
|
$
|
(181,715
|
)
|
|
$
|
11,562
|
|