Company Quick10K Filing
Biglari
Price1.00 EPS-74,223,000
Shares-0 P/E-0
MCap-0 P/FCF-0
Net Debt154 EBIT91
TEV154 TEV/EBIT2
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-09-30 Filed 2020-11-09
10-Q 2020-06-30 Filed 2020-08-10
10-Q 2020-03-31 Filed 2020-05-08
10-K 2019-12-31 Filed 2020-02-24
10-Q 2019-09-30 Filed 2019-11-01
10-Q 2019-06-30 Filed 2019-08-02
10-Q 2019-03-31 Filed 2019-05-03
10-K 2018-12-31 Filed 2019-02-25
10-Q 2018-09-30 Filed 2018-11-02
10-Q 2018-06-30 Filed 2018-08-03
10-Q 2018-03-31 Filed 2018-05-04
8-K 2020-11-06 Earnings, Exhibits
8-K 2020-08-07 Earnings, Exhibits
8-K 2020-06-25 Shareholder Vote, Other Events
8-K 2020-05-08
8-K 2020-02-22
8-K 2019-11-01
8-K 2019-10-31
8-K 2019-09-09
8-K 2019-08-02
8-K 2019-05-03
8-K 2019-04-25
8-K 2019-02-23
8-K 2018-11-02
8-K 2018-08-03
8-K 2018-05-04

BH 10Q Quarterly Report

Part 1 - Financial Information
Item 1. Financial Statements
Note 1. Summary of Significant Accounting Policies
Note 2. New Accounting Standards
Note 3. Earnings per Share
Note 4. Investments
Note 5. Investment Partnerships
Note 6. Property and Equipment
Note 7. Goodwill and Other Intangible Assets
Note 8. Restaurant Operations Revenues
Note 9. Accounts Payable and Accrued Expenses
Note 10. Notes Payable and Other Borrowings
Note 11. Leased Assets and Lease Commitments
Note 12. Accumulated Other Comprehensive Income
Note 13. Income Taxes
Note 14. Commitments and Contingencies
Note 15. Fair Value of Financial Assets
Note 16. Related Party Transactions
Note 17. Business Segment Reporting
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.01 bh_ex3101.htm
EX-31.02 bh_ex3102.htm
EX-32.01 bh_ex3201.htm

Biglari Earnings 2020-09-30

Balance SheetIncome StatementCash Flow
1.21.00.70.50.20.02016201720182020
Assets, Equity
0.30.20.10.1-0.0-0.12016201720182020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12016201720182020
Ops, Inv, Fin

bh_10q.htm

 

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

 

FORM 10-Q 

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

 

For the quarterly period ended September 30, 2020

 

or

 

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 001-38477

 

BIGLARI HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

Indiana

 

82-3784946

(State or other jurisdiction of incorporation)

 

(I.R.S. Employer Identification No.)

 

17802 IH 10 West, Suite 400

San Antonio, TX

 

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbols 

Name of each exchange on which registered

Class A Common Stock, no par value

Class B Common Stock, no par value

 BH.A

BH

New York Stock Exchange

New York Stock Exchange

 

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 ☒    No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and an “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No ☒

 

Number of shares of common stock outstanding as of November 3, 2020:

 

Class A common stock –  

 

 

206,864

 

Class B common stock –

 

 

2,068,640

 

 

 

 

   

BIGLARI HOLDINGS INC.

INDEX

 

 

 

 

Page No.

Part I – Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements

 

1

 

 

Consolidated Balance Sheets — September 30, 2020 and December 31, 2019 

 

1

 

 

Consolidated Statements of Earnings — Third Quarter and First Nine Months 2020 and 2019 

 

2

 

 

Consolidated Statements of Comprehensive Income — Third Quarter and First Nine Months 2020 and 2019 

 

2

 

 

Consolidated Statements of Cash Flows — First Nine Months 2020 and 2019

 

3

 

 

Consolidated Statements of Changes in Shareholders’ Equity — First Nine Months 2020 and 2019 

 

4

 

 

Notes to Consolidated Financial Statements 

 

5

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk 

 

26

 

Item 4.

Controls and Procedures 

 

26

 

 

 

 

 

 

Part II – Other Information

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

27

 

Item 1A.

Risk Factors

 

27

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

27

 

Item 3.

Defaults Upon Senior Securities

 

27

 

Item 4.

Mine Safety Disclosures

 

27

 

Item 5.

Other Information

 

27

 

Item 6.

Exhibits

 

27

 

Signatures

 

28

 

    

 

 

  

PART 1 – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

BIGLARI HOLDINGS INC.

 

CONSOLIDATED BALANCE SHEETS

 (dollars in thousands)

 

 

 

September 30,
2020

 

 

December 31,
2019

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$33,164

 

 

$67,772

 

Investments

 

 

85,082

 

 

 

44,856

 

Receivables

 

 

16,151

 

 

 

21,640

 

Inventories

 

 

2,908

 

 

 

4,674

 

Other current assets

 

 

5,622

 

 

 

6,449

 

Total current assets

 

 

142,927

 

 

 

145,391

 

Property and equipment

 

 

320,966

 

 

 

350,627

 

Operating lease assets

 

 

46,345

 

 

 

59,719

 

Goodwill and other intangible assets

 

 

75,656

 

 

 

67,389

 

Investment partnerships

 

 

383,670

 

 

 

505,542

 

Other assets

 

 

14,037

 

 

 

10,641

 

Total assets

 

$983,601

 

 

$1,139,309

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$117,888

 

 

$121,079

 

Current portion of operating lease liabilities

 

 

10,671

 

 

 

11,635

 

Current portion of notes payable and other borrowings

 

 

159,631

 

 

 

7,103

 

Total current liabilities

 

 

288,190

 

 

 

139,817

 

Long-term notes payable and other borrowings

 

 

76,099

 

 

 

263,182

 

Operating lease liabilities

 

 

39,865

 

 

 

53,271

 

Deferred taxes

 

 

30,130

 

 

 

54,230

 

Asset retirement obligations

 

 

9,896

 

 

 

10,447

 

Other liabilities

 

 

1,203

 

 

 

2,064

 

Total liabilities

 

 

445,383

 

 

 

523,011

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

Common stock

 

 

1,138

 

 

 

1,138

 

Additional paid-in capital

 

 

381,788

 

 

 

381,788

 

Retained earnings

 

 

536,721

 

 

 

611,039

 

Accumulated other comprehensive loss

 

 

(1,976)

 

 

(2,810)

Treasury stock, at cost

 

 

(379,453)

 

 

(374,857)

Biglari Holdings Inc. shareholders’ equity

 

 

538,218

 

 

 

616,298

 

Total liabilities and shareholders’ equity

 

$983,601

 

 

$1,139,309

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 
1

Table of Contents

  

BIGLARI HOLDINGS INC.

 

CONSOLIDATED STATEMENTS OF EARNINGS

 (dollars in thousands except per share amounts)

 

 

 

 Third Quarter

 

 

 First Nine Months

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant operations

 

$79,674

 

 

$145,111

 

 

$272,582

 

 

$478,947

 

Insurance premiums and other

 

 

14,413

 

 

 

7,681

 

 

 

38,692

 

 

 

22,305

 

Oil and gas

 

 

6,029

 

 

 

6,500

 

 

 

19,554

 

 

 

6,500

 

Media and licensing

 

 

1,719

 

 

 

924

 

 

 

3,209

 

 

 

2,666

 

 

 

 

101,835

 

 

 

160,216

 

 

 

334,037

 

 

 

510,418

 

Cost and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant cost of sales

 

 

54,062

 

 

 

113,398

 

 

 

194,737

 

 

 

397,597

 

Insurance losses and underwriting expenses

 

 

11,290

 

 

 

5,242

 

 

 

28,866

 

 

 

16,400

 

Oil and gas production costs

 

 

2,171

 

 

 

2,595

 

 

 

6,570

 

 

 

2,595

 

Media and licensing costs

 

 

548

 

 

 

514

 

 

 

1,491

 

 

 

2,103

 

Selling, general and administrative

 

 

19,902

 

 

 

22,930

 

 

 

60,687

 

 

 

81,871

 

Impairments

 

 

3,698

 

 

 

5,079

 

 

 

21,817

 

 

 

7,417

 

Depreciation and amortization

 

 

7,275

 

 

 

7,514

 

 

 

24,284

 

 

 

18,191

 

Interest expense

 

 

3,743

 

 

 

5,024

 

 

 

11,652

 

 

 

15,244

 

 

 

 

102,689

 

 

 

162,296

 

 

 

350,104

 

 

 

541,418

 

Other income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on debt extinguishment

 

 

-

 

 

 

-

 

 

 

5,713

 

 

 

-

 

Investment gains

 

 

354

 

 

 

-

 

 

 

1,863

 

 

 

-

 

Investment partnership gains (losses)

 

 

27,218

 

 

 

1,449

 

 

 

(89,276)

 

 

69,801

 

 

 

 

27,572

 

 

 

1,449

 

 

 

(81,700)

 

 

69,801

 

Earnings (loss) before income taxes

 

 

26,718

 

 

 

(631)

 

 

(97,767)

 

 

38,801

 

Income tax expense (benefit)

 

 

5,617

 

 

 

(614)

 

 

(23,449)

 

 

7,026

 

Net earnings (loss)

 

$21,101

 

 

$(17)

 

$(74,318)

 

$31,775

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per equivalent Class A share *

 

$60.07

 

 

$(0.05)

 

$(213.31)

 

$92.04

 

 

*Net earnings (loss) per equivalent Class B share outstanding are one-fifth of the equivalent Class A share or $12.01 and $(42.66) for the third quarter and first nine months of 2020, respectively, and $(0.01) and $18.41 for the third quarter and first nine months of 2019, respectively.

  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

 

 

 

Third Quarter

 

 

First Nine Months

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Net earnings (loss)

 

$21,101

 

 

$(17)

 

$(74,318)

 

$31,775

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

344

 

 

 

(628)

 

 

834

 

 

 

(736)

Other comprehensive income (loss), net

 

 

344

 

 

 

(628)

 

 

834

 

 

 

(736)

Total comprehensive income (loss)

 

$21,445

 

 

$(645)

 

$(73,484)

 

$31,039

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 
2

Table of Contents

  

BIGLARI HOLDINGS INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

 

 

 

 First Nine Months

 

 

 

2020

 

 

2019

 

 

 

(Unaudited)

 

Operating activities

 

 

 

 

 

 

Net earnings (loss)

 

$(74,318)

 

$31,775

 

Adjustments to reconcile net earnings (loss) to operating cash flows:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

24,284

 

 

 

18,191

 

Provision for deferred income taxes

 

 

(23,755)

 

 

(35,902)

Asset impairments and other non-cash expenses

 

 

22,545

 

 

 

8,105

 

(Gains) losses on disposal of assets

 

 

(1,251)

 

 

200

 

Gain on debt extinguishment

 

 

(5,713)

 

 

-

 

Investment gains

 

 

(1,863)

 

 

-

 

Investment partnership (gains) losses

 

 

89,276

 

 

 

(69,801)

Distributions from investment partnerships

 

 

97,330

 

 

 

64,329

 

Changes in receivables and inventories

 

 

9,964

 

 

 

8,817

 

Changes in other assets

 

 

955

 

 

 

(1,241)

Changes in accounts payable and accrued expenses

 

 

(31,087

)

 

 

15,386

 

Net cash provided by operating activities

 

 

106,367

 

 

 

39,859

 

Investing activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(13,297)

 

 

(8,357)

Proceeds from property and equipment disposals

 

 

3,914

 

 

 

815

 

Acquisition of business, net of cash acquired

 

 

(34,240)

 

 

(51,057)

Distributions from investment partnerships

 

 

-

 

 

 

40,000

 

Purchases of limited partner interests

 

 

(69,330)

 

 

(40,000)

Purchases of investments

 

 

(240,351)

 

 

(91,927)

Redemptions of fixed maturity securities

 

 

241,223

 

 

 

87,250

 

Net cash used in investing activities

 

 

(112,081)

 

 

(63,276)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from revolving credit facility

 

 

500

 

 

 

-

 

Principal payments on long-term debt

 

 

(22,729)

 

 

(1,650)

Principal payments on direct financing lease obligations

 

 

(4,152)

 

 

(4,353)

Net cash used in financing activities

 

 

(26,381)

 

 

(6,003)

Effect of exchange rate changes on cash

 

 

(13)

 

 

(29)

Decrease in cash, cash equivalents and restricted cash

 

 

(32,108)

 

 

(29,449)

Cash, cash equivalents and restricted cash at beginning of year

 

 

70,696

 

 

 

55,010

 

Cash, cash equivalents and restricted cash at end of third quarter

 

$38,588

 

 

$25,561

 

 

See accompanying Notes to Consolidated Financial Statements.

 

 
3

Table of Contents

   

BIGLARI HOLDINGS INC.

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(dollars in thousands)

 

 

 

Common

 

 

Additional Paid-In 

 

 

Retained  

 

 

Accumulated
Other Comprehensive 

 

 

Treasury  

 

 

 

 

 

Stock

 

 

Capital

 

 

Earnings

 

 

 Income (Loss)

 

 

Stock  

 

 

Total

 

Balance at December 31, 2019

 

$1,138

 

 

$381,788

 

 

$611,039

 

 

$(2,810)

 

$(374,857)

 

$616,298

 

Net earnings (loss)

 

 

 

 

 

 

 

 

 

 

(137,885)

 

 

 

 

 

 

 

 

 

 

(137,885)

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(312)

 

 

 

 

 

 

(312)

Adjustment to treasury stock for holdings in investment partnerships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,089

 

 

 

1,089

 

Balance at March 31, 2020

 

$1,138

 

 

$381,788

 

 

$473,154

 

 

$(3,122)

 

$(373,768)

 

$479,190

 

Net earnings

 

 

 

 

 

 

 

 

 

 

42,466

 

 

 

 

 

 

 

 

 

 

 

42,466

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

802

 

 

 

 

 

 

 

802

 

Adjustment to treasury stock for holdings in investment partnerships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

92

 

 

 

92

 

Balance at June 30, 2020

 

$1,138

 

 

$381,788

 

 

$515,620

 

 

$(2,320)

 

$(373,676)

 

$522,550

 

Net earnings

 

 

 

 

 

 

 

 

 

 

21,101

 

 

 

 

 

 

 

 

 

 

 

21,101

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

344

 

 

 

 

 

 

 

344

 

Adjustment to treasury stock for holdings in investment partnerships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,777)

 

 

(5,777)

Balance at September 30, 2020

 

$1,138

 

 

$381,788

 

 

$536,721

 

 

$(1,976)

 

$(379,453)

 

$538,218

 

 

 

 

Common

 

 

Additional 

Paid-In

 

 

Retained

 

 

Accumulated
Other
Comprehensive

 

 

Treasury

 

 

 

 

 

Stock

 

 

Capital

 

 

Earnings

 

 

 Income (Loss)

 

 

Stock  

 

 

Total

 

Balance at December 31, 2018

 

$1,138

 

 

$381,904

 

 

$564,160

 

 

$(2,516)

 

$(374,231)

 

$570,455

 

Net earnings

 

 

 

 

 

 

 

 

 

 

9,818

 

 

 

 

 

 

 

 

 

 

 

9,818

 

Adoption of accounting standards

 

 

 

 

 

 

 

 

 

 

1,499

 

 

 

 

 

 

 

 

 

 

 

1,499

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(304)

 

 

 

 

 

 

(304)

Adjustment to treasury stock for holdings in investment partnerships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(114)

 

 

(114)

Balance at March 31, 2019

 

$1,138

 

 

$381,904

 

 

$575,477

 

 

$(2,820)

 

$(374,345)

 

$581,354

 

Net earnings

 

 

 

 

 

 

 

 

 

 

21,974

 

 

 

 

 

 

 

 

 

 

 

21,974

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

196

 

 

 

 

 

 

 

196

 

Adjustment to treasury stock for holdings in investment partnerships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,162)

 

 

(1,162)

Balance at June 30, 2019

 

$1,138

 

 

$381,904

 

 

$597,451

 

 

$(2,624)

 

$(375,507)

 

$602,362

 

Net earnings (loss)

 

 

 

 

 

 

 

 

 

 

(17)

 

 

 

 

 

 

 

 

 

 

(17)

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(628)

 

 

 

 

 

 

(628)

Adjustment to treasury stock for holdings in investment partnerships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(197)

 

 

(197)

Balance at September 30, 2019

 

$1,138

 

 

$381,904

 

 

$597,434

 

 

$(3,252)

 

$(375,704)

 

$601,520

 

   

See accompanying Notes to Consolidated Financial Statements.

 

 
4

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BIGLARI HOLDINGS INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 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. 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 September 30, 2020, Mr. Biglari’s beneficial ownership was approximately 66.30% of the Company’s outstanding Class A common stock and 56.60% 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 adversely affecting nearly all of our operations during the second and third quarters.

 

Our restaurants were required to close their dining rooms during the first quarter.  In order to reopen the dining rooms profitably, Steak n Shake will require funds for capital expenditures, which are limited under its current debt agreement. The purpose of the capital spending is to convert Steak n Shake’s full-service model into a self-service one.  In addition, our restaurants have incurred costs to ensure compliance with health and safety standards in response to COVID-19.

 

The COVID-19 pandemic has caused oil demand to decrease significantly, creating oversupplied markets that have resulted in lower commodity prices and margins. In response, the Company has significantly cut production and expenses in its oil and gas business.

  

The risks and uncertainties resulting from the pandemic may continue to affect our future earnings, cash flows and financial condition.

 

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, as well as homeowners and dwelling fire insurance coverages. The financial results for Southern Pioneer from the acquisition date to the end of the third 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.

 

 
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Note 1. Summary of Significant Accounting Policies (continued)

 

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries including Steak n Shake Inc, Western Sizzlin Corporation, Maxim Inc., Southern Oil, First Guard Insurance Company, and Southern Pioneer.  Intercompany accounts and transactions have been eliminated in consolidation.

 

Change in Presentation

Interest expense on finance leases and obligations has been combined with interest expense in 2020 and reclassified as a component of cost and expenses in the consolidated statement of earnings.  Prior period balances have been adjusted to conform to the change in presentation.

 

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 September 30, 2020 and December 31, 2019.

   

 

 

 

September 30, 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 September 30, 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 third quarters of 2020 and 2019 were 351,288 and 343,519, respectively.  The equivalent Class A weighted average number of common shares during the first nine months of 2020 and 2019 were 348,396 and 345,249, respectively.

 

Note 4. Investments

 

Available for sale investments were $80,619 and $40,393 as of September 30, 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.  The Company recorded $354 and $1,863 in investment gains during the third quarter and first nine months of 2020, respectively.  The Company did not have investment gains/losses during the first quarter of 2020 and during the first nine months of 2019.   Interest and dividends earned on investments are reported as other income by our insurance companies.  We consider investment income as a component of our aggregate insurance operating results.  However, we consider investment gains and losses, whether realized or unrealized, as non-operating.

 

 
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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.

 

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)

 

 

(123,524)

 

 

(34,248)

 

 

(89,276)
Distributions (net of contributions) to investment partnerships

 

 

(28,000)

 

 

-

 

 

 

(28,000)
Increase in proportionate share of Company stock held

 

 

-

 

 

 

4,596

 

 

 

(4,596)
Partnership interest at September 30, 2020

 

$514,599

 

 

$130,929

 

 

$383,670

 

 

 

 

Fair Value

 

 

Company

Common Stock

 

 

Carrying Value

 

Partnership interest at December 31, 2018

 

$715,102

 

 

$157,622

 

 

$557,480

 

Investment partnership gains (losses)

 

 

63,419

 

 

 

(6,382)

 

 

69,801

 

Distributions (net of contributions) to investment partnerships

 

 

(64,329)

 

 

-

 

 

 

(64,329)
Increase in proportionate share of Company stock held

 

 

-

 

 

 

1,473

 

 

 

(1,473)
Partnership interest at September 30, 2019

 

$714,192

 

 

$152,713

 

 

$561,479

 

 

The carrying value of the investment partnerships net of deferred taxes is presented below.

 

 

 

 

September 30,
2020

 

 

December 31,

2019

 

Carrying value of investment partnerships

 

$383,670

 

 

$505,542

 

Deferred tax liability related to investment partnerships

 

 

(38,313)

 

 

(56,518)
Carrying value of investment partnerships net of deferred taxes

 

$345,357

 

 

$449,024

 

 

The Company’s proportionate share of Company stock held by investment partnerships at cost is $379,453 and $374,857 at September 30, 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.

     

 

 

 

Third Quarter

 

 

First Nine Months

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Gains (losses) on investment partnership

 

$27,218

 

 

$1,449

 

 

$(89,276)

 

$69,801

 

Tax expense (benefit)

 

 

6,163

 

 

 

49

 

 

 

(21,337)

 

 

15,910

 

Net earnings (loss)

 

$21,055

 

 

$1,400

 

 

$(67,939)

 

$53,891

 

     

 
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Note 5. Investment Partnerships (continued)

 

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 nine months of 2020 and 2019.

 

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 September 30, 2020

 

$98,041

 

 

$497,761

 

Total liabilities as of September 30, 2020

 

$120

 

 

$27,768

 

Revenue for the first nine months of 2020

 

$(18,941)

 

$(119,644)
Earnings for the first nine months of 2020

 

$(18,992)

 

$(120,849)
Biglari Holdings' ownership interest as of September 30, 2020

 

 

66.20%

 

 

95.30%

 

 

 

 

 

 

 

 

 

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 nine months of 2019

 

$3,332

 

 

$71,578

 

Earnings for the first nine months of 2019

 

$3,278

 

 

$65,637

 

Biglari Holdings' ownership interest as of September 30, 2019

 

 

66.10%

 

 

93.50%

 

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.

 

 

 

September 30,
2020

 

 

December 31,

2019

 

Land

 

$143,839

 

 

$150,147

 

Buildings

 

 

139,320

 

 

 

144,243

 

Land and leasehold improvements

 

 

140,940

 

 

 

157,141

 

Equipment

 

 

192,201

 

 

 

196,264

 

Oil and gas properties

 

 

75,853

 

 

 

77,475

 

Construction in progress

 

 

1,036

 

 

 

3,789

 

 

 

 

693,189

 

 

 

729,059

 

Less accumulated depreciation and amortization

 

 

(372,223)

 

 

(378,432)
Property and equipment, net

 

$320,966

 

 

$350,627

 

 

Depletion expense related to oil and gas properties was $9,249 during the first nine months of 2020 and is included in depreciation and amortization in 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 $3,698 in the third quarter of 2020 and $18,117 in the first nine months of 2020 mainly because of the decision to permanently close some Steak n Shake restaurants as well as to close the dining rooms of all company-operated restaurants.  The Company recorded an impairment to long-lived assets of $5,079 in the third quarter of 2019 and $7,417 in the first nine months 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.  Moreover, we also applied a market analysis for certain properties.

 

 
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Note 6. Property and Equipment (continued)

 

The COVID-19 pandemic has caused oil demand to decrease significantly, creating oversupplied markets that have resulted 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 nine months 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.

 

 

 

September 30,
2020

 

Balance at beginning of year

 

$40,040

 

Goodwill from acquisition

 

 

11,865

 

Change in foreign exchange rates during the first nine months of 2020

 

 

27

 

Balance at end of period

 

$51,932

 

 

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 nine months 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 September 30, 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 September 30, 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.  The Company may record goodwill impairment charges in future periods. 

 

 
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 Note 7. Goodwill and Other Intangible Assets (continued)

 

Other Intangible Assets

Other intangible assets are composed of the following.

 

 

 

 

September 30, 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

 

 

 

(810)

 

 

-

 

 

 

810

 

 

 

(792)

 

 

18

 

Total

 

 

6,120

 

 

 

(6,120)

 

 

-

 

 

 

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

 

 

7,848

 

 

 

-

 

 

 

7,848

 

 

 

11,323

 

 

 

-

 

 

 

11,323

 

Total intangible assets

 

$29,844

 

 

$(6,120

)

 

$23,724

 

 

$33,319

 

 

$(5,970)

 

$27,349

 

 

Intangible assets with indefinite lives consist of trade names, franchise rights as well as lease rights.  During the first nine months of 2020, the Company recorded impairment charges of $3,700 on lease rights related to our international restaurant operations because of the adverse effects of the COVID-19 pandemic.  The impairment and fair value were determined using Level 3 inputs and available market data.  Amortization expense for the first nine months of 2020 and 2019 was $150 and $412, respectively. The Company’s intangible assets with definite lives are fully amortized.

 

Note 8. Restaurant Operations Revenues

 

Restaurant operations revenues were as follows.

 

 

 

Third Quarter

 

 

First Nine Months

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net sales

 

$67,617

 

 

$136,651

 

 

$241,832

 

 

$454,344

 

Franchise royalties and fees

 

 

4,421

 

 

 

6,638

 

 

 

13,704

 

 

 

20,017

 

Franchise partner fees

 

 

6,894

 

 

 

989

 

 

 

14,775

 

 

 

1,668

 

Other

 

 

742

 

 

 

833

 

 

 

2,271

 

 

 

2,918

 

 

 

$79,674

 

 

$145,111

 

 

$272,582

 

 

$478,947

 

 

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. 

 

 
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Note 9. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses include the following.

 

 

 

 

September 30,
2020

 

 

December 31,

2019

 

Accounts payable

 

$26,546

 

 

$32,626

 

Gift card and other marketing

 

 

19,762

 

 

 

23,787

 

Salaries and wages

 

 

8,441

 

 

 

10,667

 

Taxes payable

 

 

14,497

 

 

 

29,275

 

Insurance accruals

 

 

32,091

 

 

 

11,418

 

Deferred revenue

 

 

10,905

 

 

 

10,454

 

Other

 

 

5,646

 

 

 

2,852

 

Accounts payable and accrued expenses

 

$117,888

 

 

$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

 

September 30,
2020

 

 

December 31,
2019

 

Notes payable

 

$153,056

 

 

$2,200

 

Unamortized original issue discount and debt issuance costs

 

 

(506)

 

 

(982)
Western Sizzlin revolver

 

 

500

 

 

 

-

 

Finance obligations

 

 

4,948

 

 

 

4,252

 

Finance lease liabilities

 

 

1,633

 

 

 

1,633

 

Total current portion of notes payable and other borrowings

 

$159,631

 

 

$7,103

 

 

 

 

 

 

 

 

 

 

Long-term notes payable and other borrowings

 

 

 

 

 

 

 

 

Notes payable

 

$-

 

 

$179,298

 

Unamortized original issue discount and debt issuance costs

 

 

-

 

 

 

(252)
Finance obligations

 

 

69,663

 

 

 

74,497

 

Finance leases liabilities

 

 

6,436

 

 

 

9,639

 

Total long-term notes payable and other borrowings

 

$76,099

 

 

$263,182

 

 

Steak n Shake Credit Facility

On March 19, 2014, Steak n Shake and its subsidiaries entered into a credit agreement that 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 September 30, 2020, $153,056 was outstanding. Biglari Holdings is not a guarantor under the credit facility and has no plans to provide a guarantee to the term loan lenders. Absent a resolution with the lenders, Steak n Shake may need to seek refinancing options, which may not be available.  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.

 

The term loan amortizes in equal quarterly installments at an annual rate of 1.00% 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 4.75% as of September 30, 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.

 

 
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Note 10. Notes Payable and Other Borrowings (continued)

 

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 September 30, 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 $26,792 of debt during the first nine months of 2020. 

 

Interest expense is summarized as follows.

 

 

 

 

Third Quarter

 

 

First Nine Months

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Interest expense

 

$2,150

 

 

$3,090

 

 

$6,973

 

 

$9,298

 

Interest on finance leases and obligations

 

 

1,593

 

 

 

1,934

 

 

 

4,679

 

 

 

5,946

 

 

 

$3,743

 

 

$5,024

 

 

$11,652

 

 

$15,244

 

 

Western Sizzlin Revolver

Western Sizzlin had $500 and $0 of debt outstanding under its revolver as of September 30, 2020 and December 31, 2019, respectively. Western Sizzlin reduced its revolver to $0 on October 30, 2020.

 

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.

 

During 2020, the Company negotiated lease concessions on certain lease arrangements related to the COVID-19 pandemic and has accounted for these under the ASC 842 COVID-19 Election.

 

Total lease cost consists of the following.

 

 

 

Third Quarter

 

 

First Nine Months

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Finance lease costs:

 

 

 

 

 

 

 

 

 

 

 

 

    Amortization of right-of-use assets

 

$279

 

 

$487

 

 

$1,087

 

 

$1,466

 

    Interest on lease liabilities

 

 

136

 

 

 

208

 

 

 

392

 

 

 

630

 

Operating lease costs *

 

 

2,096

 

 

 

4,445

 

 

 

8,321

 

 

 

12,305

 

Total lease costs

 

$2,511

 

 

$5,140

 

 

$9,800

 

 

$14,401

 

*Includes short-term leases, variable lease costs and sublease income, which are immaterial.

 

 
12

Table of Contents

   

Note 11. Leased Assets and Lease Commitments (continued)

 

Supplemental cash flow information related to leases is as follows.

  

 

 

 

First Nine Months

 

 

 

2020

 

 

2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Financing cash flows from finance leases

 

$1,132

 

 

$1,201

 

Operating cash flows from finance leases

 

$463

 

 

$630

 

Operating cash flows from operating leases

 

$10,382

 

 

$12,558

 

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

 

 

 

 

 

Finance lease liabilities

 

$-

 

 

$1,097

 

Operating lease liabilities

 

$73

 

 

$11,069

 

Supplemental balance sheet information related to leases is as follows. 

 

 

 

 

September 30,
2020

 

 

December 31,
2019

 

Finance leases:

 

 

 

 

 

 

Property and equipment, net

 

$6,476

 

 

$10,783

 

 

 

 

 

 

 

 

 

 

Current portion of notes payable and other borrowings

 

$1,633

 

 

$1,633

 

Long-term notes payable and other borrowings

 

 

6,436

 

 

 

9,639

 

Total finance lease liablities

 

$8,069

 

 

$11,272

 

 

Weighted-average lease terms and discount rates are as follows. 

 

 

 

 

September 30,
2020

 

Weighted-average remaining lease terms:

 

 

Finance leases

 

5.8 years

 

Operating leases

 

5.8 years

 

 

 

 

 

Weighted-average discount rates:

 

 

 

Finance leases

 

 

7.10%
Operating leases

 

 

6.90%

 

Maturities of lease liabilities as of September 30, 2020 are as follows.

     

 

Year

Operating

Leases

 

 

Finance
Leases

 

2020

 

$3,853

 

 

$545

 

2021

 

 

13,244

 

 

 

2,135

 

2022

 

 

11,162

 

 

 

1,614

 

2023

 

 

9,821

 

 

 

1,410

 

2024

 

 

7,902

 

 

 

1,373

 

After 2024

 

 

15,680

 

 

 

2,756

 

Total lease payments

 

 

61,662

 

 

 

9,833

 

Less interest

 

 

11,126

 

 

 

1,764

 

Total lease liabilities

 

$50,536

 

 

$8,069

 

 

 
13

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Note 12. Accumulated Other Comprehensive Income

 

During the third quarter of 2020 accumulated other comprehensive losses decreased by $344 and increased by $628 during the third quarter of 2019. During the first nine months of 2020 accumulated other comprehensive losses decreased by $834 and increased by $736 during the first nine months of 2019.  As of September 30, 2020 and 2019, the balances in accumulated other comprehensive loss were $1,976 and $3,252, respectively.  There were no reclassifications from accumulated other comprehensive income to earnings during the first nine months of 2020 and 2019.  All changes in accumulated other comprehensive income during the first nine months of 2020 and 2019 were because of foreign currency translation adjustments.

 

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 nine months 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 expense for the third quarter of 2020 was $5,617 compared to a tax benefit of $614 for the third quarter of 2019.  Income tax benefit for the first nine months of 2020 was $23,449 compared to an income tax expense of $7,026 for the first nine months 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 $89,276 during the first nine months of 2020, compared to pretax gains of $69,801 during the first nine months of 2019.  As of September 30, 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.

 

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.

 

 
14

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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 Levels 1 and 2 of the fair value hierarchy. 

 

Bonds: The Company’s investments in bonds are classified within Level l 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 Level 2 of the fair value hierarchy depending on the instrument.

 

As of September 30, 2020 and December 31, 2019, the fair values of financial assets were as follows.

 

 

 

September 30, 2020

December 31, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$17,719

 

 

$-

 

 

$-

 

 

$17,719

 

 

$43,095

 

 

$-

 

 

$-

 

 

$43,095

 

Equity securities

 

 

6,488

 

 

 

5,691

 

 

 

-

 

 

 

12,179

 

 

 

25

 

 

 

6,397

 

 

 

-

 

 

 

6,422

 

Bonds

 

 

55,007

 

 

 

-

 

 

 

-

 

 

 

55,007

 

 

 

38,911

 

 

 

-

 

 

 

-

 

 

 

38,911

 

Options on equity securities

 

 

-

 

 

 

2,872

 

 

 

-

 

 

 

2,872

 

 

 

-

 

 

 

2,166

 

 

 

-

 

 

 

2,166

 

Non-qualified deferred compensation plan investments

 

 

1,382

 

 

 

-

 

 

 

-

 

 

 

1,382

 

 

 

2,175

 

 

 

-

 

 

 

-

 

 

 

2,175

 

Total assets at fair value

 

$80,596

 

 

$8,563

 

 

$-

 

 

$89,159

 

 

$84,206

 

 

$8,563

 

 

$-

 

 

$92,769

 

 

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

 

 
15

Table of Contents

  

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 $6,300 in service fees during the first nine months 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.

 

A disaggregation of our consolidated data for the third quarters and first nine months of 2020 and 2019 is presented in the tables which follow.

 

 

 

Revenue

 

 

 

Third Quarter

 

 

First Nine Months

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating Businesses:

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant Operations:

 

 

 

 

 

 

 

 

 

 

 

 

Steak n Shake

 

$78,313

 

 

$141,354

 

 

$267,637

 

 

$467,471

 

Western Sizzlin

 

 

1,361

 

 

 

3,757

 

 

 

4,945

 

 

 

11,476

 

Total Restaurant Operations

 

 

79,674

 

 

 

145,111

 

 

 

272,582

 

 

 

478,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Guard

 

 

7,898

 

 

 

7,681

 

 

 

23,194

 

 

 

22,305

 

Southern Pioneer

 

 

6,515

 

 

 

-

 

 

 

15,498

 

 

 

-

 

Total Insurance Operations

 

 

14,413

 

 

 

7,681

 

 

 

38,692

 

 

 

22,305

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Southern Oil

 

 

6,029

 

 

 

6,500

 

 

 

19,554

 

 

 

6,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maxim

 

 

1,719

 

 

 

924

 

 

 

3,209

 

 

 

2,666

 

 

 

$101,835

 

 

$160,216

 

 

$334,037

 

 

$510,418

 

 

 
16

Table of Contents

  

Note 17. Business Segment Reporting (continued)

 

 

 

Earnings (Losses) Before Income Taxes

 

 

 

Third Quarter

 

 

First Nine Months

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating Businesses:

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant Operations:

 

 

 

 

 

 

 

 

 

 

 

 

Steak n Shake

 

$(63)

 

$(861)

 

$(12,075)

 

$(22,776)

Western Sizzlin

 

 

(396)

 

 

544

 

 

 

(937)

 

 

1,433

 

Total Restaurant Operations

 

 

(459)

 

 

(317)

 

 

(13,012)

 

 

(21,343)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Guard

 

 

2,152

 

 

 

2,279

 

 

 

7,193

 

 

 

5,673

 

Southern Pioneer

 

 

518

 

 

 

-

 

 

 

1,458

 

 

 

-

 

Total Insurance Operations

 

 

2,670

 

 

 

2,279

 

 

 

8,651

 

 

 

5,673

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Southern Oil

 

 

592

 

 

 

1,448

 

 

 

1,355

 

 

 

1,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maxim

 

 

1,150

 

 

 

364

 

 

 

1,605

 

 

 

428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Operating Businesses

 

 

3,953

 

 

 

3,774

 

 

 

(1,401)

 

 

(13,794)

Corporate and Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

(2,657)

 

 

(2,764)

 

 

(7,693)

 

 

(7,908)

Investment gains

 

 

354

 

 

 

-

 

 

 

1,863

 

 

 

-

 

Investment partnership gains (losses)

 

 

27,218

 

 

 

1,449

 

 

 

(89,276)

 

 

69,801

 

Total Corporate and Investments

 

 

24,915

 

 

 

(1,315)

 

 

(95,106)

 

 

61,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense and debt exinguishment gains not allocated to segments

 

 

(2,150)

 

 

(3,090)

 

 

(1,260)

 

 

(9,298)

 

 

$26,718

 

 

$(631)

 

$(97,767)

 

$38,801

 

 

 
17

Table of Contents

  

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

 

(dollars in thousands except per share data)

 

Overview

 

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 September 30, 2020, Mr. Biglari’s beneficial ownership was approximately 66.3% of the Company’s outstanding Class A common stock and 56.6% of the Company’s outstanding Class B common stock.

 

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”). The financial results for Southern Pioneer from the acquisition date to the end of the third quarter are included in the Company’s consolidated financial statements.

 

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.

 

Net earnings (loss) attributable to Biglari Holdings shareholders are disaggregated in the table that follows. Amounts are recorded after deducting income taxes. 

 

 

 

Third Quarter

 

 

First Nine Months

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating businesses:

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant

 

$(15)

 

$(121)

 

$(10,484)

 

$(14,888)

Insurance

 

 

2,204

 

 

 

1,790

 

 

 

6,819

 

 

 

4,465

 

Oil and gas

 

 

389

 

 

 

1,060

 

 

 

1,278

 

 

 

1,060

 

Media and licensing

 

 

885

 

 

 

281

 

 

 

1,236

 

 

 

329

 

Total operating businesses

 

 

3,463

 

 

 

3,010

 

 

 

(1,151)

 

 

(9,034)

Corporate

 

 

(2,081)

 

 

(2,117)

 

 

(5,762)

 

 

(6,116)

Investment gains

 

 

276

 

 

 

-

 

 

 

1,468

 

 

 

-

 

Investment partnership gains (losses)

 

 

21,055

 

 

 

1,400

 

 

 

(67,939)

 

 

53,891

 

Interest expense on notes payable and debt extinguishment

 

 

(1,612)

 

 

(2,310)

 

 

(934)

 

 

(6,966)

 

 

$21,101

 

 

$(17)

 

$(74,318)

 

$31,775

 

 

Restaurant businesses include Steak n Shake Inc. and Western Sizzlin Corporation.  Steak n Shake and Western Sizzlin are engaged in the ownership, operation, and franchising of restaurants.

 

Insurance businesses include First Guard Insurance Company and Southern Pioneer. First Guard is a direct underwriter of commercial trucking insurance, selling physical damage and nontrucking liability insurance to truckers.  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.

 

Oil and gas business is composed of Southern Oil. 

 

Media and licensing business is composed of Maxim Inc.

 

 
18

Table of Contents

  

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

 

Restaurants

 

Steak n Shake and Western Sizzlin comprise 570 company-operated and franchise restaurants as of September 30, 2020.

 

 

Steak n Shake

 

 

Western Sizzlin

 

 

 

Company- operated

 

 

Franchise
Partner

 

 

Traditional
Franchise

 

 

Company-operated

 

 

Franchise

 

 

Total

 

Total stores as of December 31, 2019

 

 

368

 

 

 

29

 

 

 

213

 

 

 

4

 

 

 

48

 

 

 

662

 

Corporate stores transitioned

 

 

(41)

 

 

40

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

-

 

Net restaurants opened (closed)

 

 

(67)

 

 

-

 

 

 

(15)

 

 

(1)

 

 

(9)

 

 

(92)

Total stores as of September 30, 2020

 

 

260

 

 

 

69

 

 

 

199

 

 

 

3

 

 

 

39

 

 

 

570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stores as of December 31, 2018

 

 

411

 

 

 

2

 

 

 

213

 

 

 

4

 

 

 

55

 

 

 

685

 

Corporate stores transitioned

 

 

(18)

 

 

18

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net restaurants opened (closed)

 

 

(111)

 

 

-

 

 

 

4

 

 

 

-

 

 

 

(5)

 

 

(112)

Total stores as of September 30, 2019

 

 

282

 

 

 

20

 

 

 

217

 

 

 

4

 

 

 

50

 

 

 

573

 

 

Most of our restaurant dining rooms were closed by March 17, 2020 with the remainder closing before the end of the first quarter because of the COVID-19 pandemic.  In addition, as of September 30, 2020, 37 of the 260 company-operated Steak n Shake stores were temporarily closed.  As of September 30, 2019, 106 of the 282 company-operated Steak n Shake stores were temporarily closed.

 

Earnings of our restaurant operations are summarized below.

   

 

 

 Third Quarter

 

 

 

 

 

 First Nine Months

 

 

 

 

 

 

2020

 

 

 

 

 

2019

 

 

 

 

 

2020

 

 

 

 

 

2019

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$67,617

 

 

 

 

 

$136,651

 

 

 

 

 

$241,832

 

 

 

 

 

$454,344

 

 

 

 

Franchise royalties and fees

 

 

4,421

 

 

 

 

 

 

6,638

 

 

 

 

 

 

13,704

 

 

 

 

 

 

20,017

 

 

 

 

Franchise partner fees

 

 

6,894

 

 

 

 

 

 

989

 

 

 

 

 

 

14,775

 

 

 

 

 

 

1,668

 

 

 

 

Other revenue

 

 

742

 

 

 

 

 

 

833

 

 

 

 

 

 

2,271

 

 

 

 

 

 

2,918

 

 

 

 

Total revenue

 

 

79,674

 

 

 

 

 

 

145,111

 

 

 

 

 

 

272,582

 

 

 

 

 

 

478,947

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of food

 

 

19,508

 

 

 

28.9%

 

 

40,464

 

 

 

29.6%

 

 

70,880

 

 

 

29.3%

 

 

142,757

 

 

 

31.4%

Restaurant operating costs

 

 

30,451

 

 

 

45.0%

 

 

67,435

 

 

 

49.3%

 

 

110,903

 

 

 

45.9%

 

 

236,825

 

 

 

52.1%

Occupancy costs

 

 

4,103

 

 

 

6.1%

 

 

5,499

 

 

 

4.0%

 

 

12,954

 

 

 

5.4%

 

 

18,015

 

 

 

4.0%

Total cost of sales

 

 

54,062

 

 

 

 

 

 

 

113,398

 

 

 

 

 

 

 

194,737

 

 

 

 

 

 

 

397,597

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

12,059

 

 

 

15.1%

 

 

10,907

 

 

 

7.5%

 

 

30,146

 

 

 

11.1%

 

 

40,029

 

 

 

8.4%

Marketing

 

 

3,891

 

 

 

4.9%

 

 

7,565

 

 

 

5.2%

 

 

18,406

 

 

 

6.8%

 

 

30,811

 

 

 

6.4%

Other expenses

 

 

454

 

 

 

0.6%

 

 

1,359

 

 

 

0.9%

 

 

1,721

 

 

 

0.6%

 

 

2,831

 

 

 

0.6%

Total selling, general and administrative

 

 

16,404

 

 

 

20.6%

 

 

19,831

 

 

 

13.7%

 

 

50,273

 

 

 

18.4%

 

 

73,671

 

 

 

15.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairments

 

 

3,698

 

 

 

4.6%

 

 

5,079

 

 

 

3.5%

 

 

21,817

 

 

 

8.0%

 

 

7,417

 

 

 

1.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,376

 

 

 

5.5%

 

 

5,186

 

 

 

3.6%

 

 

14,088

 

 

 

5.2%

 

 

15,659

 

 

 

3.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on finance leases and obligations

 

 

1,593

 

 

 

 

 

 

 

1,934

 

 

 

 

 

 

 

4,679

 

 

 

 

 

 

 

5,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before income taxes

 

 

(459)

 

 

 

 

 

 

(317)

 

 

 

 

 

 

(13,012)

 

 

 

 

 

 

(21,343)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

 

(444)

 

 

 

 

 

 

(196)

 

 

 

 

 

 

(2,528)

 

 

 

 

 

 

(6,455)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contribution to net earnings

 

$(15)

 

 

 

 

 

$(121)

 

 

 

 

 

$(10,484)

 

 

 

 

 

$(14,888)

 

 

 

 

 

Cost of food, restaurant operating costs and rent expense are expressed as a percentage of net sales. 

General and administrative, marketing, other expenses, impairments and depreciation and amortization are expressed as a percentage of total revenue.

 

 
19

Table of Contents

  

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

    

The COVID-19 pandemic has adversely affected our restaurant operations and financial results.  Our restaurants were required to close their dining rooms during the first quarter.  To mitigate high labor costs associated with full service, Steak n Shake is seeking to reopen dining rooms with a self-service model, which will require significant investments in equipment. The funds needed for the transition are limited under its current debt agreement. 

   

Net sales for the third quarter and first nine months of 2020 were $67,617 and $241,832, respectively, representing a decrease of $69,034 or 50.5% and $212,512 or 46.8% over the third quarter and first nine months of 2019, respectively.  Same store traffic for the third quarter and first nine months of 2020 decreased by 54.2% and 44.6%, respectively, compared to 2019 primarily because of the effects of the COVID-19 pandemic.

 

Franchise royalties and fees decreased by $2,217 or 33.4% during the third quarter of 2020 compared to 2019.  Franchise royalties and fees decreased by $6,313 or 31.5% during the first nine months of 2020 compared to 2019.  Allowances for doubtful accounts were recorded in connection with franchisees whose stores closed during the pandemic. 

 

Franchise partner fees were $6,894 during third quarter 2020 compared to $989 during 2019.  Franchise partner fees were $14,775 during the first nine months of 2020 compared to $1,668 during 2019.  As of September 30, 2020, there were 69 franchise partner units compared to 20 franchise partner units as of September 30, 2019.

 

Cost of food during the third quarter and first nine months of 2020 was $19,508 or 28.9% of net sales and $70,880 or 29.3% of net sales, respectively, compared to the third quarter and first nine months in 2019 of $40,464 or 29.6% of net sales and $142,757 or 31.4% of net sales, respectively.  The decrease as a percentage of net sales is primarily attributable to an increase in menu prices along with a reduction in menu offerings. 

 

Restaurant operating costs during the third quarter of 2020 were $30,451 compared to $67,435 in 2019.  Restaurant operating costs during the first nine months of 2020 were $110,903 compared to $236,825 in 2019.  The closure of restaurants and dining rooms, along with the transition to franchise partners, account for the decline in restaurant operating costs.

 

General and administrative costs during the third quarter and first nine months of 2020 were $12,059 or 15.1% of total revenues and $30,146 or 11.1% of total revenues, respectively, compared to expenses in the third quarter and first nine months of 2019, which were $10,907 or 7.5% of total revenues and $40,029 or 8.4% of total revenues, respectively.  The increase during the third quarter is primarily attributable to legal and professional fees.

 

Marketing expense during the third quarter and first nine months of 2020 were $3,891 or 4.9% of total revenues and $18,406 or 6.8% of total revenues, respectively, compared to expenses during the third quarter and first nine months of 2019 of $7,565 or 5.2% of total revenues and $30,811 or 6.4% of total revenues, respectively. Management reduced the level of marketing expenditures beginning in the second quarter of 2020.

 

One-time savings were obtained in both the second and third quarter by negotiating with various vendors, reducing overall expenses. These reductions were derived because of the COVID-19 pandemic.

 

Our restaurants recorded an impairment to long-lived assets of $3,698 and $5,079 in the third quarters of 2020 and 2019, respectively, and $21,817 and $7,417 during the first nine months of 2020 and 2019, respectively.  The impairments are primarily attributable to the closure of Steak n Shake stores.

 

 
20

Table of Contents

   

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

 

Insurance

 

We view our insurance businesses as possessing two activities: underwriting and investing. Underwriting decisions are the responsibility of the unit managers, whereas investing decisions are the responsibility of our Chairman and CEO, Sardar Biglari. Business units are operated under separate local management.

 

Biglari Holdings’ insurance operations consist of First Guard and Southern Pioneer. First Guard is a direct underwriter of commercial trucking insurance, selling physical damage and nontrucking liability insurance to truckers. 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. 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 are from the acquisition date (March 9, 2020) to the end of the quarter.

 

Premiums earned by the insurance group during the third quarter and first nine months of 2020 were $13,427 and $35,590, respectively, and pre-tax underwriting gain during the third quarter and first nine months of 2020 were $2,137 and $6,724, respectively.