NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(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, 2020.
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 was founded and is 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 June 30, 2021, Mr. Biglari beneficially owns shares of the Company that represent approximately 64.3% of the economic interest and 69.6% of the voting interest.
Overview of the Impact of COVID-19
The novel coronavirus (“COVID-19”) was declared a pandemic by the World Health Organization in March of 2020. Government and private sector responses to contain its spread began to affect our operating businesses significantly that same month. The COVID-19 pandemic has adversely affected nearly all of our operations, although the effects are varying significantly. The risks and uncertainties resulting from the pandemic may continue to affect our future earnings, cash flows and financial condition. The extent of such effects over the long term cannot be reasonably estimated at this time.
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 garage liability insurance, commercial property, as well as homeowners and dwelling fire insurance. The financial results for Southern Pioneer are included from the date of acquisition.
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, First Guard Insurance Company, Maxim Inc., Southern Pioneer, and Southern Oil Company. Intercompany accounts and transactions have been eliminated in consolidation.
Change in Presentation
Gain on debt extinguishment of $1,367 and $5,713 during the second quarter and first six months of 2020, respectively, have been reclassified from other income to selling, general and administrative expenses. Loss and loss adjustment expenses and unearned premiums are reflected separately from accrued expenses on the consolidated balance sheet.
Note 2. 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.
Note 2. Earnings Per Share (continued)
The following table presents shares authorized, issued and outstanding on June 30, 2021 and December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
|
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
|
|
On an equivalent Class A common stock basis, there were 620,592 shares outstanding as of June 30, 2021 and December 31, 2020. The Company has applied the "two-class method" of computing earnings per share as prescribed in Accounting Standards Codification ("ASC") 260, "Earnings Per Share". The equivalent Class A common stock applied for computing earnings per share excludes the proportional shares of Biglari Holdings' stock held by the investment partnerships. The equivalent Class A common stock for the earnings per share calculation during the second quarters of 2021 and 2020 was 323,811 and 349,478, respectively. The equivalent Class A common stock for the earnings per share calculation during the first six months of 2021 and 2020 was 322,482 and 346,934, respectively.
Note 3. Investments
Investments were $96,094 and $94,861 as of June 30, 2021 and December 31, 2020, respectively. We classify investments in fixed maturity securities at the acquisition date as either available-for-sale or held-to-maturity and re-evaluate the classification at each balance sheet date. Securities classified as held-to-maturity are carried at amortized cost, reflecting the ability and intent to hold the securities to maturity. Realized gains and losses on disposals of investments are determined on a specific identification basis. Dividends earned on investments are reported as investment 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.
Note 4. 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, 2020
|
$
|
590,926
|
|
|
$
|
171,376
|
|
|
$
|
419,550
|
|
|
Investment partnership gains (losses)
|
114,286
|
|
|
66,711
|
|
|
47,575
|
|
|
Distributions (net of contributions)
|
(153,270)
|
|
|
|
|
(153,270)
|
|
|
Increase in proportionate share of Company stock held
|
|
|
1,977
|
|
|
(1,977)
|
|
|
Partnership interest at June 30, 2021
|
$
|
551,942
|
|
|
$
|
240,064
|
|
|
$
|
311,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Company
Common Stock
|
|
Carrying Value
|
|
Partnership interest at December 31, 2019
|
$
|
666,123
|
|
|
$
|
160,581
|
|
|
$
|
505,542
|
|
|
Investment partnership gains (losses)
|
(183,096)
|
|
|
(66,602)
|
|
|
(116,494)
|
|
|
Distributions (net of contributions)
|
(21,100)
|
|
|
|
|
(21,100)
|
|
|
Decrease in proportionate share of Company stock held
|
|
|
(1,181)
|
|
|
1,181
|
|
|
Partnership interest at June 30, 2020
|
$
|
461,927
|
|
|
$
|
92,798
|
|
|
$
|
369,129
|
|
Note 4. Investment Partnerships (continued)
The carrying value of the investment partnerships net of deferred taxes is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
December 31, 2020
|
|
Carrying value of investment partnerships
|
$
|
311,878
|
|
|
$
|
419,550
|
|
|
Deferred tax liability related to investment partnerships
|
(59,859)
|
|
|
(44,805)
|
|
|
Carrying value of investment partnerships net of deferred taxes
|
$
|
252,019
|
|
|
$
|
374,745
|
|
The Company’s proportionate share of Company stock held by investment partnerships at cost is $391,594 and $389,617 at June 30, 2021 and December 31, 2020, respectively, and is recorded as treasury stock.
The carrying value of the partnership interest approximates fair value adjusted by the value of held Company stock. Fair value is according to our proportional ownership interest of the fair value of investments held by the investment partnerships. The fair value measurement is classified as level 3 within the fair value hierarchy.
Gains/losses from investment partnerships recorded in the Company’s consolidated statements of earnings are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
First Six Months
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Gains (losses) on investment partnership
|
$
|
(34,191)
|
|
|
$
|
59,248
|
|
|
$
|
47,575
|
|
|
$
|
(116,494)
|
|
|
Tax expense (benefit)
|
(7,996)
|
|
|
13,883
|
|
|
11,121
|
|
|
(27,500)
|
|
|
Contribution to net earnings
|
$
|
(26,195)
|
|
|
$
|
45,365
|
|
|
$
|
36,454
|
|
|
$
|
(88,994)
|
|
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 consolidated financial statements.
There were no incentive reallocations from Biglari Holdings to Biglari Capital during the first six months of 2021 and 2020.
Summarized financial information for The Lion Fund, L.P. and The Lion Fund II, L.P. is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Investment Partnerships
|
|
|
Lion Fund
|
|
Lion Fund II
|
|
Total assets as of June 30, 2021
|
$
|
128,809
|
|
|
$
|
574,077
|
|
|
Total liabilities as of June 30, 2021
|
$
|
47
|
|
|
$
|
68,450
|
|
|
Revenue for the first six months of 2021
|
$
|
31,297
|
|
|
$
|
100,466
|
|
|
Earnings for the first six months of 2021
|
$
|
31,260
|
|
|
$
|
100,192
|
|
|
Biglari Holdings' ownership interest as of June 30, 2021
|
61.3
|
%
|
|
94.0
|
%
|
|
|
|
|
|
|
Total assets as of December 31, 2020
|
$
|
112,970
|
|
|
$
|
566,663
|
|
|
Total liabilities as of December 31, 2020
|
$
|
189
|
|
|
$
|
25,453
|
|
|
Revenue for the first six months of 2020
|
$
|
(34,461)
|
|
|
$
|
(172,022)
|
|
|
Earnings for the first six months of 2020
|
$
|
(34,495)
|
|
|
$
|
(173,174)
|
|
|
Biglari Holdings' ownership interest as of June 30, 2020
|
66.1
|
%
|
|
92.9
|
%
|
Revenue in the above summarized financial information of the investment partnerships includes investment income and unrealized gains and losses on investments.
Note 5. Property and Equipment
Property and equipment is composed of the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
December 31,
2020
|
|
Land
|
$
|
145,915
|
|
|
$
|
142,601
|
|
|
Buildings
|
144,350
|
|
|
138,734
|
|
|
Land and leasehold improvements
|
145,070
|
|
|
141,351
|
|
|
Equipment
|
214,358
|
|
|
192,735
|
|
|
Oil and gas properties
|
73,585
|
|
|
75,900
|
|
|
Construction in progress
|
1,362
|
|
|
1,032
|
|
|
|
724,640
|
|
|
692,353
|
|
|
Less accumulated depreciation and amortization
|
(383,930)
|
|
|
(376,231)
|
|
|
Property and equipment, net
|
$
|
340,710
|
|
|
$
|
316,122
|
|
Depletion expense related to oil and gas properties was $4,551 and $6,578 during the first six months of 2021 and 2020, respectively, and is included in depreciation and amortization within the consolidated statement of earnings.
During the first six months of 2021, the Company recorded impairment charges of $559 related to closed stores. The Company recorded impairment charges of $14,419 in the first six months of 2020. The fair value of the long-lived assets was determined based on Level 3 inputs using a discounted cash flow model and quoted prices for the properties.
Note 6. Goodwill and Other Intangible Assets
Goodwill
Goodwill consists of the excess of the purchase price over the fair value of the net assets acquired in connection with business acquisitions.
A reconciliation of the change in the carrying value of goodwill is as follows.
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Goodwill at December 31, 2020
|
$
|
53,596
|
|
|
Change in foreign exchange rates during the first six months of 2021
|
(21)
|
|
|
Goodwill at June 30, 2021
|
$
|
53,575
|
|
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. In response to the adverse effects of the COVID-19 pandemic, during 2020 we considered whether goodwill needed to be evaluated for impairment for certain restaurant reporting units. We considered the available facts and made qualitative assessments and judgments for what we believed represented reasonably possible outcomes. No impairment charges for goodwill were recorded in the first six months of 2021 or 2020.
Western Sizzlin has experienced a decline in its franchised units for several years. If Western Sizzlin's franchised units continue to decline an impairment of its goodwill may be necessary.
Note 6. Goodwill and Other Intangible Assets (continued)
Other Intangible Assets
Intangible assets with indefinite lives are composed of the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Names
|
|
Lease Rights
|
|
Total
|
|
Balance at December 31, 2020
|
$
|
15,876
|
|
|
$
|
8,189
|
|
|
$
|
24,065
|
|
|
Change in foreign exchange rates during the first six months of 2021
|
—
|
|
|
(264)
|
|
|
(264)
|
|
|
Balance at June 30, 2021
|
$
|
15,876
|
|
|
$
|
7,925
|
|
|
$
|
23,801
|
|
During the first six months of 2020, the Company recorded impairment charges of $3,700 on lease rights related to our international restaurant operations.
Fair values were determined using Level 3 inputs and available market data.
Note 7. Restaurant Operations Revenues
Restaurant operations revenues were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
First Six Months
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Net sales
|
$
|
49,403
|
|
|
$
|
69,487
|
|
|
$
|
104,353
|
|
|
$
|
174,215
|
|
|
Franchise partner fees
|
12,383
|
|
|
4,537
|
|
|
20,236
|
|
|
7,881
|
|
|
Franchise royalties and fees
|
4,594
|
|
|
4,072
|
|
|
9,729
|
|
|
9,283
|
|
|
Other
|
946
|
|
|
668
|
|
|
2,962
|
|
|
1,529
|
|
|
|
$
|
67,326
|
|
|
$
|
78,764
|
|
|
$
|
137,280
|
|
|
$
|
192,908
|
|
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 partner fees
Franchise partner fees are composed of up to 15% of sales as well as 50% of profits. We are therefore fully affected by the operating results of the business, unlike in a traditional franchising arrangement, where the franchisor obtains a royalty fee based on sales only. We generate most of our revenue from our share of the franchise partners’ profits. An initial franchise fee of ten thousand dollars is recognized when the operator becomes a franchise partner.
Franchise royalties and fees
Franchise royalties and fees from Steak n Shake and Western Sizzlin franchisees 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.
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 8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
December 31,
2020
|
|
Accounts payable
|
$
|
40,665
|
|
|
$
|
26,537
|
|
|
Gift card liability
|
20,641
|
|
|
21,822
|
|
|
Insurance accruals
|
6,016
|
|
|
6,559
|
|
|
Salaries, wages and vacation
|
7,569
|
|
|
8,285
|
|
|
Deferred revenue
|
9,169
|
|
|
9,324
|
|
|
Taxes payable
|
5,699
|
|
|
10,922
|
|
|
Professional fees
|
6,214
|
|
|
5,882
|
|
|
Other
|
4,001
|
|
|
1,561
|
|
|
Accounts payable and accrued expenses
|
$
|
99,974
|
|
|
$
|
90,892
|
|
Note 9. Notes Payable and Lease Obligations
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 was scheduled to mature on March 19, 2021. As of December 31, 2020, $152,506 was outstanding. The Company repaid Steak n Shake's outstanding balance in full on February 19, 2021.
Lease obligations include the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of lease obligations
|
June 30,
2021
|
|
December 31,
2020
|
|
Finance lease liabilities
|
$
|
1,623
|
|
|
$
|
1,897
|
|
|
Finance obligations
|
4,957
|
|
|
4,854
|
|
|
Operating lease liabilities
|
10,196
|
|
|
10,614
|
|
|
Total current portion of lease obligations
|
$
|
16,776
|
|
|
$
|
17,365
|
|
|
|
|
|
|
|
Long-term lease obligations
|
|
|
|
|
Finance lease liabilities
|
$
|
5,338
|
|
|
$
|
7,034
|
|
|
Finance obligations
|
66,126
|
|
|
68,148
|
|
|
Operating leases liabilities
|
34,144
|
|
|
36,463
|
|
|
Total long-term lease obligations
|
$
|
105,608
|
|
|
$
|
111,645
|
|
Note 10. Leased Assets and Lease Commitments
A significant portion of our operating and finance lease portfolio includes restaurant locations. Operating lease expense and finance lease depreciation expense are recognized on a straight-line basis over the lease term.
Note 10. Leased Assets and Lease Commitments (continued)
Total lease cost consists of the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter
|
|
First Six Months
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Finance lease costs:
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
$
|
382
|
|
|
$
|
329
|
|
|
$
|
801
|
|
|
$
|
808
|
|
|
Interest on lease liabilities
|
126
|
|
|
78
|
|
|
273
|
|
|
256
|
|
|
Operating lease costs *
|
53
|
|
|
2,489
|
|
|
1,163
|
|
|
6,225
|
|
|
Total lease costs
|
$
|
561
|
|
|
$
|
2,896
|
|
|
$
|
2,237
|
|
|
$
|
7,289
|
|
*Includes short-term leases, variable lease costs and sublease income, which are immaterial.
Supplemental cash flow information related to leases is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Six Months
|
|
|
2021
|
|
2020
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Financing cash flows from finance leases
|
$
|
819
|
|
|
$
|
733
|
|
|
Operating cash flows from finance leases
|
$
|
258
|
|
|
$
|
320
|
|
|
Operating cash flows from operating leases
|
$
|
6,320
|
|
|
$
|
6,863
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
Operating lease liabilities
|
$
|
—
|
|
|
$
|
73
|
|
Supplemental balance sheet information related to leases is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
December 31,
2020
|
|
Finance leases:
|
|
|
|
|
Property and equipment, net
|
$
|
5,778
|
|
|
$
|
6,501
|
|
Weighted-average lease terms and discount rates are as follows.
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
Weighted-average remaining lease terms:
|
|
|
Finance leases
|
5.3 years
|
|
Operating leases
|
5.3 years
|
|
|
|
|
Weighted-average discount rates:
|
|
|
Finance leases
|
7.1
|
%
|
|
Operating leases
|
6.9
|
%
|
Note 10. Leased Assets and Lease Commitments (continued)
Maturities of lease liabilities as of June 30, 2021 are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Operating
Leases
|
|
Finance
Leases
|
|
2021
|
|
$
|
7,117
|
|
|
$
|
1,068
|
|
|
2022
|
|
11,493
|
|
|
1,725
|
|
|
2023
|
|
10,218
|
|
|
1,401
|
|
|
2024
|
|
8,242
|
|
|
1,384
|
|
|
2025
|
|
6,481
|
|
|
1,148
|
|
|
After 2025
|
|
9,639
|
|
|
1,604
|
|
|
Total lease payments
|
|
53,190
|
|
|
8,330
|
|
|
Less interest
|
|
8,850
|
|
|
1,369
|
|
|
Total lease liabilities
|
|
$
|
44,340
|
|
|
$
|
6,961
|
|
Note 11. Accumulated Other Comprehensive Income
Accumulated other comprehensive losses decreased $115 and $802 during the second quarters of 2021 and 2020, respectively. During the first six months of 2021, accumulated other comprehensive losses increased by $329 and decreased by $490 during the first six months of 2020. As of June 30, 2021 and 2020, the balances in accumulated other comprehensive loss were $1,860 and $2,320, respectively. There were no reclassifications from accumulated other comprehensive income to earnings during the first six months of 2021 and 2020. All changes in accumulated other comprehensive income were due to foreign currency translation adjustments.
Note 12. 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 six months of 2021 and 2020. 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 second quarter of 2021 was $6,198 compared to an income tax expense of $14,764 for the second quarter of 2020. Income tax expense for the first six months of 2021 was $15,818 compared to a benefit of $29,066 for the first six months of 2020. The variance in income taxes between 2021 and 2020 is attributable to taxes on income generated by the investment partnerships. Investment partnership pretax gains were $47,575 during the first six months of 2021 compared to pretax losses of $116,494 during the first six months of 2020.
Note 13. Commitments and Contingencies
We are involved in various legal proceedings and have certain unresolved claims pending. We believe, based on examination of these matters and experiences to date, that the ultimate liability, if any, in excess of amounts already provided in our consolidated financial statements is not likely to have a material effect on our results of operations, financial position or cash flow.
Note 13. Commitments and Contingencies (continued)
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 alleged 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 alleged claims of breach of fiduciary duty by the members of our Board of Directors. 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 alleged 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. 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 14. 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.
Note 14. Fair Value of Financial Assets (continued)
Bonds: The Company’s investments in bonds consist of both corporate and government debt. Bonds are classified within Level l or Level 2 of the fair value hierarchy.
Non-qualified deferred compensation plan investments: The assets of the non-qualified plan are set up in a rabbi trust. They represent mutual funds and 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 June 30, 2021 and December 31, 2020, the fair values of financial assets were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
24,905
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,905
|
|
|
$
|
23,885
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,885
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer goods
|
8,480
|
|
|
2,795
|
|
|
—
|
|
|
11,275
|
|
|
7,274
|
|
|
5,652
|
|
|
—
|
|
|
12,926
|
|
|
Insurance
|
1,059
|
|
|
—
|
|
|
—
|
|
|
1,059
|
|
|
261
|
|
|
—
|
|
|
—
|
|
|
261
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
55,156
|
|
|
—
|
|
|
—
|
|
|
55,156
|
|
|
39,472
|
|
|
14,043
|
|
|
—
|
|
|
53,515
|
|
|
Corporate
|
5,110
|
|
|
—
|
|
|
—
|
|
|
5,110
|
|
|
—
|
|
|
5,406
|
|
|
—
|
|
|
5,406
|
|
|
Options on equity securities
|
—
|
|
|
1,669
|
|
|
—
|
|
|
1,669
|
|
|
—
|
|
|
2,911
|
|
|
—
|
|
|
2,911
|
|
|
Non-qualified deferred compensation plan investments
|
1,572
|
|
|
—
|
|
|
—
|
|
|
1,572
|
|
|
1,368
|
|
|
—
|
|
|
—
|
|
|
1,368
|
|
|
Total assets at fair value
|
$
|
96,282
|
|
|
$
|
4,464
|
|
|
$
|
—
|
|
|
$
|
100,746
|
|
|
$
|
72,260
|
|
|
$
|
28,012
|
|
|
$
|
—
|
|
|
$
|
100,272
|
|
There were no changes in our valuation techniques used to measure fair values on a recurring basis.
Note 15. Related Party Transactions
Service Agreement
The Company is party to a service agreement with Biglari Enterprises LLC and Biglari Capital Corp. (collectively, the “Biglari Entities”) under which the Biglari Entities provide services to the Company. The service agreement has a five-year term, effective on October 1, 2017. The Company paid Biglari Enterprises $4,200 in service fees during the first six months of 2021 and 2020. The service 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
The Incentive Agreement establishes a performance-based annual incentive payment for Mr. Biglari contingent upon the growth in adjusted equity in each year attributable to our operating businesses. In order for Mr. Biglari to receive any incentive, our operating businesses must achieve an annual increase in shareholders’ equity in excess of 6% (the “Hurdle Rate”) above the previous highest level (the “High Water Mark”). Mr. Biglari will receive 25% of any incremental book value created above the High Water Mark plus the Hurdle Rate. In any year in which book value declines, our operating businesses must completely recover their deficit from the previous High Water Mark, along with attaining the Hurdle Rate, before Mr. Biglari becomes eligible to receive any further incentive payment.
Note 16. Business Segment Reporting
Our reportable business segments are organized in a manner that reflects how management views those business activities. Our restaurant operations 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 second quarters and first six months of 2021 and 2020 is presented in the tables that follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Second Quarter
|
|
First Six Months
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Operating Businesses:
|
|
|
|
|
|
|
|
|
Restaurant Operations:
|
|
|
|
|
|
|
|
|
Steak n Shake
|
$
|
65,223
|
|
|
$
|
78,211
|
|
|
$
|
133,524
|
|
|
$
|
189,324
|
|
|
Western Sizzlin
|
2,103
|
|
|
553
|
|
|
3,756
|
|
|
3,584
|
|
|
Total Restaurant Operations
|
67,326
|
|
|
78,764
|
|
|
137,280
|
|
|
192,908
|
|
|
Insurance Operations:
|
|
|
|
|
|
|
|
|
First Guard
|
8,375
|
|
|
7,412
|
|
|
16,594
|
|
|
15,296
|
|
|
Southern Pioneer
|
6,012
|
|
|
7,193
|
|
|
12,412
|
|
|
8,983
|
|
|
Total Insurance Operations
|
14,387
|
|
|
14,605
|
|
|
29,006
|
|
|
24,279
|
|
|
Southern Oil
|
8,365
|
|
|
2,151
|
|
|
16,957
|
|
|
13,525
|
|
|
Maxim
|
709
|
|
|
982
|
|
|
1,832
|
|
|
1,490
|
|
|
|
$
|
90,787
|
|
|
$
|
96,502
|
|
|
$
|
185,075
|
|
|
$
|
232,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Losses) Before Income Taxes
|
|
|
Second Quarter
|
|
First Six Months
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Operating Businesses:
|
|
|
|
|
|
|
|
|
Restaurant Operations:
|
|
|
|
|
|
|
|
|
Steak n Shake
|
$
|
3,236
|
|
|
$
|
292
|
|
|
$
|
8,692
|
|
|
$
|
(6,299)
|
|
|
Western Sizzlin
|
368
|
|
|
(578)
|
|
|
460
|
|
|
(541)
|
|
|
Total Restaurant Operations
|
3,604
|
|
|
(286)
|
|
|
9,152
|
|
|
(6,840)
|
|
|
Insurance Operations:
|
|
|
|
|
|
|
|
|
First Guard
|
3,077
|
|
|
2,600
|
|
|
5,270
|
|
|
5,041
|
|
|
Southern Pioneer
|
1,242
|
|
|
468
|
|
|
2,286
|
|
|
940
|
|
|
Total Insurance Operations
|
4,319
|
|
|
3,068
|
|
|
7,556
|
|
|
5,981
|
|
|
Southern Oil
|
3,026
|
|
|
(1,707)
|
|
|
6,065
|
|
|
763
|
|
|
Maxim
|
300
|
|
|
487
|
|
|
923
|
|
|
455
|
|
|
Interest expense not allocated to segments
|
—
|
|
|
(2,349)
|
|
|
(1,121)
|
|
|
(4,823)
|
|
|
Total Operating Businesses
|
11,249
|
|
|
(787)
|
|
|
22,575
|
|
|
(4,464)
|
|
|
Corporate and Investments:
|
|
|
|
|
|
|
|
|
Corporate and other
|
(2,843)
|
|
|
(2,740)
|
|
|
(5,293)
|
|
|
(5,036)
|
|
|
Investment gains
|
(1,150)
|
|
|
1,509
|
|
|
1,931
|
|
|
1,509
|
|
|
Investment partnership gains (losses)
|
(34,191)
|
|
|
59,248
|
|
|
47,575
|
|
|
(116,494)
|
|
|
Total Corporate and Investments
|
(38,184)
|
|
|
58,017
|
|
|
44,213
|
|
|
(120,021)
|
|
|
|
$
|
(26,935)
|
|
|
$
|
57,230
|
|
|
$
|
66,788
|
|
|
$
|
(124,485)
|
|