NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Years Ended December 31, 2020, 2019 and 2018)
(dollars in thousands, except share and per-share data)
Note 1. Summary of Significant Accounting Policies
Description of Business
Biglari Holdings Inc. 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 December 31, 2020, Mr. Biglari’s beneficial ownership was approximately 67.2% of the Company’s outstanding Class A common stock and 60.6% of the Company’s outstanding Class B common stock.
Overview of the Impact of COVID-19
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 2020. 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 and the majority of our dining rooms remained closed during the remainder of 2020. To mitigate high labor costs associated with table service, Steak n Shake is seeking to reopen dining rooms with a self-service model. The pandemic also caused oil demand to decrease significantly, creating oversupplied markets that have resulted in lower commodity prices and margins. In response, the Company significantly cut production and expenses in its oil and gas business during the second and third quarters of 2020. The risks and uncertainties resulting from the pandemic may continue to affect our future earnings, cash flows and financial condition.
Business Acquisitions
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 coverage, as well as homeowners and dwelling fire insurance coverages. The financial results for Southern Pioneer are included from the date of acquisition. Pro-forma financial information of Southern Pioneer is not material.
On September 9, 2019, a wholly-owned subsidiary of the Company, Southern Oil Company, acquired the stock of Southern Oil of Louisiana Inc. (collectively "Southern Oil"). Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of the Gulf of Mexico. Pro-forma financial information of Southern Oil is not material.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries including Steak n Shake Inc., Western Sizzlin Corporation, First Guard Insurance Company, Maxim Inc., Southern Pioneer, and Southern Oil. 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.
Cash, Cash Equivalents and Restricted Cash
Cash equivalents primarily consist of U.S. Government securities and money market accounts, all of which have original maturities of three months or less. Cash equivalents are carried at fair value. The statement of cash flows includes restricted cash with cash and cash equivalents.
Note 1. Summary of Significant Accounting Policies (continued)
Investments
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. As of December 31, 2020 and 2019, all investments were classified as available-for-sale and carried at fair value with net unrealized gains or losses reported in the statements of earnings. Realized gains and losses on disposals of investments are determined by the specific identification of cost of investments sold. 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.
Investment Partnerships
The Company holds a limited interest in The Lion Fund, L.P. and The Lion Fund II, L.P. (collectively the “investment partnerships”). Biglari Capital Corp. (“Biglari Capital”), an entity solely owned by Mr. Biglari, is the general partner of the investment partnerships. Our interests in the investment partnerships are accounted as equity method investments because of our retained limited partner interests. The Company records investment partnership gains (inclusive of the investment partnerships’ unrealized gains and losses on their securities) as a component of other income based on our proportional ownership interest in the partnerships. The investment partnerships are, for purposes of generally accepted accounting principles (“GAAP”), investment companies under the AICPA Audit and Accounting Guide Investment Companies.
Concentration of Equity Price Risk
The majority of our investments are conducted through investment partnerships which generally hold common stocks. We also hold marketable securities directly. We concentrate a high percentage of the investments in a small number of equity securities. A significant decline in the general stock market or in the prices of major investments may have a materially adverse effect on our earnings and on consolidated shareholders’ equity.
Receivables
Our accounts receivable balance consists primarily of franchisee, customer, and other receivables. We carry our accounts receivable at cost less an allowance for doubtful accounts, which is based on a history of past write-offs and collections and current credit conditions. Allowance for doubtful accounts was $6,859 and $4,857 at December 31, 2020 and 2019, respectively.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or market, and consist primarily of restaurant food items and supply inventory.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recognized on the straight-line method over the estimated useful lives of the assets (10 to 30 years for buildings and land improvements, and 3 to 10 years for equipment). Leasehold improvements are amortized on the straight-line method over the shorter of the estimated useful lives of the improvements or the term of the related leases. Interest costs associated with the construction of new restaurants are capitalized. Major improvements are also capitalized while repairs and maintenance are expensed as incurred. We review our long-lived restaurant assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. For purposes of this assessment, assets are evaluated at the lowest level for which there are identifiable cash flows which is generally at the individual restaurant level. Assets included in the impairment assessment generally consist of property, equipment and leasehold improvements directly associated with an individual restaurant as well as any related finance or operating lease assets. If the future undiscounted cash flows of an asset are less than the recorded value, an impairment is recorded for the difference between the carrying value and the estimated fair value of the asset.
Note 1. Summary of Significant Accounting Policies (continued)
Oil and Gas Properties
The successful efforts method is used for crude oil and natural gas exploration and production activities. All costs for development wells, related plant and equipment, proved mineral interests in crude oil and natural gas properties, and related asset retirement obligation assets are capitalized. Costs of exploratory wells are capitalized pending determination of whether the wells found proved reserves. Costs of wells that are assigned proved reserves remain capitalized. Costs also are capitalized for exploratory wells that have found crude oil and natural gas reserves even if the reserves cannot be classified as proved when the drilling is completed, provided the exploratory well has found a sufficient quantity of reserves to justify its completion as a producing well and the company is making sufficient progress assessing the reserves and the economic and operating viability of the project. All other exploratory wells and costs are expensed. There were no capitalized costs for exploratory activities during 2020.
The Company continues to capitalize exploratory well costs after the completion of drilling when (a) the well has found a sufficient quantity of reserves to justify completion as a producing well, and (b) sufficient progress has been made in assessing the reserves and the economic and operating viability of the project. If either condition is not met or if the Company obtains information that raises substantial doubt about the economic or operational viability of the project, the exploratory well would be assumed to be impaired, and its costs, net of any salvage value, would be charged to expense.
Asset retirement obligations
Asset retirement obligations relate to future costs associated with the plugging and abandonment of oil and gas wells, the removal of equipment and facilities from leased acreage, and the return of such land to its original condition. The Company determines its asset retirement obligation amounts by calculating the present value of the estimated future cash outflows associated with its plug and abandonment obligations. The fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred, and the cost of such liability increases the carrying amount of the related long-lived asset by the same amount. The liability is accreted each period through charges to depreciation, depletion and amortization expense, and the capitalized cost is depleted on a unit-of-production basis over the proved developed reserves of the related asset. If an asset retirement obligation is settled for an amount other than the recorded amount, a gain or loss is recognized.
Goodwill and Other Intangible Assets
Goodwill and indefinite life intangible assets are not amortized, but are tested for potential impairment on an annual basis, or more often if events or circumstances change that could cause goodwill or indefinite life intangible assets to become impaired. Other purchased intangible assets are amortized over their estimated useful lives, generally on a straight-line basis. We perform reviews for impairment of intangible assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying value. When an impairment is identified, we reduce the carrying value of the asset to its estimated fair value. During 2020, we recorded an impairment to goodwill of $300 and to indefinite life intangible assets of $3,728. No impairments were recorded on goodwill and other intangible assets during 2019 and 2018. Refer to Note 7 for information regarding our goodwill and other intangible assets.
Dual Class Common Stock
The Company has two classes of common stock, designated Class A common stock and Class B common stock. Each Class A common share is entitled to one vote. Class B common stock possesses economic rights equal to one-fifth (1/5th) of such rights of Class A common stock; however, Class B common stock has no voting rights.
The following table presents shares authorized, issued and outstanding.
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December 31, 2020
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|
December 31, 2019
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|
December 31, 2018
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Class A
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|
Class B
|
|
Class A
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|
Class B
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|
Class A
|
|
Class B
|
|
Common stock authorized
|
500,000
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|
|
10,000,000
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|
|
500,000
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|
|
10,000,000
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|
|
500,000
|
|
|
10,000,000
|
|
|
Common stock issued and outstanding
|
206,864
|
|
|
2,068,640
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|
|
206,864
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|
|
2,068,640
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|
|
206,864
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|
|
2,068,640
|
|
On an equivalent Class A common stock basis, there were 620,592 shares outstanding as of December 31, 2020, 2019, and 2018.
Note 1. Summary of Significant Accounting Policies (continued)
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 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 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 was 345,192, 344,736 and 348,108 for 2020, 2019 and 2018, respectively. There are no dilutive securities outstanding.
Revenue Recognition
On January 1, 2018, we adopted Accounting Standards Codification Topic 606 Revenue From Contracts With Customers (“ASC 606”). In accordance with ASC 606, we changed certain characteristics of our revenue recognition accounting policy as described below. ASC 606 was applied using the modified retrospective method, where the cumulative effect of the initial application is recognized as an adjustment to opening retained earnings at January 1, 2018. Comparative prior periods have not been adjusted.
The impact of ASC 606 on the Company’s balance sheet as of December 31, 2018 was not material. The cumulative change in retained earnings as of January 1, 2018 was $90. Upon adoption of ASC 606, the Company changed its restaurant operations accounting policies for the recognition of franchise fees, recording of advertising arrangements, and recognition of gift card revenue. The adoption of ASC 606 did not have any significant impact on our insurance or media/licensing businesses.
Restaurant operations
Restaurant operations revenues were disaggregated as follows.
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2020
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2019
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2018
|
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Net sales
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$
|
306,577
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|
|
$
|
578,164
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|
|
$
|
740,922
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|
Franchise partner fees
|
22,213
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|
|
3,829
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|
|
33
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|
|
Franchise royalties and fees
|
18,794
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|
|
23,360
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|
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30,965
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Other
|
3,082
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|
|
4,867
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|
|
3,770
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|
|
|
$
|
350,666
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|
|
$
|
610,220
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|
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$
|
775,690
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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. Therefore, we generate most of our revenue from our share of the franchise partners' profits. 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.
During the years ended December 31, 2020, 2019 and 2018 restaurant operations recognized $1,879, $1,725 and $3,096, respectively, in revenue related to initial franchise fees. As of December 31, 2020 and 2019, restaurant operations had deferred revenue recorded in accrued expenses related to franchise fees of $6,928 and $7,976, respectively. Restaurant operations expects to recognize approximately $1,071 in 2021 and the balance in the years 2022 through 2040.
Note 1. Summary of Significant Accounting Policies (continued)
Our advertising arrangements with franchisees are reported in franchise royalties and fees. During the years ended December 31, 2020 and 2019, restaurant operations recognized $5,193 and $7,815, respectively, in revenue related to franchisee advertising fees. As of December 31, 2020 and 2019, restaurant operations had deferred revenue recorded in accrued expenses related to franchisee advertising fees of $4,391 and $3,043, respectively. Restaurant operations expects to recognize approximately$2,196 of deferred revenue during 2021.
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.
For the years ended December 31, 2020 and 2019, restaurant operations recognized $9,201 and $22,869, respectively, of revenue from gift card redemptions. As of December 31, 2020 and 2019, restaurant operations had deferred revenue recorded in accrued expenses related to unredeemed gift cards of $17,431 and $20,730, respectively. The Company expects to recognize approximately $13,392 in 2021 and the balance in the years 2022 through 2023.
Insurance premiums and commissions
Insurance premiums are earned over the terms of the related policies. Expenses incurred in connection with acquiring new insurance business, including acquisition costs, are charged to operations as incurred. Premiums earned are stated net of amounts ceded to reinsurer.
Oil and gas
Revenues are derived from the sale of produced oil and natural gas. Revenue is recognized when the performance obligation is satisfied, which typically occurs at the point in time when control of the product transfers to the customer. Payment is due within 30 days of delivery.
Media advertising and other
Magazine subscription and advertising revenues are recognized at the magazine cover date. The unearned portion of magazine subscriptions is deferred until the magazine’s cover date, at which time a proportionate share of the gross subscription price is recognized as revenues. License revenue is recognized when earned. We derive value and revenues from intellectual property assets through a range of licensing and business activities, including licensing and syndication of our trademarks and copyrights in the United States and internationally.
Restaurant Cost of Sales
Cost of sales includes the cost of food, restaurant operating costs and restaurant rent expense. Cost of sales excludes depreciation and amortization, which is presented as a separate line item on the consolidated statement of earnings.
Insurance Losses and Underwriting Expenses
Liabilities for estimated unpaid losses and loss adjustment expenses with respect to claims occurring on or before the balance sheet date are established under insurance contracts issued by our insurance subsidiaries. Such estimates include provisions for reported claims or case estimates, provisions for incurred but not reported claims and legal and administrative costs to settle claims. The estimates of unpaid losses and amounts recoverable under reinsurance are established and continually reviewed by using a variety of actuarial, statistical and analytical techniques. Reinsurance contracts do not relieve the ceding company of its obligations to indemnify policyholders with respect to the underlying insurance contracts. Liabilities for insurance losses of $14,652 and $3,211 are included in accrued expenses in the consolidated balance sheet as of December 31, 2020 and 2019, respectively.
Oil and Gas Production Costs
Oil and gas production costs are composed of lease operating expenses and production taxes.
Note 1. Summary of Significant Accounting Policies (continued)
Marketing Expense
Advertising costs are charged to expense at the later of the date the expenditure is incurred or the date the promotional item is first communicated. Marketing expense is included in selling, general and administrative expenses in the consolidated statement of earnings.
Insurance Reserves
We self-insure a significant portion of expected losses under our workers’ compensation, general liability, auto, directors and officers liability, and medical liability insurance programs, and record a reserve for our estimated losses on all unresolved open claims and our estimated incurred but not reported claims at the anticipated cost to us. Insurance reserves are recorded in accrued expenses in the consolidated balance sheet.
Savings Plans
Several of our subsidiaries also sponsor deferred compensation and defined contribution retirement plans, such as 401(k) or profit sharing plans. Employee contributions to the plans are subject to regulatory limitations and the specific plan provisions. Some of the plans allow for discretionary contributions as determined by management. Employer contributions expensed with respect to these plans were not material.
Foreign Currency Translation
The Company has certain subsidiaries located in foreign jurisdictions. For subsidiaries whose functional currency is other than the U.S. dollar, the translation of functional currency statements to U.S. dollar statements uses end-of-period exchange rates for assets and liabilities, weighted average exchange rates for revenue and expenses, and historical rates for equity. The resulting currency translation adjustment is recorded in accumulated other comprehensive income, as a component of equity.
Use of Estimates
Preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from the estimates.
New Accounting Standards
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP; however, ASU 2016-13 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.
In February 2016, FASB issued ASU 2016-02, Leases. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842). We adopted ASC 842 “Leases” on January 1, 2019. Most significantly, ASC 842 requires a lessee to recognize a liability to make lease payments and an asset with respect to its right to use the underlying asset for the lease term. We applied ASC 840 to all comparative periods which included a cumulative-effect adjustment of $1,499 to retained earnings on January 1, 2019. Adoption of ASC 842 also resulted in an increase to total assets and liabilities due to the recording of operating lease assets of $63,261 and operating lease liabilities of $69,671 as of January 1, 2019 and due to the recording of finance lease assets of $11,638 and finance lease liabilities of $11,784. The difference between the asset and liability amounts primarily relates to previously recorded deferred/prepaid rent. The standard had a material impact on our consolidated balance sheets but did not have a material impact on our consolidated statements of earnings and statements of cash flow. The most significant impact was the recognition of right-of-use assets and lease liabilities for operating leases.
In adopting and applying ASC 842, we elected the package of practical expedients permitted under the transition guidance within the new standard which, among other things, allows us to carry forward the historical lease classification. In addition, we elected certain practical expedients and accounting policies, including an accounting policy election to keep leases with an initial term of 12 months or less from the balance sheet. We recognize those lease payments in the consolidated statements of earnings on a straight-line basis over the lease term.
Note 2. Investments
Investments were $94,861 and $44,856 as of December 31, 2020 and 2019, respectively. All investments are classified as available-for-sale and recorded at fair value.
Note 3. Investment Partnerships
The Company reports on the limited partnership interests in investment partnerships under the equity method of accounting. We record our proportional share of equity in the investment partnerships but exclude Company common stock held by said partnerships. The Company’s pro-rata share of its common stock held by the investment partnerships is recorded as treasury stock even though they are legally outstanding. The Company records gains/losses from investment partnerships (inclusive of the investment partnerships’ unrealized gains and losses on their securities) in the consolidated statements of earnings based on our carrying value of these partnerships. The fair value is calculated net of the general partner’s accrued incentive fees. Gains and losses on Company common stock included in the earnings of these partnerships are eliminated because they are recorded as treasury stock.
Biglari Capital is the general partner of the investment partnerships and is an entity solely owned by Mr. Biglari.
The fair value and adjustment for Company common stock held by the investment partnerships to determine carrying value of our partnership interest is presented below.
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Fair Value
|
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Company Common Stock
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Carrying
Value
|
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Partnership interest at December 31, 2017
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$
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925,279
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$
|
359,258
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$
|
566,021
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Investment partnership gains (losses)
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(180,517)
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|
(220,928)
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|
40,411
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Distributions (net of contributions)
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(29,660)
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|
|
|
|
(29,660)
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|
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Increase in proportionate share of Company stock held
|
|
|
19,292
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|
|
(19,292)
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|
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Partnership interest at December 31, 2018
|
$
|
715,102
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|
|
$
|
157,622
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|
|
$
|
557,480
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|
|
Investment partnership gains (losses)
|
80,350
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|
|
2,217
|
|
|
78,133
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|
|
Distributions (net of contributions)
|
(129,329)
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|
|
|
|
(129,329)
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|
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Increase in proportionate share of Company stock held
|
|
|
742
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|
|
(742)
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|
|
Partnership interest at December 31, 2019
|
$
|
666,123
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|
|
$
|
160,581
|
|
|
$
|
505,542
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|
|
Investment partnership gains (losses)
|
(46,997)
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|
|
(3,965)
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|
|
(43,032)
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|
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Distributions (net of contributions)
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(28,200)
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|
|
|
|
(28,200)
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|
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Increase in proportionate share of Company stock held
|
|
|
14,760
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|
|
(14,760)
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Partnership interest at December 31, 2020
|
$
|
590,926
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|
|
$
|
171,376
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|
|
$
|
419,550
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|
The carrying value of the investment partnerships net of deferred taxes is presented below.
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December 31,
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|
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2020
|
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2019
|
|
Carrying value of investment partnerships
|
$
|
419,550
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|
|
$
|
505,542
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Deferred tax liability related to investment partnerships
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(44,805)
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|
|
(56,518)
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Carrying value of investment partnerships net of deferred taxes
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$
|
374,745
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|
|
$
|
449,024
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|
The Company’s proportionate share of Company stock held by investment partnerships at cost is $389,617 and $374,857 at December 31, 2020 and 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.
Note 3. Investment Partnerships (continued)
Gains/losses from investment partnerships recorded in the Company’s consolidated statements of earnings are presented below.
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|
2020
|
|
2019
|
|
2018
|
|
Gains (losses) from investment partnerships
|
$
|
(43,032)
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|
|
$
|
78,133
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|
|
$
|
40,411
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|
Tax expense (benefit)
|
(10,526)
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|
|
17,360
|
|
|
7,171
|
|
|
Contribution to net earnings
|
$
|
(32,506)
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|
|
$
|
60,773
|
|
|
$
|
33,240
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|
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 $987 of incentive reallocations from Biglari Holdings to Biglari Capital during 2020, including $253 associated with gains on the Company's common stock. Gains on the Company's common stock and the related incentive reallocations are eliminated in our financial statements. There were no incentive reallocations from Biglari Holdings to Biglari Capital during 2019 and 2018.
Summarized financial information for The Lion Fund, L.P. and The Lion Fund II, L.P. is presented below.
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Equity in Investment Partnerships
|
|
|
Lion Fund
|
|
Lion Fund II
|
|
Total assets as of December 31, 2020
|
$
|
112,970
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|
|
$
|
566,663
|
|
|
Total liabilities as of December 31, 2020
|
$
|
189
|
|
|
$
|
25,453
|
|
|
Revenue for the year ended December 31, 2020
|
$
|
(4,052)
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|
|
$
|
(48,544)
|
|
|
Earnings for the year ended December 31, 2020
|
$
|
(4,120)
|
|
|
$
|
(49,832)
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|
|
Biglari Holdings’ ownership interest
|
66.2
|
%
|
|
95.4
|
%
|
|
|
|
|
|
|
Total assets as of December 31, 2019
|
$
|
117,135
|
|
|
$
|
758,663
|
|
|
Total liabilities as of December 31, 2019
|
$
|
158
|
|
|
$
|
114,639
|
|
|
Revenue for the year ended December 31, 2019
|
$
|
10,637
|
|
|
$
|
85,831
|
|
|
Earnings for the year ended December 31, 2019
|
$
|
10,567
|
|
|
$
|
78,604
|
|
|
Biglari Holdings’ ownership interest
|
66.1
|
%
|
|
92.9
|
%
|
|
|
|
|
|
|
Total assets as of December 31, 2018
|
$
|
107,207
|
|
|
$
|
901,750
|
|
|
Total liabilities as of December 31, 2018
|
$
|
447
|
|
|
$
|
202,770
|
|
|
Revenue for the year ended December 31, 2018
|
$
|
(92,093)
|
|
|
$
|
(120,431)
|
|
|
Earnings for the year ended December 31, 2018
|
$
|
(92,159)
|
|
|
$
|
(130,193)
|
|
|
Biglari Holdings’ ownership interest
|
65.9
|
%
|
|
92.2
|
%
|
Revenue in the above summarized financial information of the investment partnerships includes investment income and unrealized gains and losses on investments.
Note 4. Other Current Assets
Other current assets include the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
Deferred commissions on gift cards sold by third parties
|
$
|
3,491
|
|
|
$
|
3,379
|
|
|
Prepaid contractual obligations
|
3,001
|
|
|
3,070
|
|
|
Other current assets
|
$
|
6,492
|
|
|
$
|
6,449
|
|
Note 5. Property and Equipment
Property and equipment is composed of the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
Land
|
$
|
142,601
|
|
|
$
|
150,147
|
|
|
Buildings
|
138,734
|
|
|
144,243
|
|
|
Land and leasehold improvements
|
141,351
|
|
|
157,141
|
|
|
Equipment
|
192,735
|
|
|
196,264
|
|
|
Oil and gas properties
|
75,900
|
|
|
77,475
|
|
|
Construction in progress
|
1,032
|
|
|
3,789
|
|
|
|
692,353
|
|
|
729,059
|
|
|
Less accumulated depreciation and amortization
|
(376,231)
|
|
|
(378,432)
|
|
|
Property and equipment, net
|
$
|
316,122
|
|
|
$
|
350,627
|
|
Depreciation and amortization expense for property and equipment for 2020, 2019 and 2018 was $19,586, $18,881 and $18,646, respectively. Depletion expense related to oil and gas properties was $11,989 and $8,077 during 2020 and 2019, respectively. Accretion expense of the Company's asset retirement obligations was $497 and $177 during 2020 and 2019, respectively. Depletion and accretion expense are included in depreciation and amortization within the consolidated statement of earnings.
The Company recorded an impairment to restaurant long-lived assets of $19,618, $8,186 and $5,677 during 2020, 2019 and 2018, respectively. 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.
The property and equipment cost related to finance obligations as of December 31, 2020 is as follows: $54,531 of buildings, $48,015 of land, $25,682 of land and leasehold improvements, and $54,976 of accumulated depreciation.
Note 6. Asset Retirement Obligations
A reconciliation of the ending aggregate carrying amount of asset retirement obligations is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2020
|
|
2019
|
|
Beginning balance
|
$
|
10,631
|
|
|
$
|
10,542
|
|
|
Liabilities settled
|
(870)
|
|
|
(88)
|
|
|
Accretion expense
|
497
|
|
|
177
|
|
|
Asset retirement obligation
|
$
|
10,258
|
|
|
$
|
10,631
|
|
As of December 31, 2020 and 2019, $236 and $184, respectively, is classified as current and is included in accounts payable and accrued expenses in the consolidated balance sheets.
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. No goodwill was recorded with the acquisition of Southern Oil.
A reconciliation of the change in the carrying value of goodwill is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants
|
|
Insurance
|
|
Total
|
|
Goodwill at December 31, 2017
|
$
|
28,168
|
|
|
$
|
11,913
|
|
|
$
|
40,081
|
|
|
Change in foreign exchange rates during 2018
|
(29)
|
|
|
—
|
|
|
(29)
|
|
|
Goodwill at December 31, 2018
|
$
|
28,139
|
|
|
$
|
11,913
|
|
|
$
|
40,052
|
|
|
Change in foreign exchange rates during 2019
|
(12)
|
|
|
—
|
|
|
(12)
|
|
|
Goodwill at December 31, 2019
|
$
|
28,127
|
|
|
$
|
11,913
|
|
|
$
|
40,040
|
|
|
Goodwill from acquisition
|
—
|
|
|
13,800
|
|
|
13,800
|
|
|
Impairments to goodwill
|
(300)
|
|
|
—
|
|
|
(300)
|
|
|
Change in foreign exchange rates during 2020
|
56
|
|
|
—
|
|
|
56
|
|
|
Goodwill at December 31, 2020
|
$
|
27,883
|
|
|
$
|
25,713
|
|
|
$
|
53,596
|
|
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, we evaluated goodwill for impairment during 2020, specifically related to goodwill for certain restaurant reporting units. Making estimates of the fair value of reporting units at this time is significantly affected by assumptions of the severity, duration, and long-term effects of the pandemic on the reporting units' operations. We considered the available facts and made qualitative assessments and judgments for what we believed represented reasonably possible outcomes. The fair value of certain of Steak n Shake’s reporting units declined, and an impairment to goodwill of $300 was recorded in 2020. In addition, as a result of our impairment assessment, the fair value of the Western Sizzlin reporting unit was within 10% of the carrying value. Further decline in Western Sizzlin's franchise base may result in recording future impairments of goodwill to reflect the depletion in value. 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. There were no impairment charges recorded in 2019 or 2018.
Other Intangible Assets
Other intangible assets are composed of the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
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
|
8,189
|
|
|
—
|
|
|
8,189
|
|
|
11,323
|
|
|
—
|
|
|
11,323
|
|
|
Total intangible assets
|
$
|
30,185
|
|
|
$
|
(6,120)
|
|
|
$
|
24,065
|
|
|
$
|
33,319
|
|
|
$
|
(5,970)
|
|
|
$
|
27,349
|
|
Note 7. Goodwill and Other Intangible Assets (continued)
Intangible assets with indefinite lives consist of trade names, franchise rights as well as lease rights. During 2020, the Company recorded impairment charges of $3,728 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 2020, 2019 and 2018 was $150, $549 and $562, respectively. The Company’s intangible assets with definite lives fully amortized in 2020.
Note 8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
Accounts payable
|
$
|
26,537
|
|
|
$
|
32,626
|
|
|
Gift card liability
|
21,822
|
|
|
20,745
|
|
|
Loss reserves
|
14,652
|
|
|
3,211
|
|
|
Unearned premiums
|
13,277
|
|
|
1,300
|
|
|
Other insurance accruals
|
6,559
|
|
|
6,559
|
|
|
Salaries, wages, and vacation
|
8,285
|
|
|
10,667
|
|
|
Deferred revenue
|
9,324
|
|
|
10,454
|
|
|
Taxes payable
|
10,922
|
|
|
29,275
|
|
|
Other
|
7,443
|
|
|
6,242
|
|
|
Accounts payable and accrued expenses
|
$
|
118,821
|
|
|
$
|
121,079
|
|
Note 9. Other Liabilities
Other liabilities include the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
Non qualified deferred compensation
|
$
|
1,368
|
|
|
$
|
1,716
|
|
|
Other
|
312
|
|
|
348
|
|
|
Other liabilities
|
$
|
1,680
|
|
|
$
|
2,064
|
|
Note 10. Income Taxes
The components of the provision for income taxes consist of the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
(472)
|
|
|
$
|
41,005
|
|
|
$
|
(1,688)
|
|
|
State
|
476
|
|
|
7,301
|
|
|
1,204
|
|
|
Deferred
|
(12,216)
|
|
|
(38,545)
|
|
|
(2,153)
|
|
|
Income tax expense (benefit)
|
$
|
(12,212)
|
|
|
$
|
9,761
|
|
|
$
|
(2,637)
|
|
|
|
|
|
|
|
|
|
Reconciliation of effective income tax:
|
|
|
|
|
|
|
Tax at U.S. statutory rates
|
$
|
(10,542)
|
|
|
$
|
11,579
|
|
|
$
|
3,519
|
|
|
State income taxes, net of federal benefit
|
(1,750)
|
|
|
1,573
|
|
|
741
|
|
|
Tax rate changes
|
—
|
|
|
—
|
|
|
(1,342)
|
|
|
Federal income tax credits
|
(424)
|
|
|
(3,004)
|
|
|
(4,587)
|
|
|
Dividends received deduction
|
(233)
|
|
|
(955)
|
|
|
(2,142)
|
|
|
Valuation allowance
|
733
|
|
|
441
|
|
|
658
|
|
|
Foreign tax rate differences
|
240
|
|
|
116
|
|
|
349
|
|
|
Other
|
(236)
|
|
|
11
|
|
|
167
|
|
|
Income tax expense (benefit)
|
$
|
(12,212)
|
|
|
$
|
9,761
|
|
|
$
|
(2,637)
|
|
The Company did not have a net tax expense or benefit on income from international operations. Earnings (losses) before income taxes derived from domestic operations during 2020, 2019 and 2018 were $(40,989), $57,877 and $21,700, respectively. Losses before income taxes derived from international operations during 2020, 2019 and 2018 were $9,212, $2,736, and $4,945, respectively.
As of December 31, 2020, we had $204 of unrecognized tax benefits, including $59 of interest and penalties, which are included in other long-term liabilities in the consolidated balance sheet. As of December 31, 2019, we had $348 of unrecognized tax benefits, including $62 of interest and penalties, which are included in other long-term liabilities in the consolidated balance sheet. Our continuing practice is to recognize interest expense and penalties related to income tax matters in income tax expense. The unrecognized tax benefits of $204 would impact the effective income tax rate if recognized. Adjustments to the Company’s unrecognized tax benefit for gross increases for the current period tax position, gross decreases for prior period tax positions and the lapse of statute of limitations during 2020, 2019 and 2018 were not significant.
We file income tax returns which are periodically audited by various foreign, federal, state, and local jurisdictions. With few exceptions, we are no longer subject to federal, state, and local tax examinations for fiscal years prior to 2017. We believe we have certain state income tax exposures related to fiscal years 2016 through 2020. Because of the expiration of the various state statutes of limitations for these fiscal years, it is possible that the total amount of unrecognized tax benefits will decrease by approximately $190 within 12 months.
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Note 10. Taxes (continued)
Our deferred tax assets and liabilities consist of the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
Insurance reserves
|
$
|
1,621
|
|
|
$
|
1,304
|
|
|
Compensation accruals
|
1,439
|
|
|
438
|
|
|
Gift card accruals
|
2,387
|
|
|
3,280
|
|
|
Net operating loss credit carryforward
|
7,121
|
|
|
6,017
|
|
|
Valuation allowance on net operating losses
|
(6,152)
|
|
|
(5,419)
|
|
|
Fixed assets and depletable assets basis difference
|
8,234
|
|
|
6,300
|
|
|
Income tax credit carryforward
|
2,178
|
|
|
4,776
|
|
|
Other
|
2,516
|
|
|
(36)
|
|
|
Total deferred tax assets
|
19,344
|
|
|
16,660
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Investments
|
45,470
|
|
|
56,519
|
|
|
Goodwill and intangibles
|
15,220
|
|
|
14,371
|
|
|
Total deferred tax liabilities
|
60,690
|
|
|
70,890
|
|
|
Net deferred tax liability
|
$
|
(41,346)
|
|
|
$
|
(54,230)
|
|
Accrued expenses on the balance sheet include income taxes payable of $2,436 and $17,767 as of December 31, 2020 and 2019, respectively. Income taxes paid during 2020, 2019 and 2018 were $15,402, $30,375 and $810, respectively. Income tax refunds during 2020, 2019 and 2018 were $68, $1,546 and $8, respectively.
Note 11. Notes Payable and Other Borrowings
Notes payable and other borrowings include the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
Current portion of notes payable and other borrowings
|
|
|
|
|
Notes payable
|
$
|
152,506
|
|
|
$
|
2,200
|
|
|
Unamortized original issue discount
|
(87)
|
|
|
(348)
|
|
|
Unamortized debt issuance costs
|
(158)
|
|
|
(634)
|
|
|
Finance obligations
|
4,854
|
|
|
4,252
|
|
|
Finance lease liabilities
|
1,897
|
|
|
1,633
|
|
|
Total current portion of notes payable and other borrowings
|
$
|
159,012
|
|
|
$
|
7,103
|
|
|
|
|
|
|
|
Long-term notes payable and other borrowings
|
|
|
|
|
Notes payable
|
$
|
—
|
|
|
$
|
179,298
|
|
|
Unamortized original issue discount
|
—
|
|
|
(89)
|
|
|
Unamortized debt issuance costs
|
—
|
|
|
(163)
|
|
|
Finance obligations
|
68,148
|
|
|
74,497
|
|
|
Finance lease liabilities
|
7,034
|
|
|
9,639
|
|
|
Total long-term notes payable and other borrowings
|
$
|
75,182
|
|
|
$
|
263,182
|
|
Note 11. Notes Payable and Other Borrowings (continued)
Steak n Shake Credit Facility
On March 19, 2014, Steak n Shake and its subsidiaries entered into a credit agreement which provided for a senior secured term loan facility in an aggregate principal amount of $220,000. The term loan 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.
Western Sizzlin Revolver
As of December 31, 2020 and 2019, Western Sizzlin had no debt outstanding under its revolver.
Interest
Interest paid on debt and obligations under leases are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Interest paid on debt
|
$
|
9,397
|
|
|
$
|
11,273
|
|
|
$
|
10,655
|
|
|
Interest paid on obligations under leases
|
$
|
6,274
|
|
|
$
|
7,816
|
|
|
$
|
8,207
|
|
Note 12. Leased Assets and Lease Commitments
The Company adopted ASC 842 on January 1, 2019, as discussed in Note 1. Under ASC 842, leases are generally classified as either operating right-of-use assets or finance lease assets. Right-of-use assets represent the Company's right to use an underlying asset during the lease term. Right-of-use liabilities represent the Company's obligation to make lease payments arising from the lease. These assets and liabilities are calculated by using the net present value of fixed lease payments over the lease term. The Company's lease terms include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. The Company applied an incremental borrowing rate to determine the present value of lease payments. Finance lease agreements include an interest rate that is used to determine the present value of future lease payments.
A significant portion of our operating and finance lease portfolio includes restaurant locations. The Company’s operating leases with a term of 12 months or greater were recognized as operating right-of-use assets and liabilities and recorded as operating lease assets and operating lease liabilities. Historical capital leases and certain historical build-to-suit leases were reclassified from obligations under leases to finance lease assets and liabilities. Finance lease assets are recorded in property and equipment and finance lease liabilities are recorded in notes payable and other borrowings. Historical sale-and-leaseback transactions in which the Company is deemed to have a continued interest in the leased asset are recorded as property and equipment and as finance obligations. Finance obligations are recorded in notes payable and other borrowings.
Operating lease expense and finance lease depreciation expense are recognized on a straight-line basis over the lease term.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Finance lease costs:
|
|
|
|
|
Amortization of right-of-use assets
|
$
|
1,404
|
|
|
$
|
1,952
|
|
|
Interest on lease liabilities
|
582
|
|
|
828
|
|
|
Operating lease costs *
|
9,995
|
|
|
16,483
|
|
|
Total lease costs
|
$
|
11,981
|
|
|
$
|
19,263
|
|
*Includes short-term leases, variable lease costs and sublease income.
Note 12. Leased Assets and Lease Commitments (continued)
Supplemental cash flow information related to leases is as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
Year Ended December 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Financing cash flows from finance leases
|
$
|
1,512
|
|
|
$
|
1,610
|
|
|
Operating cash flows from finance leases
|
$
|
632
|
|
|
$
|
828
|
|
|
Operating cash flows from operating leases
|
$
|
13,627
|
|
|
$
|
16,863
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Finance leases:
|
|
|
|
|
Property and equipment, net
|
$
|
6,501
|
|
|
$
|
10,783
|
|
|
|
|
|
|
|
Current portion of notes payable and other borrowings
|
$
|
1,897
|
|
|
$
|
1,633
|
|
|
Long-term notes payable and other borrowings
|
7,034
|
|
|
9,639
|
|
|
Total finance lease liabilities
|
$
|
8,931
|
|
|
$
|
11,272
|
|
Weighted-average lease terms and discount rates are as follows.
|
|
|
|
|
|
|
|
|
2020
|
|
Weighted-average remaining lease terms:
|
|
|
Finance leases
|
5.7 years
|
|
Operating leases
|
5.6 years
|
|
|
|
|
Weighted-average discount rates:
|
|
|
Finance leases
|
7.1%
|
|
Operating leases
|
6.9%
|
Maturities of lease liabilities as of December 31, 2020 are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Operating Leases
|
|
Finance
Leases
|
|
2021
|
|
$
|
13,521
|
|
|
$
|
2,452
|
|
|
2022
|
|
10,949
|
|
|
1,864
|
|
|
2023
|
|
9,604
|
|
|
1,669
|
|
|
2024
|
|
7,678
|
|
|
1,633
|
|
|
2025
|
|
5,870
|
|
|
1,292
|
|
|
After 2025
|
|
9,447
|
|
|
1,906
|
|
|
Total lease payments
|
|
57,069
|
|
|
10,816
|
|
|
Less interest
|
|
9,992
|
|
|
1,885
|
|
|
Total lease liabilities
|
|
$
|
47,077
|
|
|
$
|
8,931
|
|
Note 12. Leased Assets and Lease Commitments (continued)
Rent expense is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Minimum rent
|
$
|
15,672
|
|
|
$
|
17,968
|
|
|
$
|
20,158
|
|
|
Contingent rent
|
137
|
|
|
1,050
|
|
|
1,470
|
|
|
Rent expense
|
$
|
15,809
|
|
|
$
|
19,018
|
|
|
$
|
21,628
|
|
Note 13. Related Party Transactions
Services Agreement
During 2017, the Company entered into a services agreement with Biglari Enterprises LLC and Biglari Capital Corp. (collectively, the “Biglari Entities”) under which the Biglari Entities provide business and administrative related services to the Company. The Biglari Entities are owned by Mr. Biglari. The services agreement has a five-year term, effective on October 1, 2017. The fixed fee is $700 per month for the first year with adjustments in years two through five. The monthly fee remained at $700 during 2020.
The Company paid Biglari Enterprises $8,400 in service fees during 2020 and 2019. The services agreement does not alter the hurdle rate connected with the incentive reallocation paid to Biglari Capital Corp. by the Company.
Investments in The Lion Fund, L.P. and The Lion Fund II, L.P.
As of December 31, 2020, the Company’s investments in The Lion Fund, L.P. and The Lion Fund II, L.P. had a fair value of $590,926.
Contributions to and distributions from The Lion Fund, L.P. and The Lion Fund II, L.P. were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Contributions of cash
|
$
|
70,130
|
|
|
$
|
40,000
|
|
|
$
|
39,040
|
|
|
Distributions of cash
|
(98,330)
|
|
|
(169,329)
|
|
|
(68,700)
|
|
|
|
$
|
(28,200)
|
|
|
$
|
(129,329)
|
|
|
$
|
(29,660)
|
|
As the general partner of the investment partnerships, Biglari Capital on December 31 of each year will earn an incentive reallocation fee for the Company’s investments equal to 25% of the net profits above a hurdle rate of 6% over the previous high-water mark. There were $987 of incentive reallocations from Biglari Holdings to Biglari Capital during 2020, including $253 associated with gains on the Company's common stock. Gains on the Company's common stock and the related incentive reallocations are eliminated in our financial statements. There were no incentive reallocations from Biglari Holdings to Biglari Capital during 2019 and 2018.
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. No incentive fees were earned during 2020, 2019 and 2018.
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 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.
On September 8, 2014, two former restaurant manager employees filed a purported class action lawsuit against Steak n Shake (Drake v. Steak n Shake). On January 30, 2017, a former restaurant manager employee filed a purported class action lawsuit against Steak n Shake (Clendenen v. Steak n Shake). The plaintiffs generally allege claims that Steak n Shake improperly classified its managerial employees as exempt. On July 26, 2019, the Company agreed to settle both cases for $8,350 and the Court approved the terms of the settlement. The settlement is reflected in selling, general and administrative expenses in the 2019 consolidated statement of earnings.
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.
Note 15. Fair Value of Financial Assets (continued)
•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 consist of both corporate and government debt. Bonds are classified as Level 1 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 December 31, 2020 and 2019 the fair values of financial assets were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
23,885
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23,885
|
|
|
$
|
43,095
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,095
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer goods
|
7,274
|
|
|
5,652
|
|
|
—
|
|
|
12,926
|
|
|
—
|
|
|
6,397
|
|
|
—
|
|
|
6,397
|
|
|
Insurance
|
261
|
|
|
—
|
|
|
—
|
|
|
261
|
|
|
25
|
|
|
—
|
|
|
—
|
|
|
25
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
39,472
|
|
|
14,043
|
|
|
—
|
|
|
53,515
|
|
|
38,911
|
|
|
—
|
|
|
—
|
|
|
38,911
|
|
|
Corporate
|
—
|
|
|
5,406
|
|
|
—
|
|
|
5,406
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Options on equity securities
|
—
|
|
|
2,911
|
|
|
—
|
|
|
2,911
|
|
|
—
|
|
|
2,166
|
|
|
—
|
|
|
2,166
|
|
|
Non-qualified deferred compensation plan investments
|
1,368
|
|
|
—
|
|
|
—
|
|
|
1,368
|
|
|
2,175
|
|
|
—
|
|
|
—
|
|
|
2,175
|
|
|
Total assets at fair value
|
$
|
72,260
|
|
|
$
|
28,012
|
|
|
$
|
—
|
|
|
$
|
100,272
|
|
|
$
|
84,206
|
|
|
$
|
8,563
|
|
|
$
|
—
|
|
|
$
|
92,769
|
|
There were no changes in our valuation techniques used to measure fair values on a recurring basis.
Note 16. Accumulated Other Comprehensive Income
Changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Foreign
Currency
Translation
Adjustments
|
|
Investment
Gain (Loss)
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Foreign
Currency
Translation
Adjustments
|
|
Investment
Gain
(Loss)
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Beginning Balance
|
$
|
(2,810)
|
|
|
$
|
—
|
|
|
$
|
(2,810)
|
|
|
$
|
(2,516)
|
|
|
$
|
—
|
|
|
$
|
(2,516)
|
|
|
Foreign currency translation
|
1,279
|
|
|
|
|
1,279
|
|
|
(294)
|
|
|
|
|
(294)
|
|
|
Ending Balance
|
$
|
(1,531)
|
|
|
$
|
—
|
|
|
$
|
(1,531)
|
|
|
$
|
(2,810)
|
|
|
$
|
—
|
|
|
$
|
(2,810)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
Foreign Currency
Translation Adjustments
|
|
Investment
Gain (Loss)
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Beginning Balance
|
$
|
(1,462)
|
|
|
$
|
58
|
|
|
$
|
(1,404)
|
|
|
Reclassification to (earnings) loss
|
|
|
(58)
|
|
|
(58)
|
|
|
Foreign currency translation
|
(1,054)
|
|
|
|
|
(1,054)
|
|
|
Ending Balance
|
$
|
(2,516)
|
|
|
$
|
—
|
|
|
$
|
(2,516)
|
|
There were no reclassifications from accumulated other comprehensive income to earnings during 2020 and 2019. Reclassifications made from accumulated other comprehensive income to the statement of earnings were $58 of income to earnings during 2018.
Note 17. Business Segment Reporting
Our reportable business segments are organized in a manner that reflects how management views those business activities. Our restaurant operations include Steak n Shake and Western Sizzlin. Our insurance operations include First Guard and Southern Pioneer. The Company also reports segment information for Maxim and Southern Oil. Other business activities not specifically identified with reportable business segments are presented in corporate. We report our earnings from investment partnerships separate from our corporate expenses. We assess and measure segment operating results based on segment earnings as disclosed below. Segment earnings from operations are neither necessarily indicative of cash available to fund cash requirements, nor synonymous with cash flow from operations. The tabular information that follows shows data of our reportable segments reconciled to amounts reflected in the consolidated financial statements.
Note 17. Business Segment Reporting (continued)
A disaggregation of our consolidated data for each of the three most recent years is presented in the tables which follow.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
2020
|
|
2019
|
|
2018
|
|
Operating Businesses:
|
|
|
|
|
|
|
Restaurant Operations:
|
|
|
|
|
|
|
Steak n Shake
|
$
|
344,305
|
|
|
$
|
595,004
|
|
|
$
|
760,565
|
|
|
Western
|
6,361
|
|
|
15,216
|
|
|
15,125
|
|
|
Total Restaurant Operations
|
350,666
|
|
|
610,220
|
|
|
775,690
|
|
|
|
|
|
|
|
|
|
Insurance Operations:
|
|
|
|
|
|
|
First Guard
|
30,958
|
|
|
30,083
|
|
|
27,628
|
|
|
Southern Pioneer
|
21,721
|
|
|
—
|
|
|
—
|
|
|
Total Insurance Operations
|
52,679
|
|
|
30,083
|
|
|
27,628
|
|
|
|
|
|
|
|
|
|
Southern Oil
|
26,255
|
|
|
24,436
|
|
|
—
|
|
|
Maxim
|
4,083
|
|
|
4,099
|
|
|
6,576
|
|
|
|
$
|
433,683
|
|
|
$
|
668,838
|
|
|
$
|
809,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Before Income Taxes
|
|
|
2020
|
|
2019
|
|
2018
|
|
Operating Businesses:
|
|
|
|
|
|
|
Restaurant Operations:
|
|
|
|
|
|
|
Steak n Shake
|
$
|
(4,587)
|
|
|
$
|
(18,575)
|
|
|
$
|
(10,657)
|
|
|
Western
|
(765)
|
|
|
1,756
|
|
|
2,046
|
|
|
Total Restaurant Operations
|
(5,352)
|
|
|
(16,819)
|
|
|
(8,611)
|
|
|
|
|
|
|
|
|
|
Insurance Operations:
|
|
|
|
|
|
|
First Guard
|
9,632
|
|
|
7,103
|
|
|
6,215
|
|
|
Southern Pioneer
|
2,799
|
|
|
—
|
|
|
—
|
|
|
Total Insurance Operations
|
12,431
|
|
|
7,103
|
|
|
6,215
|
|
|
|
|
|
|
|
|
|
Southern Oil
|
2,018
|
|
|
8,032
|
|
|
—
|
|
|
Maxim
|
1,784
|
|
|
742
|
|
|
1,068
|
|
|
Interest expense on notes payable and other borrowings
|
(9,262)
|
|
|
(12,442)
|
|
|
(11,677)
|
|
|
Total Operating Businesses
|
1,619
|
|
|
(13,384)
|
|
|
(13,005)
|
|
|
Corporate and investments:
|
|
|
|
|
|
|
Corporate and other
|
(12,432)
|
|
|
(9,608)
|
|
|
(10,651)
|
|
|
Investment gains
|
3,644
|
|
|
—
|
|
|
—
|
|
|
Investment partnership gains (losses)
|
(43,032)
|
|
|
78,133
|
|
|
40,411
|
|
|
Total corporate
|
(51,820)
|
|
|
68,525
|
|
|
29,760
|
|
|
|
|
|
|
|
|
|
|
$
|
(50,201)
|
|
|
$
|
55,141
|
|
|
$
|
16,755
|
|
Note 17. Business Segment Reporting (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
2020
|
|
2019
|
|
2018
|
|
Operating Businesses:
|
|
|
|
|
|
|
Restaurant Operations:
|
|
|
|
|
|
|
Steak n Shake
|
$
|
17,852
|
|
|
$
|
9,951
|
|
|
$
|
14,982
|
|
|
Western
|
6
|
|
|
72
|
|
|
61
|
|
|
Total Restaurant Operations
|
17,858
|
|
|
10,023
|
|
|
15,043
|
|
|
|
|
|
|
|
|
|
Insurance Operations:
|
|
|
|
|
|
|
First Guard
|
5
|
|
|
43
|
|
|
236
|
|
|
Southern Pioneer
|
—
|
|
|
—
|
|
|
—
|
|
|
Total Insurance Operations
|
5
|
|
|
43
|
|
|
236
|
|
|
Southern Oil
|
2,806
|
|
|
7,594
|
|
|
—
|
|
|
Maxim
|
—
|
|
|
—
|
|
|
—
|
|
|
Total Operating Businesses
|
20,669
|
|
|
17,660
|
|
|
15,279
|
|
|
Corporate and other
|
33
|
|
|
19
|
|
|
14
|
|
|
Consolidated results
|
$
|
20,702
|
|
|
$
|
17,679
|
|
|
$
|
15,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
2020
|
|
2019
|
|
2018
|
|
Operating Businesses:
|
|
|
|
|
|
|
Restaurant Operations:
|
|
|
|
|
|
|
Steak n Shake
|
$
|
18,811
|
|
|
$
|
20,533
|
|
|
$
|
18,180
|
|
|
Western
|
231
|
|
|
641
|
|
|
651
|
|
|
Total Restaurant Operations
|
19,042
|
|
|
21,174
|
|
|
18,831
|
|
|
Insurance Operations:
|
|
|
|
|
|
|
First Guard
|
96
|
|
|
85
|
|
|
76
|
|
|
Southern Pioneer
|
318
|
|
|
—
|
|
|
—
|
|
|
Total Insurance Operations
|
414
|
|
|
85
|
|
|
76
|
|
|
Southern Oil:
|
|
|
|
|
|
|
Depletion
|
11,989
|
|
|
7,900
|
|
|
—
|
|
|
Accretion
|
497
|
|
|
177
|
|
|
—
|
|
|
Depreciation
|
41
|
|
|
141
|
|
|
—
|
|
|
Total Southern Oil
|
12,527
|
|
|
8,218
|
|
|
—
|
|
|
Maxim
|
—
|
|
|
—
|
|
|
27
|
|
|
Total Operating Businesses
|
31,983
|
|
|
29,477
|
|
|
18,934
|
|
|
Corporate and other
|
239
|
|
|
101
|
|
|
384
|
|
|
Consolidated results
|
$
|
32,222
|
|
|
$
|
29,578
|
|
|
$
|
19,318
|
|
Note 17. Business Segment Reporting (continued)
A disaggregation of our consolidated assets is presented in the table that follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
Reportable segments:
|
|
|
|
|
Restaurant Operations:
|
|
|
|
|
Steak n Shake
|
$
|
341,190
|
|
|
$
|
385,259
|
|
|
Western
|
16,512
|
|
|
18,322
|
|
|
Total Restaurant Operations
|
357,702
|
|
|
403,581
|
|
|
|
|
|
|
|
Insurance Operations:
|
|
|
|
|
First Guard
|
64,764
|
|
|
58,808
|
|
|
Southern Pioneer
|
74,063
|
|
|
—
|
|
|
Total Insurance Operations
|
138,827
|
|
|
58,808
|
|
|
|
|
|
|
|
Southern Oil
|
61,017
|
|
|
82,257
|
|
|
Maxim
|
16,485
|
|
|
16,549
|
|
|
Corporate
|
24,387
|
|
|
72,572
|
|
|
Investment partnerships
|
419,550
|
|
|
505,542
|
|
|
Total assets
|
$
|
1,017,968
|
|
|
$
|
1,139,309
|
|
Note 18. Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|
For the year ended December 31, 2020
|
|
|
|
|
|
|
|
|
Total revenues
|
$
|
135,700
|
|
|
$
|
96,502
|
|
|
$
|
101,835
|
|
|
$
|
99,646
|
|
|
Gross profit
|
35,890
|
|
|
32,719
|
|
|
33,764
|
|
|
34,578
|
|
|
Costs and expenses
|
146,019
|
|
|
101,396
|
|
|
102,689
|
|
|
94,392
|
|
|
Earnings (loss) before income taxes
|
(181,715)
|
|
|
57,230
|
|
|
26,718
|
|
|
47,566
|
|
|
Net earnings (loss)
|
(137,885)
|
|
|
42,466
|
|
|
21,101
|
|
|
36,329
|
|
|
Net earnings (loss) per equivalent Class A share
|
$
|
(400.37)
|
|
|
$
|
121.51
|
|
|
$
|
60.07
|
|
|
$
|
108.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2019
|
|
|
|
|
|
|
|
|
Total revenues
|
$
|
181,859
|
|
|
$
|
168,343
|
|
|
$
|
160,216
|
|
|
$
|
158,420
|
|
|
Gross profit
|
22,837
|
|
|
30,454
|
|
|
38,467
|
|
|
43,307
|
|
|
Costs and expenses
|
204,451
|
|
|
174,671
|
|
|
162,296
|
|
|
150,412
|
|
|
Earnings (loss) before income taxes
|
11,562
|
|
|
27,870
|
|
|
(631)
|
|
|
16,340
|
|
|
Net earnings (loss)
|
9,818
|
|
|
21,974
|
|
|
(17)
|
|
|
13,605
|
|
|
Net earnings (loss) per equivalent Class A share
|
$
|
28.36
|
|
|
$
|
63.50
|
|
|
$
|
(0.05)
|
|
|
$
|
39.64
|
|
We define gross profit as net revenue less restaurant cost of sales, media cost of sales, oil and natural gas production costs and insurance losses and underwriting expenses, which excludes depreciation and amortization.
Note 19. Supplemental Disclosures of Cash Flow Information
Capital expenditures in accounts payable at December 31, 2020, 2019 and 2018 were $2,399, $339 and $1,776, respectively.
In 2020, we had new finance lease obligations of $3,285 and lease retirements of $4,842. In 2019, we had new finance lease obligations of $5,026 and lease retirements of $940. During 2018, we had new capital lease obligations of $1,000 and lease retirements of $11,557.