UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 001-38477
BIGLARI HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Indiana
82-3784946
(State or other jurisdiction of incorporation)
(I.R.S. Employer Identification No.)
17802 IH 10 West, Suite 400
San Antonio, Texas
78257
(Address of principal executive offices)
(Zip Code)
(210) 344-3400
Registrant’s telephone number, including area code
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbols
Name of each exchange on which registered
Class A, Common Stock, no par value
Class B, Common Stock, no par value
BH.A
BH
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and an “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock outstanding as of August 5, 2020:
Class A common stock -
206,864
Class B common stock -
2,068,640
INDEX
Page No.
Part I - Financial Information
Item 1.
Financial Statements
Consolidated Balance Sheets - June 30, 2020 and December 31, 2019
1
Consolidated Statements of Earnings - Second Quarter and First Six Months 2020 and 2019
2
Consolidated Statements of Comprehensive Income - Second Quarter and First Six Months 2020 and 2019
Consolidated Statements of Cash Flows - First Six Months 2020 and 2019
3
Consolidated Statements of Changes in Shareholders’ Equity - First Six Months 2020 and 2019
4
Notes to Consolidated Financial Statements
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
25
Item 4.
Controls and Procedures
Part II - Other Information
Legal Proceedings
26
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
27
Signatures
28
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30,2020
December 31,2019
(Unaudited)
Assets
Current assets:
Cash and cash equivalents
Investments
Receivables
Inventories
Other current assets
Total current assets
Property and equipment
Operating lease assets
Goodwill and other intangible assets
Investment partnerships
Other assets
Total assets
Liabilities and shareholders’ equity
Liabilities
Current liabilities:
Accounts payable and accrued expenses
Current portion of operating lease liabilities
Current portion of notes payable and other borrowings
Total current liabilities
Long-term notes payable and other borrowings
Operating lease liabilities
Deferred taxes
Asset retirement obligations
Other liabilities
Total liabilities
Shareholders’ equity
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock, at cost
Biglari Holdings Inc. shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in thousands except per share amounts)
Second Quarter
First Six Months
2020
2019
Revenues
Restaurant operations
Insurance premiums and other
Oil and gas
Media and licensing
Cost and expenses
Restaurant cost of sales
Insurance losses and underwriting expenses
Oil and gas production costs
Media and licensing costs
Selling, general and administrative
Impairments
Depreciation and amortization
Interest expense
Other income
Gain on debt extinguishment
Investment gains
Investment partnership gains (losses)
Earnings (loss) before income taxes
Income tax expense (benefit)
Net earnings (loss)
Earnings per share
Net earnings (loss) per equivalent Class A share *
*Net earnings (loss) per equivalent Class B share outstanding are one-fifth of the equivalent Class A share or $24.30 and $(55.01) for the second quarter and first six months of 2020, respectively, and $12.70 and $18.37 for the second quarter and first six months of 2019, respectively.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Other comprehensive income:
Foreign currency translation
Other comprehensive income (loss), net
Total comprehensive income (loss)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities
Adjustments to reconcile net earnings (loss) to operating cash flows:
Provision for deferred income taxes
Asset impairments and other non-cash expenses
Gains on disposal of assets
Investment (gains) losses
-
Investment partnership (gains) losses
Distributions from investment partnerships
Changes in receivables and inventories
Changes in other assets
Changes in accounts payable and accrued expenses
(17,091
)
Net cash provided by (used in) operating activities
Investing activities
Capital expenditures
Proceeds from property and equipment disposals
Acquisition of business, net of cash acquired
Purchases of limited partner interests
Purchases of investments
Redemptions of fixed maturity securities
Net cash used in investing activities
Financing activities
Proceeds from revolving credit facility
Principal payments on long-term debt
Principal payments on direct financing lease obligations
Net cash used in financing activities
Effect of exchange rate changes on cash
Decrease in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of year
Cash, cash equivalents and restricted cash at end of second quarter
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Common Stock
Additional Paid-In Capital
Retained Earnings
AccumulatedOther Comprehensive Income (Loss)
Treasury Stock
Total
Balance at December 31, 2019
Other comprehensive income, net
Adjustment to treasury stock for
holdings in investment partnerships
Balance at March 31, 2020
Net earnings
Balance at June 30, 2020
AccumulatedOtherComprehensive Income (Loss)
Balance at December 31, 2018
Adoption of accounting standards
Balance at March 31, 2019
Balance at June 30, 2019
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
(dollars in thousands, except share and per share data)
Note 1. Summary of Significant Accounting Policies
Description of Business
The accompanying unaudited consolidated financial statements of Biglari Holdings Inc. (“Biglari Holdings” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In our opinion, all adjustments considered necessary to present fairly the results of the interim periods have been included and consist only of normal recurring adjustments. The results for the interim periods shown are not necessarily indicative of results for the entire fiscal year. The financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2019.
Biglari Holdings is a holding company owning subsidiaries engaged in a number of diverse business activities, including property and casualty insurance, media and licensing, restaurants, and oil and gas. The Company’s largest operating subsidiaries are involved in the franchising and operating of restaurants. Biglari Holdings is founded and led by Sardar Biglari, Chairman and Chief Executive Officer of the Company. The Company’s long-term objective is to maximize per-share intrinsic value. All major investment and capital allocation decisions are made for the Company and its subsidiaries by Mr. Biglari.
As of June 30, 2020, Mr. Biglari’s beneficial ownership was approximately 64.4% of the Company’s outstanding Class A common stock and 55.4% of the Company’s outstanding Class B common stock.
The novel coronavirus (“COVID-19”) was declared a pandemic by the World Health Organization, which caused governments to contain its spread, thereby significantly affecting our operating businesses beginning in March and has adversely affected nearly all of our operations in the second quarter. The risks and uncertainties resulting from the pandemic may continue to affect our future earnings, cash flows and financial condition.
Business Acquisition
On March 9, 2020, Biglari Holdings acquired the stock of Southern Pioneer Property & Casualty Insurance Company, and its agency, Southern Pioneer Insurance Agency, Inc. (collectively “Southern Pioneer”). Southern Pioneer underwrites specialty insurance products including garage liability insurance, commercial property coverage, as well as homeowners and dwelling fire insurance coverages. The financial results for Southern Pioneer from the acquisition date to the end of the second quarter are included in the Company’s consolidated financial statements. The acquisition date fair values of assets and liabilities of Southern Pioneer are provisional and subject to revision as the related valuations are completed. Pro-forma financial information of Southern Pioneer is not material.
On September 9, 2019, a wholly-owned subsidiary of the Company, Southern Oil Company, acquired the stock of Southern Oil of Louisiana Inc. (collectively “Southern Oil”). Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of the Gulf of Mexico. Pro-forma financial information of Southern Oil is not material.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries including Steak n Shake Inc. (“Steak n Shake”), Western Sizzlin Corporation (“Western Sizzlin”), Maxim Inc. (“Maxim”), Southern Oil, First Guard Insurance Company (“First Guard”), and Southern Pioneer. Intercompany accounts and transactions have been eliminated in consolidation.
Change in Presentation
Interest expense on finance leases and obligations has been combined with interest expense in the current period and has been reclassified as a component of cost and expenses in the consolidated statement of earnings. Prior period balances have been adjusted to conform to the change in presentation.
Note 2. New Accounting Standards
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP; however, ASU 2016-13 requires that credit losses be presented as an allowance rather than as a write-down. The amendments in this update are effective for financial statements issued for fiscal years beginning after December 15, 2019.The Company adopted ASU 2016-13 effective January 1, 2020.The impact of this standard is not material to the Company’s financial statements and related disclosures.
Note 3. Earnings Per Share
Earnings per share of common stock is based on the weighted average number of shares outstanding during the year. The shares of Company stock attributable to our limited partner interest in The Lion Fund, L.P. and The Lion Fund II, L.P. (collectively, the “investment partnerships”) - based on our proportional ownership during this period - are considered treasury stock on the consolidated balance sheet and thereby deemed not to be included in the calculation of weighted average common shares outstanding. However, these shares are legally outstanding.
The following table presents shares authorized, issued and outstanding on June 30, 2020 and December 31, 2019.
December 31, 2019
Class A
Class B
Common stock authorized
500,000
10,000,000
Common stock issued and outstanding
The Company has applied the “two-class method” of computing earnings per share as prescribed in ASC 260, “Earnings Per Share.”
On an equivalent Class A common stock basis, there were 620,592 shares outstanding as of June 30, 2020 and December 31, 2019. There are no dilutive securities outstanding.
For financial reporting purposes, the proportional ownership of the Company’s common stock owned by the investment partnerships is excluded in the earnings per share calculation. After giving effect for the investment partnerships’ proportional ownership of common stock, the equivalent Class A weighted average number of common shares during the second quarters of 2020 and 2019 were 349,478 and 346,034, respectively. The equivalent Class A weighted average number of common shares during the first six months of 2020 and 2019 were 346,934 and 346,129, respectively.
Note 4. Investments
Available for sale investments were $80,322 and $40,393 as of June 30, 2020 and December 31, 2019, respectively.Investments in equity securities and a related derivative position of $4,463 are also included in investments. The investments are recorded at fair value. The fair value of investments acquired with Southern Pioneer was $36,876. The Company recorded $1,509 in investment gains during the second quarter of 2020.The Company did not have investment gains/losses during the first quarter of 2020 and during the first six months of 2019. Interest and dividends earned on investments are reported as other income by our insurance companies. We consider investment income as a component of our aggregate insurance operating results. However, we consider investment gains and losses, whether realized or unrealized, as non-operating.
Note 5. Investment Partnerships
The Company reports on the limited partnership interests in investment partnerships under the equity method of accounting. We record our proportional share of equity in the investment partnerships but exclude Company common stock held by said partnerships. The Company’s pro-rata share of its common stock held by the investment partnerships is recorded as treasury stock even though they are legally outstanding. The Company records gains/losses from investment partnerships (inclusive of the investment partnerships’ unrealized gains and losses on their securities) in the consolidated statements of earnings based on our carrying value of these partnerships. The fair value is calculated net of the general partner’s accrued incentive fees. Gains and losses on Company common stock included in the earnings of these partnerships are eliminated because they are recorded as treasury stock. Biglari Capital Corp. (“Biglari Capital”) is the general partner of the investment partnerships and is an entity solely owned by Mr. Biglari.
Note 5. Investment Partnerships (continued)
The fair value and adjustment for Company common stock held by the investment partnerships to determine the carrying value of our partnership interest is presented below.
Fair Value
Company
Carrying Value
Partnership interest at December 31, 2019
$
666,123
160,581
505,542
(183,096
(66,602
(116,494
Distributions (net of contributions) to investment partnerhips
(21,100
Increase in proportionate share of Company stock held
(1,181
1,181
Partnership interest at June 30, 2020
461,927
92,798
369,129
Partnership interest at December 31, 2018
715,102
157,622
557,480
Investment partnership gains
54,374
(13,978
68,352
Distributions (net of contributions) to investment partnerships
(2,490
1,276
(1,276
Partnership interest at June 30, 2019
766,986
144,920
622,066
The carrying value of the investment partnerships net of deferred taxes is presented below.
Carrying value of investment partnerships
Deferred tax liability related to investment partnerships
Carrying value of investment partnerships net of deferred taxes
The Company’s proportionate share of Company stock held by investment partnerships at cost is $373,676 and $374,857 at June 30, 2020 and December 31, 2019, respectively, and is recorded as treasury stock.
The carrying value of the partnership interest approximates fair value adjusted by the value of held Company stock.Fair value is according to our proportional ownership interest of the fair value of investments held by the investment partnerships. The fair value measurement is classified as level 3 within the fair value hierarchy.
Gains/losses from investment partnerships recorded in the Company’s consolidated statements of earnings are presented below.
Gains (losses) on investment partnership
59,248
34,198
Tax expense (benefit)
13,883
7,944
(27,500
15,861
45,365
26,254
(88,994
52,491
On December 31 of each year, the general partner of the investment partnerships, Biglari Capital, will earn an incentive reallocation fee for the Company’s investments equal to 25% of the net profits above an annual hurdle rate of 6% over the previous high-water mark. Our policy is to accrue an estimated incentive fee throughout the year. The total incentive reallocation from Biglari Holdings to Biglari Capital includes gains on the Company’s common stock. Gains and losses on the Company’s common stock and the related incentive reallocations are eliminated in our financial statements. Our investments in these partnerships are committed on a rolling 5-year basis.
There were no incentive reallocations from Biglari Holdings to Biglari Capital during the first six months of 2020 and 2019.
Summarized financial information for The Lion Fund, L.P. and The Lion Fund II, L.P. is presented below.
Equity in Investment Partnerships
Lion Fund
Lion Fund II
Total assets as of June 30, 2020
82,884
464,710
Total liabilities as of June 30, 2020
391
26,343
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
Total assets as of December 31, 2019
117,135
758,663
Total liabilities as of December 31, 2019
158
114,639
Revenue for the first six months of 2019
121
62,499
Earnings for the first six months of 2019
88
58,068
Biglari Holdings’ ownership interest as of June 30, 2019
93.4
Revenue in the above summarized financial information of the investment partnerships includes investment income and unrealized gains and losses on investments.
Note 6. Property and Equipment
Property and equipment is composed of the following.
Land
147,186
150,147
Buildings
139,046
144,243
Land and leasehold improvements
144,267
157,141
Equipment
193,468
196,264
Oil and gas properties
78,586
77,475
Construction in progress
2,730
3,789
705,283
729,059
Less accumulated depreciation and amortization
(376,525
(378,432
Property and equipment, net
328,758
350,627
Depletion expense related to oil and gas properties was $6,578 during the first six months of 2020 and is included in depreciation and amortization within the consolidated statement of earnings.
The COVID-19 pandemic had an adverse effect on our restaurant operations, thereby resulting in the evaluation of company-operated restaurants for recoverability. Consequently, the Company recorded impairment charges of $14,419 for the first six months of 2020 mainly because of the decision to permanently close some Steak n Shake restaurants as well as to close the dining rooms of all company-operated restaurants. The Company recorded an impairment to long-lived assets of $2,338 in the first six months of 2019 primarily related to Steak n Shake closed stores. The fair value of the long-lived assets was determined based on Level 3 inputs using a discounted cash flow model. Moreover, we also applied a market analysis for certain properties.
The COVID-19 pandemic has caused oil demand to significantly decrease, creating oversupplied markets, and resulting in lower commodity prices and margins. The Company evaluated the potential impact on its oil and gas properties, but concluded they were not impaired during the first six months of 2020.However, protracted low commodity prices may require impairments in future periods.
The duration and extent of the COVID-19 pandemic cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic may lead to future impairment of long-lived assets including right-of-use assets. In addition, significant estimates and assumptions used in the evaluation of long-lived assets for impairment may be subject to significant adjustments in future periods.
Note 7. Goodwill and Other Intangible Assets
Goodwill
Goodwill consists of the excess of the purchase price over the fair value of the net assets acquired in connection with business acquisitions. The Company purchased Southern Pioneer on March 9, 2020. The preliminary purchase price allocation reflects goodwill of $11,865.
A reconciliation of the change in the carrying value of goodwill is as follows.
June 30,
Balance at beginning of year
40,040
Goodwill from acquisition
11,865
Change in foreign exchange rates during the first six months of 2020
Balance at end of period
51,906
We evaluate goodwill and any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred. Goodwill impairment occurs when the estimated fair value of goodwill is less than its carrying value. The valuation methodology and underlying financial information included in our determination of fair value require significant management judgments. We use both market and income approaches to derive fair value. The judgments in these two approaches include, but are not limited to, comparable market multiples, long-term projections of future financial performance, and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results. No impairment charges for goodwill were recorded in the first six months of 2020 or 2019.
In response to the adverse effects of the COVID-19 pandemic, we considered whether goodwill needed to be evaluated for impairment as of June 30, 2020, specifically related to goodwill for certain restaurant reporting units. Making estimates of the fair value of reporting units at this time are significantly affected by assumptions on the severity, duration and long-term effects of the pandemic on the reporting unit’s operations. We considered the available facts and made qualitative assessments and judgments for what we believed represent reasonably possible outcomes. Although the fair values of certain of these reporting units declined since the time that the most recent annual impairment tests were conducted, we concluded it is more likely than not that goodwill was not impaired as of June 30, 2020. However, COVID-19 pandemic events will continue to evolve and the negative effects on our operations could prove to be worse than we currently estimate. The pandemic could have a negative impact on Western Sizzlin’s operations, which may require the Company to record goodwill impairment charges in future periods.
Other Intangible Assets
Other intangible assets are composed of the following.
Gross carrying
amount
Accumulated amortization
Franchise agreement
5,310
(5,310
(5,178
132
Other
810
(801
9
(792
18
6,120
(6,111
(5,970
150
Intangible assets with indefinite lives:
Trade names
15,876
Other assets with indefinite lives
7,516
11,323
Total intangible assets
29,512
23,401
33,319
27,349
Intangible assets with indefinite lives consist of trade names, franchise rights as well as lease rights. During the first six months of 2020, the Company recorded impairment charges of $3,700 on lease rights related to our international restaurant operations because of the adverse effects of the COVID-19 pandemic. The impairment and fair value were determined using Level 3 inputs and available market data. Amortization expense for the first six months of 2020 and 2019 was $141 and $274, respectively. The Company’s intangible assets with definite lives will fully amortize in 2020.
Note 8. Restaurant Operations Revenues
Restaurant operations revenues were as follows.
Net sales
69,487
152,062
174,215
317,693
Franchise royalties and fees
4,072
6,725
9,283
13,379
Franchise partner fees
4,537
421
7,881
679
668
853
1,529
2,085
78,764
160,061
192,908
333,836
Net sales are composed of retail sales of food through company-operated stores. Company-operated store revenues are recognized, net of discounts and sales taxes, when our obligation to perform is satisfied at the point of sale. Sales taxes related to these sales are collected from customers and remitted to the appropriate taxing authority and are not reflected in the Company’s consolidated statements of earnings as revenue.
Franchise royalties and fees are composed of royalties and fees from Steak n Shake and Western Sizzlin franchisees. Royalties are based upon a percentage of sales of the franchise restaurant and are recognized as earned. Franchise royalties are billed on a monthly basis. Initial franchise fees when a new restaurant opens or at the start of a new franchise term are recorded as deferred revenue when received and recognized as revenue over the term of the franchise agreement. Our advertising arrangements with franchisees are reported in franchise royalties and fees.
Steak n Shake is in the process of transitioning company-operated restaurants to franchise partners. The franchise agreement stipulates that the franchisee make an upfront investment totaling ten thousand dollars. Potential franchise partners are screened based on entrepreneurial attitude and ability, but they become franchise partners based on achievement. Each must meet the gold standard in service. Franchise partners are required to be hands-on operators. We limit a franchisee to a single location. As the franchisor Steak n Shake assesses a fee of up to 15% of sales as well as 50% of profits.
Gift card revenue
Restaurant operations sells gift cards to customers which can be redeemed for retail food sales within our stores. Gift cards are recorded as deferred revenue when issued and are subsequently recorded as net sales upon redemption. Restaurant operations estimates breakage related to gift cards when the likelihood of redemption is remote. This estimate utilizes historical trends based on the vintage of the gift card. Breakage on gift cards is recorded as other revenue in proportion to the rate of gift card redemptions by vintage.
Note 9. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses include the following.
December 31,
30,028
32,626
Salaries, wages, and vacation
Taxes payable
Insurance accruals
Deferred revenue
Note 10. Notes Payable and Other Borrowings
Notes payable and other borrowings include the following.
Notes payable
Unamortized original issue discount and debt issuance costs
Western Sizzlin revolver
Finance obligations
Finance lease liabilities
Total current portion of notes payable and other borrowings
Finance leases liabilities
Total long-term notes payable and other borrowings
Steak n Shake Credit Facility
On March 19, 2014, Steak n Shake and its subsidiaries entered into a credit agreement which provided for a senior secured term loan facility in an aggregate principal amount of $220,000. The term loan is scheduled to mature on March 19, 2021. As of June 30, 2020, $153,606 was outstanding. The Company is evaluating refinancing options. Alternative financing may not be available on terms commensurate with its current financing arrangement. In addition, the duration of the pandemic could have a material adverse effect on financing options or Steak n Shake’s ability to comply with the terms of its credit agreement. Biglari Holdings is not a guarantor under the credit facility.
The term loan amortizes in equal quarterly installments at an annual rate of 1.0% of the original principal amount of the term loan, subject to mandatory prepayments from excess cash flow, asset sales and other events described in the credit agreement. The balance will be due at maturity.
Interest on the term loan is based on a Eurodollar rate plus an applicable margin of 3.75% or on the prime rate plus an applicable margin of 2.75%.The interest rate on the term loan was 4.75% as of June 30, 2020.
The credit agreement includes customary affirmative and negative covenants and events of default. Steak n Shake’s credit facility contains restrictions on its ability to pay dividends to Biglari Holdings.
The term loan is secured by first priority security interests in substantially all the assets of Steak n Shake. Disruptions in debt capital markets that restrict access to funding when needed could adversely affect the results of operations, liquidity and capital resources of Steak n Shake.
The fair value of long-term debt, excluding capitalized lease obligations, was approximately $80,000 at June 30, 2020.The fair value of our debt was estimated based on quoted market prices. The fair value was determined to be a Level 3 fair value measurement.
The Company retired $26,792 of debt during the first six months of 2020.
Interest expense is summarized as follows.
Western Sizzlin Revolver
Western Sizzlin had $440 and $0 of debt outstanding under its revolver as of June 30, 2020 and December 31, 2019, respectively.
Note 11. Leased Assets and Lease Commitments
A significant portion of our operating and finance lease portfolio includes restaurant locations. The Company’s operating leases with a term of 12 months or greater were recognized as operating right-of-use assets and liabilities and recorded as operating lease assets and operating lease liabilities. Historical capital leases and certain historical build-to-suit leases were reclassified from obligations under leases to finance lease assets and liabilities. Finance lease assets are recorded in property and equipment and finance lease liabilities are recorded in notes payable and other borrowings. Historical sale-and-leaseback transactions in which the Company is deemed to have a continued interest in the leased asset are recorded as property and equipment and as finance obligations. Finance obligations are recorded in notes payable and other borrowings.
Operating lease expense and finance lease depreciation expense are recognized on a straight-line basis over the lease term.
During the quarter, 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.
Finance lease costs:
Amortization of right-of-use assets
Interest on lease liabilities
Operating lease costs *
Total lease costs
*Includes short-term leases, variable lease costs and sublease income, which are immaterial.
Supplemental cash flow information related to leases is as follows.
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows from finance leases
Operating cash flows from finance leases
Operating cash flows from operating leases
Right-of-use assets obtained in exchange for lease obligations:
Supplemental balance sheet information related to leases is as follows.
Finance leases:
Total finance lease liabilities
Weighted-average lease terms and discount rates are as follows.
Weighted-average remaining lease terms:
Finance leases
6.1 years
Operating leases
5.9 years
Weighted-average discount rates:
7.1%
6.9%
Note 11. Leased Assets and Lease Commitments (continued)
Maturities of lease liabilities as of June 30, 2020 are as follows.
Year
Operating
Leases
FinanceLeases
2021
2022
2023
2024
After 2024
Total lease payments
Less interest
Total lease liabilities
Note 12. Accumulated Other Comprehensive Income
During the second quarter of 2020 and 2019, accumulated other comprehensive losses decreased by $802 and $196, respectively, due to changes in foreign currency translation adjustments. During the first six months of 2020 accumulated other comprehensive losses decreased by $490 and increased by $108 during the first six months of 2019.As of June 30, 2020 and 2019, the balances in accumulated other comprehensive loss were $2,320 and $2,624, respectively. There were no reclassifications from accumulated other comprehensive income to earnings during the first six months of 2020 and 2019.
Note 13. Income Taxes
In determining the quarterly provision for income taxes, the Company used a discrete effective tax rate method based on statutory tax rates for the first six months of 2020 and 2019. Our periodic effective income tax rate is affected by the relative mix of pre-tax earnings or losses and underlying income tax rates applicable to the various taxing jurisdictions.
Income tax expense for the second quarter of 2020 was $14,764 compared to $5,896 for the second quarter of 2019. Income tax benefit for the first six months of 2020 was $29,066 compared to an income tax expense of $7,640 for the first six months of 2019.The variance in income taxes between 2020 and 2019 is attributable to taxes on income generated by the investment partnerships. Investment partnership pretax losses were $116,494 during the first six months of 2020, compared to pretax gains of $68,352 during the first six months of 2019.
As of June 30, 2020 and December 31, 2019, we had $348 of unrecognized tax benefits, which are included in other liabilities in the consolidated balance sheets.
Note 14. Commitments and Contingencies
We are involved in various legal proceedings and have certain unresolved claims pending. We believe, based on examination of these matters and experiences to date, that the ultimate liability, if any, in excess of amounts already provided in our consolidated financial statements is not likely to have a material effect on our results of operations, financial position or cash flow.
On January 29, 2018, a shareholder of the Company filed a purported class action complaint against the Company and the members of our Board of Directors in the Superior Court of Hamilton County, Indiana. The shareholder generally alleges claims of breach of fiduciary duty by the members of our Board of Directors and unjust enrichment to Mr. Biglari as a result of the dual class structure.
On March 26, 2018, a shareholder of the Company filed a purported class action complaint against the Company and the members of our Board of Directors in the Superior Court of Hamilton County, Indiana. This shareholder generally alleges claims of breach of fiduciary duty by the members of our Board of Directors. This shareholder sought to enjoin the shareholder vote on April 26, 2018 to approve the dual class structure. On April 16, 2018, the shareholder withdrew the motion to enjoin the shareholder vote on April 26, 2018.
Note 14. Commitments and Contingencies (continued)
On May 17, 2018, the shareholders who filed the January 29, 2018 complaint and the March 26, 2018 complaint filed a new, consolidated complaint against the Company and the members of our Board of Directors in the Superior Court of Hamilton County, Indiana. The shareholders generally allege claims of breach of fiduciary duty by the members of our Board of Directors and unjust enrichment to Mr. Biglari arising out of the dual class structure, including the ability to vote the Company’s shares that are eliminated for financial reporting purposes. The shareholders seek, for themselves and on behalf of all other shareholders as a class, a declaration that the defendants breached their duty to the shareholders and the class, and to recover unspecified damages, pre-judgment and post-judgment interest, and an award of their attorneys’ fees and other costs.
On December 14, 2018, the judge of the Superior Court of Hamilton County, Indiana issued an order granting the Company’s motion to dismiss the shareholders’ lawsuits. On January 11, 2019, the shareholders filed an appeal of the judge’s order dismissing the lawsuits. On December 4, 2019, the Indiana Court of Appeals issued a unanimous decision affirming the trial court’s decision to dismiss the shareholder litigation. On January 20, 2020, the shareholders filed a petition to transfer with the Indiana Supreme Court seeking review of the decision of the Court of Appeals. The Company opposed the petition. On April 7, 2020, the Indiana Supreme Court denied the petition to transfer. All of the cases referenced above are completed and each case was concluded in the Company’s favor.
Note 15. Fair Value of Financial Assets
The fair values of substantially all of our financial instruments were measured using market or income approaches. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, the fair values presented are not necessarily indicative of the amounts that could be realized in an actual current market exchange. The use of alternative market assumptions and/or estimation methodologies may have a material effect on the estimated fair value.
The hierarchy for measuring fair value consists of Levels 1 through 3, which are described below.
·
Level 1 - Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets.
Level 2 - Inputs include directly or indirectly observable inputs (other than Level 1 inputs) such as quoted prices for similar assets or liabilities exchanged in active or inactive markets; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that may be considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Pricing evaluations generally reflect discounted expected future cash flows, which incorporate yield curves for instruments with similar characteristics, such as credit ratings, estimated durations and yields for other instruments of the issuer or entities in the same industry sector.
Level 3 - Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or liabilities and we may be unable to corroborate the related observable inputs. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in pricing assets or liabilities.
The following methods and assumptions were used to determine the fair value of each class of the following assets recorded at fair value in the consolidated balance sheets:
Cash equivalents: Cash equivalents primarily consist of money market funds which are classified within Levels 1 and 2 of the fair value hierarchy.
Equity securities: The Company’s investments in equity securities are classified within Levels 1 and 2 of the fair value hierarchy.
Bonds: The Company’s investments in bonds are classified within Level 1 of the fair value hierarchy.
Non-qualified deferred compensation plan investments: The assets of the non-qualified plan are set up in a rabbi trust. They represent mutual funds and publicly traded securities, each of which are classified within Level 1 of the fair value hierarchy.
Derivative instruments: Options related to equity securities are marked to market each reporting period and are classified within Level 2 of the fair value hierarchy depending on the instrument.
Note 15. Fair Value of Financial Assets (continued)
As of June 30, 2020 and December 31, 2019, the fair values of financial assets were as follows.
Level 1
Level 2
Level 3
Cash equivalents
Equity securities
Bonds
Options on equity securities
Non-qualified deferred
compensation plan
investments
Total assets at fair value
There were no changes in our valuation techniques used to measure fair values on a recurring basis.
Note 16. Related Party Transactions
Services Agreement
During 2017, the Company entered into a services agreement with Biglari Enterprises LLC and Biglari Capital Corp. (collectively, the “Biglari Entities”) under which the Biglari Entities provide services to the Company. The services agreement has a five-year term, effective on October 1, 2017. The fixed fee of $700 per month can be adjusted annually. The monthly fee will remain at $700 during 2020. The Company paid Biglari Enterprises $4,200 in service fees during the first six months of 2020 and 2019. The services agreement does not alter the hurdle rate connected with the incentive reallocation paid to Biglari Capital Corp. The Biglari Entities are owned by Mr. Biglari.
Incentive Agreement Amendment
The Incentive Agreement was amended on March 26, 2019 to remove the annual limitation on Mr. Biglari’s incentive compensation, as well as the requirement of Mr. Biglari to use 30% of his incentive payments to purchase shares of the Company. In connection with the amendment, the change of control and severance provisions contained in the Incentive Agreement were eliminated and the License Agreement was terminated. The amendment became effective in 2019.
Note 17. Business Segment Reporting
Our reportable business segments are organized in a manner that reflects how management views those business activities. Our restaurant operations include Steak n Shake and Western Sizzlin. Our insurance operations include First Guard and Southern Pioneer. The Company also reports segment information for Maxim and Southern Oil. Other business activities not specifically identified with reportable business segments are presented in corporate. We report our earnings from investment partnerships separate from our corporate expenses. We assess and measure segment operating results based on segment earnings as disclosed below. Segment earnings from operations are neither necessarily indicative of cash available to fund cash requirements, nor synonymous with cash flow from operations. The tabular information that follows shows data of our reportable segments reconciled to amounts reflected in the consolidated financial statements.
Note 17. Business Segment Reporting (continued)
A disaggregation of our consolidated data for the second quarters and first six months of 2020 and 2019 is presented in the tables which follow.
Revenue
Operating Businesses:
Restaurant Operations:
Steak n Shake
Western Sizzlin
Total Restaurant Operations
Insurance Operations:
First Guard
Southern Pioneer
Total Insurance Operations
Southern Oil
Maxim
Earnings (Losses) Before Income Taxes
Total Operating Businesses
Corporate and Investments:
Corporate
Total Corporate and Investments
Interest expense and debt extinguishment gains not allocated to segments
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(dollars in thousands except per share data)
Overview
On March 9, 2020, Biglari Holdings acquired the stock of Southern Pioneer Property & Casualty Insurance Company and its agency, Southern Pioneer Insurance Agency, Inc. (collectively “Southern Pioneer”). The financial results for Southern Pioneer from the acquisition date to the end of the second quarter are included in the Company’s consolidated financial statements.
On September 9, 2019, a wholly-owned subsidiary of the Company, Southern Oil Company, acquired the stock of Southern Oil of Louisiana Inc. (collectively “Southern Oil”). Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of the Gulf of Mexico.
Net earnings (loss) attributable to Biglari Holdings shareholders are disaggregated in the table that follows. Amounts are recorded after deducting income taxes.
Operating businesses:
Restaurant
Insurance
Total operating businesses
Interest expense on notes payable and debt extinguishment
Restaurant businesses include Steak n Shake Inc. (“Steak n Shake”) and Western Sizzlin Corporation (“Western Sizzlin”).Steak n Shake and Western Sizzlin are engaged in the ownership, operation, and franchising of restaurants.
Insurance businesses are composed of First Guard Insurance Company (“First Guard”) and Southern Pioneer. First Guard is a direct underwriter of commercial trucking insurance, selling physical damage and nontrucking liability insurance to truckers.Southern Pioneer underwrites specialty insurance products including garage liability insurance, commercial property coverage for auto dealers as well as homeowners, dwelling fire insurance and credit-related insurance coverages.
Media and licensing business is composed of Maxim Inc. (“Maxim”).
Oil and gas business is composed of Southern Oil. Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of the Gulf of Mexico.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Restaurants
Steak n Shake and Western Sizzlin comprise 585 company-operated and franchise restaurants as of June 30, 2020.
Company- operated
FranchisePartner
TraditionalFranchise
Company-operated
Franchise
Total stores as of December 31, 2019
Corporate stores transitioned
Net restaurants opened (closed)
Total stores as of June 30, 2020
Total stores as of December 31, 2018
Total stores as of June 30, 2019
Most of our restaurant dining rooms were closed by March 17, 2020 with the remainder closing before the end of the first quarter because of the COVID-19 pandemic. In addition, as of June 30, 2020, 59 of the 289 company-operated Steak n Shake stores were temporarily closed. As of June 30, 2019, 103 of the 299 company-operated Steak n Shake stores were temporarily closed.
Earnings of our restaurant operations are summarized below.
Other revenue
Total revenue
Cost of food
Restaurant operating costs
Occupancy costs
Total cost of sales
General and administrative
Marketing .
Other expenses
Total selling, general and administrative
Interest on finance leases and obligations
Contribution to net earnings
Cost of food, restaurant operating costs and rent expense are expressed as a percentage of net sales.
General and administrative, marketing, other expenses, impairments and depreciation and amortization are expressed as a percentage of total revenue.
The COVID-19 pandemic has adversely affected our operations and financial results. During the first quarter, we closed the dining rooms in all our restaurants. However, most of our restaurants remained open with limited operations such as takeout, drive-through, drive in, and delivery. Steak n Shake is seeking to reopen dining rooms with counter service. The transition to a counter-service model will require significant investments in equipment. Steak n Shake intends to fund these investments mainly by selling owned real estate via an auction process.
Net sales for the second quarter and first six months of 2020 were $69,487 and $174,215, respectively, representing a decrease of $82,575 or 54.3% and $143,478 or 45.2% over the second quarter and first six months of 2019, respectively.Franchise royalties and fees decreased by $2,653 or 39.4% during the second quarter of 2020 compared to 2019.Franchise royalties and fees decreased by $4,096 or 30.6% during the first six months of 2020 compared to 2019.Reserves were realized for franchisees who closed their stores during the pandemic.
Franchise partner fees were $4,537 during second quarter 2020 compared to $421 during 2019.Franchise partner fees were $7,881 during the first six months of 2020 compared to $679 during 2019.As of June 30, 2020, there were 51 franchise partner units compared to eight franchise partner units as of June 30, 2019.
Cost of food during the second quarter and first six months of 2020 was $19,929 or 28.7% of net sales and $51,372 or 29.5% of net sales, respectively, compared to the second quarter and first six months in 2019 of $47,316 or 31.1% and $102,293 or 32.2%, respectively. The decrease is primarily attributable to a reduced menu offering along with fewer promotions.
Restaurant operating costs during the second quarter of 2020 were $26,955 compared to $78,595 in 2019. The closure of restaurants, transition to franchise partners, and the closure of dining rooms account for the decline in restaurant operating costs. Restaurant operating costs during the first six months of 2020 were $80,452 compared to $169,390 in 2019.The decrease is primarily because of reduced labor costs.
General and administrative costs during the second quarter and first six months of 2020 were $9,189 or 11.7% of total revenues and $18,087 or 9.4% of total revenues, respectively, compared to expenses in the second quarter and first six months of 2019, which were $12,021 or 7.5% of total revenues and $29,122 or 8.7% of total revenues, respectively. The lower expenses were primarily because of non-recurring settlement expenses during 2019.
Marketing expense during the second quarter and first six months of 2020 were $5,695 or 7.2% of total revenues and $14,515 or 7.5% of total revenues, respectively, compared to expenses during the second quarter and first six months of 2019 of $10,117 or 6.3% of total revenues and $23,246 or 7.0% of total revenues, respectively. Management determined to minimize its level of marketing expenditures in the second quarter of 2020.
Our restaurants obtained one-time savings in the second quarter by negotiating with various vendors, reducing overall expenses.These reductions were derived because of the COVID-19 pandemic.
Steak n Shake recorded an impairment to long-lived assets of $7,819 and $438 in the second quarters of 2020 and 2019, respectively, and $18,119 and $2,338 during the first six months of 2020 and 2019, respectively. The impairments are primarily attributable to the closure of Steak n Shake stores.
We view our insurance businesses as possessing two activities: underwriting and investing. Underwriting decisions are the responsibility of the unit managers, whereas investing decisions are the responsibility of our Chairman and CEO, Sardar Biglari. Business units are operated under separate local management.
Biglari Holdings’ insurance operations consist of First Guard and Southern Pioneer. First Guard is a direct underwriter of commercial trucking insurance, selling physical damage and nontrucking liability insurance to truckers. First Guard’s insurance products are marketed primarily through direct response methods via the Internet or by telephone. First Guard’s cost-efficient direct response marketing methods enable it to be a low-cost trucking insurer. Southern Pioneer underwrites specialty insurance products including garage liability insurance, commercial property coverage for auto dealers as well as homeowners, dwelling fire insurance and credit-related insurance coverages. The financial results for Southern Pioneer are from the acquisition date (March 9, 2020) to the end of the quarter.
Premiums earned by the insurance group during the second quarter and first six months of 2020 were $13,321 and $22,163, respectively, and pre-tax underwriting gain during the second quarter and first six months of 2020 were $2,057 and $4,587, respectively.
19
Earnings of our insurance operations are summarized below.
Premiums written
Insurance losses
Underwriting expenses
Pre-tax underwriting gain
Other income and expenses
Investment income and commissions
Other income (expenses)
Total other income
Earnings before income taxes
Income tax expense
First Guard’s underwriting results are summarized below.
Southern Pioneer’s underwriting results are summarized below.
Second
Quarter
First SixMonths
Pre-tax underwriting gain (loss)
Insurance premiums and other on the consolidated statement of earnings includes premiums earned, investment income and commissions. In the table above, investment income and commissions are included in other income.
Oil and Gas
Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of the Gulf of Mexico. Southern Oil was acquired on September 9, 2019.Earnings for Southern Oil are summarized below.
Second Quarter2020
First Six Months2020
Oil and gas revenue
Depreciation, depletion and accretion
General and administrative expenses
Income tax benefit
The COVID-19 pandemic has caused oil demand to significantly decrease, creating oversupplied markets, and resulting in lower commodity prices and margins. In response, the Company has significantly cut production and expenses. Southern Oil is a debt-free company.
Media and Licensing
Earnings of our media and licensing operations are summarized below.
Media and licensing revenue
We acquired Maxim with the idea of transforming its business model. The magazine developed the Maxim brand, a franchise we are utilizing to generate nonmagazine revenue, notably through licensing, a cash-generating business related to consumer products, services, and events.
Investment Gains
Investment gains were $1,192 (net of tax) during the second quarter of 2020.The Company did not have investment gains/losses during the first quarter of 2020 or the first six months of 2019.Interest and dividends earned on investments are reported as other income by our insurance companies. We consider investment income as a component of our aggregate insurance operating results. However, we consider investment gains and losses, whether realized or unrealized as non-operating.
Investment Partnership Gains (Losses)
Earnings (loss) from our investments in partnerships are summarized below.
Investment partnership gains include gains/losses from changes in market values of underlying investments and dividends earned by the partnerships. Dividend income has a lower effective tax rate than income from capital gains. Changes in the market values of investments can be highly volatile.
The investment partnerships hold the Company’s common stock as investments. The Company’s pro-rata share of its common stock held by the investment partnerships is recorded as treasury stock even though these shares are legally outstanding. Gains and losses on Company common stock included in the earnings of the partnerships are eliminated.
Interest Expense and Debt Extinguishment
The Company’s interest expense is summarized below.
Interest expense on notes payable and other borrowings
Tax benefit
Interest expense net of tax
The Company recorded a gain on debt extinguishment of $1,367 ($1,025 net of tax) during the second quarter of 2020 in connection with Steak n Shake’s debt retirement of $5,063. During the first quarter of 2020, the Company recorded a gain on debt extinguishment of $4,346 ($3,260 net of tax) in connection with Steak n Shake’s debt retirement of $21,729.
The outstanding balance on Steak n Shake’s credit facility on June 30, 2020 was $153,606 compared to $182,598 on June 30, 2019.The interest rate was 4.75% as of June 30, 2020 and 6.19% as of June 30, 2019.
Corporate expenses exclude the activities in the restaurant, media and licensing, insurance, and oil and gas businesses. Corporate net losses during the second quarter and first six months of 2020 were relatively flat compared to the same period during 2019.
Income Taxes
Financial Condition
Consolidated cash and investments are summarized below.
Fair value of interest in investment partnerships
Total cash and investments
Less: portion of Company stock held by investment partnerships
Carrying value of cash and investments on balance sheet
Liquidity
Our balance sheet continues to maintain significant liquidity. Consolidated cash flow activities are summarized below.
Cash provided by operating activities was $98,685 during the first six months of 2020 compared to cash used in operating activities of $8,295 during the first six months of 2019. The increase in cash provided by operations during 2020 compared to 2019 was primarily due to distributions from investment partnerships.
Cash used in investing activities during the first six months of 2020 was $103,360 compared to $8,619 during the first six months of 2019. Cash used in investing activities during the first six months of 2020 included capital expenditures of $10,040, purchases of investments net of redemptions of fixed maturity securities of $60,904 and acquisition of business for $34,240 (net of cash acquired). Cash used in investing activities during the first six months of 2019 included capital expenditures of $6,238 and purchases of investments net of redemptions of fixed maturity securities of $2,771.
During the first six months of 2020 and 2019 we incurred debt payments of $24,596 and $3,984, respectively. During the first six months of 2020, the Company retired $26,792 of term loan under Steak n Shake’s credit facility.
We intend to meet the working capital needs of our operating subsidiaries principally through anticipated cash flows generated from operations, cash on hand, existing credit facilities, and the sale of excess properties and investments. We continually review available financing alternatives.
The credit agreement includes customary affirmative and negative covenants and events of default. As of June 30, 2020, we were in compliance with all covenants. Steak n Shake’s credit facility contains restrictions on its ability to pay dividends to Biglari Holdings.
The term loan is secured by first priority security interests in substantially all the assets of Steak n Shake.
Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Certain accounting policies require management to make estimates and judgments concerning transactions that will be settled several years in the future. Amounts recognized in our consolidated financial statements from such estimates are necessarily based on numerous assumptions involving varying and potentially significant degrees of judgment and uncertainty. Accordingly, the amounts currently reflected in our consolidated financial statements will likely increase or decrease in the future as additional information becomes available. There have been no material changes to critical accounting policies previously disclosed in our annual report on Form 10-K for the year ended December 31, 2019.
Recently Issued Accounting Pronouncements
For detailed information regarding recently issued accounting pronouncements and the expected impact on our consolidated financial statements, see Note 2, “New Accounting Standards” in the accompanying notes to consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In general, forward-looking statements include estimates of future revenues, cash flows, capital expenditures, or other financial items, and assumptions underlying any of the foregoing. Forward-looking statements reflect management’s current expectations regarding future events and use words such as “anticipate,” “believe,” “expect,” “may,” and other similar terminology. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. These forward-looking statements are all based on currently available operating, financial, and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, many beyond our control, including, but not limited to, the risks and uncertainties described in Item 1A, Risk Factors of our annual report on Form 10-K and Item 1A of this report. We undertake no obligation to publicly update or revise them, except as may be required by law.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The majority of our investments are conducted through investment partnerships which generally hold common stocks. We also hold marketable securities directly. A significant decline in the general stock market or in the prices of major investments may produce a large net loss and decrease in our consolidated shareholders’ equity. Decreases in values of equity investments can have a materially adverse effect on our earnings and on consolidated shareholders’ equity.
We prefer to hold equity investments for very long periods of time so we are not troubled by short-term price volatility with respect to our investments. Our interests in the investment partnerships are committed on a rolling 5-year basis, and any distributions upon our withdrawal of funds will be paid out over two years (and may be paid in kind rather than in cash). Market prices for equity securities are subject to fluctuation. Consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. A hypothetical 10% increase or decrease in the market price of our investments would result in a respective increase or decrease in the carrying value of our investments of $45,391 along with a corresponding change in shareholders’ equity of approximately 7%.
Interest on the term loan is based on a Eurodollar rate plus an applicable margin of 3.75% or on the prime rate plus an applicable margin of 2.75%. At June 30, 2020, a hypothetical 100 basis point increase in short-term interest rates would have an impact of approximately $1,000 on our net earnings.
We have had minimal exposure to foreign currency exchange rate fluctuations in the first six months of 2020 and 2019.
ITEM 4. Controls and Procedures
Based on an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), our Chief Executive Officer and Controller have concluded that our disclosure controls and procedures were effective as of June 30, 2020.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2020 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information in response to this Item is included in Note 14 to the Consolidated Financial Statements included in Part 1, Item 1 of this Form 10-Q and is incorporated herein by reference.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors as previously disclosed in Item 1A to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit
Number
Description
31.01
Certification Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02
32.01*
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
Interactive Data Files.
104
Cover page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)
_____________________
*
Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.