(dollars in thousands except per share data)





Overview



Biglari Holdings is a holding company owning subsidiaries engaged in a number of
diverse business activities, including property and casualty insurance, media
and licensing, restaurants, and oil and gas. The Company's largest operating
subsidiaries are involved in the franchising and operating of restaurants.
Biglari Holdings is founded and led by Sardar Biglari, Chairman and Chief
Executive Officer of the Company. The Company's long-term objective is to
maximize per-share intrinsic value. All major investment and capital allocation
decisions are made for the Company and its subsidiaries by Mr. Biglari.



As of 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.



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.



                                               Second Quarter             First Six Months
                                             2020          2019          2020          2019
Operating businesses:
Restaurant                                 $  (2,527 )   $  (1,424 )   $ (10,469 )   $ (14,767 )
Insurance                                      2,299         1,459         4,615         2,675
Oil and gas                                   (1,312 )           -           889             -
Media and licensing                              376           132           351            48
Total operating businesses                    (1,164 )         167        (4,614 )     (12,044 )
Corporate                                     (2,191 )      (2,085 )      (3,681 )      (3,999 )
Investment gains                               1,192             -         1,192             -
Investment partnership gains (losses)         45,365        26,254       (88,994 )      52,491
Interest expense on notes payable and
debt extinguishment                             (736 )      (2,362 )         678        (4,656 )
                                           $  42,466     $  21,974     $ (95,419 )   $  31,792




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.






         17

  Table of Contents



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





Restaurants


Steak n Shake and Western Sizzlin comprise 585 company-operated and franchise restaurants as of June 30, 2020.





                               Steak n Shake                               Western Sizzlin
                 Company-       Franchise       Traditional
                 operated        Partner         Franchise      

Company-operated          Franchise       Total
Total stores
as of
December 31,
2019                    368             29               213                     4                 48         662
Corporate
stores
transitioned            (23 )           22                 1                     -                  -           -
Net
restaurants
opened
(closed)                (56 )            -               (13 )                   -                 (8 )       (77 )
Total stores
as of June
30, 2020                289             51               201                     4                 40         585

Total stores
as of
December 31,
2018                    411              2               213                     4                 55         685
Corporate
stores
transitioned             (6 )            6                 -                     -                  -           -
Net
restaurants
opened
(closed)               (106 )            -                 -                     -                 (3 )      (109 )
Total stores
as of June
30, 2019                299              8               213                     4                 52         576




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.





                           Second Quarter                                  First Six Months
                   2020                    2019                     2020                     2019
Revenue
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
Other revenue         668                      853                    1,529                    2,085
Total revenue      78,764                  160,061                  192,908                  333,836

Restaurant
cost of sales
Cost of food       19,929       28.7 %      47,316       31.1 %      51,372       29.5 %     102,293       32.2 %
Restaurant
operating
costs              26,955       38.8 %      78,595       51.7 %      80,452       46.2 %     169,390       53.3 %
Occupancy
costs               3,875        5.6 %       5,839        3.8 %       8,851        5.1 %      12,516        3.9 %
Total cost of
sales              50,759                  131,750                  140,675                  284,199

Selling,
general and
administrative
General and
administrative      9,189       11.7 %      12,021        7.5 %      18,087        9.4 %      29,122        8.7 %
Marketing .         5,695        7.2 %      10,117        6.3 %      14,515        7.5 %      23,246        7.0 %
Other expenses        983        1.2 %       1,179        0.7 %       1,267        0.7 %       1,472        0.4 %
Total selling,
general and
administrative     15,867       20.1 %      23,317       14.6 %      33,869       17.6 %      53,840       16.1 %

Impairments         7,819        9.9 %         438        0.3 %      18,119        9.4 %       2,338        0.7 %

Depreciation
and
amortization        4,686        5.9 %       5,104        3.2 %       9,712        5.0 %      10,473        3.1 %

Interest on
finance leases
and
obligations         1,286                    2,003                    3,086                    4,012

Earnings
(loss) before
income taxes       (1,653 )                 (2,551 )                (12,553 )                (21,026 )

Income tax
expense
(benefit)             874                   (1,127 )                 (2,084 )                 (6,259 )

Contribution
to net
earnings         $ (2,527 )              $  (1,424 )              $ (10,469 )              $ (14,767 )

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.






         18

  Table of Contents



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





The COVID-19 pandemic has adversely affected our 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.



Insurance



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



Biglari Holdings' insurance operations consist of First Guard and Southern
Pioneer. First Guard is a direct underwriter of commercial trucking insurance,
selling physical damage and nontrucking liability insurance to truckers. First
Guard's insurance products are marketed primarily through direct response
methods via the Internet or by telephone. First Guard's cost-efficient direct
response marketing methods enable it to be a low-cost trucking insurer. Southern
Pioneer underwrites specialty insurance products including garage liability
insurance, commercial property coverage for auto dealers as well as homeowners,
dwelling fire insurance and credit-related insurance coverages. The financial
results for Southern Pioneer are from the acquisition date (March 9, 2020)

to
the end of the quarter.



Premiums earned by the insurance group during the 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

  Table of Contents



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

Earnings of our insurance operations are summarized below.





                                       Second Quarter           First Six Months
                                      2020        2019         2020          2019
Premiums written                    $ 13,321     $ 7,065     $  22,163     $ 13,926

Insurance losses                       6,901       4,060        11,075        8,235
Underwriting expenses                  4,363       1,438         6,501        2,923
Pre-tax underwriting gain              2,057       1,567         4,587        2,768
Other income and expenses

Investment income and commissions      1,100         352         1,932     

    698
Other income (expenses)                  (89 )       (69 )        (538 )        (72 )
Total other income                     1,011         283         1,394          626
Earnings before income taxes           3,068       1,850         5,981        3,394
Income tax expense                       769         391         1,366          719
Contribution to net earnings        $  2,299     $ 1,459     $   4,615     $  2,675

First Guard's underwriting results are summarized below.





                               Second Quarter           First Six Months
                              2020        2019         2020          2019
Premiums written            $  7,275     $ 7,065     $  14,690     $ 13,926

Insurance losses               2,974       4,060         6,532        8,235

Underwriting expenses 1,748 1,438 3,282 2,923 Pre-tax underwriting gain $ 2,553 $ 1,567 $ 4,876 $ 2,768

Southern Pioneer's underwriting results are summarized below.





                                             2020
                                    Second       First Six
                                   Quarter        Months
Premiums written                   $  6,046     $     7,473

Insurance losses                      3,927           4,543
Underwriting expenses                 2,615           3,219

Pre-tax underwriting gain (loss) $ (496 ) $ (289 )

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.






         20

  Table of Contents



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





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 Quarter       First Six Months
                                             2020                  2020
Oil and gas revenue                     $         2,151     $           13,525

Oil and gas production costs                      1,323                  4,399

Depreciation, depletion and accretion             1,979                  

6,847


General and administrative expenses                 556                  

1,516


Earnings (loss) before income taxes              (1,707 )                 

763

Income tax benefit                                 (395 )                 (126 )

Contribution to net earnings            $        (1,312 )   $             

889




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.





                                         Second Quarter           First Six Months
                                        2020         2019         2020         2019
Media and licensing revenue           $    982       $ 865     $    1,490     $ 1,742

Media and licensing costs                  437         641            943       1,589

General and administrative expenses         58          48             92  

       89
Earnings before income taxes               487         176            455          64
Income tax expense                         111          44            104          16
Contribution to net earnings          $    376       $ 132     $      351     $    48




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.




         21

  Table of Contents



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

Investment Partnership Gains (Losses)

Earnings (loss) from our investments in partnerships are summarized below.





                                            Second Quarter            First Six Months
                                          2020         2019          2020          2019
Investment partnership gains (losses)   $ 59,248     $ 34,198     $ (116,494 )   $ 68,352
Tax expense (benefit)                     13,883        7,944        (27,500 )     15,861
Contribution to net earnings            $ 45,365     $ 26,254     $  (88,994 )   $ 52,491




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.





                                              Second Quarter              First Six Months
                                            2020          2019           2020          2019
Interest expense on notes payable and
other borrowings                         $    2,349     $   3,150     $    4,823     $   6,208
Tax benefit                                     588           788          1,216         1,552
Interest expense net of tax              $    1,761     $   2,362     $    3,607     $   4,656
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



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



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.




         22

  Table of Contents



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





Financial Condition


Consolidated cash and investments are summarized below.





                                                                            December
                                                        June 30, 2020       31, 2019
Cash and cash equivalents                              $        36,438     $    67,772
Investments                                                     84,785          44,856

Fair value of interest in investment partnerships              461,927     

666,123


Total cash and investments                                     583,150     

778,751


Less: portion of Company stock held by investment
partnerships                                                   (92,798 )      (160,581 )
Carrying value of cash and investments on balance
sheet                                                  $       490,352     $   618,170




Liquidity

Our balance sheet continues to maintain significant liquidity. Consolidated cash flow activities are summarized below.





                                                             First Six Months
                                                            2020           2019

Net cash provided by (used in) operating activities $ 98,685 $ (8,295 ) Net cash used in investing activities

                      (103,360 )       (8,619 )
Net cash used in financing activities                       (24,156 )       (3,984 )
Effect of exchange rate changes on cash                          (3 )      

3

Decrease in cash, cash equivalents and restricted cash $ (28,834 ) $ (20,895 )






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.

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.






         23

  Table of Contents



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


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.

The Company retired $26,792 of debt during the first six months of 2020.

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.

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.




         24

  Table of Contents

© Edgar Online, source Glimpses