(In thousands, except share and per share data) Biglari Holdings Inc. (" Biglari Holdings " or the "Company") is a diversified holding company engaged in a number of business activities. The Company's most important operating subsidiaries are involved in the franchising and operating of restaurants. The Company is led by Sardar Biglari , Chairman and Chief Executive Officer of Biglari Holdings and its major operating subsidiaries. The Company's long-term objective is to maximize per-share intrinsic value. All major operating, investment, and capital allocation decisions are made for the Company and its subsidiaries by Sardar Biglari , Chairman and Chief Executive Officer. In the following discussion, the term "same-store sales" refers to the sales of only those units open at least 18 months as of the beginning of the current period being discussed and which remained open through the end of the period. Investment gains/losses in any given period will vary; therefore, for analytical purposes, management measures operating performance by analyzing earnings before realized and unrealized investment gains/losses. Twelve Weeks Ended December 18, 2013 We recorded net earnings attributable to Biglari Holdings Inc. of $16,491 for the first quarter of fiscal year 2014, as compared with net earnings attributable to Biglari Holdings Inc. of $4,562 in the first quarter of fiscal year 2013. In fiscal year 2013 the Company completed a rights offering in which 286,767 new shares of common stock were issued. The earnings per share have been retroactively restated for the twelve weeks ended December 19, 2012 to give effect to the rights offering. As of December 18, 2013 , the total number of company-operated and franchised restaurants was 609 as follows: Company-operated Franchised Total Steak n Shake 418 108 526 Western 3 80 83 Total 421 188 609 In the first quarter of 2014, Steak n Shake acquired two restaurants. Steak n Shake also opened a company-operated restaurant and four franchised units, whereas Western closed one company-operated restaurant and two franchise units during the first quarter of 2014. 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 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 financial statements will likely increase or decrease in the future as additional information becomes available. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the year ended September 25, 2013 . 17 -------------------------------------------------------------------------------- Index Results of Operations The following table sets forth the percentage relationship to total net revenues, unless otherwise noted, of items included in the consolidated statements of earnings for the twelve weeks ended December 18, 2013 and December 19, 2012 : Twelve Weeks Ended December 18, December 2013 19, 2012 Net revenues Restaurant Operations: Net sales 97.9 % 98.3 % Franchise royalties and fees 1.6 1.5 Other revenue 0.4 0.3 Total 100.0 100.1 Revenue from Consolidated Affiliated Partnerships - (0.1 ) Total net revenues 100.0 100.0 Costs and expenses Cost of sales(1) 29.4 29.3 Restaurant operating costs(1) 47.6 47.2 General and administrative 10.5 8.2 Depreciation and amortization 3.3 3.6 Marketing 5.4 6.1 Rent 2.5 2.4 Pre-opening costs 0.3 - Loss on disposal of assets 0.1 0.1 Other operating (income) expense (0.1 ) (0.1 ) Other income (expenses) Interest, dividend and other investment income 0.3 1.5 Interest on obligations under leases (1.3 ) (1.3 ) Interest expense (0.9 ) (1.0 ) Realized investment gains/losses - 0.0 Total other income (expenses) (1.8 ) (0.8 ) Earnings before income taxes 0.8 3.6 Income taxes on operating earnings 0.2 0.9 Income taxes on investment partnership gains 4.6 - Total income taxes 4.9 0.9 Investment partnership gains 13.6 - Net earnings 9.6 2.6 Total earnings/loss attributable to redeemable noncontrolling interests - 0.1 Net earnings attributable to Biglari Holdings Inc. 9.6 % 2.7 % _________________ (1) Cost of sales and restaurant operating costs are expressed as a percentage of net sales. 18 -------------------------------------------------------------------------------- Index Comparison of Twelve Weeks Ended December 18, 2013 to Twelve Weeks Ended December 19, 2012 Net Earnings Attributable to Biglari Holdings Inc. For the current quarter we recorded net earnings attributable to Biglari Holdings Inc. of $16,491 , or $10.36 per diluted share, as compared with net earnings attributable to Biglari Holdings Inc. of $4,562 , or $3.17 per diluted share, for the first quarter of 2013. The increase was primarily driven by $15,516 (net of tax) of investment partnership gains. Net Revenues In the first quarter of 2014, net sales increased 3.1% from $163,739 to $168,803 primarily because of the performance of our Restaurant Operations, whose increase was largely driven by Steak n Shake's same-store sales. Steak n Shake's same-store sales increased 3.0% during the first quarter of 2014, and customer traffic increased by 2.6%. Franchise royalties and fees increased 13.5% during the first quarter of 2014. The number of franchised units was 188 on December 18, 2013 as compared to 171 on December 19, 2012 . The increase is primarily attributable to royalties from new Steak n Shake franchised stores opened in 2013. Costs and Expenses Cost of sales was $49,645 or 29.4% of net sales, compared with $47,954 or 29.3% of net sales in the first quarter of 2013. The increase in costs is primarily caused by higher sales. Restaurant operating costs were $80,346 or 47.6% of net sales compared to $77,360 or 47.2% of net sales in the first quarter of 2013. The increase in costs is primarily caused by higher sales. General and administrative expenses increased from $13,577 or 8.2% of total net revenues in the first quarter of 2013 to $18,007 or 10.5% of total net revenues. Our efforts to franchise the Steak n Shake concept during the quarter resulted in higher expenses. Depreciation and amortization expense was $5,646 or 3.3% of total net revenues versus $5,943 or 3.6% of total net revenues in the first quarter of 2013. Marketing expense was $9,369 or 5.4% of total net revenues versus $10,233 or 6.1% of total net revenues in the first quarter of 2013. The decrease in expenses is primarily the result of higher commercial production costs in the first quarter of 2013. Rent expense was $4,334 or 2.5% of total net revenues versus $4,012 or 2.4% of total net revenue in the first quarter of 2013. Other Income (Expenses) We recorded interest, dividend and other investment income of $588 primarily through accruing dividends versus $2,544 recorded in the first quarter of 2013. The decrease is impelled by the contribution of securities on July 1, 2013 to the investment partnerships. The dividends for 2014 from the contributed securities are reflected in investment partnership gains. Interest expense decreased from $1,737 for the first quarter of 2013 to $1,474 for the current quarter. This decrease primarily pertained to lower debt balances in the current quarter. The interest rate on Steak n Shake's credit facility was 3.9%, which increased from 3.7% on December 19, 2012 . The outstanding borrowing decreased on December 18, 2013 to $107,250 as compared to $145,000 on December 19, 2012 . Income tax expense increased from $1,543 for the first quarter of 2013 to $8,373 for the current quarter. The increase in expense is primarily attributable to income taxes on investment partnership gains. Consolidated Affiliated Partnerships Investment Gains Prior to the July 1, 2013 sale of Biglari Capital we accounted for investment gains and losses on securities held by our consolidated affiliated partnerships. As we have ceased to hold a controlling interest in the consolidated affiliated partnerships, they are no longer consolidated in the Company's financial statements. In the first quarter of 2013, we recorded a net realized gain of $87 related to dispositions of investments held by the consolidated affiliated partnerships as well as an unrealized net investment loss of $435 for a total of $348 . These totals were offset by $154 linked to losses attributable to redeemable noncontrolling interests. Investment Partnerships We recorded $23,493 of investment partnership gains in 2014. Our interest in the investment partnerships is accounted for as equity method investments. The carrying value of investment partnerships is inclusive of unrealized gains and losses on their securities. Our proportional ownership interest in the investment partnerships is net of an incentive fee payable to Biglari Capital , the general partner. 19 -------------------------------------------------------------------------------- Index Liquidity and Capital Resources We generated $2,109 in cash flows from operations during the current year-to-date period as compared to $6,992 during the same period last year. The decrease in cash flows from operations in the current quarter was primarily a result of lower earnings before investment partnership gains. Net cash used in investing activities during the current year-to-date period was $3,982 compared to net cash used by investing activities of $45,199 during the same period last year. This change primarily resulted from a decline in direct purchases of investments during the current year. Rather, our investments are now primarily made through investment partnerships. Net cash used in financing activities during the current year-to-date period was $14,582 compared to net cash provided by financing activities of $9,978 during the same period last year. This change generally was related to increased debt payments of $10,664 in the current quarter compared to the prior quarter and a $15,000 increase in Steak n Shake's revolver balance in the first quarter of 2013. Our balance sheet continues to maintain significant liquidity. We intend to meet the working capital needs of our operating subsidiaries predominantly through anticipated cash flows generated from operations, existing credit facilities and the sale of excess properties and investments. We continuously review available financing alternatives. Steak n Shake Credit Facility The outstanding debt on Steak n Shake's credit facility on December 18, 2013 was $107,250 compared to $145,000 (including a revolver balance of $15,000 ) on December 19, 2012 . As of December 18, 2013 no amounts were drawn on the Revolver. Steak n Shake's credit facility includes affirmative and negative covenants and events related to default as well as financial covenants relating to a maximum total leverage ratio and a minimum consolidated fixed charge coverage ratio. Steak n Shake was in compliance with all financial covenants under the credit facility as of December 18, 2013 . New Accounting Standards Refer to Note 2 in our notes to consolidated financial statements within Item 1 of Part I of this Quarterly Report on Form 10-Q. Effects of Governmental Regulations and Inflation Most Restaurant Operation employees are paid hourly rates related to minimum wage laws. Any increase in the legal minimum wage would directly increase the Company's operating costs. The Company is also subject to various laws related to zoning, land use, safety standards, working conditions, and accessibility standards. Any changes in these laws that require improvements to its restaurants would increase operating costs. In addition, the Company is subject to franchise registration requirements and certain related laws regarding franchise operations. Any changes in these laws could affect our ability to attract and retain franchisees. Inflation in food, labor, fringe benefits, energy costs, transportation costs, and other operating costs also directly affect our restaurant operations. 20 -------------------------------------------------------------------------------- Index Risks Associated with 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 ability of the restaurant operations to increase store traffic on a profitable basis; · competition in the restaurant industry for customers, staff, locations, and new products; · disruptions in the overall economy and the financial markets; · the Company's ability to comply with the restrictions and covenants to its debt agreements; · declines in the market price of our common stock, which could adversely affect our goodwill impairment analysis; · the potential to recognize additional impairment charges on our long-lived assets; · fluctuations in food commodity and energy prices and the availability of food commodities; · the ability of our franchisees to operate profitable restaurants; · the poor performance or closing of even a small number of restaurants; · changes in customer preferences, tastes, and dietary habits; · changes in minimum wage rates and the availability and cost of qualified personnel; · harsh weather conditions or losses due to casualties; · unfavorable publicity relating to food safety or food-borne illness; · exposure to liabilities related to the ownership and leasing of significant amounts of real estate; · our ability to comply with existing and future governmental regulations; · our ability to adequately protect our trademarks, service marks, and other components of our brand; · changes in market prices of our investments; and · other risks identified in the periodic reports we file with the Securities and Exchange Commission . Accordingly, such forward-looking statements do not purport to be predictions of future events or circumstances and may not be realized. Additional risks and uncertainties not currently known to us or that are currently deemed immaterial may also become important factors that may harm our business, financial condition, results of operations or cash flows. We assume no obligation to update forward-looking statements except as required in our periodic reports. 21 -------------------------------------------------------------------------------- Index
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