Biglari Holdings 2012 Annual Meeting Notes

The meeting started off with Sardar Biglari handling the business portion. You could sense that Sardar

couldn’t wait to get to the questions. Before the questions however, Sardar provided a presentation on

Biglari Holdings (BH).

Some of the numbers from the presentation that stood out:

a. The ratio of unrealized and realized gains to unrealized and realized losses at BH since inception

is 38:1.

b. The average check at Steak ‘N Shake (SNS) in 2008 – just prior to when current management

took over – was $7.07. In fiscal 2011, this had dropped to $6.44. The gross margin in 2008 was

27.4%, the exact same number as in 2011.

c. More SNS numbers (dollar amounts in millions):

Year 2008 2011

Labor costs (% of sales) 39.1% 34.9%

G&A expenses $47.3 $41.9

Franchise fees $4.0 $5.3

As part of the presentation, there was a video compilation of the coverage that accompanied the

opening of the first SNS “Signature” store in New York City, including a particularly funny David

Letterman segment. Sardar takes obvious pride in SNS and this showed, in particular, as the video was

about to be screened. Sardar then opened the floor to questions from shareholders.

The questions and answers that follow are not verbatim. They have been compiled from notes that I

made while at the meeting and from memory. SB denotes Sardar Biglari. PC denotes Phil Cooley.

Q: Given the initial success of the 9 new franchisees, would you consider moving into new areas for

SNS?

SB: To demonstrate the viability of the new “Signature” units, company-owned stores are a possibility.

Sizeable population and high density of population are the factors that will drive company-owned store

locations. We continue to prefer franchising as a means to expanding into new areas because of the lack

of operating risk that entails.

Q: SNS has 413 company-owned stores and it owns the land and building for 153 restaurants. Have

you considered refranchising the company-owned stores and/or sale-leaseback of the owned

properties?

SB: The decision on whether to refranchise the company-owned stores is driven by the economics of the

situation.

Currently, average sales/unit = $1.6 million; If refranchised, the company will receive a 5.5% fee which

works out to $88,000. So, for the entire system at 412 units, franchise fees would be approximately $36

million ($88,000 * 412). At 50% margins, the incremental pre-tax income to the company from

refranchising would be $18 million.

Now, assume that unit-level performance can be improved so that sales reach $2 million/unit. This

would, conservatively, add $160,000 in pre-tax income to each unit. So, for the entire system at 412

units, the incremental pre-tax income to the company from improving unit-level performance would be

approximately $66 million.

Clearly, in order to optimize value, it currently makes sense to work on improving operating

performance at the company-owned stores. Refranchising is a possibility, just not right at the moment.

As for sale-leasebacks, the properties that are currently owned would likely sell for about $200 million,

with after-tax proceeds of $160 million. The rent on the leaseback would be $16 million/year. This

would imply that we’d need to make more than 10% on the proceeds from the sale-leaseback in order

to add value. Plus, the loss of optionality when the property is no longer in our hands is significant. We

are more likely to buy real estate than to do sale-leasebacks.

Q: Is your pledge to not sell any CBRL stock an invitation for people to invest alongside you i.e. Is this a

way of forming a group that gets around the 20% ownership poison pill instituted by Cracker Barrel

(CBRL) management?

SB: We do not like poison pills. We don’t really understand the point of CBRL’s 20% poison pill. Under

Tennessee law, which governs CBRL, any entity that owns more than 20% of the common stock of a

corporation can’t vote its shares unless approved by the majority of the remaining owners. This would

require us to call a special meeting, with resources coming out of our pocket to do so.

The Fremont Michigan Insurance Corporation (FMMH) investment is instructive in understanding BH’s

determination in these situations. There was a member on FMMH’s board with political connections. As

a result, FMMH introduced a bill specifically designed to thwart BH’s proposed takeover attempt.

The bill would require only the approval of the Governor if it contained a sunset provision. FMMH went

with the sunset provision, hoping BH would go away. BH stood pat, and ultimately FMMH was sold. We

are similarly going to outlast Wodehouse at CBRL.

[Ragu:] There was a boxing analogy (Ali vs. Foreman?) that I didn’t quite get. Gist of it was: No matter

how many punches are thrown, we’ll be the ones left standing at the end, not CBRL management.

Half of CBRL’s marketing spend is on billboards. They spend $1400/month per billboard. Now, you may

not know this, but I do know the cost of advertising on these billboards and CBRL spends way too much

on them.

Every CBRL store has a dedicated employee restroom. Why would you need something like that? CBRL

management may say that this represents their culture, but we see this as yet another example of their

“culture of expenses”.

We don’t agree with the manner of their restructuring at CBRL headquarters. They have now had 2 cuts,

one in July and one recently. This leads to people wondering whether they are next and is not conducive

to shaping a turnaround.

When I became CEO at SNS, I took my time initially. We did one big cut, 90 days after I came in, and that

was it. While layoffs are necessary to get a turnaround started, a company doesn’t become great by

repeatedly decreasing headcount. We have grown significantly at SNS since the original cut.

Q: Could you talk about the growth prospects for SNS?

SB: We have 130 units that are under contract to be opened over time. 9 of those are already open. 10

are scheduled to be open in 2012. We are working with a group in the Middle East as part of our plans

to expand internationally.

The new unit sales are currently at an annual run-rate of $2.7 million. These results were possible

because we were slow, methodical and achieved an artistic design. My mandate when the first design

was complete was to go back and redesign. We are constantly striving to do better.

We aspire to be best-in-class and will not compromise on quality. Our goal is to make the competition

irrelevant. We can create value in the restaurant industry by taking advantage of the myopia that exists

because of the short-term nature of decision making.

Q*: In your most recent letter to BH shareholders, you wrote that the intrinsic value of SNS rose faster

than earnings did this year. If the increase in IV is not reflected in the numbers, could you elaborate

on what qualitative factors you use in order to make the judgment about SNS’ intrinsic value?

SB: The numbers which are necessary in order to arrive at an estimate of BH’s intrinsic value are laid out

in the annual letters.

Follow-up*: I meant the growth in intrinsic value of SNS, whose disparity with respect to the growth in

reported earnings you’d drawn attention to in the annual letter. What situation existed this year that

prompted you to highlight that difference?

SB: Thanks for clarifying. We made investments in SNS this year that are recorded as expenses in our

financial statements. We should see the benefits of these investments accrue over time. That’s why the

growth in the intrinsic value of SNS this year is greater than the growth in reported earnings.

Q: What should CBRL management do?

SB: Own the stock.

Follow-up: That’s what CBRL management should do? Own the stock?

SB: Yes. If they did, the incentives would be aligned properly. People get on boards to collect fees, not to

create value. It’s a problem across corporate America.

When we met with one of the CBRL directors, one of the questions posed to us was if we would be

impatient if we got on the board. We are impatient when it comes to destructive behavior.

PC: CBRL management shouldn’t be afraid of new ideas. They seem to be frightened by us.

SB: It is frustrating to see the bloated cost structures at CBRL. They seem to be a group of zombies down

there.

Q: BH stock appears to be cheap currently. Would you consider a stock buyback?

SB: No further comments other than what was in the presentation about capital allocation choices. If we

intend to do a buyback, you will hear about it.

Q: Is BH all-in on CBRL or is there cash available for other investments currently?

SB: The board is meeting right after to evaluate a new investment opportunity. We will find a way to

finance the right opportunities.

We plan to hold CBRL for decades. The CBRL investment may take a long time to work out.

Q: Could you provide detail on the 14% debentures that were issued in connection with the Western

Sizzlin’ (WEST) merger with SNS? Did the Lion Fund end up owning these debentures?

SB: The details are available in prior annual reports. The SNS stock held at WEST was distributed to

stockholders, with the rest being financed by the debentures. The Lion Fund held its share of the

debentures until SNS redeemed them a year later.

The transaction was negotiated by two independent committees at SNS and WEST. I was not involved,

although I gave the final deal my blessing. I did not want to issue SNS stock as part of the merger

because I considered it cheap.

[Ragu]: Sardar actually had someone go get the 2009 and 2010 annual reports. He provided the details

that the questioner had asked for once he got those reports.

Q: Could you comment on capital expenditures at SNS?

SB: Capital expenditures for this year are likely to be $1 million more than that of last year. The existing

units will require a significant reimage over the next few years.

Q: Can you talk about the breakfast day part given the sales push for the same over the past year?

SB: Breakfast has been a success. The increase from breakfast sales contributed 2.6% to the same-store-

sales numbers for the past fiscal year.

This day part was virtually non-existent prior. The new units get a disproportionately higher percentage

of the new products, so their sales have been impacted more by the breakfast menu.

PC: I love both our breakfast sales and late-night sales. People spend more late-night. I’ll let you figure

out why that might be.

Q: Could you provide an update on the meetings for the reverse-split and dual-class stock structure?

SB: The meeting remains postponed. We consider current shareholders as the founding partners of the

new holding company structure. Therefore, the new class of stock, which will be used as currency for

acquisitions, comes with a lower voting power.

We are prepared to exchange a lower economic interest for a proportionately higher value company in

the event of an acquisition, but we aren’t willing to dilute voting control of today’s shareholders to a

similar extent.

There will be times when the discount to value at a holding company, and by extension BH, will be large.

This situation will be inviting for those that wish to take control of the company at an attractive price.

We don’t want to be faced with the prospect of losing control at a time when having it would be

critically important to us.

A dual-class stock structure with the voting control mostly lodged in the hands of the holders of one

class of stock is appropriate for holding companies. A single-class stock structure is appropriate for pure-

play companies.

PC (to SB): You’ll need to continue to educate people more on why this is necessary.

Q: Could you share your thoughts on spending so much money ($6 million) on growing franchising?

SB: The returns from franchising are high. We hope that the current spending turns out to be a low

number with respect to the future.

Q: Not available in my notes and I can’t recollect either.

SB: Our motto is that we don’t know our customer. Otherwise, we would never experiment. We sell

more organic than original burgers at our NYC store, something we didn’t anticipate when we opened

there. We are always learning.

Q: Are supply-chain issues going to be significant during international expansion?

SB: The quality is going to be unchanged wherever we go. Freshness, however, is an issue that needs

solving.

Q: Were you involved in the Penn Millers Insurance Corporation (PMIC) deal?

SB: We blessed the deal, but we weren’t involved.

Q: Can you expand on the rationale for the debt structure at SNS? Why not long-term bonds, for

instance?

SB: The ability to exclude liability from the parent company was important to us. We were willing to pay

a higher rate for the same reason.

Q: Do you have the most recent 30 day sales numbers of the NYC Signature store?

SB: I do, but I can’t share them.

Q: Do you have an update on CCA Industries (CCA)?

SB: We don’t talk about specific investments.

Q: Capital expenditures have been low relative to history at SNS since you took over. Surely, this

situation can’t continue much longer. I’d assume that traffic will fall off if you don’t make significant

capital expenditures, would it not?

SB: Well, that assumption may not turn out to be right and isn’t borne out by the data so far. Some of

our maintenance expenditures are not capitalized, but are classified as repairs. So, our maintenance

capital expenditures are a combination of both capitalized expenditures as well as repairs.

Q: Could you provide an update on the asset management business?

SB: We are only interested in partners who understand how we operate and are willing to invest for the

long-term. We are looking at a lock-up period of 5 years. Since the Lion Fund is a private placement, we

can’t provide more information on efforts to raise capital.

Our goal is for the Lion Fund to reach $300 million in assets a decade from now. This will require that we

compound capital within the Lion Fund at a rate of 15% per annum over that time-frame.

Q: Would you consider a change to the incentive agreement that lowers your annual bonus?

SB: Would you ask your hedge fund manager to take less? BH is an investment vehicle and my pay is

structured accordingly.

Follow-up: If you took less, wouldn’t there be more capital available to be invested on behalf of BH

shareholders?

SB: By that logic, my pay ought to be zero. I can’t provide an intelligent answer to such an unintelligent

question.

Q: You are very arrogant. You could’ve answered that question without insulting the previous

questioner.

SB: Do you have a question?

Q: Yes. BH’s board gets paid $250,000 cumulatively per year. Could you describe what the board does

that makes them deserving of this amount?

SB: What do you think they ought to be paid?

Q: Well, if they were paid less, that amount could be invested on behalf of shareholders. Each

individual on Berkshire’s board gets paid $1,000 per year.

SB: You should buy Berkshire then.

PC: To answer the question of what the board’s responsibilities are, I would recommend that you read

the book that deals with boards by J. Lorsch.

[Ragu]: Phil Cooley did not provide a book title, but I would guess that the book he was referring to was

Building Better Boards.

SB: I dislike these kinds of comparisons.

Q: Not available in my notes and I can’t recollect either.

SB: We believe CBRL has been opening stores that cannibalize sales from their existing restaurants. For

instance, the average distance between 2 CBRL stores was 30 miles prior to 2004. Since 2004, that has

shrunk to 12 miles.

At SNS, there were 266 stores that had been opened prior to 2000 and 146 that opened after. During

2008, we found that the sales of the older stores did not decline, whilst same-store-sales at the recent

stores declined significantly. The new stores were doing better than the old ones in 2 years since we

took over.

Q: How do you think about pricing at SNS?

SB: We don’t apply formulaic methods. We are always thinking about providing the best value for the

customer for his/her money. And, we define value as a combination of food quality, service and price.

PC: Sardar is extraordinarily disciplined when it comes to pricing. Wal-Mart was the same way, although

this discipline has deteriorated in the recent past. I couldn’t be as disciplined as Sardar is on price. It is

not easy and Sardar is very special in this regard.

Q*: This question is on behalf of a friend and me. Given the Lion Fund’s holdings of BH stock, how do

you think about the circularity that exists because the stock price movements of BH affect the

incentive allocation, thereby affecting BH’s earnings and book value in turn?

SB: BH stock held by the Lion Fund is recorded as Treasury stock on our books, so the stock price of BH

does not affect its book value directly. I have provided an explanation of the accounting behind this in

the 2010 annual letter. However, there is the issue of Lion Fund partners paying an incentive allocation

on top of my BH bonus for their pro-rata share of BH stock held through the Lion Fund.

Q: You have mentioned in the past that you admire Henry Singleton. Could you expand on that a bit?

SB: Yes, I admire Henry Singleton. The extraordinary growth in Teledyne’s earnings over the 70’s and the

intelligent capital allocation that allowed him to buyback Teledyne’s stock cheap are noteworthy.

Q: You have written that you’d like to establish Biglari Holdings as a brand. What would like the brand

to represent?

SB: Ultimately, we want BH to stand for creating value.

Q: How did William L. Johnson, previously on the FMMH board, come to be on BH’s board?

SB: We met with Bill during the FMMH discussions. We found him to be very practical and there was

mutual respect for each other.

I made a call to Bill earlier this year asking if he’d join BH’s board and he agreed.

Q: If you were in the audience today and could ask one question, what would it be?

PC: Do you have any book recommendations?

SB: Daniel Kahneman’s Thinking, Fast and Slow

PC: Daniel Coyle’s Talent Code

[Ragu:] Phil Cooley did not have the author’s name handy at the time and asked that we look up the

book by the title.

Q: You mentioned that restaurants were a source of low-hanging fruit that you could take advantage

of to create value. Are there other industries where similar opportunities exist?

SB: Yes, insurance and retail to name a couple. There are plenty of insurance companies out there today

that trade at a discount to book.

Q*: In your most recent letter to CBRL shareholders, you’d mentioned that your expectation for same-

store-sales was at least a 3% increase annually. Can you talk about the basis for those expectations?

SB: The letter actually referenced traffic and it’s based solely on just how much traffic (15%) that CBRL

has lost over the last few years since the deterioration in performance set in. Arguably, you could say

that CBRL’s poor performance has led us to low expectations.

PC: Yes, those expectations should really be viewed against what is a really low base at CBRL.

Q: Could you tell us the latest cash position at BH and what the expected cash position is at the end of

the year?

SB: I can’t comment on the latest cash position and we are unwilling to provide any sort of guidance.

Q*: This question is on behalf of a friend. I told him what I thought the answer was going to be, but

he’d like me to ask it anyway. What are your thoughts on the recent Itex Corporation (ITEX) tender

offer? Did BH or any of its subsidiaries tender stock in the offer?

SB: I am pleased with the results of the offer because ITEX stock is undervalued in my opinion. However,

I do not agree with the reason for the tender. We have not sold any of our stock, so our economic

interest in ITEX has gone up since the tender.

I spoke to Steven White, the CEO of ITEX, about his proposed compensation arrangement and told him

that he would not have our support unless he put the matter to a shareholder vote. In the absence of a

vote, we view it as akin to corporate looting.

Q: Do you see CBRL as your best available investment or your best opportunity for an activist

investment?

SB: We invest to maximize returns for BH on a risk-adjusted basis.

Q*: SNS announced uniform pricing across all of its stores earlier this year. Could you explain the

thought behind such a move?

SB: The uniform pricing has actually been in effect since early last year. In fact, we’ve had uniform

pricing in the company-owned stores since late 2008. The franchisees resisted the idea initially, but

they’ve now implemented it as well. The goal is to ensure a consistent experience for customers that

walk into any SNS store.

Follow-up*: What other restaurant chains have uniform pricing?

SB: None. This is unique to SNS.

Q: Given your multiple responsibilities, do you believe it is an optimal use of your time to sit on the

board of CCA, which represents a small investment for BH?

SB: Yes, I do. We have learnt lessons on the CCA board that we believe will be useful to us in the future.

Q*: You mentioned earlier in the meeting that you wanted rational institutional investors holding

CBRL stock. Is it reasonable to assume that the Institutional Shareholder Services (ISS)

recommendation against your election to the CBRL board played a major role in the result?

SB: No question. It absolutely did.

Follow-up*: How does the process work? Do you get to meet the ISS representatives in person? It

seems fairly clear that anyone looking at the CBRL situation objectively would vote for your election

to the board. How did ISS make the recommendation that it did? The recommendation boggles the

mind.

SB: We do meet the ISS people and make a presentation to them. These things happen from time to

time. ISS even recommended that The Coca Cola Company (KO) shareholders vote against the election

of Warren Buffett to the board the one time.

PC: I like the phrase “it bothers the mind [sic]”.

And, with that, we were done. The entire meeting lasted close to 5 hours.

Postscript: Three of us headed from the meeting to the SNS “Signature” store that had opened to such

fanfare in the city earlier this year. I was the only vegetarian and there was some skepticism about

whether SNS was the right place to go to, especially if I was interested in eating. I was still keen on

seeing the store in person, so off we went.

The queue wasn’t long – it was just after 6 PM – but the store was full. And, to my eternal delight, clean.

I was initially hesitant to walk up to the order counter, but I figured that I’d give at least the famed hand-

tossed milkshake a try.

The lady at the counter didn’t simply go: Sorry, no vegetarian. Instead, she offered to leave out the meat

from an otherwise vegetarian sounding burger. Add in some fries and a milkshake and I was soon

making my first contribution to the operating profits at SNS. Never have I parted with $8.69 more

willingly than I did on that day.

Since seating was at a premium, we were quick to grab some seats that had just been vacated as we

were waiting on our order. The only thing quicker than our order was the person that fairly swooped in

to clean our eating area. The meal completed a very satisfactory visit.

My satisfaction as a customer was only exceeded by my joy at a being a part-owner of that store. The

future for SNS, and indeed BH, looks bright.