Notes to Condensed Parent Company Financial Statements

3 Months Ended

Dec. 31, 2014

Condensed Financial Information of Parent Company Only Disclosure [Abstract]

Notes to Condensed Parent Company Financial Statements

Note 1. Basis of Presentation

Biglari Holdings Inc.’s (the “Company”) condensed financial information has been derived from the consolidated financial statements and should be read in conjunction with the consolidated financial statements included in this transition report on form 10-K.

Prior to July 2013, the consolidated financial statements included the accounts of the Company, its wholly-owned subsidiaries (including Biglari Capital Corp. (“Biglari Capital”)), and investment related limited partnerships The Lion Fund, L.P. and Western Acquisitions, L.P. (collectively the “consolidated affiliated partnerships”), in which we had a controlling interest.

In July 2013 the Company liquidated the partners’ interest in Western Acquisitions, L.P. by distributing assets of the partnership to the partners and Biglari Holdings sold all of the outstanding shares of Biglari Capital to Mr. Biglari. Biglari Capital is the general partner of The Lion Fund, L.P. and The Lion Fund II, L.P. (collectively the “investment partnerships"), which are limited partnerships that operate as private investment funds.

As a result of the sale of Biglari Capital and the related liquidation of Western Acquisitions, L.P. the Company ceased to have a controlling interest in Biglari Capital and the consolidated affiliated partnerships.  Accordingly, Biglari Capital and the consolidated affiliated partnerships are no longer consolidated in the Company’s financial statements.

During fiscal years 2014 and 2013, the Company contributed cash and securities in exchange for limited partner interests in the investment partnerships. Prior to the contributions of securities to the investment partnerships the Company accounted for the securities as available-for-sale securities with unrealized gains and losses recorded as a component of shareholders’ equity in the condensed balance sheet. Our interests in the investment partnerships are accounted for as equity method investments due to our retained limited partner interest. The Company records earning from investment partnerships in the condensed statement of earnings based on our proportional ownership interest in the investment partnerships’ total earnings.

Our investments consist of available-for-sale securities and are carried at fair value with net unrealized gains or losses reported as a component of accumulated other comprehensive income in shareholders’ equity. Realized gains and losses on disposals of investments are determined by specific identification of cost of investments sold and are included in realized investment gains/losses, a component of investment gains.

In each of fiscal years 2014 and 2013, Biglari Holdings completed an offering of transferable subscription rights. The offerings were oversubscribed and 344,261 and 286,767, respectively, new shares of common stock were issued. The Company received net proceeds of $85,873 and $75,595 from the offerings, respectively.

Note 2. Subsidiary Transactions

Dividends

The Company received $150 cash dividends from subsidiaries during the 2014 transition period. During fiscal year 2014, the Company received cash dividends from subsidiaries of $52,564, which included distribution of current year earnings of $32,223 and historical earnings of $20,341. No cash dividends were received during fiscal year 2013 or 2012.

One of our wholly-owned subsidiaries has a credit facility that imposes restrictions on its ability to transfer funds to the Company through intercompany loans, distributions, or dividends.

Investment in Subsidiaries

The Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries.

Note 3. Investments

Investments consisted of the following.

	December	September	September
	31, 2014	24, 2014	25, 2013
Cost .......................................................................................................................	$        5,989	$         5,989	$      5,989
Gross unrealized gains ........................................................................................	-	128	133
	(208)
Fair value ..............................................................................................................	$        5,781	$         6,117	$      6,122

As of December 31, 2014, the Company retained a balance of $5,781 of investments deemed as available-for-sale securities.

Investment gains/losses are recognized when investments are sold (as determined on a specific identification basis) or as otherwise required by GAAP. The timing of realized gains and losses from sales can have a material effect on periodic earnings. However, such realized gains or losses usually have little, if any, impact on total shareholders’ equity because the investments are carried at fair value with any unrealized gains/losses included as a component of accumulated other comprehensive income in shareholders’ equity. We believe that realized investment gains/losses are often meaningless in terms of understanding reported results. Short-term investment gains/losses have caused and may continue to cause significant volatility in our results.

Investment gains were as follows.

	2013	2012
Gain on contributions to investment partnerships ..............................................................................	$  162,869	$            -
Gross realized gains on sales ................................................................................................................	1	4,536
Gross realized losses on sales ..............................................................................................................	-	(384)
Other than temporary impairment .......................................................................................................	(570)	-
Gains on contributions and sales of investments .................................................................................	$  162,300	$      4,152

The Company did not recognize a gain during the 2014 or 2013 transition periods or during fiscal 2014.

The Company recognized a pre-tax gain of $162,869 ($102,607 net of tax) on contributions of $324,751 in securities to investment partnerships for fiscal year 2013. The gain had a material effect on the Company’s fiscal 2013 earnings. However, this gain had no impact on total shareholders’ equity because the investments were carried at fair value prior to the contribution, with the unrealized gains included as a component of accumulated other comprehensive income.

During fiscal year 2013, the Company had unrealized losses on available-for-sale securities in a continuous unrealized loss position for more than twelve consecutive months. Therefore, we recorded an impairment of $570 in fiscal year 2013.

Note 4.  Investment Partnerships

The Company reports on the limited partnership interests in The Lion Fund, L.P. and The Lion Fund II, L.P. (collectively the “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.  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. 

The fair value and adjustment for Company common stock held by the investment partnerships to determine carrying value of our partnership interest is presented below.

	Fair Value	Company Common Stock	Carrying Value
Partnership interest at July 1, 2013 ..........................................................	$        54,608	$            43,580	$      11,028
Investment partnership gains ...................................................................	23,053	2,985	20,068
Contributions of cash and securities to investment partnerships ......	326,451	-	326,451
Increase in proportionate share of Company stock held .....................	-	11,033	(11,033)
Partnership interest at September 25, 2013 .............................................	404,112	57,598	346,514
Investment partnership gains (losses) ....................................................	1,071	(5,678)	6,749
Contributions of cash and securities (net of distributions) to
investment partnerships .........................................................................	52,224	-	52,224
Increase in proportionate share of Company stock held .....................	-	18,594	(18,594)
Partnership interest at September 24, 2014 .............................................	457,407	70,514	386,893
Investment partnership gains ..................................................................	117,664	7,396	110,268
Increase in proportionate share of Company stock held ....................	-	3,958	(3,958)
Partnership interest at December 31, 2014 .........................................	$   575,071	$          81,868	$ 493,203

The Company’s proportionate share of Company stock held by investment partnerships at cost is $77,165, $73,207 and $54,613 at December 31, 2014, September 24, 2014 and September 25, 2013, respectively, and is recorded as treasury stock.

The carrying value of the partnership interest approximates fair value adjusted by changes in 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.

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%. Our policy is to accrue an estimated incentive fee throughout the fiscal year. The total incentive reallocation from Biglari Holdings to Biglari Capital for calendar year 2014 was $24,163. The total incentive reallocation from Biglari Holdings to Biglari Capital for calendar year 2013 was $13,946, including $3,655 associated with gains on the Company’s common stock, whose gains are eliminated in our financial statements. As of September 25, 2013, the Company accrued $5,033 for the incentive fee for Biglari Capital. No amount was accrued as of September 24, 2014 because net profits for the calendar year to date did not exceed the hurdle. Our investments in these partnerships are committed on a rolling 5-year basis.

The investments held by the investment partnerships are largely concentrated in the common stock of one investee, Cracker Barrel Old Country Store, Inc.

Note 5. Income Taxes

Federal income taxes are paid based on the consolidated results of Biglari Holdings.