BH Biglari Holdings Inc

Notes to Financial Statements

for the years eNDED December 31, 2016, 2015 and 2014

The Lion Fund II, L.P. (the “Fund”) is an investment fund organized as a limited partnership under the laws of the State of Delaware. The Fund is managed by Biglari Capital Corp. (the “General Partner”). The Fund commenced operations in July 2013 to provide investors with a professionally managed fund with the objective of achieving above-average, long-term growth of capital. In meeting this objective, the Fund will seek to find investments that the General Partner believes offer exceptional value.

Basis of Accounting — The accompanying financial statements of the Fund have been presented on the accrual basis of accounting, in accordance with accounting principles generally accepted in the United States of America. The Fund is an investment company and therefore complies with accounting and reporting guidance presented in Accounting Standards Codification 946, Financial Services – Investment Companies .

Investments in Securities — Security transactions are accounted for on the date the securities are purchased or sold (trade date). Gains or losses from sales of investments are computed on the specific identification basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis.

Exchange-listed securities are valued at the last sale price on the principal exchange on which they are traded.

Income Taxes — In accordance with federal income tax regulations, no income taxes are levied on a partnership, but rather on the individual partners. Consequently, no provision or liability for federal income taxes has been reflected in the accompanying financial statements.

There were neither liabilities nor deferred tax assets relating to uncertain income tax positions taken or expected to be taken on the tax returns. The Fund has reviewed open tax years and has concluded that there is no significant tax liability resulting from uncertain tax provisions. 2015, 2014 and 2013 remain open for both federal and state jurisdictions.

Cash — Any highly liquid investments with a maturity of three months or less at the date of acquisition are considered cash equivalents. The cash balances as of December 31, 2015 represents cash held by the custodian of the Fund’s investments.

Due to Broker — Due to broker represents margin debit balances collateralized by investments in securities.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Allocation of Net Increase (Decrease) from Operations — The Fund’s income and losses, including unrealized gains or losses and realized gains or losses from the sale of investments, are allocated to the partners in proportion to their respective capital accounts as of the end of each month, except for the General Partner performance reallocation discussed in Note 3.

Tender Offer — On June 4, 2015, the Fund commenced a tender offer to acquire up to 575,000 shares of the common stock of Biglari Holdings Inc. at a price of $420.00 per share. The tender offer concluded on July 1, 2015 with 620,679 shares tendered. The Fund elected to increase the number of shares accepted for payment by 41,312 or 2% of the outstanding shares of Biglari Holdings Inc. The Fund purchased 616,312 shares of Biglari Holdings common stock for $258,851,040 ($420.00 per share).

Forward Derivative Contract — The Fund entered into a pre-paid variable share forward transaction on February 5, 2015 with 1,250,000 shares of Cracker Barrel Old Country Store, Inc. On February 10, 2015, the Fund received $135,095,500. The derivative contract is marked to market each period with the changes in fair value of the contract recorded in net change in unrealized appreciation in the Statement of Operations. The change in unrealized appreciation for the contract in 2016 and 2015 was a loss of $39,923,076 and $5,254,704, respectively. As of December 31, 2016 and 2015, the Fund’s liability for the contract on the Statement of Assets and Liabilities was $180,273,280 and $140,350,204, respectively. Subject to the applicable terms and conditions, the Fund may elect to settle the forward contract in cash or shares. The scheduled valuation dates occur from June 14, 2017 to September 19, 2017. The Fund did not enter into a master netting arrangement with the counterparty. The contract is secured by 1,250,000 shares of common stock of Cracker Barrel Old Country Store, Inc. held by the Fund.

Recently Issued Accounting Pronouncements — In June 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-08, Amendments to the Scope, Measurement, and Disclosure Requirements of Investment Companies (“ASU 2013-08”), effective for the year ended December 31, 2014. The adoption of ASU 2013-08 did not have a material impact on the financial statements.

The Fund does not clear its own securities transactions. It has established accounts with financial institutions for this purpose. This can, and often does, result in concentration of credit risk with one or more of these firms. Such risk, however, is mitigated by the obligation of U.S. financial institutions to comply with rules and regulations governing broker/dealers and futures commission merchants. These rules and regulations generally require maintenance of net capital, as defined, and segregation of customers’ funds and securities from holdings of the firm.

The General Partner is entitled to receive a performance reallocation of 25% of the increase in net assets annually. This reallocation is subject to a 6% performance hurdle rate that the Fund’s performance must exceed in order for the General Partner to be entitled to such reallocation. Additionally, this reallocation is subject to a highwater mark provision. For the years ended December 31, 2016, 2015 and 2014, the General Partner earned $30,840,204, $23,982, and $34,405,750 of performance reallocation fees, respectively.

Sardar Biglari is the Chairman, Chief Executive Officer and sole owner of the General Partner. Mr. Biglari is also the Chairman and Chief Executive Officer of Biglari Holdings Inc. (“Biglari Holdings”) and of Biglari Holdings’ wholly owned subsidiary, Steak n Shake Inc. (“Steak n Shake”). Biglari Holdings and Steak n Shake are limited partners in the Fund and are subject to pay their proportional share of performance reallocation.

The General Partner of the Fund also serves as the General Partner of The Lion Fund, L.P. The Lion Fund, L.P. is a limited partner in the Fund and is not subject to a performance reallocation.

As of December 31, 2016, 2015 and 2014, Biglari Holdings, Steak n Shake and The Lion Fund, L.P. represented the limited partners in the Fund.

Exchange-listed securities are valued at the last sale price on the principal exchange on which they are traded. Level 1 securities in accordance with the U.S. GAAP established fair value hierarchy are based on unadjusted quoted prices in active markets for identical assets and liabilities. As of December 31, 2016 and 2015, the total securities were $1,106,345,999 and $816,623,168, respectively. The securities are classified as Level 1 inputs within the U.S. GAAP established hierarchy.

Level 2 valuations in accordance with the U.S. GAAP established fair value hierarchy are based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. The value of the derivative depends upon the contractual terms of, and specific risks inherent in the instrument, as well as, the availability and reliability of, observable inputs.  Such inputs include market prices for reference securities, yield curves, credit curves, measures of volatility, prepayment rates, and correlations of such inputs. As of December 31, 2016 and 2015, the liability for the forward contract was $180,273,280 and $140,350,204, respectively. The liability is classified as a Level 2 input within the U.S. GAAP established hierarchy.

We have evaluated subsequent events for recognition or disclosure through the time of issuance of these financial statements on March 31, 2017.

Total return for limited partners is calculated for the limited partners as a whole and is measured by dividing the increase or decrease in net assets, net of the expenses and performance reallocation to the General Partner, into the weighted average limited partners’ capital measured at the end of each month. An individual limited partner’s return may vary from these returns based on the timing of capital transactions.

Gross partnership return is calculated for the Fund as a whole and is measured by dividing the total increase or decrease in net assets, before expenses, into the weighted average partners’ capital measured at the end of each month. The net partnership return is calculated in similar fashion, after expenses.

Average partners’ capital is determined using the Fund’s partners’ capital measured at the end of each month. The performance reallocation to the General Partner is not included in the net investment income ratio.

Expenses include accounting fees, interest and other expenses. Net investment income is computed as investment income from dividends and interest, less expenses.

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