Whitney R. Tilson phone: 212 277 5606

Managing Partner WTilson@KaseCapital.com

Carnegie Hall Tower, 152 West 57th Street, 46th Floor, New York, NY 10019

January 1, 2014

Dear Partner,

I hope you’ve had a wonderful holiday season and wish you a happy new year.

I will send you my annual letter later this month, but wanted to give you a quick update

immediately, as I do at the beginning of every month.

Our fund rose an estimated 3.9% in December vs. 2.5% for the S&P 500 and 1.3% for the HFRX

Equity Hedge Index. For the year, our fund finished up 16.8% vs. 32.4% for the S&P 500 and

11.2% for the HFRX Equity Hedge Index.

Winners on the long side in December were Grupo Prisa (B shares) (+23.5%), Hertz and Avis

(18.0% and 9.7%, respectively) and Spark Networks (9.2%). Thank goodness I exited dELiA*s

in November, as it tumbled 26.7% in December.

For all of 2013, our three largest positions all year, Howard Hughes, AIG and Berkshire, all

performed well, rising 64.5%, 44.6% and 32.7%, respectively. Other winners included Netflix

(297.6%), Grupo Prisa (B shares) (172.6%), Deckers (109.7%), the Japan side fund (90.5%

through November), Canadian Pacific (48.9%), Goldman Sachs (39.0%), and Citigroup (31.7%).

The only decliners of note during the year were Spark Networks (-20.9%) and Iridium (-7.0%).

It was a different story on the short side, however. As I’ve discussed in previous letters, 2013

was horrific for pretty much all short sellers and we were no exception. I will discuss the year’s

lowlights and lessons learned in my annual letter.

Our short book was flat in December, despite the market’s strong upward move, thanks primarily

to InterOil (-41.8%), Krispy Kreme (-24.0%) and Opko Health (-19.9%).

InterOil

In last month’s monthly update, I wrote the following about InterOil:

InterOil, however, jumped 27.3% because the new CEO promised that the company would sign a

deal by the end of the year with an energy major (presumably ExxonMobil) to monetize the

natural gas discovery InterOil claims to have made in Papua New Guinea. I expect that InterOil

will, in fact, sign a deal (despite years of broken promises), but believe that it won’t be anything

close to the jackpot bulls are expecting. Rather, I expect nothing more than an indication from

ExxonMobil that it would be interested in buying any natural gas InterOil produces many years

from now. If I’m right, there’s a lot of downside for the stock based on the company’s absurd

$4.3 billion market cap today.

-2-

In addition, here’s a transcript of what I said about InterOil during the Q&A session following

my presentation on Lumber Liquidators at the Robin Hood Investors Conference on Nov. 22nd

:

Moderator: Whitney, since you were nice enough to come with a short, would you mind if I

asked you about another short, which you are public on and have written a lot about that I think is

close to its all-time high? It’s a Papua New Guinea oil and gas exploration company which has a

big market cap and basically no earnings and virtually no revenues to support it.

Me: Sure, it’s called InterOil – IOC is the ticker. Lumber Liquidators is one of my newest shorts;

I think InterOil may be the oldest short in my book. It’s fluctuated between $50 and $100 for five

plus years and is in the high $80’s right now. It has a $4.3 billion market cap for a company that’s

done nothing but burn money for 15 years going around drilling wells in one of the world’s most

corrupt and primitive countries. But now they are on the verge of a deal. On the conference call

last week, the new CEO said “We are going to sign an asset monetization deal”. They’ve been

promising one pretty much every quarter for the last five years and it’s all come to naught, but

now they’re serious. By the end of this year, they’re going to sign a huge asset monetization deal

and the stock has run up a lot on that news.

ExxonMobil is building a big LNG plant right nearby and if InterOil actually does have any

natural gas, the logical thing to do would be to sell it to Exxon. Exxon knows that and I think

Exxon is perfectly happy to sign an offtake agreement – and that’s all it will be.

I think this is a buy-on-the-rumor, sell-on-the-news kind of story.

Moderator: It’s one of these odd ones where you’re kind of hoping for a deal so there’s

something to analyze. If there’s no deal, which sounds likely based on what you said of the

history, then by the beginning of next year, it’ll be the deal that’s coming by the end of 2014.

Me: Exactly. Investors seem to have an infinite capacity to believe a company that has

consistently let them down, so if they actually sign a deal, people will see…

They’ve never run an extended flow test, which is what makes me skeptical about the size of the

resource.

So I think there will be a deal that’s very back-end loaded and could cut the stock in half.

Two weeks later, InterOil announced a deal with French energy giant Total and, as I expected, it

was a disappointment and the stock sold off sharply. I shared my analysis in an article I

published on Seeking Alpha, Why There’s More Downside for InterOil (see Appendix A). Here’s

the beginning:

After InterOil announced its long-awaited asset monetization deal with energy supermajor Total

on Thursday night, the stock plunged 37% on Friday (before popping 10% today) because the

deal failed to meet investors’ overheated expectations. So is it time to declare victory on what

was my largest short position and move on? No. Though I took some profits today, I maintain a

short position because I think there’s more downside to come for InterOil.

-3-

Rather than engaging in breathless speculation about InterOil’s future (fueled by the most

clueless, conflicted “analysts” and venomous, anonymous message board trolls I’ve encountered

in my career), it’s now possible – at last! – to analyze this company based on real information.

There are some interesting parallels with K12. When I presented K12 at the Value Investing

Congress on Sept. 17th

, it had risen 71% YTD and become a nerve-wracking 3.4% short position

in our fund – but I stubbornly refused to cover any of it. Three weeks and one day later, the stock

blew up, falling 38% in a day.

Similarly, when I mentioned IOC at the Robin Hood Investors Conference, it had risen 56%

YTD and become a nerve-wracking 3.4% short position in our fund – but I stubbornly refused to

cover any of it. Two weeks and one day later, the stock blew up, falling 37% in a day.

Lumber Liquidators

I published another article in December in Seeking Alpha entitled My Analysis of Lumber

Liquidators’ Updated Guidance (see Appendix B). Here’s an excerpt:

After the close yesterday, Lumber Liquidators updated its guidance (see press release here) and

released a new investor presentation (here). I believe this new information provides evidence to

support the key pillar of my investment thesis (outlined in my original presentation, posted here):

that margins will come under pressure, leading Lumber Liquidators to miss the exuberant

expectations built into the stock price.

…Most importantly, LL guided to materially lower gross and operating margins relative to Q3

and the trend over the past 2+ years, as this chart shows:

I have covered most of my InterOil and Lumber Liquidators short positions, and hope to have

another opportunity to ramp them up once again.

-4-

Conclusion

Entering 2014, I believe our fund is well positioned to outperform, as I will discuss further in my

annual letter.

As always, thank you for your support and please let me know if you have any questions.

Sincerely yours,

Whitney Tilson

The estimated, unaudited return for the Kase Fund versus major benchmarks (including

reinvested dividends) is:

December Q4 YTD Since Inception

Kase Fund – net 3.9% 9.9% 16.8% 146.0%

S&P 500 2.5% 10.5% 32.4% 79.4%

HFRX Equity Hedge Fund

Index

1.3% 4.2% 11.2% n/a

The Kase Fund’s returns reflect an estimate for the Japan side fund because I don’t get the performance report for this fund until

approximately a week into each month. Any necessary adjustments will be made in the performance table of my annual letter.

Past performance is not indicative of future results. Please refer to the disclosure section at the end of this letter. The Kase Fund

was launched on 1/1/99.

Kase Fund Performance (Net) Since Inception

Past performance is not indicative of future results.

-40

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60

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Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

(%)

Kase Fund S&P 500

-5-

Kase Fund Monthly Performance (Net) Since Inception

Past performance is not indicative of future results. Note: Returns in 2001, 2003, 2009 and 2013 reflect the benefit of the high-water mark, assuming an investor at inception.

Kase S&P Kase S&P Kase S&P Kase S&P Kase S&P Kase S&P Kase S&P Kase S&P Kase S&P Kase S&P Kase S&P Kase S&P Kase S&P Kase S&P Kase S&P

Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500 Fund 500

January 7.8 4.1 -6.3 -5.0 4.4 3.6 -1.8 -1.5 -5.5 -2.6 4.7 1.8 1.1 -2.4 1.9 2.7 2.4 1.7 1.9 -5.9 -3.6 -8.4 -1.6 -3.6 -2.8 2.4 12.6 4.5 4.5 5.2

February -2.9 -3.1 6.2 -1.9 -0.6 -9.2 -1.1 -2.0 2.9 -1.6 7.0 1.5 2.1 2.0 -3.1 0.2 -3.3 -2.1 -6.9 -3.3 -8.9 -10.8 7.3 3.1 4.1 3.4 -0.8 4.3 0.8 1.4

March 4.1 4.0 10.3 9.8 -2.6 -6.4 3.0 3.7 1.4 0.9 3.9 -1.5 3.9 -1.7 3.9 1.3 -0.8 1.1 -2.3 -0.5 2.9 9.0 4.6 6.0 -4.1 0.0 10.9 3.3 1.3 3.8

April 2.1 3.7 -5.1 -3.0 5.1 7.8 -0.2 -6.0 10.5 8.2 2.4 -1.5 0.6 -1.9 2.2 1.4 4.4 4.6 -0.9 4.9 20.1 9.6 -2.1 1.6 1.9 3.0 1.3 -0.6 0.1 1.9

May -5.7 -2.5 -2.8 -2.0 1.8 0.6 0.0 -0.8 6.6 5.3 -1.4 1.4 -2.6 3.2 1.8 -2.9 2.5 3.3 7.9 1.2 8.1 5.5 -2.6 -8.0 -1.9 -1.1 -13.6 -6.0 2.8 2.3

June 2.2 5.8 4.1 2.4 4.6 -2.4 -7.3 -7.1 2.9 1.3 0.1 1.9 -3.1 0.1 -0.2 0.2 -3.0 -1.5 -1.2 -8.4 -5.0 0.2 4.5 -5.2 -2.4 -1.7 0.5 4.1 -1.0 -1.3

July -0.7 -3.2 -3.6 -1.6 -1.1 -1.0 -5.0 -7.9 2.3 1.7 4.6 -3.4 0.5 3.7 -0.9 0.7 -5.4 -3.0 -2.5 -0.9 6.8 7.6 3.5 7.0 -4.6 -2.0 0.2 1.4 -0.1 5.1

August 4.1 -0.4 5.4 6.1 2.5 -6.3 -4.3 0.5 0.4 1.9 -0.9 0.4 -3.2 -1.0 2.9 2.3 1.7 1.5 -3.3 1.3 6.3 3.6 -1.5 -4.5 -13.9 -5.4 -7.2 2.3 -5.8 -2.9

September -3.3 -2.7 -7.2 -5.3 -6.1 -8.1 -5.4 -10.9 1.7 -1.0 -1.6 1.1 -1.5 0.8 5.0 2.6 -1.1 3.6 15.9 -9.1 5.9 3.7 1.7 8.9 -9.3 -7.0 0.0 2.6 3.9 3.1

October 8.1 6.4 -4.5 -0.3 -0.8 1.9 2.8 8.8 6.2 5.6 -0.4 1.5 3.5 -1.6 6.3 3.5 8.2 1.7 -12.5 -16.8 -1.9 -1.8 -1.7 3.8 7.0 10.9 1.6 -1.9 5.6 4.6

November 2.8 2.0 -1.5 -7.9 2.3 7.6 4.1 5.8 2.2 0.8 0.8 4.0 3.1 3.7 1.9 1.7 -3.6 -4.2 -8.9 -7.1 -1.2 6.0 -1.9 0.0 -0.6 -0.2 -4.5 0.6 0.2 3.0

December 9.8 5.9 2.3 0.5 6.5 0.9 -7.4 -5.8 -0.4 5.3 -0.2 3.4 -1.3 0.0 1.4 1.4 -4.3 -0.7 -4.0 1.1 5.5 1.9 0.5 6.7 0.1 1.0 0.1 0.9 3.9 2.5

YTD

TOTAL31.0 21.0 -4.5 -9.1 16.5 -11.9 -22.2 -22.1 35.1 28.6 20.6 10.9 2.6 4.9 25.2 15.8 -3.2 5.5 -18.1 -37.0 37.1 26.5 10.5 15.1 -24.9 2.1 -1.7 16.0 16.8 32.4

20132012201120051999 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010

-6-

Appendix A

Why There’s More Downside to Come for InterOil

Whitney Tilson

12/10/13

http://seekingalpha.com/article/1887451-why-theres-more-downside-to-come-for-interoil

After InterOil announced its long-awaited asset monetization deal with energy supermajor Total

on Thursday night, the stock plunged 37% on Friday (before popping 10% today) because the

deal failed to meet investors’ overheated expectations. So is it time to declare victory on what

was my largest short position and move on? No. Though I took some profits today, I maintain a

short position because I think there’s more downside to come for InterOil.

Rather than engaging in breathless speculation about InterOil’s future (fueled by the most

clueless, conflicted “analysts” and venomous, anonymous message board trolls I’ve encountered

in my career), it’s now possible – at last! – to analyze this company based on real information.

Here are the links:

1. InterOil’s press releases and presentation (here, here and here)

2. Total’s press release

3. InterOil’s conference call (audio here and transcript here)

4. The 80-page “PRL 15 Sale Agreement” that IOC filed on Friday

The deal guarantees InterOil $613 million upon signing (expected in Q1 ’14), with two

additional payments contingent upon the joint venture reaching final investment decision (FID),

which Total expects in 2016 ($112 million), and first LNG cargo ($100 million), for a total of

$825 million. Then, the remaining payments are mostly tied to how much gas (if any) there is in

PRL 15 (the area covered by the agreement). Here is a table showing how much InterOil will

received based on various resource levels:

-7-

How this translates into fair value for InterOil’s share price is subject to many variables,

including (my estimates are in parentheses): date of payments (as outlined in press releases),

discount rate (10%), minority interests (40%), value of InterOil’s refinery ($200 million), value

of Triceratops and other assets ($500 million), the company’s overhead ($25 million annually),

net debt levels (constant) and share count (51 million). Using these estimates and then plugging

in a range of possible resource levels (the latter five are the ones in InterOil’s press releases), I

come up with a fair value for the stock today ranging from $11 to $98, as this table shows:

The current share price of $61.13 is near the middle of this range, so does that mean the stock is

roughly fairly valued? I don’t think so because I don’t believe these scenarios are equally likely.

I’ve long believed that there was only a small – say, 20% – chance that PRL 15 would ever yield

any economically producible gas for reasons that are summarized well in these four reports:

1. InterOil (IOC): "Major Momentum" Or Just A Castle In The Air? (click here; focus on

the history section, which documents the many energy companies that have explored

PRL 15 for more than 50 years without success, and the geology section, which explains

why: “There were no sustainable hydrocarbon flows – just a spectacular initial flow

followed by failure.”)

2. Presentation by Lakeview Investment Group (click here)

3. A write-up on ValueInvestorsClub.com (click here; log in as a guest)

4. InterOil: Three Strikes, You're Out, And A Beanball To The Head On The Way Back To

The Dugout? (click here)

But doesn’t the deal with Total, which guarantees InterOil $613 million up front, prove that there

must be at least some economically producible gas in PRL 15? Not necessarily – though it does

improve the odds (see below). Total is one of the world’s most profitable companies, so $613

million represents a mere 2.2% of its $28 billion in pre-tax income in the past year. Thus, it may

view the deal with InterOil as a cheap call option – perhaps worth nothing, but a risk offset by

the potential large upside.

If I were to guess, I think Total would ascribe the following probabilities to the range of

outcomes for PRL 15:

-8-

If so, the resulting expected value for InterOil’s stock, using the share price estimates above, is

$44.

But I think these probabilities are much too high and would instead estimate the following:

If these probabilities are correct, the resulting expected value for InterOil’s stock is only $31.45,

barely half of yesterday’s closing price of $61.13 – which is why I remain short the stock.

So who’s right: one of the world’s largest energy companies, with vast experience and resources,

or little ‘ol me? While it sounds like the height of arrogance to say so, I think I am. Big

companies do dumb things all the time. Remember when HP announced in April 2010 that it was

acquiring Palm for $1.2 billion in cash? That very day I went on CNBC and said it was a bone-

headed acquisition – and was eventually proven right.

I’ve been short InterOil’s stock for more than four years and have been closely following the

company even longer. In contrast, I suspect that Total has only been looking seriously at InterOil

for the past few months, given that for most of this year, InterOil was in exclusive negotiations

with Exxon. In addition, InterOil over the years has been rumored to be on the verge of a deal

with a nearly endless parade of partners – but Total’s name rarely came up. In March 2009 a

Reuters story mentioned Total, and since then InterOil, its analysts, and the media have

mentioned 19 other potential partners!

By far the most logical partner for InterOil is Exxon, which has a $19 billion LNG project on the

verge of completion, with scheduled shipments to begin next year. The economics of Exxon

doing a brownfield expansion are far superior to Total building a greenfield liquefaction terminal

so, naturally, all of the focus has been on Exxon. Despite its superior economic position,

however, Exxon wasn’t even willing to match the disappointing deal InterOil agreed to with

Total. This fact pattern certainly lends credence to the notion that Total doesn't have a clue

-9-

and/or is taking a gamble as it struggles to replace reserves (a problem many of the supermajors

are grappling with). As a result, I think Total is likely flushing $613 million down the drain.

An article in the Wall Street Journal in July offers some clues to what I think happened. It notes

that “Exxon's $19 billion project, dubbed PNG LNG, is among the more advanced in Papua New

Guinea,” whereas Total’s “foray into Papua New Guinea has gotten off to a shaky start, with two

exploration wells yielding only "modest" amounts of natural gas.” Having struck out on their

own and under pressure to, in general, build reserves and, specifically, catch up with Exxon in

PNG, I wouldn’t be surprised if we later learn that Total rushed its due diligence and convinced

itself that PRL 15 is a major resource when, in reality, there’s no economically producible gas

whatsoever.

To see what I think will happen to InterOil, look at OGX, a heavily promoted energy company in

Brazil that is now in bankruptcy with its shares down 99% from their peak. This Bloomberg

article summarizes OGX’s history:

OGX was founded in 2007 and raised $1.3 billion from private investors to buy oil

concessions in November of the same year, a month after state-run Petroleo Brasileiro

SA, or Petrobras, announced the discovery of a giant offshore oil province south of Rio

de Janeiro.

Seven months later, Batista raised 6.7 billion reais ($4.1 billion) for OGX in an initial

public offering in what was at the time the biggest IPO in Brazilian history.

A year after that he was drilling wells. A period of rapid success in finding oil led OGX

to briefly outstrip Petrobras as the most successful explorer in Brazil by strikes registered.

OGX pumped its first oil in January 2012, but by mid-year it became clear that the field

would not produce near expectations and the company's stock began a drawn-out decline.

In the last year alone, OGX's share price has plunged about 95 percent…

I think we’ll eventually learn that, like OGX, InterOil’s PRL 15 field will “not produce near

expectations” and that InterOil’s stock will suffer “a drawn-out decline.”

That said, we won’t know anything for sure until the appraisal wells are drilled and the resource

is certified (or not), which might not happen until 2015. Until then, InterOil bulls may be able to

pump this stock up once again, so I’d advise short sellers to size this position small for now and

look to ramp it up shortly before the results of the appraisal wells are released. At that point, if

the results are as dismal as I expect, the stock will collapse.

-10-

Appendix B

My Analysis of Lumber Liquidators’ Updated Guidance

Whitney Tilson

12/10/13

http://seekingalpha.com/article/1887441-my-analysis-of-lumber-liquidators-updated-guidance

After the close yesterday, Lumber Liquidators updated its guidance (see press release here) and

released a new investor presentation (here). I believe this new information provides evidence to

support the key pillar of my investment thesis (outlined in my original presentation, posted here):

that margins will come under pressure, leading Lumber Liquidators to miss the exuberant

expectations built into the stock price.

While LL increased its prior guidance for Q4 and 2014, it missed current consensus analyst

estimates. Specifically:

For Q4

Net sales of $252-$258 million; the midpoint, $255 million, is exactly the current

consensus

EPS of $0.69-$0.72, below the current consensus of $0.73

Incremental SG&A of $1.8-$2.3 million, up $0.4-$0.5 million from prior guidance due to

“the start-up of the West Coast distribution center and certain incremental legal and

professional fees” (interestingly, on page 5 of the investor presentation, the language is

different: “the start-up of the West Coast distribution center and certain incremental legal

and professional fees associated primarily with regulatory matters, including the Lacey

Act investigation, and the continued enhancement of our compliance programs” – exactly

the areas I highlighted that would cause expenses to rise and margins to fall)

Most importantly, LL guided to materially lower gross and operating margins relative to

Q3 and the trend over the past 2+ years, as this chart shows:

-11-

(Note that while LL gave Q4 gross margin guidance of 40.4-40.7%, it didn’t give

operating margin guidance. I estimated a range of 12.5-12.8% based on the average of

12.4% for all of 2013 – see page 31 of the investor presentation.)

For 2014

Net sales of $1.15-$1.2 billion, in line with the current consensus of $1.16 billion

EPS of $3.25-$3.60; the midpoint of $3.43 is below the current consensus of $3.50

Operating margin of 13.0-13.8%, up from 12.4% for all of 2013

This guidance would be fine if the stock were trading at 15-20x earnings (which is where it

would be trading if the market were rational), but at yesterday’s closing price of $103.80, the

stock is trading at 38x the midpoint of 2013 estimates and 30x the midpoint of the new 2014

guidance.

Such nosebleed multiples can only be sustained by companies consistently beating estimates and

raising guidance – which is what LL had been doing for the past two years, leading to a nearly 7x

rise in its stock. But LL just missed and lowered – and for precisely the reasons I outlined.

As investors wake up to LL’s new reality, I think the stock drifts lower until the next earnings

report in the third week of February, at which point the company will update 2014 guidance. I

expect even weaker guidance for the year at that time, as I think it’s highly unlikely that LL can

increase its operating margin from 12.4% in 2013 to the 13.0-13.8% it’s now promising for

2014. Rather, I think operating margin will be flat to down, which spells big trouble for the

stock.

For those of you who really want to dive into the weeds, LL’s latest investor presentation

includes a number of new and updated slides that aim to address the many issues I’ve raised –

see the appendix below for the highlights. LL is very clever in presenting information which

makes the case that even if the Environmental Investigation Agency report is correct, it focuses

on only one supplier, which the company can simply stop sourcing from with minimal

disruption.

-12-

I’m skeptical that this is an isolated problem limited to one rogue supplier. Rather, I believe that

Lumber Liquidators has a big problem on its hands due to the combination of a) the evidence in

the EIA report, b) the unusually rapid increase in Lumber Liquidators’s margins to

unprecedented levels immediately after acquiring a Chinese supply chain company, and c) the

hugely corrupt business environment in both Russia and China. Though I can’t prove it, the

evidence I see, combined with common sense, makes me think it’s highly likely that what EIA

has uncovered is a pervasive problem across Lumber Liquidators’s Chinese supply chain.

Since the raid, the company is surely scrambling to show the authorities that whatever problems

are in their supply chain are isolated cases, they didn't know about it, etc. But keep in mind that

the authorities raided Lumber Liquidators based on the EIA report, so they're not going to be

easily fooled by some spin and token actions. Rather, I think Lumber Liquidators right now has

no choice but to very quickly clean up its act to avoid major sanctions by the authorities.

Specifically, I think Lumber Liquidators will have to: 1) immediately stop sourcing from

suppliers they even suspect are trafficking in illegal wood; 2) find replacement suppliers; and 3)

ensure their entire worldwide supply chain is pristine. Doing all of these things is likely to be

very costly and disruptive to the business – not to mention management being distracted by

having to deal with the authorities for the foreseeable future.

Yesterday’s updated guidance reinforces my belief, so I maintain my $53 price target (and I

think I’m being generous), which is based on the following back-of-the-envelope math:

• Sales grow 16% annually in the next two years, as analysts expect (resulting in

revenue of $1.35 billion)

• Operating margins give back half of the 830 basis point increase in the last nine

quarters and fall to 9% (still far above the long-term average)

• The market responds to this by assigning the stock a 20x P/E multiple

• Result: $1.35B x 9% - 39% tax rate / 28M shares = $2.65 EPS x 20 = $53

Appendix

Here are my comments on the latest investor presentation:

1) This was the slide in the prior investor presentation (dated 8/14/13; posted here) showing the

sources of gross margin improvement:

-13-

This is the new version of it:

Notice how they’ve carefully removed any mention of buying product for less – instead it’s

“eliminate markup” and “eliminate middlemen”.

-14-

2) In slide 21, Our Sourcing, LL repeats that “No single supplier provides more than 4% of our

hardwood purchases” and “No single hardwood product represents more than 1% of our sales

mix”. In addition, there’s new language here:

Mills go through an on-boarding process and regular reviews of performance

Since the fourth quarter of 2011, we have replaced 50% of the Asian mills

existing at that time, yet doubled the net total number of mills to reduce risk by

diversifying our supply base

In any given year, we expect mill turnover to range from 15% to 30%, yet

continue to broaden the number of mills supplying flooring products

3) On slide 22, LL highlights again that hardwoods are declining as a percentage of sales (now

down to 43%, from 47% in 2012 and 64% in 2008).

4) Slide 23 is a new slide on sourcing mix, showing an “Increase in Asian sourcing where

bamboo and Acacia hardwood grow, and where laminate, engineered and handscraped hardwood

products are cost-effective to produce.”

5) Slide 24 aims to show how insignificant Asian hardwood is in LL’s supply chain:

6) Slide 25 addresses the formaldehyde issue: “Our emissions compliance policies and

procedures are designed to go above and beyond regulatory requirements and make our products,

whether sold in California or any other state/country, compliant with CARB’s wood product

formaldehyde emission standards.”

-15-

7) Slide 31 shows the expansion in operating margin, but adds three more years and adds this

box that reads: “SAP Implementation in August 2010: Full Productivity Restored in 2H 2011”.

In other words, operating margin fell as the new SAP system was installed, and then expanded as

the benefits of the system kicked in. Here’s the slide from August:

-16-

And here’s the new one:

-17-

The T2 Accredited Fund, LP (dba the Kase Fund) (the “Fund”) commenced operations on January 1,

1999. The Fund’s investment objective is to achieve long-term after-tax capital appreciation

commensurate with moderate risk, primarily by investing with a long-term perspective in a concentrated

portfolio of U.S. stocks. In carrying out the Partnership’s investment objective, the Investment Manager,

T2 Partners Management, LP (dba Kase Capital Management), seeks to buy stocks at a steep discount to

intrinsic value such that there is low risk of capital loss and significant upside potential. The primary

focus of the Investment Manager is on the long-term fortunes of the companies in the Partnership’s

portfolio or which are otherwise followed by the Investment Manager, relative to the prices of their

stocks.

There is no assurance that any securities discussed herein will remain in Fund’s portfolio at the time you

receive this report or that securities sold have not been repurchased. The securities discussed may not

represent the Fund’s entire portfolio and in the aggregate may represent only a small percentage of an

account’s portfolio holdings. The material presented is compiled from sources believed to be reliable and

honest, but accuracy cannot be guaranteed.

It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will

prove to be profitable, or that the investment recommendations or decisions we make in the future will be

profitable or will equal the investment performance of the securities discussed herein. All

recommendations within the preceding 12 months or applicable period are available upon request. Past

results are no guarantee of future results and no representation is made that an investor will or is likely to

achieve results similar to those shown. All investments involve risk including the loss of principal.

Performance results shown are for the Kase Fund and are presented net of all fees, including management

and incentive fees, brokerage commissions, administrative expenses, and other operating expenses of the

Fund. Net performance includes the reinvestment of all dividends, interest, and capital gains.

The fee schedule for the Investment Manager includes a 1.5% annual management fee and a 20%

incentive fee allocation. For periods prior to June 1, 2004 and after July 1, 2012, the Investment

Manager’s fee schedule included a 1% annual management fee and a 20% incentive fee allocation. In

practice, the incentive fee is “earned” on an annual, not monthly, basis or upon a withdrawal from the

Fund. Because some investors may have different fee arrangements and depending on the timing of a

specific investment, net performance for an individual investor may vary from the net performance as

stated herein.

The return of the S&P 500 and other indices are included in the presentation. The volatility of these

indices may be materially different from the volatility in the Fund. In addition, the Fund’s holdings differ

significantly from the securities that comprise the indices. The indices have not been selected to represent

appropriate benchmarks to compare an investor’s performance, but rather are disclosed to allow for

comparison of the investor’s performance to that of certain well-known and widely recognized indices.

You cannot invest directly in these indices.

This document is confidential and may not be distributed without the consent of the Investment Manager

and does not constitute an offer to sell or the solicitation of an offer to purchase any security or

investment product. Any such offer or solicitation may only be made by means of delivery of an approved

confidential offering memorandum.