Accredited fund-letter-to-investors-nov-11

545 views
492 views

Published on

Published in: Business, Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
545
On SlideShare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
3
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Accredited fund-letter-to-investors-nov-11

  1. 1. Whitney R. Tilson and Glenn H. Tongue phone: 212 386 7160Managing Partners fax: 240 368 0299 www.T2PartnersLLC.comDecember 1, 2011Dear Partner,Our fund fell 0.6% in November vs. -0.2% for the S&P 500, +1.2% for the Dow and -2.3% forthe Nasdaq. Year to date, it’s down 25.0% vs. +1.1% for the S&P 500, +6.7% for the Dow and-0.5% for the Nasdaq.On the long side, our three winners of note were Grupo Prisa (B shares) (18.9%), Iridium (stock11.8% and warrants 4.0%), and AB InBev (8.2%). These gains were more than offset by Netflix(-21.4%), Sears Canada (-16.7%), Citigroup (-13.0%), Goldman Sachs (-12.5%), and dELiA*s(-10.7%).Our short book did well during the month and is now in the black on the year (meaning that all ofour losses are on the long side). Our biggest winners in November were Career Education(-56.2%), Green Mountain Coffee Roasters (-19.4%), Nokia (-14.0%), Lululemon (-12.0%), ITTEducational Services (-11.3%), and Salesforce.com (-11.1%). Our only loser of note wasInterOil (+15.1%).Tax EstimatesTax estimates through the end of October will soon be available, so if you would like to receiveyours please email or call Kelli at KAlires@T2PartnersLLC.com or (212) 386-7160.IridiumIridium’s stock jumped after the company reported very strong earnings on November 8th. Thecompany soundly beat analysts’ estimates and its own guidance for revenue, margins, EBITDA,and subscriber growth, with particular strength in both the machine-to-machine and legacycommercial voice product lines. Operational EBITDA margin hit a new high of 53.5% andmanagement raised its 2011 outlook for subscriber growth (up 25% year over year) andoperational EBITDA (up 20% year-over-year to ~$190 million). As an added bonus, thecompany said it would pay “negligible cash taxes from 2011 to approximately 2020.”We think this earnings report should assuage the concerns we’ve heard from investors andanalysts, and are optimistic that it will prove to be a turning point for the stock, which we believeis deeply undervalued.Grupo PrisaGrupo Prisa received a boost in November when Mexican billionaire Carlos Slim acquired a3.2% stake (see article in Appendix A). We think the stock will receive another boost in the nextfew weeks when the company announces that it has successfully refinanced its debt. The GM Building, 767 Fifth Avenue, 18th Floor, New York, NY 10153
  2. 2. As background, this is what we wrote in our September letter: Spain and Portugal are going through a crisis similar to the one the U.S. went through in late 2008, so it’s not surprising that the stock of a company with 77% of its revenues in these two countries is suffering. It’s also not surprising that the company’s operating performance has been affected by the deep recession in its primary markets, though the company is holding up remarkably well in light of this: in the first half of 2011, revenues were down only 1.2%, adjusted EBITDA rose 3.6%, and the company’s restructuring and cost-cutting is on track. Prisa, however, needs to refinance its debt to give it breathing room to get through the current crisis. Our discussion with management and others – plus our own experience – leads us to have a high degree of confidence that Prisa will be able to do so successfully, but the uncertainty is weighing heavily on the stock.Netflix and Green Mountain Coffee RoastersA couple of weeks ago we sent you an article we published entitled “Why We’re Long Netflixand Short Green Mountain Coffee Roasters,” which is attached in Appendix B. Since then, bothstocks have moved against us, making them even more attractive in our opinion.InterOilThough we haven’t discussed it in some time, InterOil remains one of our largest short positions.Our bearish thesis is being validated as the company continues to miss deadlines on itsunrealistic promises, which will likely never be fulfilled, yet the company still has a $2.6 billionmarket cap. We believe intrinsic value is zero. The government of Papua New Guinea appears to finally be waking up to this gigantic promotion because it’s demanded that InterOil find an “internationally-recognized LNG [liquefied natural gas] operating partner,” which is highly unlikely ever to occur, for reasons that are well articulated in this article, and will certainly not happen anytime in the near future. InterOil bulls are hoping for a partnership similar to the one between Oil Search and Exxon Mobil, but this deal took five years to reach final investment decision (FID). Real energy companies do not quickly make multi-billion dollar commitments in one of the world’s poorest, most corrupt countries, so even if InterOil has discovered a major natural gas field (which we highly doubt), it will take years to sign a deal with an “internationally-recognized LNG operating partner,” yet InterOil has promised this in the very near future. Here is a laundry list of what InterOil has promised by year-end: - Secure FID with Mitsui for condensate stripping plant (CSP) - Secure FEED [front-end engineering design] and FID with Energy World Corp. for modular LNG plant - Secure FEED and FID with Flex LNG on floating LNG plant - Sign definitive agreement with Noble Group for offtake of 1MTPA [million tons per annum] - Secure “internationally-recognized LNG operating partner” - Sign additional Heads of Agreement for 1-2MTPA offtake -2-
  3. 3. With less than a month to go in the year, the only one of these that IOC has delivered on is thelast one, announcing recently that it had signed “a Heads of Agreement (HOA) with GunvorSingapore Pte. Ltd., for the supply of one million tonnes per annum (mtpa) of liquefied naturalgas (LNG).” However, Gunvor, according to Wikipedia, has unsavory ties: Following the major Wikileaks release of US State Department cables in November 2010, it was reported by the London Daily Telegraph[17] that the wealth of Russian Prime Minister Vladimir Putin is linked to a "secretive Swiss-based oil trading firm" called Gunvor. It said that John Beyrle, the United States Ambassador to the Russian Federation stated that close connections exist between Gunvor and the Russian Government and that he reported: "its secretive ownership is rumoured to include prime minister Putin."The whole point of an offtake agreement is so lenders will provide the billions of dollars that thisproject would cost – but we question whether anyone would lend such a large amount of moneyagainst an agreement with a firm like Gunvor.For the most in-depth expose of InterOil, see this article, which links to 12 pages starting here.For a more recent take, see this article.ConclusionThank you for your continued confidence in us and the fund. As always, we welcome yourcomments or questions, so please don’t hesitate to call us at (212) 386-7160.Sincerely yours,Whitney Tilson and Glenn TongueThe unaudited return for the T2 Accredited Fund versus major benchmarks (including reinvesteddividends) is: November Year-to-Date Since InceptionT2 Accredited Fund – net -0.6% -25.0% 113.9%S&P 500 -0.2% 1.1% 27.9%Dow 1.2% 6.7% 76.8%NASDAQ -2.3% -0.5% 24.2%Past performance is not indicative of future results. Please refer to the disclosure section at the end of this letter. The T2Accredited Fund was launched on 7/1/04. -3-
  4. 4. T2 Accredited Fund Performance (Net) Since Inception 200 180 160 140 120 100 (%) 80 60 40 20 0 -20 -40 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 T2 Accredited Fund S&P 500 T2 Accredited Fund Monthly Performance (Net) Since Inception 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P T2 S&P AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500 AF 500January 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 2.4February -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 3.4March 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 0.0April 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 3.0May -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 -1.1June 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 -1.7July -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 -2.0August 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 -5.4September -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 -7.0October 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 10.9November 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 -0.2December 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 6.7YTD 31.0 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 -25.0 1.1TOTALNote: Returns in 2001, 2003, and 2009 reflect the benefit of the high-water mark, assuming an investor at inception. -4-
  5. 5. Appendix A  WSJ, DEALS & DEAL MAKERS  NOVEMBER 18, 2011, 9:50 A.M. ETSlim Buys Stake in Spains El PaisBy DAVID ROMAN And ANA GARCIAMADRID—A company owned by Mexican billionaire Carlos Slim has acquired a 3.2% stake inSpains media group Promotora de Informaciones SA, in an unexpected move into one of theeconomies at the forefront of the euro zones debt crisis.Mr. Slim, one of the worlds richest men, bought the stake through Inmobiliaria Carso SA de CV,a firm which he controls, according to regulatory filings released Friday. Mr. Slim has also usedCarso to build up a 8.1% stake in New York Times Co., the publisher of the New York-baseddaily.Inmobiliaria Carso didnt disclose how much it paid for the stake. At current market prices, it isworth €12.5 million (about $17 million). The shares of Prisa, as the Spanish company is known,jumped on the news of Mr. Slims purchase, and they last traded up 13% at €0.85, valuing theentire company at €383.2 million.For Madrid-based Prisa, the countrys largest media group, Mr. Slims move is a much-neededshow of backing. The company, owner of Spains best-selling newspaper El Pais, has beenrestructuring and shedding assets in recent years as it seeks to reduce its heavy debt load.As in the case of the New York Times Co., Prisas share price has struggled recently. El Pais hassuffered a dip in sales, as well as a revenue squeeze owing to lower advertising. El Pais sellsaround 370,000 newspapers a day.Late last year, Prisa announced a plan to lay off 2,500 staff through the first quarter of 2012. Thiscame after U.S. investment fund Liberty Acquisition Holdings Corp. bought a majority stake inthe firm for some €650 million.This is Mr. Slims first foray in Spains media sector, which until recently was flushed with cashowing to the countrys long-running property bubble. The sector is now in dire straits becauselarge corporate and government advertisers have cut down on investments sharply, just asInternet competition and a drop in spending by highly indebted households has lowered demandfor newspapers.Prisa, haunted by a series of bad investments, has been Spains largest media company fordecades. Besides El Pais, it also owns Cadena Ser, Spains largest radio network by audience,and the profitable publisher Santillana, which has a large foothold in Latin America. -5-
  6. 6. Appendix B Why We’re Long Netflix and Short Green Mountain Coffee Roasters November 13, 2011 T2 Partners LLC The GM Building 767 Fifth Avenue, 18th Floor New York, NY 10153 (212) 386-7160 Info@T2PartnersLLC.comDISCLAIMER: THIS LETTER IS FOR INFORMATIONAL AND EDUCATIONAL PURPOSES ONLY AND SHALL NOT BE CONSTRUEDTO CONSTITUTE INVESTMENT ADVICE. NOTHING CONTAINED HEREIN SHALL CONSTITUTE A SOLICITATION,RECOMMENDATION OR ENDORSEMENT TO BUY OR SELL ANY SECURITY OR PRIVATE FUND MANAGED BY T2 PARTNERS.SUCH AN OFFER WILL BE MADE ONLY BY AN OFFERING MEMORANDUM, A COPY OF WHICH IS AVAILABLE TO QUALIFYINGPOTENTIAL INVESTORS UPON REQUEST. AN INVESTMENT IN A PRIVATE FUND IS NOT APPROPRIATE OR SUITABLE FOR ALLINVESTORS AND INVOLVES THE RISK OF LOSS.INVESTMENT FUNDS MANAGED BY T2 PARTNERS OWN CALLS AND ARE LONG THE STOCK OF NETFLIX AND OWN PUTS ANDARE SHORT THE STOCK OF GREEN MOUNTAIN COFFEE ROASTERS.WE MAKE NO REPRESENTATION OR WARRANTIES AS TO THE ACCURACY, COMPLETENESS OR TIMELINESS OF THEINFORMATION, TEXT, GRAPHICS OR OTHER ITEMS CONTAINED IN THIS PRESENTATION. WE EXPRESSLY DISCLAIM ALLLIABILITY FOR ERRORS OR OMISSIONS IN, OR THE MISUSE OR MISINTERPRETATION OF, ANY INFORMATION CONTAINED INTHIS PRESENTATION.T2 PARTNERS MANAGEMENT LP IS A REGISTERED INVESTMENT ADVISOR. A COPY OF T2’S DISCLOSURE STATEMENT (PART IIOF FORM ADV), WHICH CONTAINS MORE INFORMATION ABOUT THE ADVISOR, INCLUDING ITS INVESTMENT STRATEGIESAND OBJECTIVES, CAN BE OBTAINED BY CALLING (212) 386-7160. -6-
  7. 7. Netflix and Green Mountain Coffee Roasters are former market darlings whose stocks havecollapsed in recent months, wiping out a combined $23.2 billion in market capitalization from theirpeaks ($11.7 and $11.5 billion, respectively). By many metrics, both stocks appear cheap and theterrible headlines are attractive to value investors like us, who like to buy when others are selling ina panic. For example, BP was one of our biggest winners in 2010 (click here to read our analysis atthe time). The company, its CEO and the stock were all universally hated, with endless negativeheadlines (similar to Netflix today), which provided a wonderful opportunity to buy the stock farbelow its intrinsic value. We love situations like this – as long as we’re convinced that there’s agood company and a cheap stock once one cuts through all of the noise.So are Netflix and Green Mountain similar opportunities today? Yes and no. We’ve analyzed bothcompanies carefully and concluded that Netflix is an attractive investment at today’s price, so fundswe manage own the stock, but Green Mountain isn’t, we remain short it. Allow us to explain why.SimilaritiesThe stocks of both Netflix and Green Mountain over the past three months have suffered similardeclines, as this chart shows:In addition, the companies are remarkably similar in revenues and profitability over the past 12months: NFLX GMCRRevenues $2,925 $2,651Operating Income $393 $369Net Income $238 $201Operating Margin 13.4% 13.9%Net Margin 8.1% 7.6%All figures are in millions, over the trailing 12 monthsYet here the similarities end. Let’s take a look at both companies. -7-
  8. 8. NetflixWhen Netflix fell 35% in one day last month to under $80, we purchased it aggressively, not as ashort-term trade, but with a multi-year horizon. Over the next few quarters, the company will likelylose money as it invests in international growth and struggles to overcomes its missteps over thepast few months. Ultimately, however, we think Netflix is an excellent company and that themarket has overreacted to all of the recent negative news, thereby providing us the chance to own itat a cheap price, for reasons we discussed in our October letter to investors.Green MountainIn contrast, we are not only still short Green Mountain’s stock, but it remains our largest shortposition, even after last Thursday’s 40% decline. Our reasons are superbly articulated in the 110-slide presentation that Greenlight Capital’s David Einhorn gave on the company at the ValueInvesting Congress last month. Even if you don’t have a position in the stock, it’s worth studyingas a brilliant piece of analytical work – and it’s a must-read if you have a position. Although wewere already short Green Mountain, after seeing Einhorn’s presentation we concluded that it was aneven better short than we realized and increased the size of our investment, which has paid offhandsomely.There’s a saying that pigs get fed and hogs get slaughtered, so why don’t we cover our short andtake our profits? After all, the stock, at $43.71, is now trading at “only” 16.8x the midpoint of thecompany’s guidance for next year, and at 12.5x Einhorn’s estimate of the company’s long-termearnings power of $3.50 (see page 66 of his presentation).The answer is that we think only the first shoe has dropped and there are more to come.Netflix vs. Green MountainHere is a summary of our concerns about Green Mountain, with a comparison to Netflix:  Green Mountain gave strong guidance for next quarter and year, which we think, in light of the company’s performance last quarter, is too high and will need to be reset downward. Analysts remain bullish. In contrast, Netflix has given very poor – and, we believe, conservative – guidance that we think the company can exceed, and analysts are significantly more bearish.  Though it has similar revenues and profits, Green Mountain’s market cap, at $7.0 billion, is nearly 50% higher than Netflix’s $4.7 billion, which means there’s more downside and less likelihood of an acquisition.  Green Mountain’s business is highly dependent on two key patents, both of which expire on September 16, 2012. Contrary to the company’s and bullish analysts’ views, we believe that soon after these patents expire, there will be significant competitive pressures that will meaningfully impact Green Mountain’s profitability and growth. Netflix faces no patent risk though it, too, faces many competitive threats.  There is an ongoing SEC investigation at Green Mountain and we think Einhorn’s presentation provides a detailed roadmap that will, in our opinion, likely lead the SEC to uncover various accounting shenanigans. Netflix faces no such risk.  Green Mountain has spent $1.4 billion in cash on three richly-priced acquisitions over the past two years, which raises questions about organic growth and earnings quality. Einhorn notes: “The very -8-
  9. 9. high allocations to Goodwill raise suspicion about subsequent earnings quality.” (See page 53 of his presentation.) In contrast, Netflix has made no acquisitions in recent years.  Green Mountain inventories and cap ex have been growing much faster revenues: last year, on a 95% revenue increase, inventories rose 156% from $262 million to $672 million, while cap ex rose 125% from $126 million to $283 million. The result has been severely negative free cash flow and a significant worsening of the balance sheet over the past two years, which raises questions about how the company will fund its cap ex plans for next year. The trends at Netflix are precisely the opposite.Netflix vs. Green Mountain: A Comparison of Balance Sheets and Cash FlowsThe last bullet point warrants further discussion because, while the two companies have similarincome statements, their balance sheets and cash flows diverge massively. Netflix has a healthy netcash position of $166 million, while Green Mountain has $561 million in net debt. And Netflix hashealthy operating cash flow, which substantially exceeds both net income and cap ex, resulting infree cash flow of $201 million, whereas Green Mountain is the reverse, with free cash flow of minus$282 million. This chart shows the data for both companies over the past 12 months: NFLX GMCRCash & Cash Equiv* $366 $13Debt $200 $574Net Cash (Debt) $166 ($561)Operating Cash Flow $349 $1Cap Ex** $148 $283Free Cash Flow $201 ($282)* For GMCR, excludes $28M of restricted cash** For NFLX, cap ex includes "Acquisitions of DVD content library"All figures are in millions, over the trailing 12 monthsThe balance sheet and cash flow numbers are critical because both companies are making largeinvestments to grow their businesses: in Netflix’s case, signing deals for streaming content andgrowing internationally and, in Green Mountain’s case, primarily to “increase our portion packpackaging” and “expand our physical plants.” Both companies (and stocks) are at risk if they runinto trouble financing these investments.Given Netflix’s strong balance sheet and free cash flow, we think it’s highly likely that the companywill be able to fund its growth, even if it loses more subscribers than the company (and we) expect(within reason). In contrast, Green Mountain is at much higher risk, both because of higher plannedexpenses and also a far weaker balance sheet and cash flow statement.As noted above, in last week’s earnings release, Green Mountain said “For fiscal 2012, we currentlyexpect to invest between $630.0 million to $700.0 million in capital expenditures to support theCompany’s future growth.” That’s a huge amount of money for a company that only had $201million of net income last year and less than $1 million of operating cash flow.Our question is, where are they going to get the money? They’ve guided to $2.55-$2.65 in EPS inthe next 12 months, but we are highly skeptical that the company will meet this guidance, and italso excludes some very real cash expenses like “acquisition-related transaction expenses; legal and -9-
  10. 10. accounting expenses related to the SEC inquiry and the Company’s pending litigation.” In addition,the company’s balance sheet is consuming huge amounts of cash: due mainly to the rise ininventories and, to a lesser extent, accounts receivable, operating cash flow over the last 12 monthswas a mere $785,000 – basically zero. Nor was this an exception: in the prior year, the companyhad $80 million in net income yet operating cash flow of minus $3 million. On top of this arenumerous richly priced acquisitions, which consumed $908 million in cash last year and $459million the year before.To summarize, over the last two years, Green Mountain has generated $281 million of net income,yet lost $2 million of operating cash flow, plus spent $410 million on cap ex and another $1,367million on acquisitions – a total cash burn of $1.8 billion! This chart shows the company’saccelerating cash burn over the past three years: GMCR (09) GMCR (10) GMCR (11)Operating Cash Flow $38 ($3) $1Cap Ex $48 $126 $283Free Cash Flow ($10) ($129) ($282)Acquisitions $41 $459 $908FCF Minus Acquisitions ($51) ($588) ($1,190)So how has Green Mountain funded these huge cash flow deficits? By using cash, taking on debt,and issuing stock. Over the past two years, the company has seen its net cash position go from+$164 million to -$561 million, a swing of $725 million, plus it’s raised $990 million by sellingstock, as this chart shows: GMCR (09) GMCR (10) GMCR (11)Cash & Cash Equiv* $242 $4 $13Debt $78 $354 $574Net Cash (Debt) $164 ($350) ($561)Issuance of Common Stock $395 $9 $981* Excludes restricted cashIn summary, we question how Green Mountain will fund its $630-$700 million cap ex plan over thenext 12 months. Even if one believes the midpoint of the company’s guidance of $2.60/share, thisonly translates into $414 million of net income, plus the balance sheet is likely to continueconsuming cash. We think investors will not look kindly on more debt, nor issuing stock atdepressed prices, yet the company almost certainly will have to do one or the other.ConclusionWe’re long Netflix because we think the bad news is out, we like the company’s balance sheet andcash flows, and see few red flags. In contrast, with Green Mountain, we think there is much morebad news to come, are very concerned about the company’s balance sheet and cash flows, and seemany red flags. -10-
  11. 11. T2 Accredited Fund, LP (the “Fund”) commenced operations on January 1, 1999. The Fund’sinvestment objective is to achieve long-term after-tax capital appreciation commensurate withmoderate risk, primarily by investing with a long-term perspective in a concentrated portfolio ofU.S. stocks. In carrying out the Partnership’s investment objective, the Investment Manager, T2Partners Management, LLC, seeks to buy stocks at a steep discount to intrinsic value such thatthere is low risk of capital loss and significant upside potential. The primary focus of theInvestment Manager is on the long-term fortunes of the companies in the Partnership’s portfolioor 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 the Fund’s portfolio atthe time you receive this report or that securities sold have not been repurchased. The securitiesdiscussed may not represent the Fund’s entire portfolio and in the aggregate may represent only asmall percentage of an account’s portfolio holdings. It should not be assumed that any of thesecurities transactions, holdings or sectors discussed were or will prove to be profitable, or thatthe investment recommendations or decisions we make in the future will be profitable or willequal the investment performance of the securities discussed herein. All recommendations withinthe preceding 12 months or applicable period are available upon request.Performance results shown are for the T2 Accredited Fund, LP and are presented net ofmanagement fees, brokerage commissions, administrative expenses, other operating expenses ofthe Fund, and accrued performance allocation or incentive fees, if any. Net performanceincludes the reinvestment of all dividends, interest, and capital gains. Performance for the mostrecent month is an estimate.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, the Investment Manager’s feeschedule included a 1% annual management fee and a 20% incentive fee allocation, subject to a10% “hurdle” rate. In practice, the incentive fee is “earned” on an annual, not monthly, basis orupon a withdrawal from the Fund. Because some investors may have different fee arrangementsand depending on the timing of a specific investment, net performance for an individual investormay 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 ofthese indices may be materially different from the volatility in the Fund. In addition, the Fund’sholdings differ significantly from the securities that comprise the indices. The indices have notbeen selected to represent appropriate benchmarks to compare an investor’s performance, butrather 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.Past results are no guarantee of future results and no representation is made that an investor willor is likely to achieve results similar to those shown. All investments involve risk including theloss of principal. This document is confidential and may not be distributed without the consentof the Investment Manager and does not constitute an offer to sell or the solicitation of an offerto purchase any security or investment product. Any such offer or solicitation may only be madeby means of delivery of an approved confidential offering memorandum. -11-

×