DENALI INVESTORS, LLC

1120 Avenue of the Americas, Fourth Floor New York, NY 10036 (646) 484-9896 www.DenaliInvestors.com

April 14, 2014

First Quarter 2014 Investor Letter

PERFORMANCE S&P 500 (Total Return) +1.8% +1.8% +39.3% +5.3%

Denali Investors 2014 Q1 Performance 2014 Year-to-Date Performance Total Return Since Inception* Annualized Return Since Inception* * Return from inception November 2007 +4.0% +4.0% +124.0% +13.4%

GENERAL COMMENTS During the first quarter, we were able to generate strong returns in a volatile environment. Moreover, we generated this outperformance with significantly less exposure due to our large cash position as well as our position level and market hedges. Beginning the year, we anticipated 2014 would be one of increased volatility and our cash and hedges have been beneficial. We took advantage of the volatility in late January/early February and were able to enter a number of new positions including the Dover Corp (DOV) + Knowles Corp (KN) spinoff and Rayonier (RYN) + Rayonier Advanced Materials (RYAM) spinoff, among others. As certain investments hit their price targets and other opportunities arose, we scaled back and exited investments including Harvest Natural Resources (HNR), Office Depot (ODP), LIN Media (LIN), and Mosaic (MOS). The overall special situations pipeline for 2014 continues to grow. Our opportunity set is increasing due to many specific and understandable catalysts with attractive risk/return profiles. There is a wide breadth of such opportunities and these have ironically created cover for the more interesting special situation ideas. If the markets continue to experience volatility, as has been the case during April, and there is a more significant pullback, we stand

to benefit as the special situations on our watch list become better values and more investible.

SELECT PORTFOLIO POSITIONS SunEdison Inc. (SUNE) – We first identified SUNE as a potentially interesting name two years ago in Q1 2012. Solar related companies were abandoned wholesale with stocks down 80% to 90% because of the negative sentiment surrounding the solar industry. However, SUNE was part of a group we identified as having separate non-solar core businesses as well as a solar business. SUNE’s solar segment had overwhelmed the fundamentals of its core segment and obscured its value. Moreover, semiconductor investors and analysts did not appreciate the solar business while solar investors and analysts did not appreciate the semiconductor business. We followed the company and took notice in early 2013 when the management team began to execute a complete shift in strategy which included the separation of the solar and semiconductor segments. In our view, this step would unlock tremendous value at multiples of the valuation at that time. We established a position after disappointing headline earnings numbers caused a sharp drop in the price and created an attractive entry point. We believed the larger thesis remained intact. In addition, the company planned to create a separate yield vehicle to hold solar energy producing assets to further unlock value. In our view, this pending development was completely underappreciated by the market. The YieldCo entity, analogous to MLP or REIT structures, was unfamiliar to both semiconductor analysts and solar analysts and therefore the likely impact was largely ignored by them. The company held an Investor Day in February 2014 and more fully disclosed the details of the strategic plan. The carveout of the semiconductor business WFR is expected in Q2 2014. The carveout of the YieldCo is expected in Q2 2014. Although the stock is at $18 versus our cost basis of $7, in our view the market continues to significantly undervalue SUNE. Extendicare Inc. (TSE:EXE) – We first identified EXE as a potentially interesting name one year ago in Q1 2013. The company was exploring strategic options which could result in the sale or spinoff of the US SNF (Skilled Nursing Facility) from its Canadian operations. We believed the US operations were being ascribed very little value. The combination of these businesses created complexity for potential investors. The Canadian investors and analysts do not give credit to the valuable US-based assets. Likewise, the American investors and analysts do not give credit to the valuable Canada-based assets. We initiated our position
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in Q2 2013 after a sharp drop in the stock price after an earnings miss. We believe the separation via sale or spinoff will unlock value and cause the stock to rerate significantly higher. EXE management guided expectations for an announcement by the end of Q4 2013. However, this timing has been extended to the end of Q2 2014. Interestingly, we previously invested in a prior EXE spinoff. In 2006, EXE effectuated a spinoff of Assisted Living Concepts (ALC). We first identified ALC in Q3 2012 after the stock was cut in half after a bad earnings report and we made an investment at that time. We believed the stock was significantly undervalued and that ALC’s Chairman, who held ultimate voting control, had designs to take ALC private. ALC announced it would be taken private in Q1 2013. The takeout price of $12 was far below fair value, but significantly above our cost basis of $8. As you know, another healthcare opportunity we had previously invested in was the Sun Healthcare (SUNH) + Sabra Health Care REIT (SBRA) spinoff in Q4 2010. SUNH was a skilled nursing facility operator. SBRA was a REIT spinoff. For more background, our full presentation then given at Columbia Business School is here. SUNH was acquired by Genesis HealthCare a year and a half later. SBRA is still managed by the original SUNH CEO, who moved over at the time of the SBRA spinoff. We mention our SUNH + SBRA investment because we believe the SUNH + SBRA investment has similarities to the current EXE opportunity. However, we mention our ALC investment because EXE also has similarities to the ALC investment with a possible take-under outcome. In both cases EXE produces positive returns. Genworth Financial Inc. (GNW) – We first identified GNW as a potentially interesting name in Q3 2011. We established our position in Q4 2011. At that time, we believed GNW at $5 per share was incredibly undervalued with the core business being ascribed a large negative value. Since then, a number of events have occurred to increase value. Although GNW is at $16 today, we believe it remains significantly undervalued. We believe the sum of the parts of the Global MI (GMI) segment and core business is worth $20 to $30 per share. Thomas McInerney took over as CEO in Dec 2012 after a lengthy search process. He and the board have implemented the strategic plan well thus far. The four strategic priorities are to: 1) Improve the operating performance of the businesses; 2) Simplify the portfolio; 3) Generate capital; 4) Increase the financial strength and flexibility of the company. The noncore Wealth Management business was sold. The Australia MI carveout is expected mid2014. Our full GNW presentation is here and our first letter is here. The Chairman & CEO

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was let go several months after our initial contact with the company, setting the stage for GNW’s turnaround. Liberty Media (LMCA), Liberty Interactive (LINTA), & Liberty Ventures (LVNTA) – The market continued to be focused on the offer for Time Warner Cable (TWC) by Charter (CHTR) and Liberty Media (LMCA). Dramatically, Comcast (CMCSA) entered the picture with a substantially higher nominal offer. This development has far reaching implications and has set off a chain of events that could catalyze the entire communications industry including DirectTV (DTV) and Dish Network (DISH), as well as Sprint (S) and TMobile (TMUS). Thus, John Malone is once again an agent of change, but perhaps not in the way he intended. The move by CMCSA should not be a surprise because, in just one example, the Roberts’ in the late 90’s tried to secretly buy the voting shares from the Magness estate in an effort to take control of TCI away from Malone. That’s coopetition for you. Liberty Media (LMCA) did an about face and reversed itself on the decision to buy-in the 47% of Sirius XM Holdings (SIRI) it does not own with a new class of non-voting C shares. LMCA announced that the company would instead create a tracking stock for Liberty Broadband (LBRDA) which will represent the interests in Charter Communications (CHTR), Time Warner Cable (TWC), TruePosition, and assorted liabilities. The LBRDA separation will be effectuated via a spinoff of the tracking stock and rights offering. We believe the value of LMCA and LBRDA to be materially higher than the current stock price. Our previous investments with LMCA include the spinoff of Starz (STRZA) in January 2013, which has more than doubled since then. STRZA began trading at a substantial discount to comparables despite Malone giving away the longer term thesis that STRZA needed a big brother (buyer). Liberty Interactive (LINTA) will separate and reclassify Liberty Digital (LDCA) assets and the remaining LINTA will become QVC Inc. (QVCA). QVCA will consist of QVC and a 38% stake in HSNI equity. LDCA will consist of ecommerce businesses including Provide Commerce, Bodybuilding.com, Backcountry.com, CommerceHub, Right Start, and Evite (moving into LDCA from Celebrate Interactive). LINTA announced that the separation is expected to occur in Q3 2014 instead of Q2 2014. We believe the value of QVCA and LDCA to be materially higher than the current stock price. Liberty Ventures (LVNTA) will separate and reclassify TripAdvisor Holdings (LTRPA) assets. LTRPA will hold a significant 22% economic and 57% majority voting control of
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TripAdvisor (TRIP) as well as $350m in net debt and Celebrate Interactive (holding company that includes BuySeasons, an online supplier of costumes and party supplies). New LVNTA will consist of investments in businesses such as Expedia (EXPE), Time Warner Cable (TWC), Time Warner (TWX), Tree.com (TREE), and Interval Leisure Group (IILG) as well as other projects including solar. LVNTA itself is a spinoff. We have owned LVNTA since it was originally separated from LINTA in August 2012 and the stock has more than tripled since the spinoff. The separation of LVNTA and LTRPA has been delayed to Q3 2014. We believe the value of LVNTA and LTRPA to be materially higher than the current stock price. Our full Malone Complex presentation is here.

NEW POSITIONS Dover Corp. (DOV) + Knowles Corp. (KN) – We first identified DOV as a potentially interesting name in Q2 2013 when the company announced it would spinoff its acoustics business Knowles (KN). We had been following DOV for many years. After separation, New DOV will have a new four segment structure: 1) Energy; 2) Engineered Systems (comprised of Printing & Identification as well as Industrial); 3) Fluids; and 4) Refrigeration & Food Equipment. New DOV will continue to pursue acquisitions, dividend growth, and buybacks. KN will have two segments: 1) Mobile Consumer Electronics (MCE), which provides the acoustic backbone to mobile devices such as smartphones, tablets, and laptops; and 2) Specialty Components (SC), which includes acoustic solutions for hearing aids, and precision devices (oscillators and capacitors). The separation allows KN to pursue a more aggressive growth strategy. DOV + KN is similar to our previous investments in industrials special situations, such as the TYC +ADT + Flow RMT spinoffs, and ITT + XYL + XLS spinoffs. After the KN spinoff announcement, the pre-spin DOV valuation continued to trade above our range. However, DOV missed earnings badly in January 2014, which also coincided with a sharp market selloff, resulting in a steep drop in the price to $83 from close to $100 per share. We used that window in Q1 2014 to establish a position. At that price, we believed the market was ascribing no value to KN and we were creating New DOV at $63 to $68 per share. We believed New DOV was worth $80 to $90 per share. DOV began to rerate higher into the spinoff that occurred less than one month later and New DOV itself (ex KN)
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rerated to $83, allowing us to create KN for free. New DOV rapidly reached our target price and we exited New DOV and rotated the capital into the KN spinoff. KN has remained at $15 per share ($30 split adjusted) since spinoff. We believe KN is overlooked for a number of reasons. New DOV has a $15b market cap while KN has only a $2.5b market cap. New DOV is a multi-industrial company while KN is more of a niche technology company. Unlike DOV, KN has almost no research coverage. More interestingly, there seems to be very little appreciation for a number of positive inflection points for the fundamentals of the KN business. There are a few drivers to consider. KN was a major supplier for Nokia (NOK) and Blackberry (BBRY) handsets, which have been a major headwinds. Despite this, the company has grown through this period because KN is also a major supplier to all the other major OEMs such as Apple (AAPL) and Samsung (KRX:005930). Going forward, without the NOK and BBRY headwind, growth should accelerate substantially. KN is also consolidating 18 facilities down to 11, which will save $40m to $50m per year. The proliferation of mobile devices provides a favorable industry backdrop. Current acoustic system ASPs are $2-$3. Due to continuing premiumisation of mobile devices, ASPs are expected to increase to $4-$6, which is still a small fraction of the cost of the devices. Comparables trade at much higher valuations. Thus, we have a new spinoff with the wrong shareholder base, no research coverage, index exclusion, hidden fundamental growth, high industry unit growth, price per unit increases, fractional cost to its customers, substantial internal cost savings, and at the lowest valuation. We believe KN is worth a materially higher valuation. Rayonier Inc. (RYN) – We first identified RYN as a potentially interesting name in Q1 2014 when the company announced plans to spinoff its performance fibers business Rayonier Advanced Materials (RYAM), which is expected mid-2014. Old RYN was not appropriate for potential timber REIT investors because two thirds of the business was from a specialty chemicals business, while other pure play timber REITs are available. New RYN will become a pure play timber REIT and will be valued on its assets and dividend yield, similar to pure play comparables. New RYN will no longer have the performance fibers business as an overhang to traditional REIT investors. New RYN will offer an attractive dividend that is expected to grow. Its low pro forma leverage profile is a fraction of comparables and provides capacity for growth and other potential transactions. Its low leverage also would be attractive for potential acquirers.
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The RYAM spinoff will be the leading high-value pure-play cellulose specialties chemicals company with leading technology and margins, and significant free cash flow. It will be the only company fully dedicated to cellulose specialties and will be exiting commodity grades and transitioning to a pure specialty chemical company. RYAM will be able to be valued more appropriately in line with its comparables. Currently, potential specialty chemicals investors are not able to properly value RYN’s valuable chemicals business because it exists within a timber REIT structure. Interestingly, the Chairman and CEO will be leading the RYAM spinoff. We expect that RYAM will use its substantial cash flow to pay down debt which will accrue value to equity and to look for accretive transactions. The RYN stock price had dropped 20% from its value in Q4 2014. We established our position in Q1 2014 ahead of the spinoff. We believe the market is ascribing a substantial discount to the value of New RYN and RYAM.

EXITED POSITIONS Mosaic Co. (MOS) – We first identified MOS as a potentially interesting name in Q3 2013 on the news that the Uralkali and Belaruskali, which together control over one third of the potash market, were breaking their BPC trading cartel. The shock sent producer stock prices down sharply. We established our position in Q3 2013. Since then, MOS has announced a major acquisition and the first buyback from the MAC trust. Uralkali and Bearuskali are working to reform the BPC trading cartel. While we continue to like MOS, we exited in Q1 2014 and moved into new investments. LIN Media LLC (LIN) – We first identified LIN as a potentially interesting name in Q2 2013 when the company announced plans to convert to an LLC for a tax benefit to offset gains from unwinding a joint venture and related debt guarantees, which would remove a material overhang on the stock. We established our position in Q3 2013. We expect consolidation in the industry to continue. However, as LIN approached our target price, we exited in Q1 2014 and moved into new investments. During the quarter, LIN agreed to merge with Media General (MEG) for a substantial premium. Harvest Natural Resources, Inc. (HNR) – We first identified HNR as a potentially interesting name in Q1 2013 when the company announced that the sale of their Venezuela assets to Indonesia fell through. Following this, the company announced that accounting
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restatements would be necessary for the previous three years, which would delay SEC filings and create a vacuum of information. In Q3 2013, the company announced a possible sale of their Venezuela assets to PlusPetrol which would result in a large special cash dividend plus a spinoff of their other assets. We believed the market was ascribing no value to the spinoff assets. We established our position in Q3 2013. However, as the situation progressed, our confidence in the management team became an issue. We exited in Q1 2014 and moved into new investments. Office Depot Inc. (ODP) – We first identified ODP as a potentially interesting name in Q2 2012. ODP was trading at a distressed valuation and we believed any improvement in fundamentals would result in upside. We established our position in Q4 2012. ODP subsequently merged with Office Max (OMX) to achieve scale, extract synergies, and better compete with Staples (SPLS). Having produced a significant gain, we exited in Q1 2014 and moved into new investments.

CONCLUSION We believe the coming years will be as exciting and productive as the previous ones. We are grateful for your trust and support. As always, above all else our focus remains on investing for survival. Sincerely, Denali Investors LLC

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ADDENDUM DENALI = VALUE + SPECIAL SITUATIONS + HEDGES OUR INVESTMENT FRAMEWORK It is worthwhile to revisit the fundamentals of our investment framework and to reevaluate the manner in which they hold us in good stead through turbulent times. Although our partners already adhere to our investment mindset and believe in the validity of the tenets (which we consider sensible and logical), we know that most managed capital does not align with our framework. Our basic structure (the allocation groupings and the incentive structure) is based on the Buffett partnerships from the 1950’s. Today, most people associate Buffett with a buy -andhold-forever philosophy. However, most people do not know how he first created wealth for his investors and himself. What the popular view discounts is that Buffett began his career managing a hedge fund that was value-based and heavily involved in special situations. Buffett’s early work basically fell into two categories: 1) his “Generals” which were undervalued stocks (still studied by many today), and 2) his “Workouts” which were special situations investments (unstudied by almost all). Generals + Workouts: The Generals (Long/Short) tend to produce returns that are more greatly affected by the overall market performance, as with rising or falling tides. The Workouts (Special Situations) tend to provide market agnostic returns and tend to have more attractive risk-reward profiles in downturns. Much of Buffett’s consistency in outperformance, even during years in which the markets declined, is attributable to his special situation investments. Critically, the combination of the two is much more powerful than either one alone in producing absolute returns over an extended time frame. The validity of this portfolio structure strikes me as powerful, simple, and elegant. In my view, those that focus only on one category at the exclusion of the other are at a fundamental disadvantage. The inherent balance in the combined structure is why Buffett himself said he expected, although could not guarantee, to outperform in bear markets and underperform in bull markets. By having a balanced tool kit, our portfolio remains flexible in allocating to the most promising opportunity set that presents itself. Flexible & Opportunistic Mandate: We have a flexible mandate that allows us to look at any opportunities that may be attractive. Certain funds that are designed to fit into a ‘style box’ remain captive to a certain sector, geography or asset class. The problem for such fund managers is that capital can flood out as easily as it floods in (i.e. technology sector funds in 1999 versus 2000 or energy specific funds in 2008 versus 2009). Also, they become captive to a slice of the market when it is no longer attractive and are simultaneously prevented from areas that are attractive. Whether bargains are available or not is immaterial. The order of the
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day is to sell. As a generalist, our flexible mandate allows us to look at opportunities across the spectrum. Concentration: We are highly selective. Our concentration of investments into our best five to ten investment ideas is an advantage. Our opportunistic style of investing allows us to wait for investments with highly favorable risk-reward profiles and requisite margins of safety. Allocating more capital to really good ideas, which do not come around too often, simply makes sense. This builds a portfolio one idea at a time, such that performance over time correlates to the outcome of those ideas rather than to the market. On the flip side, the typical mutual fund holds about 80 positions, which practically guarantees below average performance and explains why 80% of them underperform the market simply due to frictional costs. Net Cash = Fortress: Another advantage is the ability to maintain net cash in the absence of other opportunities. Cash is a valuable strategic asset and not a burden. Many funds must be fully invested according to the fund’s mandate. A fund manager must then perhaps buy at a time that may not be prudent or sell at a time that is even less prudent. Our ability to hold cash remains a great tactical advantage. When the market is desperately seeking liquidity, we will be able to provide it and invest on our terms. The use of leverage can be extremely dangerous. As has become apparent, investments that were mediocre at best were made to look superior in cooperative markets through the use of easy borrowing. Alignment of Interests: We eat our own cooking. I have the lion’s share of my net worth in the fund and I will continue to keep my assets in the fund. OUR INVESTORS Denali Investors is fortunate to 1) be extremely selective in the manner we make investments, 2) be able to focus on research and investing as opposed to marketing and promotion, and 3) have partners with a long-term value perspective in combination with outstanding professional and personal character. The firm is lucky, and rare, in this regard. It is a true pleasure to go to work every day on your behalf. I thank you for your trust and support.

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