July 22, 2011

We like to ask ourselves whether or not we have a unique insight. If the answer to that question is “No,” or “I’m not sure,” then perhaps we’re no better off than a weekend golfer challenging Tiger Woods to a high-stakes match.
Dear Fellow Members and Those that May Be Future Members, We have been pleased with the limited opportunities we have seen in which to deploy capital over the last several months, despite what we would describe as a generally resilient market. While we continue to hold significant amounts of cash, approximately 27% of our current capital has been deployed into investments since January 1st of this year. Of particular note, a significant majority of this capital has been deployed to international ideas, an area where we continue to find intriguing small and micro-cap companies to study. In the second quarter Howard Marks, an investor we hold in the highest regard, published The Most Important Thing: Uncommon Sense for the Thoughtful Investor, which we think warrants special mention. It is a clear synthesis of the investment philosophy of one of the world’s greatest investors. Mr. Marks writes in his book that “The markets are a classroom where lessons are taught every day. The keys to investment success lie in observing and learning.” That is what we try to do every day and hope that we are continually improving our investment thinking and process. We highly recommend the book and quote it a few times in this letter. A Weekend Match with Tiger for Money? While all three members of the fund’s management are avid golfers, betting high stakes against a world-class golfer is obviously not a smart decision for any of us. As most golfers know, such formidable challenges are—if ever—best left to top amateur golfers and the professional guys or gals on television. In our case, there is a good possibility that after such a match, we might not have a shirt to wear nor a house to live in at the end of the day. Us weekend golfers should avoid this type of challenge, choosing instead a different game altogether, at which we excel and our opponent may prove weak. Investing without a unique insight is, in our opinion, much like attempting the nearly impossible, and financially tragic, struggle above. “Second-level thinkers know that, to achieve superior results, they have to have an edge in either information or analysis, or both. They are on the alert for instances of misperception.” Howard Marks, The Most Important Thing: Uncommon Sense for the Thoughtful Investor We came across one company earlier this year that, while previously known to us, we now believe provides an interesting opportunity for the fund. After some further work and research, we believed we had generated a genuinely unique insight. Previously disclosed as Company G, Butler National Corp. (BUKS.PK) is a $35 million (market cap) Pink-Sheet traded company headquartered in Kansas City, Kansas, with a peculiar mix of businesses that on the whole appears quite cheap when you imagine what its financial profile might very well look like going forward. That future is being masked right now due to accounting peculiarities. The company has the following five segments:  Aircraft Modifications  Avionics  Gaming   Monitoring Services Corporate/Professional Services

The three business lines above and to the left are the key drivers of the group, and the gaming segment is the key to our investment thesis. Several years ago the company was an instrumental party in support of gaming legislation in Kansas. The resulting legislation provided for four state-owned casinos that would be managed by private entities. Butler was chosen as the manager for the state’s southwest casino in Dodge City. The company commendably financed the entire project with very little capital. Prior to being announced as operator, the company purchased a tract of land in Dodge City for
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approximately $2 million. It brought in a real estate partner that paid Butler $2 million to buy a portion of this land and build the casino in return for a 40% stake in the management company and the right to receive lease payments. Butler now owns 60% of the management company for essentially no net capital outlay. This is where the Butler thesis becomes interesting. After the casino opened, Butler’s revenue grew dramatically, but profitability from that growth appeared to be nonexistent. This was due to some peculiar accounting and ownership legalities. The state legislation dictated that the private manager could not own the gaming equipment. The machines had to be owned by or leased to the state, so Butler decided to purchase the gaming equipment on behalf of the state with state funds. The company could not book the assets to its balance sheet, so ever since the casino opened, Butler has been using cash flows from the casino to repay the state’s gaming equipment capital costs. The series of payments have been booked as a reduction in revenues. Based on repeated comments from the company, these payments should be completed by the end of the third quarter of this year. Essentially, Butler has reported a reduction in revenues that amounted to capital spending for the first 18 months of gaming operations. The magnitude of the peculiar situation is significant to Butler, as the company estimates that this will result in additional net income of $200,000 to $300,000 per month or $2.4 million to $3.6 million for a full year. This is for a casino that is not yet at maturity, as there is currently no hotel on the property (though construction recently began on a third-party-owned and -branded hotel). It took listening to an obscure company’s conference call to begin to realize what was actually happening (something we regret we didn’t do during the previous yearlong period in which we knew about the company). If you imagine the future financial profile of the company, it would appear that our average cost is between 6 and 7 times the 12-month net income beginning in June or July of this year. In our opinion, especially considering the quality of the casino management agreement, the room for growth at the casino, and the additional assets on the company’s balance sheet, 6 or 7 times earnings is much too cheap. To contemplate our upside, if you said that the company would be trading at a reasonable 13 times trailing 12-month earnings by September 30, 2012, the upside would be nearly 75% with no growth in earnings and taking into consideration all management incentives currently in place. Butler is not the type of company that will come up on a screen for value ideas; it is an idea that requires an imagination of what the future might look like that is based on a unique insight. With that unique insight we can proceed more like a seasoned, top-ten golfer facing Tiger – our chance for victory is much improved. Things Aren’t Always as they Seem “Skepticism is what it takes to look behind a balance sheet, the latest miracle of financial engineering or the can’t-miss story.… Only a skeptic can separate the things that sound good and are from the things that sound good and aren’t. The best investors I know exemplify this trait. It’s an absolute necessity.” Howard Marks, The Most Important Thing: Uncommon Sense for the Thoughtful Investor Although we could probably have begun this section with a repeat performance from the male Thynnid wasp in our previous letter, we’ve instead decided to use the cuttlefish for our metaphor. As wonderfully depicted in the BBC documentary, Life, cuttlefish gather a couple of times a year to mate. The males try to woo the females to mate by changing and flashing different colors. Once he has found a female cuttle to cuddle with, the male works to fight off other males from getting intimate with his female of choice. As one might imagine, the smaller males are at quite a disadvantage when it comes to fighting the larger males, so they—like many creatures on this planet—turn to deception. In order to get close to the females in the hope of passing along their genes, the smaller males will change their shape and color to resemble the females. The larger male cuttlefish, thinking he’s landed himself yet another female mate, will let the smaller, deceptive male join his female and then continue to protect them both from other intruders. As you may be able to conclude, the smaller guy accomplishes what he set out to accomplish and makes a quick escape in the other direction. One useful quality our larger cuttlefish above could have used more of is skepticism, and it’s a trait important to successful investing as well. As investors, we want to find profitable investments. We want to find companies that are going to make a
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lot more money or grow a lot faster than the market is giving them credit for. We want to hear a credible story about how we can buy low now and sell high later, or maybe even sooner than later. Due to some of the other investment activities the fund’s management oversees at Chanticleer, we get to see deal proposals from a number of private companies. Most include something along the lines of five-year projections and rarely, if ever, do the projections not move up in a straight line with every year looking much better than the previous year. And if we invested based on those projections, every deal would look like a deal worth doing. But the future is never so clear, so predictable, and so easy in a competitive environment. We don’t meet many CEOs who think their story isn’t better than the other guy’s or that their competition is going be the one taking market share from them instead of the other way around. When dealing with the future, it pays to have a healthy amount of skepticism. A lack of it may lead one to end up like the large cuttlefish, with the guy on the other side of the trade getting the better end of the deal. But we must also remember another wise quote from Howard Marks, which he wrote when discussing the events of 2008, “Skepticism is usually thought to consist of saying, ‘no, that’s too good to be true’ at the right times. But I realized in 2008— and in retrospect it seems so obvious—that sometimes skepticism requires us to say, ‘no, that’s too bad to be true.’” Skepticism works both ways. Currently, we think it is generally wise for investors to be in the “no, that’s too good to be true” camp. Broadly speaking, asset prices have risen, but debt problems have not been resolved and most asset prices don’t reflect this reality. Put simply, there is too much hope and not enough skepticism priced into many stocks and other assets. We continue to find a few interesting prospects and continue to look in areas that we believe are less efficient. It is these areas—specifically in the micro-cap stocks of both U.S. and international companies—that we believe offer the best opportunities to find mispriced investments. But fishing in a comparatively well-stocked pond doesn’t mean you’ll necessarily catch fish. We have to keep a healthy skepticism in mind, which leads us to believe that just because something is unloved and underfollowed, it doesn’t necessarily mean it is undervalued. That determination comes from digging to try and develop a unique insight, such as we mentioned above regarding our investment in Butler National. Of course developing a unique insight isn’t enough. It has to be unique and correct, which is something we can only know once we’ve given the thesis time to run its course. Dealogic At the end of the second quarter, Dealogic Holdings plc was our third-largest holding. The company is a UK-traded software and data provider in the mergers and acquisitions business. Toward the end of the quarter the company announced that for several reasons it was going to delist its shares. While in most cases a delisting is a huge negative for a company and its shares, there are reasons to believe this scenario is not entirely self-serving on the part of management and the large insider owners. Uniquely, the company is making a serious effort to preserve the opportunity for shareholders to continue owning shares after the delisting. The company will also institute a share exchange mechanism at a third-party-determined valuation at least once a year. It will also be providing audited financial statements at least once a year. Despite the fact that the company will buy back all shares from owners who will not be able to hold shares after the delisting, we have tentatively decided to continue to hold our shares. While this effectively means that we will own shares in a private enterprise, we believe this is the right decision to make, considering the current valuation of the company’s shares and our future outlook for the company. In this regard, a recent private market transaction highlights just how much the market is currently missing. We have taken steps with our administrator, Michael J. Liccar & Co., and our auditor, Joseph Decosimo and Company, to properly continue to hold shares and still maintain a regular and reliable valuation. Notwithstanding our current intentions, should we choose to change our minds, current indications from the company indicate that we would be able to sell our shares back to the company at the end of September. We will update investors in our next letter on our future direction with this holding. As always, we encourage our members or potential members to call with questions, thoughts or comments. Sincerely,

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Mike Pruitt (704) 366-1535 mp@chanticleerholdings.com

Matthew Miller (704) 366-5078 mmiller@chanticleerholdings.com

Joe Koster (704) 366-0496 jkoster@chanticleerholdings.com

No information contained herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security, or fund. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, goals, assumptions or future events or performance are not statements of historical fact and may be "forward looking statements." Forward looking statements are based on expectations, estimates and projections at the time the statements are made that involve a number of risks and uncertainties which could cause actual results or events to differ materially from those presently anticipated. Forward looking statements in this action may be identified through the use of words such as "expects", "will", "anticipates", "estimates", "believes", or statements indicating certain actions "may", "could", or "might" occur. Any non-factual statements, including those regarding possible future events, constitute views and/or present intentions and are not representations or warranties and are subject to change. Past performance is no guarantee of future results and all investing involves risk.

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