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RICE UNIVERSITY / JONES BUSINESS SCHOOL – SPRING 2010

SPECIAL SITUATIONS INVESTING

DENALI INVESTORS, LLC

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DisclaimersThese presentation materials have been prepared solely as a means to determine investor interest in Denali Investors Accredited Fund, LP or the Denali Investors Offshore Limited (the “Funds”). These materials are qualified in their entirety by the Fund’s Confidential Private Placement Memorandum (the “Offering Memorandum”) and the exhibits thereto. This is not an offer to invest in the Fund; any offers will be made only by means of the Offering Memorandum. Any decision to invest in the Fund must be based solely upon the information set forth in the Offering Memorandum and the exhibits thereto, each of which should be read carefully by prospective investors prior to investment. These presentation materials are confidential and may not be reproduced or distributed by the recipient, except that they may be provided to advisers to the recipient in connection with an evaluation of a potential investment. Prospective investors should be aware that an investment in the Fund is speculative and involves a high degree of risk. There can be no assurance that the Fund’s investment objectives will be achieved or that an investor will receive a return of or on its capital. In addition, there may be occasions when the Fund’s general partner, its affiliates and/or its members or employees may encounter potential conflicts of interest in connection with the Fund. An investment in the Fund is subject to restrictions on transfer and withdrawal. The Offering Memorandum discusses these and other important risk factors and considerations that should be carefully evaluated before making an investment in the Fund. Prospective investors should consult with their own legal, tax and financial advisers as to the consequences of an investment in the Fund.

Sources of Information. Certain of the economic and market information contained herein has been obtained from published sources and/or prepared by third parties. While such sources are believed to be reliable, none of the Fund, its general partner, the investment manager or their respective affiliates, employees and representatives assume any responsibility for the accuracy of such information.

Forward-looking Statements. These presentation materials may contain forward-looking statements within the meaning of the United States federal securities laws. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. For example, forward-looking statements may predict future economic performance, describe plans and objectives of management for future operations and make projections of revenue, investment returns or other financial items. A prospective investor can generally identify forward-looking statements as statements containing the words “will,” “believe,” “expect,” “anticipate,” “intend,” “contemplate,” “estimate,” “assume” or other similar expressions. Such forward-looking statements are inherently uncertain, because the matters they describe are subject to known (and unknown) risks, uncertainties and other unpredictable factors, many of which are beyond the Fund’s control. No representations or warranties are made as to the accuracy of such forward-looking statements.

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Denali Investors, LLC only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advise for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. Our current disclosure statement is available for review upon request.

Not an Offer to Purchase or Sell Securities. This document is for informational purposes only. The information contained herein is subject to change. However, we are under no obligation to amend or supplement this document. This document does not constitute an offer to sell or the solicitation of an offer to buy any interest in the Fund. Interests in the Fund will only be available to parties who are “accredited investors” (as defined in Rule 501 promulgated pursuant to the Securities Act of 1933, as amended) and who are interested in investing in the Fund on their own behalf. Any offering or solicitation will be made only to qualified prospective investors pursuant to a confidential offering memorandum, and the subscription documents, all of which should be read in their entirety. An investment in Denali Investors Accredited Fund, LP or Denali Investors Offshore Limited involves a substantial amount of risk. Investments should only be made by investors who fully understand these risks and can withstand a loss of their entire investment. Past performance is no guarantee of future results. This document is being sent only to persons with whom we have a preexisting business relationship. If you have received this document and do not have a preexisting business relationship with us, please notify sender and discard this document immediately.

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Simple Framework

SURVIVAL INVESTING

Survival = Value + Spec Sits + Options

Investing = “Art + Craft + Science”

Respect Micro + Macro + Cycles

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Portfolio Construction

“Generals”Longs

� Undervalued stocks

� Neglected

� Long time horizon

� Favorable risk/reward

Shorts

� Flawed business, management

� Unrealistic expectations

� Negative catalysts

“Workouts”Special Situations

� Non-recurring; Catalyst

� Internal/External

� Mergers

� Tender Offers

� Spin-offs

� Capital Structure Arbitrage

� Reorganizations

� Liquidations

� Bankruptcies

An exceptionally flexible search for opportunities…

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WWBD?*

� No system can guarantee success

� Markets can be unforgiving

Yet investing doesn’t need to be anxiety ridden.

Be able to pick your spots and roll with the punches.

*What Would Buffett Do?

500 free throws at

6AM EVERY DAY

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A Fundamental Question

The Risk-Return Relationship

� Show of hands - What does the Risk-Return Relationship look like?

Hint: Haugen

Return

Risk

Return

Risk

OR

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Case Study #1

What do you get when the following get together?

� An industry no one wants to touch

� Two industry leaders

� Sandbagging management

� A catalyst

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Case Study #1

Cardinal Health’s (ticker CAH) SPINOFF of

CareFusion (ticker CFN)

CAH CFN

Thesis:

Buy ParentCo, and get SpinCo for very cheap

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Deal Background

� Summer 2009 - CAH was trading at $30 - $31 per share

� CAH was still expected to close the spin in Q3 2009

Mr. Market says NO to healthcare for various reasons…

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Cardinal Parent (CAH)

� The new CAH is now organized into two segments.

� The Pharmaceutical Segment, which accounts for 2/3 of profits, includes pharmaceutical distribution, manufacturer and specialty services, and nuclear and pharmacy services.

� The Medical Segment, which accounts for 1/3 of profits, includes medical product distribution, lab product distribution, and infection prevention products.

� Pharma Distribution is an industry in the final innings of consolidation in which the top three players (CAH, MCK, and ABC) have 90% market share.

� Outlier in distribution economics…

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CareFusion Spinoff (CFN)

� CFN is another industry leader with attractive metrics and margins and additional room for upside in fundamentals.

� CFN offers product lines in the areas of IV infusion, medication and supply dispensing, respiratory care, infection prevention and surgical instruments – a razor/razor blade model.

� The industry has a longer runway and is quite fragmented and under penetrated.

� Demonstrated maintenance of pricing discipline and expressed desire to continue to grow organically.

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CareFusion Spinoff (CFN)

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Valuation – CAH Pre-Spin

� Comps traded around 7x – 9x EBIT

� Market is afraid of healthcare reform uncertainties

� Work shows spinoff may unlock $5 - $10 per share value

� 1 CAH to 0.5 CFN share ratio

� CAH keeps 20% of CFN

$13.7bEV

$2.1bEBIT (TTM)

6.5xEBIT Multiple

$2.0bNet Debt

$1.7bCash

$3.7bDebt:

$11.7bMC:

$31Price:

CAH (Pre-Spin)JUL 2009

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Valuation – CAH Post-Spin

� Comps traded around 7x – 9x EBIT (ABC

and MCK)

� CAH deserves slight premium (pricing,

margins, customer base, etc.)

� Private transactions took place above 10x -

20x EBIT.

� CAH should kick out $1.5b in EBIT 09.

� At 5x - 8x, that's $18 - $30 per share.

� The CAH shares started trading on Sept 1st

at $25 per share, or 6.7x EBIT.

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Valuation - CFN

� CFN should kick out $540m in proforma EBIT 09.

� Comps trade around 9x – 15x EBIT, 15x – 20x PE, and 2x – 3x book.

� If valued in line with comps, that implies $18 - $40 per share (or $9 - $20 per CAH share).

� CFN deserves a value at the middle of the ranges.

� CFN-wi started trading on Sept 1st at $20 per share.

At the company given assumption of $16 per share, that implies only 6 -7x EBIT and 0.8x book.

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Other Factors/Forces

� Must respect legislative and regulatory risk

� Hospital spending patterns

� Forgotten margins

� Spinoffs costs roll off

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Spinoff Checklist

� Valuation

� Capital structure

� Quality business

� Institutional ownership

� Management incentives/ownership

� Fundamentals

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Ways to Place an Investment

Pre-spin

Play the break up value

- Via equity or options

- Many possible scenarios, so consider ‘long strangle’position (very attractive…)

Post-spin

Buy CAH on the cheap

Buy CFN on the cheap- Via equity or options (time arbitrage/LEAPs)

Options/Catalysts create very attractive risk/reward…

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Position Pre-Spin

Long strangle position breakdown and review…

Leg 1: KCFLG – DEC 09 35 Calls at $1.20

Leg 2: KCFXE – DEC 09 25 Puts at $0.50

Total position cost = $1.70 (KCFLG + KCFXE)

Each option contract adjusted to deliver 100 CAH shares and 50 CFN shares

Structure allows for sizing of position because it is safer (risk and return relationship is negative)

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Valuation – CAH & CFN

Pricing has moved more for CAH than CFN and upper range of

expected value creation ($5 - $10) has been reached…

0.9x1.4xPB

10.7x7.7xEV/EBIT (ttm)

$5.8b$11.5bEV:

$0.8b$1.1bNet Debt:

$5.0b$10.4bMC:

$22$29Price:

CFNCAHOCT 2009

$13.7bEV

$2.1bEBIT (TTM)

6.5xEBIT Multiple

$2.0bNet Debt

$11.7bMC:

$31Price:

CAH (Pre-Spin)JUL 2009

Initial work indicated $5 - $10 of value unlocked per share as a result of the spinoff…

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So What Happened?

� Pre-spin investment� Outcome agnostic� Greenlight files soon after� Last week Barron’s article

EventsCatalystsInsurance at work

OUTCOME

KCFLG: $1.20 to $8.50 [+$7.20]KCFXE: $0.50 to $0.00 [-$0.50]Net Gain/(Loss) = +$6.80

* Figures per contract

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Review

Intersection of Value + Spec Sits + Options…

� Spinoffs

� Inefficiency built into the system� Valuation

� Options / Hedges� “The Ratio”

� Downside protection!

Brains vs. Bull Market – plenty of credit given to market (Thanks and praise to Bernanke? Tread lightly…)

Process vs. Probability vs. Outcome (Favorable this time)

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SS O

Survive

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Case Study #2

What happens when the following get together?

� A Shrinking Pie

� Clever Management

� Unsuspecting Convertible Note Holders

� Zero Sum Incentives

� Legal Uncertainty

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Answer: CCRT

CCRT

� Special Dividend + Spinoff + Convertible

Dutch Tender + Ongoing Lawsuit + Free

Optionality

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“We are three meals away from punching our neighbor in the face for a

ham sandwich.”

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Situation BackgroundCCRT has been a tragicomic multiyear saga

2007 to 2009 CCRT is experiencing severe dislocation.

JUN 30 2009 Restructured into a holding company.

DEC 03 2009 CCRT announces first ever $0.50 per share dividend ($25m total) and intention to spinoff Purpose Financial. CCRT stock jumps from $2 to $4. Converts drop 20% - 30%.

DEC 21 2009 Claiming fraudulent conveyance, Convert holders file a lawsuit in an attempt to prevent the dividend and spinoff.

DEC 29 2009 U.S. District Court Judge rejects claim. Dividend is allowed.

JAN 28 2010 CCRT announces dutch tender offer for $160m face (46 – 50 for 3.625%s and 31 – 35 for 5.875%s. Minimum of $80m face of the 3.625s. Converts jump.

FEB 25 2010 Convert tender expires. Extended & minimum waived. Somewhat successful.

MAR 2010 CCRT 10K released first half of the month.

Q2 – Q4 2010 CCRT completes spinoff of Purpose Financial?

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Cast of CharactersMINORITY EQUITY Eye of the subprime storm.

Massive reverse lollapalooza.

INSIDERS Own 2/3 of the equity. Insider wealth down $1,000m to $100m.

David Hanna has orchestrated some very clever moves.

CONVERT HOLDERS $390m face of convertible notes. Two tranches: $230m of 3.625%s and $160m of 5.875%s. The 3.625s were puttable back to CCRT in 2012.

SHORTS They were the smart money. 6m shares short today on 15m float.

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The Clever Moves

THE DIVIDEND

� CCRT completed the dividend of $0.50 per share, or $25m total.

� $15m went to Insiders, $10m went to minority shareholders.

� The Shorts have to pay for dividends. Ouch!

� Adding insult to injury, the stock doubled. Double Ouch!

THE SPINOFF

� Coincident with the dividend, CCRT announced the intention to spinoff of Purpose Financial.

� Insiders will retain control of both companies.

� If CCRT goes bankrupt, insiders will still have the SpinCo!

� The spinoff was another jab at the Shorts - they have to buy shares of the spinoff for delivery. Triple Ouch!

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The Clever Moves (Continued)

CONVERT TENDER

� Management is actively working to capture/take value at their expense.

� Seeking legal recourse to the inversion of creditor priority has not worked.

� If successful, 40% of the notes are cancelled and remaining debt will have higher pro rata recovery claims.

� Remaining debt is being created at 50% to 70% discount to face, further increasing chances of recovery.

� Remaining 3.625s are still puttable at face in 2012.

� If successful, it will mean a much cleaner balance sheet and more room for equity value.

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Spinoff Valuation

Purpose Financial (Payday Loan Business)

� Purpose Financial itself was worth the total market cap of CCRT.

� Based on a rough triangulation to payday lenders, Purpose should be valued at $100m to $150m.

� Purpose’s proforma book value is about $120m and annualized revenue is about $130m.

� SpinCo will be capitalized with $40m cash and no debt.

� Management may be sandbagging the numbers.

� Proforma numbers include a $20m goodwill impairment charge that masks the Spinco’s true metrics.

� Also, watch carefully how management sets compensation and stock options for themselves.

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Parent Valuation

There will remain three main business segments

� Credit Cards

� Auto Lending

� Jefferson Capital

� The valuation exercise is a bit open-ended. Many variables.

� A big variable was the outcome of the dutch tender, which in part determines residual value of equity.

� My view - Valuation boils down to much a simpler equation. The remaining business is being CREATED FOR FREE if the value of Purpose Financial is in the ballpark.

� If roughly correct, then any upside is a free option.

� Post-spin estimate - CCRT should approximate value before the dividend and spinoff announcement, or $1 to $2 per share.

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So What Has Happened So Far?

Drivers: � Special Dividend � Spinoff Announced� Lawsuit Filed� Form 10� Convert Tender Completed� 10K Filed� Short Squeeze

Defined CatalystsFree Optionality

OUTCOME TO DATE

FEB 2010 $3 per shareMAR 2010 $5 per shareGain/(Loss) $2 per share

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Review

� Special Situation Combination

� Multiple Catalysts

� Optionality… That’s Free

� “The Ratio”

� Market Agnostic

� Subtext Over Numbers

� Follow the Story

Heads I win, tails I don’t lose…

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Survive

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Remember Columbo“Columbo is a scruffy-looking cop who is often underestimated by his fellow officers and by the murderer du jour. Despite his appearance and superficial absentmindedness, he solves all of his cases and manages to come up with the evidence needed for indictment, thanks to his eye for detail and the meticulous and committed approach he brings to his work.”*

* Source: Wikipedia

"Just one more thing..."

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Live Situation #1

A Tender Offer…

MDZ – MDS Inc. ($8.30)

� Up to 45% of shares (120m out), no minimum

� $8.10 to $9.30 cash per share tender

� 11% return in one week

� Expiration March 29, 2010 (next Monday)

� Unlikely to reach share maximum

� Don’t forget: post tender potential…

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Live Situation #2

Pharmaceutical Product

Development, Inc. (PPDI)

Spinoff of

Compound Partnering

Business (Ticker TBD)

- A decade in the making…

- Spinoff timing is for middle of 2010 (lots of time to think)

- Transfer of $100m cash to SpinCo

- Everyone seems to hate the SpinCo

Variant Thesis: [GoodCo + BadCo] – BadCo = BetterCo

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Live Situation #2

Factors to Consider

PPDI:

- Fundamentals

- Customer concentration (pharma R&D spend)

- Need for M&A (signs of gambling re Celtic investment)

- Cashflow and Capex

SpinCo:

- Fundamentals

- Follow the management

- Cashflow?

- Precedents are instructive (FACT and MYRX)

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Looking Forward

� Capital structure arbitrage

� Merger arbitrage

� Corporate liquidations

� Tender offers (self & third party)

� Upcoming bankruptcy wave

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Denali Investors

H. Kevin Byun

kbyun@DenaliInvestors.com

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Thank You

Congrats to Class of 2010!

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