ANNUAL MEETING 2009

DENALI INVESTORS, LLC

DENALI INVESTORS, LLC

An Uncommon Fund…

� Modeled after the original Warren Buffett

Partnerships hedge fund of the 1950’s

� Value-Based

� Special Situations

� Opportunistic

� Concentrated

� Net Cash

Our framework is rare in today’s world

Overview

OBJECTIVE Produce superior long-term absolute and relative returns versus the S&P index

STRATEGY Combine “Generals” and “Workouts”; Focus on identifying value-based investment ideas and margin of safety

PORTFOLIO Build a portfolio of 5 – 15 very attractive, non-market correlated investment ideas which have high conviction through fundamental research

“Generals” + “Workouts”

Generals� Undervalued stocks

� Neglected

� Long time horizon

� Favorable risk/reward

� Shorts

� Flawed business, management

� Unrealistic expectations

� Negative catalysts

Workouts� Non-recurring; Catalyst

� Internal/External

� Mergers

� Tender Offers

� Spin-offs

� Capital Structure Arbitrage

� Reorganizations

� Liquidations

� Bankruptcies

Flexible search for opportunities…

Investment Philosophy

VALUE Buy Cheaply. Invest at steep discounts to intrinsic (business) value

FUNDAMENTALS Be an Owner. Approach investments as an owner of a business, rather then chasing momentum or technicals

CONCENTRATION Be Selective. A handful of great, high-conviction ideas is better than a hundred mediocre ones

LONG-TERM VIEW Use Time. Patient long-term investing creates a distinct advantage over short-term speculation

NET CASH Don’t Risk Ruin. Leverage is hazardous no matter the number of PhD’s

A Bit About Q4 2008…

�Generals

Generals – Long/Short

15 - 30%Net

10 - 15%Short

30 - 40%Long

% Exposure

Our Generals consist of a handful of longer-term

ideas, and we are looking to add more.

Q4 2008

� Special Situations

Q4 2008 – Idea #1

�An Election Merger

Deal Background

Precision Drilling (PDS) buys Grey Wolf (GW)

� GW and PDS announced a merger in Aug 2008

� Tail end of an energy boom.

� The election merger consideration for each GW share was either 1) $9.02 in cash per share, or 2) 0.4225 share of PDS. Election subject to proration.

� By December 2008, in combination with the market market, GW traded down from $9 per share to about $6 per share. PDS from $20 - 25 to $6 - 7 per share.

An opportunity hiding in plain sight…

Possible Outcomes

Outcome Band includes:

� The deal closes (PDS buys GW)

� The deal breaks (PDS does not buy GW)

� GW shareholder makes cash election

� GW shareholder makes share election

� GW shareholder makes no election (defaults

to share election)

� Something in between…

Ways to Place an Investment

The Approach…

“Short” GW & hedge PDS

� Counterintuitive (typical to long target / short acquirer)

� Tactics are critical

� Standard merger arb analysis on GW alone is limited

� Insurance/hedge “cost”

� Combination increases safety

� “The Ratio” – 1/10 risk/reward ratio

Heads I Win, Tails I Don’t Lose

Combining the GW short and PDS hedge:

Investment boils down to – heads I win (likely a

lot), tails I break even.

� The near-term catalyst creates value – the

merger will either close or break.

� The Outcome Does Not Matter: the potential for 100% upside exists on a close or

break.

So What Happened?

� Deal closed Dec 19th � Hiding in plain sight

EventsCatalystsInsurance active

1

1

2

2

Review

� Special situation

� Optionality… that’s free

� Hedging (Insurance)

� “The Ratio”

Heads I win, tails I don’t lose…

Q4 2008 – Idea #2

�Free Spin-Off

PNX Spin-Off of VRTS

Phoenix (PNX) Spin-off of Virtus (VRTS)

PNX VRTS

Phoenix (PNX)

PNX is a Tier 2/3 player in the insurance (life and annuity) space.

Valuation

� Sector volatility creates value-based opportunity.

� Book value, $0.9b upon spin, implies 0.2x book.

� Assume large haircut to book value, metrics.

� PNX pricing is still far below conservative values.

� Pricing implies high likelihood of bankruptcy scenario.

� No credit to VRTS…

Virtus (VRTS)

VRTS is a Tier 2/3 player in the space.

A company with $20b - 25b in AUM.

Valuation

� VRTS pricing at 0.2% of AUM… At 50bps, $20 per share (adj. for the 20 to 1 spin ratio).

� At 0.3x book value at spin.

� Net cash of ~$3 per share, NOLs of ~$40 per share ($20 federal; $20 state; taxable spin).

� We should remember that the value from VRTS - it is free to us.

Valuation – PNX & VRTS

0.2x0.8xPB

$180m$1.2bMC:

$1.50$10Price:

DEC 08

PNX

SEP 08

PNX

* 20 to 1 share ratio on spin

0.2%% of AUM

0.3x0.4xPB

$58m$360mMC:

$10*$3.00Price:

JAN 09

VRTS

JAN 09

PNX

Pricing implied bankruptcy…

Deal Background

PNX was a stomping ground for hedge funds that helped create the catalyst…

2

1

Spinoff Checklist

� Valuation

� Capital structure

� Orphan business/stock

� Institutional ownership/pressures

� Management incentives/ownership

� Fundamentals

Ways to Place an Investment

Pre-spin

Play the break up value

- Via equity or options

Post-spin

Buy PNX on the cheap

Buy VRTS on the cheap

- Via equity or options (time arbitrage/LEAPs)

Options/Volatility create very attractive risk/reward…

Review

� Spinoff

� Inefficiency built into the system

� Valuation

� “The Ratio”

Q4 2008 – Idea #3

�Forgotten Merger

Idea #3 (Presented 11/20/08)

A Merger Arb…

OVEN – TurboChef ($1.60)

- MIDD is a consolidator… (know Selim Bassoul)

- $4.90 per share consideration: $3.67 cash (funded via revolver), $1.22 stock (MIDD $25 x 0.0486)

- Planning to close Q4 2008- Special meeting for OVEN vote (simple majority)

- Management on board (20% ownership)

- Synthetic via options (size, cash inflow, cost basis)

Q4 2008 – Idea #4

� Self-Tender Offer

Idea #4 (Presented 11/20/08)

A Tender Offer…

HLTH – HLTH Corp. ($8.10)

- Up to 80m shares (of 185m outstanding), no minimum- $8.80 cash per share tender (funded via $1b net cash)

- 9% return in one week

- Expiration 11/25/08 (next Tuesday)- Management on board and have tendered (think

motivations & busted merger…)- Unlikely to reach 80m share max

- Don’t forget: post tender potential…

Looking Forward

� Capital structure arbitrage

� Merger arbitrage

� Corporate liquidations

� Tender offers (self & third party)

� Upcoming bankruptcy wave

Thank You