Thursday, November 30, 2006

Reports Circulating Kirk Kerkorian Sold his Remaining 4.95% Interest in General Motors (GM)

UPDATE: Reports circulating that Kirk Kerkorian has sold his remaining 4.95% interest in General Motors (NYSE: GM). A large block of shares traded recently which is believed to be from Kerkorian. However, owning less than 5%, he doesn't have to file any public information on his trading activity in the stock.

In an earlier 13D filing, Kerkorian disclosed they agreed to sell 14,000,000 shares which brought his stake to 28 million shares. It just so happens that a 28 million share block trade crossed the tape at 2:41PM at $29.25 per share.

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Kerkorian's Tracinda Dumps Another 14 Million GM Shares

In an amended 13D filing on General Motors (NYSE: GM), Kirk Kerkorian's Tracinda Corp disclosed they agreed to sell 14,000,000 shares of General Motors common stock in a private transaction for $28.75 per share. The sale is to be settled on December 1, 2006.

The sale brings Kerkorian's stake to 28,000,000 shares or 4.95%. This is down from the 7.4% stake he disclosed on 11/22, which was down from his prior 9.9% stake.

The sale follows news in October that Tracinda's representative on GM'S board, Jerome York, resigned as a director after global partnership talks with Nissan-Renault broke down. Tracinda was pushing for the partnership.

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Advocat (AVCA) Holder Wants Stock Split and Buyback

In an amended 13D filing on Advocat Inc. (NASDAQ: AVCA) after the close yesterday, 4.8% combined owners of the stock, Bristol Capital Advisors and Oakdale Capital Management, LLC, disclosed a letter sent to the company requesting that they consider effectuating a 3:2 share split and adopting a share repurchase program.

In the letter, the firms congratulated the company on its Q3 results, but said, "We are, however, concerned about the market's reaction to your performance during this most recent quarter. While we appreciate that Advocat represents what we believe to be the most compelling opportunity in the nursing home sector due to your low occupancy rates and relatively poorer payer mix relative to your peers (factors that we perceive as opportunities, not risks), your low daily trading volume has impeded the ability of sophisticated investors to take advantage of the opportunity and has resulted in Advocat trading at a substantial discount to the valuation of its peers. As you have rejected our offer to acquire the Company, we ask that you do what is in the best interests for all the shareholders and engage immediately in a 3:2 share split as well as a share repurchase program."

A Copy of the Letter:

Dear Mr. Council:

Bristol Investment Fund, Ltd. and Oakdale Capital Partners I, LP(collectively, "we") are the beneficial owners of a total of approximately 4.8%of the outstanding common stock of Advocat Inc. ("Advocat" or the "Company").

Let us first begin by congratulating you on the Company's performanceduring your third fiscal quarter ended September 30, 2006. Obviously, the highreturn on invested capital in your renovations is having a tangible impact onoccupancy rates as well as payer mix which, when coupled with the opportunitiesthat exist in the assisted living center market in general, lead us to remainvery optimistic about Advocat's ability to grow its free cash flow materially inthe coming months and years.

We are, however, concerned about the market's reaction to yourperformance during this most recent quarter. While we appreciate that Advocatrepresents what we believe to be the most compelling opportunity in the nursinghome sector due to your low occupancy rates and relatively poorer payer mixrelative to your peers (factors that we perceive as opportunities, not risks),your low daily trading volume has impeded the ability of sophisticated investorsto take advantage of the opportunity and has resulted in Advocat trading at asubstantial discount to the valuation of its peers. As you have rejected ouroffer to acquire the Company, we ask that you do what is in the best interestsfor all the shareholders and engage immediately in a 3:2 share split as well asa share repurchase program. Please feel free to contact either of us at yourconvenience to discuss this matter further.

Yours truly,
Paul Kessler
Manager
Bristol Capital Advisors, LLC

Yours truly,
David Cheng
Managing Member
Oakdale Capital Management, LLC

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Wednesday, November 29, 2006

UPDATE: Greenberg Has Less Than 100K New York Times (NYT) Shares, And No Current Plans to Raise Stake

After the close of trading Wednesday, a Hank Greenberg's spokesman said Mr. Greenberg has less than 100,00 shares of New York Times Co. (NYSE: NYT) stock and has no present intention of increasing his stake. The stock was up today on reports from the New York Post, Greenberg was buying loads of NYT stock in an effort to break the Sulzberger family's control of the company.

Shares of New York Times closed up 7.5% today on the original reports and follow-up reports from CNBC's Charlie Gasparino that Greenberg wanted to buy the company.

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MMI Investments Discloses 5.3% Stake in Acxiom Corporation (ACXM)

In a 13D filing on Acxiom Corporation (Nasdaq: ACXM), MMI Investments disclosed a 5.3% stake (4.1 million shares) in the company.

In a general disclosure, the firm said they bought the shares for investment purposes and said they may communicate with company's representatives in the future. The firm said it has no current plan or proposal that relates to or would result in any of the transactions or other matters specified in clauses (a) through (j) of Item 4 of Schedule 13D, but said it reserves the right to develop such plans or proposal in the future.

MMI Investments recently disclosed a large stake in Unisys Corporation (NYSE: UIS). The hedge fund also holds a large stake in Paxar Corporation (NYSE: PXR).

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Pirate Capital Sells Its Entire Stake in Mirant Corporation (MIR)

In an amended 13D filing on Mirant Corporation (NYSE: MIR), Pirate Capital disclosed they sold their entire stake in the company. For the quarter ended September 30th, Pirate held 4.15 million shares of Mirant. They held 4.84 million shares for the quarter ended June 30th.

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New York Times (NYT) Higher On Reports Hank Greenberg Is Buying Up Stock

New York Times Co. (NYSE: NYT) is higher today following reports from the New York Post, Maurice "Hank" Greenberg, the former Chairman of AIG, has begun buying significant blocks of the stock in an effort to break the Sulzberger family's control of the company.

The Post said Greenberg has been buying hundreds of thousands of New York Times shares, but an exact amount was not known.

Morgan Stanley, another large New York Times shareholder, has been pressing the company to drop the dual-class share structure that gives the Sulzberger-Ochs family voting control.

Shares of New York Times are 6% to $24.42 in mid-day action Wednesday.

NOTE: No filing has been noted yet disclosing the purchases. If Greenberg accumlates a 5% or more stake and intends to influence the company he will be recquired to file a 13D.

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Tuesday, November 28, 2006

Metropolitan Capital Demands Kevin Moore Be Removed from Cyberonics' (CYBX) Board

Large Cyberonics, Inc. (Nasdaq: CYBX) holder Metropolitan Capital Advisors demands in a letter that the Company immediately relieve Kevin Moore of his position as director of the Company. The firm said they want Moore to return the fees and stock options he was awarded during the period when he was "improperly serving as a director".

The firm said if the company doesn't take action in 10 days, they will "bring an action in the Delaware Chancery Court to compel it to do so."

Karen Finerman and Jeffrey Schwarz of Metropolitan Capital Advisors said, "Given Mr. Moore's longstanding close friendship with Robert Cummins -- dating back to their days at Dartmouth together in the 1970's -- we are particularly disturbed that Mr. Moore, who we believe was not lawfully a Member of the Board, served on the Board's Compensation and Nominating and Governance committees and participated in the decision to not only approve the new compensation package for Mr. Cummins in 2005, despite the existing contract having nearly three more years left to run, but his severance package as well."

Metropolitan Capital together with related parties own approximately 7.33% of the outstanding common stock of Cyberonics, Inc.

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51job (JOBS) CEO Buys 633K Shares

In an amended 13D filing on 51job Inc. (Nasdaq: JOBS) CEO Rick Yan disclosed he raised his stake in the company to 30.1% (17.1 million shares).

633,118 additional Common Shares, in the form of ADS, were purchased by Yan in a series of open market purchases from November 13, 2006 to November 22, 2006 using personal funds totaling $5,077,727.72.

51job provides integrated human resource services in China.

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Monday, November 27, 2006

EXX Inc (EXX.a) Discloses 9% Stake in All American Semiconductor (SEMI)

In a 13D filing on All American Semiconductor, Inc. (Nasdaq: SEMI), EXX Inc. (Amex: EXX.A) (Amex: EXX-B) disclosed a 9.02% stake (361K shares) in the company.

EXX said it purchased the Shares based on the belief that the Shares, when purchased, were undervalued and represented an attractive investment opportunity.

In a press release on the positon, EXX said it, "hopes to consult with All American's management and Board of Directors to determine if EXX can be of assistance to All American and thereby increase shareholder value."

EXX said the aggregate purchase price of the 360,773 shares was $1,108,246.

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MMI Investments Discloses 6% Stake in Unisys (UIS)

In a 13D filing this morning on Unisys Corporation (NYSE: UIS), MMI Investments disclosed a 6% stake (20.6 million shares) in the company.

In a standard disclosure, the firm said they made the purchase for investment purposes and may communicate with the Issuer's management, directors and other shareholders in the future. The firm said it has no current plan or proposal that relates to or would result in any of the transactions or other matters specified in clauses (a) through (j) of Item 4 of Schedule 13D.

The firm said the total purchase price of its 20,621,700 shares was $133,727,480.

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Friday, November 24, 2006

The Lion Fund Raises Stake in Friendly Ice Cream (FRN) to Nearly 15%

In an amended 13D filing late Wednesday on Friendly Ice Cream Corp. (AMEX: FRN), The Lion Fund disclosed a 14.92% stake (1.18 million shares) in the company. This is up from the 12.73% stake (1 million shares) the firm disclosed in a recent filing (10/05).

The investment firm provided an update on its request to nominate its representatives Mr. Biglari and Dr. Cooley to the company's board of directors. The firm said they sent notice to the company's Secretary, in accordance with the company's by-laws, of its intention to nominate the two at the company's next stockholders meeting. The firm also said they've requested the company's stockholder records.

The firm believes that because their interest are aligned with other stockholders, Mr. Biglari and Dr. Cooley would be constructive contributors to the board.

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Wednesday, November 22, 2006

Bill Ackman's Pershing Square Liquidates Wendy's (WEN) Stake

In an amended 13G filing after the close yesterday on Wendy's International Inc. (NYSE: WEN), activist investor Bill Ackman's, though his Pershing Square Capital hedge fund, disclosed a 5K stake in the company. This is down from the 6.42 million share stake disclosed in a 13F filing for the quarter ended September 30, 2006.

Ackman was instrumental in pushing Wendy's to spin-off its Canadian Tim Horton unit, which occurred in March.

Recently, Ackman has built large stakes in book retailers Borders Group Inc. (NYSE: BGP) and Barnes & Noble (NYSE: BKS) - calling both companies undervalued.

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Northwest Airlines (NWACQ) Holder Says Stock Could Be Worth $19.75-$33.50, Wants Shareholder Committee

Bankrupt airline Northwest Airlines Corp. (OTC: NWACQ) is soaring today following a disclosure in a 13D filing from 5% holder Owl Creek Asset Management that describe possible scenarios whereby the stock could be worth between $19.75 and $33.50 per share and arguing in favor of forming a committee to represent shareholders.

The fund said, "Nevertheless, there is a growing and substantial likelihood that equity holders will receive a meaningful distribution in these cases. The Debtors have achieved cost savings with several labor groups and certain aircraft financiers as well as from industry-wide trends that are benefiting all airlines. These industry wide trends include a substantial decline in the cost of oil, potential consolidation of the industry through mergers, lower capacity, and an increased ability to maintain pricing."

Shares of Northwest Airlines are up 28% to $3.36 today. The stock has jumped from below $1 per share ($0.90) since 11/15 following news that US Airways Group (NYSE: LCC) made an $8 billion merger proposal for other bankrupt carrier Delta Air Lines, Inc. (OTC: DALRQ).

A Copy of the Letter:

Dear Diana: (Acting United States Trustee)

We represent Owl Creek Asset Management, L.P. ("OWL CREEK"). Owl Creekowns 4.4 million shares of common stock issued by Northwest Airlines Corp.("NORTHWEST"), the principal debtor in the above-referenced cases. For the reasons set forth below, Owl Creek requests the appointment of an OfficialNorthwest Equity Committee (the "NORTHWEST EQUITY COMMITTEE") to represent the currently unrepresented yet critical shareholder interests in the Northwestcases. Should you exercise your discretion to appoint the Northwest EquityCommittee, Owl Creek will serve if you select it and believes that, along withitself, there will be many other interested shareholders willing to work toprotect shareholders' legitimate economic interests in accordance with thistimely request.

As you know, little over a year ago, on September 14, 2005 (the"PETITION DATE"), Northwest and certain affiliates (collectively, the "DEBTORS")filed voluntary petitions for relief under chapter 11 of title 11 of the UnitedStates Code (the "BANKRUPTCY CODE").(1) The Debtors' cases proceed on a jointly administered basis in the United States BankruptcyCourt for the Southern District of New York before the Honorable Allan L.Gropper (the "COURT"). On September 30, 2005, you appointed the OfficialCommittee of Unsecured Creditors (the "OFFICIAL CREDITORS COMMITTEE") torepresent the interests of the Debtors' unsecured creditors. In addition to itscreditors' claims, however, Northwest has outstanding over 87.3 MILLION sharesof common stock and approximately 4.7 MILLION shares of preferred stock that arecurrently unrepresented in Debtors' bankruptcy cases. In terms of equityholders, over 37,000 separate registered record holders hold Northwest's equitysecurities.(2) As you know, with approximately 37,000 record holders, the numberof actual beneficial holders is much higher and may number in the hundreds ofthousands if not more. As in many bankruptcy cases where, as here, it ispossible (if not likely) that there will be a meaningful equity recovery,Northwest's equity securities continue to trade actively in the"over-the-counter" market at substantial valuations.

Owl Creek submits that appointment of a representative NorthwestEquity Committee is both appropriate and necessary here. In fact the Debtors'cases present, we believe, each criterion upon which your office and the courtsrely when appointing equity committees:

(a) the Debtors' cases are large and complex;

(b) the Northwest stock is widely held and actively traded;

(c) the interests of Northwest's shareholders are not otherwise adequately represented;

(d) the Debtors do not, under reasonable (non-strategic) valuations, appear to be "hopelessly" insolvent;

(e) Owl Creek's request is appropriately timed based on the status of the Debtors' cases; and

(f) the necessary costs do not significantly outweigh the concerns for adequate representation.

SEE, E.G., IN RE JOHNS-MANVILLE CORP., 68 B.R. 155, 159-60 (S.D.N.Y. 1986); INRE BEKER INDUS., 55 B.R. 945, 950 (Bankr. S.D.N.Y. 1985) (equity committeeappointed); IN RE WANG LABS., INC., 149 B.R. 1, 2 (Bankr. D. Mass. 1992)(appointing an equity committee over objections of the United States Trustee andthe official creditors committee even while debtor had negative book value ofseveral hundred million dollars); IN RE DELPHI CORP., Oral Opinion, Case No.05-44481 (RDD) (Bankr. S.D.N.Y. Mar. 22, 2006) (Hearing Transcript Mar. 22, 2006at pp. 160-161) (appointing equity committee over the objections of the UnitedStates Trustee, the debtors and the official creditors' committee where "it is undisputed that on abalance-sheet basis [that the debtors have a] roughly 6.3 billion dollar hole,or insolvency").

THE NORTHWEST BANKRUPTCY CASES ARE LARGE AND COMPLEX. These casesinvolve BILLIONS of dollars of assets and liabilities. There are severalcreditor constituencies. In addition to the Official Creditors Committee thatyou appointed, the Court has appointed a separate official committee torepresent the interests of certain retirees (the "OFFICIAL RETIREES COMMITTEE"and, with the Official Creditors Committee, the "OFFICIAL COMMITTEES"). Thesecases involve collective bargaining agreements and bargaining units, massive andhighly leveraged equipment assets, significant commodity needs (fuel) subject tonational and international pressures, substantial competitive pressures withconsolidation trends among legacy carriers, and price competition from low-costcarriers. In terms of sheer size, the Northwest cases are among the largest. Interms of relevant issues, the Debtors' cases are among the most complex, with anumber of issues directly affecting the likely recovery to equity holders.

NORTHWEST'S STOCK IS WIDELY HELD. Over 37,000 record holders hold, foreven more beneficial owners, over 87.3 million shares of Northwest common stockand 4.7 million shares of Northwest preferred stock. Those numbers are enormousand meet and exceed court-tested concepts of "widely held" equity. In fact,courts have ordered the appointment of equity committees in other chapter 11cases where the number of shareholders was SIGNIFICANTLY less than here. SEE,E.G., IN RE BEKER INDUS. CORP., 55 B.R. at 947 (court directed the appointmentof an equity committee where common stock was held by 2,148 shareholders); IN REBALDWIN UNITED CORP., 45 B.R. 375, 376 (Bankr. S.D. Ohio 1983) (court directedthe appointment of an equity committee where common stock was held byapproximately 15,000 shareholders).

NORTHWEST'S STOCK IS ACTIVELY TRADED. Northwest's shares tradeactively in the "over-the-counter" market. Over the last several weeksNorthwest's average daily trading volume EXCEEDED 11 MILLION SHARES. AndNorthwest is no "penny stock." Yesterday, Northwest was trading at $2.20 per ashare, implying an EQUITY capitalization of close to $200 million; that is, ONTOP OF over $15 BILLION in debt. In fact, Northwest's common stock traded ashigh as $3.10 per a share over the past year, implying a valuation of over $270million. Northwest's trading volume and pricing indicates a market view thatequity is, or is likely to be, "in the money." As set forth further in thisletter below, Owl Creek believes that Northwest's reasonable valuation even atthis preliminary time, drawn from the values that the market ascribes toNorthwest's competitors and the value that the recent hostile offer for DeltaAirlines implies, could exceed a billion dollars. Owl Creek suggests that $200to $270 million in CURRENT market value or over $1 billion in POTENTIAL marketvalue, attributable to tens or hundreds of thousands of equity holders,demonstrates an interest worthy of dedicated fiduciary protection.

NORTHWEST'S SHAREHOLDER INTERESTS ARE NOT ADEQUATELY REPRESENTED.Outside of bankruptcy, Northwest's board may singularly focus on itsshareholders' interests. But inside bankruptcy, Northwest's board and itsofficers have broad-based fiduciary responsibilities to every interest party inthese cases, not principally to the public investors. SEE COMMODITY FUTURESTRADING COM. V. WEINTRAUB, 471 U.S. 343, 355 (1985). In practice, boards andofficers act for and react to the creditors, as they are more senior in thecapital structure and they have United States Trustee- and court- appointed representatives with whom the boardof directors must deal. For this reason, the Debtors' directors and officers aresubject to serious conflicting loyalties and are not advocates for the publicshareholders. In fact, here, as in many cases in which it later proves wrong,the board already has taken the strategic view that an equity recovery is"unlikely" (regardless of the contrary market view). Thus, those at leasttheoretically in a position to look out for equity have said that they do not.

Likewise, the Official Committees represent creditors and do notprotect shareholders' interests. In fact, just the opposite is true. OfficialCommittees advocate for recoveries AT THE EXPENSE of equity recoveries. Seminalcases such as NATIONAL GYPSUM, K-MART, and the recently confirmed MIRANT CORP.demonstrate that creditors committees advocate for value to creditors,regardless of shareholders' entitlement. MIRANT CORP. is a case in point. TheMIRANT debtors repeatedly admonished the MIRANT court that its equity was "outof the money." The two MIRANT creditors committees repeated this mantra andforcefully litigated to restrict the equity from any recovery. The Mirant courtappointed an equity committee, and, thereafter, the debtors and the twocreditors committees forced a valuation fight to render equity without arecovery. At the conclusion of a twenty-seven day valuation trial, the MIRANTcourt held that equity was well in the money and that the estate fiduciaries hadsought instead to transfer over $600 million to creditors. SEE MIRANT MemorandumOpinion, signed November 17, 2006 at pp. 18-19, 43. Here, as in MIRANT, only aNorthwest Equity Committee can fully and fairly represent Northwest'sshareholders in these cases.

EQUITY LIKELY WILL RECEIVE A MEANINGFUL DISTRIBUTION. Here, as inDELPHI CORP., Owl Creek seeks the appointment of the Northwest Equity Committee"early in the case, as opposed to at the time a plan is to be negotiated and/orlitigated at confirmation . . . [and] it is as a result, important . . . to givethe benefit of the doubt to the movants here." DELPHI CORP., March 22, 2006Hearing Transcript at pp. 166-167. Thus you should not require Owl Creek TOPROVE NOW that there is a substantial likelihood that equity holders willreceive a meaningful distribution. These cases have not reached the planconfirmation stage. Nevertheless, there IS a growing and substantial likelihoodthat equity holders will receive a meaningful distribution in these cases. TheDebtors have achieved cost savings with several labor groups and certainaircraft financiers as well as from industry-wide trends that are benefiting allairlines. These industry wide trends include a substantial decline in the costof oil, a consolidation of the industry through mergers, lower capacity, and anincreased ability to maintain pricing. In the past twelve weeks alone, tradingprices for the Northwest bonds have MORE THAN DOUBLED from the low forties tothe mid-eighties. Here, in fact, the active trading prices of the Northwestbonds are SIGNIFICANTLY higher than were the trading prices of bonds in othercases, such as DELPHI CORP., DANA CORP., and MIRANT CORP., when their equitycommittees were appointed. Northwest's bond prices support a view that equitywill recover. SEE IN RE WILLIAMS COMM. GROUP., 281 B.R. 216, 221 (Bankr.S.D.N.Y. 2002) (solvency appears likely when bonds are trading at close to facevalue).

NORTHWEST IS NOT "HOPELESSLY" INSOLVENT. Though it is early to valueNorthwest for recovery purposes, Owl Creek submits that, based on Wall Streetanalyst reports, the trading markets value Northwest's legacy carrier peers(American, Continental, United, and US Airways) at 5-1/2 to 6 times "EBITDAR."(3) Carriers like Northwest with a higherlikelihood of being a merger candidate trade for more than 6x EBITDAR andcarriers with a lower likelihood of being a merger candidate trade closer to5.5x EBITDAR. Based on similar 2007 fuel price assumptions to those underlyingthe comparable company valuations, Owl Creek forecasts Northwest's 2007 EBITDARto be $2,700,000,000. Given a valuation of 6.0x 2007 EBITDAR, Northwest shouldhave a total enterprise value of over $16,200,000,000 at the time of itsexpected emergence from bankruptcy protection in September of 2007. With a cashbuild up of over $1,000,000,000 during the remaining pendency of the bankruptcycases, this would result in an equity value of $19.75 per share AFTER coveringall claims with interest and the preferred stock.

Furthermore, US Airways' hostile offer for Delta Airlines last week --aside from signaling directly the consolidation trend in the legacy carriermarket from which Northwest's value undoubtedly will increase -- demonstratesthe inherent value, recoverable by Northwest's equity holders, that a merger ofNorthwest with a strategic partner will create. US Airways announced that itexpects the combination to generate $1,650,000,000 of annual synergies, which is6.2% of the combined Delta/US Airways passenger sales. Assuming comparableproportional synergies to a Northwest merger with Continental (ContinentalAirlines is the most logical partner, but this analysis would be equallyapplicable to another carrier), then the synergies generated by a combination ofContinental Airlines with Northwest would be approximately $1,250,000,000annually. Valuing the company at a post-merger multiple of 5.25x EBITDARincluding one half of the synergies accruing to Northwest (the other half to themerger partner) results in an implied stock price of $33.50 per share.This is not a "what if" analysis. Experts have been calling forconsolidation for some time, and US Airway's offer for Delta Airlines suggeststhe starting point. SEE, E.G., Benjamin Silverman and Susan M. Donofrio, TWOEVENTS MAY TRIGGER AIRLINE CONSOLIDATION THIS FALL, Cathy Financial IndustryReport, September 22, 2006; Jeff Bailey, A REVITALIZED US AIRWAYS IS CREATING AMERGER BUZZ, N.Y. Times, July 31, 2006, at C2 ("The surprising early success ofUS Airways Group, the result of a merger last year, has led to somebehind-the-scenes talks among investors and airline executives that could leadto more industry consolidation in the months ahead"); Susan Carey and MelanieTrottman, MERGER TALKS BRING OUT FEAR OF FLYING, Wall Street Journal, April 21,2006, at C1 ("Most airline investors agree that consolidation would be great foran industry with too many airlines chasing too few dollars"). The value of themergers becomes immediately apparent in the change in trading prices of DeltaAirlines unsecured bonds following the November 15, 2006 announcement of USAirways' offer. The trading price of Delta Airlines bonds increased by fiftypercent in the week after the announcement, and Delta's board has neitheraccepted nor closed that transaction yet. Owl Creek believes, in fact, that Northwest is a MORE strategic asset to an acquirer than Delta Airlines due toits strong international network and its "Golden Share" in Continental Airlines.(4)

As discussed above, all of the recent developments in the Northwestcases and in the airline industry in general, demonstrate that the Debtors donot "appear to be hopelessly insolvent" or at least that it is "important . . .to give the benefit of the doubt to [Owl Creek] here."(5) The applicable legalstandard on consideration of a request for the appointment of a Northwest EquityCommittee is not whether the Debtors are insolvent, but, rather, whether theDebtors "appear to be hopelessly insolvent." IN RE WILLIAMS COMM. GROUP., 281B.R. at 220-21 (noting "there is no clear litmus test" in determining whether adebtor is insolvent and stating that the determination is "a practicalconclusion based on a confluence of factors"). Here, in particular based oncurrent market valuations, the possibility of merger transactions to unlockfurther value, and the very real risk of a NATIONAL GYPSUM, K-Mart, or theintended (but averted) MIRANT CORP. outcome, the Northwest shareholders have areal economic interest at stake in these cases, and the Debtors do not "appearto be hopelessly insolvent."

OWL CREEK'S REQUEST IS TIMELY. The Court recently granted the Debtors'exclusivity motion [Docket No. 2863] (the "EXCLUSIVITY MOTION") that extended the deadline of the Debtors' exclusive right to file a plan of reorganization and the deadline to obtain acceptances of such plan to January 16, 2007 andMarch 16, 2007, respectively. In the Exclusivity Motion, the Debtors confirmedthat the cases are large and complex, and that the Debtors have not yetfinalized their business plan. SEE Exclusivity Motion at 6-9 and 12-13. Thus, ifyou were to appoint the Northwest Equity Committee now, Northwest's shareholderswould have the opportunity to be represented effectively in the process prior toany reorganization proposal. SEE IN RE MCLEAN INDUS., 70 B.R. 852, 862-63(Bankr. S.D.N.Y. 1987) ("Committees should generally be formed at an early stageso that adequate representation can be afforded before significant bridges are crossed").

SHAREHOLDER REPRESENTATION OUTWEIGHS THE ADDITIONAL COST. A Northwest Equity Committee will necessarily impose certain expenses to the debtors'estates. But "cost alone cannot, and should not, deprive . . . security holdersof representation." IN RE MCLEAN INDUS., 70 B.R. at 860. Northwest is an enterprise with over $16 billion in value (based on current securities pricing and capitalized rents) if not more. Equity value alonecurrently exceeds $200 million, has approached $300 million, and may be in thebillions. Owl Creek submits that the Northwest Equity Committee costs will be negligible when compared to the value at issue in these cases and the value ofthe shareholder interests the Northwest Equity Committee will protect. And, aswith any retained professionals, the Northwest Equity Committee's professionalsmust comply with the strictures of the Bankruptcy Code and the United StatesTrustee's and the Court's oversight of professional fees and expenses. Here, thebenefits of official committee representation of shareholders' interests faroutweigh any minimal (under the circumstances) additional costs to the Debtors' estates.

Accordingly, Owl Creek respectfully requests that you solicit interest in the appointment of a Northwest Equity Committee at your earliest possible opportunity. We and the Owl Creek principals are available to address any questions or comments you may have at any time. Thank you for your consideration of this letter.

Sincerely,

David S. Rosner

(1) NWA Aircraft Finance, Inc. filed its chapter 11 petition sixteen days later on September 30, 2005.

(2) Information drawn from Northwest's most recent FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2006 and the DECLARATION OF NEAL S. COHEN PURSUANT TO LOCAL BANKRUPTCY RULE 1007-2 AND IN SUPPORT OF THE DEBTORS' CHAPTER 11 PETITIONS AND FIRST DAY ORDERS DATED SEPTEMBER 14, 2005 [Docket No. 10].

(3) "EBITDAR" means earnings before interest, taxes, depreciation, amortization, and aircraft rent and is a commonly used valuation measure in the airline industry.

(4) In late 2000, Continental Airlines purchased 6.7 million shares of CAL held by Northwest, representing an equity position of close to 15% for $450 million. As part of the transaction, and for the stated reason of preserving the Continental/Northwest alliance, Northwest requested the "Golden Share." Northwest's ownership of the Golden Share gives it the ability to block changes of control transactions involving Continental Airlines and a third-party major air carrier.

(5) DELPHI CORP., March 22, 2006 Hearing Transcript at pp. 166-167.

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Kerkorian's Tracinda Confirms Large Sale of GM Stock

In an amended 13D filing on General Motors Corporation (NYSE: GM) this afternoon, Kirk Kerkorian's Tracinda Corporation disclosed a 7.4% stake (42 million shares). This is down from the prior 9.9% stake (56 million shares) the firm disclosed. Rumors of a lowered Tracinda stake were rampant on Wall Street today.

On November 20, 2006, Tracinda agreed to sell 14,000,000 shares of common stock in a private transaction for $33.00 per share.

The sale follows news in October that Tracinda's representative on GM'S board, Jerome York, resigned as a director after global partnership talks with Nissan-Renault broke down. Tracinda was pushing for the partnership.

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Barington Capital Raises Stake in Pep Boys (PBY)

In an amended 13D filing after the close on Pep Boys (NYSE: PBY), Barington Capital/James Mitarotonda disclosed a 8.1% (4.4 million shares) in the company. The fund said, "Since October 2, 2006 Barington Companies Equity Partners, L.P., Barington Companies Offshore Fund, Ltd., Barington Investments L.P. and RJG Capital Partners, L.P. purchased an aggregate of 545,900 shares of Common Stock."

Yesterday, Pirate Capital disclosed it raised its stake in Pep Boys to 11.7%.

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ValueAct Capital Lowers Stake in MSC.Software (MSCS) to 3.2%

In an amended 13D filing after the close on MSC.Software Corporation (Nasdaq: MSCS), ValueAct Capital disclosed a 3.2% stake (1.38 million shares) in the company. This is down from the 3.43 million shares the investment firm disclosed for the quarter ended June 30, 2006.

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Pirate Capital Continues Liquidating James River Coal (JRCC) Stake

In an amended 13D filing on James River Coal Company (Nasdaq: JRCC), Pirate Capital disclosed a 7.4% (1.23 million share) stake in the company. This is down from the 8.8% (1.475 million shares) million share stake the firm disclosed on 11/13. Pirate held 2.34 million shares of James River Coal as of the quarter ended September 30th.

Recently Pirate disclosed that Matthew Goldfarb, a James River Coal Board member, resigned from Pirate as part of the fund's recent shake-up.

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Archer-Daniels (ADM) Discloses Large Stake in Natural Plastic Maker Metabolix (MBLX)

In a 13D filing on recent IPO Metabolix, Inc. (NASDAQ: MBLX), Archer-Daniels-Midland (NYSE: ADM) disclosed a 6.27% stake (1.22 million shares) in the company. Metabolix's IPO started trading on the Nasdaq on 11/10. The stock is currently $17.41 after pricing at $14.

Archer-Daniels said, "On November 15, 2006, concurrent with the Company’s initial public offering, ADM acquired 535,714 shares of Common Stock from the Company in a private placement at a price of $14.000 per share. On the same date, 833,333 shares of convertible preferred stock owned by ADM were converted into 681,083 shares of Common Stock of the Company. ADM originally acquired the shares of convertible preferred stock from the Company on January 19, 2006 at a price of $6.00 per share. All purchases of the Common Stock and convertible preferred stock were made from ADM’s working capital."

MBLX disclosed the ADM relationship and share transaction in its IPO prospectus.

ADM is one of the world’s largest processors of soybeans, corn, wheat and cocoa. ADM is also a leader in soy meal and oil, ethanol, high fructose corn syrup and flour.

Metabolix, Inc. is developing and commercializing environmentally sustainable and totally biodegradable Natural Plastic as a clean alternative to petroleum-based plastics.

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Is a 13D from Kerkorian on GM Forthcoming

Is an amended 13D forthcoming from Kirk Kerkorian's on GM showing he cut his stake? Here is the rumor from our rumor blog: http://stockrumor.blogspot.com/

"CNBC's David Faber makes note that Tracinda Corp/Kirk Kerkorian had announced a cash tender offer to increase his stake in MGM (NYSE: MGM). However, Faber says the real question is "Is Kerkorian Selling General Motors (NYSE: GM) Stock?", noting the significant drop in share price over the past few days and the 45 day 'quiet period' window which recently expired after Jerome York resigned from the GM board."

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Tuesday, November 21, 2006

Pirate Capital Raises Pep Boys (PBY) Stake to 11.7%

In an amended 13D filing on The Pep Boys (NYSE: PBY), Pirate Capital disclosed an 11.7% stake (6.61 million shares) in the company as of Nov 20th. This is up slightly from the 11.3% stake (6.36 million shares), the firm disclosed in a filing this morning. A quarterly 13F filing showed Pirate owned 5.62 million shares as of September 30th.

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Parlux (PARL) Holder Nussdorf Looks to Remove All or a Majority of the Board

In an amended 13D filing on Parlux Fragrances Inc. (Nasdaq: PARL), 12.2% holder Glenn H. Nussdorf disclosed a letter to the Board of Directors of the Company in which Mr. Nussdorf advised the Board of Directors of his intention to commence a consent solicitation to remove all or a majority of the members of the Board of Directors of the Company and to fill the vacancies created by such removal with individuals to be nominated by Mr. Nussdorf.

A Copy of the Letter:

Dear Board Members:
I am writing to advise you that I intend to commence a consent solicitation to remove all or a majority of the members of the Board of Directors of Parlux Fragrances, Inc. ("Parlux" or the "Company") and to fillvacancies created by such removal with individuals to be nominated by me.

As the beneficial owner of a substantial percentage of the outstanding shares of Parlux, I believe that much can be done to increase shareholder value and that it is time for immediate change at both the Board and managemen tlevels. The decline in the Company's share price from a high closing price of$18.96 earlier this year (after adjusting for a 2-for-1 split in June 2006) tothe current $6.26 level (a decrease in shareholder value of 67%), the Company'srecent disclosure of decreased sales and earnings for the quarter ended September 30, 2006, and the allegations in the recently amended class actionl awsuit that the Company improperly recognized revenues on sales to related parties, have led me to conclude that the Board of Directors is failing to actin the best interests of the Company's shareholders and is not exercising appropriate oversight of management. I am convinced that a continuation of the status quo risks a further destruction of shareholder value and, accordingly, I intend to protect the value of my significant investment in the Company through a consent solicitation to replace members of the Board of Directors.

As I have publicly disclosed in my Schedule 13D filing, I am exploring the possibility of making an acquisition proposal to acquire the Company in a business combination transaction. While I have not made a decision at this time whether to pursue such a proposal, I strongly urge the Board not to take any action (such as the previously announced and subsequently abandoned sale of thePerry Ellis brand) which would materially modify or impact the Company's business, products or assets and could adversely effect the Company's value. In addition, the consent solicitation will present Parlux shareholders with aunique opportunity to express their views on the future direction of the Company.

In view of the foregoing, I am putting each director and executive officer on notice not to attempt to usurp the rights of shareholders to determine the Company's future direction, including any attempt to sell orotherwise dispose of or surrender any of its product lines, including, without limitation, the Perry Ellis brand.

I intend to take all actions necessary to hold each director and executive officer accountable if they approve or engage in any transaction with respect to the foregoing or which is otherwise inconsistent with the best interests of the Company and its shareholders.

In addition, Mr. Lekach is aware of my serious concern about the level of payments and benefits under existing severance agreements with him and three other senior executives of Parlux. I am putting Parlux's Board of Directors on notice that no payments should be made or benefits granted under these agreements until they are subjected to a thorough review by my nominees, if elected to the Board.

Sincerely,
Glenn H. Nussdorf

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Marvin Schwartz Discloses 5.32% Stake in WCI Communities (WCI)

In a 13D filing on WCI Communities Inc. (NYSE: WCI) this morning, Marvin C. Schwartz, a Managing Director of Neuberger Berman LLC, disclosed a 5.32% stake (2.23 million shares) in the company. The stake in personal and not as an employee of Neuberger Berman.

Mr. Schwartz does not presently have any plans or proposals that relate to or would result in any of the actions required to be described in Item 4 of Schedule 13D.

The news follows recent disclosures showing stakes in WCI owned by Carl Icahn and Bill Gates.

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Pogo Producing (PPP) Higher After Daniel Loeb's Third Point LLC Discloses Large Stake

In a 13D filing after the close on Pogo Producing Co. (NYSE: PPP), Daniel Loeb's Third Point LLC disclosed a 7.2% stake (4.2 million shares) in the company. The firm had no stake in the company as of the quarter ended September 30, 2006.

In a rather standard disclosure in the Item 4 (Purpose of Transaction) section of the filing, Loeb said they may from time to time, among other things, hold discussions with third parties or with management of such companies (including the Company) in which the Reporting Persons may suggest or take a position with respect to potential changes in the operations, strategy, management or capital structure of such companies as a means of enhancing shareholder value.

Rabble-rousing investor Daniel Loeb is known for his aggressive activism with his investments.

Shares of Pogo Producing are up 7% today to $51.16 on the news.

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Pirate Capital Wants Brinks (BCO) Sale, Seat on Board

In an amended 13D filing on Brinks Co. (NYSE: BCO), 8.5% holder Pirate Capital disclosed a letter to the board of directors of the Issuer, among other things, encouraging the board to (i) take immediate steps to unlock long-term shareholder value by retaining an investment bank to explore the sale of the Company and initiate a large Dutch tender offer for the Shares, and (ii) immediately appoint Thomas R. Hudson Jr. to the board. The firm also recommended a substantial second Dutch tender offer for its stock.

The firm said its past request urging the company to an retain an investment bank to explore the sale of the Company has not been met and instead, based on management's posturing on the most recent investor call, BCO appears to be pursuing an acquisition.

In its letter the firm said, "Despite BCO's two premier security businesses, the Company has yet to be awarded a deserving multiple. While we applaud the Board's successful strategic initiatives, we believe that BCO remains an undervalued and underleveraged company. We have urged BCO to engage an investment bank to explore the sale of the Company, and we further call on the Company to immediately pursue a substantial second Dutch tender offer for its stock. If the Board agrees thatBCO shares are undervalued then it is an opportune time to initiate a Dutch tender. If the shares continue to trade at an unwarranted discount, we believe substantial value will be realized through competitive bidding and the sale process. We are confident that our proposals will unlock significant shareholder value as evidenced by the success of the sale of BAX Global and the first Dutch tender offer. Unfortunately, we have seen no progress towards the fulfillment of these shareholder initiatives."

The firm also said, "We have had meaningful conversations with investment bankers and are highly confident that a number of financial and strategic buyers would be interested in acquiring the Company at a considerable premium to the current stock price."


A Copy of the Letter:

Dear Members of the Board:

Pirate Capital LLC, as the investment advisor to Jolly Roger Fund LP, JollyRoger Offshore Fund LTD and Jolly Roger Activist Portfolio Company LTD, is the beneficial owner of approximately 4.1 million shares of the common stock of TheBrink's Company ("BCO" or the "Company"). As a long-term investor and as one of the largest shareholders, we have urged BCO to maximize shareholder value by retaining an investment bank to explore the sale of the Company. This request has not been met and instead, based on management's posturing on the most recent investor call, BCO appears to be pursuing an acquisition. We are concerned that shareholder propositions are falling upon deaf ears.

Despite BCO's two premier security businesses, the Company has yet to be awarded a deserving multiple. While we applaud the Board's successful strategic initiatives, we believe that BCO remains an undervalued and underleveraged company. We have urged BCO to engage an investment bank to explore the sale ofthe Company, and we further call on the Company to immediately pursue asubstantial second Dutch tender offer for its stock. If the Board agrees that BCO shares are undervalued then it is an opportune time to initiate a Dutch tender. If the shares continue to trade at an unwarranted discount, we believe substantial value will be realized through competitive bidding and the sale process. We are confident that our proposals will unlock significant shareholdervalue as evidenced by the success of the sale of BAX Global and the first Dutch tender offer. Unfortunately, we have seen no progress towards the fulfillment ofthese shareholder initiatives.

As one of the largest shareholders, we believe it is in the best interest of all investors to have a significant shareholder presence on the Board in order to ensure that shareholder objectives are properly deliberated. Accordingly, Pirate Capital hereby requests that I be appointed to the Board immediately. We note that the current Board and executive officers as a group beneficially owns only approximately 2.1% of the BCO shares. Pirate Capital beneficially owns approximately 8.5% of the BCO shares, or over four times as much as the combined amount owned by the Board and executive officers. We believe that a Board seat designated to Pirate Capital will substantially enhance the quality of the Boardby providing considerable shareholder interest at the Board level.

If the Company neglects to grant me a Board seat, I intend to run for election at the upcoming annual meeting. Pirate Capital also intends to submit a formal shareholder proposal, requesting that BCO retain an investment bank to explore strategic alternatives, including the sale of the Company and a large Dutch tender offer for the Company's stock. We have had meaningful conversations with investment bankers and are highly confident that a number of financial and strategic buyers would be interested in acquiring the Company at a considerable premium to the current stock price. We look forward to working with the Board to unlock significant shareholder value.

Sincerely,
Thomas R. Hudson Jr.
Manager

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Monday, November 20, 2006

Red Mountain Capital Discloses a 6.3% Stake in ABX Air (ABXA)

In a 13D filing on ABX Air, Inc. (NASDAQ: ABXA), Red Mountain Capital Partners LLC disclosed a 6.3% stake (3.66 million shares) in the company. There is no other record showing a stake owned by the investment firm.

Red Mountain said it has met with the management of ABX Air and expects to maintain a dialogue with management regarding, among other things, ABX Air’s operations, strategic direction, capital structure and corporate governance and Red Mountain’s expectation that management will pursue appropriate measures to enhance shareholder value. In addition, Red Mountain may communicate with other persons regarding ABX Air, including, without limitation, the board of directors of ABX Air, other shareholders of ABX Air and potential strategic or financing partners.

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Blue Harbour Makes Good on Reader's Digest (RDA) Investment

In an amended 13D filing on Reader's Digest Association Inc. (NYSE: RDA) after the close Friday, Blue Harbour Group, LP disclosed they sold their entire 6.6 million share stake in the company. A majority of the sales occurred after Reader's Digest announced a deal to be acquired by Ripplewood Holdings for $17 per share.

The position appears to have turned out a winner for Blue Harbour, which disclosed in July that the cost of their 6,435,400 share stake was $99,359,060, or about $15.44 per share.

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UBS AG Raises Stake in ADVO (AD) to 5.6%

In a 13D filing on ADVO Inc. (NYSE: AD) after the close Friday, UBS AG disclosed a 5.57% stake (1.77 million shares) in the company. This is up from the 618K stake the firm disclosed in a 13F filing for the quarter ended September 30, 2006.

The firm said the stake was acquired for investment and proprietary trading purposes and not with the purpose or effect of changing or influencing control of the company.

In August, Valassis Communications, Inc. (NYSE: VCI) sued ADVO to rescind its $1.3 billion merger agreement with the company based on fraud and material adverse changes, alleging that ADVO management materially misrepresented the financial health of the company and failed to reveal internal control deficiencies.

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Large Autobytel (ABTL) Holder Liberate Technologies Slashes Stake

In an amended 13D filing on Autobytel (Nasdaq: ABTL) on Friday, Liberate Technologies disclosed a 2.32% stake in the company. This is down from the prior 9% stake the firm disclosed. Also in the past, Liberate was calling for a restructuing or sale of the company.

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Friday, November 17, 2006

Lone Star (STAR)/Barington Capital Fight Wages On Ahead of Shareholder Vote on Merger

With just two weeks to go before shareholders vote on the $27.10 per share acquisition of Lone Star Steakhouse (Nasdaq: STAR) by private equity firm Lone Star Funds, dissident shareholder Barington Capital and the company continue to fight.

In an letter made public in an amended 13D filing on Thursday, Barington Capital said a financial advisor they engaged, Compass Advisers, has identified five parties that may be interested in purchasing the Company at a price higher than $27.10 per share if they are given the opportunity to review the Company’s non-public information without the requirement of having to first submit an acquisition proposal.

In a response to the the letter, Lone Star Steakhouse said they found the claims made by the firm "disingenuous and oddly timed". The company said a potential buyer does not have to submit a binding offer, making it easier than many comparable transactions. The company questioned if the "allegedly interested parties" were truly serious about a transaction.

In response to the response, Barington Capital reiterated their stance that the company was not maximizing value under the current merger agreement and said they will vote against the merger.

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Unhappy Triad Hospitals (TRI) Shareholder TPG-Axon Capital Sends Letter to the Company

In an amended 13D filing on Triad Hospitals Inc. (NYSE: TRI), 6.2% holder TPG-Axon Capital disclosed a letter to the company outlining their concerns regarding the company's strategy and performance.

In the letter the fund said, "... our concerns are not regarding broad factors which the company cannot control. We are focused on the company's strategy and execution, which RELATIVE to industry peers has delivered sub-par returns. We believe Triad's hospital assets are high quality, and generally well-positioned. As such, the company should trade at favorable valuations to industry comparables. HOWEVER, INSTEAD, TRIAD HAS REGULARLY TRADED AT A SIGNIFICANT DISCOUNT TO INDUSTRY PEERS, AND CURRENTLY TRADES AT THE LOWEST VALUATION IN THE INDUSTRY. Why? In stark contrast to its peers, Triad has achieved poor return on investment and diluted its shareholders. Unfortunately for shareholders, capital spending and management compensation have been high relative to the industry, but growth (per share) and returns have been low. We believe that it is time to put an end to this dilutive strategy, and that the Directors and management must finally begin to show discipline, and focus on creating value for shareholders."

The fund said the company should amend the composition of the board, focus on improving and optimizing existing assets, excess cash flow should be returned to shareholders through dividends and they should increase leverage significantly.

The fund believes the fair value of the stock is 25 to 50% higher than current levels.

A Copy of the Letter:

Dear Mr. Shelton,

As you know, we recently filed a 13-D with the SEC, and in the filing expressed concern regarding the company's strategy and performance. We look forward to continuing our discussions with the company, but in advance of that, we thought it would be useful to further outline our thoughts.

Clearly, the hospital industry has been facing a number of broader challenges,many of which are outside the control of individual companies or hospitals. Rising bad debt is the most significant current challenge, but anemic admission volumes and increased pressure on costs have also been meaningful factors inrecent years. Valuations for the overall industry have declined in response toconcerns about the environment. Despite challenges, many of which are cyclicalin nature, the hospital business is still one in which well-run companies cangenerate solid investment returns and significant cash flow. In fact, we believe that the current environment provides a compelling opportunity for long term investors who are willing to look through the near term noise.

Therefore, our concerns are not regarding broad factors which the company cannotcontrol. We are focused on the company's strategy and execution, which RELATIVE to industry peers has delivered sub-par returns. We believe Triad's hospitalassets are high quality, and generally well-positioned. As such, the companyshould trade at favorable valuations to industry comparables. HOWEVER, INSTEAD,TRIAD HAS REGULARLY TRADED AT A SIGNIFICANT DISCOUNT TO INDUSTRY PEERS, AND CURRENTLY TRADES AT THE LOWEST VALUATION IN THE INDUSTRY. Why? In stark contrast to its peers, Triad has achieved poor return on investment and diluted itsshareholders. Unfortunately for shareholders, capital spending and management compensation have been high relative to the industry, but growth (per share) and returns have been low. We believe that it is time to put an end to this dilutive strategy, and that the Directors and management must finally begin to showdiscipline, and focus on creating value for shareholders.

At the outset, we would note some surprise at management comments in the past two quarterly conference calls, describing (implicitly and explicitly) shareholders as a burden because of their "short term thinking". We would stress that this is not an issue of short-term vs. long-term, or profits vs. care. Rather, we believe this debate is about the importance of accountability and returns. The company's actions and comments leave it very unclear whether the management and Directors of the company are truly focused on shareholder value,as opposed to maximizing growth. Ultimately, shareholders are not a pesky burden, but the owners of the company, for whom management works, and to whom Directors owe their fiduciary duty.

STRATEGY

Three factors, in particular, are critical to optimal strategy for a hospital company. First, hospitals are ultimately an extremely local business, in which the characteristics of individual hospitals and markets are far more important than large/broad company factors. Second, hospitals are remarkably capitalintensive businesses, and can be 'money pits' if prudent capital discipline is not applied. Increasing admissions and quality of care is easy if cost/return isno object. Third, because of their local nature, hospital companies gain littlesynergy through expansion outside of existing local markets. Therefore, any acquisitions or expansions outside of existing communities must be viewed aspure investments and meet extremely high hurdles.

Local market share is a critical factor in determining pricing power. Relative quality of services, and relationships in a region, are critical in driving admissions and market share. As such, unlike many other industries, there are few real advantages of a large pan-regional or national hospital chain company. In reality, other than modest benefits in purchasing power, the primary value acorporate management can provide are strong analytical tools, chain-wide best practices in management, and (most importantly) rigorous capital discipline.Even within a specific market, growth must be analyzed very carefully. While more market share increases bargaining power with managed care companies, onehas to very carefully assess the cost of that increased market share against the expected returns. If all things are equal, high local market share is betterthan low local market share. However this does not justify unlimited spending.Instead, a company must carefully assess potential returns, and solve for optimal levels of market share relative to the required investment.

In the hospital business, one can spend virtually unlimited amounts on capital expenditures. Better facilities and enhanced technology & services are all factors that can help improve revenue, and drive admissions. However, the critical issue is whether these expenditures improve returns sufficiently tojustify the cost. A non-profit hospital spends as much as they can in order to improve care; the only real question for a non-profit is how they spend the money. A for-profit hospital, by its very nature, must act differently. It must assess whether to spend money, not just ask how. Prior to any meaningful capital expenditure, whether a facility enhancement, or an acquisition, a for-profitcompany must rigorously analyze the potential return on that investment, and assess whether the risk and cost is justified. In addition, there must becareful ongoing monitoring of those investments, to ensure that they areachieving return objectives. The best run hospital companies are painstaking and deliberate in assessing, analyzing, and monitoring return on investment for even small capital expenditures.

Lastly, expansions (whether through acquisitions, joint ventures, or new facility construction) into new markets should receive particular scrutiny. In and of themselves, they do not add any value to the company's existing hospitals and operations. Therefore, they must be viewed, purely and simply, as new investments. These investments must generate a clear and demonstrable excess return for shareholders, in order to be worth the use of precious capital and company resources. In addition, this return must be rigorously compared to the most obvious alternative - returning capital to shareholders (whether via adividend or stock buyback). Investment in new markets and hospitals must show dramatic benefit relative to the return of the company's existing business. In recent conference calls, management has referred to share buybacks as "gimmicks"and "financial engineering". We would certainly agree that buybacks are not a magical tool, to be used in all circumstances. However, we would stress that a buyback is a reinvestment in your own business, which presumably carries less risk and better value than paying premiums for new businesses. It makes no sense to buy someone else's hospitals at a premium, when you can buy your own at a discount. Either strategy has the POTENTIAL to create growth for shareholders -however the buyback has lower risk and greater certainty, while the new investment is much higher risk.

RETURN ON INVESTMENT

Ultimately, the acid test for company strategy is the returns generated for shareholders. In this regard, Triad has performed poorly. For comparison purposes, we would use the four other publicly traded general hospital companies- HCA, Community Health Systems, LifePoint Hospitals, and Health Management Associates. In addition, we have used the 2002 through 2006 period as the most sensible assessment period, since that is the period following the merger with Quorum (and also in which capital expenditures have aggressively increased).FINALLY, WE DO NOT BELIEVE IT IS SENSIBLE TO FOCUS ON GROSS MEASURES OF GROWTH, AS THESE DO NOT CAPTURE REALITY FOR SHAREHOLDERS - IF A COMPANY GROWS BUT DILUTES SHAREHOLDERS IN THE PROCESS, VALUE MAY NOT HAVE BEEN CREATED. For ashareholder, the ONLY measure of growth that is relevant is per share growth.

In the 2002 - 2006 time periods, compared to your peers, Triad has delivered lower returns than the peer group, often by substantial amounts.

- EBITDA PER SHARE: Triad has had the lowest growth in EBITDA per share, with just 3.8% growth over this period, compared to 7.7% to 20% for the peer group.

- EARNINGS PER SHARE: Triad is second to last in the peer group in EPS growth over this period. EPS growth has been 8.8%, comparable only to HMA (7.2%). However the other three hospital companies have been far higher, with EPS growth ranging from 15% to 24%

THEREFORE, WHEN ONE ACCOUNTS FOR SHAREHOLDER DILUTION, TRIAD GROWTH OVER THEPAST FOUR YEARS HAS BEEN THE LOWEST IN THE INDUSTRY. We do not believe that the asset base is structurally flawed, and of course management has had ample opportunity to optimize the assets since the spin-off from HCA. However, Triad's strategy has contrasted sharply with that of its peers in two very significantways.

- Triad has been the most aggressive company in the industry in capital expenditure spending, and new facility development

- Triad has diluted its shareholders through offerings and mergers, while other companies have balanced growth with capital return, and therefore generally shrunk their share count

Other companies have been more balanced in their investment, and have generally bought assets where strategically needed (as opposed to building newfacilities). Triad is the one of the only companies in the industry that has NEVER returned capital to shareholders, and has aggressively spent on capitalexpenditures and new construction. The end result is clear and unfortunate forshareholders - return on investment has been poor, and overall returns have been depressed.

In addition, when adjustments are made for the cost of uninsured and charity care, EBITDA margins for Triad are below average for the industry. Therefore, not only has the heavy capital expenditure program failed to deliver growth without dilution, it has also failed to improve efficiency of existing hospitals.

We would be remiss if we did not note that, despite returns that have trailed the industry, management compensation (particularly highlighted in the amount of options expense relative to earnings) is one metric that is near the top of the peer group.

MANAGEMENT CONTROLS

We have been frustrated and disappointed by the lack of disclosure from the company regarding return on investment and the analytical tools used to assesscapital spending. Given the turnover in the company's finance team, and thec omplex hodge-podge of systems, we are concerned that the company simply doesnot have the analytical tools in place to properly analyze complex investments and monitor them properly.

Rigorous analysis must be done to assess the merit of any capital expenditure.In particular, prior to embarking on expensive and large facilities development, the company must have painstakingly analyzed the risks and reward of thisinvestment. It is not sufficient that a project provide an eventual return that is adequate. The company must assess whether the time and risk involved in the project is appropriate, compared to the return achieved through share buybacks,more modest and incremental capital expenditure, or acquisitions (instead ofconstruction). Building new hospitals is generally considered to be the riskiest type of investment, and certainly has the most deferred return - without careful scrutiny, these investments can result in tremendous leakage of value. It is not surprising that Triad has been the most aggressive of the hospital companies in large scale facility expansion and construction, and is also the company with the poorest returns and growth in that period.

The recent announcements regarding bad debt are symptomatic of the company's challenges. Bad debt is an industry issue, and no company has a crystal ball with which to predict future trends. However, Triad has been particularly challenged in assessing and analyzing the problem, and has repeatedly had to make retroactive adjustments based on improper previous calculations. With more focus on integrated systems, and greater financial depth, Triad would have better ability to understand and analyze business trends, collection rates, receivables, etc. It is critical for a hospital company to have a precise understanding of its financials - without this, it cannot properly monitor andassess capital expenditures and maximize efficiency of operations.

Overall, this is not just a systems problem. We do not believe the management team or the Board of Directors has sufficient depth of financial expertise for acompany of Triad's complexity. In particular, the Board is heavily composed of accomplished academics and community leaders. We do not doubt their quality as individuals; however we are concerned about their apparent lack of qualificationto be careful stewards of our capital. A Board of Directors is not an advisory or consulting group - first and foremost, its function is to ensure that shareholder interests are being served, and its members must EACH have the fullcapability of rigorously assessing company strategy and returns.

RECOMMENDATIONS

In recent years, shareholders have not had the benefit of a single dollar of share price appreciation, dividend, or capital return. Free cash flow has been negative, drained by heavy capital expenditures. Despite those capital expenditures, growth has been the lowest in the industry, and operating margins are sub-par. We believe it is high time for the company to focus intensely oncreating and growing shareholder value.

In order to accomplish this, we believe the company should consider the following steps:

Significantly amending the composition of the board, in order to improve the depth of financial sophistication, and also to include representation from shareholders. The current board is simply not credible as a guardian of our capital.

The company should focus on improving and optimizing existing assets. It is critical that focus be placed on improving the company's analytical tools and controls. Margins must be improved, capital expenditures must be rationalized, and issues like bad debt must be analyzed carefully. Ultimately, until the current assets have been optimized and management control has been enhanced, it does not appear sensible to continually expand, and increase complexity.

Capital usage strategy should be dramatically altered. Instead of aggressive spending on capital expenditures and acquisitions, the company should reduce expenditures to levels needed to optimize existing assets. Excess cash flow should be returned to shareholders, via dividends or share buyback.

The company has the flexibility to increase leverage significantly without impairing operating flexibility, or increasing risk to imprudent levels. Rather than keeping this capacity as a `war chest', the company should instead use it to optimize the capital structure, and generate return for shareholders. With these steps, the company could comfortably implement a capital reduction of $1.0 to $1.25 billion, and still have leverage ratios and coverage metrics that would be prudent and manageable.

We believe the combination of these efforts can help improve the efficiency ofthe company's operations and assets, improve the valuation of the company'sshares (from industry trailing levels), and will ultimately significantly enhance shareholder value. If capital efficiency is increased, margins areimproved, and valuation increases to levels comparable to peers, Triad stock would be significantly higher. Poor capital discipline has led to dilution andlow growth - this in turn has resulted in a valuation lower than any of the hospital peer group. We believe the fair value of the stock is 25 to 50% higher than current levels, and that the company should commit itself to realizing this return for shareholders.

Finally, we would stress that we do not mean to be disrespectful to you, your management team, or the Board of Directors. We understand that all parties ar ewell-intentioned, and we further recognize that the industry has been facing significant headwinds. We are not generally considered 'activist' investors, and we do not repeatedly harangue management teams with unfair and aggressive demands. We believe we have a reputation as a high-quality long-term investor, and our focus is on investing in situations with significant long term potential(not just short term break-up value). However, ultimately we are shareholders,and it is our responsibility to ensure that the value of our investment is maximized in a sensible and appropriate manner.

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Atlantic Investment Management Lowers Stake in Black & Decker (BDK)

In a amended 13D filing on Black & Decker Corp. (NYSE: BDK) Atlantic Investment Management disclosed a 4.9% stake (3.37 million shares) in the company. This is down from the 4.3 million share stake the firm disclosed for the quarter ended September 30, 2006.

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Ampex (AMPX) Turns Down ValueVest Request to Buy Assets, Will Meet with the Firm

In an amended 13D filing on Ampex Corporation (NASDAQ: AMPX) yesterday, 8.3% holder ValueVest High Concentration Master Fund, which had expressed interest in acquiring assets in the company, said they received a response saying it would not be in their best interest of the company to sell the Data Systems business at this time.

The group also noted that that company's CFO agreed to meet with their representatives in New York next week to discuss ways ValueVest might be able to help increase shareholder value and the commercial utilization of the company's intellectual property assets.

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Wednesday, November 15, 2006

Gone Thursday

I will be out of the office on Thursday 11/16 and won't be able to post. I hope everyone is enjoying the blog.

Farallon Capital Discloses Confidentiality and Standstill Agreement with Mills (MLS)

In an amended 13D filing on Mills Corp. (NYSE: MLS) 10.9% holder Farallon Capital disclosed a Confidentiality and Standstill Agreement with the company.

The firm said at the request of the Company and as a condition to being included in discussions about a possible strategic transaction (if any) involving the Company, they have agreed to be subject to the "standstill" arrangements.

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SAC Capital's Latest Adjustments

Another 13F filing of interest. This one from one of the world's largest and most well respected hedge funds SAC Capital, which is run by Steve Cohen.

SAC is not a buy and hold type investor, so while interesting the stocks may not be good piggybacks:

Some positions closed out: FPL Group Inc. (NYSE: FPL) (sold 1.9M shares), Emulex Corp. (NYSE: ELX) (sold 2.3M shares), Laidlaw International Inc. (NYSE: LI) (sold 1.3M shares), Source Interlink Companies Inc. (Nasdaq: SORC) (sold 2.5M shares), Level 3 Communications Inc. (Nasdaq: LVLT) (sold 5.8M shares).

Some new positons: NTL Inc. (Nasdaq: NTLI) (added 2.5M shares), Tyco International Ltd. (NYSE: TYC) (added 1.45M shares), Pentair Inc. (NYSE: PNR) (added 1.3M shares)

Some raised positons: Business Objects SA (Nasdaq: BOBJ) (added 2.85M shares), Alcoa Inc. (NYSE: AA) (added 2.6M shares), Phelps Dodge Corp. (NYSE: PD) (added 482K shares)

Some lowered position: Inco Ltd. (NYSE: N) (cut 1.5M shares), International Paper Co. (NYSE: IP) (cut 2.6M shares), Time Warner Inc. (NYSE: TWX) (cut 5.6M shares).

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Changes in Buffett's Berkshire Hathaway Holdings

While certainly not an activist investors, Warren Buffett's moves are always newsworthy:

Here are his latest from a quarterly 13F filing yesterday.:

The firm showed a new 10 million share position in Western Union Co. (NYSE: WU).

The firm raised its stake in USG (NYSE: USG) from 10.2 million shares to 16.7 over the quarter (already known through 13D). The firm raised its stake in Lowes (NYSE: LOW) from 780K to 7 million over the quarter. The firm raised its stake in Nike (NYSE: NKE) from 2.47 million to 4 million shares. The firm raised its stake in Iron Mountain Inc. (NYSE: IRM) from 5 million to 6 million.

The firm lowered its stake in Anheuser-Busch Companies Inc. (NYSE: BUD) from 43.5 million shares to 36.4 million. The firm lowered its stake in Target Corp. (NYSE: TGT) from 5.5 million to 746K. The firm lowered its stake in Ameriprise Financial Inc. (NYSE: AMP) from 23.9 million to 19.3 million over the quarter (already known from 13G, currently at 14.72 million). The firm lowered its stake in H&R Block (NYSE: HRB) from 11.4 million shares to 10.98 million shares.

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Value Act Capital Lowers Stake in Williams Scotsman (WLSC)

In an amended 13D filing on Williams Scotsman International, Inc (NASDAQ: WLSC), Value Act Capital disclosed a 4.9% stake (2.1 million shares) in the company. This is down from the 2.52 million share stake the firm disclosed in an August 13D filing.

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Spirent Communications (SPM) Rejects Large Shareholder Proposal for Board Representation

Spirent Communications Plc (NYSE: SPM) said it considered and rejected a proposal from Sherborne Investors GP, LLC to remove the Company Chairman, the Chairman of the Audit Committee and the Chairman of the Remuneration Committee and to replace them with four Sherborne nominees.

The company said a Spirent Board proposed by Sherborne would comprise four Sherborne nominees (led by Mr Bramson of Sherborne who would become Chairman), one Lexa BV nominee, two independent non-executive directors and two executive directors.

The company said they offered Sherborne two seats on the Spirent Board, one as Deputy Chairman and one as Chairman of the Audit Committee, but this offer was rejected.

Sherborne has previously notified Spirent that it holds 130,250,000 shares in the Company, representing 14.68% of the issued share capital and Lexa BV has previously notified Spirent that it held 120,000,000 shares in the Company, representing 13.52% of the issued share capital.

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Tuesday, November 14, 2006

Icahn Shifts Positions, Adds CYBX, HLT and WCI

Activist investors Carl Ichan made the following changes in a 13F filing from his Icahn Management LP unit:

New stakes: Cyberonics Inc. (Nasdaq: CYBX) 607K shares, Hilton (NYSE: HLT) 4.06 million shares, WCI Communities Inc. (NYSE: WCI) 1.66 million shares.

No longer holding: BJ's Wholesale Club Inc. (NYSE: BJ), BKF Capital (OTC: BKFG), Cimarex Energy Co. (NYSE: XEC), Pioneer Natural Resources (NYSE: PXD), Ryland Group Inc. (NYSE: RYL), Transocean Inc. (NYSE: RIG).

Raised stakes: Time Waner (NYSE: TWX) from 49.6M shares to 55 million shares, Take Two (Nasdaq: TTWO) from 800K to 2.9 million shares.

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Major eCom (ECMV) Holders Nussdorfs Propose Acquisition of Model Reorg, A Company They Control

In an amended 13D filing on eCom Ventures, Inc. (Nasdaq: ECMV), large holder Glenn Nussdorf with his brother Stephen Nussdorf, who together beneficially owned 45.34% of the stock, disclosed a proposal for eCom to buy Model Reorg, Inc. a company they control.
The transaction proposed by Model would have the following terms:

1. Model would be acquired by the Issuer and would become a wholly owned subsidiary of the Issuer.

2. The outstanding common stock of Model would be converted into 6,396,649 shares of common stock of the Issuer.

3. Following this conversion, Glenn and Stephen Nussdorf would own an aggregate of 80.90% of Issuer’s outstanding common stock (assuming the conversion of the Subordinated Note held by them, but not assuming the exercise of outstanding options). The projected percentage ownership set forth in the Proposal Letter assumes the exercise of the options, but not the conversion of the Subordinated Note.

4. Inter-company amounts due from Model to Quality King Distributors, Inc. (“Quality King”) will be paid in cash to Quality King, or converted into preferred stock or debt of Model prior to the transaction. Any such cash payment by Model may be financed by its issuance of additional debt. Glenn and Stephen Nussdorf own two thirds of Quality King’s equity and their sister, Arlene Nussdorf, owns the balance. If any preferred stock is issued in satisfaction of this inter-company amount, it will be converted into an equal number of shares of the Issuer’s preferred stock having identical terms.

5. The Issuer, or one of its subsidiaries, will issue indebtedness to unrelated third parties to provide working capital.

6. The transaction will be subject to the satisfaction of certain conditions, two of which will be that the transaction is approved and recommended to the stockholders of the Issuer by an independent committee of the board, and that the transaction is approved by a majority of disinterested stockholders of Issuer.

According to a letter sent to eCom Ventures' Board of Directors, for the fiscal year ended October 31, 2006, the unaudited pro forma revenue of Model (giving effect to the acquisition of Jacavi) is expected to be $371 million.

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Sedna Capital Discloses 5.65% Stake in Selectica (SLTC)

In a 13D filing after the close on Selectica, Inc. (NASDAQ: SLTC), Sedna Capital disclosed a 5.65% (1.73 million shares) stake in the company.

Sedna said it currently does not have any plan or proposal which relate to or would result in the action enumerated in the instructions to Item 4, but may formulate such a plan or proposal in the future.

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ValueVest Discloses 8.3% Stake in Ampex (AMPX) and Proposed Asset Transaction

In a 13D filing after the close on Ampex Corporation (NASDAQ: AMPX), ValueVest High Concentration Master Fund disclosed an 8.3% stake (318K shares) in the company. The firm also disclosed a series of conversations with the company including its interest in acquiring the company or making a further equity investment.
The firm also proposed an alternate asset transaction to buy the company's Data Systems business and all of its intangible assets other than those patents which the company was currently licensing or litigating and their related patent families

According to the firm, Ampex said it would respond to their proposal at the next meeting of its board of directors. The firm said as of the date of the filing they have not received any further response from the company related to their proposals.

From the Purpose of Transaction (Item 4) section of the filing:

The Master Fund purchased the Shares for investment because the Investment Manager believes that the market price of the Shares does not fully reflect the underlying value of the Issuer and its assets and businesses. In particular, the Investment Manager believes that the Issuer can increase shareholder value through greater commercial utilization of its intellectual property assets.

On February 1, 2006, the Master Fund entered into a letter agreement with M.CAM, Inc. ("M.CAM"), an intellectual property rights and intangible asset financial services firm, pursuant to which M.CAM agreed to provide advisory services to the Master Fund in connection with developing and pursuing proposalsfor alternative transactions relating to the Issuer's proprietary intellectualproperty and/or the sale, transfer, or other disposition of all or a material portion of the business, assets or securities of the Issuer. A copy of this letter agreement is attached hereto as Exhibit 4 and is incorporated herein by reference. Under the terms of the agreement, certain fees are payable by theMaster Fund to M.CAM for its advisory services in certain circumstances. Inparticular, a Value Enhancement Fee is payable by the Master Fund to M.CAM ifone of the following events shall occur: (i) the value of the Issuer's stockincreases above certain specified market price points while the Master Fund is aminority shareholder of the Issuer; (ii) a Transaction (as defined in the letteragreement) is effectuated; or (iii) a definitive agreement or agreement in principle for a Transaction is executed or announced by the Issuer. In addition,the letter agreement provides that if the Master Fund at any time holds a controlling position in the stock of the Issuer, the Master Fund will use its best efforts to cause the Issuer to engage M.CAM to perform certain additional services, for certain additional compensation, as set forth in Exhibit 1 to theagreement.

On May 22, 2006, Messrs. Bakar and Cariani met with the chief financialofficer of the Issuer at the Issuer's offices. During that meeting, Messrs. Bakar and Cariani indicated that the Master Fund had accumulated a significantequity investment in the Issuer and was interested in acquiring additional equity pursuant to a strategic investment in the Issuer. The chief financial officer indicated that he did not believe that the Issuer was interested in raising any additional capital at this time but that the board of directors ofthe Issuer would consider any definitive proposal that the Master Fund wasprepared to make.

On July 19, 2006, Messrs. Bakar and Cariani had a telephone conversation with the chief executive officer and chief financial officer of the Issuer. In this call, Messrs. Bakar and Cariani once again expressed the Master Fund's interest in increasing its equity investment in the Issuer and also indicatedthat the Master Fund would like to explore the possible acquisition of the Issuer. The chief executive officer and chief financial officer indicated that the Issuer was not interested in raising additional equity capital at this time and that while the Master Fund was free to make an offer to acquire the Issuerto the board of directors of the Issuer such executives did not know whether theboard would be interested in pursuing such a transaction.

In a letter to the chief executive officer of the Issuer dated September13, 2006, the Investment Manager once again confirmed the Master Fund's interest in acquiring or making a further equity investment in the Issuer. In that letter, the Investment Manager also indicated that it would like to discuss an alternative transaction in which the Master Fund would acquire the Issuer's DataSystems business and all of its intangible assets other than those patents which the Issuer was currently licensing or litigating and their related patent families. The Investment Manager indicated that it believed that this alternate asset transaction, which would not be subject to any financing contingency or condition, could be implemented relatively quickly and would give the Issuer the opportunity to realize immediate value for its shareholders and to generate further shareholder value through its ongoing patent licensing and litigation efforts.

By letter dated September 15, 2006 sent by regular mail and received by the Investment Manager on September 21, 2006, the chief executive officer of the Issuer indicated that the board of directors of the Issuer would consider theI nvestment Manager's letter and proposals at its next meeting scheduled for early November.

By letter to the Issuer dated September 21, 2006, Investment Manager offered to meet with the Issuer's management before the November board meeting to explore in further detail the types of transactions and terms that might be acceptable to both parties. In that letter, the Investment Manager indicated that it believed that such a meeting would put management in a better position to fully inform the Issuer's board of directors about the available alternatives and put the Investment Manager in a better position to provide the Issuer'sboard of directors with its most compelling value propositions for the Issuer'sshareholders. The Investment Manager also offered to present its proposals inperson to the Issuer's board of directors at the November board meeting.

The Issuer responded by letter dated September 22, 2006 that it would respond to Investment Manager after the next meeting of its board of directors,or earlier if the Issuer's board of directors felt that to be desirable.

As of the date of this Statement, none of the Reporting Persons or Named Individuals has received any further response from the Issuer with respect tothe Investment Manager's proposals.

The Reporting Persons have become increasingly dissatisfied with the Issuer's financial results and operating performance and its unwillingness to consider and explore transactions which the Investment Manager believes can increase shareholder value by, among other things, increasing the commercial utilization of the Issuer's intellectual property portfolio. Accordingly, the Reporting Persons intend to continue to attempt to engage in discussions with the management of the Issuer and/or the members of the Issuer's board ofdirectors with respect to certain issues relating to, among others, the Investment Manager's prior and future proposals, the Issuer's strategic decision-making and the Issuer's recent financial and operating performance. The Reporting Persons may also approach other holders of the Issuer's securities in order to discuss similar matters of mutual interest, including, but not limited to, the possibility of nominating one or more persons to become a director ofthe Issuer. Each of the Reporting Persons intends to continuously review theMaster Fund's investment in the Issuer and reserves the right to change its plans or intentions and to take any and all actions that it may deem appropriate to maximize the value of its investment(s), including by, among other things, acquiring additional securities of the Issuer, disposing of any securities of the Issuer owned by it, or formulating other plans or proposals regarding theIssuer or securities of the Issuer to the extent deemed advisable by the Reporting Persons in light of their general investment policies, market conditions, subsequent developments affecting the Issuer (including, but not limited to, the attitude of the Issuer's board of directors and management andother shareholders of the Issuer) and the general business and future prospect sof the Issuer.

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Monday, November 13, 2006

HealthCor Management Sends New Letter to ICOS (ICOS) Opposing Eli Lilly Takeover

In an amended 13D filing on ICOS Corp. (Nasdaq: ICOS), 5% holder HealthCor Management, L.P. disclosed another letter sent to the company related to its view that the $32 per share merger agreement with Eli Lilly and Company (NYSE: LLY) significantly undervalues the company. The firm thinks the company is worth well in excess of $40 per share.

In its new letter sent to the ICOS board of director the group said, "The proposed purchase of ICOS by Eli Lilly is not an arm’s length transaction. The acquisition has not occurred in a market-based, competitive bid process. Therefore, in making its determination of fair value, we believe the Board of Directors must rely upon market-based comparables of similar transactions. We have clearly shown, in our initial communication to you, the flaws and distortions that are contained within the “Fairness Opinion” provided by Merrill Lynch. Without a competitive bid and without a “Fairness Opinion” that can be relied upon, the Board of Directors of ICOS is “flying blind” while trying to assess appropriate value."

In the letter, the firm noted the 101.6% premium Merck (NYSE: MRK) paid for Sirna Therapeutics Inc. (Nasdaq: RNAI); the 55.7% premium Abbott Laboratories (NYSE: ABT) paid for KOS Pharmaceuticals Inc. (Nasdaq: KOSP); and the 46.6% premium Genentech Inc. (NYSE: DNA) paid for Tanox Inc. (Nasdaq: TNOX). The firm compares this to the 18.2% premium Eli Lilly paid for ICOS.

A Copy of the Letter:

Dear Gentlemen:

HealthCor Management, L.P. (“HealthCor”) is the investment advisor to certain private investment funds that currently own 3,300,000 shares of ICOS Corporation (“ICOS” or the “Company”). This represents more than 5% of all ICOS common shares outstanding.1

On November 2, 2006, HealthCor stated in a letter delivered to ICOS our intention to vote against the proposed acquisition of ICOS by Eli Lilly & Company (“Eli Lilly”) at the upcoming shareholder meeting that was announced in the Company’s November 1, 2006 Proxy Statement.2 The reason we will take this action is that we believe that ICOS’ actual value is well in excess of $40 per share.

On November 3, 2006, we contacted the offices of Paul N. Clark, Chairman and Chief Executive Officer, and Michael A. Stein, Chief Financial Officer, to offer that we would travel to ICOS’ offices, at our expense, and discuss with management and the Board of Directors our valuation analysis and conclusions. On November 10, 2006, we again contacted the offices of both executives with the same offer.

We are concerned that ICOS has not directly responded to the serious issues we have raised especially in light of our repeated and unacknowledged offers to assist in the proper valuation analysis of the Company. We are attempting to communicate productively and in good faith with the Company’s management and the Board of Directors to openly discuss our concerns. Our objective is the realization of fair value for ICOS’ stockholders, not just incumbent management and the acquiring company, Eli Lilly.

The proposed purchase of ICOS by Eli Lilly is not an arm’s length transaction. The acquisition has not occurred in a market-based, competitive bid process. Therefore, in making its determination of fair value, we believe the Board of Directors must rely upon market-based comparables of similar transactions. We have clearly shown, in our initial communication to you, the flaws and distortions that are contained within the “Fairness Opinion” provided by Merrill Lynch. Without a competitive bid and without a “Fairness Opinion” that can be relied upon, the Board of Directors of ICOS is “flying blind” while trying to assess appropriate value.

Our analysis is based upon objective data sourced from independent investment analysts’ projections as well as from the information provided by the Company in its November 1, 2006 Proxy Statement. As set forth in the following table, since the announcement of the proposed merger with Eli Lilly, three additional transactions have been announced in the relevant healthcare universe. These transactions are all at premiums significantly higher than the premium in the Eli Lilly/ICOS transaction, as currently proposed. The Genentech, Inc. purchase of Tanox, Inc. is particularly important as there is an ongoing partnership on the target’s lead commercial product, Xolair. While ICOS’ management might believe that ICOS is a “captive target” for Eli Lilly and therefore unable to generate a fair price, the existence of a partnership did not prohibit Tanox, Inc. or Genentech, Inc. from agreeing on a fair price.

{TABLE)

We believe these additional transactions further support our case that ICOS’ actual value is well in excess of $40 per share.

We hope to hear from you so that we can have a productive discussion with you regarding the issues we have raised.

Sincerely,

HealthCor Management, L.P.

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