Thursday, June 29, 2006

Sunterra (SNRR) Holder Chapman Capital Sends Nasty Letter to Company

In a 13D filing after the close yesterday on Sunterra (Nasdaq: SNRR) 8.4% holder Chapman Capital disclosed a vicious letter sent to the company demanding the sale of Sunterra Europe and the company. The stock is reacting positively today on the news. For more 13D filing data check out's premium membership.

The Letter:

June 28, 2006

Dear Mr. Gobbay (and the Sunterra Board of Directors):

Chap-Cap Partners II and Chap-Cap Activist Partners (the “Chap-Cap Funds”), advised by Chapman Capital L.L.C., own over 1.6 million common shares, or 8.4%, of Sunterra Corporation (“Sunterra”, the “Company”). To put this ownership level into perspective, our hedge funds’ financial interest in Sunterra’s common equity now exceeds Sunterra’s Board of Directors’ ownership by a factor of 13-to-17. Despite our disproportionate ownership stake in the Company, you would be well advised not to mistake it for a vote of confidence in you (as Sunterra’s “warden”) or the balance of the Board. To the contrary, from the perspective of the likely owner of the largest block of Sunterra’s equity, Chapman Capital believes that Sunterra’s Board of Directors has treated their fiduciary duty of due care worse than they would a timeshare in a construction site Porta Potti.

Sunterra Europe is a malignant cancer ulcerating at Sunterra’s healthy North American business; accordingly, Chapman Capital demands that, at a minimum, this division be sold to the highest bidder. While some players in the European timeshare industry have cleaned up their act since faced with tighter regulation8, higher second home penetration rates combined with increased complexity9 for timeshares sales leave Sunterra Europe’s turnaround plans unrealized. Fortunately, unsubstantiated rumors have circulated that former Sunterra Europe Managing Director10 Richard Harrington,11 who once supervised Mr. Nicholas Benson, has indicated an interest in paying at least $80 million12 in partnership with Club La Costa, 13 for Sunterra Europe and its $80-85 million in calendar 2005 sales.14 Since his departure from Sunterra, Mr. Harrington15 and his business partner Ian Ganney16 have been busy spending the money17 they took out of their 1997 sale of LSI Group Holdings plc to Sunterra.18 Given Sunterra Europe’s negative 3% EBITDA margins (driven by an estimated 75% marketing expense ratio19 and a G&A percentage20 nearly twice as high as various stand alone time share companies21), a sale with a minimum price tag of $80 million (~ $4/share) should project dramatically Sunterra’s equity valuation (currently ~ $8/share), particularly given the enterprise value dilution that attends this resource-draining subsidiary.
Sunterra Board of Directors owned 128,646 shares per Sunterra 2006 Proxy Statement.
The UK’s Timeshare Act gives consumer the right to cancel a contract within 14 days of signing an agreement in Britain; UK Timeshare Consumers’ Association ( Chairman Sandy Gray reportedly takes up to 50 calls/day from worried timeshare owners.
“Point swapping,” through exchange networks such as RCI and Interval International, often involves complex options.
Mr. Harrington was named Sunterra CEO in January 2000, following the departure of CEO Steven Miller.
Mr. Harrington served as co-Chief Executive Officer with Mr. T. Lincoln Morison from January 2000, until Mr. Harrington’s return to Europe later that year. Mr. Morison resigned his position as CEO in October 2000 and assumed the position of Vice Chairman of the Board of Directors, serving thereon below T. Taylor Crandall, a money manager for the Bass family of Texas, who was named Interim Chairman in February 2000.
Sunterra’s Form 8-K dated June 1, 2006, itself acknowledged that Sunterra had “recently received a preliminary indication of interest to acquire Sunterra Europe” but that it was Sunterra’s “initial view that this offer [did] not reflect the true value of the business …”.
Club La Costa (, run by Mr. Roy Peires, is a Málaga, Spain-based “holiday club” and outright owner of 21 timeshare resorts; it is linked to US-based Resorts Condominiums Intl. (, the Cendant Corporation (NYSE: CD) subsidiary and biggest timeshare exchange network in the world with over 3,700 resort locations in 101 countries; Club La Costa reportedly generates £100 million revenue/year with 20% EBITDA margins.
Due to Sunterra Europe’s reorganization announced May 3, 2006, 2007 annual sales of Sunterra Europe are expected to be in the $50-60 million range after losing an estimated 50% of the $60 million of European vacation interest sales.
Mr. Harrington, 48, founded an estate agency business in 1980, joined LSI Group Holdings in 1991, and since leaving Sunterra has overseen Harvington Property’s projects including building 750 houses, and the Harvington Business Park in south Wales in a JV with National Power.
Mr. Ganney, 54, began his career in law and founded LSI in 1984, marketing timeshares in Spain and Portugal.
Mr. Harrington, via acquisition vehicle Citrus Hotels, purchased One Devonshire Gardens in 2002 for a reported £8 million, including the Edinburgh Residence and the 40-bedroom, celebrity-frequented Devonshire Hotel, from Residence International, a timeshare company that reportedly collapsed under £22 of debt in December 2001.
Mr. Harrington, as CEO, sold UK-based LSI Group Holdings plc (the leading developer, owner and operator of European multi-site vacation ownership resorts with a points-based system utilizing 11 resorts in England, Spain and Austria) to Sunterra (then known as Signature Resorts) for an estimated $50.6 million in stock and $1 million in cash in September 1997. LSI recorded revenues of approximately $27 million for the year ended December 31, 1996 and was debt free as of March 31, 1997. Andrew Gessow, Sunterra’s co-founder and president, spearheaded this acquisition.
Closure rates in the low single digit percentages cause marketing costs per closed timeshare sale to be extraordinarily high.
In Sunterra Europe’s quarter ending December 31, 2005, G&A totaled US$3.8 million on US$14 million of vacation interest sales and US$22 million of total sales; the balance of revenues was US$7.3 in management service revenue.
Analysts estimate normalized, steady state time share industry EBITDA margins of 10-25% after vacation interest revenue dissipation of 20-25% to CGS, 45-50% to marketing, and 10-15% to G&A.

Chapman Capital further demands that Sunterra, in parallel with the auction of Sunterra Europe, explore the full scale auction of the Company in its entirety, which we estimate to be worth in excess of $14.00 per share in a private market transaction involving a strategic or financial buyer. Various market sources have conveyed burgeoning interest from both strategic and private equity bidders interested in acquiring Sunterra Corporation in its entirety. It is our understanding that such potential bidders22 believe that, among other value enhancing exercises, they may be able to eliminate duplicative public company and other SG&A expenses that serve as putrid bile currently metabolizing nearly two thirds of an estimated $150 million in Sunterra annual pre-G&A operating income. ILX Resorts Incorporated (AMEX: ILX) and Silverleaf Resorts, Inc. (AMEX: SVF, the stock of which has risen 170% in the past year by focusing on local sales centers rather than long-shot free trips to Hawaii) run at pre FAS 152 G&A/Revenue rates of 9-14% despite Sunterra’s massively larger revenues and high end customer base. Full infrastructure in Europe and the United States (where the Las Vegas headquarters location is of questionable judgment) has led to significant and avoidable redundancies, despite Mr. Benson’s biased claims to the contrary.

Sunterra’s post bankruptcy operational and financial turnaround remains praiseworthy, despite the destruction of shareholder value at the hands of Mr. Benson’s intransigent loyalty to the faltering European division. After filing for Chapter 11 bankruptcy on May 31, 2000, listing $828 million in debts that were overwhelmed into default, Sunterra emerged from bankruptcy on July 29, 2002 with a new $300 million financing package from Merrill Lynch. Then-CEO Nick Benson beamed upon being freed from the shackles of the Bankruptcy Court, “We are now poised to re-establish the company as the global leader in the vacation ownership industry.” To his credit, Sunterra accomplished a near doubling of vacation interest annual sales since filing for bankruptcy, with the number of families owning vacation interests having grown from 260,000 to over 300,000 over the same period.23 Ignoring the plight of Sunterra Europe for the moment, the Company’s industry leading inventory purchase program has led to CGS of approximately 20% (vs. the greater than 45% level in the year of bankruptcy filing), driving higher profits to Sunterra’s bottom line. However, before Mr. Benson takes excessive credit for this Phoenix-like rebirth of Sunterra, it should be noted that Gregory F. Rayburn, a 20-year turnaround veteran and principal of the corporate restructuring advisor Jay Alix & Associates,24 was appointed Sunterra CEO and President on October 11, 2000, and is considered most responsible for restructuring Sunterra into its healthy post-bankruptcy form.

Mr. Benson’s compensation as CEO of Sunterra and former head of flailing Sunterra Europe Group Holdings seems to have no material relationship to this meretricious stewardship of Sunterra’s scare resources. The Company’s owners would be most interested to hear your explanation for why on October 13, 2005, Mr. Benson’s egregiously lavish employment agreement was extended through November 19, 2006. Not only is the up to $1.5 million annual compensation25 an indefensible amount given Sunterra’s $160 million market capitalization, but to include a clause in the letter agreement that obligates Sunterra to elect Mr. Benson to the Board as long as he serves as President and CEO added governance insult to financial injury. Now that Mr. Benson is on “paid administrative leave from all officer positions,” and thus not “serving” in any executive capacity, Chapman Capital demands that Mr. Benson be removed from the Board and placed on unpaid leave immediately. Chapman Capital estimates that $20 million of Sunterra’s $90 million in G&A could be discharged without materially impacting associated revenues, starting with cutting Mr. Benson’s $750,000 annual base salary (re-signed in late 2005), and $520,000-$750,000 cash bonus, itself formulaically tied to various statistics that may include but certainly do not emphasis Sunterra’s share price. As if Mr. Benson’s cash compensation was not enough to compensate him for failing to cure Sunterra Europe, in FY2005, the Board ornamented Mr. Benson’s wallet with $997,500 in restricted stock awards.26 Moreover, we suspect that Sunterra has been able to utilize the relatively flexible GAAP cost accounting to bury some of “Benson and Co.’s” lifestyles of the rich and infamous in Sunterra’s “advertising, sales and marketing” expense line, which itself remains well above industry averages.__________________
Blackstone Real Estate Advisors (BREA;, Colony Capital (, and Apollo Real Estate Advisors (, among other private equity leaders, have been extremely active in acquiring real estate assets and related public equity.
Sunterra arguably expanded far too rapidly from the time of its 1996 IPO to its 2000 bankruptcy, growing from nine to 89 resorts and from 25,000 to more than 300,000 owners and members during that four year period. In 1998, Sunterra changed its name from Signature Resorts, Inc.
Mr. Rayburn was formerly a partner with Arthur Anderson, where he helped to create and develop its corporate recovery services practice.
Mr. Benson’s employment agreement provides for $750,000 annual salary plus up to $780,000 in annual cash bonus based on the “attainment of quantitative performance goals agreed upon annually by [Sunterra’s] compensation committee and Mr. Benson.
Source: Sunterra 2006 Proxy Statement.

Sunterra’s executive management, which under Maryland corporate law reports to the Company’s Board, appears to have followed the Board’s example by owning less than 0.5%27 of the Company’s shares. This pathetic misalignment with Sunterra’s owners could be rectified with open market purchases, but recently demoted Mr. Benson has failed to utilize any material portion of his $1.3 million in total 2005 compensation to do so. However, I suppose Mr. Benson feels no need to spend his own money to buy Sunterra shares when the Board is willing to grant him the upside on 512,812 shares, or 2.6% of the Company, at no cost to Mr. Benson whatsoever. 28 Chapman Capital wonders if it ever crossed the Board’s collectively simple minds that by having a relatively small amount of outright stock ownership but an enormous allocation of free stock options, Mr. Benson might be induced into the reckless mentality of a gambler playing with the “house’s money” as he gallivanted back and forth to Sunterra’s money losing roulette wheel in Europe. We also wonder if the Board has considered whether the fact that Mr. Benson calls London “home” might make him less inclined to sell Sunterra Europe, and thus kill any rationale for his further involvement as the overpaid CEO of a consequently smaller Sunterra Corporation as a whole.

The Compensation Committee of Sunterra, comprised of you and co-directors Nelson and Willes, surely understands its fiduciary responsibility to a) tie pay to performance, and b) ensure that management is rewarded primarily when the shareholders receive the rewards of capital gains and not irrespective of the absence thereof. Yet, the only thing worse than a Compensation Committee paying now-terminated29 Sunterra Europe Managing Director30 David Harris $647,29231 in FY2005 for his abject failure across the pond was his being paid over $350,00032 to leave. I refuse to believe that Mr. Steven E. West (Fmr. EVP and CFO; 57,355-share/$484,650 ownership vs. $1,184,500 total 2005 compensation), James A. Weissenborn (Interim President and CEO, see Page 6 for compensation figures), Frederick C. Bauman (Vice President, General Counsel and Secretary; 13,075-share/$110,484 ownership vs. $520,993 total 2005 compensation), or Andrew Gennuso (Senior Vice President; 14,009-share/$118,376 ownership vs. $853,125 total 2005 compensation) are in the least bit inept or indolent in performing their duties to the Company’s owners given the disconcerting small ratio of their ownership stake in the Company to their annual compensation.33 I am sure they all have excellent explanations besides the fact that they receive free handouts of restricted stock and free stock option authorized by the Compensation Committee. While Sunterra’s owners may want to inform resigning CFO Steve West not to let the front door slap him on his posterior on the way out, attracting and retaining quality executive talent does not appear to be your strong point. Sunterra director Olof Nelson’s former role as a “Senior Advisor” to Richard C. Breeden & Co., “which provides Financial Advisory, Corporate Governance and Regulatory Consulting Services,” leaves him with no excuse for allowing corporate governance to run awry since Mr. Nelson’s board appointment over two years ago. Working closely with Mr. Breeden, himself formerly the head of the United States Securities and Exchange Commission, should have prepared Mr. Nelson adequately to deal with potential conflicts of interest such as one presented by a London-domiciled CEO of a Las Vegas, NV company intransigently fighting that company’s owners’ quest to sell its London-based European division.
Source: Sunterra 2006 Proxy Statement (as of December 31, 2005), which disclosed a total of 93,260 shares owned by Sunterra executive officers
In 2003, Sunterra granted Mr. Benson options to purchase 512,812 shares of our common stock under its 2002 Stock Option Plan, as contemplated by his employment agreement, at an exercise price of $15.25 per share. These options were immediately exercisable with respect to 192,305 shares on the date of grant and the remaining options vest pro rata over the 30 months beginning June 30, 2003 so that all of them are presently vested.
Source: Sunterra Form 8-K dated April 27, 2006; on May 2, 2006, Sunterra Europe and Mr. Harris entered into a “compromise agreement” dated as of April 27, 2006 pursuant to which Mr. Harris’ employment agreement dated February 23, 2004 between Sunterra Europe and David R. Harris was terminated effective April 30, 2006.
Mr. Harris served as Managing Director of Sunterra Europe Group Holdings plc from February 2004 until April 30, 2006.
Source: Sunterra 2006 Proxy Statement; Mr. Harris received FY2005 annual compensation consisting of the following: salary of $383,914, bonus of $37,004, restricted stock award of $199,500 and all other compensation of $26,874.
Mr. Harris’ “compromise agreement” stipulated that Sunterra Europe will pay Mr. Harris a lump sum of £180,000, less deductions for income tax and national insurance contributions, and the further sum of £30,000, less deductions for income tax and national insurance contributions, on the earlier of the first anniversary of the compromise agreement and a change of control of either Sunterra Europe or Sunterra Europe Limited.
Sunterra shares owned by executives valued at $8.45/share.

As Chairman of the Board of Directors of Sunterra, you cannot escape blame for weak oversight of a partially-expelled executive management team that dwelled far too long in the abyss of confident incompetence. It may have seemed like an expeditious exercise in denunciation to “direct that” Mr. Benson take paid administrative leave34 (God forbid he be forced to survive on his mere $1.3 million in 2005 compensation). On January 17, 2006, apparently to deflect yet again the Company’s top shareholder’s repeated requests for Board representation, you defended the existing Board’s competence, stating, “Sunterra's incumbent Board members have extensive business and industry experience, including detailed knowledge of the Company and the vacation ownership industry. They share a strong commitment to optimizing Sunterra's performance strategically, operationally and financially, and thereby building value for all our shareholders. We believe that the addition of a board member with extensive and complementary marketing and hospitality industry experience will benefit both the Company and its shareholders.” However, for many months, Sunterra’s Board has acted out a series of sham indulgences of Sunterra’s former top owner group, which had communicated publicly to the Board its reasonable critique of Mr. Benson’s Oscar award winning Pollyanna performance every time the curtain rose on Sunterra Europe. Sunterra’s Board, along with its connected-at-the-hip management team, may have become insensitive to the sheer agony being felt by these owners due to the Board’s near failure to qualify as owners themselves.

Chapman Capital believes that your professional background at Conseco and elsewhere renders you poorly qualified to chair Sunterra’s Board of Directors. Your employment as Conseco’s EVP for Strategic Business Development and member of CEO Gary “Dough Boy”35 Wendt’s senior staff terminated abruptly in March 2002 after only one year’s service, during which brief period Conseco’s stock plummeted from approximately $14/share to $4/share en route to becoming worthless via Conseco’s bankruptcy filed several months later. With Conseco having spiraled toward Chapter 11 during your executive tenure, combined with your lax oversight of Mr. Benson and his European fiasco, I am hard pressed to understand how you could expect Sunterra’s owners to sleep well at night with you at the helm of their company. What may be more alarming is the apparent decay in your professional standards over the last fifteen years, deduced from your commentary that we have obtained from April 2001.36 It is unfortunate that you and the Board seem to lack the energy and focus that the young, 38-year-old David Gubbay possessed, as seen when you described why you still lived in an apartment: “I'm single and spend a lot of time at work."37 More relevant to Sunterra’s current plight, you were quoted as stating, “There were high-flying companies in the 80s, but in the 90s, people want stability, predictability, a quality company with established relationships that you know is going to be there when you have a claim.” At the risk of insulting you by stating the obvious, in the 2000s, people want stability, predictability and a quality company” as well, and in this endeavor, as Chairman of Sunterra’s Board of Directors, you have failed miserably to deliver.
Mr. Benson was directed to “take paid administrative leave, to which he agreed, pending the results of the previously disclosed investigation by the Audit and Compliance Committee of the Board into various allegations …” on June 22, 2006.
Credit for Mr. Wendt’s “Dough Boy” nickname belongs to Mr. Daniel S. Loeb, who reportedly profited handsomely from Conseco’s revaluation during bankruptcy proceedings.
Source: Mississippi Business Journal, dated April 29, 1991.
In the same article, Mr. Gubbay established his status as a “player” when he told the reporter that “calls from interested females would be welcome.”

Though Mr. James Weissenborn was just appointed Interim CEO and President, as a director of the Company for over two years38 he is culpable in part for the Board’s willingness to let Mr. Benson’s baby bleed Sunterra into a single digit stock price. Our preliminary investigation of Mr. Weissenborn’s professional background leaves us dubious as to his ability to execute any turnaround plan, no matter how facile the task. In our view, decamping CFO Steven West also had little confidence in Mr. Weissenborn’s ability to maximize shareholder value, as Mr. West recently forgave the unvested portion of his 190,000 stock options (struck at $15.25/share) and forfeited 30,000 restricted, unvested shares (worth nearly $300,000 at the time of his June 21, 2006 resignation notification). Formerly the treasurer and vice president of business development for Pulte Homes, Inc. (NYSE: PHM), president of Pulte Financial Companies Inc. and a CPA with Arthur Andersen, Mr. Weissenborn should have possessed sufficient experience in tax matters to handle the Spanish Inquisition in a more deft fashion. Moreover, Chapman Capital is troubled by Mr. Weissenborn’s resume, including his abrupt departure as CFO of from Ilitch Ventures, Inc.39 in September 1999 only six months after assuming that position. After an apparent hiatus from employment, some five months later it was announced that Mr. Weissenborn was forming Mackinac Partners as an incubator for Michigan-based startups with Mr. Paul Tobias, who had just reached a settlement with Comerica over the latter’s “ouster”40 as CEO of Munder Capital. To compensate (in part)41 a man with this “pedigree” and lack of timeshare management experience, you and the rest of the Board determined it fair to spend Sunterra’s owners’ money to the tune of $900,000 annually,42 plus up to 100,000 shares of restricted stock (valued today at over $800,000), plus “reasonable out-of-pocket expenses,”43 more than the salary of Bluegreen Corporation’s CEO ($500,000 salary on a $350 million market capitalization). This latest deal (disclosed just yesterday) follows a June 5, 2006 agreement by Sunterra to pay Mackinac $85,000/month (subject to upward/downward adjustments based on the actual hours of work performed), plus out-of-pocket reimbursement to provide advisory and management services to Sunterra Europe (arguably a job that Mr. Benson was being paid handsomely to oversee, at a minimum). Mackinac Partners also was retained to perform consulting services to the Company during its bankruptcy and post-emergence period, taking in nearly $2 million for related efforts. Essentially, Mr. Weissenborn and his partners at Mackinac have been, and will continue to be paid, a king’s ransom while Sunterra’s owners remained confined in a single digit dungeon.

Unless you or Audit Committee members Messrs. Dickerson (Chairman), Nelson or Willes have illicit or negligent acts you desire to keep ensconced from replacement auditors, Sunterra must replace Grant Thornton LLP as its financial auditors immediately. As recently as February 22, 2006, when you assembled Sunterra’s owners for the annual meeting of stockholders in Orlando, Florida, you recommended “the ratification of the appointment of Grant Thornton LLP as the Company’s independent registered public accounting firm.” Yet, only one month later on March 21, 2006, Sunterra, “upon recommendation and authorization from the Audit and Compliance Committee of Sunterra’s Board of Directors, dismissed44 Grant Thornton LLP45 (“Grant Thornton”) as the Registrant’s independent registered public accounting firm.”46 Sunterra’s Board’s disrespect of the Company’s owners was evident even in this crucial filing, as the Company waited a full week until March 27, 2006, to inform its owners of this material event. At that time over three months ago, Sunterra stated that it “ha[d] begun the process of evaluating several firms to replace Grant Thornton,” adding that “[o]nce this evaluation process yields a decision, another Form 8-K will be issued.” Yet, as you and your accomplices on the Board appear to be taking your time resolving this issue, Sunterra’s owners have lost nearly half the market value of their investment.47 Sunterra’s owners should not and shall not tolerate the Board’s failure to retain rumored Grant Thornton replacement Deloitte & Touche, a task that should be facilitated by newly promoted Sunterra CFO Robert Krawczyk, who was employed there from 1995 to August 2004 and most recently as a Senior Manager specializing in the timeshare industry. With members such as the former CFO of Caremark Rx, Inc. and Aetna U.S. Healthcare (Mr. Dickerson), former treasurer of Pulte Homes, Inc., CFO of the holding company for Little Caesars, and CPA with Arthur Andersen (Mr. Weissenborn), and former CFO of ISCO International Inc. (audited by Grant Thornton; AMEX: ISO; Mr. Willes), Sunterra’s Board should have no problem utilizing its accounting network to replace Grant Thornton. The final resolution of the “Spanish Inquisition” has been estimated at four-six weeks from now, an excessive amount of time in our view given that by your own admission48 Sunterra was made aware of the former Spanish employee’s withholding tax allegations on December 9, 2005, nearly seven months ago.
Mr. Weissenborn was named to the Sunterra Board of Directors in April 2004, when he and Messrs. Dickerson and Nelson replaced retiring directors Messrs. Joseph Jacobs, Bradford T. Whitmore, and Frederick Simon.
Ilitch Ventures, Inc. is the holding company for Michael and Marian Ilitch that oversees Little Caesars Enterprises Inc. and their other companies.
Source: Detroit Free Press. See further
Sunterra engaged Mackinac Partners as of June 5, 2006.
Source: Sunterra Form 8-K filed June 27, 2006; Payment is made in $75,000/month installments, subject to a $200,000 minimum and $900,000 “make-whole lump sum cash amount” of $900,000 based on the initial six-month initial engagement period.
Ibid., out-of-pocket expenses include commuting, temporary housing and legal fees.
According to sources, Sunterra has claimed that Grant Thornton’s March 21, 2006, dismissal originally was unrelated to the Spanish Inquisition, but instead derived from the Company’s determination that an auditor more familiar with timeshare accounting would be preferable to Grant Thornton’s Los Angeles office.
Chapman Capital supports the March 21, 2006, dismissal of Grant Thornton given the Company’s testimony (via Form 8-K/A filed April 10, 2006) that Grant Thornton was a) “informed … of the receipt of such email and the nature of the allegations” [emphasis added]), and b) advised “orally and in writing” that Sunterra’s management “had submitted the allegations made by the former employee to its internal auditors and in-house legal counsel for investigation and follow-up” on or about December 12, 2005, but Grant Thornton has failed to take responsibility for its not having “previously been provided with this email [emphasis added], or the specific allegations being made by the previous employee during either [its] audit of Sunterra Corporation’s financial statements for the year ended September 30, 2005 or when [it] performed interim review procedures on the Company’s financial statements for the quarter ended December 21,2005.” Obviously, it was incumbent upon Grant Thornton at a minimum to request a copy of “the email,” a claim that it apparently has not made at any time.
Source: Sunterra Form 8-K dated March 28, 2006.
Sunterra’s common shares closed at $14.34 on March 27, 2006 vs. their market value of approximately $8.00 at of the date of this letter.
Source: Sunterra Form 8-K/A dated April 10, 2006.

The velvet-gloved disrespect shown to major Sunterra owners and prominent real estate tycoons possessing such surnames Zell and Pritzker shall not be tolerated by Chapman Capital. Guided by tenacious John D. Ziegelman’s CD Capital Management, LLC, this investment group has beseeched you for six months to make the obvious strategic move of amputating hemorrhaging Sunterra Europe and install on the Board a highly qualified owner representative to ensure the surgery is successful. Instead of displaying the proper reverence for these esteemed Sunterra owners, you engaged in Corporate America’s old-school game of “Dodge and Defer.” However, our Schedule 13D filing is not being made today by a coalition of the willing tainted by a timorous member who may lose his nerve, cowardly fleeing this new world of shareholder activism. To the contrary, Chapman Capital will not allow you to pretermit its demands for a sale of the Company. Our firm intends to initiate a full scale investigation of you and the balance of the Board, utilizing an in-house private investigator (and former Marine has returned from battle in the Balkans) who will be directed to shadow your past, present and prospective activities as they potentially affect our ownership interest in the Company. We may seek to obtain intimate knowledge of all aspects of your life that may indicate an adverse effect or risk to our investment. In essence, you should live and breathe under the cloud that your past failures to regulate Mr. Benson have subjugated the Board and executive management into a state of perpetual audit.

Any takeover defense by Sunterra’s management counterclaiming that Chapman Capital is “attacking” or otherwise adverse to the best interests of the Company (as compared to its management’s careers) is patently preposterous. On behalf of our own partners and shareholders, Chapman Capital has expended nearly $12 million to purchase over 8% of the Company, ample incentive to protect rather than punish the investment. Yet, despite a virtually unblemished activist track record and near doubling (on average) of our targets’ stock prices following fifteen previous campaigns of “Owner Liberation,” I have been confronted repeatedly with three identical management/director defenses. Accordingly, in order to head off certain tutelary tactics on your part, I hereby articulate Chapman Capital’s rebuttals to the baseless accusations I anticipate:

Baseless Accusation #1: Chapman Capital has made personal attacks against the Company and its management;

Cogent Rebuttal #1: The fustigation contained herein targets exclusively Sunterra management and directors’ professional actions or inactions (i.e., failure to sell the European division). We are entirely complimentary of the Company’s products, services and non executive employees, while we neither know nor care little about the personal lives, habits or attributes of Sunterra’s management or Board to the extent such deportment does not affect our investment in the Company. Once again, criticism of a person’s behavior in his capacity as a professional fiduciary does not constitute a personal attack.

Baseless Accusation #2: Chapman Capital is acting in concert with other Sunterra owners;

Cogent Rebuttal #2: No member of Chapman Capital has engaged in any prohibited discussion or alternate form of communication regarding Sunterra with any other owner of Sunterra. Moreover, should Sunterra General Counsel Frederick Bauman take a few minutes to review Securities Exchange Act of 1934, Section 13(d)(3) and related Rule 13d-3, he will realize that legal constitution of a “group” requires the exceptionally high hurdle that “two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding or disposing of securities of an issuer,” with the list of beneficial owners belonging to such group only including “any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares voting or investment power” in the Issuer. Lastly, as I am sure Sunterra’s lawyers will inform you, since 1992,49 two shareholders of any size, amounting to any combined percentage of Sunterra, can debate or otherwise discuss amongst themselves the Company’s merits and pitfalls, intentions or expectations regarding matters of his/her own portfolio management, research, trading, or corporate governance involving the Company. Thus, at the risk of being officious, please take this word of advice: when the angry masses inevitably come huffing and puffing on the door of 3865 West Cheyenne Avenue, crying wolf pack will only enrich the Company’s attorneys and delay the unavoidable destiny a public company whose majority ownership wants it sold to the highest bidder.

Baseless Accusation #3: Chapman Capital seeks short term, “quick-buck” profits at the expense of long term shareholders;

Cogent Rebuttal #3: Sunterra’s long term shareholders seem to have paid dearly for believing in your long term plans for the Company. One by one, whether it be 6% shareholder Heartland Advisors or one of a handful of others that punted their ownership stake in just the past week (to Chapman Capital and others), your owners seem to have imbibed Nick’s Long-Term Value Cool Aid and now have “fool poisoning.” Clearly, after expending scarce corporate resources on the Boston Consulting Group review and an extended period of failed growth strategies for Europe, Sunterra’s distressed stock price speaks for itself. Moreover, we look forward to transitioning our ownership into what the U.S. government defines as “long-term” status on Day 366 of our holding period. Nothing would please our firm more than selling our entire position above $14/share, as legally “long-term shareholders,” at the conclusion of a successful auction in 2007.

If our ownership stake in Sunterra leaves you tossing and turning through sleepless nights, we recommend that you pick up a copy of insomnia-killer The Modern Corporation and Private Property by Adolph Berle and Gardiner Means. Printed 21 years before you were born, this corporate governance suspense thriller spells out Berle and Means’ view of how modern capitalism is characterized by pervasive oligopoly and the separation of management from ownership. For a decade now, I have lamented publicly via Schedule 13D filings how fragmented equity ownership converts capital-risking “Owners” into un-concentrated, faceless, DTC-coded “shareholders.” In this conflicted world of “Agency Capitalism,” a board and its hired hands (together, the “Agents”) conveniently lose sight of the most important fact of their corporate lives: the Agents work for the Owners, and should such Agents differ in opinion from the majority of Owners regarding strategic and operational direction, it is incumbent upon those Agents to convert dissident Owners to management’s disparate views rather than simply state, “We possess more complete information and/or better judgment than the Owners who hired us.” Importantly, for the Agents’ intransigent approach to have any legitimacy, this “complete information” must be material in its relevance to a rational investor in his making a decision to buy or sell the company’s shares. If such “information” is in fact “material” by the SEC’s definition thereof, then under Regulation FD the Company has a responsibility to make “fair disclosure” of any such information promptly via an 8-K filing (possibly accompanied by a press release), thus feeding the process of informing Owners of any material developments that the Agents feel is creating deficient Owner comprehension. In essence, Agents must make their alternate case public and subsequently convince the Owners that their own views are either out-of-date or simply irrational. We are watching this play out now in the battle for Board control of H.J. Heinz Company, as both incumbent and agitator have campaigned their cost cutting platforms to the entire Ownership base. Yet, if Agents truly were beholden to public company Owners rather than the executives to whom they often owe their directorship in the first place, there would be no need for proxy contests whatsoever as directors exercising due care would mediate the conflict between management’s plans and those of the Owner majority. While such mediation requires a director remaining able and willing to communicate with Owners, any director unable or unwilling to commit such time to fulfill his fiduciary duties simply should resign his directorship.__________________
In 1992, the SEC, under pressure from CalPERS et. al., revised its proxy rules to allow shareholders to communicate with each other without going through elaborate and expensive filing procedures. See Exchange Act Release No. 31326 (Regulation of Communications Among Shareholders; Oct.16, 1992), 57 Fed. Reg. 48276.

I must reiterate that Chapman Capital has absolutely no interest in obtaining Board seats at Sunterra Corporation. As noted in our recent Schedule 13D filing in another shareholder-unfriendly public company,50 we have no interest in being shackled by the membership rules of a Club Sunterra “insider”. Chapman Capital is a “Berle and Gardiner Shareholder Activist,” yearning for the ephemerally salubrious separation of management from ownership. To be honest, I begin to retch at the image of my flying into Las Vegas to attend a board meeting as a minority director outweighed by the group-think driven crew listed in the addressee section above. I have nightmares involving my sitting across from Mr. Benson as he offers me tea and biscuits just before expounding his evidence-free, “long-term” business judgment regarding the imminent “European turnaround.” I ponder why any Owner, such as CD Capital, should become fearfully compelled to have its representative serve on the Company’s board of directors - you and the rest of the Sunterra gang, according to “B&G”, are being paid cash of $41,250 - $71,000 per year,51 plus $40,000 per year of “stock-based compensation”52, to maximize (and certainly not destroy) the value of the Owners’ investments. Essentially, the Owners gave Mr. Benson a lease on Sunterra, but that lease ran out Friday, June 23, 2006, when you and the rest of the Board belatedly sent Mr. Benson home to ponder his failure as CEO. On that day, when your and Mr. Benson’s ability to point to the “long term shareholders” for support lapsed as their ownership interests were puked into a market valuing Sunterra’s shares at their immediate post bankruptcy level,53 the “two minute warning” on your career as a public company fiduciary began ticking away. I pray you do not rest peacefully at night dreaming of a world free of proxy fights. Should another shareholder determine to follow our lead, “shadow 13D” our filing, and propose an alternative slate of directors, consider your eviction notice having been served.

In conclusion, Chapman Capital, on behalf of what it believes is a majority of Sunterra’s owners, demands that the Company’s Agents consummate an auction of Sunterra Corporation. As a microcap public company forced to wade through public beach waters infested with the dorsal fins of Messrs. Sarbanes, Oxley, and Chapman, Sunterra should be able to command a massive premium (to public market) valuation as part of either a vertically or horizontally combined strategic buyer, a financial buyer capable of obtaining management accountability and performance unattainable when management knows public equity is either faceless (small, non-demanding “shareholders”) or feckless (large, “flight over fight” owners). While the sale of Sunterra at our estimated valuation may not be the lottery ticket to which Mr. Benson has become accustomed54 while at the Company, I am sure you realize that Mr. Benson has only himself to blame any prospective expiration of such options in “out of the money” form.


/s/ Robert L. Chapman, Jr.

Robert L. Chapman, Jr.

On June 8, 2006, Chapman Capital filed a Schedule 13D on Carreker Corporation, a public company mismanaged with distinction by CEO Denny Carreker.
Source: Sunterra 2006 Proxy Statement, based on FY2005 “Compensation of Directors”.
Ibid.; a director who is also an employee of Sunterra does not receive additional compensation for service as a director.
In May 2003, Sunterra common shares traded in the range of approximately $7 to 9.
Due to the out-of-the-money, $15.25/share strike price on his half a million stock options, any acquisition of Sunterra below such strike price would render those particular options worthless.

Wednesday, June 28, 2006

Vector Capital Lowers Offer for Watchguard Tech (WGRD) to $4.65

In an amended 13D filing with the SEC on WatchGuard Technologies Inc. (Nasdaq: WGRD), 9.4% holder Vector Capital said after an extensive due diligence investigation they are lowering their offer for the company from $5.10 to $4.65 per share, subject to the satisfactory completion of confirmatory due diligence and definitive agreements.

Monday, June 26, 2006

Sandell Asset Management Discloses 9.62% Stake in Southern Union (SUG), Urges Steps to Maximize Shareholder Value

In an 13D filing this morning on Southern Union Company (NYSE: SUG), 9.62% holder Sandell Asset Management disclosed a letter sent to the company's Board of Directors outlining steps they believe the company could take to maximize shareholder value.

Among the groups suggestions were that the company: 1. create a tax advantageous master limited partnership, 2. continue to sell the remaining local gas distribution utilities, and 3. raise the annual dividend to $1 per share to bring the Company's dividend policy more in line with peers, and consider putting itself up for sale.

Thursday, June 22, 2006

MSD Capital Raises Stake in School Specialty (SCHS) to 12.1% - 13D

In an amended 13D filing on School Specialty Inc. (Nasdaq: SCHS), MSD Capital disclosed it raised its stake in the company to 12.1%. The firm said since the Amendment No. 1 to Schedule 13D was filed with the Commission on April 13, 2006, they have acquired an aggregate of 616,200 shares of Common Stock in open market transactions for an aggregate purchase price of approximately $19,855,000.

NOTE: MSD Capital, L.P. was formed in 1998 to exclusively manage the capital of Michael Dell and his family.

Wednesday, June 21, 2006

Loeb Partners Lowers Stake in Onyx Software (ONXS) To 8.35% - 13D

In an amended 13D filing (#5) on Onyx Software Corp. (Nasdaq: ONXS) today, Loeb Partners and affiliated funds disclosed a 8.35% stake in the company down from the 9.81% stake disclosed on Aprl 20th (amendment #4). In the April filing, the group demanded two board seats and said they will urge the company to negotiate a definitive merger agreement with CDC Corp (Nasdaq: CHINA) at a premium. NOTE: CDC raised its bid for ONXS yesterday - $4.85 per share in cash - or - $5.00 per share comprised of 50 percent (or $2.50) in cash and 50 percent (or $2.50) in registered Class A Common Shares of CDC.

Thursday, June 15, 2006

Third Point LLC Raises Stake in Nabi Biopharm (NABI), Sends Letter to Board to Maximize Value

In an amended 13D filing on Nabi Biopharmaceuticals (Nasdaq: NABI) Daniel Loeb's Third Point LLC disclosed a 9.5% stake in the company, up from the 8.7% disclosed on 04/27. The group sent a letter to the Board of Directors of NABI which, among other things, calls on the Board to commence a public process to maximize value.

A copy of the letter disclosed in the filing:

June 15, 2006

Mr. David L. Castaldi

Geoffrey F. Cox, Ph.D

Mr. Peter B. Davis

Mr. Richard A. Harvey, Jr.

Leslie Hudson, Ph.D.

Ms. Linda Jenckes

Mr. Thomas H. McLain

Mr. Stephen G. Sundova

rc/o Mr. Thomas E. Rathjen

Vice President, Investor Relations

Nabi Biopharmaceuticals

5800 Park of Commerce Boulevard, N.W.

Boca Raton, Florida 33487

To the Board of Directors of Nabi Biopharmaceuticals:

As one of the largest shareholders of Nabi Biopharmaceutials ("Nabi" or the "Company"), I am shocked that management has failed to contact us directly regarding our letter of April 27th and has refused to address any of the issues therein. We submitted our proposal in good faith and we had looked forward to a prompt and thoughtful reply. Instead we received a terse note dated May 1, 2006 which addressed our specific issues and concerns in a perfunctory and platitudinous manner. Frankly, we did not expect this inexplicable level of insouciance and disrespect for such significant shareholders.

Rest assured: our silence since receiving your flaccid response should not be interpreted as reduced focus on our position in Nabi, nor diminution in our resolve to see Nabi undertake an immediate formal and public process to maximize shareholder value. Perhaps management and its cronies on the Board have deluded themselves into thinking that Third Point would be placated by the unsupportable statement in the note that "[t]he Board of Directors and senior management team have developed and are effectively executing on a strategic business plan...." Maybe you thought we would "go away" or sell our position in frustration. To the contrary, each day that passes without action by management increases our resolve. In fact, for the reasons outlined below (specifically, our knowledge that there is significant current interest in purchasing Nabi, either in components or as a whole) we have increased our already-substantial stake in the Company during this time.

We are further alarmed by your apparent misrepresentation of the voting results at the Company's 2006 Annual Meeting of shareholders. Whereas you reported on May 12th that 74% of the Company's shares were counted towards a quorum at the annual meeting, and that 64% of the outstanding shares were voted in favor of your directors (an extremely weak "vote of confidence" by the way), Knott Partners Management, LLC, your largest shareholder, subsequently stated publicly that its shares were erroneously counted towards the quorum. Given this, the fact that roughly half of our shares were not acquired before the record date, and that this was apparently the case with several other large shareholders as well, you were quite lucky to have your uncontested directors elected by a majority of the shares outstanding.

Your luck may be running out, since much of your shareholder base appears to have turned over recently (judging by the volume in the shares and SEC filings over the past few months) and since investors have had more time to understand the byzantine process of successfully preventing their shares from being represented at a meeting. Based on our conversations with other shareholders, and the outcome of the May 12th vote, we strongly believe that if the vote were retaken today you would not achieve a quorum, and that substantially less than half of the shares would cast an affirmative vote for the current directors.

Despite this, you hide your heads in the nearest warm aperture in an apparent "ostrich defense" and ignore your shareholders (the top three now owning over 28% of your shares in aggregate) in the hope that the Company's owners will go away before your next annual meeting. We want to be clear that while the May 2006 Annual Meeting might have bought you time, unless a process is put into place to maximize shareholder value well prior to the next annual meeting we will work assiduously between now and then to ensure that you will have ample time to pursue your golf games and to enjoy the Florida sun thereafter. While you have ignored shareholders, we have not failed to notice that since your election the stock is down over 20% - with barely an uptick along the way. We believe that the marketplace is speaking loud and clear.

Mr. McLain has paid only lip service to the notion that management serves at the pleasure of the owners of the Company (i.e., the shareholders), but no substance supports his sanctimony. You, the Board of Directors, are no doubt well-aware that it is your legal duty to look out for the best interests of shareholders (although your previous actions, including the suspect retention program that you approved recently - a disproportionate share of which inexplicably went to Mr. McLain - throws this into question).

As such, we have to assume (1) that you are aware that there is currently significant interest in various pieces of Nabi (all of your marketed products, some of your developmental products, and the plasma business) and in the Company as a whole - which Mr. McLain undoubtedly well knows, and (2) that you are currently seriously considering this interest as a means to maximize the value of NABI stock in the near-term without incurring all of the risks and uncertainties that your many-year, high-risk strategic plan entails. Should Mr. McLain not have relayed the recent expressions of interest in all aspects of the Company to you, or should the apparently onerous and unusual confidentiality agreements that Nabi is asking potential acquirers to sign have kept some parties out of the process, feel free to give me a call to learn more about the outside interest in purchasing Nabi or its various assets.

To summarize: (1) We do not believe that you or your long-term strategic plan have the support of a majority of current shareholders, (2) ignoring your largest shareholders is not a workable strategy, and (3) we are aware of current significant and serious interest in purchasing all or parts of your Company as, we believe, is Mr. McLain. Accordingly, we call on you again to discharge your fiduciary duties to shareholders and immediately hire an investment bank with which you do not have a pre-existing relationship (which should hold true for the new relationship banker as well) to commence a public process to maximize shareholder value. We are not asking that you commit to any specific outcome, only that you explore all possible value-enhancing options fully and openly, so that all of the Company's owners can judge them on risk and time-adjusted metrics versus your current plans.

Neither you nor the Nabi management team has earned the right to unilaterally embark on another multi-year program that puts shareholders at significant risk and is unlikely to yield results, positive or negative, within an acceptable timeframe. Both current management and the majority of the Board have presided over a virtually unbroken string of missed earnings estimates, failed milestones, trial failures, etc. Mr. McLain has continually trumpeted a new era for Nabi since taking over as CEO three years ago. Sadly, all shareholders have gotten is "more of the same," while Mr. McLain has, during his tenure, managed to foster poor relations with several other management teams in the industry that we are aware of - to the detriment of Nabi and its shareholders (indeed, the CEO of a much-larger biotech company took the unheard of action of singling out Nabi at a recent industry conference for being "mismanaged" - apparently because of the low regard he has for Mr. McLain and his managerial abilities). Unfortunately, the Nabi Board is no better. Of the eight Nabi Board members, only one has seen NABI stock rise during his time on the Board, and then by a paltry cumulative 7% over 5 1/2 years. Put differently, the eight Nabi directors have served an average of 6 1/2 years on the Board, and the stock is, on average, down 35% during their tenures. Of the public companies that the current Nabi directors have been involved with, either as senior managers or directors, the overwhelming majority have been significant money losers for the shareholders of those companies during their tenures - some of them spectacularly so. Suffice it to say that Nabi has added two Board members overthe past year. One is CEO and President of a company whose stock is down over 85% in the less than one year that he has run that company, and now has a market capitalization of $60 million. The other was CFO of a company whose stock declined during the 11 years that he was at the financial helm, and which now is also in the micro-cap arena. It is especially alarming that this is the pedigree of the people that Nabi is bringing on board to safeguard our interests, and the type of people whose business judgment the Company is acting upon. They have not been successful in creating value for shareholders at their "day jobs," and there is no reason to believe that they will have any better success at Nabi. Although we do not believe in your latest strategic plan anyway, given the substantial risks and timeframe to which it exposes shareholders, we are even more negative about it in the hands of a management team and Board of Directors at Nabi that has a demonstrated record of virtually always destroying value for shareholders as either management or board members.

One last, but important, point: we understand that you are currently entertaining offers for at least one of Nabi's revenue-producing assets. As we've said previously, and as has been expressed to us by interested buyers of the Company, we believe that the greatest shareholder value will be derived from a public auction of the Company in its entirety (as opposed to the clandestine discussions that you have apparently undertaken). However, if there is to be an asset sale along the way, it must be demonstrably and irrefutably positive for shareholders.


It is our fear that your plan is to "burn the furniture to heat the house" - i.e., sell off our revenue-producing assets to fund your ongoing cash burn and high-risk development projects. As we've stated many times, and as have other major Nabi shareholders, your strategic plan is laden with financial risk, scientific risk, execution risk, time risk, etc. Mr. McLain himself tried to explain away last year's StaphVAX trial failure by explaining that most new drug trials fail. Yet you are now asking that the owners of the Company assume all of these risks, without any commitment, or even comment, on when we can expect to see the Company in a positive operating cash flow and earnings position. Simply put, you have not demonstrated an ability to navigate any of these risks successfully over the course of many years, nor to allocate capital properly. Indeed, quite the contrary - based on past performance, this "strategic plan" is almost guaranteed to fail - and we, the owners of the Company, will bear the pain disproportionately as neither the Company's Board nor management has significant outright shareholdings, nor have any insiders demonstrated any willingness to "put their money where their mouth is" by buying significant amounts of stock in the marketplace as a show of confidence in the long-term strategic plan that you are attempting to foist upon us against our will.

We believe that the value to Nabi shareholders that could be derived from a value maximization process is comfortably in excess of $10 per share, a number that has been validated by additional work that we've done, and contacts that we've made, subsequent to our last letter to you (the recent IPO of Grifols also highlights the significant value of your plasma business in the right hands). We would be happy to review our valuation metrics with you in detail should you wish. When the stock was over $7 per share early last month (i.e., before you were re-elected), a Wall Street analyst wrote "... if a potential bidder were to offer a premium to today's current value, we believe it would be wise for the company to sell itself, as its pipeline and core technology still have clinical and regulatory hurdles to overcome, and are still several years from making it to market." Clearly we agree. As we've said previously, we believe that you have an extremely valuable and desirable set of assets, but only if managed properly - which history has shown will not be the case under the current Nabi management team.

We trust that you will do the right thing for all of the reasons noted above and immediately commence a well-organized public auction of the Company. We believe that you have met with several possible new investment banking firms to represent NABI recently, so we hope that this is a signal that you agree that this is the right approach. We are highly confident that this value maximization process will result in the best risk-adjusted and present-valued outcome for Nabi shareholders. We are also certain that this course of action has the support of the majority of current Nabi shareholders, for whom you work. If you disagree, why not canvas your current shareholder base to get their views rather than refusing to interact with them?

It is our preference, of course, to work out an amicable and cooperative solution to the issues we have raised. However, nothing short of a full and public value maximization process will satisfy us. We have written this letter directly to the Company's Board of Directors because we do not have faith in the CEO based on prior experience. Should you disregard the will of the majority of your shareholders, the consequences will be meted out through the democratic process afforded shareholders under Delaware law and your charter and bylaws. In that event, the clock is ticking towards the next annual meeting, and we will make sure to fully chronicle your many missteps, past, present and future, as you're shown your way out the door.


/s/Daniel S. Loeb

Daniel S. Loeb

Chief Executive Officer

Third Point LLC

Wednesday, June 14, 2006

Tribune (TRB) Holder The Chandler Trusts Said They Will Not Tender Shares; Sees Worth $35+ in LBO

In an 13D filing on Tribune Co. (NYSE: TRB) 12% holder The Chandler Trusts said they do not intend to tender any shares in response to the tender offer announced by Tribune on May 30, 2006 and sent a letter to the board. The Trusts believe that the process by which the offer was presented and considered by the Tribune Board was fundamentally flawed, and that the offer is a purely financial device that fails altogether to address the real business issues facing Tribune. The Trusts said prompt and meaningful strategic action is required to preserve the premium value of the company’s franchises.

From the Filing:

"In the filing the group said, "As a result of this continued underperformance, Tribune not only trades at a steep discount to its peers but to its intrinsic value, as measured by a sum-of-the-parts analysis. Morgan Stanley and Bear Stearns research suggest a breakup value of $42 per share (as shown below), or a 50% premium over the pre-tender price of $28 per share. Prudential analysts suggest a similar price, pegging the value at $43 per share. Reflecting the premium value of the company’s properties, analysts at Ariel Capital, one of Tribune’s biggest stockholders, figure that Tribune shares would be worth $44 to $46 per share in a breakup involving a subsequent sale of the parts (Wall Street Journal, June 9, 2006). These four data points define a range of values resulting from sum-of-the-parts of $42 to $46 per share." ...

In addition, in light of inquiries received from very credible private equity firms, and the very liquid, low cost financing markets, it seems quite likely that a leveraged buyout could be accomplished at a price in excess of $35 per share. ...."

Tuesday, June 13, 2006

Farallon Capital Discloses 9.2% Stake in Hummingbird Ltd (HUMC) - 13D

In a 13D filing after the close on Hummingbird Ltd. (Nasdaq: HUMC), Farallon Capital Management disclosed a 9.2% stake noting that its stake was increased after 05/26 the date the company agreed to be acquired by affiliates of Symphony Technology for $26.75 per share. Shares of HUMC are currently at $27.26.

From the 'Purpose Of The Transaction' section of the filing:

"As stated in the Preliminary Note, the Reporting Persons are filing this Schedule 13D to report their ownership of 1,599,093 of the Company's Shares, representing approximately 9.2% of such class. On May 26, 2006, the Company filed a Form 6-K to announce that it had entered into a definitiveagreement, subject to shareholder approval, with affiliates of Symphony Technology Group ("Symphony") under which an entity owned by Symphony will acquire all of the Company's outstanding Shares in an all-cash transaction valued at $26.75 per share, or approximately $465 million.

The purpose of the acquisition of the Shares was for investment, and the acquisitions of the Shares by each of the Funds and the Managed Accounts were made in the ordinary course of business and were not made for the purpose of acquiring control of the Company.

Although no Reporting Person has any specific plan or proposal to acquire or dispose of Shares, consistent with its investment purpose, each Reporting Person at any time and from time to time may acquire additional Shares or dispose of any or all of its Shares depending upon an ongoing evaluation of the investment in the Shares, prevailing market conditions, other investment opportunities, liquidity requirements of the Reporting Person and/or other investment considerations. No Reporting Person has made a determination regarding a maximum or minimum number of Shares which it may hold at any point in time.

Also, consistent with their investment intent, the Reporting Persons may engage in communications from time to time with one or more officers of the Company, one or more members of the board of directors of the Company and/or one or more shareholders of the Company and/or one or more potential investors in the Company regarding the Company, including but not limited to its operations,capital structure, potential strategies to enhance shareholder value and/or any current or future initiatives that may be proposed or adopted by the Company's management or board of directors. The Reporting Persons may communicate with any of the foregoing persons regarding the announced acquisition by Symphony, the acquisition price and whether the board has considered, or should consider, alternative transactions. During the course of any such communications, the Reporting Persons may advocate one or more courses of action or object to one or more courses of action proposed by the Company.

Except to the extent the foregoing may be deemed a plan or proposal, none of the Reporting Persons has any plans or proposals which relate to, or could result in, any of the matters referred to in paragraphs (a) through (j), inclusive, of the instructions to Item 4 of Schedule 13D. The Reporting Persons may, at any time and from time to time, review or reconsider their position and/or change their purpose and/or formulate plans or proposals with respect thereto."

Monday, June 12, 2006

Elkhorn Partners discloses an approximate 5% stake in Orbit Intl (ORBT) - 13D

Elkhorn Partners discloses an approximate 5% stake in Orbit International Corp. (Nasdaq: ORBT) in a 13D filing:

From the 'Purpose of Transaction' section of the filing:"The Partnership has acquired the Orbit common stock as an investment. The Partnership intends to review on a continuing basis its investment in the Orbit common stock, Orbit's business affairs and financial condition, as well as conditions in the securities markets and general economic and industry conditions. The Partnership may purchase additional Orbit common stock either in the open market, in privately-negotiated transactions, or otherwise. Additionally, the Partnership may dispose of the Orbit common stock it presently owns or hereafter acquires either in the open market, in privately negotiated transactions, or otherwise."

Tuesday, June 06, 2006

Loeb Partners Raises Stake in Outlook Group (OUTL) Again - 13D

In an amended 13D filing on Outlook Group Corp. (Nasdaq: OUTL), Loeb Partners and related funds disclosed a 8.66% stake in the company. This is up from the 7.34% stake disclosed in the a 13D/A filing on 05/09/06. NOTE: On 03/20, OUTL signed a definitive agreement to be acquired by Vista for $13.50 per share (currently at $13.22)

From the 'Purpose of Transaction' section of the filing:

"LAF, LPC and LOF ("Loeb") have acquired shares of Common Stock for investment purposes. Loeb reserves the right, consistent with applicable law, to acquire additional securities of the Issuer (whether through open market purchases, block trades, private acquisitions, tender or exchange offers or otherwise).

Loeb intends to review its investment in the Issuer on a continuing basis and may engage in discussions with management or the Board of Directors of the Issuer concerning the business and future plans of the Issuer. Depending on various factors, including, without limitation, the Issuer's financial position and investment strategy, the price levels of the Common Stock of the Issuer,conditions in the securities markets and general economic and industry conditions, Loeb may in the future take such actions with respect to its investment in the Issuer as it deems appropriate including, without limitation, seeking Board representations, making proposals to the Issuer concerning the capitalization of the Issuer, purchasing additional Common Stock and other securities of the Issuer, selling some or all of its Common Stock, engaging in short selling of or any hedging or similar transaction with respect to the Common Stock of the Issuer or changing its intention partially or entirely with respect to any and all matters referred to in Item 4."

Monday, June 05, 2006

Pirate Capital discloses 5.3% stake in OSI Restaurant Partners, Inc. (OSI) -13D

Pirate Capital discloses 5.3% stake in OSI Restaurant Partners, Inc. (NYSE: OSI) in 13D filing. On June 2, 2006, Pirate Capital sent a letter to OSI, urging the board of directors to undertake measures to enhance long-term shareholder value. The firm said, "Ascribing no value to Cheeseburger in Paradise, Lee Roy Selmon's or Blue Coral, we conservatively value OSI's equity at $50/share, with each incremental 100 bps of margin recovery at the core domestic Outback concept adding an additional $3 per share of value."

A copy of the letter disclosed in the filing:"

Mr. Chris T. Sullivan Chairman OSI Restaurant Partners, Inc.2202 North West Shore BoulevardSuite 500Tampa, Florida 33607

Dear Mr. Sullivan:

Pirate Capital LLC, as the investment advisor to Jolly Roger Fund LP, Jolly Roger Offshore Fund LTD and Jolly Roger Activist Portfolio Company LTD, is the beneficial owner of 5.3% of the common stock of OSI Restaurant Partners, Inc. ("OSI" or the "Company"). We are long-term investors, having invested inOSI because we believe the market price of OSI shares fails to reflect the value embedded in the Carrabba's, Bonefish Grill and Fleming's concepts (the "Growth Concepts"), the potential for margin recovery at the core Outback concept and the significant value in the Company's real estate portfolio. We are writing this letter to encourage your board to take immediate steps to unlock long-term shareholder value by (1) conducting a spin-off of the Growth Concepts and (2) ceasing new unit growth at domestic Outback and other fledgling concepts unless and until relevant unit-level economics and a broader return to prosperity at domestic Outback justify further development.

Given our concern that a renewed focus on generating shareholder returns might be stifled by your de facto control of the board of the Company you co-founded, we have made numerous attempts to set up a meeting with you to discuss our concerns. You have denied our requests, leaving us no choice but topresent our views in a public forum.

We feel compelled to voice our concerns now because we have become increasingly frustrated with your misallocation of capital and inability to manage the Company's assets in a return-focused manner. Our initial meeting and subsequent conversations with Messrs. Allen and Montgomery provided us a glimmer of hope that the "new" OSI would regain its luster as a first-class casual dining operator, and eschew its legacy as an aimless brand aggregator, attained under your direction in recent years.We view favorably OSI's previously announced decision to consider strategic alternatives ("Shareholder Value Initiatives"), including the separation of individual or multiple concepts, taking on additional financial leverage, share repurchases and the monetization of real estate assets. We take issue, however, with the pace at which your analysis is moving. Of even greater concern to us is our fear that senior management is burdened with conducting this review, serving as a significant distraction to what we believe should be their primary goal - namely, turning around the operations of the core Outbackbrand.


Your first quarter conference call included a promise to "thoughtfully review" the Shareholder Value Initiatives over the balance of 2006. Mr. Allen has stated publicly to the investment community that "[i]f you came here to watch us sprint you're in the wrong room. We're running a marathon....We're interested in great long-term investors, people that want to run this marathon with us."(1) In this context and for the foregoing reasons, we highlight our view that the trailing four fiscal years at OSI may best be characterized as a disaster from a shareholder returns perspective:

1. The Company has incurred approximately $1 billion in capital expenditures, of which we estimate $800 million to be "growth" CapEx;(1) Source: Transcript of Outback Steakhouse Analyst Meeting of February 17,2006.

2. Revenue has grown at a CAGR of 14% from $2.1 billion to $3.6 billion, while net income has grown at a CAGR of less than 5%;

3. The Company has lost approximately 300 basis points of operating margin, which we estimate to be primarily attributable to continuing weakness at domestic Outback units(2); and

4. OSI stock has declined 5%, compared with a 40% increase in the Dow Jones U.S. Restaurant and Bars Index ("DJUSRU"), in the four -year period ending June 2, 2006;

It is this history of significant underperformance that we feel should instill a sense of urgency among your board toward delivering improved shareholder returns. If we assume the "marathon" referred to above began back in June 2002 with OSI shares trading at $39/share (v. today's price of $37), we are confident that the vast majority of your shareholder base would favor an acceleration of the marathoner's pace closer toward something approximating a sprint.


To the extent you have not already done so, we urge you to immediately establish a special committee of the board of directors to assess, with the help of a reputable investment banking firm, the "Shareholder Value Initiatives." Inthe Company's May 23, 2006 letter to Pirate Capital(3) responding to our request for a more detailed update on the status of the Shareholder Value Initiatives,Mr. Montgomery stated that "[u]ntil we complete our analysis, we cannot determine the recommendation that we will make to our Board of Directors." Pirate Capital is appalled at the suggestion that you deem it appropriate for senior management to be charged with this review process over the balance of calendar 2006.

Our understanding was that Messrs. Allen and Montgomery were brought in last year to revitalize OSI as a portfolio brand management company focused on the efficient deployment of capital, while preserving the stature of core Outback as a leader in the casual dining space. Especially in light ofdisappointing recent sales figures and traffic trends, we feel strongly that senior management should be focusing their time primarily on operational improvements. Determining the strategic direction of the Company is a task for your board, with input of senior management as decisions take shape. Moreover,we are concerned that your senior management team may lack the independence necessary to appropriately assess whether adopting some or all of the Shareholder Value Initiatives is in the best interests of all shareholders. We view your apparent willingness to charge senior management with basic "blocking and tackling" duties on the strategic initiatives front to the potential detriment of a focus on core brand operational improvements as both reckless and disingenuous.

(2) Unlike certain other casual dining operators with multiple concepts, OSI does not break out profitability on a concept-by-concept basis.

(3) A copy of the Company's letter to Pirate Capital is attached as an Exhibit to Schedule 13D.


The argument for creating value through the sale or spin-off of one or more "growth" concepts is well established. We view the spin-off of the above-referenced Growth Concepts into a separate, publicly-traded entity as the most effective way of creating long-term shareholder value. In conjunction withthe spin-off and depending upon the amount of capital raised, we would encourage the Company to take on an appropriate amount of leverage to fund the repurchase of at least 15% of OSI shares outstanding.

Our analysis assumes an expected contribution by the Growth Brands of $185 million, or 42%, of OSI's 2007E EBITDA of $440 million. We conservatively value the Growth Brands at $25 per OSI share, or 10.2x 2007E EBITDA. Valuing domestic Outback at 7.5x a severely depressed 2007E EBITDA level of $200 million yields another $20 per share, while our valuation of International Outback at 8x our 2007E EBITDA of $53 million results in another $6 per share. Ascribing no value to Cheeseburger in Paradise, Lee Roy Selmon's or Blue Coral, we conservatively value OSI's equity at $50/share, with each incremental 100 bps of margin recovery at the core domestic Outback concept adding an additional $3 per share of value.

Beyond creating long-term shareholder value, such a sale or spin-off would bring other long-term strategic benefits. We would expect a sale or spin-off of the Growth Brands to boost managerial accountability, resource allocation and overall concept-level focus at both companies. Further, the public-listing of the Growth Brands would more closely align management and restaurant partners' compensation to the performance of their respective restaurant concepts. Allowing investors the choice of investing in either a growth company through the newly-issued shares, or a value/turnaround story through ownership of the "stub" Outback, should increase the likelihood that the individual pieces willbe rewarded full market multiples by appealing to more traditional investor constituencies.


At great expense to OSI shareholders, the Company has become an undisciplined restaurant concept collector. We believe this lack of focus on returns has caused restaurant-level margins to deteriorate to an industry-low of approximately 11%, or an estimated 300 basis points below the casual diningsector average,(4) while return on incremental invested capital has been abysmal. We associate OSI's perception of itself as a "portfolio brand management company" with a heightened level of execution risk, necessitating a fiercely disciplined approach to capital allocation across portfolio concepts.

(4) Based on our estimated fiscal 2006 restaurant level margins at Brinker International, Darden Restaurants, Rare Hospitality, Applebee's, Cheesecake Factory and PF Chang's.

The Company has stated publicly its intention to allocate capital toward concepts with the potential to grow revenues to $1 billion and $500 million, respectively, for casual and upscale casual concepts. While we view the sale of the Paul Lee's concept in January as a step in the right direction, we aretroubled by the fact that OSI is quietly building Blue Coral (a new upscale seafood concept), continuing the build-out of the unprofitable Cheeseburger in Paradise concept, and continuing to grow domestic Outback units in the face of declining customer counts and key operating metrics.

Our view is that long-term shareholder value will be maximized by ceasing new unit development at domestic Outback and other "non-core" concepts until the turnaround at domestic Outback gains considerable traction.

We believe that you and your board have lost credibility among both investors and Wall Street research firms, with the market now heavily discounting your strategic vision and ability to generate an equity-like return on invested capital. We challenge you to prove both constituencies wrong.

Our comfort level in owning OSI shares therefore rests largely in our conviction that one of the following two eventualities will occur: either the existing board of directors will take immediate steps to unlock shareholder value by instituting the measures outlined above; or the 2007 proxy season will include several new director nominees providing your frustrated shareholder base the ability to inject into the boardroom fresh perspective and a return-focused approach toward maximizing long-term shareholder value through the efficient allocation of capital.

Pirate Capital, as one of your largest shareholders, reiterates its request for a meeting with your board to discuss our views in greater detail.

Sincerely,/s/ Matt Goldfarb

Matt Goldfarb

Senior Investment Analyst"

Thursday, June 01, 2006

Pirate Capital Discloses 1.6% Stake in Mirant (MIR), Urges Not to Enter Bidding War for NRG and Put Itself Up for Sale

In a 13D filing, Pirate Capital LLC disclosed a 1.6% stake in Mirant Corp. (NYSE: MIR). The group said on June 1st it sent a letter to the company advising the Board of Directors that it does not believe that entering into a hostile bidding war for NRG (NYSE: NRG) is in the best interest of the Issuer's shareholders, questioning whether Mirant should be a consolidator, and urging the Board to engage a financial advisor and initiate a process to put itself up for sale.

A copy of the letter disclosed in the filing:

"June 1, 2006


Edward R. Muller
Chairman and Chief Executive Officer
Mirant Corporation
1155 Perimeter Center West
Suite 100
Atlanta, GA 30338

Mr. Muller:

Pirate Capital LLC, as the investment advisor to Jolly Roger Fund LP and JollyRoger Offshore Fund LTD, is the beneficial owner of approximately 5 millionshares, or 1.6%, of the common stock of Mirant Corporation ("Mirant" or the"Company"). In addition to becoming one of the largest equity owners of theCompany, we have been a creditor of the Company since 2003. We are concerned bythe offer made to acquire NRG Energy, Inc. ("NRG").

We do not believe that entering into a hostile bidding war for NRG is in thebest interest of Mirant shareholders. While we believe that consolidation in thepower sector is necessary, we question whether Mirant should be a consolidator.Mirant's reported first quarter 2006 earnings and outlook give proof to thestrength of its assets. We believe shareholders would be substantially rewardedif Mirant put itself up for sale.

We strongly urge Mirant to engage a financial advisor to begin a process to sellitself. We also request a meeting with the Company's Board of Directors tofurther discuss these matters.

Kindest Regards,

/s/ Thomas R. Hudson Jr.

Thomas R. Hudson Jr.
Portfolio Manager
cc: Mirant Board of Directors"