EFTA00505780.pdf

Galloway Partners Introduction O.ber.13..0 EFTA00505780 Contents Executive Summary 3 Market Opportunity 6 Strategy & Execution 11 Track Record: Bruce Galloway 17 Case Studies 19 Investment Targets 22 Appendix 26 2 EFTA00505781 Executive Summary • Galloway Partners ("GP") is a newly established investment management company that specializes in acquiring influential ownership stakes in undervalued, micro & small cap companies. GP's strategy is to use an "activist" approach to drive a turnaround in corporate value which will benefit both stakeholders and shareholders of GP's portfolio companies. • GP's primary focus is on US-listed companies which are in the Tech/Telcom, Natural Resources, Consumer Retail, Healthcare Services and Business Services sectors. GP's target return is 2-5x on invested capital over a 2-4 year investment horizon. • Due to a unique confluence of events, valuations for many small and micro cap companies have been pushed to distressed levels. Market inefficiencies are at an all- time high due to a dramatic reduction in the number of buy-side and sell-side participants in the Small and Micro cap space. As a result, GP believes that current market conditions are ripe for producing once-in-a-generation returns. • Co-founded and controlled by Bruce Galloway, GP is uniquely positioned to capitalize on the current market opportunity. Bruce Galloway has over 25 years of experience researching and investing in the Small and Micro cap sector. In addition to being recognized as one of the industry's leading investors, he has an unparalleled network of contacts and relationships to help source and assess potential investments. • GP has identified several initial investments which meet its investment requirements. GP is seeking to raise US$50 million in a first closing for a new hedge fund ("Strategic Turnaround Fund") which will invest in Small and Micro caps. GP intends to transfer all control stakes to a newly formed investment holding company ("LISTCO") and file a registration statement in order to affect a public listing of LISTCO's shares. 3 EFTA00505782 Executive Summary - Indicative Term Sheet Issuer Strategic Turnaround Fund. LP Security Description Series A Exchangeable Redeemable Preferred Shares Dividend Rate I S".. payable in cash or in-kind) Maturity Date [51 years from Closing Issue Price USS[10,0(X)) per share Issue Size USS50,000.000 ('losing Date [November 24' 201:1 Conversion Series A Preferred convert at any time after a Qualified Listing, at a (20%) discount to the Listing Price Anti-Dilution The Conversion Price will be subject to adjustment if the Company issues additional shares at a price per share less than the then applicable Conversion Price Voting Rights Each share of Preferred stock will have the right to a number of votes equal to the number of shares of Class A common stock issuable upon conversion of each share of preferred stock Protective Provisions Consent of the holders of at least 50.1% of the Series A Preferred will be required to: • Alter any provision of the articles of incorporation or the bylaws; • Approve any transaction or series of transaction deemed to be a liquidation of the Company: • Approve any related party transactions: • Approve any merger or other corporate reogranization; • Declare or pay any dividend or distribution or approve any repurchase with respect to the Preferred or Common stock. loscstor Richt, • Maintain proportionate ownership: • Right of First Refusal: • Co-Sale Rights: • Drag-Along Rights 4 EFTA00505783 Executive Summary — Organizational Structure Galloway Partners (Mgmt Co) Operation> Galloway Holdings (LISTCO) Bruce Galloway (Co-Chairman & Co-CEO) Eugene Kim (COO) Aaron Braun (Co-Chairman & Co-CEO) Investments 111:1110: Control stakes transferred to LISTCO, which will be a publicly traded holding company • Standard 2%I20% management fees paid by LISTCO ("GH") and Hedge Fund to the Mgmt Co. • Additional 10% Incentive Fee of Net Appreciation which exceeds 2.5x return of • Mgmt Co. is owned by Galloway, Braun and Kim • Galloway Holdings is a [C-corp]., established in [Delaware] • Preferred Shares will be exchangeable into LISTCO shares 5 EFTA00505784 Market Opportunity EQUITY MARKET CAPITALIZATION (USS billions) Saudi Arabia Singapore Mexico Russian Federation Korea Hong Kong SAR, China Brazil India US (Small & Micro Cap + OTC) China {All Equity Market Capitaliza SOO 1,000 1,500 2,000 2,500 3,000 3,500 4,000 China US (Small & Micro Cap + OTC) India Brazil Hong Kong SAR, China Korea Russian Federatio in Mexico Singapore Saudi Arabia ion 3,697 3,354 1,263 1,230 1,108 1,180 875 525 414 373 At approximately US$3.3 trillion, the combined market capitalization of exchange-traded US Small & Micro Caps and OTC equities is comparable in size with the largest emerging market stock markets, but with significantly better trading liquidity, transparency and regulation Source: World Bank and (Data as of December 31, 2012) 6 EFTA00505785 Market Opportunity US Equity Market Composition 4% 111111111111k ■ Large Cap ■ Mid Cap 3% Small Cap Micro 1% Ultra Micro air+ OX The Best Marketplace with Qualified Companies The OTCOX3 uarkelplace 0rers the Coo eopnned rod not °floe, . ',Oro CT US. and global otenparses TOO for Inct OTCOX —antatteoe oprnponos mustr0ot non inanoel sunSardes 00 urn', n tar docture. and be wowed bygones...coal rd.arty *deur Devgned the tot repelatet toed and ',colophon:Sy ofleroan'es. (NCO% a...veto: moa'. M. the Internet*, memo'. rooPgarcry analyze. value and trade Weir sear,. The Venture Stage Marketplace with Current U.S. Reporting Companies Tr,.()TCCTOS sarketlace OMs interned nano rer secur nes to srcaller 0eyetong companes Cal are roppong teUS regslarat (SEC. tont or eisurencol. Once OTCCO has no uneurn manual ra,ards. macdes shells and penny stole Inal are current n Mr onclowre 0100010019. The O1CO8 martainaca nas elseguely rePsoced TO FNMA opor000 OTC Belem Board lOTC881 as Ito emery 'Mot for SEC and bank repcelna *woes us: trade on Pe escnanoes OTCPink The Open Marketplace with Variable Reposing Companlee The OTC Unt3 usuelpace onus Pedro el a rode =Kum of rusty poosntep Innugh any bros. Ito MUM'Ste d tr all ',nes or e- 111050a:000Tire by MMS dera0. d'ageSS Or 04.0n. enreh e•rry ney are Nave ronmegonzed by na kneh of nternabon matey wove. • Combined market capitalization of exchange-traded Small & Micro Cap stocks is approximately US$2.1 trillion. OTC securities have a combined market cap of US$1.3 trillion • OTC securities are bought and sold through brokers in a manner similar to that of NYSE or NASDAQ-listed securities • There are approximately 10,000 OTC securities. Total OTC daily trading volume currently exceeds US$750 billion Source: and (Data as of December 31. 2012) 7 EFTA00505786 Market Opportunity "A Perfect Storm" Increased Regulation • Increased capital requirements and costs of compliance has forced many of the traditional broker-dealers in the sector to merge or close • FINRA is aggressively cracking down on market misconduct and raising the standards for issuers Redemptions • Market collapse due to the Credit Crisis of 2007-8 led to a wave of hedge funds, which specialized in the sector, shutting down • Fund flows out of the sector resulted in forced liquidation of positions into a market with no new buyers • Clearinghouses unwilling to take in OTC securities • Limited research coverage • Reputational concerns Sourcc: Company data • Stocks of many lower ranked Small & Micro Caps remain at or near all- time lows • Valuations are compelling • Very few experienced players in the sector remaining 8 EFTA00505787 Market Opportunity Limited Competition RIP Sellside Buy side Rodman & Renshaw Willowcreek First Montauk Laurus First Tennessee Vision Capital V Finance Special Situations Gleecher Barron Partners Think Equities Yorkville Pali Capital Trinad Morgan Joseph Merriman Curham GTAX Jessup & Lamont Empire Capital Rochdales Securities • The winnowing of broker-dealers which were active in the Small & Mid Cap sector has dramatically altered the competitive landscape • Hedge fund participation is virtually not existent. Position sizes of large funds are too large for the sector and most of the smaller, dedicated funds have shut down due to poor performance • Traditional long-only funds are constrained by restrictions on buying shares trading below US$1.00 and/or owning shares with small floats and limited daily trading volumes • No true Micro Cap ETFs Due to the sharp reduction in market participants, there are very few ways to get exposure to the most attractive small and micro cap names 9 EFTA00505788 Market Opportunity Ideal point in Current Market Growth (2011-2015 Distressed (2007-2008) Recapitalization (2009-2010) r US economic growth expected to lea all developed markets • Monetary policy remains extremely accomodative • Low interest rates spurring increased risk appetite • Liquidity is beginning to move out of Mid-Large Caps. Small & Micro Cap valuations remain compelling relative to larger caps which have already recovered to pre-Lehman levels Markets no longer punishing "bad" news Expect favorable momentum to be supportive for the next 2-4 years 10 EFTA00505789 Strategy & Execution • Fundamental Valuation Metrics • Historical Highs • Asset Value Distressed Valuation Growth Potential • Financial Analysis • Industry Dynamics • Economic Conditions • Competitive Landscape • Management Change • Financial Recapitalization • Macro Environment • Industry/Product cycic change Turnaround Catalyst • Investment strategy is focused on "turnaround" candidates which have been forgotten by the market • Utilize an Activist Approach to expedite implementation of changes and ensure smooth execution • Avoid potential financial restructurings and development stage companies • "Real Companies" with tangible assets and substantial revenue 11 EFTA00505790 Strategy si Execution Russell Investments Microcap Indexes Performance Within the Microcap sector, Value stocks have consistently outperformed Growth stocks in both up and down markets Russell Microcap Value Index (M-Value) Russell Microcap Growth Index (M-Growth) Bloomberg ticker symbo RMICROV Bloomberg tcker symbol RIVICROG Reuters ticker symbol Reuters ticker symbol Weighted average market cap (SB) 0.357 Weghted average market cap (SB) 0 428 Median market cap (SB) 0.194 Median market cap (SB) 0.184 Largest company Dy market cap (SB) 1.200 Largest company by market cap (SB) 1 200 Characteristics Characteristics Price/Eck* 1.26 Price/Book 3.65 Dividend yield 1.83 Dividend yield 0.48 Price/Earnings Bowl egatve cantles) 15.89 Price/Earnings (ex-negative earnings) 22.09 IDES long-term growth forecast (%) 12.00 IBES long-term growth forecast (%) 17.47 EPS 5-year growth 8.79 EPS 5-year g-owt 14 33 Source: (Index data as of August 3). 2013) 12 EFTA00505791 Strategy & Execution Clearly defined and historically successful Investment Process Screening Due Diligence Execution Monitoring Exit • "Bottoms-Up" • Financial • Negotiations • Board/Mgmt role • Approach Analysis with • Regular • Block Sale • Pending • Scenario stakeholders Reporting • Market Sell- Catalysts/News Analysis • Legal, Tax & requirements Down • Fundamental Metrics: • Business Risk Assessment Compliance sign-off • Management Updates  EV/Book Value  Revenue/EV • Supply Chain Verification • Trading strategy • Tracking to Operational Plan  Discount to Historical • Industry Outlook • Hedging Requirements • Management meetings • STEP-score • Competition • Settlement • Financial Review • Proprietary network • Analysis Corporate Procedures • Assist with Investor • Recent Trading Range & History • • Governance & Legal Review Management meetings Site Visit • Communications Participate in discussions with stakeholders such as creditors or labor 13 EFTA00505792 Strategy & Execution Tech/Telec om Healthcare Services Value Business Services Natural Resources Consumer Retail • GP's core investment universe consists of approximately 500- 1,000 companies across five key sectors, which collectively represent approximately 50% of the total market cap in the small and micro cap sector • Median market cap of GP's target companies is approximately US$150 million and max is US$1,200 billion • Typically target companies will have been trading at historically low valuations for 12-24 months already 14 EFTA00505793 Strategy & Execution Share Price • Sharp share price decline from Highs • Forced selling • No Sell Side .average . b owed trading I I Entry point (x) • Change catalyst. • Momentum implemented I Buyer • Improvement • Sell Side visible coverage quarterly MUM% repots First Exit! (2x) r Time 12-24 months 4 4 9-12 months 44 12-36 months Complete Exit (5-10x) • By focusing on "forgotten" companies which trade at historical lows, GP can obtain maximum influence while experiencing minimal disruption to share price while building the position • Exiting in Growth Phase provides for optimal profit maximization. The typical investment holding period is between 2-4 years 15 EFTA00505794 Strategy & Execution Investment Buckets 10% 8% 2% MIS a Deep, Deep Value "Turnaround" • Financial Engineering - High Growth/ International • Hedges Hedges High Growth/International Financial Engineering Deep, Deep Value "Turnaround* 0 10 20 30 40 Investment Horizon • Minimum • Maximum SO 60 (months) • Although Deep Value, Turnaround investments will represent the main focus of the portfolio, GP does make shorter-term opportunistic investments • Financial Engineering plays include pre-IPO financings, bridge equity, mezzanine investments, etc. • High Growth companies and/or non- US investments will collectively make up less than 10% of the portfolio • As a hedge against any sudden, major capital markets meltdown (i.e. Daily drop in major equity indexes of >5%), GP uses deep, out-of-the-money puts and/or CDS • Little to no leverage used 16 EFTA00505795 Track Record: Bruce Galloway Proven track record of successful investing: 20+% annual returns over past 15 years Present 1979 • O 2005-2013 GALLO 1994-2005 •Galloway V 1983 Burnham 'VT tu nagement (Co-s Securities (MD) •Managed US$100 i assets OM tern usiness School conomics BA Hobart Williams Smith College m n •Published research on distressed companies •Led several corporate finance transactions • Launched STEP •Managed USS25 mil turnaround fund A ERS EO) • 26+ years of Small & Micro cap experience • Second to none investment track record • Unparalleled network of relationships • Extensive experience with turnarounds, activist investing and "bear" markets 11 EFTA00505796 Track Record: Bruce Galloway STEP Fund Personal Account Year =500 Russell 2000 Dow Jones Galloway 2009 13.44% 19.46% 7.50% 41.46% 2008 -38.49% -34.80% -33.84% -63.46% 2007 3.53% -2.75% 6.43% -34.81% 2006 13.62% 17.00% 16.29% 42.42% Ilim-2-005 3.00% 45.37% -0.61%.=.-31.75% II 2004 8.99% -21.58% 3.15% 39.99% 2003 26.38% 45.37% 25.32% 83.24% 2002 -23.37% -21.58% -16.76% -36.99% 2001 -13.04% 1.03% -7.10% 56.33% 2000 -10.14% -4.20% -6.17% -58.95% 1999 19.53% 19.62% 25.22% 904.63% 1998 26.67% -0.35% 16.10% -33.47% 1997 31.01% 20.52% 22.64% 117.37% 1996 20.26% 14.76% 26.01% -8.36% 1995 34.11% 26.21% 33.45% 98.78% 1994 -1.54% -3.18% 2.14% -18.87% 1993 7.06% 17.00% 13.72% 167.06% Cumulative 235.18% 269.96% 285.80% 3778.52% Avg. Annual 5.16% 6.02% 6.37% 23.82% Selected Investment Hi hli hts 1. Command Security (MOC) — 2002 • Entry Price: $0.60 • Exit Price: $3.20 • Cumulative Return: 350% • Exit: 2009 2. Radnet (RGX/RDNT) — 2004 • Entry Price: $3.00 • Exit Price: $13.00 • Cumulative Return: 300% • Exit: 2005 3. Seitel (SITL) - 2005 • Entry Price: $0.24 • Exit Price: $4.60 • Cumulative Return: 2000% • Exit: 200? Note: All performance numbers arc audited and available upon request. STEP fund went into liquidation mode in 2010. Perfonnance for 2010-present is estimated to be approximately 30% per annum 18 EFTA00505797 Case Studies: Command Security MOM Acquire controlling block Value Creation: Replaced Board of Directors Took over as Chairman Brought in Rudy Guiliani ?CO/ Exit 142 N6 t3 tlt 1211 $22 12 ST N6 S1 4 t , 1 SOO SOS g`4 • • Took over control of the Board and acted as Chairman in order to institute a plan to enhance the company's reputation Leverage network of relationships to bring in Rudy Guliani to lend credibility to the company's turnaround plan Company Profile: • Command Security is a provider of contract security services with over 30 years of experience and 6,000 personnel. • The company provides armed and unarmed security personnel to governments, companies, schools and residential/commercial buildings as well as customer service personnel for airlines Key Investment Considerations: • US$72 mio of annual revenue at time of investment (trading at over 12x Revenue/Market Cap.) • Favorable industry dynamics post-9/11 • Over 4x return on investment Source: and company reports 19 EFTA00505798 Case Studies: Radiologix/RadNet (KW InOARfluts 2606 203? he Her b 14Y A Xi A.0 Sac Oct va Dog 20:6 Fa MU Value Creation: • Advocated for merger or sale of the company • Utilized SEC filings to exert pressure • Merger announcement made within 12 months of establishing a position MINT) Company Profile: • Acquired by RadNet in November 2006, Radiologix was a leading, independent provider of diagnostic imaging services in the US. • In addition to providing imaging services such as MRI, CT, PET, etc., it also provides administrative management, and information services to radiology practices. Key Investment Considerations: • Solidly profitable, unleveraged balance sheet and cheap valuation (EV/EBITDA) • Industry leading technology and quality management team • 4x return on investment Source: and company reports 20 EFTA00505799 Case Studies: Pier 1 Imports trial Initial Entry Doubled Position Exit Value Creation: • 111-depth research of operations and store visits • Debt buy-back • Return to operational profitability Company Profile: • A specialty retailer which focuses on the direct importation of decorative home furnishings and gifts which have a high degree of handcraftmanship and uniqueness. • The company operates over 1,000 stores across the US, Canada and Mexico. Key Investment Considerations: • Strong liquidity position with over US$200 million in unencumbered cash • Favorable competitive dynamics due to bankruptcy of leading competitor • Strong profit growth potential with over US$1.0 billion in annual sales • 4x return on investment Source: and company reports EFTA00505800 Investment Targets: Company "A" 14 Share Performance Last 24 months 1\* 9/25/2013 Turnaround Catalysts: Company Profile: • A Fortune 500 company which operates in the transportation sector • An industry leader in providing supply-chain solutions. Its network has local, regional, national and international capabilites Selected Financial Metrics: • Market Cap: < US$200 million • Annual Revenue: >US$ 4.0 billion • Cash: > US$100 million • PIE Ratio: N/A • Div. Yield: 0.0% • Down from 52-week High: 55% Investment Targets: • • • New management team Restructuring of labour contract Return to profitability Target Return: [5]x Holding Period: [24] months and company reports 22 EFTA00505801 Investment Targets: Company "B" L\v\i : liDGARoam Share Performance Last 60 months 9/25/2013 Turnaround Catalysts: • Forced selling has run its course • Turning cash flow positive • Improving industry dynamics Company Profile: • A leading provider of renewable fuels that primarily operates in the Western US • Vertically integrated operations spanning production, storage and delivery • Low-cost provider while demand growth is outpacing supply Selected Financial Metrics: • • • • • • Market Cap: < US$100 million Annual Revenue: >US$ 1.0 billion Liquidity: > US$10 million PIE Ratio: N/A Div. Yield: 0.0% Down from 52-week High: 50% Investment Targets: Target Return: [5]x Holding Period: [36] months and company reports 23 EFTA00505802 Investment Targets: Company "C" I Share Performance Last 24 months Turnaround Catalysts: 9/25/2013 Company Profile: • A leading provider of marine transportation services • Listed on NASDAQ • The company has operations around the world Selected Financial Metrics: • Market Cap: < US$100 million • Annual Revenue: > US$1.0 billion • Asset Value: > US$500 million • PIE Ratio: N/A • Div. Yield: 0.0% • Down from 52-week High: 0% Investment Targets: • Highly leveraged to global economic growth • • Improving industry dynamics Return to positive cash flow Target Return: [5]x Holding Period: [36] months Source: and company reports 24 EFTA00505803 t‘. Investment Targets: Company "D" EDGARN:m Share Performance Last 80 months Company Profile: • E-commerce company which provides cloud-based sales solutions • Proprietary technology which enables the Company to service customers of all sizes, ranging from Fortune 500 to small businesses • Global reach Selected Financial Metrics: • Market Cap: > US$50 million • Annual Revenue: < US$100 million • PIE Ratio: N/A • Div. Yield: 0.0% 9/25/2013 • Down from 52-week High: 65% Turnaround Catalysts: • New management team • Favorable product cycle • candidate Investment Targets: Target Return: [10]x Holding Period: [36] months Source: and company reports 25 1 EFTA00505804 Appendix: GP Team Profile Bruce Galloway Co-Chairman & Co-CEO Mr. Galloway oversees and manages all aspects of OP's investments. He is a professional portfolio manager with 26 yrs of experience investing and advising small and micro-cap companies. He is widely recognized as a leading investor of turnarounds, deep value small and micro-cap stocks. He has held seats on the Board of numerous companies and implemented turnarounds of several companies. Mr. Galloway graduated from Hobart Williams Smith College in 1979 and received an MBA from NYU in 1983. Aaron Braun Co-Chairman & Co-CEO Mr. Braun works alongside Mr. Galloway in managing GP's investments. Eugene Kim COO Mr. Kim is responsible for GP's operations and finances. including investor relations and legal/compliance. He has over 20 years of experience in the finance industry and has served as the CFO of a China- based manufacturing company with over US$500 million in annual revenue. His previous experiences include serving as the CIO of a pan-Asian credit hedge fund, an investment banker with ING Barings and Barclays Capital, and as a research analyst with UBS and Nomura. Mr. Kim graduated from Yale University in 1992. EFTA00505805 Appendix: Selected Publicly Traded Holding Companies (USS 000s) Berkshire Hathaway (BRK.B) Leucadia National (LUK) Harbinger Group Inc. (HRG) Steel Partners (SPLP) RCS Capital Corp (RCAP) BFC Financial Corp. (BFCF) Fiscal Year ended 12/31/2012 12/31/2012 12/31/2012 12/31/2012 12/31/2012 12/31/2012 Revenue 162,463 9,194 4,500 761 288 497 Profit Margin 9.2% 10.9% 1.8% 5.4% 2.6% 4.6% Total Assets 427,452 9,349 27,400 1,378 62 1,414 Book Equity 187,647 6,767 1,599 527 31 365 Equity Market Cap. 283,800 9,900 1,449 451 457 194 P/E 16.1x 8.1x 9.4x 54.6 - GH (Pro Forma) 12/31/2013 E 500-1,000 0-5% 100-200 50-100 TBD TBD ROE 10.2x 12.8x 14.5x Eamings/Share 10.9 3.38 1.09 0.28 Price/Book 1.5Ix 1.46x 0.91x 0.85x 14.74x 0.5 .1 \ Div/Yield Institutional 66.4% 59.8% 85.4% 28.8% 1.0% 10.2% I TBD Ownership 0.9% 4.7% GI figures Pro Forma consolidation of Target Company "A" and US$5O million Pref. issuance Source: CNI3C and company reports. Market share price data as 0(9.27,2013 EFTA00505806