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 Holdings Galloway (LISTCO) Control stakes transferred to LISTCO, which Partners will be a publicly traded holding company (Mgmt Co) • Standard 2%I20% management fees paid by LISTCO ("GH") and Hedge Fund to the Mgmt Co. Bruce Galloway Aaron Braun • Additional 10% Incentive Fee of Net (Co-Chairman & (Co-Chairman & Co-CEO) Co-CEO) Appreciation which exceeds 2.5x return of • Mgmt Co. is owned by Galloway, Braun and Kim Eugene Kim Investments • Galloway Holdings is a [C-corp]., (COO) established in [Delaware] • Preferred Shares will be exchangeable into LISTCO shares Operation> 111:1110: 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 SOO 1,000 1,500 2,000 2,500 3,000 3,500 4,000 US (Small Hong Russian & Micro Saudi China India Brazil Kong SAR, Korea Federatio Mexico Singapore Arabia Cap + China in OTC) {All Equity Market Capitaliza 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 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,. ■ Large Cap ■ Mid Cap 3% 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 4% Small Cap 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. Micro The O1CO8 martainaca nas elseguely rePsoced TO FNMA opor000 OTC Belem Board lOTC881 as Ito 1% emery 'Mot for SEC and bank repcelna *woes us: trade on Pe escnanoes Ultra Micro 111111111111k 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 capital requirements and costs of compliance has forced many of the traditional broker-dealers in the sector to merge or close Increased • FINRA is aggressively cracking down on market Regulation misconduct and raising the standards for issuers • Stocks of many lower ranked Small & Micro Caps remain at or near all- • Market collapse due to the Credit Crisis of 2007-8 led to a time lows wave of hedge funds, which specialized in the sector, shutting down Redemptions • Fund flows out of the sector resulted in forced liquidation • Valuations are compelling of positions into a market with no new buyers • Very few experienced players in the sector • Clearinghouses unwilling to take in OTC securities remaining • Limited research coverage • Reputational concerns Sourcc: Company data 8 EFTA00505787 Market Opportunity Limited Competition RIP Sellside Buy side • The winnowing of broker-dealers which Rodman & Renshaw Willowcreek were active in the Small & Mid Cap First Montauk Laurus sector has dramatically altered the First Tennessee Vision Capital competitive landscape V Finance Special Situations • Hedge fund participation is virtually not Gleecher Barron Partners existent. Position sizes of large funds Think Equities Yorkville are too large for the sector and most of Pali Capital Trinad the smaller, dedicated funds have shut Morgan Joseph down due to poor performance Merriman Curham • Traditional long-only funds are GTAX constrained by restrictions on buying Jessup & Lamont shares trading below US$1.00 and/or Empire Capital owning shares with small floats and Rochdales Securities limited daily trading volumes • No true Micro Cap ETFs Due to the sharp reduction in market participants, there are veryfew ways to get exposure to the most attractive small and micro cap names 9 EFTA00505788  Market Opportunity Ideal point in Current Market r US economic growth expected to lea all developed markets • Monetary policy remains extremely accomodative • Low interest rates spurring increased Growth Distressed risk appetite (2011-2015 (2007-2008) • Liquidity is beginning to move out of Mid-Large Caps. Small & Micro Cap valuations remain compelling relative to larger caps which have already Recapitalization (2009-2010) 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 Growth • Fundamental Valuation Potential • Management Change Metrics • Financial Recapitalization • Historical Highs • Financial Analysis • Macro Environment • Asset Value • Industry Dynamics • Industry/Product cycic • Economic Conditions change • Competitive Landscape Distressed Turnaround Valuation 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 Due Screening Execution Monitoring Exit Diligence • "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 • Business Risk Compliance • Management Metrics: Assessment sign-off Updates ✓ EV/Book Value • Supply Chain • Trading • Tracking to ✓ Revenue/EV Verification strategy Operational Plan ✓ Discount to • Industry • Hedging • Management Historical Outlook Requirements meetings • STEP-score • Competition • Settlement • Financial Review • Proprietary Analysis Procedures • Assist with network • Corporate Investor • Recent Trading Governance & Communications Range & History Legal Review • Participate in • Management discussions with meetings stakeholders such • Site Visit as creditors or labor 13 EFTA00505792 Strategy & Execution • GP's core investment universe Tech/Telec consists of approximately 500- om 1,000 companies across five key sectors, which collectively represent approximately 50% of the total market cap in the small Healthcare Natural Services Resources and micro cap sector Value • Median market cap of GP's target companies is approximately US$150 million and max is US$1,200 billion Business Consumer • Typically target companies will Services Retail have been trading at historically low valuations for 12-24 months already 14 EFTA00505793  Strategy & Execution Share Price • Change • Sharp share catalyst. • Momentum • No Sell Side implemented I Buyer price decline .average from Highs . b owed • Improvement • Sell Side • Forced visible coverage trading quarterly MUM% selling repots I Entry point (x) I r First Exit! (2x) Complete Exit (5-10x) Time 12-24 months 4 4 9-12 months 44 12-36 months • 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 • Although Deep Value, Turnaround investments will represent the main a Deep, Deep Value focus of the portfolio, GP does make 10% 8% "Turnaround" shorter-term opportunistic investments 2% • Financial Engineering • Financial Engineering plays include MIS - High Growth/ pre-IPO financings, bridge equity, International mezzanine investments, etc. • Hedges • High Growth companies and/or non- US investments will collectively make Investment up less than 10% of the portfolio Hedges Horizon • As a hedge against any sudden, major High Growth/International capital markets meltdown (i.e. Daily • Minimum drop in major equity indexes of >5%), • Maximum GP uses deep, out-of-the-money puts Financial Engineering and/or CDS Deep, Deep Value "Turnaround* • Little to no leverage used 0 10 20 30 40 SO 60 (months) 16 EFTA00505795 Track Record: Bruce Galloway Proven track record of successful investing: 20+% annual returns over past 15 years Present 2005-2013 O GALLO A 1994-2005 •Galloway V ERS Burnhamtu 'VT nagement (Co-s EO) 1983 Securities (MD) • Launched STEP •Managed US$100 OMusinesstern m i n assets •Published research •Managed USS25 mil turnaround fund • 26+ years of Small & Micro cap 1979 School on distressed experience companies •Led several • Second to none investment track • conomics corporate finance record transactions BA Hobart Williams • Unparalleled network of Smith relationships College • Extensive experience with turnarounds, activist investing and "bear" markets 11 EFTA00505796  Track Record: Bruce Galloway Year =500 Russell 2000 Dow Jones Galloway 2009 13.44% 19.46% 7.50% 41.46% Selected Investment Hi hli hts STEP 2008 -38.49% -34.80% -33.84% -63.46% Fund 2007 3.53% -2.75% 6.43% -34.81% 1. Command Security (MOC) — 2002 2006 13.62% 17.00% 16.29% 42.42% • Entry Price: $0.60 3.00% 45.37% -0.61%.=.- 31.75% • Exit Price: $3.20 Ilim-2-005 2004 8.99% -21.58% 3.15% 39.99% • Cumulative Return: 350% II 2003 26.38% 45.37% 25.32% 83.24% • Exit: 2009 2002 -23.37% -21.58% -16.76% -36.99% 2. Radnet (RGX/RDNT) — 2004 2001 -13.04% 1.03% -7.10% 56.33% • Entry Price: $3.00 Personal 2000 -10.14% -4.20% -6.17% -58.95% • Exit Price: $13.00 Account • Cumulative Return: 300% 1999 19.53% 19.62% 25.22% 904.63% 1998 26.67% -0.35% 16.10% -33.47% • Exit: 2005 1997 31.01% 20.52% 22.64% 117.37% 3. Seitel (SITL) - 2005 1996 20.26% 14.76% 26.01% -8.36% • Entry Price: $0.24 1995 34.11% 26.21% 33.45% 98.78% • Exit Price: $4.60 1994 -1.54% -3.18% 2.14% -18.87% • Cumulative Return: 2000% 1993 7.06% 17.00% 13.72% 167.06% • Exit: 200? Cumulative 235.18% 269.96% 285.80% 3778.52% Avg. Annual 5.16% 6.02% 6.37% 23.82% 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 142 Company Profile: Exit N6 • Command Security is a provider of contract security services with over 30 years of experience and t3 6,000 personnel. tlt 1211 • The company provides armed and unarmed security personnel $22 to governments, companies, Acquire controlling 12 block schools and ST N6 residential/commercial buildings S1 4 as well as customer service Replaced Board of Directors Took over as Chairman t, 1 personnel for airlines Brought in Rudy Guiliani SOO Key Investment Considerations: SOS ?CO/ g` 4 • US$72 mio of annual revenue at time of investment (trading at Value Creation: over 12x Revenue/Market Cap.) • Took over control of the Board and acted as Chairman in order to • Favorable industry dynamics institute a plan to enhance the company's reputation post-9/11 • Leverage network of relationships to bring in Rudy Guliani to • Over 4x return on investment lend credibility to the company's turnaround plan Source: and company reports 19 EFTA00505798  Case Studies: Radiologix/RadNet (KWMINT) 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: InOARfluts • Solidly profitable, unleveraged 2606 203? he Her b 14Y A Xi A.0 Sac Oct va Dog 20:6 Fa MU balance sheet and cheap valuation (EV/EBITDA) Value Creation: • Industry leading technology and • Advocated for merger or sale of the company quality management team • Utilized SEC filings to exert pressure • 4x return on investment • Merger announcement made within 12 months of establishing a position Source: and company reports 20 EFTA00505799  Case Studies: Pier1Imports trial 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, Exit Canada and Mexico. Key Investment Considerations: Initial Entry Doubled • Strong liquidity position with Position over US$200 million in unencumbered cash • Favorable competitive dynamics due to bankruptcy of leading Value Creation: competitor • Strong profit growth potential • 111-depth research of operations and store visits with over US$1.0 billion in • Debt buy-back annual sales • Return to operational profitability • 4x return on investment Source: and company reports EFTA00505800 Investment Targets: Company "A" Company Profile: Share Performance Last 24 months • 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 14 Selected Financial Metrics: 1\* • • • Market Cap: < US$200 million Annual Revenue: >US$ 4.0 billion Cash: > US$100 million • PIE Ratio: N/A 9/25/2013 • Div. Yield: 0.0% • Down from 52-week High: 55% Turnaround Catalysts: Investment Targets: • New management team • Restructuring of labour contract Target Return: [5]x • Return to profitability Holding Period: [24] months and company reports 22 EFTA00505801 Invest