EFTA02672819.pdf

Galloway Partners Introduction EFTA02672819 Contents Executive Summary 3 Market p port u rat-y Strateg Lxecution II Track Record: Bruce Galloway 11 cISL, . LI I LS 19 Investment Tar(iets 77 Appendix 26 2 EFTA_R1_01947036 EFTA02672820  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$50 million in a first closing for a new hedge fund ("Strategic Turnaround Fund") which will invest in Small and Micro caps. GP intends to transfer all control stakes to a newly formed investment holding company ("LISTCO") and file a registration statement in order to affect a public listing of LISTCO's shares. 3 EFTA_R1_01947037 EFTA02672821 Executive Summary - Indicative Term Sheet Level %It Illttli I urnao.und I, urn', I IP Scuunty IX,cnotoci Serie, A 1-•clumgeribk Ka:enable Pruterred !dun,. I hi itteri,l R ire :s.-. pc.ahl, ...di ar In -kind] Maturity Ihite ($i ;arc, from Cloiang Is.tre Pnee I ',SI II 9 per shirr trim Sire US$30.000.000 eliming Date IN‘nernher In' Zoi 1 Cornet-don Scrim A Preferred comet at any time after *Qualified I.isting at a PM) discount to the lastme Price Antilhlutton the Comvnion Price will be subject to a qmcm if the Company itsue. Ndii tonal at a price per 'hare less than the them applicable Conerrqor Prier, VOini Rights Each share of Preferred st.ock will have the right to a number of antes equal to the number of 'hares of (lam A common onck rssuahk uµ a-. comersion of each share of preferred stock Irrotectiae Pruci ton, t 'or itt of the holder. of at le-aq .7, 0 I'out the Scne, A Picfermi will be requtred to • Alter any pain iNilin of the attic Its of incorporat ii,ra or the l, laws: • Appnwe am INSILICI ion or wrier. of trans.se ' deemed to bc a liquidarren of the CorneurY. • Approve am mimed pans. inuractions. • Apprv‘e any merger or other e.irporate reorsranuatien. • IX-clan:or pay any dnidend ocdrqnhution or trppiroae ran rcpurch.b.: with respect to die l'n:terred or Common stock. hrentor Rights • Maintain propertionate ownrrihip. • ROI of First Refusal: • Co-Sale Rights. • DratAlons Rights 4 EFTA_R1_01947038 EFTA02672822 Executive Summary — Organizational Structure Galloway Holdings Galloway (LISTCO) Control stakes transferred to LISTCO. which Partners will be a publicly traded holding company (Mgmt Co) Strategic Turnaround Fund (Hedge Fund) • Standard 2%/20% management fees paid by LISTCO ("GH") and Hedge Fund to the Mgmt Co. Bruce Galloway Aaron Braun (Co- • Additional 10% Incentive Fee of Net (Co-Chairman & Chairman & Co• Co-CEO) CEO) Appreciation which exceeds 2.5x return of S&P • 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 Operations Finance 5 EFTA_R1_01947039 EFTA02672823  Market Opportunity EQUITY MARKET CAPITALIZATION kt;SSbillions) Saudi Arabia Singapore Mexico Russian Federation Korea Hong Kong SAR, China Brazil India US (Small & Micro Cap OTC) China 500 1,000 1,500 2.000 2.500 3,000 3,500 4,000 US (Small Hong Russian & Micro Singaporei Saudi China India Brazil Kong SARI Korea Federatto Mexico Cap • Arabia China n OTC) I Oa Equity Market Capitalization 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 ofexchange-traded US Small & Micro Gaps and OTC equities is comparable in size with the largest emerging market stock markets, but with significantly better trading liquidity, transparency and regulation Swam. World Bank and txmarkets corn (Due as of December 31. 2012) 6 EFTA_R1_01947040 EFTA02672824  Market Opportunity US Equity Market Composition OT£= TIM Oat leadiacilaa VIII Galena CaPailia Pe (max, -.mecum res re ea 'info ra plICOVVION te V sn4 go:* CO.Or. To G) e/ b're Otte% nmorepcnr. corprant RY nee mei hum., sranttires. omirf box data,. end Tr4 .cornor.41,4 • r.,44.44crot nrrt3+444164nniX4 DO4nr443 br . annbe Yerray orocrann• OTCCX drnastrit "Inftrel nirrefwribinailfter riair041441, IO.r'r IWO* to Ana na. Two ..f a large Cap • Mid Cap =Ca 3% The Venial Slap Iteritepla• ma Curren U.S Rattling Campania Tb OICOlanailailateeen ranald VIOa ne Wen' te May a. asap an.. • Small Cap repatinala US Waist, ISEC a at. o 14444rWall) &me Otaill nu none...yr Marc. a . Maar Ma -wry mos na w warn ti nw adoiare t; rep.inan do • Micro The OTC ineamiam a aka Oa ralinta M FIS operas PC &nem Sat 101‘201M T.• 70% 1% • Ultra Micro raw, Ann be SW rod blot reconna son., %It vide or/ Ins errouncrei CIEPink Tim Open larkapacie with actable Minding Campania no OTC Pm* meatifra cam annsi a tree 4:44.44u4t amyl encotes i" 444.1•04, rreOra r ' T x ananao. . la a am co naafi*. !ha an nor 5.044440`441044.41; ee. a oar naa , ^ MI WS LTV sviYealftgen4 Ye t< lanes Trxrannuton natter :IOWA • 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 ▪ Jr.: rt and otantailicts coin (Data as of Dttember M.2012) EFTA_R1_01947041 EFTA02672825  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 Lack of • Reputational concerns Sponsorship Source Company data 8 EFTA_R1_01947042 EFTA02672826 Market Opportunity Limited Competition RIP Seaside Bu)side The winnowing of broker-dealers which Rodman & Renshaw WInom:reek ere active in the Small & Mid Cap lint Montauk Laums ------ c'sector has dramatically altered the First Tennessee Vision Capital Is - competitive ul landscape V Finance Special Situations edge fund participation is virtually not Gktcher Barron Partners - . existent. Position sizes of large funds think Equities Yorkville are too large for the sector and most of Pali Capital 'frinad the smaller, dedicated funds have shut Morgan Joseph down due to poor performance Merriman Curham • Traditional long-only funds are (ITAX 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 EFTA_R1_01947043 EFTA02672827  Market Opportunity Idealpoint in the cycle • US economic growth expected to lead all developed markets Current Nlarket • Monetary policy remains extremely accomodative • Low interest rates spurring increased Growth Distressed risk appetite (201 1-2015) (2007-2(x8) • 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 supportivefor the next 2-4 years EFTA_R1_01947044 EFTA02672828 Strategy & Execution Growth • Fundamental Valuation Potential • Management Change Metrics • Financial Recapitalization • Historical Highs • Financial Analysis • Macro Environment • Asset Value • Industry Dynamics • Industry/Product cycle • 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 EFTA_R1_01947045 EFTA02672829 Strategy a Execution Russell Investments Microcap Indexes Performance 350 300 250 —Micro Index Within the Microcap em•BA-Growth sector, Value stocks + . 1*(1.01-Value have consistently outperformed Growth 0 • • stocks in both up and e oc)% eeee % % e e 4, down markets Russell Mierocap Value Index (M-Value) Russell Microcap Growth Index (M-Growth) wcaov alc.3,Ova:cke-synaoc rtnir,ROG - -a Lacer freed Reuters tiler Syrrtd :. 'o0 average market cap ($8) 0 357 Wognsla average) market Cap (sa) 0428 .'” 'nerket Cap (WI 0 114 Sedan instal cop (SB) 0 'a , -.: company el market ceo (Se) 1200 Swum conosny to mental cap ($B) ' /CO ;- ,ractedstles Chatectarlstles 12f, ProeMcok . .c.lo y1111 1e - v dere 01111 , am,ngs (a ...germ earrongs) 15 e . 'AC-Wring.lel+.210ve arn.ngs) ,Agterni growth bream 00 12c: ‘ S toetterm growth breast(%) ' cr :.--++.) + ' 5 p, g0 GrClit 12 EFTA_R1_01947046 EFTA02672830 Strategy & Execution Clearly defined and historically successful Investment Process Due Execution Screening Diligence • "Bottoms-Up" Financial • Negotiations Board/Mgmt role • M&A • 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 EFTA_R1_01947047 EFTA02672831 Strategy a Execution GP's core investment universe Tech/I-elm consists of approximately 500- 1,000 companies across five key sectors, which collectively represent approximately 50% of the total market cap in the small Healiheare Natural Seri ices 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 EFTA_R1_01947048 EFTA02672832  Strategy a Execution I I Share I I I Price • Shall" • Change slure cicrlysts • M3IIIII0IUOI I inPlcIticisted I &Wen &Ant I Invonitmil I Set Skit (tom w.t•ig in gni/0g [Wks I %utterly I return • ISxcal %drag I reingg• I Complete Exit First Exiti (5-10x) (2x) I ntry point (x) ; Time 12-24 months 9-12 months WK4 '-36 months It • 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 EFTA_R1_01947049 EFTA02672833  Strategy a Execution Investment Buckets Although Deep Value, Turnaround investments will represent the main • Deep, Deep Value focus of the portfolio, GP does make "Turnaround" shorter-term opportunistic investments • Financial Engineering Financial Engineering plays include pre- a High Growth/ IPO financings, bridge equity, International mezzanine investments, etc. a 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 Ugh 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 so (months) 16 EFTA_R1_01947050 EFTA02672834 Track Record: Bruce Galloway Proven track record ofsuccessful investing: 20+% annual returns over past 15 years Present 2005-2013 IIIIIILLOWAY 1994-2005 •rnham i lloway Capital anagemcnt (CEO) ARTNERS (Co- CEO) 1983 Securities (MD) • Launched STEP • Managed USS25 mil • Managed USS100 mil turnaround fund OBA Stern in assets • Published research on • 26+ years of Small & Micro cap Business School distressed 1979 companies experience • l.ed several corporate finance transactions • Second to none investment track e conomics record BA Hobart Williams • Unparalleled network of Smith relationships College • Extensive experience with turnarounds, activist investing and "bear" markets 17 EFTA_R1_01947051 EFTA02672835  Track Record: Bruce Galloway Russell Year S&P 500 2000 Dow Jones Galloway 2009 13.44 7.50% 41.46% Selected Investment Hi hli hts stEr Fund 2008 -38.49 •f -33.84% -63.46% Command Security (MOC) - 2002 2007 3.53' 6.43% -34.81% • Entry Price: $0.60 2006 13.62 I 16.29% 42.42% • Exit Price: $3.20 3.00% 45.37 -0.61 • Cumulative Return: 350% 8.99' -21.58 3.15 aike:Iir"' • Exit: 2009 r/22 IlirnilirE 83.24 2. Radnet (RGX/RDNT) - 2004 rEr -16.76% .?' -36.99'. • Entry Price: $3.00 Personal -13.04 1.03 -7.10 C • Exit Price: $13.00 Account -10.14 -4.20% ,, -58.95% • Cumulative Return: 300% 19.62 . 904.63% • Exit: 2005 26.67 M.35 16.10 . -33.47% 3. Seitel (SITL) - 2005 31.01 20.52' 22.64 1_17.37% • Entry Price: $0.24 20.26' 26.01 ' -8.36 • Exit Price: $4.60 26.21 33.45 i 98.78 • Cumulative Return: 2000% -1.54' . -3.18% 2.14 ... , 48, • Exit: 200? 7.06% 17.00% 13.72 Cumulative 285.80% 3778.52% Avg. Annual 6.02% 6.37% 23.82% No4e All ivrfonnance munbca+ art autIncd and n‘niIalne upon tcyuni npprinatnaicly 10-. pa annum Cunt, k-ni Into I Kunio,ion mode in 2010 Perfonnanm for 2010iTmeni is cnimmed in be 18 EFTA_R1_01947052 EFTA02672836  Case Studies: Command Security MOM 142 t. Company Profile: Pa Exit Y. • Command Security is a provider of contract security services with 112 over 30 years of experience and 6,000 personnel. xn u• • The company provides armed and unarmed security personnel U2 to governments, companies, Acquire cooiroilink O Mock schools and H• nn residentiaUcommercial buildings Eray as well as customer service • Rept iccd Redid of Directors • look in cir n ( hitorrisn '.3 personnel for airlines • Itniushi ituJi Kcy Investment Considerations: .14..MINts NO. • US$72 mio of annual revenue at time of investment (trading at Value Creation: over I2x Revenue/Market Cap.) • Took over control of the Board and acted as Chairman in order Favorable industry dynamics post- to institute a plan to enhance the company's reputation 9/ I I • Leverage network of relationships to bring in Rudy Guliani to Over 4x return on investment lend credibility to the company's turnaround plan 19 So unic oiciniclici, coin and compan,, reponi EFTA_R1_01947053 EFTA02672837  Case Studies: Radiologix/RadNet IRGX/RONT) Company Profile: • Acquired by RadNet in November 2006, Radiologix was Exit 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: •IOXISP‘sen. • Solidly profitable, unleveraged ICU XX? Cot ur A...• VS. so) Soe Col b Cos 2,3“ coS tsw 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 20 Souroc °knurl< I. cam and comixtny rerun. EFTA_R1_01947054 EFTA02672838  Case Studies: Pier1Imports IPIRI 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. s4 Key Investment Considerations: Initial Entry Doubkd • Strong liquidity position with &sake over USS200 million in unencumbered cash Favorable competitive dynamics due to bankruptcy of leading competitor • Strong profit growth potential • In-depth research of operations and store visits with over USS1.0 billion in • Debt buy-back annual sales • Return to operational profitability • 4x return on investment SOU., c uitirnMet. cOm and CaxtniXtilt fcrtorl‘ EFTA_R1_01947055 EFTA02672839 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