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9th annual Spring value investing congress

April 3, 2014 Las Vegas, NV Focusing Where Others Arent


Eric Andersen, Western Standard

www.ValueInvestingCongress.com

Diversified long/short fund with 40 long positions and 50+ short positions We aim to provide capital appreciation over a long-term period Aligned incentives
100% of employees net worth invested in the fund
No personal accounts are allowed

1/4 of capital is from employee and immediate family No hidden fees to LPs

Investment Focus
Companies with market capitalizations below $500mm Underfollowed companies with little to no sell-side coverage
No one is educating the market

90% of our work is focused on downside to avoid losses

Investment Ideas
We cast a wide net in our search for value
Proprietary screens Database of >500 securities News alerts on hundreds of companies Investor network Management team relationships Brokerage firm conferences Currently invested in 13 different countries

Investment Process
Fundamental analysis
Focus on the downside first Quantify our analysis with detailed valuation work Understand the current business through company specific and industry level diligence Analyze the sustainability of a companys competitive advantage Face-to-face evaluation of management teams

Security Selection
We look for price discrepancies between the value of a business and the current share price Why are we so lucky to have this investment opportunity?
Complexity Corporate change Company distress Long holding period requirement

Risk Management
Common sense
Is this a risk I want to take with my mothers retirement savings?

Good businesses with good management at attractive prices We do not employ leverage to enhance returns

Ticker: FORR

High quality company with high recurring revenue, high client retention rates, and significant visibility Key player serving a large and growing TAM supported by secular growth Sales force restructuring will drive substantial earnings growth Net cash balance sheet + FCF generation supports large returns of capital to shareholders

Business Overview
Leading technology research and advisory company Attractive business with ~70% recurring revenues Limited invested capital and 60% incremental margins Diversified with no customer >2% of sales
Data 9% Leadership Boards 20% Non-Recurring Revenue 31% Core Research 40% Events 4% Consulting 27%

Product Overview
Forresters primary areas of focus:
Business Technology (52% of sales):
Selling traditional tech research to traditional tech users (systems of record)
Ex: Chief Technology Officers, Chief Information Officers, etc.

Marketing & Strategy (43% of sales):


Selling tech research to help clients better manage, reach, and communicate with customers (systems of engagement)
Ex: Chief Marketing Officers, Customer Intelligence VPs, etc.

This is where Forrester dominates and differentiates itself from peers Tech budgets for customer interaction are growing much faster than traditional tech (+15%/yr vs +1-2%/yr)

Industry Overview
Total addressable market of $12 billion and growing
Two biggest players have 17.5% market share:
Gartner with 15% and Forrester with 2.5% Competitors are small and lack scale

High growth industry


Tech research grows >2x tech spending and tech spending growing faster than GDP
Tech spending expected to grow 3.2-5.5% in 2014

10-15% normalized annual organic growth rates Forrester and Gartner have recently commented they cannot hire fast enough to keep up with demand

Too many changes, too quickly


Several operational decisions made in 2012 have temporarily impacted Forresters growth profile
Leadership Changes:
Replaced Chief Sales Officer and fired Chief Operating Officer

Client Delivery:
Changed to one sales rep per account vs one rep per product Changed to regional/territorial based sales reps
Majority of sales force was located in Cambridge, MA

Sales Compensation:
Completely revamped the compensation structure to a very unpopular and confusing plan

Relocated Headquarters:
Increased commutes significantly

Aftermath
Revenue growth stumbled and increased costs weighed on margins 60% of client accounts switched reps Attrition spiked especially amongst senior sales reps
Indexed Research Revenue
140

130 Sales force transition begins 120

110

100 Forrester 90 Gartner

Earnings Growth
Forresters new Chief Sales Officer has since fixed the compensation issues and revamped recruiting
Attrition levels are beginning to normalize

The new sales model is well received by clients and driving cross selling opportunities for the first time
Should drive double digit bookings growth in 2H 2014

Sales staff fully ramping over the next 12-18 months should drive double digit earnings growth beg. 2015
Fully ramped sales staff should sell ~$1 million/yr vs non ramped sales staff that sell ~$230,000/yr With 60% incremental margins, growth falls to the bottom line

Fair Value
At a peer multiple, we believe FORR is worth $48.10/sh

Downside is protected by FORRs aggressive stock repurchase program


Repurchased 16.2% of shares O/S in 2013 at average price of $36.24 2.8% above the current price

Further returns of capital likely as FORR would like to get to $100 million in cash
Implies another ~$80 million in cash to be returned in 2014

FORR has returned 42% of its market cap to shareholders since 2009 through buybacks, regular dividends, and special dividends

Investment Risks
Sales transition takes longer than expected Increased competition in marketing & strategy research Increased proliferation of free tech information available on the internet Consulting sales continue to grow faster than research sales reducing recurring revenue mix Limited float as Founder owns ~42% of the company

Ticker: OFS

Busted IPO results in skewed risk/reward


Total return of 60-80%

Limited downside as trading at 87% of BV Earnings should more than double over the next 2 years Paid to wait with a dividend yield of 11% Aligned incentives as manager owns 30%

Background
Externally managed BDC lending to the middle-market Stock sold off due to a delay in receiving SBIC drop-down approval
Approval received in December 2013

Target portfolio of $450mm


$225mm Sr Loan Fund: $189mm (84% ramped) $225mm SBIC: $49mm (22% ramped)

Small Business Investment Company


Total returns on investments of 12-16% Return on equity of >20% Access to SBA Debenture program
Interest only, bullet with 10 year maturity Fixed rate at 10 yr treasury + ~60bps Unsecured, non-recourse to manager No prepayment penalty

Direct lending platform


Proprietary database of >8k companies Lends to the lower middle-market

Earnings Growth From SBIC Ramp


ROE - SBIC Model: Investment Return Cost of funds Mgmt fee D/E Debt/Total Capital Debt - $ Equity - $ Total Assets Revenue Interest expense Management fee Loan loss provision Income (pre-incentive) Incentive fee Net Income ROE
Q413 $1.4 $5.7 Q114 $2.4 $6.7 17% Q214 $2.7 $7.9 18% Q314 $2.9 $9.4 19% Q414 $3.3 $11.3 21%

14.0% 4.0% 1.75% 2.0x 66.7% $150.0 $75.0 $225.0 $31.5 ($3.0) ($3.9) ($2.3) $22.3 ($4.5) $17.9 24%
Q115 $3.7 $12.7 12% Q215 $4.2 $14.1 12% Q315 $4.6 $15.8 12% Q415 $5.0 $17.5 10%

OFS net income LTM net income Seq Growth - %

Management
External manager owns 30%
CEO owns >10% of OFS directly

Face-to-face evaluation of management team


SBIC application process
Principals with strong, positive reputations Realized track record of superior returns benchmarked against funds of same vintage year and style Evidence of strong deal flow in investment area for proposed fund

Industry checks positive on managers

Fair Value
Upside: PE Ratio: Earnings per share Multiple Price target Dividends received through Q415 Total value received vs Current Implied dividend yield Book Value: BV/sh (Q415) Multiple Price target vs Current Dividends received through Q415 Total value received vs Current $1.87 11.0x $20.59 $2.72 $23.31 83.6% 9.1%

$14.39 126% $18.10 42.6% $2.72 $20.82 64.0%

Investment Risks
Execution risk
Target growing SBIC assets $20-30m per quarter

Interest rate risk


SBIC loans are fixed rate

Dilution
Equity offering needed of $13.6m (10% dilution)

General economic downturn


Small businesses are inordinately affected

Ticker: HART DC

Leading egg packaging company with a 10.5% FCF yield* Defensive and stable industry with few large players Restructuring program will continue to improve margins Increasing egg demand continues to drive sales growth

* Based on MCX

Industry Overview
Leading producer of molded fibre egg packaging (40% MS)

Molded fibre preferred by both consumers and packers

Business Overview
Broad portfolio of customizable products easily matches all marketing strategies
High end represents >40% of Hartmanns European sales and growing

Regional large production capabilities


Production sites: Canada, Denmark, Germany, Hungary, Croatia, and Israel
% Sales by Geography
N. America 18%

% EBIT by Geography
Corporate -15%

Europe 82%

N. America 43%

Europe 74%

Growth Drivers
Increasing demand for premium packaging in Europe
Driven by grocers as they earn >20% EBIT margins on premium eggs

Increasing penetration of molded fibre in North America


U.S. market is ~50% foam today Molded fibre gaining share as customers demand sustainable alternatives Hartmann is increasing capacity 33% over next 12 months to support demand

Increasing consumption of eggs in Europe


Egg consumption in developed Europe increased 3.9% in 2013 Population growth and urbanization are key drivers

Restructuring Program
Phase One: Completed
Divest capital intensive businesses
Management overhaul (new Chairman, CEO, CFO, and COO)

Turn around loss making segments

Centralize corporate functions

Phase Two: In Progress


Rationalize cost base Improve sales mix Optimize manufacturing facilities Expand N. American capacity

Results to Date
EBIT Margins: 5.7% -> 9.4% FCF positive since 2010 and growing ROIC %: 8.5% -> 23.0% Dividends per share: DKK 1.50 -> DKK 9.50

Fair Value
At a peer multiple, HART DC is worth DKK 286.69/sh

Investment Risks
Margins susceptible to input costs
Two largest inputs are recycled paper and energy

Low growth industry


New market opportunities in the U.S. and Central Europe given low penetration

Sales are tied to a commodity


Egg volumes are very stable

Alternative packaging materials exist