GrizzlyRock 2013 Annual Investor Letter

GrizzlyRock Value Partners, LP
2013 Annual Investor Letter

February 5
th
, 2014

Fellow Partners,

During 2013, GrizzlyRock Value Partners, LP (the Fund) returned 13.64% net of fees and
was profitable in three out of four quarters. Since inception in January 2012, the Fund has
returned 29.1% (annually compounding investor capital at ~13.6%). This has been achieved
with an average net long exposure of less than 50% and delivering positive returns in seven
out of eight calendar quarters. This two-year result represents solid progress toward
GrizzlyRocks goal of strong long-term risk-adjusted returns.

As an investor with 100% of my investible net worth invested alongside you, I view the Funds
return in 2013 as in-line with our performance expectations irrespective of broader market
fluctuations. Based on the current portfolio, I believe we can continue to compound upon our
robust initial two years of performance.

The corporate securities markets in which GrizzlyRock invests were somewhat divergent
during 2013. High yield corporate bonds returned only their annual coupon of roughly 6%
233 S Wacker, Suite 8625 Chicago IL 60606 | (312) 605-0215 | www.grizzlyrockcapital.com 1

during the year. We maintain our previously shared thoughts on the high yield markets lack
of appeal. High yield investors are not being compensated for assuming credit risk.
Additionally, high yield bonds exhibit significant downside risk from interest rate movements
and increasingly weak covenant protections.

On the other hand, stock markets in most developed economies advanced continuously during
2013. American stocks increased ~30% while the MSCI World Stock Market index excluding
the United States gained nearly 18%. Broad economic conditions remain fruitful for focused
businesses with steady GDP growth, all-time high profit margins, declining unemployment,
and persistently low cost of capital courtesy of the US Federal Reserve and global central bank
policies. Yet the largest factor driving stock prices in 2013 was increasing earnings multiples.

At year end 2013, the S&P 500 traded at about 15.9x estimated earnings up from 12.7x one-
year prior. This ~25% expansion in earnings multiple drove the majority of stock market
appreciation while profit increases represented the remainder. According to Goldman Sachs,
since 1976 the S&P 500 has only traded at or above this level of earnings 5% of the time.
Accordingly, we expect mean reversion over time via either increased earnings, a decreased
multiple, or both. While noting the current outlier period, our focus remains on specific ideas.

As you know, GrizzlyRock is not in the business of anticipating macro movements. We simply
pursue our repeatable investment process with relentless discipline while
demanding risk mispricing in excess of 40%. We are ambivalent if the stock market is
at all-time highs or all-time lows or high yield credit is or is not attractive. We have the skills,
will, and mandate to capture opportunity across markets. We currently see select
opportunities in high yield corporate debt and value equities while finding a plethora of event-
driven special situations and short equity ideas.

Performance Attribution

2013 GrizzlyRock Value Partners Return Attribution by Category


When assessed at face value, the Funds performance of 13.64% in 2013 is similar to 2012s
performance of 13.56%. Yet in 2012 the high yield markets were attractive compared to the
highly unattractive value proposition offered during 2013. As such, credit securities
contributed 3.4% of our 13.6% gain in 2013 as opposed to 6.6% in 2012 (chart on page 2)
This reduction in attribution from high yield securities is due to reduced Fund allocation. As
we enter 2014, the Fund has only select exposure to high yield credit while we eagerly
anticipate opportunities to purchase attractive high yield bonds when conditions improve.

With many corporations flush with confidence as the Great Recession fades from the memories
of many market participants, 2013 marked increased activity for both company management
teams and (currently popular) activist shareholders. Both factors increased the availability of
event-driven situations and we have been taking advantage. Aggressive decisions by
corporate management teams provide ample selection for both capturing prescient value
creation and profiting from ill-fated strategy or confidence gone awry in the short book.

Our short positions detracted from performance during 2013. While not ideal, performance
of our short book is not surprising given US equity markets gained over 30%. However, our
short positions in aggregate were profitable during the fourth quarter in spite on a rising stock
market and we believe many of these positions remain significantly overvalued.

Yearly Portfolio Review

GRVP
Exposure
Q1 Q2 Q3 Q4
Annual
Average
Gross Long 53.9% 65.6% 70.9% 67.0% 64.8%
Gross Short 21.7% 14.5% 14.4% 21.5% 16.8%
Net Exposure 50.2% 51.2% 56.5% 45.5% 48.0%

During the first half of 2013 we were aggressive with select value and event driven long
investments while less aggressive with short positions. Towards the middle of the year, we
increased selective focus on a handful of investments which required additional focus while
easing back on our shorts in light of equity markets persistent advance. Towards the end of
the year, we began to increase our allocation to specific short positions.

As many investments played out much quicker than anticipated during 2013, GrizzlyRock
experienced more portfolio turnover than normal. For further topical commentary, refer to
the detailed discussion included in the First Quarter 2013 letter.

At year-end, we held 12 long positions and 15 short positions with 45.5% net long exposure.
The Funds top 5 long positions at year-end represented 42% of the aggregate portfolio while
the top 5 shorts represented 8.5% of the aggregate portfolio.

2013 Lessons Learned

Our annual letters include a few items not included in quarterly correspondence. The first item
consists of both (1) a transparent discussion of factors which adversely impacted performance
and (2) a brief discussion of core principles which played an integral role in our annual
performance. The forthcoming second item included is an especially intriguing idea.

Our main lesson learned in 2013 is to beware when searching for value opportunities in
difficult industries. During the third quarter, a top holding Sandstorm Metals & Energy
(CVE:SND), experienced visceral problems in large part due to industry-wide issues. (Please
see our third quarter letter which details many of the points of our long thesis.) In retrospect,
we did not appreciate the negative asymmetry of the metals and mining industry, which
exacerbated the company-specific risks which we properly assessed.

On the positive side, we did not let Sandstorms issues percolate within the Fund. When the
problems arose, we sold a significant amount of the Funds position given the change in our
thesis. The unanticipated events remind us why we assess situations probabilistically and are
pragmatic (as opposed to dogmatic) in risk control. In December 2013, we exited the position
completely as problems at the second of three major projects limited future gain. Sandstorm
was the first permanent capital impairment for our Fund. While clearly displeased with the
result, the Sandstorm Metals experience has reminded us to demand an ever-greater margin
of safety when investing in structurally challenged industries.

2013 Core Principles Reaffirmed

At GrizzlyRock, we believe in leveraging our knowledge of credit analysis to pursue mispriced
risk regardless of capital structure tranche. While current high yield markets are unappealing,
that does not mean our credit skills languish unused. For example, the core thesis underlying
our 123% gain in Genworth Financial (more in the appendix on page 12) was based on a
detailed credit analysis and probabilistic assumption that Genworths structurally challenged
operations would be able to be legally separated from their more profitable operations in a
downside scenario. Of course the analysis was much more detailed (and beyond the scope of
this letter) yet we relay this story to emphasize our core principle of leveraging credit analysis
to aid our investing.

Another core principle reaffirmed in 2013 was to continue to demand our requisite 40%+
margin of safety regardless of market activity. Ex-post facto, as risk markets accelerated
seemingly every month in 2013, our performance would have been better if we lowered our
ex-ante hurdle rate on new long investments. Yet, our thinking distinctly disregards the peril
of recency bias so fundamental to human thought. We simply do not chase returns that
are not attractive when assessed with conservative probability. Our insistence in
demanding a vast margin of safety is principally designed to preserve and compound capital
regardless of market cycles.

Recall, GrizzlyRocks core identity was forged in the proverbial fire of investing capital during
2008. Regardless of the fact that was four years before we opened the Fund, our long-term

core advantage can be defined as follows: (1) demanding a substantial margin of safety and
(2) primacy of focusing on the investment process inclusive of a through ex-ante analysis of
multiple probabilistic scenarios.

As such, our focus is on compounding capital over the long term. We care very little about
outperforming any one index during an arbitrary 12 month period and very much
about compounding capital exponentially over the intermediate and long term time
horizons. Speaking of compounding capital, we now highlight a business with a stellar
chance of compounding capital for many years to come.

Current Fund Investment: Currency Exchange International (TSE:CXI)

How many businesses are capable of consistently produce 15%+ normalized return on assets
and a 20%+ return on equity with an unlevered balance sheet? Of those businesses, how
many are run by a successful operator who owns 25% of the business and previously built
and sold a successful company in the same market? Next, how many are capital-light,
recurring revenue service providers with massive embedded operating leverage beginning to
flow through the financial statements?

Your list must be dwindling. Lets add one last question: how many businesses have a
definitive near term catalyst to increase margins 15%+? At GrizzlyRock, we only know of one
business with the aforementioned characteristics Currency Exchange International Corp.

GrizzlyRock purchased shares of Currency Exchange in September and October of 2013 with
an average price of CAD $8.90 per share. As owners of both physical shares in hand and
electronically traded shares on the Toronto Stock Exchange, we plan on being extremely long-
term holders of this compounding machine. So what does Currency Exchange do?

Currency Exchange is primarily a business-to-business wholesale provider of foreign exchange
services to regional and mid-market banks. Said more plainly, Currency Exchange is a high-
quality technology & logistics platform that procures foreign currency notes for bank
customers. For example, if you are taking your family on a trip to Paris you may want to
obtain a handful of Euro notes before departing. You would go to your bank and request
certain denominations say ten 20 notes and fifteen 10 notes. If your bank is a Currency
Exchange customer, Currency Exchange will procure the exact request and send to either
your bank for pickup or directly to your house. Banks widely offer this service to customers
yet tend to outsource note procurement as they lack the requisite scale required for efficiency.
Currency Exchange is able to provide these services overnight via their customized front-end
software and their four vaults (two main and two auxiliary vaults).

Additionally, Currency Exchange has 24 retail branches and kiosks. These business-to-
consumer outlets have stronger unit margins yet process significantly less currency than
wholesale operations. The US-based consumer kiosks tend to be net buyers of foreign
currency while the wholesale business tends to be a net seller of foreign currency allowing
Currency Exchange to generate margin on both the purchase and sale of foreign currency.

CXIs competitive advantages are significant

(1) Flexible, scalable technology platform

(2) Strong customer service and ease of use

(3) Focused, passionate management

(4) Prices in line with large competitors with the service quality of a specialist

(5) Customers do not have to share valuable branch data with a competitor (i.e. Bank of
America or Wells Fargo)

The first two competitive advantages, technology and service, are paramount to
CXIs continued success. After initially being skeptical of these intangible competitive
advantages, we gained significant comfort by placing a multitude of customer calls prior to
purchasing common shares in the business.

Currently regulated as a money service business (akin to Western Union and Travelex),
Currency Exchange is in the final months of an approximately 18 months process to become
a banker's bank in Canada. GrizzlyRock expects this endeavor (endeavour if you are
Canadian!) to conclude early in 2014. As a bankers bank, Currency Exchange will continue
to provide foreign currency exchange services to local banks and will not open branches or
make loans. There are two main reasons for CXI to undertake the arduous process of
becoming a bankers bank (1) increased regulatory oversight and (2) an approximately 20
basis point decrease in the cost of sourcing foreign currency when given access to both the
US Federal Reserve window and the Bank of Canada.

Why Does the Opportunity in Currency Exchange Shares Exist?

(1) Currency Exchange does not have a natural buyer of minority shares

Listed in Canada with a CAD $70 million market value, most institutional investors are wholly
unaware of Currency Exchange. As EBITDA increases above $10 million dollars per year over
the next few years, many institutional investors will begin to track the business. With a few
notable exceptions, the current shareholder base is less sophisticated in understanding both
business nuance and the massive forthcoming operating leverage. As the shareholder base
institutionalizes, Currency Exchanges price should rise towards intrinsic value.

(2) Misperception of the core wholesale nature of operations as a scalable business to
business enterprise

Currency Exchange appears to have its roots in the retail kiosk business (i.e. a poor mans
Travelex). This misconception derives from the early annual reports which reference just the
retail business not the wholesale business. CEO Randolph Pinna negotiated the purchase of
many of Bank of Ireland retail kiosk locations as a portion of his severance package when the
Bank of Ireland chose to exit the business during the Great Recession. Due to the nature of
the sale, Mr. Pinna and the rest of the Currency Exchange team had a multi-year non-compete
clause in their contracts. Happily for shareholders, Mr. Pinna and team spent their time during


the non-compete period building their retail branch base while optimizing their proprietary
wholesale software platform.

Currency Exchanges explosive recent growth is a direct result of this dynamic software
system and stellar customer service to wholesale clients. This technology-enabled logistics
business appears much stodgier than true prospects. GrizzlyRock expects a dynamic re-rating
of business valuation as this perception fades.

(3) Currency Exchange has massive embedded operating leverage

With their scalable technology system firmly in place, Currency Exchange began further
institutionalizing their operating staff and management team. Currency Exchange now is able
to leverage their sustainable infrastructure as incremental volume from new customers is
processed efficiently. The new volume will earn full margin while requiring minimal additional
support staff thus increasing margins dramatically over the next 12 to 24 months.

Valuation & Conclusion

We estimate Currency Exchange is currently priced at one half its current private market value
if the business were to be acquired. Further, GrizzlyRock expects business value to grow
15%+ per year as Currency Exchange begins servicing larger and larger financial institutions
and increases margins.

Accordingly, GrizzlyRock conservatively estimates Currency Exchanges current valuation to
be approximately $125 million which implies 100%+ equity upside for the share price over
the next few years. As return potential is inconsequential without considering potential
investment downside, what then is Currency Exchanges value in a stress scenario? Assuming
no growth and a stressed EBITDA multiple GrizzlyRock values the business at ~$55 million
which implies a ~20% decline in share price. GrizzlyRock considers the stress case to be
highly unlikely and expects substantial price appreciation over the next few years.


The Pyramid of Success

There are two personal mementos on my desk amidst the myriad of research & industry
information: my wedding picture and a signed copy of John Woodens Pyramid of Success.
While the Pyramid was initially written with an eye to athletic success, the 14 main traits that
build towards competitive greatness are foundational to successful long-lasting partnerships
of any type including investment management.

During 2012 and 2013, I was the sole professional at GrizzlyRock and accordingly performed
a myriad of tasks. Yet, the Pyramid of Success has three building blocks which are impossible
in the absence of a team cooperation, friendship, and team spirit.

As Managing Partner of GrizzlyRock, I have expressed to each of you my commitment to build
a robust investment management firm. As such, we are extremely pleased to announce those
building blocks are now firmly in place at GrizzlyRock. We have partnered with three quality
people each with a history of exemplary professional success. Here is a link to the formal
press release: http://grizzlyrockcapital.com/press-release-grizzlyrock-capital-expands-management-team/

Please plan to meet each team member at this years Annual Meeting on May 18
th
in Chicago.
Below is a short introduction to each of our new GrizzlyRock professionals:

Doug Laux, CPA Chief Financial Officer

As Chief Financial Officer, Doug brings over 30 years of experience to GrizzlyRock.
Dougs breadth of knowledge and experience includes private and public companies
(both international and domestic) and includes strengths in balance sheet &
operational restructuring, M&A, IPOs, and bankruptcy situations. Doug spent the
first 20 years of his career at Ernst & Young in Chicago, the last 9 of which he was
a partner. Doug has also served as Chief Financial Officer for a number of diverse

business including ANC Rental Corporation (holding company for Alamo and
National Car Rental), EaglePitcher (manufacturing), Remy International (auto
supplier), and InterAct Public Safety (public safety software). He has also served
on multiple corporate boards including SIRVA (corporate relocation services), and
RJ OBrien (independent futures brokerage).

Doug holds a B.S. in Accounting from the University of Illinois at Urbana-
Champaign and is a Certified Public Accountant.

Chris Ricciardi, CAIA Managing Partner, Business Development

Chris has over 8 years of experience in alternative investments and is a Managing
Partner and Head of Business Development for GrizzlyRock Capital. Chris began
his career trading in the global futures and options markets and later joined Man
Financials West Coast Office in Los Angeles providing global execution services
and managed futures solutions to broker dealers, registered investment advisors
and institutions. Chris went on to co-found Herron Capital Management, a
registered Commodity Trading Advisor and Introducing Broker. Prior to joining
GrizzlyRock, Chris served as Director of Strategic Relationship for Altegris
Investments where he focused on the distribution of both private and public
investment solutions to a diverse universe of professional investors, banks, wealth
managers, and platforms.

Chris holds a Chartered Alternative Investment Analyst (CAIA) designation and a
B.S. in Business Administration from San Diego State University.

Saidal Mohmand Vice President, Investment Research

As Vice President of Investment Research, Saidal plays an integral role in
GrizzlyRocks investment idea generation, analysis and portfolio management.
Saidal began his career in research at Greenleaf Trust, a leading trust company in
Michigan, where he covered banking, rail, and technical services sectors. Prior to
GrizzlyRock, Saidal served as an analyst for Fifth Third Banks Leveraged Finance
team based in Chicago, where he focused on fundamental analysis and credit
research.

Saidal holds a B.A. in Finance and Accounting from Western Michigan University
(Magna Cum Laude) and is a member of the prestigious Value Investors Club; an
investment forum made up of a select group of 250 global value investors.


Expanded Team Capabilities

Our new professional partners brief biographies speak for themselves with respect to
capabilities. Yet you as our Partner are likely interested in contextualizing how each
professional fits into GrizzlyRock. The best way to think about the expanded GrizzlyRock staff
is a Venn diagram with multiple overlapping circles.

Doug, Chris, and I work jointly to set GrizzlyRock Capitals strategic direction and ensure the
company is laser-focused and stable. While this letter pertains to GrizzlyRock Value Partners
(the Fund), the Funds long-term success will be inextricably linked to the stability and focus
of the management company. We are committed to building a thriving successful
management company as a firm foundation for Fund success.

Chris will lead the firms communication efforts with both prospective and current investors.
Chriss experience supporting professional investors will further GrizzlyRocks efforts to
provide you exceptional investment services.

Doug leads all Fund operations as well as providing extensive business acumen to the
GrizzlyRock investment team. Given his diverse background and experience in corporate
finance, his addition is of tremendous value to our team and our investors.

As the investment team, Saidal and I focus on sourcing and analyzing prospective investments
as well as maintaining a sharp eye on capital already deployed. One of GrizzlyRocks core
competencies is to capture opportunity that others may miss. Saidals skills mesh extremely
well with my own and I am looking forward to seeing what we uncover together. Expect us
to pursue a wide range of corporate opportunities over the years to come.

Lastly, each of you has my direct phone line and my pledge to communicate regarding any
and all Fund related matters you desire.

Annual Meeting & Operational Items

Please note our 2
nd
Annual Meeting will be held in Chicago on the afternoon of May 18
th

(Sunday before Memorial Day weekend). Location and time will be delivered along with an
RSVP request from Chris so we can have an accurate head count. The meeting will begin with
a brief update on Fund operations inclusive of ample time for questions and answers. Last
years question and answer session was lively you have set a very high bar for yourselves!

After the question & answer session, we will enjoy a meal together. If I may be so bold,
meeting and networking with your fellow investors will undoubtedly prove valuable as many
Partners who attended last year will attest. We look forward to seeing you and your family in
May.

Lastly, Doug has asked me to remind you to expect a copy of your 2013 K-1 in early April.
We will update you with more specific timing as provided to us by Rothstein Kass as our audit
and K-1 provider.

Conclusion

As we begin our third year of operations, I am encouraged by our progress to date. The past
two years have seen solid performance (neither spectacular nor tepid in my mind), we have
built the GrizzlyRock team, and the quality of our investor base is superb.

As mentioned at last years Annual Meeting, the comment regarding the quality of our investor
base is not simply a laudatory remark this fact makes our task much easier. When (not if)
markets prove turbulent, whether during 2014 or any other year, our knowledge that you
believe as we do give us confidence to focus and execute for intermediate and long term
results.

At March 1
st
, GrizzlyRock is open for additional and new subscriptions. Please contact us for
further information.

Sincerely,

Kyle Mowery
Managing Partner, GrizzlyRock Capital

www.grizzlyrockcapital.com
(312) 605-6317 | kyle@grizzlyrockcapital.com

Legal Disclaimer

This is not an offering or the solicitation of an offer to purchase an interest in GrizzlyRock
Value Partners, LP (the Fund). Any such offer or solicitation will be made only to qualified
investors by means of a Confidential Private Placement Memorandum and only in those
jurisdictions where permitted by law.

The Funds investment strategy does not track the S&P 500 nor any other index. Comparison
shown for informational purposes only.

No assurance can be given that the investment objective will be achieved or that an investor
will receive a return of all or part of his or her investment. Investment results may vary
substantially over any given time period. Past performance not indicative of future results.


Appendix: Fourth Quarter Closed Positions Review (organized by investment type)

As included each quarter, the below are brief reviews of investments exited during the fourth
quarter. For year end, we chose to present the closed position review in the Appendix as this
commentary focuses on just the fourth quarter while the letter covers the full year.

Credit
Fifth Street Finance Baby Bonds (realized gain of +4% from inception): A high yield
security tranche of Fifth Streets business development company, we purchased the
bonds after realizing that credit losses would have to be 3x worse than in the 2008
and 2009 Great Recession for our investment to be impaired. However, the ex-ante
return became insufficient to account for increased interest rate risk and we exited.

Value Equity
Brookfield Real Estate Services (realized gain of +23% from inception): An original
GrizzlyRock investment, we purchased Brookfield Real Estate Services in anticipation
of the 9% yearly dividend yield and a chance for a buyout by parent Brookfield Asset
Management at a significant premium. We sold Brookfield Real Estate Services as the
buyout became increasingly unlikely while potential interest rate increases & a frothy
Canadian real estate market lessened Brookfield Real Estate Services attractiveness
and margin of safety.

Genworth Financial (realized gain of +123% from position inception): A deep-value
investment predicated on Genworths ability to ring fence their ailing US and
Australian mortgage insurance operations from the rest of their business. While our
initial thesis occurred one year ago, Genworth continued to improve operations and
sell underperforming business units throughout 2013. Genworth was sold as the
majority of the low risk investment gains had been realized.

Sandstorm Metals & Energy (realized loss of 60% from position inception): Discussed
at length in the Third Quarter 2013 Letter, Sandstorm Metals was purchased in
anticipation of increasing free cash flow beginning in late 2013. Due to a series of
adverse outcomes, Sandstorms free cash flow generation capabilities have been
significantly impaired and are unlikely to dramatically rebound in the near term.

Event- Driven Equity
United Online / FTD (realized gain of +11% from position inception): We purchased
United Online in anticipation of the company fulfilling their year-long process to split
into two unique publicly traded companies. Legacy United Online is a declining
internet service provider with a tremendous free cash flow profile while the new FTD
flower distribution business is asset-light and oligopolistic to boot! We earned a solid
profit on both businesses as they were purchased by two very different investor types
and sold as the positions moved closer to full value, decreasing our margin of safety.

Short
Tempur Sealy International (realized gain of +24% from position inception):
GrizzlyRock shorted Temper Sealy in anticipation of poor same store sales growth and
decreasing margins due to increasing industry competition and a lack of new products.
The short was closed as the price moved quickly towards our price target.

GrizzlyRock 2013 Annual Investor Letter

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