First American Capital Management, Inc.

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First American Capital Management, Inc.

  1. 1. First American Capital Management, Inc. • First American Capital Management Form ADV Part II • First American Capital Management Privacy Policy • First American Capital Management Anti-Money Laundering and Anti-Terrorism Policy This brochure provides information about the qualifications and business practices of First American Capital Management, Inc. Please contact us if you have any questions about the contents of this brochure. First American Capital Management, Inc. Offices: Corporate Office: 5567 San Nicolas Dr., Suite 101, Newport Beach, California 92660 • (949) 719-4546 Southern California Regional Office: 2100 Fifth Ave., San Diego, California 92101 • (619) 515-3425 Northern California Regional Office: 3333 Mendocino Ave., Suite 100, Santa Rosa, California 95403 • (707) 577-1159 South/Southwest Regional Office: 8435 North Stemmons Freeway, Dallas, Texas 75247 • (469) 759-3150 888-888-FACM • Internet: www.facm.com • E-mail: FACMINFO@firstam.com
  2. 2. First American Capital Management, Inc. August 15, 2002 Dear Investor: This booklet is the most recent copy of our First American Capital Management, Inc.’s (“FACM”) Form ADV Part II. The purpose of this document is to inform you of all material aspects of our organization, its fees, services and key personnel. It is provided to new clients and also mailed to all existing clients annually. If you have any questions about FACM, please call me at (949) 719-4520 or write to me at the address below. Sincerely, Mark A. Hoppe President Corporate Office: 567 San Nicolas Drive, Suite 101, Newport Beach, California 92660-6596 Tel: (949) 719-4546 • Fax: (949) 719-4550 888-888-FACM • Internet: www.facm.com • E-mail: FACMINFO@firstam.com
  3. 3. (Schedules A, B, C, D, and E are included with Part I of this Form, for the use of regulatory bodies, and are not distributed to clients.) SEC 1701 (8/98) ©1996-98 - ProFormWare, Inc, (561) 447-6684 OMB APPROVAL OMB Number: 3235-0049 FORM ADV Expires: February 28, 2001 Uniform Application for Investment Adviser Registration Estimated average burden Part II - Page 1 hours per response. . . .9.01 Name of Investment Adviser: First American Capital Management, Inc. Address: (Number and Street) (City) (State) (Zip Code) Area Code: Telephone Number: 567 San Nicolas Drive, Ste. 101 Newport Beach CA 92660 ( 949) 719-4546 This part of Form ADV gives information about the investment adviser and its business for the use of clients. The information has not been approved or verified by any government authority. Table of Contents Schedule F Item Number Item Page 1 Advisory Services and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 Types of Clients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3 Types of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4 Methods of Analysis, Sources of Information and Investment Strategies . . . . . . 7 5 Education and Business Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 6 Education and Business Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 7 Other Business Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 8 Other Financial Industry Activities or Affiliations . . . . . . . . . . . . . . . . . . . . . . . . 14 9 Participation or Interest in Client Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 15 10 Conditions for Managing Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 11 Review of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 12 Investment or Brokerage Discretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 13 Additional Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 14 Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 First American Capital Management Privacy Policy. . . . . . . . . . . . . . . . . . . . . . . 21 First American Capital Management Anti-Money Laundering and Anti-Terrorism Policies and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
  4. 4. Answer all items. Complete amended pages in full, circle amended items and file with execution page (page 1). ©1996 -98 - ProFormWare, Inc, (561) 447-6684 FORM ADV Applicant: SEC File Number: Date: Part II - Page 2 First American Capital Management, Inc. 801-53106 8/15/02 Definitions for Part II Related person - Any officer, director or partner of applicant or any person directly or indirectly controlling, controlled by, or under common control with the applicant, including any non-clerical, non-ministerial employee. Investment Supervisory Services - Giving continuous investment advice to a client (or making investments for the client) based on the individual needs of the client. Individual needs include, for example, the nature of other client assets and the client’s per- sonal and family obligations. 1. A. Advisory Services and Fees. (check the applicable boxes) For each type of service provided, state the approximate % of total advisory billings from that service. Applicant: (See instruction below.) (1) Provides investment supervisory services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . (2) Manages investment advisory accounts not involving investment supervisory services . . . . . . . . . . . . . . . . . . . 100% (3) Furnishes investment advice through consultations not included in either service described above . . . . . . . . . . % (4) Issues periodicals about securities by subscription . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % (5) Issues special reports about securities not included in any service described above . . . . . . . . . . . . . . . . . . . . . % (6) Issues, not as part of any service described above, any charts, graphs, formulas, or other devices which clients may use to evaluate securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . % (7) On more than an occasional basis, furnishes advice to clients on matters not involving securities . . . . . . . . . . . % (8) Provides a timing service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % (9) Furnishes advice about securities in any manner not described above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % (Percentages should be based on applicant’s last fiscal year. If applicant has not completed its first fiscal year, provide estimates of advisory billings for that year and state that the percentages are estimates.) B. Does the applicant call any of the services it checked above financial planning or some similar term? . . . . . . . . . . . Yes No C. Applicant offers investment advisory services for: (check all that apply): (1) A percentage of assets under management (4) Subscription fees (2) Hourly charges (5) Commissions (3) Fixed fees (not including subscription fees) (6) Other D. For each checked box in A above, describe on Schedule F: l the services provided, including the name of any publication or report issued by the adviser on a subscription basis or for a fee l applicant’s basic fee schedule, how fees are charged and whether its fees are negotiable l when compensation is payable, and if compensation is payable before service is provided, how a client may get a refund or may terminate an investment advisory contract before its expiration date 2. Types of Clients - Applicant generally provides investment advice to: (check those that apply) A. Individuals E. Trusts, estates, or charitable organizations B. Banks or thrift institutions F. Corporations or business entities other than those listed above C. Investment companies G. Other (describe on Schedule F) D. Pension and profit sharing plans
  5. 5. Answer all items. Complete amended pages in full, circle amended items and file with execution page (page 1). ©1996 -98 - ProFormWare, Inc, (561) 447-6684 FORM ADV Applicant: SEC File Number: Date: Part II - Page 3 First American Capital Management, Inc. 801- 53106 8/15/02 3. Types of Investments. Applicant offers advice on the following: (check those that apply) A. Equity Securities H. United States government securities (1) exchange-listed securities (2) securities traded over-the-counter I. Options contracts on: (3) foreign issues (1) securities (2) commodities B. Warrants J. Futures contracts on: C. Corporate debt securities (1) tangibles (other than commercial paper) (2) intangibles D. Commercial paper K. Interests in partnerships investing in: (1) real estate E. Certificates of deposit (2) oil and gas interests (3) other (explain on Schedule F) F. Municipal securities L. Other (explain on Schedule F) G. Investment company securities (1) variable life insurance (2) variable annuities (3) mutual fund shares 4. Methods of Analysis, Sources of Information, and Investment Strategies. A. Applicant’s security analysis methods include: (check those that apply) (1) Charting (4) Cyclical (2) Fundamental (5) Other (explain on Schedule F) (3) Technical B. The main sources of information applicant uses include: (check those that apply) (1) Financial newspapers and magazines (5) Timing services (2) Inspections of corporate activities (6) Annual reports, prospectuses, filings with the Securities and Exchange Commission (3) Research materials prepared by others (7) Company press releases (4) Corporate rating services (8) Other (explain on Schedule F) C. The investment strategies used to implement any investment advice given to clients include: (check those that apply) (1) Long term purchases (5) Margin transactions (securities held at least a year) (2) Short term purchases (6) Option writing, including covered options, (securities sold within a year) uncovered options or spreading strategies (3) Trading (securities sold within 30 days) (7) Other (explain on Schedule F) (4) Short sales
  6. 6. Answer all items. Complete amended pages in full, circle amended items and file with execution page (page 1). ©1996 -98 - ProFormWare, Inc, (561) 447-6684 FORM ADV Applicant: SEC File Number: Date: Part II - Page 4 First American Capital Management, Inc. 801-53106 8/15/02 5. Education and Business Standards. Are there any general standards of education or business experience that applicant requires of those involved in determining or giving investment advice to clients? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yes No (If yes, describe these standards on Schedule F.) 6. Education and Business Background. For: l each member of the investment committee or group that determines general investment advice to be given to clients, or l if the applicant has no investment committee or group, each individual who determines general investment advice given to clients (if more than five, respond only for their supervisors) l each principal executive officer of applicant or each person with similar status or performing similar functions. On Schedule F, give the: l name l formal education after high school l year of birth l business background for the preceding five years 7. Other Business Activities. (check those that apply) A. Applicant is actively engaged in a business other than giving investment advice. B. Applicant sells products or services other than investment advice to clients. C. The principal business of applicant or its principal executive officers involves something other than providing investment advice. (For each checked box describe the other activities, including the time spent on them, on Schedule F.) 8. Other Financial Industry Activities or Affiliations. (check those that apply) A. Applicant is registered (or has an application pending) as a securities broker-dealer. B. Applicant is registered (or has an application pending) as a futures commission merchant, commodity pool operator or commodity trading adviser. C. Applicant has arrangements that are material to its advisory business or its clients with a related person who is a: (1) broker-dealer (7) accounting firm (2) investment company (8) law firm (3) other investment adviser (9) insurance company or agency (4) financial planning firm (10) pension consultant (5) commodity pool operator, commodity trading (11) real estate broker or dealer adviser or futures commission merchant (12) entity that creates or packages limited partnerships (6) banking or thrift institution (For each checked box in C, on Schedule F identify the related person and describe the relationship and the arrangements.) D. Is applicant or a related person a general partner in any partnership in which clients are solicited to invest? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yes No (If yes, describe on Schedule F the partnerships and what they invest in.)
  7. 7. Answer all items. Complete amended pages in full, circle amended items and file with execution page (page 1). ©1996 -98 - ProFormWare, Inc, (561) 447-6684 FORM ADV Applicant: SEC File Number: Date: Part II - Page 5 First American Capital Management, Inc. 801- 53106 8/15/02 9. Participation or Interest in Client Transactions. Applicant or a related person: (check those that apply) A. As principal, buys securities for itself from or sells securities it owns to any client. B. As broker or agent effects securities transactions for compensation for any client. C. As broker or agent for any person other than a client effects transactions in which client securities are sold to or bought from a brokerage customer. D. Recommends to clients that they buy or sell securities or investment products in which the applicant or a related person has some financial interest. E. Buys or sells for itself securities that it also recommends to clients. (For each box checked, describe on Schedule F when the applicant or a related person engages in these transactions and what restrictions, internal procedures, or disclosures are used for conflicts of interest in those transactions.) 10. Conditions for Managing Accounts. Does the applicant provide investment supervisory services, manage investment advisory accounts or hold itself out as providing financial planning or some similarly termed services and impose a minimum dollar value of assets or other conditions for starting or maintaining an account? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yes No (If yes, describe on Schedule F.) 11. Review of Accounts. If applicant provides investment supervisory services, manages investment advisory accounts, or holds itself out as providing financial planning or some similarly termed services: A. Describe below the reviews and reviewers of the accounts. For reviews, include their frequency, different levels, and triggering factors. For reviewers, include the number of reviewers, their titles and functions, instructions they receive from applicant on performing reviews, and number of accounts assigned each. Please refer to Schedule F. B. Describe below the nature and frequency of regular reports to clients on their accounts. Please refer to Schedule F.
  8. 8. Answer all items. Complete amended pages in full, circle amended items and file with execution page (page 1). ©1996 -98 - ProFormWare, Inc, (561) 447-6684 FORM ADV Applicant: SEC File Number: Date: Part II - Page 6 First American Capital Management, Inc. 801-53106 8/15/02 12. Investment or Brokerage Discretion. A. Does applicant or any related person have authority to determine, without obtaining specific client consent, the: (1) securities to be bought or sold? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yes No (2) amount of the securities to be bought or sold ? . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yes No (3) broker or dealer to be used ? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yes No (4) commission rates paid? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yes No B. Does applicant or a related person suggest brokers to clients? . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . Yes No For each yes answer to A describe on Schedule F any limitations on the authority. For each yes to A(3), A(4) or B, describe on Schedule F the factors considered in selecting brokers and determining the reasonableness of their commis- sions. If the value of products, research and services given to the applicant or a related person is a factor, describe: l the products, research and services l whether clients may pay commissions higher than those obtainable from other brokers in return for those products and services l whether research is used to service all of applicant’s accounts or just those accounts paying for it; and l any procedures the applicant used during the last fiscal year to direct client transactions to a particular broker in return for products and research services received. 13. Additional Compensation. Does the applicant or a related person have any arrangements, oral or in writing, where it: A. is paid cash by or receives some economic benefit (including commissions, equipment or non-research services) from a non-client in connection with giving advice to clients? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yes No B. directly or indirectly compensates any person for client referrals? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yes No (For each yes, describe the arrangements on Schedule F.) 14. Balance Sheet. Applicant must provide a balance sheet for the most recent fiscal year on Schedule G if applicant: l has custody of client funds or securities; or l requires prepayment of more than $500 in fees per client and 6 or more months in advance Has applicant provided a Schedule G balance sheet? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yes No
  9. 9. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 1 of 22 Item Number Answer Item 1C. Item 1.D See Item 1.D SERVICES PROVIDED IN THE MANAGEMENT OF ACCOUNTS First American Capital Management, Inc. (“FACM”) provides portfolio advisory and management services to various clients, including affiliates of the First American Corporation, institutions, pension plans, endowments, foundations, trust and high net worth and managed accounts / wrap fee clients, using a variety of investment strategies, including equities, balanced, short-term fixed income and cash management. FACM’S INVESTMENT PROCESSES EQUITY INVESMENT PROCESS FACM’s equity investment decision-making process utilizes both top-down economic and bottom-up company specific analysis. Our top-down approach reviews long-term secular factors, such as demographic trends, global economy metrics and political environments that may influence the future relative performance of industry sectors. FACM also considers cyclical factors that may affect interest rate and economic growth outlook. This top-down review helps determine our allocation to the various economic sectors represented in the portfolio. Our bottom-up approach is used to select individual securities. Emphasizing a long-term investment approach, FACM selects those securities that are good investments based on the overall outlook for the firm. We analyze several factors, including earnings, products, quality of management, market presence, revenue growth, valuation and other factors demonstrating positive fundamental change. Our sell discipline is designed to drive the portfolio continually toward strength utilizing various sell alerts, which trigger verification research. A stock is sold from portfolios if it no longer meets our criteria or a better total-return candidate is identified. Buy candidates challenge current holdings so each holding must continue to earn its place in the portfolio. FACM’s investment committee, consisting of nine senior portfolio managers, meets formally once per week and is led by our Chief Investment Officer. Each portfolio manager presents their sector(s) to the group and makes recommendations for necessary changes. This team also meets informally to review sectors and holdings requiring modifications due to changing conditions. All investment decisions are reached through team consensus. The team is responsible for creating a model portfolio with target allocation to each sector and security. All fully discretionary portfolios then are managed to the created model. We believe that this risk-controlled approach will allow us to achieve consistent returns.
  10. 10. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 2 of 22 Our external network of relationships with research analysts provide us with extensive coverage of companies worldwide. We also monitor breaking financial news via resources such as Bloomberg. FACM’s expanding technology allows us to quickly convert raw data into useful information and incorporate it into our stock selections. Our technology integration strengthens the entire research and portfolio management effort. Our investment objective is to outperform the appropriate benchmark over a full economic cycle (three to five years), with controlled market risk. The portfolio is diversified among 50-60 holdings, representing all major sectors of the economy. Our typical universe consists of U.S. securities with $5 billion market capitalization. Our tax-efficient strategy attempts to maximize after-tax returns. Comparing each tax lot’s expected return with the returns of other potential holdings, we evaluate both the market impact and the tax implications of a trade. We attempt to use gains from one trade to offset with the losses from another. BALANCED INVESTMENT PROCESS FACM’s balanced investment strategies are based on an asset allocation of equities and fixed income. The weighting of these two styles is dependent upon the specific investment objectives of each client. We seek to maximize total return over a full market cycle from a portfolio of investment-grade fixed income securities. Securities rated below investment grade are very limited and atypical for our style of management. See Equity Investment Process and Fixed Income Investment Process for a general description of our management styles. FIXED INCOME INVESTMENT PROCESS FACM uses a diversified portfolio of fixed income instruments to deliver high current income and long-term capital appreciation. Our short duration and intermediate fixed income philosophy is built around controlling market price volatility and insuring predictable cash flows. Using intermediate maturity, high quality issues for portfolio construction normally provides for both of these objectives. We use short maturity fixed income securities for liquidity management. For safety, we invest in investment grade bonds. Due to the potential for unforeseen market and/or financial fluctuations, we are sensitive to the credit quality of a specific company. We purchase bonds only after thoroughly researching the financial strength of the specified issuer. The FACM Fixed Income Policy Committee (FIPC) maintains a buy list and specific credit, maturity and security structure guidelines to create suitable risk parameters. We continuously analyze business cycles to reveal patterns and trends in fixed income markets that may be exploited. We watch overall market yield levels, seek offerings from multiple institutional bond brokers, and strive to get the most competitive prices available for our clients. FACM’s FIPC
  11. 11. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 3 of 22 strictly limits the use of derivative products. For liquidity, FACM focuses on investments that will be priced competitively should we choose to sell them before maturity. For that reason, we invest in U.S. Treasury, federal agency, municipal and well-known corporate bonds which have active secondary markets. MUTUAL FUND ASSET ALLOCATION INVESTMENT PROCESS The Mutual Fund Asset Allocation program is designed to provide clients with a diversified investment portfolio through the use of mutual funds. Each portfolio is designed to represent and maintain a weighting in three core asset classes: equities, fixed income and cash. Each portfolio is constructed from an approved mutual fund list. A model portfolio is designed to produce characteristics similar to the broad market indices. During the construction process, consideration is placed on the overall portfolio’s attributes, such as style and capitalization. From this model, client portfolios are constructed and maintained to match the client’s objectives, goals and risk profile. MANAGED ACCOUNT / WRAP FEE PROGRAM The Managed Account / Wrap Fee program is designed to provide smaller accounts with the opportunity to invest in a large cap core style managed by our team of institutional portfolio managers. Unaffiliated brokerage firms under which FACM will provide investment management services sponsor these managed accounts. PORTFOLIO INVESTMENT ALLOCATIONS FACM considers many factors when allocating securities among accounts, including the account’s investment style, applicable restrictions, available securities, available cash and other current holdings. FACM attempts to allocate investment opportunities among accounts in a fair and equitable manner. However, due to the above factors, accounts cannot be assured of participating equally or in all investment allocations. Prioritization is based on the time at which orders are received by the trading desk. In the case where orders are received simultaneously from different product areas, the orders may be bunched. Please see Items 12.A and 12.B for a more detailed description of our trading process. INSTRUMENTS AND OTHER INVESTMENTS FACM will invest the portfolios’ assets in instruments deemed appropriate. These include, but are not limited to, securities and other financial instruments of U.S. and non-U.S. entities, such as bonds, notes, capital stock, shares of beneficial interest, mutual funds, money market instruments, obligations of the United States or any state thereof, commercial paper, certificates of deposit, bankers’ acceptances, trust receipts, and instruments of indebtedness of whatever kind or nature.
  12. 12. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 4 of 22 The portfolios generally are not limited with respect to the types of investment strategies employed or the markets or instruments in which it may invest, with the exception of derivatives and initial public offerings of securities. Over time, markets may change and FACM may seek to capitalize on attractive opportunities. Therefore, FACM may employ other instruments or techniques it considers appropriate and is in the best interest of the portfolios. For example, FACM may use Exchange-Traded Funds (“ETFs”) when, for example, portfolio managers are unable to identify attractive buying opportunities among individual securities. ETFs have a number of uses, including investing idle cash targeted for equity investment, managing sector or style exposure, profiting from an industry view and gaining diversified access to international markets. Most ETFs are structured as registered investment companies and may be in the form of a Unit Investment Trust (“UIT”) or a managed fund. Like other investment companies, ETFs impose a management fee. Therefore, when invested in ETFs, clients will pay this fee in addition to FACM’s fees. ETFs normally are at least as liquid as their underlying portfolio of securities. ETFs in UIT form typically track an index, (which generally is a narrower stock basket focused on specific industries or sectors), and rebalance to match changes in the index (e.g., SPYs, QQQs, MDYs and DIAs). Managed funds also track an index, but are not required to rebalance when the index changes and may use sampling and derivatives to simulate the index (e.g., Sector SPDRs, WEBS and iShares). ETFs that are not structured as registered investment companies are structured as grantor trusts (e.g., HOLDRs). Because grantor trusts consist of a static basket of securities for the life of the trust (comparable to ADRs), retain voting rights, are taxed as shares and can be unbundled into share holdings of the underlying securities, FACM does not currently anticipate purchasing ETFs in the form of grantor trusts. FEES Typically, portfolio assets are valued monthly and advisory fees are payable quarterly in arrears. FACM determines client fees based on the portfolio’s ending market value as of the last day of the quarter. Fees may be negotiated in certain circumstances on a case-by-case basis. All fees are noted in the client management agreement / advisory contract. FACM employs the particular investment strategy selected by the client for the management of its accounts, subject to various fee structures. INSTITUTIONAL FEE SCHEDULE Large Cap Core Equity Fee First $10 million .65% Next $15 million .55% Next $25 million .45% Above $50 million .40% Minimum Separate Account Investment: US$1 Million
  13. 13. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 5 of 22 Core Fixed Income Fee First $10 million .45% Next $15 million .35% Next $25 million .30% Above $50 million .25% Minimum Separate Account Investment: US$5 Million Balanced Fee First $10 million .60% Next $15 million .50% Next $25 million .40% Above $50 million .35% Minimum Separate Account Investment: US$1 Million Short Term Fixed Income Fee $5 to $10 million .28% Next $15 million .23% Next $25 million .18% Above $50 million .13% Minimum Separate Account Investment: US$5 Million Liquidity Management Fee $5 to $10 million .25% Next $15 million .20% Next $25 million .15% Above $50 million .10% Minimum Separate Account Investment: US$5 Million INDIVIDUAL FEE SCHEDULE Customized Individual Portfolio Management Fee First $1 million 1.30% Next $1 million 1.00% Next $1 million .80% Next $2 million .60% Above $5 million Negotiated Customized Individual Portfolio Management (Fixed income securities only) Fee First $1 million .80% Next $1 million .60% Next $1 million .50% Next $2 million .40% Above $5 million Negotiated Client portfolios are generally invested in individual securities selected to reflect the client’s investment objectives. Certain mutual funds also may be used to represent particular market segments or investment objectives consistent with the client’s needs. Typically, accounts with less than $500,000 of managed securities are placed into mutual funds selected to reflect client investment objectives.
  14. 14. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 6 of 22 Item 2.G Generally, either party upon 30 days written notice may terminate the investment advisory contract. Fees are payable through the final settlement date. In the event an investment advisory contract is terminated prior to its expiration date, FACM will refund a pro rata portion of its fees listed above. FACM may, if mutually agreed with an eligible client, employ a performance fee. Although performance-based fees are not part of FACM’s advisory arrangement, FACM may accept such an arrangement based upon appropriate circumstances and compliance with the Investment Advisers Act of 1940. Typically, FACM will be entitled to a management fee for 1031 exchange portfolios which will be determined by the following formula: (The deposit amount) x (The rate of return earned by such deposit in the portfolio - the interest rate of the deposit that is specified in the Notice of Deposit) However, to the extent that deposits continue beyond the maturity date specified in the notice of deposit, FACM will, subsequent to the maturity date, be entitled to a management fee determined by the following formula: (The deposit amount) x [(Rate of return earned by the portfolio) – (Interest rate quoted by FACM)] The Client will be responsible for timely paying all costs incurred by FACM and/or the portfolio due to the failure of the Client to pay the deposit amount on the deposit date. SUB-ADVISORY RELATIONSHIPS FACM provides discretionary sub-advisory investment services to First American Trust FSB, a Federal Savings Bank and a SEC registered investment adviser. Please refer to Item 8.C.2 for additional information. MANAGED ACCOUNT / WRAP-FEE PROGRAM FACM participates in a sub-advisory capacity providing portfolio management services in managed account / wrap-fee programs sponsored by unaffiliated broker-dealers (“program sponsors”). Under these programs, the program sponsor generally recommends an investment adviser / sub-adviser based on the client’s investment objectives. FACM sub-advises the following wrap-fee programs: Managed Account / Wrap Fee Program Sponsor Firm LCCE Advisorport/Persimmon Research Partners, Inc.
  15. 15. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 7 of 22 Item 4.B.8 Item 5 Item 6 OTHER TYPES OF CLIENTS FACM provides advisory services for Taft Hartley Plans, 401(k) Plans, foundations, endowments, corporate pension plans and municipalities. Other sources of information used by FACM include computer services that provide historical data on individual securities. Company and industry data also is gathered from an external network of research analysts. EDUCATION AND BUSINESS STANDARDS FACM requires that all members of the investment committee and its principal officers have at least five years related experience in the Investment / Financial industry. Additionally, such individuals must meet any required qualification examinations. MEMBERS OF THE INVESTMENT COMMITTEE AND PRINCIPAL OFFICERS FACM utilizes a team approach in the management of its portfolios. President Mark Hoppe and Chief Investment Officer Bob Venable oversee all investment- related activities. Kennedy, Donald P. (1918) Board Member, First American Capital Management, Inc. Chairman of the Board, The First American Corporation Chairman of the Board for First American Capital Management, Inc. Education: Stanford University (B.A. Economics 1940) University of Southern California (Juris Doctor 1948) Business Background: The First American Corporation (06/1988 to Present) – Chairman of the Board Klemens, Thomas A. (1950) Board Member, First American Capital Management, Inc. Chief Financial Officer, The First American Corporation Board Member for First American Capital Management, Inc. Education: California State Polytechnic University (B.S. Administration/Accounting 1972) CPA, State of California Business Background: The First American Corporation (02/1996 to Present) – Executive Vice President, Chief Financial Officer First American Capital Management, Inc. (07/2000 to 10/2000) – President,
  16. 16. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 8 of 22 Chief Financial Officer First American Financial Corporation (09/1993 to 02/1996) – Vice President, Chief Financial Officer First American Title Insurance Corporation (09/1993 to Present) – Vice President, Chief Financial Officer Arnesen, Mark R (1952) Board Member, First American Capital Management, Inc. Secretary and Corporate Counsel, The First American Corporation Board Member for First American Capital Management, Inc. Education: University of California, San Diego (B.S. Economics 1974) Yale University (Juris Doctor 1977) Licensed to Practice Law – State Bar of California, U.S. District Court, Central District of California and U.S. Supreme Court Business Background: The First American Corporation (04/1992 to Present) – Vice President, Secretary and Corporate Counsel First American Title Insurance Company (04/1992 to Present) – Secretary First American Title Insurance Company (01/1992 to Present) – Corporate Counsel First American Title Insurance Company (10/1989 to Present) – Vice President O’Bryan, Frank E. (1933) Board Member, First American Capital Management, Inc. Board Member for First American Capital Management, Inc. Education: University of Arizona (B.A. Business) Business Background: The First American Corporation (08/1994 to Present) – Board Member WMC Mortgage Mortgage (04/1997 to Present) - Chairman Hoppe, Mark A. (1955) Board Member, President Responsible for overseeing all activities of First American Capital Management, Inc. Education: University of Southern California (B.S. Business, 1977) Series 7 & 63 Business Background: First American Capital Management, Inc. (10/2000 to Present) – President First Security Van Kasper, Inc. (09/1996 to 10/2000) – Vice President,
  17. 17. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 9 of 22 Investments Prudential Securities, Inc. (12/1993 to 9/1996) – Registered Representative Venable, Robert S. (1962) Board Member – Chief Financial Officer; Executive Vice President, Chief Investment Officer, CFA Responsible for overseeing all of the firm’s investment activities Education: University of California, Berkeley (B.S. Electrical Engineering and Computer Sciences, 1986) The Wharton School of Business (M.B.A. Finance, 1992) Series 6 & 66; Chartered Financial Analyst Business Background: First American Capital Management, Inc. (11/2000 to Present) – Executive Vice President, Chief Investment Officer, CFA PIMCO Advisors L.P. (08/1996 to 06/2000) – Vice President, Global Asset Allocation Pacific Investment Management Company (08/1992 to 08/1996) – Vice President, Equity Portfolio Manager Rogers, James H. (1963) Senior Vice President, Senior Portfolio Manager, Director of Fixed Income, CFA Responsible for overseeing all fixed income investment activities. Education: Southwest Texas State University (B.A.A. Finance 1991) California State University, Long Beach, CA (M.B.A. Finance 1996) Series 7 & 63; Chartered Financial Analyst Business Background: First American Capital Management, Inc. (08/1999 to Present) – Senior Portfolio Manager, Director of Fixed Income, CFA Wells Fargo Bank (02/1994 to 08/ 1999) – Senior Portfolio Manager Willardson, David K. (1961) Senior Vice President, Senior Portfolio Manager, Director of Equities, CFA Responsible for overseeing all equity investment activities focusing on Large Cap Core Equity and is research analyst for the software, commercial services and consumer discretionary sectors Education: University of Texas, Austin (B.B.A. Finance 1984) Series 7 & 63; Chartered Financial Analyst
  18. 18. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 10 of 22 Business Background: First American Capital Management, Inc. (01/2001 to Present) – Senior Portfolio Manager, Director of Equities, CFA First American Trust, FSB (04/2000 to 01/2001) – Portfolio Manager Crawford-Doherty Capital Management (07/1999 to 04/2000) – Partner Harris Webb Garrison (06/1996 to 07/1999) – Financial Advisor Ast, Daniel (1960) Senior Vice President, Senior Portfolio Manager, CFA Serves as portfolio manager and research analyst for the capital goods, discretionary retail and health sectors Education: University of California, San Diego (B.A. Economics 1981) University of Southern California (M.B.A. Finance 1986) Chartered Financial Analyst Business Background: First American Capital Management, Inc. (11/1996 to Present) – Senior Portfolio Manager, CFA Rogers, Christopher J. (1956) Senior Vice President, Senior Portfolio Manager, CFA Serves as portfolio manager and research analyst for the materials and transportation sectors Education: University of Washington (B.S. Economics 1983) Chartered Financial Analyst Business Background: First American Capital Management, Inc. (07/2000 to Present) – Senior Portfolio Manager, CFA First American Trust, FSB (07/1999 to 01/2001) – Vice President, Portfolio Consultant Self-Employed (10/1998 to 07/1999) – Consultant Metlife (02/1997 to 10/1998) – Portfolio Analyst Grimm, Stephen S. (1954) Senior Vice President, Senior Portfolio Manager, CFP Serves as portfolio manager and research analyst for the food beverage and tobacco sectors Education: University of Michigan (B.A. Political Science 1976) California State University, Fullerton (M.A. Public Administration 1983) Certified Financial Planner
  19. 19. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 11 of 22 Business Background: First American Capital Management, Inc. (01/2000 to Present) – Portfolio Manager, CFP Clear Vision Consultants (10/1998 to 12/1999) – Consultant Inland Eye Institute (06/1997 to 09/1998) – Chief Administrative Officer Bessler, Donald (1962) Senior Vice President, Senior Portfolio Manager, CPA Serves as portfolio manager and research analyst Education: Leigh University (B.S. Finance, B.S. Accounting, B.A. Psychology 1986) Series 2, 63 & 65 Business Background: First American Capital Management, Inc. (06/2002 to Present) – Senior Vice President, Senior Portfolio Manager, CPA Self-Employed (11/2001 to 05/2002) - Consultant Roxbury Capital Management, LLC (08 /1992 to 10/2001) - Principal, Managing Director and Director of Research Self-Employed (11/1991 to 07/1992) - Consultant Unemployed (05/1991 to 10/1991) Price Waterhouse Coopers, LLC (08 /1986 to 04/1991) - Manager, Audit Practice Group Giles, Minnie L. (1960) Vice President, Portfolio Manager Serves as the portfolio manager and research analyst for the household & personal products and utilities sectors Education: University of Central Arkansas (B.S. Political Science 1982) Business Background: First American Capital Management, Inc. (12/1996 to Present) – Portfolio Manager First American Trust Company (04/1996 to 12/1996) – Investment Officer Marosek, Yuka O. (1960) Vice President, Portfolio Manager/Senior Securities Analyst, CFA Serves as portfolio manager and senior securities analyst for the telecommunications and technology sectors Education: Tsuda College, Tokyo (B.A. English 1983) California State University, Long Beach (M.B.A. Finance 1990) Chartered Financial Analyst
  20. 20. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 12 of 22 Business Background: First American Capital Management, Inc. (08/1998 to Present) – Portfolio Manager/Senior Securities Analyst, CFA Royal Bank of Canada (04/1995 to 08/1998) – Assistant Manager Wilcox, Kevin M. (1960) Vice President, Portfolio Manager/Securities Analyst, CFA Serves as portfolio manager and securities analyst for the financials sectors Education: University of Southern California (B.A. Economics 1983) Chartered Financial Analyst Business Background: First American Capital Management, Inc. (12/1998 to Present) – Portfolio Manager/Securities Analyst, CFA Fixed Income Securities, Inc. (1/1996 to 12/1998) – Bond Trader Nerio, Jason N. (1973) Vice President, Associate Portfolio Manager/Securities Analyst Serves as associate portfolio manager and research analyst for the energy sector Education: California State University, Fullerton (B.A. Business Administration 1997) Level II candidate in the CFA Program Business Background: First American Capital Management, Inc. (01/2001 to Present) – Associate Portfolio Manager/Securities Analyst First American Trust, FSB (09/1996 to 12/2000) – Associate Portfolio Manager, Trust Operations Majchrzak, Michelle L. (1971) Vice President, Director of Compliance and Legal Counsel Responsible for internal and external legal matters and compliance; joined firm in 2002 and previously was with Nicholas-Applegate Capital Management, LLC Education: University of San Diego (B.A. International Relations, 1993) St. Mary’s University School of Law (Juris Doctor, 1996) Series 7, 66, 24; Licensed to Practice Law – State Bar of California and U.S. District Court, Southern District of California Business Background: First American Capital Management, Inc. (05/02 to Present) – Vice President, Director of Compliance and Legal Counsel Nicholas-Applegate Capital Management (06/98 to 04/02) – Compliance
  21. 21. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 13 of 22 Manager PIM Financial Services, Inc. (06/96 to 06/98) – Compliance Officer Hauswirth, John (1945) Senior Vice President, Director - Institutional Services Responsible for management and oversight of all institutional sales, marketing and client service efforts in addition to individual institutional sales responsibilities Education: San Jose State University (B.S. Aeronautical Operations 1968) Series 6, 7, 22, 39, 63 & 65 Business Background: First American Capital Management, Inc. (01/2001 to Present) – Senior Vice President, Director of Institutional Services Financial Finesse (02/2000 to 12/2000) – Director of Corporate Sales Essential Data Corporation (08/1999 to 02/2000) – Associate International Television Productions (03/1999 to 01/2001) – Executive Producer McKinley Capital Management (03/1995 to 01/2001) – Institutional Sales National Securities Corporation (03/1995 to 01/2001) – Registered Representative Walker, Michael J. (1946) Vice President, South/Southwest Regional Director – Institutional Services Responsible for Institutional marketing and client servicing efforts Education: Fairfield University (B.A. History 1969) Virginia Technical University (M.A. Urban and Regulatory Planning) Business Background: First American Capital Management, Inc. (01/2002 to Present) – Vice President, South/Southwest Regional Director Met Life (06/2000 - 12/2001) - National Director CIGNA Investment Management (05/1997 to 05/2000)– Vice President Maloney, Kevin D. (1972) Vice President, Institutional Services – Corporate Headquarters Responsible for Institutional marketing and client servicing efforts Education: University of California, Irvine (B.A. Social Science, 1994) Pepperdine University – Graziadio School of Business and Management (M.B.A., 2002) Series 7, 26, 63 & 65 Business Background: First American Capital Management, Inc. (01/2001 to Present) – Vice President,
  22. 22. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 14 of 22 Item 7.C Item 8.C1 Item 8.C3 Items 8.C4; 8.C7 Institutional Services SaveDaily.com, Inc. (05/2000 to 12/2000) – Director, Financial Services Thomson Financial (02/2000 to 05/2000) – West Coast Account Executive PIMCO (03/1997 to 01/2000) – Compliance Officer Terano, Alex J. (1968) Head Trader Responsible for all FACM trading activities. Education: California State University, Long Beach (B.A. Economics 1994) Level II candidate in the CFA Program Business Background: First American Capital Management, Inc. (05/2000 to Present) – Head Trader SAI Capital Management, Inc. (01/1994 to 04/2000) – Trader / Junior Equity Analyst OTHER BUSINESS ACTIVITIES FACM’s Board of Directors is employed by or affiliated with the First American Corporation, one of the nation’s leading diversified provider of business information and related products and services. The First American Corporation is a publicly traded company listed on the New York Stock Exchange (Symbol: FAF). In addition to serving as Board Members to First American Capital Management, these members also have a variety of roles and responsibilities to the parent company and its subsidiaries, including but not limited to title services, trust administration, bill payments, fiduciary tax return preparations, loan servicing and administration of employee benefit plans. FACM has a 38.14% ownership interest in Pacific American Services Group, LLC, the holding company for Pacific American Securities, LLC (“PAS”). PAS is a member of the National Association of Securities Dealers, Inc., Securities Investors Protection Corporation and International Securities Marketing Association. All trades are cleared through DB Alex Brown. PAS is not a subsidiary of the First American Corporation. First American Trust, FSB, was registered with the Securities and Exchange Commission on July 6, 1999, as an investment adviser. FACM acts as a subadvisor, providing portfolio advisory and investment management services to accounts that may have various trust relationships through First American Trust, FSB, an affiliate. In addition, First American Trust, FSB may provide custodial services for advisory clients. First American Trust, FSB and First American Capital Management are wholly owned subsidiaries of the First American Corporation. FACM has a 38.14% ownership interest in Pacific American Services Group, LLC, the holding company for Pacific American Advisors, LLC (“PAA”). PAA is a provider of financial planning, accounting and tax services. From time to time, the First American Corporation and its subsidiaries may hire
  23. 23. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 15 of 22 Item 8.C6 Item 8.9 Item 9.B Item 9.D several tax preparers, including PAA, to prepare fiduciary income tax returns for its trust clients. Generally, PAA is the preferred provider of such services so long as the costs and quality of tax preparation do not materially differ from similar services offered by other local reputable tax preparers. First American Trust, a California state chartered bank, became a Federal Savings Bank on August 4, 1999 and is 100% owned by the First American Corporation. First Security Thrift is an affiliated thrift institution that FACM shares no financial or transactional relationship with. First American Trust, FSB, First Security Thrift and First American Capital Management are wholly owned subsidiaries of the First American Corporation. The First American Corporation and its subsidiaries may use the services of First American Title Insurance Company, an affiliate, to provide escrow services and property title services when selling and purchasing real property in trust accounts when the costs and services to the client do not materially differ from similar services offered by other local reputable title insurance and escrow service providers. FACM is one of the investment advisers to The First American Corporation and its various entities, such as First American Title Insurance Company, First American Trust, FSB, First American Real Estate Information Services, Inc., First American Exchange Corporation, First American Property & Casualty Insurance Company and First American Specialty Insurance Company. Pacific American Securities, LLC, an affiliated broker-dealer, receives commissions in connection with all transactions for which it serves as introducing broker. Therefore, the broker-dealer may have a conflict of interest in limiting expenses of its clients’ accounts when generating brokerage commissions. FACM selects investments for clients based on several investment considerations, including whether the investments meet the client’s investment objectives and guidelines. In the course of providing advisory services, FACM may simultaneously recommend the sale of a particular security for one account while recommending the purchase of the same security for another account if such recommendation is consistent with each client’s investment objectives and guidelines. In certain circumstances, and in compliance with Rule 206(3)-2 of the Investment Advisers Act, FACM may execute agency cross transactions for its clients and in those instances, will obtain advanced written consent. FACM, and persons associated with it, seeks to ensure that it does not personally benefit from the short-term market effects of their recommendations. From time to time, a client account may purchase a security in which a related person of FACM may have an ownership position or a related person may purchase a security that is contained in a client account. Associated persons of FACM may occasionally serve on outside boards. FACM has implemented procedures that are designed to prevent any actual or
  24. 24. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 16 of 22 Item 9.E Item 10 Item 11A. Item 11B. Item 12.A potential conflicts of interest. To help prevent conflicts of interest, all employees of FACM must comply with the firm’s Code of Ethics, which imposes restrictions on the purchase or sale of securities for their own accounts and accounts of affiliated persons. Among other things, the Code of Ethics requires pre-clearance and monthly reporting of all personal securities transactions, except certain exempt transactions and exempt securities (such as government securities and mutual funds). In addition, FACM has adopted certain policies and procedures concerning the misuse of material non-public information that are designed to prevent insider trading by any board member, officer or employee of FACM. See Item 9.D above. FACM generally imposes a $5-10 Million minimum for institutional separate account relationships, $500,000 minimum for individual portfolio management and $100,000 minimum for managed account / wrap fee relationships. Fees and account minimums may be negotiated. For example, FACM may waive this requirement for accounts it believes will grow through contributions to reach the minimum level. The continuous review of client accounts is an integral component of FACM’s investment management process. FACM utilizes a team approach in managing client accounts. At the account’s inception, a committee is assigned by the Chief Investment Officer to create a transition plan. Each portfolio is reviewed and rebalanced in accordance with the model portfolio.∗ The model portfolio is typically reviewed in weekly investment meetings where economic outlook, sector weightings and positions are discussed. Each account is monitored by portfolio management to ensure compliance with client guidelines and investment objectives. A formal review and comparison of the account’s strategy and objectives to the assets allocated is performed on at least an annual basis by the portfolio managers with a final account review provided to the client. The nature and frequency of reports to clients are determined primarily by the particular needs of each client. Generally, clients or their custodians receive quarterly statements and account performance utilizing software and services provided by the custodian, Advent, Greenhill and others. These reports summarize investment performance, asset mix, investment strategy, current portfolio holdings, current asset value and market conditions as well as advisory fees. In addition, through telephone calls and in-person meetings, client service representatives regularly keep clients informed of the investment policy and strategy being used to achieve the client’s investment objectives. FACM is a discretionary money manager. Accordingly, FACM generally determines the securities and quantities to be bought and sold for each client’s account. On a quarterly basis or as requested, clients receive itemized account statements reflecting present holdings and transactions for the account’s stated period. ∗ NOTE: Individual account circumstances may cause individual deviations from the model (e.g. taxes).
  25. 25. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 17 of 22 While FACM generally selects the broker-dealers that provide best execution of portfolio transactions, a client may, in writing, direct FACM to use a particular broker-dealer to execute portfolio transactions for its account or request that certain types of securities not be purchased for its account. If a client directs the use of a particular broker-dealer, FACM asks that the client also specify in writing the general types of securities for which the designated firm should be used and whether the designated firm be used for transactions even though FACM may be able to obtain a more favorable net price and execution from another broker-dealer in particular transactions. A client who designates the use of a particular broker-dealer should understand that it may lose the possible advantage that non-designating clients derive from aggregation of orders for several clients as a single transaction for the purchase or sale of a particular security. Since FACM will not be able to effectively negotiate the commission rate, FACM may not be free to seek best available price and most favorable execution as if considering transactions with other broker-dealers. Additionally, such a client’s trades may be effected after the trades of clients who have not designated a particular broker-dealer. In accordance with the managed account / wrap – fee program(s) FACM sub- advises, FACM typically directs all trading to the applicable program sponsor. Clients generally pay no commissions on such trades. However, wrap-fee clients should recognize that commissions for the execution of client transactions in the client’s account are not negotiated by FACM and FACM may not be free to seek best available price and most favorable execution as of considering transactions with other broker-dealers. While it has been FACM’s general experience that broker-dealers which FACM deals with pursuant to wrap-fee agreements generally offer competitive price / execution for transactions in listed equity securities, no assurance can be given that this will continue to be the case. Accordingly, the client should satisfy itself that the wrap fee or suitable program is suitable, given the client’s particular financial needs and circumstances. FACM owes a fiduciary duty to our clients to provide best price and execution on trades effected. In selecting a broker-dealer for each specific transaction, FACM chooses the broker-dealer deemed most capable of providing the services necessary to obtain the best available price and most favorable execution. Best available price and most favorable execution are generally understood to mean the most favorable total cost or net proceeds reasonably obtainable under the circumstances. The full range of brokerage services applicable to a particular transaction may be considered when making this judgment, which may include, but is not limited to, price, commission, timing, research, aggregated trades, capable floor brokers or traders, competent block trading coverage, ability to position, capital strength and stability, reliable and accurate communications and settlement processing, use of automation, knowledge of other buyers or sellers and administrative ability. The applicability of specific criteria will vary depending upon the nature of the transaction, the market in which it is executed, and the extent to which it is possible to select from among multiple broker-dealers.
  26. 26. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 18 of 22 Subject to the foregoing, FACM may, without limitation, effect transactions through Pacific American Securities (PAS), a broker-dealer in which FACM owns a 38% interest. PAS is a non-clearing firm (introducing broker) who clears trades through DB Alex Brown. On a fully disclosed basis, DB Alex Brown uses clearing brokers on the floor of the various exchanges to effect purchases and sales in which clearing charges must be paid. Our clients should be aware of the relationship FACM has with PAS and that brokerage commission, though competitive, may be available elsewhere at lower costs. On March 13, 2000, the Department of Labor granted FACM The Prohibited Transaction Exemption No. 2000-12 for transactions involving related broker- dealers (in this case, PAS). This exemption may be found in the Federal Register, Volume 65, Number 49, pages 13331 through 13333. For fixed income trades, FACM uses a variety of institutional bond brokers, selecting the best execution, price and delivery of securities with approximately three bids or offers that meet the client’s account objective. On occasion, PAS may have bonds available that meet the best execution, price and delivery status and may be utilized to fill the order for the account. These “principal trades” require the written consent of the client to execute such transaction. Since FACM is a sub-adviser to First American Trust, we must obtain their client(s)’ written approval prior to settlement date of the “principal trade” executed through PAS. In selecting brokers, we may consider selecting those brokers that assist FACM in fulfilling its investment management responsibilities by providing research or research-related products or services that assist portfolio managers in their investment decision-making process (“soft dollars”). Research services that may be considered include information on the economy, industries, group of securities, individual companies, statistical information, accounting and tax law /interpretations, political developments, legal developments affecting portfolio securities, pricing and appraisal services, credit analysis, risk measurement analysis, performance analysis and proxy voting services. Broker-dealers, including Pacific American Securities, may provide these research services in the form of written reports, telephone contacts and personal meetings with security analysts. In addition, such research services may be provided in the form of accessing various computer-generated data, computer hardware and software, support and backup systems and related maintenance costs for this computer-generated data, computer hardware and software. Research services also may be provided by way of meetings arranged with corporate and industry spokespersons, economists, academicians and government representatives. Services and equipment that facilitate the execution and monitoring of securities transaction, for example, by providing rapid communications with financial markets and broker-dealers, or by providing real-time tracking of orders, settlements and investment positions are also provided by broker-dealers. In some cases, brokerage and research services are generated by third parties but are provided to FACM by or through broker- dealers. Therefore, commissions paid may be higher than those obtained from other brokers. Generally, FACM pays commissions at approximately $.04 per
  27. 27. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 19 of 22 share for hard dollar and $.09 per share for soft dollar. Currently, FACM does not participate in any rebate or commission recapture programs. FACM monitors the best execution reports of its broker-dealers and periodically tests the commissions available from competing brokers and dealers. FACM’s use of a particular broker-dealer may be contingent upon the firm’s good faith determination that the commission paid is reasonable in relation to the value of the brokerage and research services provided. The determination may be viewed in terms of either the particular transaction involved or the overall responsibilities of FACM with respect to the accounts over which it exercises investment discretion. Such brokerage or research services may be used to service any or all of FACM’s clients and/or may be used in connection with accounts other than those that pay commissions to the broker-dealer providing the brokerage and research services, as defined in Section 29(e) of the Securities Exchange Act of 1934, in connection with selling concessions and designations in fixed price offerings. In circumstances where FACM receives products or services that are used for certain administrative purposes (such as preparation of client account valuations), FACM makes a “good faith” allocation of the value of the product or service received between those used in making investment decisions in client accounts and the value attributable to administrative functions that are paid in cash by FACM. From time to time, FACM may enter agreements with, or make commitments to, any broker-dealer that would bind FACM to compensate that broker-dealer, directly or indirectly, for client referrals. However, FACM may select a broker- dealer in recognition of the broker-dealer’s past referral of the particular client for whom the transaction is being executed, or of other clients, or in anticipation of possible future referrals from the broker-dealer. Registered investment companies and ERISA clients are not permitted to participate in such transactions. Conflicts of interest may exist when FACM makes the allocation between research and non-research information. The research services used are for all of FACM’s accounts, not just those accounts paying for it. As sub-adviser to First American Trust, FSB, FACM does not determine the amount of “soft dollars” received by First American Trust, FSB through any arrangement with the brokers First American Trust, FSB directs FACM to trade with. When possible, FACM will bunch orders of various clients for execution, which generally results in lower commission rates being attained. In certain cases, where the aggregate order is executed in a series of transactions at various prices on a given day, each participating client’s proportionate share of such order reflects the average price and commission rate paid or received with respect to the total order placed on that day. When trades are effected based on the needs of an individual client, block trading is not possible. In addition, block trading may not be possible for First American Trust, FSB joint authority client accounts due to timing issues for clients who have an immediate need for cash or reallocation. In those situations, securities
  28. 28. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 20 of 22 Item 12.A.1 Item 12.A.2 Item 12.A.3 Item 12.A.4 Item 12.B Item 13.A Item 13.B transactions are approved by First American Trust, FSB trust administrators during the normal course of business. Should a trading error occur in a client account, the client will be made whole. In resolving any possible trading error, FACM’s fundamental policy is that our clients’ interests come first. Normally, this means placing the client in the same position that it would be in had the error not occurred. Any losses incurred due to a FACM trading error are the responsibility of FACM as the adviser to the affected account. Immediately upon learning of a trading error, it is reported to Management for prompt attention. Examples of trading errors may include, but are not limited to: purchasing or selling one security when the intent was to purchase or sell a different security; incorrect account allocations; incorrect number of shares purchased or sold; selling a security when a purchase was ordered by the portfolio manager; incorrect price for the security that was purchased or sold; or violation of client guidelines / restrictions. Errors do not include changes to commission rates, settlement date or similar administrative changes to a trade. The SEC prohibits the use of soft dollars to remedy trade errors (US Department of Labor, October 25, 1988.) As a result, FACM will not use soft dollars to correct a trading error. All trading errors will be reviewed and discussed with the Director of Compliance to ensure that no client is disadvantaged and that all errors are corrected in compliance with applicable law and FACM’s policy. See Item 12.A above. See Item 12.A above. See Item 12.A above. See Item 12.A above. See Item 12.A above. FACM may pay cash referral fees pursuant to a written agreement. The referral agreement and the related activities of FACM will be in compliance with Rule 206(4)-3 of the Investment Advisers Act of 1940. Rule 206(4)-3 specifies certain standards that must be met by an investment adviser and any person who solicits any client for, or refers any client to, an investment advisor prior to the payment of a cash fee directly or indirectly, for client solicitation or referral. Prior to or at the time of executing an advisory contract, the adviser must receive a signed and dated acknowledgment from the client evidencing receipt of the adviser’s brochure and the solicitor’s brochure. In compliance with Rule 204-2(a)(15), the adviser retains the acknowledgement. See Item 13.A above.
  29. 29. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 21 of 22 Privacy Notice Privacy Notice The relationship between FACM and its customers is the most important asset in our business. We strive to maintain our clients’ trust and confidence in our company, an essential aspect of which is FACM’s commitment to protect personal information to the best of our ability. We believe that clients value their privacy, so we will not disclose personal information to anyone unless it is required by law, by the client’s direction, or is permitted by law and is necessary to provide our clients with FACM’s services. We have not and will not sell personal information to anyone. Personal Information We Collect and Communicate The primary reason FACM collects and maintains personal information is to serve our clients and administer the customer relationship. The types and categories of information we collect about our clients includes: • Information received on applications and/or other documents for to open an account or provide investment advice, including the client(s)’ name, home address, social security number, telephone number and financial information; • Information about client transactions with FACM, such as account activity; and • Information that we may receive from third parties with respect to the client(s)’ account or about transactions, such as trade confirmations from brokerage firms. In order for FACM to administer client accounts, we may disclose this personal information that we collect, as described above, in limited instances including but not limited to: • Disclosures as permitted by law to service the client account. Examples include providing account information to companies that perform administrative services, such as printing and mailing account statements; companies that assist in evaluating investment performance; and/or brokers that place client trades. These companies must use this information solely for the services for which we hired them and are not permitted to use, reuse or share this information for any other purpose. How We Protect Personal Information To fulfill our privacy commitment, FACM has instituted practices to safeguard the information maintained about our clients. These include: • Maintaining physical, electronic and procedural safeguards that comply with government requirements to keep personal information safe; • Limiting access to personal information to those employees who need it to perform their job duties; • Taking the appropriate steps to ensure that third parties that perform services for us agree to keep company and/or personal information secure and confidential; and • Protecting the personal information of our former clients to the same extent as our current clients.
  30. 30. Schedule F of Form ADV SEC File No. 801-53106 First American Capital Management August 15, 2002 Page 22 of 22 Anti-Money Laundering and Anti- Terrorist Policies and Procedures ANTI-MONEY LAUNDERING AND ANTI-TERROTIST POLICIES AND PROCEDURES FACM takes reasonable steps to detect terrorist activities in our client accounts. Specifically, FACM reviews client accounts monthly and reports any information to authorities, in compliance with the Presidential Executive Order and the United Nations Suppression of Terrorism Regulations. FACM thoroughly searches our client database on a monthly basis to detect "potential hits" that could be possible matches with persons or entities listed on the Presidential Executive Order. In the event that FACM has a potential hit, the firm reports our findings to the FBI and applicable financial regulators, such as the SEC and NASD. FACM will take any necessary action to freeze said open accounts for any persons or entities that are on the terrorist list and report the information to the relevant authorities. In addition, on a monthly basis, FACM downloads the terrorist list provided by the United Nations, which is an updated Presidential Executive Order, to ensure that we do not have additional matches with newly appearing names. At least annually, FACM provides training to its employees on our anti-money laundering and anti-terrorist policies and procedures. FACM notifies senior management and reports transactions relating to known and suspected federal crimes, including securities law violations, of $5,000 or more. In addition, each FACM employee annually signs an acknowledgement form indicating he/she has reported all suspected federal crimes to the Director of Compliance.
  31. 31. Page 23
  32. 32. First American Capital Management (A wholly owned subsidiary of The First American Corporation) Balance Sheet December 31, 2001 and 2000
  33. 33. First American Capital Management (A wholly owned subsidiary of The First American Corporation) Balance Sheet The accompanying notes are an integral part of the balance sheet. December 31, 2001 2000 Assets Cash and cash equivalents 5,038,000$ 2,092,000$ Prepaid taxes deposited with parent company 35,000 502,000 Accrued fees receivable 704,000 424,000 Due from First American Title Insurance Company 57,000 278,000 Due from First American Trust, FSB 276,000 178,000 Investment in affiliate 3,758,000 3,969,000 Prepaid expenses and deposits 163,000 42,000 Property and equipment, net 412,000 623,000 Total assets 10,443,000$ 8,108,000$ Liabilities and Stockholder's Equity Accounts payable and accrued expenses 770,000$ 407,000$ Total liabilities 770,000 407,000 Commitments and contingencies (Notes 5 and 6) Stockholder's equity: Capital stock, $0.001 par value, 1,000 shares authorized and outstanding - - Additional paid-in capital 3,990,000 3,990,000 Retained earnings 5,683,000 3,711,000 Total stockholder's equity 9,673,000 7,701,000 Total liabilities and stockholder's equity 10,443,000$ 8,108,000$
  34. 34. First American Capital Management (A wholly owned subsidiary of The First American Corporation) Notes to Balance Sheet Page 1 1. Description of Business and Summary of Significant Accounting Policies Description of Business First American Capital Management (the “Company”) is a wholly owned subsidiary of The First American Corporation (“FAC”). The Company is an SEC-registered investment services firm providing advisory and management services for nearly $2 billion in assets. Staff includes institutional salespeople, portfolio managers, analysts, and traders. The Company also holds a 38% interest in an affiliated, licensed broker/dealer, Pacific American Securities Group (see Note 4). The Company operates primarily in Southern California. Cash and Cash Equivalents The Company considers cash and cash equivalents to be all short-term investments that have an initial maturity of 90 days or less. Property and Equipment Property and equipment are recorded at cost. Depreciation on the furniture and equipment, leasehold improvements and software are computed using the straight-line method over estimated useful lives of 3 to 10 years, 3 to 5 years and 3 years, respectively. Income Taxes The Company is included in the consolidated federal and combined California State tax returns of FAC. Federal income taxes are apportioned to the Company in an amount that approximates the federal income taxes that would be payable if the Company prepared and filed a separate return. The state income tax provision for the combined group is apportioned to the profitable entities within this group based on relative taxable income. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. At December 31, 2001and 2000 temporary differences were not significant and no deferred income taxes have been recorded. Employee Benefits Substantially all of the Company’s employees participate in the defined benefit pension plan, the profit sharing plan and the group health insurance plan of FAC. Pension, profit sharing and group health insurance expenses attributable to the Company’s employees are allocated to the Company by FAC. Information on the defined benefit pension plan’s accumulated benefits and net assets attributable to the Company’s employees is not available. Substantially all employees are eligible for The First American Corporation 401(k) Savings Plan (the “Savings Plan”). The Savings Plan allows for employee elective contributions up to the maximum deductible amount as determined by the Internal Revenue Code. Use of Estimates The balance sheet has been prepared in conformity with generally accepted accounting principles in the United States of America, which require management to make estimates and assumptions that effect the amounts and disclosures reported in the balance sheet and accompanying notes. Actual results could differ from those estimates.
  35. 35. First American Capital Management (A wholly owned subsidiary of The First American Corporation) Notes to Balance Sheet Page 2 2. Property and Equipment Property and equipment are summarized as follows: 3. Related Party Transactions and Balances First American Title Insurance Company (“FATICO”) The amount due from FATICO, a wholly owned subsidiary of FAC, is the result of services rendered by the Company to FATICO, reduced by various administrative costs and expenses related to the operations of the Company paid by FATICO. The amounts due from FATICO as of December 31, 2001 and 2000 were $57,000 and $278,000, respectively. First American Trust, FSB (“FAT”) The amount due from FAT, a wholly owned subsidiary of FAC, is the result of investment management and advisory services rendered by the Company to FAT. The amounts due from FAT as of December 31, 2001 and 2000 were $276,000 and $178,000, respectively. 4. Investment in Affiliate Investment in affiliate consists of the Company’s ownership in Pacific American Services Group, LLC (“PASG”), which is accounted for under the equity method of accounting. The Company owns 38% of PASG. As of December 31, 2001 and 2000, PASG had assets of $7,325,000 and $9,847,000, respectively, and liabilities of $1,363,000 and $3,079,000, respectively. For the year ended December 31, 2001 and 2000, PASG had net loss of $(343,000) and net income of $2,219,000, respectively. Distributions received from PASG for the years ended December 31, 2001 and 2000 were $77,000 and $1,451,000, respectively. December 31, 2001 2000 Leasehold improvements 15,000$ 14,000$ Furniture and equipment 830,000 793,000 Software 37,000 66,000 882,000 873,000 Less accumulated depreciation and amortization (470,000) (250,000) Net property and equipment 412,000$ 623,000$
  36. 36. First American Capital Management (A wholly owned subsidiary of The First American Corporation) Notes to Balance Sheet Page 3 5. Operating Leases The Company entered into operating lease agreements for office equipment and office space at its Newport Beach branch location. Future minimum lease payments under non-cancelable operating leases in excess of one year as of December 31, 2001 are as follows: 6. Regulatory Matters/Litigation The Company is involved in various routine legal proceedings related to its operations. While the ultimate disposition of each proceeding is not determinable, the Company does not believe that any of such proceedings will have a material adverse effect on its financial condition or results of operations. 2002 131,000$ 2003 155,000 2004 163,000 2005 170,000 2006 - Total minimum future rental payments 619,000$

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