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Section 3 Pre-IPO or M&A and Estate Planning Considerations
Section 4 Our Approach to Investing
Pacific Asset Management
Section 1
Partnership
Pacific Asset Management
Mission, Value Proposition, Capabilities
Value Proposition
Leveraging PAMRIA’s global resources and our team’s network, we are uniquely positioned to
provide your Family more sophisticated and precise investment advice. We focus our education,
training and experience on select clients so we can develop intimate and comprehensive
understanding of your needs, goals and overall relationship expectations.
Mission Statement
We seek to be the Strategic Chief Investment Officer for families and select institutions with
significant financial resources. For those unique families and individuals, we commit to provide
highly customized advice and investment solutions with a standard-setting level of service and
investment expertise.
Capabilities
Financial Advice for Complex Situations Direct Core Asset Management
Asset Allocation & Risk Management Access to Third Party Specialty Managers
Proprietary Investment Ideas Alternative Investment Consulting & Access
On-Line Access Institutional access to Pacific Asset Management
When we design a wealth management, investment and lifestyle management solution that helps families achieve what’s important to them-- safety, simplicity, security and support-- we believe that’s
the basis for working together in partnership.
Mission Statement:
To become the “Strategic Investment Officer” for our clients, providing highly customized advice and investment solutions with a standard-setting level of service and investment expertise.
Pacific Asset Management
Partnership at a Glance
• Multiple Professionals: Investment Advisors, Client Representatives, Local Analysts,
and Full-time Trading Capability
• Pacific Northwest Based Team
• Focus on Providing Asset Management and Investment Advisory Services
• Tax-Efficient Equity and Fixed Income Portfolio Management
– Research: Equity, Fixed Income, Foreign Exchange and Global Economics/Strategy
– Investment Banking and Alternative Investment Groups e.g. MSREF
– Sales & Trading: Equity, Fixed Income, Derivatives, etc.
• Extensive External Relationships:
– Entrepreneurs and Family Business Owners
– Hedge Fund and Traditional Investment Managers
– Securities Research (Multiple Sources)
– Private Equity Investors and Venture Capitalists
• Other Pacific Asset Management Resources Employed
– Tax and Estate Planning Group
– Global Asset Allocation Team
Mission Statement:
To become the “Strategic Investment Officer” for our clients, providing highly customized advice and investment solutions with a standard-setting level of service and investment expertise.
Dual Shore USA and Asia Pacific Advisory Services
Pacific Asset Management
Section 2
Relationship Overview
Pacific Asset Management Relationship Overview
Client Experience
• Optimize risk/reward trade-off
• Tailor asset allocation
• Diversification strategy
• Optimize global Risk adjusted returns
• Risk tolerance and investment experience
• Cash flow needs
• Tax & estate planning needs
• Performance objectives
• Time horizon
• Real assets
• Financial assets
• Liquid assets
• Liabilities
• Unrealized gains
• Concentrated/ restricted positions
• Investment manager selection
• Opportunistic investment
• Allocation of funds
• Custody
• Tracking and reporting
• Performance attribution
• Portfolio rebalancing
• On-going review of objectives and strategies
• Altered client circumstances
• Altered financial market conditions
• Strategic and tactical adjustments
Understand
your
Balance Sheet
Determine
Investment
Parameters
Define
Investment
Strategy
Implement
Investment
Allocation
Performance
Measurement
Continuous
Monitoring
& Adjustment
These materials are solely informational, based upon publicly available information believed to be reliable, and may change without notice. Pacific Asset Management shall not in any way beliable for claims relating to them, and makes no express or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in, or omissions
from, them. Legal, accounting and tax restrictions, transaction costs and changes to any assumptions may significantly affect the economics of any transaction. The information and analysescontained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investmentor other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns, past, hypothetical or otherwise, are not indicative offuture performance. These materials do not constitute an offer to buy or sell any financial instrument or participate in any trading strategy.
Access to Estate Planning Services Group for functional, objective expertise
Custody Services SIPC and excess SIPC protection (1)
Securities safekeeping and client protection
Collection of income—interest and dividends
Fund wires and transfers
Gifts and distribution of cash or securities
Foreign exchange services
Short-term investments for cash reserves
Internet Access Online account access via ClientLink web application
Access to research reports, video broadcasts and other resources
Aggregate portfolio information and account details (updated daily)
Ability to export account details into Microsoft Excel or Quicken
Reporting Services Comprehensive, customized portfolio statements for certain eligible investors
Timely written confirmation of transactions executed for each account
Comprehensive monthly statement detailing all activity and investment values
Upon request, duplicate statements and/or confirmations sent to designated parties
Dedicated Team Service tailored to each family’s needs
Performance measurement and analysis
Assistance with tactical adjustments to structures or investments to meet changing aspirations
Review of risk parameters and profile
Careful attention to special situations and strategies driven by tax, market and other factors
Notes1. Coverage may change at any time. The asset protection does not protect against losses of value due to market fluctuations. Multiple
accounts with a single beneficiary are treated as a single account for purposes of coverage. Additional information regarding SIPC may be obtained through the SIPC website at www.sipc.org. Excess coverage is provided by Customer Asset Protection Company (CAPCO). Information regarding CAPCO may be obtained through CAPCO’s website at www.capcoexcess.com.
2. Smart will provide contact names and arrange for information sharing with the goal of ensuring seamless representation. This is a referral service only. Smart does not provide any of these services. These services are offered by third parties over which we have no control. Therefore, we take no responsibility for whether the services will be provided in accordance with your needs or expectations. Additionally, we do not receive any compensation from the service providers we may recommend.
Please see important disclosures at the end of this material.
– Assistance with asset allocation rebalancing and tactical adjustments to structures or investment
• Technology & Reporting
– Online Access
– ConsolidatedReporting
– Performance Measurement
– Risk Measurement
Post – IPO/M&APre – IPO/M&A
FOCUS FOR
TODAY’S DISCUSSION
Pacific Asset Management Pre-IPO/M&A Overview
Tax/Estate Planning Overview
• Important tax savings
strategies can be
implemented prior to the
IPO/M&A
• While certain contingencies
arising after (or in
connection with) the
transaction may produce
some tax advantages, such
savings may not put the
business owner in the same
position as if the owner acted
prior to the transaction
• Upon exercise, spread is not taxed but treated as an adjustment item for
alternative minimum tax (AMT) purposes, possibly triggering AMT.
• After exercise, if stock is held for one year from the exercise date and two
years from option grant date, all appreciation over the strike price will be
considered capital gain when stock is sold.
• Exercise of an ISO prior to IPO/M&A (assuming price increases) can
minimize or even eliminate AMT exposure and starts executive’s holding
period.
Incentive Stock Options
• Upon exercise, the difference between the fair market value of the stock and
the exercise price (the spread) is taxed as compensation.
• After exercise, all future appreciation in the stock is taxed as capital gain.
• Exercise of an NQSO prior to IPO/M&A can save an executive the difference
between the maximum ordinary income tax rate and the preferential long term
capital gains tax rate on all future appreciation if stock is held longer than one
year at time of sale.
Non-Qualified Stock Options
• A number of tools allow the individual rather than
the state to control his or her person and property
when he or she is unable to do so because of death
or incapacity, e.g., will, revocable living trust,
power of attorney, health care proxy and living
will.
Estate Planning: Gifting
Estate Planning: Leveraged Gifting
Income Tax Planning: Executive Stock Options
Control
Estate Planning: Necessities
• Assets can be sold to a trust for the
benefit of one’s family. The trust can
purchase the property by giving the
donor a note bearing a market interest
rate.
• When the trust terminates, the
property will pass to the
remaindermen of the trust with all
appreciation over the interest rate on
the note, in effect, passing free of
additional gift tax.
Sale to Defective Grantor Trust
• Asset placed in trust with donor
retaining an annuity and making a gift
of the remainder to family members.
• Remainder is valued using an IRS
benchmark rate.
• Upon termination of trust, the
property will pass to the
remaindermen of the trust with all
appreciation over the benchmark rate,
in effect, passing free of additional
gift tax.
Grantor Retained Annuity Trust
(GRAT)
• Asset placed in trust with donor
making tax-free gift of an income
interest to a charity and a taxable gift
of the remainder to family.
• Upon termination of trust, the
property will pass to the
remaindermen of the trust with all
appreciation over the benchmark rate,
in effect, passing free of additional
gift tax.
Charitable Lead Annuity Trust
(CLAT)
• An individual interested in keeping
control of the gifted property away
from the donee can gift in trust.
• Individuals interested in keeping
control of the assets themselves can
transfer assets to an FLP or LLC and
make gifts of non-controlling
interests outright or in trust.
• Individuals can give property away,
change the title of property or
change the character of property to
possibly protect assets from
creditors.
• In 2007 and 2008, $2.0M (increasing to $3.5M in
2009) can be passed free of estate tax and $1M
can be passed free of gift tax.
Applicable Credit/Exempt Amounts
• Each person can make gifts of a
present interest in property worth
$12,000 per year, per donee, tax free
(married couples can gift $24,000 per
year, per donee).
Annual Exclusion
Asset Protection
Pacific Asset Management Pre-IPO/M&A Overview
Custody Services and Benefits
Security Safe Keeping
• Private/Public stock certificates housed in
Pacific Asset Management’s vault
• Avoid risk of loss and fees/deposits required
to replace certificates
Record Keeping
• Property registered and reported in
shareholder’s name
• Positions included on monthly statements
Insured
• SIPC Insurance protection
• Unlimited coverage through Pacific Asset
Management
Splitting/Gifting
• Process and record all splits
• Handle gifting and other transfers
Prepare Restricted Share Transactions
• Interface with issuer’s counsel to review
proposed transactions and help ensure
compliance with regulatory or contractual
restrictions
Cleaning/Processing
• Work behind scenes with Transfer Agent
and legal counsel
• Clean restricted shares as per SEC
regulations to settle restricted trades
Administrative Support
• Preparation and processing of required
documentation:
–Form 144
–Broker’s Rep letters
–Seller’s Rep letters, etc.
Hedging/Borrow
• Securities must be custodied at Pacific
Asset Management in order to borrow,
pledge, hedge or monetize
Pre-IPO/M&A
Online Access (Client Link)
• Track positions
• Access MS resources
• Transacting in restricted
shares can be a complicated
legal and regulatory process.
• Pamria offers a team of
experienced specialists in
this area to guide you
through this complex and
time consuming procedure.
Post-IPO/M&A
Pacific Asset Management
Section 4
Our Approach to Investing
Pacific Asset Management Our Approach to Investing
Our Fundamental Philosophy
Eliminate Debt
Asset “Rich” Families rarely should borrow funds, and instead become lenders. Leverage can be used to
increase the risk/return of an investment, but is not optimally used for tax efficiency, long term liquidity,
or to fund expenses. Leverage provides for short term liquidity, but dramatically increases the chances of
wealth destruction.
Insure Lifestyle with Income Producing Asset
Our experience is that families who have financed their lifestyle with income producing assets (bonds,
income real estate, etc) are able to weather volatility and illiquidity in other investments. By
“segmenting” risk, we are able to create a more efficient risk/return profile. We believe this allocation
should be a dollar allocation as opposed to a percentage allocation, for historically income producing
assets do not outpace inflation, and the returns are meant for consumption.
Invest the Balance of Assets for Growth
With your primary residences and income stream provided for, the balance of your assets should be
invested in growth assets with returns in the form of capital gains. Investors have been compensated
through history for tolerating volatility and illiquidity with superior after-tax compounding returns.
Mission Statement:
To become the “Strategic Investment Officer” for our clients, providing highly customized advice and investment solutions with a standard-setting level of service and investment expertise.
Pacific Asset Management Our Approach to Investing
Needs Drive Investment Parameters
Level One
Level Two
Level Three
WealthLevel
Time
HigherWealthLevel
LowerWealthLevel
Wealth Seeding Phase Wealth Building Phase Wealth Realization Phase
Advanced Needs1. Philanthropy2. Multiple estates3. Capital intensive pursuits Venture Capital
Absolute Return Investments
Private Equity
Private Real Estate
International Equities
International Fixed Income
Real Estate and REITS
Commodities
Domestic Fixed Income
Domestic Equities
Mutual Funds
Cash Equivalents
Asset ClassesWith Generally Greater Liquidity and Pricing Frequency, and Lesser
Complexity
Asset ClassesWith Generally Lesser Liquidity and Pricing
Frequency, and Greater Complexity
Matching Asset Classes with Wealth Levels and Investor Needs
We believe these two words –
asset allocation - are the most
overused and abused words in
our business. We have four
general statements concerning
asset allocation:
1. The more equity (stocks
and related assets)
exposure you choose, the
more risk you accept and
the more return you should
expect.
2. Emotions will not be your
friend.
3. Long term actions should
produce better results than
short term reactions.
4. There are no investment
short cuts.
Pacific Asset Management Our Approach to Investing
Asset Allocation Over Time
U.S. Stocks
60%
U.S. Bonds
30%
Cash
10%
Historical Strategy: Cash, Stocks, and Bonds
%
Traditionally, most U.S. private clients'
portfolios were invested almost
completely in domestic stocks, bonds,
and cash, with an asset mix that
averaged about 60% in stocks, 30% in
bonds, and 10% in cash over time.
U.S. Stocks
30%
EM
Debt
2%
EM
Equity
10%Int'l Debt
(Developed)
5%
Int'l Equity
(Developed)
18%
Private Equity
(VC, LBOs, O&G)
5%
Real Estate
5%
Cash
10%
U.S. Bonds
15%
1980s:
Alternative and International Assets
%
Beginning in the mid- to late 1980s,
some institutional and a smaller
proportion of private client investors
began to shift some assets into venture
capital, real estate, LBOs, oil and gas
investments, and, more recently, into
international and emerging markets
equity and debt.
In the 1990s and after the turn of the
Millennium, institutional and private
client investors have pursued various
market-neutral strategies based on
equities (including warrant and
convertible arbitrage, hedged closed-
end fund strategies, hedged balance
sheet or cross ownership arbitrage,
paired shares arbitrage, synthetic
security arbitrage, and other techniques
involving derivative instruments)
and/or fixed-income securities
(including futures, swap arrangements,
and mispricings of credit risk, yield
curve shape, and embedded and
explicit option features).
U.S. Stocks
26%
Absolute
Return
8%
EM
Debt
2%EM
Equity
10%
Int'l Debt
(Developed)
5%
Int'l Equity
(Developed)
18%
Private Equity
(VC, LBOs,
O&G) 5%
Real
Estate
5%
Cash
9%
U.S. Bonds
12%
1990s and post-2000: Absolute Return Strategy
%
See attached disclaimer
• Understanding investment
alternatives is paramount to
making prudent allocation
decisions
• Different asset classes
present very different
risk/reward characteristics
• Our clients input, in
conjunction with our
investment outlook, ultimate
drives the allocation decision
Pacific Asset Management Our Approach to Investing
Open Architecture Approach
Our team’s clients can select from a range of investment vehicles and managers from within or outside of Pacific Asset
Management. The appropriately timed funding of investments is critical and depends on many factors, such as market
environment and tax considerations.
Traditional Investments:
Equity, Cash, Fixed Income
(Fee Based)
Pacific Asset
Management
Third-Party
Separate Account
• Smart Investment
Representative
Managed
• Smart Investment
Group
• Pacific Asset
Management
Investments
• Structured Products
Separate Account
• Investment
Consulting Services
Funds
• Investment
Consulting Services
• Exchange Funds
Opportunistic Strategies:
Representative Ideas
(Brokerage Based)
Equity
Related
Fixed Income
Related
Other
• Research calls
• Underwriting
calendar
• Yield
enhancement
(covered call
writing)
• Exchange
traded funds
• Research calls
• Bond credit
swaps
• Underwriting
calendar
• Leveraged
strategies
• Exchange
traded funds
• Commodities
• Foreign
exchange
• Structured
credit-linked or
equity-linked
notes
“Open Architecture”
Alternative Investments
(Fee Based)
Pacific Asset
Management
Third-Party
Funds
• Private Equity
• Venture Capital
• Real Estate
• Managed Futures
• Commodities
Funds of Funds
• Hedge Funds (AIP)
Funds
• Hedge Funds
• Private Equity
Fund of Funds
• Hedge Funds
• Private Equity
These materials are solely informational, based upon publicly available information believed to be reliable, and may change without notice. Pacific Asset Management shall not in any way beliable for claims relating to them, and makes no express or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in, or omissions
from, them. Legal, accounting and tax restrictions, transaction costs and changes to any assumptions may significantly affect the economics of any transaction. The information and analysescontained herein are not intended as tax, legal or investment advice and may not be suitable for your specific circumstances; accordingly, you should consult your own tax, legal, investmentor other advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Any investment returns, past, hypothetical or otherwise, are not indicative offuture performance. These materials do not constitute an offer to buy or sell any financial instrument or participate in any trading strategy.
Note: (1) Rolling one-year returns data are calculated using 1011 sample time periods. (2) Indexes used for this analysis include: (i) Stocks: S&P 500 Index Total Return; (ii) Bonds: Ibbotson U.S. Long-Term 20-Year Government Index Total Return; and (iii) Cash: U.S. 30-Day T-Bill Index Total Return. (3) Historical data shown represent past performance and do not guarantee comparable future results. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
Note: (1) Rolling five-year returns data are calculated using 963 sample time periods. (2) Indexes used for this analysis include: (i) Stocks: S&P 500 Index Total Return; (ii) Bonds: Ibbotson U.S. Long-Term 20-Year Government Index Total Return; and (iii) Cash: U.S. 30-Day T-Bill Index Total Return. (3) Historical data shown represent past performance and do not guarantee comparable future results. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
N/A = Not Applicable. For these rolling ten-year time periods during January 1926-March 2011, there were no periods of negative returns.
Note: (1) Rolling ten-year returns data are calculated using 903 sample time periods. (2) Indexes used for this analysis include: (i) Stocks: S&P 500 Index Total Return; (ii) Bonds: Ibbotson U.S. Long-Term 20-Year Government Index Total Return; and (iii) Cash: U.S. 30-Day T-Bill Index Total Return. (3) Historical data shown represent past performance and do not guarantee comparable future results. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
�:��4&&���-����F� ���� ���������:��4&&���-���������8�<����� �� Best and Worst Returns Generated by Different Holding Periods
S&P 500 Index (January 1926 – March 2011)Rolling 1-Year, 5-Year, 10-Year, 20-Year Compounded Annual Growth Rates (%)
Distribution of S&P 500 Index Rolling 3 Year ReturnsS&P 500 Index 3-Year Compound Annual Growth Rate Distribution January 1926 – December 2010
Number of Observations
Note: The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. All returns are total returns in U.S. Dollars. Past performance does not guarantee future results. Index returns do not include any expenses, fees or sales charges, which would lower performance.
Source: Ibbotson Associates, Morgan Stanley Smith Barney LLC. Data as of March 2011.
Note: The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. All returns are total returns in U.S. Dollars. Past performance does not guarantee future
results. Index returns do not include any expenses, fees or sales charges, which would lower performance. The Compound Annual Growth Rate is the year-over-year growth rate of an investment over a specified period of time. Please note no 10-Year CAGR is available for the period after 3Q2001 and 2Q2002.
Source: Ibbotson Associates; Morgan Stanley Smith Barney LLC. Data as of December 2010.
Note: (1) Rolling one-year returns data are calculated using 243 sample time periods. (2) Indexes used for this analysis include: (i) U.S. Stocks: S&P 500 Index Total Return; (ii) Non-U.S. Stocks: MSCI All Country World ex US Index Total Return ($US); (iii) U.S. Bonds: Ibbotson U.S. Long-Term 20-Year Government Index; (iv) Non-U.S. Bonds: JPMorgan Global ex-U.S. Government Bond Index Total Return ($US); and (v) Cash: U.S. 30-Day T-Bill Index Total Return. (3) Historical data shown represent past performance and do not guarantee comparable future results. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
N/A = Not Applicable. For these rolling five-year time periods during January 1990-March 2011, there were no periods of negative returns.
Note: (1) Rolling five-year returns data are calculated using 195 sample time periods. (2) Indexes used for this analysis include: (i) U.S. Stocks: S&P 500 Index Total Return; (ii) Non-U.S. Stocks: MSCI All Country World ex US Index Total Return ($US); (iii) U.S. Bonds: Ibbotson U.S. Long-Term 20-Year Government Index Total Return; (iv) Non-U.S. Bonds: JPMorgan Global ex-U.S. Government Bond Index Total Return ($US); and (v) Cash: U.S. 30-Day T-Bill Index Total Return. (3) Historical data shown represent past performance and do not guarantee comparable future results. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.
N/A = Not Applicable. For these rolling ten-year time periods during January 1990-March 2011, there were no periods of negative returns.
Note: (1) Rolling ten-year returns data are calculated using 135 sample time periods. (2) Indexes used for this analysis include: (i) U.S. Stocks: S&P 500 Index Total Return; (ii) Non-U.S. Stocks: MSCI All Country World ex US Index Total Return ($US); (iii) U.S. Bonds: Ibbotson U.S. Long-Term 20-Year Government Index Total Return; (iv) Non-U.S. Bonds: JPMorgan Global ex-U.S. Government Bond Index Total Return ($US); and (v) Cash: U.S. 30-Day T-Bill Index Total Return. (3) Historical data shown represent past performance and do not guarantee comparable future results. The indexes are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.