first american capital management, inc

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 Launderingand Anti-Terrorism Policy

This brochure provides information about the qualifications and business practices ofFirst 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) 515-3425Northern 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: [email protected]

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 allmaterial aspects of our organization, its fees, services and key personnel. It is provided tonew 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 meat the address below.

Sincerely,

Mark A. HoppePresident

Corporate Office: 567 San Nicolas Drive, Suite 101, Newport Beach, California 92660-6596Tel: (949) 719-4546 • Fax: (949) 719-4550

888-888-FACM • Internet: www.facm.com • E-mail: [email protected]

(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)

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OMB APPROVALOMB Number: 3235-0049

FORM ADV Expires: February 28, 2001Uniform 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

Answer all items. Complete amended pages in full, circle amended items and file with execution page (page 1).

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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, orunder 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) basedon 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 % oftotal 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, provideestimates 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 asubscription 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 clientmay 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 thoselisted above

C. Investment companiesG. Other (describe on Schedule F)

D. Pension and profit sharing plans


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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) commoditiesB. 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 securitiesL. 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


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5. Education and Business Standards.

Are there any general standards of education or business experience that applicant requires of those involved indetermining 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, orl 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 schooll 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 thanproviding 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, commoditypool 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 toinvest? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Yes

No

(If yes, describe on Schedule F the partnerships and what they invest in.)


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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 toor bought from a brokerage customer.

D. Recommends to clients that they buy or sell securities or investment products in which the applicant or a relatedperson 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 whatrestrictions, 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 advisoryaccounts or hold itself out as providing financial planning or some similarly termed services and impose a minimum dollar value of assetsor 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 holdsitself 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, andtriggering factors. For reviewers, include the number of reviewers, their titles and functions, instructions they receivefrom 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.


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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 productsand 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 inreturn 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 anon-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

Schedule F of Form ADV SEC File No. 801-53106First American Capital Management August 15, 2002

Page 1 of 22

ItemNumber

Answer

Item 1C.

Item 1.D

See Item 1.D

SERVICES PROVIDED IN THE MANAGEMENT OF ACCOUNTS

First American Capital Management, Inc. (“FACM”) provides portfolioadvisory and management services to various clients, including affiliates of theFirst 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-termfixed income and cash management.

FACM’S INVESTMENT PROCESSES

EQUITY INVESMENT PROCESS

FACM’s equity investment decision-making process utilizes both top-downeconomic and bottom-up company specific analysis.

Our top-down approach reviews long-term secular factors, such as demographictrends, global economy metrics and political environments that may influencethe future relative performance of industry sectors. FACM also considerscyclical factors that may affect interest rate and economic growth outlook. Thistop-down review helps determine our allocation to the various economic sectorsrepresented in the portfolio.

Our bottom-up approach is used to select individual securities. Emphasizing along-term investment approach, FACM selects those securities that are goodinvestments based on the overall outlook for the firm. We analyze severalfactors, including earnings, products, quality of management, market presence,revenue growth, valuation and other factors demonstrating positive fundamentalchange.

Our sell discipline is designed to drive the portfolio continually toward strengthutilizing various sell alerts, which trigger verification research. A stock is soldfrom portfolios if it no longer meets our criteria or a better total-return candidateis identified. Buy candidates challenge current holdings so each holding mustcontinue 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. Eachportfolio manager presents their sector(s) to the group and makesrecommendations for necessary changes. This team also meets informally toreview sectors and holdings requiring modifications due to changing conditions.All investment decisions are reached through team consensus. The team isresponsible for creating a model portfolio with target allocation to each sectorand security. All fully discretionary portfolios then are managed to the createdmodel. We believe that this risk-controlled approach will allow us to achieveconsistent returns.


Page 2 of 22

Our external network of relationships with research analysts provide us withextensive coverage of companies worldwide. We also monitor breakingfinancial news via resources such as Bloomberg.

FACM’s expanding technology allows us to quickly convert raw data intouseful information and incorporate it into our stock selections. Our technologyintegration strengthens the entire research and portfolio management effort.

Our investment objective is to outperform the appropriate benchmark over a fulleconomic cycle (three to five years), with controlled market risk. The portfoliois diversified among 50-60 holdings, representing all major sectors of theeconomy. Our typical universe consists of U.S. securities with $5 billionmarket capitalization.

Our tax-efficient strategy attempts to maximize after-tax returns. Comparingeach tax lot’s expected return with the returns of other potential holdings, weevaluate both the market impact and the tax implications of a trade. We attemptto 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 ofequities and fixed income. The weighting of these two styles is dependent uponthe specific investment objectives of each client. We seek to maximize totalreturn over a full market cycle from a portfolio of investment-grade fixedincome securities. Securities rated below investment grade are very limited andatypical for our style of management.

See Equity Investment Process and Fixed Income Investment Process for ageneral description of our management styles.

FIXED INCOME INVESTMENT PROCESS

FACM uses a diversified portfolio of fixed income instruments to deliver highcurrent income and long-term capital appreciation. Our short duration andintermediate fixed income philosophy is built around controlling market pricevolatility and insuring predictable cash flows. Using intermediate maturity,high quality issues for portfolio construction normally provides for both of theseobjectives. We use short maturity fixed income securities for liquiditymanagement. For safety, we invest in investment grade bonds. Due to thepotential for unforeseen market and/or financial fluctuations, we are sensitive tothe credit quality of a specific company. We purchase bonds only afterthoroughly researching the financial strength of the specified issuer.

The FACM Fixed Income Policy Committee (FIPC) maintains a buy list andspecific credit, maturity and security structure guidelines to create suitable riskparameters. We continuously analyze business cycles to reveal patterns andtrends in fixed income markets that may be exploited. We watch overall marketyield levels, seek offerings from multiple institutional bond brokers, and striveto get the most competitive prices available for our clients. FACM’s FIPC


Page 3 of 22

strictly limits the use of derivative products.

For liquidity, FACM focuses on investments that will be priced competitivelyshould we choose to sell them before maturity. For that reason, we invest inU.S. Treasury, federal agency, municipal and well-known corporate bondswhich have active secondary markets.

MUTUAL FUND ASSET ALLOCATION INVESTMENT PROCESS

The Mutual Fund Asset Allocation program is designed to provide clients with adiversified investment portfolio through the use of mutual funds. Each portfoliois 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 modelportfolio is designed to produce characteristics similar to the broad marketindices. During the construction process, consideration is placed on the overallportfolio’s attributes, such as style and capitalization. From this model, clientportfolios are constructed and maintained to match the client’s objectives, goalsand risk profile.

MANAGED ACCOUNT / WRAP FEE PROGRAM

The Managed Account / Wrap Fee program is designed to provide smalleraccounts with the opportunity to invest in a large cap core style managed by ourteam of institutional portfolio managers. Unaffiliated brokerage firms underwhich FACM will provide investment management services sponsor thesemanaged accounts.

PORTFOLIO INVESTMENT ALLOCATIONS

FACM considers many factors when allocating securities among accounts,including the account’s investment style, applicable restrictions, availablesecurities, available cash and other current holdings. FACM attempts toallocate investment opportunities among accounts in a fair and equitablemanner. However, due to the above factors, accounts cannot be assured ofparticipating equally or in all investment allocations. Prioritization is based onthe time at which orders are received by the trading desk. In the case whereorders are received simultaneously from different product areas, the orders maybe bunched. Please see Items 12.A and 12.B for a more detailed description ofour 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 instrumentsof U.S. and non-U.S. entities, such as bonds, notes, capital stock, shares ofbeneficial interest, mutual funds, money market instruments, obligations of theUnited States or any state thereof, commercial paper, certificates of deposit,bankers’ acceptances, trust receipts, and instruments of indebtedness ofwhatever kind or nature.


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The portfolios generally are not limited with respect to the types of investmentstrategies employed or the markets or instruments in which it may invest, withthe exception of derivatives and initial public offerings of securities. Over time,markets may change and FACM may seek to capitalize on attractiveopportunities. Therefore, FACM may employ other instruments or techniques itconsiders appropriate and is in the best interest of the portfolios.

For example, FACM may use Exchange-Traded Funds (“ETFs”) when, forexample, portfolio managers are unable to identify attractive buyingopportunities among individual securities. ETFs have a number of uses,including investing idle cash targeted for equity investment, managing sector orstyle exposure, profiting from an industry view and gaining diversified access tointernational markets. Most ETFs are structured as registered investmentcompanies and may be in the form of a Unit Investment Trust (“UIT”) or amanaged fund. Like other investment companies, ETFs impose a managementfee. Therefore, when invested in ETFs, clients will pay this fee in addition toFACM’s fees. ETFs normally are at least as liquid as their underlying portfolioof securities. ETFs in UIT form typically track an index, (which generally is anarrower stock basket focused on specific industries or sectors), and rebalanceto match changes in the index (e.g., SPYs, QQQs, MDYs and DIAs). Managedfunds also track an index, but are not required to rebalance when the indexchanges and may use sampling and derivatives to simulate the index (e.g.,Sector SPDRs, WEBS and iShares). ETFs that are not structured as registeredinvestment companies are structured as grantor trusts (e.g., HOLDRs). Becausegrantor 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 beunbundled into share holdings of the underlying securities, FACM does notcurrently anticipate purchasing ETFs in the form of grantor trusts.

FEES

Typically, portfolio assets are valued monthly and advisory fees are payablequarterly in arrears. FACM determines client fees based on the portfolio’sending market value as of the last day of the quarter. Fees may be negotiated incertain circumstances on a case-by-case basis. All fees are noted in the clientmanagement agreement / advisory contract.

FACM employs the particular investment strategy selected by the client for themanagement 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


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 toreflect the client’s investment objectives. Certain mutual funds also may beused to represent particular market segments or investment objectives consistentwith the client’s needs. Typically, accounts with less than $500,000 of managedsecurities are placed into mutual funds selected to reflect client investmentobjectives.


Page 6 of 22

Item 2.G

Generally, either party upon 30 days written notice may terminate theinvestment advisory contract. Fees are payable through the final settlementdate. In the event an investment advisory contract is terminated prior to itsexpiration date, FACM will refund a pro rata portion of its fees listed above.

FACM may, if mutually agreed with an eligible client, employ a performancefee. Although performance-based fees are not part of FACM’s advisoryarrangement, FACM may accept such an arrangement based upon appropriatecircumstances and compliance with the Investment Advisers Act of 1940.

Typically, FACM will be entitled to a management fee for 1031 exchangeportfolios which will be determined by the following formula:(The deposit amount) x (The rate of return earned by such deposit in theportfolio - the interest rate of the deposit that is specified in the Notice ofDeposit)

However, to the extent that deposits continue beyond the maturity date specifiedin the notice of deposit, FACM will, subsequent to the maturity date, be entitledto a management fee determined by the following formula:(The deposit amount) x [(Rate of return earned by the portfolio) – (Interest ratequoted by FACM)]

The Client will be responsible for timely paying all costs incurred by FACMand/or the portfolio due to the failure of the Client to pay the deposit amount onthe deposit date.

SUB-ADVISORY RELATIONSHIPS

FACM provides discretionary sub-advisory investment services to FirstAmerican Trust FSB, a Federal Savings Bank and a SEC registered investmentadviser. Please refer to Item 8.C.2 for additional information.

MANAGED ACCOUNT / WRAP-FEE PROGRAM

FACM participates in a sub-advisory capacity providing portfolio managementservices in managed account / wrap-fee programs sponsored by unaffiliatedbroker-dealers (“program sponsors”). Under these programs, the programsponsor generally recommends an investment adviser / sub-adviser based on theclient’s investment objectives. FACM sub-advises the following wrap-feeprograms:

Managed Account / Wrap FeeProgram

Sponsor Firm

LCCE Advisorport/Persimmon ResearchPartners, Inc.


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 thatprovide historical data on individual securities. Company and industry data alsois gathered from an external network of research analysts.

EDUCATION AND BUSINESS STANDARDS

FACM requires that all members of the investment committee and its principalofficers have at least five years related experience in the Investment / Financialindustry. Additionally, such individuals must meet any required qualificationexaminations.

MEMBERS OF THE INVESTMENT COMMITTEE AND PRINCIPALOFFICERS

FACM utilizes a team approach in the management of its portfolios. PresidentMark 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 VicePresident, Chief Financial OfficerFirst American Capital Management, Inc. (07/2000 to 10/2000) – President,


Page 8 of 22

Chief Financial OfficerFirst American Financial Corporation (09/1993 to 02/1996) – Vice President,Chief Financial OfficerFirst American Title Insurance Corporation (09/1993 to Present) – VicePresident, Chief Financial Officer

Arnesen, Mark R (1952)Board Member, First American Capital Management, Inc.Secretary and Corporate Counsel, The First American Corporation


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, CentralDistrict of California and U.S. Supreme Court

Business Background:The First American Corporation (04/1992 to Present) – Vice President,Secretary and Corporate CounselFirst American Title Insurance Company (04/1992 to Present) – SecretaryFirst American Title Insurance Company (01/1992 to Present) – CorporateCounselFirst American Title Insurance Company (10/1989 to Present) – Vice President

O’Bryan, Frank E. (1933)Board Member, First American Capital Management, Inc.


Education:University of Arizona (B.A. Business)

Business Background:The First American Corporation (08/1994 to Present) – Board MemberWMC 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) – PresidentFirst Security Van Kasper, Inc. (09/1996 to 10/2000) – Vice President,


Page 9 of 22

InvestmentsPrudential Securities, Inc. (12/1993 to 9/1996) – Registered Representative

Venable, Robert S. (1962)Board Member – Chief Financial Officer; Executive Vice President, ChiefInvestment Officer, CFA

Responsible for overseeing all of the firm’s investment activities

Education:University of California, Berkeley (B.S. Electrical Engineering and ComputerSciences, 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 VicePresident, Chief Investment Officer, CFAPIMCO Advisors L.P. (08/1996 to 06/2000) – Vice President, Global AssetAllocationPacific Investment Management Company (08/1992 to 08/1996) – VicePresident, 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) – SeniorPortfolio Manager, Director of Fixed Income, CFAWells 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 LargeCap Core Equity and is research analyst for the software, commercial servicesand consumer discretionary sectors

Education:University of Texas, Austin (B.B.A. Finance 1984)Series 7 & 63; Chartered Financial Analyst


Page 10 of 22

Business Background:First American Capital Management, Inc. (01/2001 to Present) – SeniorPortfolio Manager, Director of Equities, CFAFirst American Trust, FSB (04/2000 to 01/2001) – Portfolio ManagerCrawford-Doherty Capital Management (07/1999 to 04/2000) – PartnerHarris 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) – SeniorPortfolio Manager, CFA

Rogers, Christopher J. (1956)Senior Vice President, Senior Portfolio Manager, CFA

Serves as portfolio manager and research analyst for the materials andtransportation sectors

Education:University of Washington (B.S. Economics 1983)Chartered Financial Analyst

Business Background:First American Capital Management, Inc. (07/2000 to Present) – SeniorPortfolio Manager, CFAFirst American Trust, FSB (07/1999 to 01/2001) – Vice President, PortfolioConsultantSelf-Employed (10/1998 to 07/1999) – ConsultantMetlife (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 andtobacco sectors

Education:University of Michigan (B.A. Political Science 1976)California State University, Fullerton (M.A. Public Administration 1983)Certified Financial Planner


Page 11 of 22

Business Background:First American Capital Management, Inc. (01/2000 to Present) – PortfolioManager, CFPClear Vision Consultants (10/1998 to 12/1999) – ConsultantInland 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 VicePresident, Senior Portfolio Manager, CPASelf-Employed (11/2001 to 05/2002) - ConsultantRoxbury Capital Management, LLC (08 /1992 to 10/2001) - Principal,Managing Director and Director of ResearchSelf-Employed (11/1991 to 07/1992) - ConsultantUnemployed (05/1991 to 10/1991)Price Waterhouse Coopers, LLC (08 /1986 to 04/1991) - Manager, AuditPractice 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) – PortfolioManagerFirst 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 thetelecommunications and technology sectors

Education:Tsuda College, Tokyo (B.A. English 1983)California State University, Long Beach (M.B.A. Finance 1990)Chartered Financial Analyst


Page 12 of 22

Business Background:First American Capital Management, Inc. (08/1998 to Present) – PortfolioManager/Senior Securities Analyst, CFARoyal 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) – PortfolioManager/Securities Analyst, CFAFixed 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) – AssociatePortfolio Manager/Securities AnalystFirst 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 firmin 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 CounselNicholas-Applegate Capital Management (06/98 to 04/02) – Compliance


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ManagerPIM 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, marketingand client service efforts in addition to individual institutional salesresponsibilities

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 VicePresident, Director of Institutional ServicesFinancial Finesse (02/2000 to 12/2000) – Director of Corporate SalesEssential Data Corporation (08/1999 to 02/2000) – AssociateInternational Television Productions (03/1999 to 01/2001) – Executive ProducerMcKinley Capital Management (03/1995 to 01/2001) – Institutional SalesNational Securities Corporation (03/1995 to 01/2001) – RegisteredRepresentative

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 DirectorMet Life (06/2000 - 12/2001) - National DirectorCIGNA 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,


Page 14 of 22

Item 7.C

Item 8.C1

Item 8.C3

Items 8.C4;8.C7

Institutional ServicesSaveDaily.com, Inc. (05/2000 to 12/2000) – Director, Financial ServicesThomson Financial (02/2000 to 05/2000) – West Coast Account ExecutivePIMCO (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 TraderSAI Capital Management, Inc. (01/1994 to 04/2000) – Trader / Junior EquityAnalyst

OTHER BUSINESS ACTIVITIES

FACM’s Board of Directors is employed by or affiliated with the FirstAmerican Corporation, one of the nation’s leading diversified provider ofbusiness information and related products and services. The First AmericanCorporation is a publicly traded company listed on the New York StockExchange (Symbol: FAF). In addition to serving as Board Members to FirstAmerican Capital Management, these members also have a variety of roles andresponsibilities to the parent company and its subsidiaries, including but notlimited to title services, trust administration, bill payments, fiduciary tax returnpreparations, 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 SecuritiesMarketing Association. All trades are cleared through DB Alex Brown. PAS isnot a subsidiary of the First American Corporation.

First American Trust, FSB, was registered with the Securities and ExchangeCommission on July 6, 1999, as an investment adviser. FACM acts as asubadvisor, providing portfolio advisory and investment management servicesto accounts that may have various trust relationships through First AmericanTrust, FSB, an affiliate. In addition, First American Trust, FSB may providecustodial services for advisory clients. First American Trust, FSB and FirstAmerican Capital Management are wholly owned subsidiaries of the FirstAmerican 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. Fromtime to time, the First American Corporation and its subsidiaries may hire


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 returnsfor its trust clients. Generally, PAA is the preferred provider of such services solong as the costs and quality of tax preparation do not materially differ fromsimilar services offered by other local reputable tax preparers.

First American Trust, a California state chartered bank, became a FederalSavings Bank on August 4, 1999 and is 100% owned by the First AmericanCorporation. First Security Thrift is an affiliated thrift institution that FACMshares no financial or transactional relationship with. First American Trust,FSB, First Security Thrift and First American Capital Management are whollyowned subsidiaries of the First American Corporation.

The First American Corporation and its subsidiaries may use the services ofFirst American Title Insurance Company, an affiliate, to provide escrowservices and property title services when selling and purchasing real property intrust accounts when the costs and services to the client do not materially differfrom similar services offered by other local reputable title insurance and escrowservice providers.

FACM is one of the investment advisers to The First American Corporation andits various entities, such as First American Title Insurance Company, FirstAmerican Trust, FSB, First American Real Estate Information Services, Inc.,First American Exchange Corporation, First American Property & CasualtyInsurance Company and First American Specialty Insurance Company.

Pacific American Securities, LLC, an affiliated broker-dealer, receivescommissions in connection with all transactions for which it serves asintroducing broker. Therefore, the broker-dealer may have a conflict of interestin limiting expenses of its clients’ accounts when generating brokeragecommissions.

FACM selects investments for clients based on several investmentconsiderations, including whether the investments meet the client’s investmentobjectives and guidelines. In the course of providing advisory services, FACMmay simultaneously recommend the sale of a particular security for one accountwhile recommending the purchase of the same security for another account ifsuch recommendation is consistent with each client’s investment objectives andguidelines.

In certain circumstances, and in compliance with Rule 206(3)-2 of theInvestment Advisers Act, FACM may execute agency cross transactions for itsclients and in those instances, will obtain advanced written consent.

FACM, and persons associated with it, seeks to ensure that it does notpersonally benefit from the short-term market effects of their recommendations.From time to time, a client account may purchase a security in which a relatedperson of FACM may have an ownership position or a related person maypurchase 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


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 withthe firm’s Code of Ethics, which imposes restrictions on the purchase or sale ofsecurities for their own accounts and accounts of affiliated persons. Amongother things, the Code of Ethics requires pre-clearance and monthly reporting ofall personal securities transactions, except certain exempt transactions andexempt securities (such as government securities and mutual funds). Inaddition, FACM has adopted certain policies and procedures concerning themisuse of material non-public information that are designed to prevent insidertrading by any board member, officer or employee of FACM.

See Item 9.D above.

FACM generally imposes a $5-10 Million minimum for institutional separateaccount relationships, $500,000 minimum for individual portfolio managementand $100,000 minimum for managed account / wrap fee relationships. Fees andaccount minimums may be negotiated. For example, FACM may waive thisrequirement for accounts it believes will grow through contributions to reachthe minimum level.

The continuous review of client accounts is an integral component of FACM’sinvestment management process. FACM utilizes a team approach in managingclient accounts. At the account’s inception, a committee is assigned by theChief Investment Officer to create a transition plan. Each portfolio is reviewedand rebalanced in accordance with the model portfolio.∗ The model portfolio istypically reviewed in weekly investment meetings where economic outlook,sector weightings and positions are discussed. Each account is monitored byportfolio management to ensure compliance with client guidelines andinvestment objectives. A formal review and comparison of the account’sstrategy and objectives to the assets allocated is performed on at least an annualbasis by the portfolio managers with a final account review provided to theclient.

The nature and frequency of reports to clients are determined primarily by theparticular needs of each client. Generally, clients or their custodians receivequarterly statements and account performance utilizing software and servicesprovided by the custodian, Advent, Greenhill and others. These reportssummarize investment performance, asset mix, investment strategy, currentportfolio holdings, current asset value and market conditions as well as advisoryfees. In addition, through telephone calls and in-person meetings, client servicerepresentatives regularly keep clients informed of the investment policy andstrategy being used to achieve the client’s investment objectives.

FACM is a discretionary money manager. Accordingly, FACM generallydetermines the securities and quantities to be bought and sold for each client’saccount. On a quarterly basis or as requested, clients receive itemized accountstatements reflecting present holdings and transactions for the account’s statedperiod.

∗ NOTE: Individual account circumstances may cause individual deviations from the model (e.g. taxes).


Page 17 of 22

While FACM generally selects the broker-dealers that provide best execution ofportfolio transactions, a client may, in writing, direct FACM to use a particularbroker-dealer to execute portfolio transactions for its account or request thatcertain types of securities not be purchased for its account.

If a client directs the use of a particular broker-dealer, FACM asks that theclient also specify in writing the general types of securities for which thedesignated firm should be used and whether the designated firm be used fortransactions even though FACM may be able to obtain a more favorable netprice and execution from another broker-dealer in particular transactions.

A client who designates the use of a particular broker-dealer should understandthat it may lose the possible advantage that non-designating clients derive fromaggregation of orders for several clients as a single transaction for the purchaseor sale of a particular security. Since FACM will not be able to effectivelynegotiate the commission rate, FACM may not be free to seek best availableprice and most favorable execution as if considering transactions with otherbroker-dealers. Additionally, such a client’s trades may be effected after thetrades 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-feeclients should recognize that commissions for the execution of clienttransactions in the client’s account are not negotiated by FACM and FACMmay not be free to seek best available price and most favorable execution as ofconsidering transactions with other broker-dealers. While it has been FACM’sgeneral experience that broker-dealers which FACM deals with pursuant towrap-fee agreements generally offer competitive price / execution fortransactions in listed equity securities, no assurance can be given that this willcontinue to be the case. Accordingly, the client should satisfy itself that thewrap fee or suitable program is suitable, given the client’s particular financialneeds and circumstances.

FACM owes a fiduciary duty to our clients to provide best price and executionon trades effected. In selecting a broker-dealer for each specific transaction,FACM chooses the broker-dealer deemed most capable of providing theservices necessary to obtain the best available price and most favorableexecution. Best available price and most favorable execution are generallyunderstood to mean the most favorable total cost or net proceeds reasonablyobtainable under the circumstances. The full range of brokerage servicesapplicable to a particular transaction may be considered when making thisjudgment, which may include, but is not limited to, price, commission, timing,research, aggregated trades, capable floor brokers or traders, competent blocktrading coverage, ability to position, capital strength and stability, reliable andaccurate communications and settlement processing, use of automation,knowledge of other buyers or sellers and administrative ability. Theapplicability of specific criteria will vary depending upon the nature of thetransaction, the market in which it is executed, and the extent to which it ispossible to select from among multiple broker-dealers.


Page 18 of 22

Subject to the foregoing, FACM may, without limitation, effect transactionsthrough Pacific American Securities (PAS), a broker-dealer in which FACMowns a 38% interest. PAS is a non-clearing firm (introducing broker) whoclears trades through DB Alex Brown. On a fully disclosed basis, DB AlexBrown uses clearing brokers on the floor of the various exchanges to effectpurchases and sales in which clearing charges must be paid. Our clients shouldbe aware of the relationship FACM has with PAS and that brokeragecommission, though competitive, may be available elsewhere at lower costs.

On March 13, 2000, the Department of Labor granted FACM The ProhibitedTransaction Exemption No. 2000-12 for transactions involving related broker-dealers (in this case, PAS). This exemption may be found in the FederalRegister, 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 approximatelythree bids or offers that meet the client’s account objective. On occasion, PASmay have bonds available that meet the best execution, price and delivery statusand may be utilized to fill the order for the account. These “principal trades”require the written consent of the client to execute such transaction. SinceFACM is a sub-adviser to First American Trust, we must obtain their client(s)’written approval prior to settlement date of the “principal trade” executedthrough PAS.

In selecting brokers, we may consider selecting those brokers that assist FACMin fulfilling its investment management responsibilities by providing research orresearch-related products or services that assist portfolio managers in theirinvestment 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, legaldevelopments affecting portfolio securities, pricing and appraisal services,credit analysis, risk measurement analysis, performance analysis and proxyvoting services. Broker-dealers, including Pacific American Securities, mayprovide these research services in the form of written reports, telephone contactsand personal meetings with security analysts. In addition, such researchservices may be provided in the form of accessing various computer-generateddata, computer hardware and software, support and backup systems and relatedmaintenance costs for this computer-generated data, computer hardware andsoftware. Research services also may be provided by way of meetings arrangedwith corporate and industry spokespersons, economists, academicians andgovernment representatives. Services and equipment that facilitate theexecution and monitoring of securities transaction, for example, by providingrapid communications with financial markets and broker-dealers, or byproviding real-time tracking of orders, settlements and investment positions arealso provided by broker-dealers. In some cases, brokerage and research servicesare generated by third parties but are provided to FACM by or through broker-dealers. Therefore, commissions paid may be higher than those obtained fromother brokers. Generally, FACM pays commissions at approximately $.04 per


Page 19 of 22

share for hard dollar and $.09 per share for soft dollar. Currently, FACM doesnot participate in any rebate or commission recapture programs.

FACM monitors the best execution reports of its broker-dealers and periodicallytests the commissions available from competing brokers and dealers. FACM’suse of a particular broker-dealer may be contingent upon the firm’s good faithdetermination that the commission paid is reasonable in relation to the value ofthe brokerage and research services provided. The determination may beviewed in terms of either the particular transaction involved or the overallresponsibilities of FACM with respect to the accounts over which it exercisesinvestment discretion. Such brokerage or research services may be used toservice any or all of FACM’s clients and/or may be used in connection withaccounts other than those that pay commissions to the broker-dealer providingthe brokerage and research services, as defined in Section 29(e) of the SecuritiesExchange Act of 1934, in connection with selling concessions and designationsin fixed price offerings.

In circumstances where FACM receives products or services that are used forcertain administrative purposes (such as preparation of client accountvaluations), FACM makes a “good faith” allocation of the value of the productor service received between those used in making investment decisions in clientaccounts and the value attributable to administrative functions that are paid incash by FACM.

From time to time, FACM may enter agreements with, or make commitmentsto, 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 clientfor whom the transaction is being executed, or of other clients, or in anticipationof possible future referrals from the broker-dealer. Registered investmentcompanies and ERISA clients are not permitted to participate in suchtransactions.

Conflicts of interest may exist when FACM makes the allocation betweenresearch and non-research information. The research services used are for all ofFACM’s accounts, not just those accounts paying for it. As sub-adviser to FirstAmerican Trust, FSB, FACM does not determine the amount of “soft dollars”received by First American Trust, FSB through any arrangement with thebrokers First American Trust, FSB directs FACM to trade with.

When possible, FACM will bunch orders of various clients for execution, whichgenerally results in lower commission rates being attained. In certain cases,where the aggregate order is executed in a series of transactions at variousprices on a given day, each participating client’s proportionate share of suchorder reflects the average price and commission rate paid or received withrespect to the total order placed on that day. When trades are effected based onthe needs of an individual client, block trading is not possible.

In addition, block trading may not be possible for First American Trust, FSBjoint authority client accounts due to timing issues for clients who have animmediate need for cash or reallocation. In those situations, securities


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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 administratorsduring 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 ourclients’ interests come first. Normally, this means placing the client in the sameposition that it would be in had the error not occurred. Any losses incurred dueto a FACM trading error are the responsibility of FACM as the adviser to theaffected account. Immediately upon learning of a trading error, it is reported toManagement for prompt attention.

Examples of trading errors may include, but are not limited to: purchasing orselling 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 clientguidelines / 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 (USDepartment of Labor, October 25, 1988.) As a result, FACM will not use softdollars to correct a trading error. All trading errors will be reviewed anddiscussed with the Director of Compliance to ensure that no client isdisadvantaged and that all errors are corrected in compliance with applicablelaw and FACM’s policy.

See Item 12.A above.





FACM may pay cash referral fees pursuant to a written agreement. The referralagreement and the related activities of FACM will be in compliance with Rule206(4)-3 of the Investment Advisers Act of 1940.

Rule 206(4)-3 specifies certain standards that must be met by an investmentadviser and any person who solicits any client for, or refers any client to, aninvestment advisor prior to the payment of a cash fee directly or indirectly, forclient solicitation or referral. Prior to or at the time of executing an advisorycontract, the adviser must receive a signed and dated acknowledgment from theclient evidencing receipt of the adviser’s brochure and the solicitor’s brochure.In compliance with Rule 204-2(a)(15), the adviser retains theacknowledgement.



Page 21 of 22

PrivacyNotice

Privacy Notice

The relationship between FACM and its customers is the most important assetin our business. We strive to maintain our clients’ trust and confidence in ourcompany, an essential aspect of which is FACM’s commitment to protectpersonal information to the best of our ability. We believe that clients valuetheir privacy, so we will not disclose personal information to anyone unless it isrequired by law, by the client’s direction, or is permitted by law and isnecessary to provide our clients with FACM’s services. We have not and willnot sell personal information to anyone.

Personal Information We Collect and CommunicateThe primary reason FACM collects and maintains personal information is toserve our clients and administer the customer relationship. The types andcategories of information we collect about our clients includes:

• Information received on applications and/or other documents for toopen an account or provide investment advice, including the client(s)’name, home address, social security number, telephone number andfinancial information;

• Information about client transactions with FACM, such as accountactivity; and

• Information that we may receive from third parties with respect to theclient(s)’ account or about transactions, such as trade confirmationsfrom brokerage firms.

In order for FACM to administer client accounts, we may disclose this personalinformation that we collect, as described above, in limited instances includingbut not limited to:

• Disclosures as permitted by law to service the client account. Examplesinclude providing account information to companies that performadministrative services, such as printing and mailing accountstatements; companies that assist in evaluating investment performance;and/or brokers that place client trades. These companies must use thisinformation solely for the services for which we hired them and are notpermitted to use, reuse or share this information for any other purpose.

How We Protect Personal InformationTo fulfill our privacy commitment, FACM has instituted practices to safeguardthe information maintained about our clients. These include:

• Maintaining physical, electronic and procedural safeguards that complywith government requirements to keep personal information safe;

• Limiting access to personal information to those employees who need itto perform their job duties;

• Taking the appropriate steps to ensure that third parties that performservices for us agree to keep company and/or personal informationsecure and confidential; and

• Protecting the personal information of our former clients to the sameextent as our current clients.


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Anti-MoneyLaunderingand Anti-TerroristPolicies andProcedures

ANTI-MONEY LAUNDERING AND ANTI-TERROTIST POLICIESAND PROCEDURESFACM takes reasonable steps to detect terrorist activities in our client accounts.Specifically, FACM reviews client accounts monthly and reports anyinformation to authorities, in compliance with the Presidential Executive Orderand 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 onthe Presidential Executive Order. In the event that FACM has a potential hit,the firm reports our findings to the FBI and applicable financial regulators, suchas the SEC and NASD. FACM will take any necessary action to freeze saidopen accounts for any persons or entities that are on the terrorist list and reportthe information to the relevant authorities.

In addition, on a monthly basis, FACM downloads the terrorist list provided bythe United Nations, which is an updated Presidential Executive Order, to ensurethat we do not have additional matches with newly appearing names.

At least annually, FACM provides training to its employees on our anti-moneylaundering and anti-terrorist policies and procedures. FACM notifies seniormanagement and reports transactions relating to known and suspected federalcrimes, including securities law violations, of $5,000 or more. In addition, eachFACM employee annually signs an acknowledgement form indicating he/shehas reported all suspected federal crimes to the Director of Compliance.

DWMartin

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First AmericanCapital Management(A wholly owned subsidiary ofThe First American Corporation)

Balance SheetDecember 31, 2001 and 2000

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

AssetsCash 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 EquityAccounts 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$


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 FirstAmerican Corporation (“FAC”). The Company is an SEC-registered investment services firmproviding advisory and management services for nearly $2 billion in assets. Staff includesinstitutional 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). TheCompany operates primarily in Southern California. Cash and Cash Equivalents The Company considers cash and cash equivalents to be all short-term investments that have aninitial maturity of 90 days or less. Property and Equipment Property and equipment are recorded at cost. Depreciation on the furniture and equipment, leaseholdimprovements and software are computed using the straight-line method over estimated useful livesof 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 ofFAC. Federal income taxes are apportioned to the Company in an amount that approximates thefederal income taxes that would be payable if the Company prepared and filed a separate return. Thestate income tax provision for the combined group is apportioned to the profitable entities within thisgroup based on relative taxable income. The Company recognizes deferred tax assets and liabilitiesfor the expected future tax consequences of temporary differences between the carrying amounts andthe tax bases of assets and liabilities. At December 31, 2001and 2000 temporary differences werenot 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, theprofit sharing plan and the group health insurance plan of FAC. Pension, profit sharing and grouphealth insurance expenses attributable to the Company’s employees are allocated to the Company byFAC. Information on the defined benefit pension plan’s accumulated benefits and net assetsattributable 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 maximumdeductible amount as determined by the Internal Revenue Code. Use of Estimates The balance sheet has been prepared in conformity with generally accepted accounting principles inthe United States of America, which require management to make estimates and assumptions thateffect the amounts and disclosures reported in the balance sheet and accompanying notes. Actualresults could differ from those estimates.



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 renderedby the Company to FATICO, reduced by various administrative costs and expenses related to theoperations 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 investmentmanagement and advisory services rendered by the Company to FAT. The amounts due from FAT asof 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 owns38% 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 endedDecember 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 2000were $77,000 and $1,451,000, respectively.

December 31,2001 2000

Leasehold improvements 15,000$ 14,000$ Furniture and equipment 830,000 793,000Software 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$



5. Operating Leases

The Company entered into operating lease agreements for office equipment and office space at itsNewport Beach branch location. Future minimum lease payments under non-cancelable operatingleases 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 theultimate disposition of each proceeding is not determinable, the Company does not believe that anyof such proceedings will have a material adverse effect on its financial condition or results ofoperations.

2002 131,000$ 2003 155,000 2004 163,000 2005 170,000 2006 - Total minimum future rental payments 619,000$

first american capital management, inc

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