strategies for concentrated equity positions

EquityServices

2010

Equity Services

Hedging Strategies for Concentrated Equity Positions

144 Sales/10b5-1 Sales Plans

Employee Stock Option Plans

HARBORLIGHTCapital Group

1

TABLE OF CONTENTS

Page

Equity Protection Strategies….………………………………………………………………………………….. 3

Stock Loans .………………………………………………………………………………………………….. 5

Collars….…….…….………………………………………………………………………………………….. 15

Prepaid Forward Contracts……...………………………….….……………..….…………………………… 24

Rule 144 Sales/10b5-1 Sales Plans……………………………………………………………………………….. 30

Employee Stock Option Plans……………………………………..……………………………………………... 33

Firm Overview ….…….……………………………………………………………………….…………………. 37

Contact Information .…………………………………………………………………………………………….. 38

2HarborLight Capital Markets, LLC

Equity Services


EQUITY PROTECTION STRATEGIES

Equity Protection Strategies


• Equity Protection Strategies are designed for holders of a concentrated position in a single stock. The primary purpose is to protect or hedge the value of the position. The holder can also monetize the value in a tax-efficient manner while maintaining ownership benefits.

• The holder may not be able to sell the position for a variety of reasons such as taxable-event considerations (low cost basis), a contractual agreement with the company, or general restrictions on the shares. Leaving the position unhedgedleaves the holder exposed to market risk. The holder may also need to monetize the position for diversification or other financial needs.

• We offer customized products that are tailor made for the individual holder’s needs. The holder can hedge their market risk, retain upside participation in the stock price and retain voting rights. The holder can also monetize the position, while deferring the taxable event until the end of the contract. This creates the ability to diversify their portfolio.

Overview



• Stock Loans – The holder can borrow up to 90% of the current value in a non-recourse loan. They can hedge their downside exposure, diversify their portfolio, pay below-market rate interest and still retain upside appreciation. These are not margin loans, so the loans are not subject to margin calls.

• Cashless Collar – The client can protect their downside risk without incurring an out-of-pocket expense. The client is in effect buying a European-style put option on the stock and offsetting the cost by selling a European-style call option.

• Non-Cashless Collar – Same concept as a cashless collar, but the client pays for higher upside potential.

• Pre-paid Forward – The client can monetize up to 90% of the current value, retain upside exposure, pay no interest while deferring the taxable event until maturity.

Types of Hedging Products



Goal Stock Loan Protective Put Covered Call Cashless Collar Prepaid Variable Delivery Forward

Downside Protection YES YES NO YES YES

Upside Potential Yes(Unlimited or capped)

YES(Unlimited)

YES(Capped)

YES(Capped)

YES(Capped)

Liquidity YES No YES(Capped)

No YES(embedded in structure)

Diversification YES(with Reinvestment)

No Yes(with Reinvestment)

NO Yes(with Reinvestment)

Deferral of Tax Event* Yes YES YES YES YES

Premium NO YES(Payable to GAF)

YES(Payable to Investor)

NO NO

*Investors should consult their own tax and legal advisors regarding structures

Hedging Strategies for Concentrated Equity Positions



• Pricing is subjective based on:• market capitalization• stock price• trading liquidity• trading volatility• option availability• dividend yield• general market conditions

• Stock Loans typically require freely-tradable shares at the beginning of the transactions, although some products do allow for restricted shares. For collars & pre-paid forward contracts, the holder must be able to deliver freely tradable / unrestricted shares at the conclusion of the contract.

• The position must be worth at least $100 thousand for stock loans and $2 million for collars. There are exceptions based on the aforementioned variables.

• Not every stock is eligible for hedging strategies. Most counter-parties have minimum standards for market cap, trading liquidity, stock price and option availability.

Pricing/Eligibility



• Once a holder expresses interest, Equity Services would then discuss the various strategies to determine the objectives.

• Equity Services would then solicit bids from the various counter-parties. Equity Services maintains an equal commission schedule with each counter-party to ensure that the best bid is presented to the holder.

• Equity Services and the financial advisor would present the terms to the holder and discuss the various considerations and scenarios. All terms are given as percentages (downside protection, upside cap, initial proceeds, etc.).

• If the holder accepts the terms, they would complete the documentation, from which the counterparty would perform their internal due-diligence. Upon approval, there would be a pricing call to review terms and take an order from the holder. The client can give a market order or limit order to execute the transaction. Based on the instructions, the counter-party would execute the underlying trade in the market. The terms would then be based on that execution price.

• The holder would receive a final term sheet for their signature. Upon approval and settlement, any applicable funds would be sent to the holder.

• Equity Services will guide the holder and the financial advisor through the entire process. Although we cannot provide official legal and tax-related advice, we have several resources at our disposal to help assist the holder.

Transaction Process

Equity Services


STOCK LOANS

Stock Loans


• Stock Loans allow a client to borrow against their stock, while hedging themselves against a decline in the stock value.

• The client can borrow from 50% to 90% of the current value. The client participates in the stock appreciation. If the stock declines in value, the client has the option to walk away with no recourse against them, keeping the borrowed funds.

• There are several structures that can allow for a clients desire for higher loan-to-value, low interest rates, higher upside appreciation or term length.

• These loans differ from traditional margin loans in several ways. The client is protected below the amount of the LTV. If the stock falls in value, there are no margin or house calls. The hedged loan interest rates are typically lower than regular margin rates.

Introduction

Stock Loans


• Example 1 - Up to 85% loan-to-value with low interest and the right to pay the loan off at anytime after the first three months. Interest paid quarterly. All growth in portfolio to the account of the borrower (full upside). No margin calls. Cash hedges.

• Example 2 - Allows the borrower to enjoy all of the upside growth of their portfolio over time at flat 90% loan-to-value standard. Interest may accrue. No margin or house calls. Prepayable on annual basis. Private investment-grade options hedges.

• Example 3 – Similar to Example 2, except that instead of having all upside growth go to the account of the client, the upside is capped at an agreed-upon percentage, with all upside beyond the cap going to the lender, and all upside under the cap going to the client/borrower. This comes with a lower interest rate, and is often used with foreign stocks or stocks that have difficulty qualifying for Example 2.

• Example 4 - Lowest interest, lower loan-to-value loans on a very wide variety of stocks including pink sheets. Very large upside caps - 100% (doubling of stock value per year cap). Cash and private options hedges. Interest-only loan repayment.

Examples

Stock Loans


• Standard Exit Option: (Loan repaid in cash) If full-upside all value returned. If Capped, value up to Cap returned.

• Out-of-the-Money Exit Option: (Stocks worth less than loan payoff amount at loan maturity) Client chooses to surrender the stock, keeps loan cash and walk away. (“Nonrecourse” loan provision).

• In-the-Money Exit Option: (Stocks worth more than loan payoff at loan maturity) Client chooses to have us sell shares sufficient to payoff loan, while returning remaining stocks/value to client.

• Prepay Exit Option: Client pays off loan principal and any remaining interest, or instructs us to sell shares sufficient to repay. Shares returned.

• Rollover Option: Client chooses to extend loan by paying small fee. New loan documents issued.

Client’s Choice of Exit

Stock Loans


Clients Holdings:

Stock: XYZ Shares: 20,000 Price: $89.70 Portfolio value: $1,794,000

Terms• 90% loan amount: $1,614,600• Less loan origination fee (5%): $80,730• Proceeds to borrower: $1,533,870• Nominal (APR) interest rate of: 9.67%• Estimated effective annual interest rate of: 9.81%• Loan term – 5 years

Example

Stock Loans


What If… Portfolio Value Declines? Portfolio Break Even Point

Portfolio Value Rises

Original Portfolio Market Value $1,794,000 $1,794,000 $1,794,000

Loan Payoff Amount $2,577,857No payments during loan

$2,577,857No payments during loan

$2,577,857No payments during loan

Portfolio Return per Year Depreciate - 8% Appreciate 7.52% Appreciate 12%

Portfolio Value After 5 Years $1,182,392 $2,577,857 $3,161,641

Typical Borrower Exit Choice

Just Walk AwayForfeit shares; Owe

nothing else to lender

Repay LoanGet securities back

Loan RepaidGain $583,784

and securities back

Variable Scenarios (Example)

Equity Services


Cashless Collars /Non-Cashless Collars

Collars


• Cashless Collar: Allows the holder to protect the value the concentrated position, while incurring no out-of-pocket expense. The client is protected on the downside, but is limited on the upside participation.

• The holder is effectively buying a European-style put and offsetting the cost by selling a European-style call. The counterparty is responsible for the actual execution of the trade. European-style options can only be exercised upon maturity as opposed to American-style options that can be exercised at any time. This protects the holder from having the call exercised early, creating a taxable event.

• The downside protection is usually no higher than 90%. This allows the holder to avoid a constructive sale ruling, which would trigger a taxable event.

• Typically these contracts are between 1 to 3 years. The longer the contract, the higher the upside participation

• The three variables are downside protection, upside cap and length of contract. Any of these variables can be adjusted to the client’s needs.

• Non-Cashless Collars: If the holder would like to receive additional upside participation, they can pay a negotiated amount upfront to raise the cap limit.

Cashless versus Non-Cashless

Collars


• The holder can hedge their position up to 90% of the current value. (Anything above 90% could trigger a constructive sale ruling, creating a taxable event.)

• We utilize European-style options, which means the underlying hedge can not be exercised until the end of the contract. An American-style option can be exercised at any time leaving the client unhedged and possibly creating a taxable event.

• These products are customized to expire based on the client’s objectives. We can have the contract expire on specific date, to allow the client to make appropriate tax and financial planning decisions (American-style options expire at most once a month).

• The products are flexible, so the client can negotiate upside participation, length of contract, initial proceeds and dividend retainment to their individual needs.

Customer Benefits

Collars


• The actual options are created by a counter-party. The holder agrees to the terms and the counter-party is responsible for execution. HarborLight Capital only utilizes financial institutions with investment-grade debt ratings.

• HarborLight Capital utilizes a competitive bid strategy. Most firms only offer their in-house products which have inflated margins. We engage multiple firms on a confidential basis. We maintain a strict no-solicitation policy.

• The holder can arrange to retain dividends.

• The holder remains the owner of record for the duration of the contract, so they retain voting rights.

Customer Benefits

Collars


• The underlying European-style options are illiquid securities. If the holder chooses to unwind the contract before expiration, it could result in an out-of-pocket expense.

• If the client chooses to settle with shares, they would create a taxable event.

• For some protection strategies, different settlement options create different taxable events, such as long-term vs. short-term holding periods. The “straddle rules” may also apply. This would freeze the holding period on an equity held over a year, and reset the value to zero for an equity held less than one year.

• Not every stock is eligible for hedging strategies. Most counter-parties have minimum standards for market cap, trading liquidity, stock price and option availability. They vary from firm to firm.

Considerations

Collars


Zero Cost Collar StrategyA Zero Cost Collar enables an investor to hedge a concentrated equity position while participating in additional price appreciation to an upper limit. This structure requires no upfront premium to be paid by the Investor. The Investor hedges their position below the Put strike and gives up appreciation of the stock above the Call strike while retaining ownership, voting rights and current dividends.

Settlement Stock Price is less than Put Strike

Stock Price is equal to or between Put & Call strikes

Stock Price is greater than Call Strike

Physical Investor sells stock at the Put strike

Collar expires worthless Investor sells stock at the Call strike price

orCash Investor receives the

cash difference between Put strike and stock price

Collar expires worthless Investor pays the cash difference between stock price and Call strike

Potential Outcomes at Maturity

Investor Profile:The Investor owns ABC stock and is unwilling/unable to sellshares to reduce downside/concentration risk and does not want topay an upfront premium. The Investor is willing to foregoappreciation above a target price.

Recommended Transaction:The current price of ABC stock is $45 per share. The Investorenters into a 2-year, Zero Cost Collar with BNY. The Investorpurchases a 2-year, European style Put option from BNY andfinances the Put option premium by selling a 2-year, Europeanstyle, Call option to BNY. Indicatively, the Put option could havea $50.00 strike price and the Call option a $60.00 strike price.

Zero Cost Collar

$25$30$35$40$45$50$55$60$65$70$75

$25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75Stock Price

Val

ue

Counterparty: InvestorStructure: Investor Enters into Zero Cost CollarMaturity: 2 YearUnderlying Stock: ABC Corp. (ABC)Amount: 1,000,000 SharesOption Style: EuropeanSettlement Method Cash or PhysicalSettlement Time: NYSE Closing PricePut Strike Price: $50.00 (100%)Call Strike Price: $60.00 (120%)

Indicative Deal Terms

Collars


Clients Holdings:


Terms

• Downside Protection: 90%• Upside Cap 115%• Term Length: 1 year

Cashless Collar Example

Collars


• A holder owns 100,000 shares of stock XYZ valued at $50 for a position value of $5,000,000. The holder enters into a 1 year, 90-115% cashless collar. This means at the end of 1 year, the position will be worth no less than $4,500,000 ($45 per share) and retain value of no more than $5,750,000 ($57.50 per share).

• If XYZ is within the range of $45 to $57.50, then the contract is closed and the client retains the shares. If XYZ is trading at less than $45, the holder can either choose to receive $45 per share and sell the position or receive the difference of $45 minus the current price and retain the shares. If XYZ is trading above $57.50, the holder can choose to pay the amount above $57.50 and retain the shares or receive $5,750,000 in cash and sell the shares.


Collars


Symbol XYZ

Shares 100,000

Current Price $50.00

Position Value $5,000,000

Term 12 months

Downside Protection 90.00% $45.00 $4,500,000

Upside Cap 115.00% $57.50 $5,750,000

At the end of the term

Stock Price Hedged Price Client's Value Shares Retained Cash Received

$25.00 $45.00 $4,500,000.00 100,000 $2,000,000.00

$35.00 $45.00 $4,500,000.00 100,000 $1,000,000.00

$45.00 $45.00 $4,500,000.00 100,000 $0.00

$50.00 $50.00 $5,000,000.00 100,000 $0.00

$55.00 $55.00 $5,500,000.00 100,000 $0.00

$65.00 $57.50 $5,750,000.00 88,462 $0.00

* The holder can choose to settle in cash and retain all of the shares.


Equity Services


Prepaid Forward Contract

Prepaid Forward Contracts


• A Pre-paid Forward Contract provides downside protection and allows the holder to monetize a portion of the value. The holder receives the cash upfront, but defers the taxable event until the conclusion of the contract. The holder retains a capped amount of upside participation.

• The holder is effectively buying a put, selling a call and receiving a discounted amount of the current value.

• The downside protection limit is matched to the “pay back” amount, so at minimum, the shares will be worth enough to cover that amount. The holder will not have to pay anything out-out-pocket at the conclusion of the contract, which gives them additional freedom when reinvesting the proceeds.

• The variables are initial proceeds, upside participation and contract length.

• A Pre-paid Forward Contract allows the client to receive the proceeds immediately, and deliver shares at a future date. The selling price is typically at a discount since delivery is delayed. The client has the option to settle in cash if they choose.

• The holder can also enter into a Cashless Collar and borrow against that position. Since the equity value is hedged the rates would be comparable to a secured loan. The holder would be responsible for regular loan and interest payments.

Monetization Strategies



A Prepaid Variable Delivery Forward allows an investor to maximize liquidity, protect against downside moves in the stock and participate in any price appreciation to an upper cap. The Investor hedges a position below the floor price, relinquishes appreciation of the stock above the cap price and receives an upfront payment. The Investor retains ownership, voting rights and current dividends.

Settlement Stock Price is less than Floor Price

Stock Price is between the Floor Price and Cap Price

Stock Price is greater than Cap Price Level

Cash Client Pays: 100% Value of Long Position (Delivery Amount will never be greater than share value)

Client Pays: Floor Value Client Pays: Floor Value + Appreciation above Cap Value

orPhysical Client Delivers: 100%

Long PositionClient Delivers: Portion of Stock Equivalent to Floor Value

Client Delivers: Portion of Stock Equivalent to Floor Value + Appreciationabove Cap Value

Potential Outcomes at Maturity

Variable Prepaid Delivery Forward

$0

$35

$40

$45

$50

$55

$60

$65

$70

$75

$80

$0 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80

Stock Price

Val

ue

Downsize protection below Put Strike Price

Forgone upside above Call Strike Price

Investor Profile:The Investor owns ABC stock and is unwilling/unable to sell shares to reduce downside/concentration risk and does not want to pay an upfront premium. The Investor would like to receive the maximum upfront liquidity with no restrictions and is willing to forego appreciation above a target stock price.

Recommended Transaction:The current price of ABC stock is $50 per share. The Investor enters into a 1-year, Prepaid Variable Delivery Forward with BNY. The Investor establishes a 1-year floor and finances the floor by selling a 1-year cap. A floor is purchased at $50.00 per share and a cap is sold at $60.00 per share. The Investor would receive an upfront payment of $42.50 per share (the present value of the $50 floor in one year minus any costs of implementing the floor and cap. These proceeds may be tax deferred.

Counterparty: InvestorStructure: Investor Enters into a Prepaid VDFMaturity: 1 YearUnderlying Stock: ABC Corp. (ABC)Amount: 1,000,000 SharesOption Style: EuropeanSettlement Method Cash or PhysicalSettlement Time: NYSE Closing PriceFloor Strike Price: $50.00 (100%)Cap Strike Price: $60.00 (120%)Upfront Proceeds: $42.50 (85.00%)

Indicative Deal Terms

Equity Protection Agreement



Clients Holdings:


Terms

• Downside Protection: 90%• Upside Cap 130%• Initial Proceeds: 80%• Term Length: 1 year

Equity Protection Agreement example



• A holder owns 100,000 shares of stock XYZ valued at $50 for a position value of $5,000,000. The holder enters into a 1 year, 90-130% EPA with initial proceeds of 80%. The holder will receive $4,000,000 ($40 per share) at the beginning of the contract. The client is obligated to payback $4,500,000 ($45) worth of XYZ stock at the end of 1 year.

• The stock is hedged at $4,500,000 ($45), so if the value of the stock is below $4,500,000 ($45) the holder walks away with the $4,000,000 ($40) they received in initial proceeds. If the value of the stock at the end of 1 year exceeds $4,500,000 ($45), the holder would keep the difference up to a cap of $6,500,000 (130%, $65). The holder can also choose cash settlement with an EPA as well if they choose to retain the shares. Since the holder will not incur an out-of-pocket expense at the conclusion of the contract with a physical settlement, they have unlimited flexibility in investing the initial proceeds.




Symbol XYZ

Shares 100,000

Current Price $50.00

Position Value $5,000,000

Term 12 months

Downside Protection 90.00% $45.00 $4,500,000

Upside Cap 130.00% $65.00 $6,500,000

Initial Proceeds 80.00% $4,000,000.00

At the end of the term

Stock Price Hedged Price Hedged Value Shares Retained Additional Client Value

$25.00 $45.00 $4,500,000.00 0 $0.00

$37.50 $45.00 $4,500,000.00 0 $0.00

$45.00 $45.00 $4,500,000.00 0 $0.00

$50.00 $50.00 $5,000,000.00 10,000 $500,000.00

$55.00 $55.00 $5,500,000.00 18,182 $1,000,000.00

$62.50 $62.50 $6,250,000.00 28,000 $1,750,000.00


Equity Services


RULE 144 Sales / 10b5-1 Sales Plans


Rule 144 Sales / 10b5-1 Sales Plans

• The HarborLight Capital Corporate Trading Services (CTS) team will handle each transaction within full compliance of all appropriate regulations and guidelines.

• CTS will maintain full confidentiality throughout the transaction.

• CTS will handle the entire process for the client including approval, execution, settlement and all necessary regulatory filings.

• CTS will assist with an appropriate trading customized to the client’s individual situation. We can develop a 10b5-1 Sales Plan tailored to the client’s objectives.

• Our goal is to achieve the clients selling objectives without disrupting the stocks’ trading activity.


Rule 144 Sales / 10b5-1 Sales Plans

There are a variety of issues involved when an entity connected to the company is selling. Any sales done by“control people” or involving restricted shares, are governed by Rule 144, Rule 144(k) or Rule 145. There arerestrictions on volume and the manner in which the trades are executed. There are also necessary filings thatneed to done in a timely manner. In the current regulatory environment, the company and its associates need tostay within full compliance of these heavily scrutinized transactions.

CTS will assist the seller throughout the process, including approval, execution, filings and settlement. Wemaintain full confidentiality throughout the transaction. We will recommend a strategy that achieves the sellersobjectives, without unnecessarily disrupting the normal trading activity in the stock.

Our team has handled sales involving companies such as:

http://www.uafc.com/�

Equity Services





HarborLight Capital places a high priority on the corporate relationship, which extends to each member of their team. Our Corporate Trading Services (CTS) team prides itself on providing superior service and execution for each order.

Service – Our team will assist our client advisors through the entire process, which includes approval, execution and settlement. We do not route calls through an automated process, rather we provide personalized guidance based on the advisor’s situation.

Execution – Each order is personally handled by the CTS team. We provide the client advisor with institutional-quality service and execution not typically available to retail investors. At most firms, smaller orders are electronically routed with no value-added approach to execution. We will provide a proprietary trading strategy based on each advisor’s objectives.



Financial Advisor will contact HarborLight Capital Corporate Trading Services department and fill out an ESOP packet.

HarborLight Capital will then confirm with the company all vested options and any applicable costs such as the strike price and tax rate.

Once approved, HarborLight Capital will notify the employee and they can give an order to sell the options. This is handled exactly like a traditional stock transaction.

HarborLight Capital will notify the client once the transaction is completed.

HarborLight Capital will send money to the company to cover the client’s obligations for taxes and strike price.

The company will direct the transfer agent to send shares to HarborLightCapital to satisfy the trade.

Once HarborLight Capital receives the shares from the transfer agent, the employee’s funds are available.

HarborLight Capital will send the employee a letter with the details of the transaction.

Typically your money will be available in 4 to 6 business days based on how quickly the transfer agent delivers the shares.

Our CTS team will develop a process with the corporate client that will be employee-friendly and easy to administer. The typical process is as follows:

Overview



The only costs for the employee is the commission charged on the sale of the shares. We do not have any hidden costs such as carrying fees, account fees or handling fees.

Our commission schedule is:

0 to 1,000 shares = $0.08 per share, $50 minimum 1,001 to 10,000 shares = $0.05 per share 10,001 to 25,000 shares = $0.03 per share 25,001 shares and higher = $0.02 per share

Fee Schedule

FIRM OVERVIEW

FIRM: HarborLight Capital Markets, LLC, was formed in 2010 to provide accredited and institutional investors access to private & public equity and debt offerings, private investment partnerships and structured product investments.

TEAM: The team brings together skills and expertise in Institutional and Retail Portfolio Trading Investment Banking and Capital Markets Long-Only Asset Management Private Partnership Investing Risk Management Due Diligence (both qualitative and quantitative) Institutional and Retail Sales Client Service and Investor Relations

BACKGROUND: Strong history with Vanguard Group, CS First Boston, Kidder Peabody, Raymond James, HarborLight Financial, Fidelity Investments, Morgan Stanley, State Street Bank, Loomis Sayles, and Starview Capital (a Zurich Capital Markets Private Investment Company).

Dean G. TanellaSenior Managing Director

CAPITAL MARKETS OPERATIONS/FINANCIALINVESTMENT BANKING

Roger OverbyManaging Director

James DiCesaroManaging Director

David RichManaging Director

John DeeksManaging Director

Liz ChinowthOffice Manager

Peggy CrusanCapital Markets Transaction Coordinator

Jason SmithController


Adin LohryVice President

Rafael WilliamsonManaging Director

Michael FaraoneVice President

CONTACT INFORMATION

John D. DeeksManaging Director, Capital Markets & Corporate Trading Services

[email protected](813) 443-4923

Michael FaraoneRegional Vice President, Capital Markets

[email protected](813) 868-3591

HARBORLIGHTCapital Markets


mailto:[email protected]�

mailto:[email protected]�

strategies for concentrated equity positions

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