3550 Lakeline Blvd., Ste. 170, #1715 • Leander, TX 78641 Ph (858) 354-7180 • Ph (512) 310-8545 • Fax (888) 302-3545

www.PacificaCapital.Net

July 12th, 2017 Re: PCI Overview of 2nd Quarter, 2017 Dear Pacifica Client, While Pacifica Capital Investments reports quarterly results, we do so with reluctance. Our focus is on generating long term results, and our belief is that short term performance is not meaningful. As demonstrated in the table on page 8, PCI’s long term, aggregate results continue to be very rewarding for our clients. Overview Significant declines in the stock market, such as the one we experienced in late 2008/early 2009 and again (though to a lesser extent) during the second half of 2011, and briefly in early 2016, give us the best opportunities to invest for long term capital appreciation. Conversely, markets also occasionally become overvalued as we experienced in 1999/2000, 2006/2007, and over most periods in the last few years. We take those opportunities to sell holdings with high market prices and build cash in our accounts to avoid the higher risks associated with inflated asset prices. The majority of the time markets trade in the range of “fairly valued”, in which case we tend to be less active as either buyers or sellers. We did take advantage of the market slump in late 2015/early 2016 to initiate and add to positions in a few, select companies. However, the market has been generally strong for most recent periods, with the S&P 500 Total Return Index moving into its ninth straight year of gains with a very strong 8.66% first half 2017 performance. While no one knows for sure whether 2017 will continue this streak of gains, we do know that we will get closer to the inevitable down period. 1. Critical Issues

A. Passive Investments May Be Causing a New Market Dynamic – A recent Wall Street Journal

article reported that the popularity of ETFs has surged to an all time high. ETFs bought $98 billion in US stocks during the 1st quarter, which is on pace to surpass their total purchases for 2015 and 2016 combined. These funds owned nearly 6% of the US stock market in the 1st quarter – their highest level on record (and this level likely increased into the 2nd quarter). As capital has flowed into ETFs, the corresponding buying of the larger stocks that make up the indices have driven their stock prices even higher. The 2nd quarter of 2017 marked the 16th winning quarter out of the past 18. Throughout the whole history of the S&P 500, the only periods with a similar performance ended between 1998 and 2000 (according to FactSet data). We believe that when the market eventually reverses course, investors in ETFs may be likely to dump their shares, forcing large sales in these same stocks and downward pressure on prices. History has proven that the market will always move more in either direction than most expect, but in this new ETF era we have yet to experience a real down period.

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B. Valuations Continue to Rise – Based on nearly every metric, valuations are close to or at all-time highs (see graphs below). The CAPE ratio (a cyclically adjusted price-to-earnings ratio) surpassed 30 times at quarter’s end. The only time in history it has been higher was in 1929 and 2000. (It is important to remember that markets can continue to move higher in the short run though, as they did in 2000). The US stock market capitalization as a percent of GDP has also hit a record. The gap between earnings and dividend growth versus the total return of the S&P 500 index is approaching a precipitous divide. The market continues to shrug off many mediocre economic readings, diminished expectations about the Trump Administration economy-boosting policies, and rising interest rates around the globe. Again, markets can move up higher and longer than we would expect, but at some point, there has to be a reversion to the mean.

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C. PCI Accounts in 2017 – Pacifica added to cash balances in the 2nd quarter with continued sales of financial-related stocks, including CNA Insurance (CNA), Wells Fargo (WFC), and American Express (AXP). These stocks had all experienced very strong gains over the past 9 months, and we saw future risks and increased competition as outweighing the prospects for additional appreciation. Although these are still top companies, we believe minimizing our positions was prudent in light of the strong market valuations. It can be uncomfortable to hold large cash balances that are not appreciating in a rising market but having cash available at key times in the market cycle is an important element of our investment approach, as it minimizes risk and gives us resources to purchase future bargains. We did continue to add a very few, select positions in the 2nd quarter of 2017. This was done primarily in retail companies, where changing consumer habits are transforming how and where people shop. The overall retail sector has been weak, but Pacifica believes we may continue to find some opportunities in this sector with those companies that have a clear plan on how to distinguish themselves in this changing landscape. With the continued strength of the market, we want to be patient and careful with the companies we buy and the prices we pay. Our first and foremost priority remains to minimize risk from overvalued investments AND to have cash available for when those future bargains are available. (Our historical results on page 8 demonstrate the benefits of having cash ready to take advantage of opportunities in down markets.) We prefer to earn less today rather than risk overpaying for companies that will compromise performance tomorrow.

2. Global Trends

We remain focused on US based international businesses that will benefit from expanding economies in faster growing countries with large populations such as China, India, Brazil, etc. Nations like Vietnam, other South East Asian countries, parts of Africa, South America, and even Mexico will experience growth in their labor forces over the next many years which should contribute to accelerated growth and rising income levels. The most attractive growth opportunities are in these emerging countries of the world. We prefer to own North American-based companies due to preferable transparency and governance. Within those parameters though, the overwhelming majority of our capital is invested in global businesses such as Fairfax Financial, Starbucks,

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Goldman Sachs, and Berkshire Hathaway that will greatly benefit from expanding operations in those high-growth regions. From a global perspective, we remain very concerned about aggressive worldwide government stimulus programs, increasing debt levels, unsustainable spending, excessive monetary policy, a growing support of protectionist measures (including opposition to free trade agreements), and the inevitable, unintended consequences over the long term of these actions. Public debt levels, almost across the board throughout the world, are rising to unsustainable levels – a trend that has dramatically shifted control of resources from the private to the public sector. We are beginning to experience the fallout from countries with the highest debt levels. Pacifica remains skeptical of government sponsored solutions and interventions. We believe it is very likely they will eventually result in negative consequences, including: entitlement program rollbacks, pension fund defaults in both the public and private sectors, and municipal and sovereign bankruptcies and/or debt defaults. By concentrating our investments in companies with superior management, strong balance sheets, and solid global business prospects, we will best protect our capital over time against these dynamics. We have ongoing concerns about possible “spill over” effects from the serious issues in many countries:

Japan – after years of exploding government debt and increasing government market manipulation its

economy continues to suffer from stagnant income levels and very slow growth; China – alarming growth in overall debt levels as well as a surge in speculative investments; Europe – also very high levels of debt in certain countries and overburdened social welfare systems; US – underfunded public and private pension funds and other obligations; and Global – potential restrictions in movement of capital – includes human, physical (trade), and investment.

3. Economic Outlook

Most leading economic indicators have been positive, and the US economy seems to be moving in the right direction. Nevertheless, the upward trend is still quite modest. We know the US economy is resilient, but we believe its sustainable long term growth rate will be lower than it has been. In other words, the economic “pie” will not grow as fast in the future as it has in the past; so, selecting the best companies that can weather varying economic and political conditions and gain market share will be more critical than ever to investment success. Public policy decisions do make a difference over time. Lower taxes and less regulation will help economic growth; higher trade barriers will not. 4. The Investment Environment and Public Equity Markets

Our long-term expectation for the US market is for annual growth, including dividends, of just over 5% and for PCI’s average results to be better than that by a few percentage points net of fees. In fact, in just under 19 years of PCI management (March 1998 – December 2016), the overall market was up 189.5%. Meanwhile, PCI’s accounts, in aggregate, gained 627.5% - an approximate 11.0% compounded annual gain (see PCI Results and Performance Record on page 8 for details). We continue to have many concerns about the current investment environment. As we have highlighted in prior letters, interest rates and assets values historically have had an inverse relationship. As rates eventually rise to historic averages, it is very likely that asset values will be negatively affected. Interest rates have been near zero in the US for close to a decade. Although rates percentage-wise have recently moved higher, the increases in just over the past year have only been one percentage point – still very low compared to historical averages. Corporate

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profits as measured by share of both sales and the overall economy are also near peak levels; thus, for profits to continue to grow, the overall economy will need to continue to grow.

Although Pacifica does not attempt to time the market, we are aware of these various indicators. We know that if we remain patient there will be occasional favorable buying opportunities on a market-wide level as we saw briefly in late 2015 and early 2016. We continue to look for additional opportunities to purchase those quality companies whose market prices fall under our estimate of their intrinsic value while holding in our portfolios those outstanding companies whose long-term prospects should provide increasing returns (this also limits capital gains taxes). Pacifica has selectively pruned some holdings and limited most purchases for the past few years. We will continue to invest client cash only when we find attractive prices for the businesses we want to own. To summarize, we do not anticipate strong overall market returns over the mid term based on current stock market levels. Nevertheless, we do feel positive about the global business prospects of our current portfolio of companies, and we are ready and waiting for buying opportunities when they present themselves. 5. Pacifica’s Portfolio Fairfax Financial and Berkshire Hathaway continue to be our two largest holdings and our two long term favorites. The price of Fairfax has been somewhat weak over the past three quarters (down over 27%). Its underlying insurance and reinsurance businesses remain strong, and it has seen some strong gains in its equity holdings portfolio in 2017. (For example, it has large positions in Blackberry (BBRY) – up 45% in 2017 – and Eurobank Ergasias (EGFEY) – up 56% in 2017). Therefore, we remain somewhat perplexed at the continued weakness in the market price of its shares. Likely investors remain somewhat wary of the shares due to Fairfax’s weak performance on its investment portfolio over the past few years (primarily due to defensive equity hedges). We have no plans to shift from these two positions to others for potentially better short term results. We also own smaller amounts of very solid companies with bright long term prospects (Five Below, Goldman Sachs, and Starbucks). Of utmost importance to us has always been limiting the downside (risk) and focusing on long term performance (reward). We are pleased that most of the companies we own have strong cash flows that allow them to raise their dividend payouts each year. We believe we have owned among the strongest players in the financial sector (Goldman Sachs, Wells Fargo, US Bank, and American Express), but in light of the strong price appreciation relative to underlying book value, we felt it was prudent to trim our holdings. Our largest purchase during the quarter was once again additional shares in our position of Fossil (FOSL). The price of Fossil has been extremely weak in 2017, but we remain positive about its future prospects. For an in-depth analysis on Fossil, as well as more specifics on all of the positions in our portfolio, please refer to the attached Investment Positions Summary. We are mindful of the tax implications of our investment decisions. In a tax free account (IRA, 401k, pension plan, foundation, etc.), we are much more willing to sell earlier and incur a gain than in taxable ones. In all

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accounts, Pacifica always considers the after-tax proceeds from a sale, and we especially try to avoid short term capital gains in taxable accounts (for clients in the top tax bracket in California these short-term capital gains can be taxed at combined federal and state rates exceeding 50% - see picture below for tax rates by state). Generally speaking, if a client has both a taxable and a non-taxable account managed by Pacifica, we try to maximize the activity in the non-taxable account first to create the largest net after-tax gain for the client overall.

6. Closing Thoughts

In conclusion, market prices have outpaced economic fundamentals over the last few years. We are not confident about the stock market overall, but we do have conviction in our current portfolio of businesses. We sleep well at night because we believe our companies will be doing well in five and ten years in most any predictable economic environment. Over the last 19 years – since Pacifica has been managing public equity investments for its clients – the world has experienced multiple “shocks,” including: wars in Iraq and Afghanistan, significant natural disasters (hurricanes, earthquakes, tsunamis, floods, etc.), the rise of terrorism, including attacks in Europe, Africa, and the US; booms and subsequent busts in many industries (technology, internet, housing, raw materials, etc.); a credit-related crisis; significant shifts in political power bases and polices, and more. However, over a period that included all these “events”, our clients’ accounts have benefited from substantial appreciation. The primary reason for that success is because Pacifica has had the discipline and patience to adhere to our investment strategy as detailed in this letter and elsewhere (see pages 8 and 9 for more information on our investment strategy, or look on our website at www.pacificacapital.net). Please do not hesitate to contact us as indicated below with questions, comments, or to setup a time to review and discuss your account. Also, it is important that you contact us if there have been any changes in your financial situation, investment objectives, or if you desire to impose any reasonable restrictions or modify existing ones on your account. Sincerely,

Steve Leonard Kari Pemberton Managing Principal Principal, Chief Investment Officer steve@pacificacapital.net kari@pacificacapital.net 858-354-7180 512-337-5521

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CC: Blake Isaacson Enclosure: Investment Positions Summary

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ADDENDUM TO PCI QUARTERLY LETTER

Pacifica News Real Estate Partnerships Over the last few years, Steve Leonard and Blake Isaacson have again been directing investment partnerships in commercial real estate projects in certain West Coast markets, primarily Southern California and Colorado. Please note, investments in these real estate partnerships are limited to accredited investors only. If you qualify and have an interest in learning more about these opportunities, please contact us for further details about current projects.

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PCI’s Results and Performance Record

PCI has outperformed the market and has provided significant gains to its longest-term clients. We have outperformed the market in 10 of the last 19 calendar years, and more significantly, not suffered nearly as much in the years when the stock market suffered its greatest losses. The following are PCI’s Performance Results from inception (1998) through 2016; they are compared to those of the S&P 500 Total Return Index. PCI accounts, in aggregate, vastly outperformed the overall market over the long term because our declines were much less during periods of market weakness and our gains were generally better during periods of market strength. Over the past seven years PCI has fallen short of the S&P 500 Total Return Index. Our cautious outlook, due to our skepticism of market strength in the face of weak economic fundamentals, has caused us to hold large cash balances which have earned almost no return in the face of a very strong market. This has been the largest contributor to our recent underperformance, and it is more pronounced in newer accounts that did not have the buying opportunities of 2008 and 2009, and to a lesser extent, the end of 2011. However, over the long term, we continue to believe our caution will be well rewarded by continued strong, long term results. We update this chart annually, as we do not believe comparisons for any shorter periods are meaningful.  

PCI S&P 500 TR Difference

1998* 15.8% 13.0% 2.8% 1999 -16.3% 21.0% -37.3% 2000 46.7% -9.1% 55.8% 2001 23.5% -11.9% 35.4% 2002 -0.5% -22.1% 21.6% 2003 30.7% 28.7% 2.0% 2004 12.1% 10.9% 1.2% 2005 2.0% 4.9% -3.0% 2006 22.4% 15.8% 6.6% 2007 6.7% 5.5% 1.3% 2008 -13.0% -37.0% 24.1% 2009 35.2% 26.5% 8.7% 2010 13.2% 15.1% -1.9% 2011 -0.9% 2.1% -3.0% 2012 9.6% 16.0% -6.4% 2013 21.9% 32.4% -10.5% 2014 11.1% 13.7% -2.6% 2015 -1.1% 1.4% -2.5% 2016 10.3% 12.0% -1.7% Total (18-3/4 years) 627.9% 189.5% 438.4% Annualized Return 11.0% 5.7% 5.3%

*PCI performance for each year is unaudited and is a Time Weighted Rate of Return for that year, except for 1998‐2004, which is an Internal Rate of Return for those years. IRR is a  dollar‐weighted  return  that  accounts  for  contributions  and  withdrawals  during  the  period.  TWR  is  a  time‐weighted  return  that  effectively  eliminates  the  effects  of contributions and withdrawals and their timing. 1998  is a partial year. The S&P 500 Total Return measures the change from the start of the period to the end of the period, assuming no contributions and/or withdrawals and includes dividends. The “Total” is for the entire period, compounded annually. PCI results are shown net of all fees, including management fees, brokerage fees and custodial expenses, and reflect the reinvestment of all dividends and earnings. Performance results provided herein are the aggregate of all fully discretionary accounts managed by PCI, including those accounts no longer with PCI, and include the performance of the accounts of PCI’s principals (which do not incur management  fees) and certain other accounts  that have  reduced management  fees. Minimal  leverage and short selling has been used since  inception  for  the PCI managed accounts; the effects of such leverage and short selling on PCI’s performance figures have been nominal. Results for individual accounts are varied and will vary in the future. In addition, it is not likely that the relative performance of PCI’s managed accounts will exceed the performance of the broader stock market (as measured by the S&P 500 Total Return or other broad market indexes) by as large a margin as has occurred to date. The stock market faced an unprecedented decline in the year 2008, which strongly impacted the performance of the S&P 500 Total Return Index during the time period shown. In addition, PCI’s performance during the year 2000 was significantly enhanced by the strong performance of one large position in its accounts under management. The 12/31/16 total ending balance for all accounts was approximately $343 million and approximately $77 million was in accounts of PCI principals (Leonard and Pemberton family accounts). Total number of individual accounts was 269 as of 12/31/16.   Past performance is not a guarantee or indicator of future results, and investors should not assume that investments made on their behalf by PCI will be profitable, and may, in fact,  result  in a  loss.  Investors also  should not assume  that PCI’s  results will outperform  the S&P 500 Total Return  Index or other broad market  indexes  in  the  future. The investment objective of PCI’s managed accounts is capital appreciation. PCI’s strategy is to concentrate its investments in a limited number of positions with certain positions representing an intentionally large size in the accounts. This concentration is likely to result in greater volatility than the overall market as measured by the S&P 500 Total Return Index, which is made up of 500 large companies. The S&P 500 Total Return Index reflects both changes in the prices of stocks in the S&P 500 Index as well as the reinvestment of the dividend  income from  its underlying shares. The  Index does not bear fees and expenses, and  investors cannot  invest directly  in the  Index.  In addition, PCI’s strategy  is to “hold for the long term” which reduces trading costs.

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PCI’s Approach As we have written much about in the past, the investment approach that we employ in the management of your account is to focus on a limited number of businesses and industries at a given time. In that sense, your account is concentrated in industries that we feel we have a thorough knowledge of and in businesses that we have been able to purchase at prices below our estimation of their intrinsic value. While owning fewer stocks and concentrating on specific industries may result in increased account volatility, this investment philosophy has resulted in superior investment returns since 1998 as you can see from the PCI Results and Performance Record on page 7 of this report (please be advised that past performance is not a guarantee of future performance). In addition, we focus exclusively on equity purchases and do not attempt to invest your portfolio in bonds, commodities, or other miscellaneous types of investments. Any funds that are not invested in equities are placed in the money market to earn interest while we wait to buy (at our Buy Price) the investment opportunities on which we are focusing. Cash in your account may earn relatively low returns while we wait patiently for the businesses that we feel confident in to be offered by the market at the price we are willing to pay. As opposed to most money managers who invest relatively equal amounts of money in many different positions, we focus the largest part of our investment capital on our favorite companies. We also do our best to limit the number of different companies owned to those in which we have the most confidence and understanding. Using this strategy, PCI has kept our “losses” smaller and our “wins” more significant, and this dynamic is reflected in our superior, long term compounded return. Our goal remains to be near 100% invested, but only when we can find very good businesses at very good prices. PCI concentrates investments in our favorite companies and those with very positive, long term international growth prospects (see the Global Trends section at the beginning of this letter). We are also seeking to invest in companies that have a track record of paying, and/or that we believe are likely to pay, larger dividends over time. We favor investments that produce net cash flow that is either reinvested in the core businesses at high rates of return or paid out to the owners in the form of dividends. An additional component of our investment decision making is our concern about the possibility of much higher inflation at some point in the future and how the results from accompanying higher interest rates may affect valuations and business prospects. Thus, we are looking more favorably at companies that will be less adversely affected by higher inflation and ultimately, interest rates, as we believe the consequences to certain businesses and industries could be very severe.

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PCI’s Investment Philosophy PCI has outperformed the market because our strategy works, and we are generally disciplined in following our stated strategy. Initially, when the market becomes overvalued, we tend to sell stocks and hold more cash. Conversely, when the market is depressed we get emboldened and begin to invest our cash. We are constantly analyzing new businesses with the goal of determining attractive prices at which to purchase stock. In addition, we continually monitor changes in anticipated future operating results of the businesses in our accounts and update the estimation of their intrinsic value in order to determine prices at which we would be willing to buy more shares or sell existing ones. We have many companies on our Buy List (i.e., companies that we would like to own and whose stock prices have occasionally traded within approximately 20% of our Buy Price). These companies fall within our “intellectual and financial understanding”, and we patiently wait for stock price declines in these companies to our Buy Price. “Open buy limit orders” for many of these companies have been placed in most accounts to purchase these shares as the prices begin to come down to our Buy Price. We continue to study these companies to update our estimation of their intrinsic value and adjust our Buy Price accordingly. The discipline to maintain a consistent valuation process independent of the “investor herd mentality” is pivotal to the successful execution of PCI’s investment philosophy. Over the last 16 years market conditions have periodically allowed us to make additional purchases in existing positions and in new companies both at, and below, our Buy Prices. Our Buy Price must offer two very important attributes:

(1) a “discount” or margin of safety relative to our estimation of intrinsic value (2) a price that will provide the likelihood of strong investment returns over a reasonable holding period – the longer the better. Note: We are realistic in acknowledging that we won’t always be able to buy at the lowest prices. Rather, Pacifica aims for acquisition prices that should reward us with above average long term returns.

We want to emphasize that we do not try to time the market. Generally, Pacifica neither sells stocks because we believe the overall market is overvalued, nor buys stocks because we believe the overall market may be undervalued. We focus on individual companies whose businesses we understand, and buy them when we can be confident in our estimates of their intrinsic value and future profits. We still hope to become fully invested if the market weakens (including selling our preferred stock positions and reinvesting those proceeds in common stocks). The key for us is to have the discipline and patience to be able to invest in fine companies when the markets for their share prices are depressed. We believe successful investing requires the knowledge to be able to accurately value the business being acquired, as well as an understanding of market dynamics (psychology). We believe the stock market’s cyclical nature produces broad-based periods of overvaluation, fair valuation, and then undervaluation before the pattern reverses and repeats itself. This classic market cycle is driven by investor emotions during each period - greed near the markets peak, and fear as the market bottoms. To quote one of the great investors in history and a wonderful man who has passed away, John Templeton, “Bull Markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the maximum optimism is the best time to sell.” We believe this market cycle psychology is important to understand so that one does not make the mistake of following the herd mentality and suffering subpar investment returns. While it is impossible to determine exactly when each of these phases is entered, we know that today’s market is in the part of the cycle where the best buys are no longer easily found. While we cannot predict with accuracy when the next broad market buying opportunity will occur, we can say with confidence that we will try to be patient and wait for better bargains. The bottom line is that to be a good investor you need to not only buy when it is emotionally the hardest, and sell when emotionally it is the hardest, but also do nothing while waiting for market extremes to offer better opportunities. Sounds so easy, but it is so hard. You often don’t know you have been right until months or even years later. There is often no immediate gratification for the best of those decisions. At the end of this quarter, we believe that the market is at the part of the cycle where we primarily wait. While we wait we search for opportunities driven by company specific factors, and we continue to be very patient with limited investing activity. As we continue to preach tirelessly, successful investing is not about beating the market every quarter, or even every year, but beating the market over the long term. This requires buying when conditions appear bleak and wisely pruning positions when conditions are unsustainably strong.

3550 Lakeline Blvd., Ste. 170, #1715 • Leander, TX 78641 Ph (858) 354-7180 • Ph (512) 310-8545 • Fax (888) 302-3545

www.PacificaCapital.Net

Investment Positions – Business Summary

Listed in approximate descending order of size in the aggregate of all accounts (within individual accounts, percentages will vary). Largest Positions

Fairfax Financial – (FRFHF) (initial purchase in 2001, most recent purchase 2017) – A holding company that engages in property and casualty insurance and reinsurance worldwide. Fairfax owns significant operations in the United States, Canada and Europe, and most importantly, growing operations in much of the developing world including India, China, Thailand, Singapore, Hong Kong, Poland, Dubai, Kuwait, Brazil, Sri Lanka, Indonesia, and Africa, among others.

Business Outlook: Fairfax has managed its large investment balances, approximately three times its book value, shrewdly through various investment environments while generating very attractive returns. Although Prem Watsa, Fairfax’s CEO, is less concerned about a global economic collapse after President Trump’s victory, he still has lingering concerns that protectionism, China’s unraveling, and/or the Euro’s disintegrating could cause major international disruptions. Therefore, Fairfax is still defensively positioned with substantial cash holdings. Watsa’s defensive positioning of Fairfax has dampened returns over the last few years. However, Fairfax is well poised to take advantage of almost any economic scenario. Fairfax also has used its strong financial position and its excess cash to make investments and acquisitions in both insurance and non-insurance operating companies around the globe. In December 2016, Fairfax agreed to purchase Allied World Assurance Company Holdings, which Mr. Watsa called the “most significant acquisition in our history.” Allied World writes $3.1 billion in business and has a major presence with the large brokers and Fortune 1000 companies in the US, fitting well with Fairfax’s existing businesses. The merger is Fairfax’s largest to date and is expected to be completed this week. Underwriting results from Fairfax’s current insurance business continue to be strong, with all of its insurance groups showing a profit in 2016 (the company makes money writing insurance policies as well as investing the large float “for free”). Fairfax also continued to pay an annual dividend of $10 per share in January 2017 (2.3% of its 6/30/16 stock price).

Investment Activity: Fairfax is a company we will resist selling unless its share price reaches levels that place our continued ownership at risk of significant market loss. That being said, at certain points in 2016 Fairfax’s share price rose to new highs, and we did sell a few shares in some accounts with large positions. Recently, Fairfax’s market price has been weak, and we have been able to add a handful of shares in newer accounts. It is very challenging to find companies with management teams such as Fairfax’s that have proven so valuable to shareholders over long time periods. Fairfax’s track record since inception 31 years ago (1985) is indeed impressive with book value growing from $1.52 per share to approximately $367.40 per share (as of 12/31/16) – an annual compounded growth rate of approximately 20.2% (including dividends paid). Our target is to have this company represent a significant share of account values, though strong gains in Fairfax’s stock price since mid-2009 have prevented us from reaching this level in newer accounts.

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Berkshire Hathaway – (BRKB) (initial purchase in late 1999, most recent purchase 2012) – Berkshire is a conglomerate that owns a variety of operating businesses as well as public company investments, bonds, and cash. One of the strongest companies in the world as ranked by shareholder equity, The Warren Buffett-led firm employs an extremely prudent operating and investment philosophy. Berkshire’s largest and oldest operating businesses are its insurance subsidiaries. Berkshire’s insurance units have a combined float (borrowed money from policy holders) of over $91 billion (up from $65 billion since just 2010). Berkshire has profitable insurance underwriting businesses (not an easy feat) that enable it to hold and invest that float “for free,” plus make a profit on the underwriting business. Berkshire also owns and operates a multitude of other non-insurance businesses led by: BNSF railroad, Berkshire Hathaway Energy, Marmon, Lubrizol, IMC, and Precision Castparts along with dozens of other smaller businesses. These businesses earned over $13.6 billion in 2016, up from $10.7 billion in 2015 (a 26.8% increase). Berkshire has deployed more capital into joint ventures in recent years, including deals with 3G Capital on Heinz, Tim Horton’s/Burger King, Mars, and Kraft, as well as a mortgage joint venture company with Leucadia National Corporation (LUK – another one of our holdings). While we feel very confident that Berkshire’s strong performance will continue given its insightful management, extraordinarily conservative operating strategy and huge capitalization, its future growth as a percentage of equity will likely be lower. Business Outlook: Berkshire’s current operating results and investment returns are strong. The

Omaha-based firm continues to increase its intrinsic value by using its robust cash flow for acquisitions and joint ventures and taking advantage of its rock solid financial strength over the long term. In the 1st quarter of 2016, Berkshire completed its largest acquisition ever. It bought Precision Castparts Corporation (“PCC”), an aerospace industry provider, for $37.2 billion. Berkshire’s subsidiaries also make regular “bolt-on” acquisitions, which cost $1.4 billion in 2016. These additions all have increased Berkshire’s return on otherwise low-yielding cash.

Investment Activity: We believe that, at the right price, this outstanding company should be held in every account. Berkshire’s share price has recently traded above the level at which we are willing to initiate a position. During periods of overall market weakness, buying opportunities can appear for Berkshire’s stock, and Pacifica waits patiently for such occasions. With this business as our second largest holding, we sleep peacefully at night.

Medium-Sized Positions Five Below – (FIVE) (initial purchase 2015, most recent purchase 2016) – Five Below is a rapidly growing specialty, value retailer offering a broad range of trend-right merchandise targeted at the teen and pre-teen customer. With an assortment of products all priced at $5 and below, it offers a unique merchandising strategy and high-energy retail concept that aims to be fun and exciting. Products include select brands, licensed merchandise, and private label merchandise across a number of categories: Style, Room, Sports, Media, Crafts, Party, Candy and Seasonal. The average store size is approximately 7,500 ft. FIVE began operations in 2002, and as of 3/31/2017 it operated over 550 stores in 32 states. It is on target to open 100 stores and enter the state of California in 2017.

Business Outlook: We believe FIVE has the potential for very strong and rapid growth over the next many years. While it has been expanding its store base at 20% per year, it still does not have stores within trade areas of the majority of the US population. We believe FIVE has the

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potential for 2,000+ stores in the US given its unique value proposition, fun shopping environment, and lack of direct competition. Further, its high return model reasonably allows a store to be located in a wide range of markets and locations. FIVE expects to continue to expand its store base by both filling in existing markets and expanding into new trade areas. This expansion includes plans to open its first stores in the very large California market in 2017 with nine stores in the greater Los Angeles area. Equally as important, its store economics (the return on store development costs, not the profit the average stores earns) are exceptional versus retail averages – with new store payback periods of less than one year! The 2016 class of new stores was FIVE’s strongest ever – with first year sales expected to reach an average of $2 million.

Investment Activity: We began buying shares in mid-2015 and continued at various times since

when its stock price moved lower. During most of 2016 and 2017, the stock price has been above a level where we are willing to pay. However, the price did move lower in the 4th quarter of 2016 due to overall concerns by the market about the retail sector (FIVE’s results for 2016 continued to be strong). We were able to buy some shares in newer accounts that did not own a position. We look forward to owning this business and adding to our ownership over time as buying opportunities present themselves.

Starbucks – (SBUX) (initial purchase 1998, most recent purchases in 2009) – Starbucks is one of the world’s leading consumer brands and should continue to show impressive growth in many international markets for years to come. Simply put, loyal customers around the world frequently visit Starbucks to enjoy one of their favorite, affordable, “addictive” indulgences.

Business Outlook: We think the Starbucks brand and customer loyalties are second to none. With Starbuck’s core North American business showing strong margins and moderate growth, it is now focused on new opportunities, such as: aggressively expanding internationally (especially in China and India), broadening food and juice offerings both in store and in grocery aisles, expanding its presence in tea through its Teavana brand, launching a new high end coffee brand and store – Reserve – and expanding in-store services to include mobile ordering and delivery. Starbucks should continue to earn high returns on invested capital within existing and new markets. Sales, store openings, same store sales and profits are growing, providing Starbucks with strong free cash flow. Those funds have been used to buy back its stock and raise its dividend (up between 23% to 30% each year for the past seven years).

Investment Activity: Pacifica purchased a very concentrated position in Starbucks in the latter part of the 1990’s and later sold it as the stock reached new highs between 2003 and 2005. We began buying Starbucks once again in late 2008 and early 2009 at an average cost of around $7 per share (adjusted for the subsequent 2 for 1 stock split). That price represented a 70% decline from its high share price reached a few years prior. We feel very comfortable owning a large position in this strong global brand that generates substantial free cash flow. However, Starbucks’ share price has increased significantly since our purchases, and it has recently traded at values above our estimate of its intrinsic value. We have sold shares in taxable accounts, and we will continue to sell if the share price moves higher. We would look forward to adding more shares if its price declined to an attractive level.

Goldman Sachs - (GS) (initial purchase 2010, most recent purchase 2016) – A leading provider of financial services to the major institutional participants in global capital markets. Revenue sources include 1) trading, 2) investment banking, 3) asset management and security services, and 4) interest and income

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from balances and holdings. Goldman Sachs has grown its international presence, particularly in Asia, to take advantage of developing capital markets. This expansion is enhancing operations in the fastest growing regions of the world’s economy. Goldman Sachs is often ranked as the top operator worldwide across its range of financial offerings. In 2013, Berkshire Hathaway converted its warrants into stock in GS with the intention of remaining a large, long term owner – a strong vote of confidence from Warren Buffett.

Business Outlook: Goldman Sachs has grown its book value from $20.94 at the end of its first

year as a public company in 1999 to $182.47 as of 12/31/16 – a compounded growth rate of over 14%. (For “financial” companies such as Goldman Sachs, Wells Fargo, Fairfax, Berkshire, etc. we believe shareholder equity – which is measured by book value – is a very meaningful measure of intrinsic value.) Keep in mind that during this period the stock market had a few very challenging periods, and many financial companies suffered severe setbacks. Nonetheless, Goldman Sachs outperformed its competitors, and its long-term shareholders have been handsomely rewarded. We are very impressed with Goldman Sachs’ management, industry position, strength in most emerging growth markets, durable reputation, and entrepreneurial culture. After the US presidential election in the 4th quarter of 2016, Goldman Sachs’ share price has surged in anticipation of a more favorable regulatory environment.

Investment Activity: We added to our position during 2011 and 2012 at attractive prices. Investor fear, caused by global financial turmoil, new regulatory modifications, and general cautiousness surrounding financials, caused Goldman’s stock price during that time to fall to its lowest level relative to tangible book value during its history as a public company. Since then, as fear has dissipated, the stock has risen over 200% and is now above a price we are willing to pay (approximately its tangible book value, which was $175.10 per share on 3/31/17). We anticipate that Goldman Sachs will likely earn lower than its historical return on equity of over 20% going forward due to lower leverage, regulations, etc. Nevertheless, we also think its market position has been enhanced as a result of the many financial market upheavals that have weakened competition and caused some competitors to exit certain markets and businesses. Later in the 2015 and at points in 2016, the price fell under tangible book value (our initial buy price), and we did add small purchases in some new accounts. Goldman Sachs’ sizeable stock price appreciation since our purchases (between 30% - 50% above tangible book value during the last nine months) caused the position to become larger than we feel comfortable with in many accounts. Therefore, in late 2016 and early 2017 we sold shares in most accounts.

Leucadia National Corp – (LUK) (initial purchase 2014, most recent purchase 2016) – A diversified holding company that primarily operates in the investment banking and capital markets sector. Its main subsidiaries are the Jefferies Group LLC (investment banking), Berkadia (commercial mortgage financing, a 50/50 joint venture with Berkshire Hathaway), National Beef Packing (the fourth largest beef processor in the US), Garcadia (an auto dealership joint venture), and various other financial, manufacturing, and energy businesses.

Business Outlook: Leucadia owns a variety of operating businesses, and it regularly buys and sells these businesses and their assets in order to realize value for shareholders. Leucadia has a very conservative management team and a strong track record of buying cyclical and distressed companies. Leucadia’s growth in book value since inception is impressive – from $(0.04) per share at its founding in 1978 to about $28.18 on 12/31/16. In 2013, Leucadia underwent a strategic succession plan with the acquisition of Jefferies. Rich Handler and Brian Friedman, Jefferies’ long term managers, replaced Ian Cumming and Joseph Steinberg, the founders and long term managers of Leucadia. The new management team has an equally

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strong track record as its predecessors. The compounded annual return for shareholders at Jefferies during their tenure there was an exemplary 22% (see performance comparison below). Further, over the last ten years, 75% of Handler and Friedman’s total direct compensation has been paid in stock, and neither of them has parted with one share (other than a one-time sale to fund a tax obligation and sales of shares donated or sold for charitable purposes). We gain additional confidence in a management team whose compensation is so closely in line with performance for shareholders.

Investment Activity: Leucadia has been raising cash by refinancing debt at lower rates and

divesting certain assets over the past year few years in order to position itself to take advantage of better investment opportunities down the road. Due to its strong financial position, management’s competence in negotiating, and deal flow from Jefferies, Leucadia has been able to take advantage of lucrative opportunities when they arise. (The most recent example being the assistance to FXCM in January of 2015 after FXCM struggled with liquidity in the face of a surprise move in the Swiss franc.) In 2016, better operating results at both Jeffries and National Beef significantly improved Leucadia’s operating performance. The stock price has rebounded dramatically – up almost 80% at quarter end from 2016 lows.

Smallest Positions CNA Financial – (CNA) (initial purchase in 2004, most recent purchase 2016) – One of the larger direct property and casualty insurers in the US, 90% owned by Loews Corp. New management was installed a several years ago, and the company subsequently completed a major restructuring and turnaround. CNA also continues to expand internationally, most recently through the acquisition of Hardy in the United Kingdom.

Business Outlook: CNA’s book value fell fairly dramatically in late 2008 and early 2009 due to severe temporary declines in the value of its alternative investment portfolio. As the market recovered for those hard-to-value investments, CNA’s book value rebounded dramatically. Insurance markets have firmed, and CNA’s capital position and industry ratings are strong and rising.

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Investment Activity: CNA’s share price had historically followed the changes in its book value. However, since the “financial crisis” it has typically traded dramatically below that level. CNA’s share price has seen strong gains of late, and at quarter’s end, its share price was above book value for the first time in many years (book value is $43.15 as of 3/31/16). CNA currently pays a quarterly dividend of $0.25 as well as an annual special dividend ($2/share in 2017, $2/share in 2016, $1/share in 2015, $2/share 2014, and $1/share in 2013). The current yield on CNA’s shares with both the quarterly and annual dividend is about 6.0%. CNA’s share price was weak in the latter half of 2015 and early 2016, and we added shares in some accounts. Since then, CNA's share price has recovered considerably (up almost 60% since the lows of 2016), and we have sold shares in many accounts.

MDC Holdings Inc. – (MDC) (initial purchase 2014, most recent purchase 2016) – A large homebuilder in selected markets in the United States whose subsidiaries operate under the name "Richmond American Homes." MDC also provides mortgage financing, primarily for MDC's homebuyers, through its wholly owned subsidiary, Home American Mortgage Corporation.

Business Outlook: MDC has a very conservative management team which navigated better than most of its competitors through the housing slump. MDC has a strong balance sheet and has benefitted as demand for single family housing continues to increase toward historical norms. The supply of new homes being built today is still below historical levels relative to the population. While this dynamic was expected after the overbuilding of the past decade, at some point the market will need to return to more normal levels. Looking at the demographics, we also believe there also is a likely shift in demand coming from urban apartments to more suburban, single-family homes by Millennials as they marry and have children. We feel there is plenty of runway for MDC to continue to increase sales, margins, and profits in light of these trends.

Investment Activity: MDC dropped to the top range of our buy price at points during 2014 to 2016. We added shares to accounts with high cash balances and non-taxable accounts. MDC was hurt by a lack of inventory of developable land. It now has increased its lot supply and is once again growing its community counts, revenues and margins. The share price has increased over 50% since November 2016. That improvement has stemmed both from improved operating performance as well as speculation that an improving economy and possible lower tax rates will continue to spur housing sector growth. We appreciate management’s cautious nature, and we will continue to add to our position of MDC if the price falls back into our buy range.

Fossil Group Inc. – (FOSL) (initial purchase 2015) – Fossil is a developer and distributor of consumer fashion accessories, primarily watches (78.4% of 2016 sales), as well as jewelry, handbags, and small leather goods (collectively, 21.6% 2016 sales). Its proprietary brands include Fossil, Michele, Relic, Skagen and Zodiac. It derives 45% of revenue from products created under licensed brands, including: Michael Kors, Marc by Marc Jacobs, Kate Spade, Adidas, Armani Exchange, Burberry, Diesel, DKNY, Emporio Armani, Karl Lagerfeld, and Tory Burch.

Business Outlook: After a slight recovery in the stock price in late 2016, Fossil’s share price has fallen dramatically in 2017. As a result, we will elaborate more than usual on this position here.

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We have listed below the primary reasons for the stock’s loss of market value. We believe investors have over reacted to these short-term challenges and that Fossil’s business and competitive advantages are intact for the long-term.

(1) Traditional watch sales have been weak in the face of increasing demand for tech watches (in particular, the Apple watch). Fossil is in the midst of building its own wearable technology business, but it has taken time and significant investments over the past two years to build out its capabilities in this area. This has weighed on short term results, as margins in tech watches are lower and sales of new products have not been high enough to offset the decline in traditional products.

(2) Overall sales have been very weak in department stores and among other retailers where Fossil has traditionally sold a majority of its products.

(3) Fossil’s 1st quarter results were disappointing. Traditional watch sales were weaker than expected and Fossil’s other business lines (jewelry and hand bags) were also unexpectedly soft. Hand bag sales in the US market overall have been very weak: a retail survey of the US handbag market shows that sales were off 19% in the US in the 1st quarter. Fossil’s were down 21%.

(4) The company’s margins have been compressed due to continued investments in tech watches as it ramps up production. Fossil believes the margins on these tech watches will improve as it gets to critical mass later this year and begins to benefit from economies of scale. Gross margins have been higher than internal estimates for the earlier part of the year, suggesting that Fossil is already getting traction in improving the profitability of these products.

(5) The CEO, Kosta Kartsotis, recently had to report the sale of a significant amount of his holding of Fossil shares. Mr. Kartsotis has not received cash compensation as CEO for almost 10 years. Due to a personal situation that he did not disclose, Kartsotis used the bulk of his shares as collateral for a personal line of credit. With the drastic drop in the share price over the past month, the bank sold shares in order to maintain its collateral on the line of credit (much like a margin call). Without knowing the details of this special situation, insider sales amid such price weakness could have easily been misinterpreted very negatively by some shareholders. However, Mr. Kartsotis had no control over if or when the bank sold his shares. Based on our conversation with him, the CEO was not expecting the stock price to ever get to a point that his pledged shares would be sold.

Despite the challenges Fossil faces and the recent downward pressure on the stock price, we believe its plan to integrate technology into its suite of watches and brands, rationalize its , and add new distribution channels should result in significantly higher earnings in the future. This improvement would result in the stock price rising considerably from current levels. Fossil’s new initiatives and other strengths include:

(1) Fossil is expanding its product line to include a full suite of technology-integrated products via varying classes of wearable devices that run the gamut from regular watches, to activity trackers, to “hybrid” watches (devices that look like regular watches but include a variety of tech features like syncing to new time zones and alerting you when you get a text or call), to full smart watches. Having a wider variety of options for consumers (regular, hybrid, and smartwatches) should position Fossil well for the future, as they will be able to appeal to 1) typical consumers, who are more concerned with fashion than functionality in a watch, 2) consumers who are interested in the added features that smartwatches provide, and 3) consumers who want both fashion and functionality (through their hybrid products). Although Apple

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watch sales have been relatively strong, Apple will have nothing close to a monopoly on the market, as 80% of the world’s smart phones are on the Android platform. (Fossil products are compatible with both Android and Apple operating systems).

(2) The company is the clear leader in wearable technology capabilities. None of its competitors have pursued the technology integration to the extent that Fossil has (both from a product and manufacturing standpoint). Accordingly, the competitors’ products are far fewer, less attractive, and will take much longer to ramp up. Consider that Movado, one of Fossil’s few direct competitors, is planning to launch less than 30 SKU’s this year, compared to Fossils 300+.

(3) Fossil plans to roll out additional distribution channels with these tech products to consumer electronic outlets by the Fall. Originally, Fossil had plans to complete this roll out sooner; but it sold out of its new products so quickly that it could not stock all of the new channels in the 1st quarter. Although it was disappointing that Fossil was unable to deliver enough product to meet the strong demand, it shows how well the new products are selling. Fossil and its licensed products can now be found at Best Buy, some cell phone carrier stores, and on many consumer electronics websites.

(4) Fossil’s smartwatch sales have quickly grown and will represent 15% of revenue by the end of this year. On Michael Kors’ most recent conference call (Michael Kors is its largest licensed product, representing more than 20% of sales), MK’s management praised the ACCESS line of smartwatches (made by FOSL) as one of its hottest products this quarter and an “outstanding success”.

(5) Fossil has a truly international business model. More than half of its revenue comes from outside the US, and it accordingly has an unmatched manufacturing and distribution infrastructure. This is an enduring competitive advantage that can't be easily replicated by competitors and makes Fossil the obvious choice for license partners. As a result, 55% of Fossil’s business comes from licensed brands, including Michael Kors, Kate Spade, Emporio Armani, Tory Burch, and other internationally recognized brands.

We talk and/or meet with management regularly as well as regularly visit stores that carry Fossil products and licensed brands. Pacifica believes that the underlying business plan is sound and is being implemented competently. If Fossil can continue to execute on its current initiatives, it will be able to increase earnings considerably, and its stock price will follow suit. In short, we think that the market is drastically overreacting to the trends affecting Fossil’s business and is underestimating Fossil’s ability to address challenges and generate greater earnings in the future. We should have waited longer to initiate our position, but we continue to see significant upside in this company.

Investment Activity: Fossil’s share price fell dramatically in the first half of 2017 after reporting very weak results. We took advantage of the price decline by continuing to add shares in most accounts. As consumers continue in greater numbers to demand varying tech features from their watches, they will be willing to pay more for them. We are not expecting that margins will get back to the historical levels of a few years ago when the stock was trading over $100 per share; but we do believe that the company will be able to make good returns on its owned and licensed brands over time. The key piece will be Fossil’s execution. Fossil has a good long-term track record and substantial insider ownership, both of which we view as positives in evaluating the likelihood of long term success. Remember, just last year, Fossil was earning over $1.50/share, and that was down from $7/share as recently as 2014. Granted we do not expect earnings to get back to $7/share due to lower margins on the wearables products; but sustainable earnings per share should be significantly higher than last year which would boost the price of the stock well above the current price of just over $10/share.

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Michael Kors (MK) watches (made by Fossil) were prominently displayed on the front and bank cover of the most recent MK product catalog. MK also specifically lauded the watches as” an outstanding success” on its 1st quarter 2017 call with its shareholders

Staples – (SPLS) (initial purchase 2014, most recent purchase 2016) – The largest office supply chain store with 2,000 stores worldwide in 26 countries. Staples has an impressive online retail position and is, in fact, a top global online retailer. In addition, Staples has large direct to business operations in most of the markets in which it has a retail presence.

Business Outlook: The office supply sector faces challenging conditions as technological changes have reduced the demand for many of the industry’s typical products (copy paper, file storage, etc.). Staples is the industry’s leader, and its management’s track record is impressive. Under pressure from activist investor groups, Staples announced during the 1st quarter of 2015 a merger agreement with Office Depot, which itself just completed a merger with rival Office Max in late 2013. In the 2nd quarter of 2016, the FTC announced it would not approve the merger on appeal, and Staples takeover bid of Office Depot was abandoned. Staples had to pay a costly breakup fee of $250 million in 2016. We still view Staples as the strongest competitor in this field, and we remain confident it will perform better over time as the industry continues to consolidate. The announcement of the blocked merger caused Staples’ shares to tumble again in the 2nd quarter of 2016 (after a 30%+ recovery in its price earlier in the year), and we gradually added shares. Just before the close of the 2nd quarter 2017, Staples announced it had agreed to be acquired by the investment firm Sycamore Partners for about $10.25/share. We do believe this price seems low, and there may be pushback from investors for a higher price to gain shareholder approval.

Investment Activity: Staples share price declined from above $25 per share in 2010 to around $10 per share, where we established our initial account positions in 2014. We believe that as the industry’s consolidation reaches equilibrium, profits should return to near historical levels; and eventually, a better supply and demand balance should allow for more favorable returns. (Often industry contractions over shoot for a period of time allowing for above average returns for the survivors.) Early in 2015, with news of a buyout, Staples’ price soared to almost $18 a share, and we sold the position in our non-taxable accounts. However, we were reluctant to realize short term taxable gains in fully taxable accounts. In the meantime, the shares dropped to new lows on news of the FTC blocking the Office Depot merger, and we purchased additional shares in non-taxable accounts and those accounts with large cash balances. The share price traded at quarter end slightly below the buyout price of $10.25.

Fairfax India Holdings Corporation – (FFXDF) (initial purchase 2015, most recent purchase 2016) – An investment holding company created by Fairfax Financial (our largest holding – see page 1) created to achieve long term capital appreciation, while preserving capital, by investing in Indian businesses.

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Business Outlook: Fairfax India was formed in early 2015, with Fairfax Financial as its largest owner, in order to capitalize on a growing Indian economy as well as a more business-friendly regulatory environment following the election of Prime Minister Modi in May 2014. The CEO of Fairfax India has a stellar track record managing Fairfax’s portfolio investments in India, delivering annualized returns of 18% from 2000 to 2014 (vs. 9% for the Indian stock market). We share Fairfax’s positive view of India’s future, and we feel a partnership with Fairfax in this growing area of the world is likely a long-term winner for Pacifica’s clients.

Investment Activity: We initially tried to participate in the IPO of the Fairfax India shares, but as a new, foreign offering, restrictions with our US custodians prevented us from doing so. The share price of Fairfax India had traded above the initial offering price of $10 per share for much of 2015. With the volatility in the markets early in 2016, the price of Fairfax India dropped back toward its initial offering price (and even below that for a period), and we added shares in many accounts. More recently the stock price has surged, and now trades at over $16/share, well above our initial buy price.

Wells Fargo – (WFC) (initial purchase 2008, most recent purchase 2012) - Wells Fargo is a nationwide, diversified financial services company and is one of the largest financial institutions in the US, ranking fourth in assets ($1.6 trillion) and first in market value among its domestic peers. One in three households in America does business with Wells Fargo. We believe that Wells is the strongest and best managed of the four national US banks, though this reputation has been tarnished somewhat by the recent scandal involving unauthorized opening of new accounts (see below).

Business Outlook: We believe Wells is uniquely positioned to use its competitive advantages (extensive banking network; diverse businesses; strong, customer-focused corporate culture; and proven, conservative management team) to continue to increase its market share, earn above industry average returns on capital, and reward its shareholders. The Federal Reserve continually gives Wells Fargo strong results on its annual capital stress tests, allowing Wells Fargo to continue to raise its dividend and increase its stock repurchase activity every year. Even though we believe Wells Fargo will continue to perform in the very top tier of the banking industry, we doubt that earnings will continue to increase at the rate they have been the past few years. Lower loan loss releases, pressure on net interest margins, and increased competition from other large banks are all forces that will likely lower future earnings growth in the industry at large. In the 3rd quarter 2016, Wells Fargo came under scrutiny for the opening of unauthorized accounts at the branch level. Initially, the stock price suffered, but after the election the likelihood of reduced financial regulation overshadowed this issue, and the share price rose dramatically.

Investment Activity: We purchased a limited position in Wells Fargo during the financial panic of 2008 at bargain prices. As valuations soared in 2009, we sold that position. During the latter part of 2011, Wells Fargo’s price once again came into our buy range, and we added shares. Although we believe that Wells Fargo is still one of the strongest players in the industry, we are concerned that loan losses will likely increase from current, historical lows and that this trend will compromise Well’s profits going forward. As Wells Fargo’s share price moved higher through mid-2016 and then surged through the 4th quarter of 2016 and into 2017 to almost 2 times tangible book value, we significantly reduced our position in almost all accounts.

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Build-A-Bear Workshop, Inc. – (BBW) (initial purchases 2017, most recent purchase 2017) – Build-A Bear Workshop operates as a specialty retailer of plush animals and related products. Its merchandise comprises a range of styles of stuffed animals, and their clothing, shoes, and accessories Customers typically stuff and accessorize animals themselves in stores. Products are sold via company owned stores, franchised stores, licensed retail products, and wholesale partners (like cruise ships).

Business Outlook: We believe Build-A-Bear offers a unique retail experience for children of all ages to create a personalized stuffed toy. New management started in 2013 and turned the chain around after it had overbuilt the concept in prior years. Now Build-A-Bear boasts a chain where substantially all stores generate positive cash flow and in aggregate North American stores have 4-wall contributions of almost 20%. Build-A-Bear is undertaking several initiatives, including: remodeling its current stores; expanding the store base through additional franchise locations; adding new and flexible store models in innovative locations like movie theaters and mall kiosks; and expanding its commercial and licensed channels. We believe these new initiatives give the company the flexibility to be where the consumer is shopping while providing the personalized and fun experience that consumers’ demand – factors that are essential to be successful in today’s changing retail landscape. Build-A-Bear has a strong balance sheet, with no debt and cash of about $2 per share.

Investment Activity: We initiated our position in Build-A-Bear during the 1st quarter of 2017 as its share price was weak due to poor 4th quarter results from underperformance from licensed products and weak retail traffic in the second half of December. After the company reported adequate 1st quarter results, the share price surged almost 30% to a price above our initial buy price. We would add to our position if the price dropped lower once again.

Fairfax Africa Holdings Corporation – (FFXXF) (initial purchase 2017, most recent purchase 2017) – An investment holding company created by Fairfax Financial (our largest holding – see page 1) created to achieve long term capital appreciation, while preserving capital, by investing in African businesses. The fund will invest in private and public equity as well as debt of companies operating on the continent, with a view to acquiring control or significant positions.

Business Outlook: Fairfax Africa was formed in early 2017, with Fairfax Financial as its largest owner, in order to capitalize on a growing and diverse African economy. Although Africa has been dogged historically by political and economic uncertainty, Fairfax believes that parts of Africa will be transformed in the coming years by an emerging middle class, improved political stability and governance, and increased integration with global markets. Similar to our investment in Fairfax India, we feel a partnership with Fairfax in this growing area of the world is likely a long-term winner for Pacifica’s clients.

Investment Activity: We would have participated in the IPO of the Fairfax Africa shares, but as a new, foreign offering, restrictions with our US custodians prevented us from doing so. We have been buying shares close to the initial offering price of $10 per, as they are available, in 2017.

Sold Positions

American Express – (AXP) (initial purchase 2008, most recent purchase 2016) – We believe American Express faces increasing competitive pressures from other credit cards for its high-end customers, and it will likely experience a lower discount rate (what it charges stores to process their transactions) as well as higher rewards costs going forward, lowering future

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returns from historical levels. With share prices having increased considerably in late 2016 and 2017(up almost 50% from the 2016 low), we have sold shares in many accounts.

US Bank – (USB) (initial purchase 2009, most recent purchase 2010) – Although we believe US Bank’s conservative management team to be one of the best in the industry, current banking valuations overall give us pause. We believe loan losses will return to historical levels and that trend will hurt US Bank’s profits. USB's shares have traded well above our buy target during the last few years. As the stock’s price rose an additional 20% in the 4th quarter of 2016 and into early 2017 (to almost 2.5 times tangible book value), we sold shares.