PSH-Annual-Report

Annual Report December 31, 2014Notes to Financial Statements (continued)13. FINANCIAL RISK AND MANAGEMENTOBJECTIVES AND POLICIES (continued)The Company maintains its cash position at majorfinancial institutions. At times cash balances mayexceed federally insured limits and as such theCompany has credit risk associated with suchfinancial institutions. The cash and cashequivalents balances are reflected in the statementof financial position. At December 31, 2014 andDecember 31, 2013, cash was primarily invested ina U.S. Treasury money market fund with dailyliquidity as disclosed in Note 10.The following table analyzes the Company’s cash,due from brokers and financial assets portfoliobased on the underlying custodians’ andcounterparties’ credit rating.2014 2013AAA 8% 13%AA – –A 92% 87%Total 100% 100%14. COMMITMENTS ANDCONTINGENCIESOn October 1, 2014, PSCM entered into anagreement with Sachem Head CapitalManagement, L.P. (“SHCM”) whereby SHCMwould receive 10% of the net profits from theCompany and three affiliated funds of PSCM(collectively, the “PS Entities”), based on a $500million investment in Zoetis Inc. (“Zoetis”). The netprofits of the PS Entities will be calculated basedon the PS Entities’ weighted average cost inpurchasing Zoetis and weighted average sale pricein selling Zoetis. In the event that the PS Entitiesstill hold their investment in Zoetis as of December28, 2015, the weighted average sale price will becalculated using 98% of the volume-weightedaverage trading price of Zoetis shares during theten consecutive trading days ending on December28, 2015, after which time SHCM will no longer beentitled to any additional profits from the PSEntities. The net profits will reflect all third-partyfees, financing costs and expenses incurred by thePS Entities relating to its Zoetis investment. As ofDecember 31, 2014, the Company’s liability toSHCM was $2,881,901 as reflected in trade andother payables in the statement of financialposition.Other than the above and as disclosed in Note 8there were no other commitments or contingenciesas of the reporting date and December 31, 2013.15. INVESTMENT MANAGEMENT ANDINCENTIVE FEESManagement FeeDuring the Private Phase and after the IPO, theInvestment Manager received a quarterlymanagement fee payable in advance in an amountequal to 0.375% (1.5% per annum) of the net assetvalue attributable to all fee-paying shares in issueas of the last business day of the previouscalendar quarter (excluding any such sharesredeemed on that day) and all fee-paying sharessubscribed as of the first business day of suchcalendar quarter. During the Private Phase, thefee-paying shares of the Company comprised ofthe Existing Shares, and effective October 1, 2014,the fee-paying shares of the Company comprisedof the Public Shares and the Class B shares.Incentive FeeDuring the Private Phase, the Investment Managerreceived an annual incentive fee in an amountequal to 16% of the net profits attributable to thefee-paying shares of the Company, subject to aloss carryforward.After October 1, 2014, the Investment Manageragreed to a further reduction of the 16% incentivefee (the “Variable Incentive Fee”) to all fee-payingshareholders by way of an additional reduction (the“Additional Reduction”). The Additional Reductionis calculated based on 20% of the aggregateperformance allocation and incentive fees earnedby the Investment Manager and its affiliates for thegains of all other current and certain future fundsmanaged by the Investment Manager or any of itsaffiliates.The Variable Incentive Fee will equal (i) the 16%incentive fee per the Investment Manageragreement minus (ii) the Additional Reduction. TheVariable Incentive Fee for any period cannot beless than zero, but any negative amount due to theAdditional Reduction will be carried forward andavailable to reduce the Variable Incentive Fee forfuture periods. In the event that any such carriedforwardamount is still available after offsetting anyincentive fee crystallized upon the dissolution ofthe Company or the termination of the InvestmentManagement Agreement, such amount will beforfeited. The Additional Reduction will not begin toreduce the Variable Incentive Fee until the “OffsetAmount” (described further in Note 16) is fullyreduced to zero.66 PERSHING SQUARE HOLDINGS, LTD.