As filed with the Securities and Exchange Commission on January 29, 2013
File Nos. 811-09607
333-88517
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
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THE SECURITIES ACT OF 1933
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 27
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and/or
REGISTRATION STATEMENT
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UNDER
THE INVESTMENT COMPANY ACT OF 1940
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Amendment No. 29
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(Check appropriate box or boxes)
FAIRHOLME FUNDS, INC.
(Exact name of Registrant as Specified in Charter)
4400 BISCAYNE
BLVD
MIAMI, FL 33137
(Address of Principal Executive Office)
305-358-3000
(Registrants Telephone Number, including Area Code)
MR. BRUCE R. BERKOWITZ
FAIRHOLME CAPITAL MANAGEMENT, L.L.C.
4400 BISCAYNE BLVD
MIAMI, FL 33137
(Name and address of agent for Service)
Copies of Communications to:
Mr. Paul M. Miller
Seward & Kissel LLP
901 K Street, N.W.
Washington, D.C. 20001
It is proposed that this filing
will become effective (check appropriate box)
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Immediately upon filing pursuant to Rule 485(b).
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on (date) pursuant to Rule 485(b).
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on (date) pursuant to Rule 485(a)(1).
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60 days after filing pursuant to Rule 485 (a)(1).
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75 days after filing pursuant to Rule 485 (a)(2).
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on (date) pursuant to Rule 485(a)(2).
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If
appropriate, check the following box:
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This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
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The Registrant has registered an indefinite number of shares under the Securities Act of 1933, as amended, pursuant to Rule 24f-2 promulgated under the
Investment Company Act of 1940, as amended. Therefore, no registration fee is due with this filing.
Explanatory Note: This Post-Effective Amendment to the Registration Statement of Fairholme Funds, Inc. is
being filed to amend certain information concerning The Fairholme Focused Income Fund.
THE FAIRHOLME
FOCUSED INCOME FUND
(Ticker: FOCIX)
A No-Load, Non-Diversified Fund
Seeking Current Income
PROSPECTUS
, 2013
A Series of
FAIRHOLME FUNDS, INC.
MANAGED BY FAIRHOLME CAPITAL
MANAGEMENT
The Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed on the accuracy or adequacy of this Prospectus. Any representation to the
contrary is a criminal offense.
TABLE OF CONTENTS
THE FAIRHOLME FOCUSED INCOME FUND
(the Fund)
Investment Objective
The Fund seeks current income.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and hold shares of the Fund.
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SHAREHOLDER FEES
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(fees paid directly from your investment)
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Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of
offering price)
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None
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Maximum Deferred Sales Charge (Load) (as a percentage of
amount redeemed)
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None
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Maximum Sales Charge (Load) Imposed on
Reinvested Dividends and Other Distributions
(as a percentage of amount reinvested)
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None
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Shareholders will be charged fees by the Funds transfer agent for outgoing wire transfers,
returned checks, and stop payment orders relating to such shareholders transactions. Additionally, individual retirement accounts and Coverdell educational savings accounts will be charged an annual custodial maintenance fee by the Funds
custodian.
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ANNUAL FUND OPERATING EXPENSES
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(expenses that you pay each year as a percentage of the value of your investment)
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Management Fees
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1.00%
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Distribution (12b-1) Fees
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None
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Other Expenses
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Acquired Fund Fees and Expenses
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0.01%
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Total Annual Fund Operating
Expenses
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1.01%
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Acquired Fund Fees and Expenses are those fees and expenses incurred indirectly by
the Fund as a result of investing in securities of one or more investment companies, including money market funds. Please note that the Total Annual Fund Operating Expenses in the table above may not correlate to the Ratio of Expenses to Average Net
Assets found within the Financial Highlights section of this Prospectus.
Example
This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at
the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Funds operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs
would be:
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1 Year
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3 Years
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5 Years
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10 Years
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$103
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$322
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$558
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$1,236
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Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A
higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the
Funds performance. During the most recent fiscal year, the Funds portfolio turnover rate was 8.27% of the average value of its portfolio.
Principal Investment Strategies
Fairholme
Capital Management, L.L.C. (the Manager), the investment adviser to the Fund, attempts, under normal circumstances, to achieve the Funds investment objective by investing in a focused portfolio of cash distributing securities. The
Fund will typically invest in the securities of 15 to 50 issuers. To maintain maximum flexibility, the securities in which the Fund
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may invest include corporate debt securities of issuers in the U.S. and foreign countries, bank debt (including bank loans and participations), government and agency debt securities of the U.S.
and foreign countries, convertible bonds and other convertible securities, and equity securities, including preferred and common stock, and interests in real estate investment trusts (REITs). The Funds securities may be rated by
one or more nationally recognized statistical rating organizations (NRSROs), such as Moodys Investors Service, Inc. (Moodys) or Standard & Poors Ratings Services (S&P), or may be
unrated. The Manager may invest in securities for the Fund without regard to maturity or the rating of the issuer of the security. The Fund may invest without limit in lower-rated securities. Lower-rated securities are those rated below
Baa by Moodys or below BBB by S&P or that have comparable ratings from other NRSROs or, if unrated, are determined to be comparable to lower-rated debt securities by the Manager.
Although the Fund normally holds a focused portfolio of securities, the Fund is not required to be fully invested in such securities and
may maintain a significant portion of its total assets in cash and securities generally considered to be cash equivalents.
The
Fund may also use other investment strategies and invest its assets in other types of investments, which are described in the section in this Prospectus entitled Additional Information about the Funds Investments and Risks, and in
the Funds Statement of Additional Information (the SAI).
Principal Risks of Investing in the
Fund
General Risks.
All investments are subject to inherent risks, and an investment in the Fund is no
exception. Accordingly, you may lose money by investing in the Fund. Markets can trade in random or cyclical price patterns, and prices can fall over time. The value of the Funds investments will fluctuate as markets fluctuate and could
decline over short-or long-term periods.
Focused Portfolio and Non-Diversification Risks.
The Fund may have more
volatility and is considered to have more risk than a fund that invests in securities of a greater number of issuers because changes in the value of a single issuers securities may have a more significant effect, either negative or positive,
on the net asset value (NAV) of the Fund. To the extent that the Fund invests its assets in the securities of fewer issuers, the Fund will be subject to greater risk of loss if any of those securities decreases in value or becomes
impaired. To the extent that the Funds investments are focused in a particular issuer, region, country, market, industry, asset class or other category, the Fund may be susceptible to loss due to adverse occurrences affecting that issuer,
region, country, market, industry, asset class or other category.
Credit Risk.
The Funds investments are
subject to credit risk. An issuers credit quality depends on its ability to pay interest on and repay its debt and other obligations. Defaulted securities (or those expected to default) are subject to additional risks in that the securities
may become subject to a plan or reorganization that can diminish or eliminate their value. The credit risk of a security may also depend on the credit quality of any bank or financial institution that provides credit enhancement for the security.
The Manager does not rely solely on third party credit ratings to select the Funds portfolio securities.
Interest Rate Risk.
The Funds investments are subject to interest rate risk, which is the risk that the value of a
security will decline because of a change in general interest rates. Investments subject to interest rate risk will usually decrease in value when interest rates rise and rise in value when interest rates decline. Also, securities with long
maturities typically experience a more pronounced change in value when interest rates change.
High Yield Security
Risk.
Investments in fixed-income securities that are rated below investment grade by one or more NRSROs or that are unrated and are deemed to be of similar quality (high yield securities) may be subject to greater risk of loss
of principal and interest than investments in higher-rated fixed-income securities. High yield securities are also generally considered to be subject to greater market risk than higher-rated securities.
An investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency. Further discussion about other risks of investing in the Fund may be found in the section in this Prospectus entitled Additional Information about the Funds Investments and Risks, and in the SAI.
Past Performance
The bar chart and table set out below show the Funds historical performance, and provide some indication of the risks of investing in the Fund by showing changes in the Funds performance from
year to year and by showing how the Funds average annual total returns for 1- and 3-year periods and since inception compare to the performance of the Barclays Capital U.S. Aggregate Bond Index. The Funds past performance (before and
after taxes) may not be an indication of how the Fund will perform in the future. Updated performance information for the Fund may be obtained by visiting www.fairholmefunds.com or by calling 1-866-202-2263.
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Annual Returns of the Fund for the Last 3 Calendar Years
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Best Quarter 1
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Qtr 2012: 12.82%
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Worst Quarter 3
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Qtr 2011: -9.41%
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Average Annual Total Returns for the Fund (for the periods ended December 31, 2012)
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Portfolio Returns
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1 Year
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3 Years
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Since Inception
(12/31/2009)
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Return Before Taxes
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5.19%
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5.10%
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5.10%
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Return After Taxes on
Distributions
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1.75%
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2.76%
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2.76%
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Return After Taxes on Distributions and
Sale of Fund Shares
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3.42%
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3.08%
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3.08%
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Barclays Capital U.S. Aggregate Bond
Index (reflects no deduction for fees, expenses or taxes)
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4.22%
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6.18%
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6.18%
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The theoretical after-tax returns shown in the table are calculated using the highest
historical individual federal marginal income tax rates, and do not reflect the impact of state and local taxes.
Your actual after-tax returns depend on your personal tax situation and may differ from the returns shown above
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Also, after-tax return information is not relevant to shareholders who hold Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. The after-tax returns shown in the table
reflect past tax effects and are not predictive of future tax effects.
The average annual total return after taxes on
distributions and sale of Fund shares for a specific period may be higher than the average annual total return before taxes or the average annual total return after taxes on distributions for that same period because of realized losses that would
have been sustained upon the sale of Fund shares immediately after such period. The calculation assumes that an investor holds the shares in a taxable account, is in the actual historical highest individual federal marginal income tax bracket for
the year, and would have been able to immediately utilize the full realized loss to reduce his or her federal tax liability. However, actual individual tax results may vary and investors should consult their tax advisors regarding their personal tax
situations.
The Barclays Capital U.S. Aggregate Bond Index is an unmanaged market-weighted index comprised of investment
grade corporate bonds (rated BBB or better), mortgages, and U.S. Treasury and government agency issues with at least one year to maturity. Because indices cannot be invested in directly, these index returns do not reflect a deduction for fees,
expenses or taxes.
Investment Adviser
Fairholme Capital Management, L.L.C., the Manager, provides investment advisory services to the Fund.
Portfolio Manager
Bruce R. Berkowitz,
Managing Member and Chief Investment Officer of the Manager, and the President and a Director of Fairholme Funds, Inc. (the Company), has been the Funds lead portfolio manager since the Funds inception. Mr. Berkowitz is
responsible for the day-to-day management of the Funds portfolio.
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Purchase and Sale of Fund Shares
The Board of Directors has authorized the Manager, in its discretion, to determine that, at any time, shares of the Fund will no longer be
offered and sold (including in connection with reinvestment of Fund distributions) to any or all investors, including existing shareholders. The Manager has determined, pursuant to this authority, to suspend the sale of shares of the Fund to new
investors, effective as of the close of business on February 28, 2013.
Effective as of the close of business on February
28, 2013, the Fund will suspend the sale of shares to new investors, including new investors seeking to purchase Fund shares directly from the Fund or indirectly through financial intermediaries. Subject to the rights of the Fund to reject any order
to purchase shares or to withdraw the offering of shares at any time, shares will remain available for purchase to existing shareholders.
Your purchase of Fund shares is subject to the following minimum investment amounts (which may be waived by the Manager in its discretion):
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Minimum Investment
To Open Account
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$25,000
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Minimum Subsequent Investment
(Non-Automatic Investment Plan Members)
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$2,500
for Regular Accounts
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$1,000
for IRAs
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Minimum
Subsequent Investment
(Automatic Investment Plan Members)
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$250 per month minimum
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You may purchase or redeem Fund shares through your financial intermediary or by contacting the
Fund: (i) by telephone at 1-866-202-2263; or (ii) in writing c/o BNY Mellon Investment Servicing (US) Inc., P.O. Box 9692, Providence, RI 02940-9692; or (iii) if using overnight delivery, c/o BNY Mellon Investment Servicing (US)
Inc., 4400 Computer Drive, Westborough, MA 01581-1722.
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or capital gains.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund and its related
companies may pay the intermediary for certain administrative and shareholder servicing functions. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary to recommend the Fund over another investment.
Ask your salesperson or visit your financial intermediarys website for more information.
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ADDITIONAL INFORMATION
ABOUT THE FUNDS INVESTMENTS AND RISKS
This section of the Prospectus provides additional information about the investment practices and related risks of the Fund.
Investment Objective and Investment Strategies
The Fund seeks current income. The Funds investment objective is non-fundamental and may be changed without shareholder approval.
The Manager attempts, under normal circumstances, to achieve the Funds investment objective by investing in a focused portfolio of
cash distributing securities. The Fund will typically invest in the securities of 15 to 50 issuers. To maintain maximum flexibility, the securities in which the Fund may invest include corporate debt securities of issuers in the U.S. and foreign
countries, bank debt (including bank loans and participations), government and agency debt securities of the U.S. and foreign countries, bank loans and loan participations, convertible bonds and other convertible securities, and equity securities,
including preferred and common stock and interests in REITs. The Funds securities may be rated by one or more NRSROs, such as Moodys or S&P, or may be unrated. The Manager may invest in securities for the Fund regardless of the
maturity or the rating of the issuer of the security. The Fund may invest without limit in lower-rated securities. Lower-rated securities are those rated below Baa by Moodys or below BBB by S&P or that have
comparable ratings from other NRSROs or, if unrated, are determined to be comparable to lower-rated debt securities by the Manager. Additional information about the bond ratings of the NRSROs can be found in
Appendix A
. The Fund may also
invest in rights or warrants, which entitle the holder to buy equity securities at a specific price for a specific period of time.
The proportion of the Funds assets invested in various securities will be modified, from time to time, in accordance with the Managers overall assessment of the investment prospects for
issuers, the relative yields of securities in various market sectors, the economy, and other factors. In making investment decisions for the Fund, the Manager will consider many factors, including cash distribution yields, quality and liquidity.
The average maturity of the Funds portfolio at any time will also depend on the Managers overall assessment of the
investment prospects for issuers, the relative yields of securities in various market sectors, the economy, and other factors. The Manager may invest in an array of securities with short, intermediate, and long maturities in varying proportions.
Although the Fund normally holds a focused portfolio of securities, the Fund is not required to be fully invested in such
securities and may maintain a significant portion of its total assets in cash and securities generally considered to be cash equivalents, including U.S. Government securities, money market funds, commercial paper, repurchase agreements, and other
high quality money market instruments. From time to time, cash and cash reserves may also include foreign securities, short-term obligations of foreign governments or other high quality foreign money market instruments. The Fund believes that a
certain amount of liquidity in its portfolio is desirable both to meet operating requirements and to take advantage of new investment opportunities. Under adverse market conditions, when the Fund is unable to find sufficient investments meeting its
criteria, cash and cash reserves may comprise a significant percentage of the Funds total assets. When the Fund holds a significant portion of assets in cash and cash reserves, it may not meet its investment objective.
The Fund may also use other investment strategies and may invest its assets in other types of investments, which are described in the SAI.
Risks of Investing in the Fund
General Risks.
All investments are subject to inherent risks, and investments in the Fund are no exception. Accordingly, you may lose money by investing in the Fund. When you sell your shares,
they may be worth less than what you paid for them because the value of the Funds investments will fluctuate, reflecting day-to-day changes in market conditions, interest rates, and numerous other factors.
Market Risk.
Markets can trade in random or cyclical price patterns, and prices can fall over time. The value of the
Funds investments will fluctuate as markets fluctuate and could decline over short-or long-term periods.
Focused
Portfolio and Non-Diversification Risks.
The Fund attempts to invest in a limited number of securities. Accordingly, the Fund may have more volatility and is considered to have more risk than a fund that invests in a greater number of
securities because changes in the value of a single security may have a more significant effect, either negative or positive, on the Funds NAV. To the extent that the Fund invests its assets in fewer securities, the Fund is subject to greater
risk of loss if any of those securities becomes impaired.
The Fund is considered to be non-diversified under the
Investment Company Act of 1940, as amended (1940 Act), which means that the Fund can invest a greater percentage of its assets in the securities of fewer issuers than a diversified fund. The Fund may also have a greater percentage of its
assets invested in particular industries than a diversified fund, exposing the Fund to the risk of unanticipated industry conditions as well as risks particular to a single company or the securities of a single
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company. Additionally, the NAV of a non-diversified fund generally is more volatile, and a shareholder may have a greater risk of loss if the shareholder redeems his or her shares during a period
of high volatility. Lack of broad diversification also may cause the Fund to be more susceptible to economic, political, regulatory, liquidity or other events than a diversified fund.
Credit Risk.
The Funds investments are subject to credit risk. An issuers credit quality depends on its ability to
pay interest on and repay its debt and other obligations. Defaulted securities (or those expected to default) are subject to additional risks in that the securities may become subject to a plan or reorganization that can diminish or eliminate their
value. The credit risk of a security may also depend on the credit quality of any bank or financial institution that provides credit enhancement for the security. The Manager does not rely solely on third party credit ratings to select the
Funds portfolio securities.
Interest Rate Risk.
The Funds investments are subject to interest
rate risk, which is the risk that the value of a security will decline because of a change in general interest rates. Investments subject to interest rate risk will usually decrease in value when interest rates rise and rise in value when interest
rates decline. Also, securities with long maturities typically experience a more pronounced change in value when interest rates change.
Prepayment Risk.
The Funds investments may be subject to prepayment risk. Prepayment risk occurs when the issuer of a security can repay principal prior to the securitys maturity.
Securities subject to prepayment can offer less potential for gains during a declining interest rate environment and similar or greater potential for loss in a rising interest rate environment. In addition, the potential impact of prepayment
features on the price of a security can be difficult to predict and result in greater volatility.
High Yield Security
Risk.
Investments in fixed-income securities that are rated below investment grade by one or more NRSROs or that are unrated and are deemed to be of similar quality may be subject to greater risk of loss of principal and interest than
investments in higher-rated fixed-income securities. High yield securities are also generally considered to be subject to greater market risk than higher-rated securities. The capacity of issuers of high yield securities to pay interest and repay
principal is more likely to weaken than is that of issuers of higher-rated securities in times of deteriorating economic conditions or rising interest rates. In addition, high yield securities may be more susceptible to real or perceived adverse
economic conditions than higher-rated securities. The market for high yield securities may be less liquid than the market for higher-rated securities. This can adversely affect the Funds ability to buy or sell optimal quantities of high yield
securities at desired prices.
Inflation Risk.
This is the risk that the value of assets or income from investments
will be less in the future as inflation decreases the value of money. As inflation increases, the value of the Funds assets can decline as can the value of the Funds distributions. This risk increases as the Fund invests a greater
portion of its assets in fixed-income securities with longer maturities.
REITs Risk.
The Fund may invest in REITs,
including equity REITs and mortgage REITs. Equity REITs invest directly in real property while mortgage REITs invest in mortgages on real property. REITs may be subject to certain risks associated with the direct ownership of real property,
including declines in the value of real estate, risks related to general and local economic conditions, overbuilding and increased competition, increases in property taxes and operating expenses, and variations in rental income. REITs are dependent
upon management skills, are not diversified, and are subject to heavy cash flow dependency, default by borrowers, and self-liquidation. REITs (especially mortgage REITs) are also subject to interest rate risks. When interest rates decline, the value
of a REITs investment in fixed-rate obligations can be expected to rise. Conversely, when interest rates rise, the value of a REITs investment in fixed-rate obligations can be expected to decline. Mortgage REITs may be affected by the
quality of any credit extended to them.
Rights and Warrants Risk.
Rights and warrants may be considered more
speculative than certain other types of investments in that they do not entitle a holder to dividends or voting rights with respect to the underlying securities that may be purchased nor do they represent any rights in the assets of the issuing
company. Also, the value of a right or warrant does not necessarily change with the value of the underlying securities and a right or warrant ceases to have value if it is not exercised prior to the expiration date.
Liquidity Risk.
The Funds investments are subject to liquidity risk. This is the risk that the market for a security or
other investment cannot accommodate an order to buy or sell the security or other investment in the desired timeframe, possibly preventing the Fund from selling these securities at an advantageous price. This risk includes the risk that legal or
contractual restrictions on the resale of a security may affect the Funds ability to sell the security when deemed appropriate or necessary by the Manager. Derivatives and securities involving substantial market and credit risk tend to involve
greater liquidity risk. This risk also includes the risk that trading on an exchange may be halted because of market conditions.
Recent Market Events
. In response to recent instability in U.S. and foreign economic and credit markets, the U.S.
Government, foreign governments and certain domestic and foreign banks have taken steps designed to stabilize credit markets, increase consumer confidence and spur economic growth, including by injecting liquidity into the markets. The effect of
these efforts is not yet known. Withdrawal of this support, or other policy changes by governments or central banks, could negatively affect the value and liquidity of certain securities. Adverse financial market conditions have resulted in calls
for increased regulation and
6
the need for many financial institutions to seek government assistance. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) was enacted in
the U.S., reflecting a significant revision of the U.S. financial regulatory framework. The Dodd-Frank Act addresses a variety of topics, including, among others, a reorganization of federal financial regulators; new rules for trading in
derivatives; the registration and additional regulation of private fund managers; and new federal requirements for residential mortgage loans. Securities in which the Fund invests, or the issuers of such securities, may be impacted by the Dodd-Frank
Act and any related or additional legislation or regulation in unforeseeable ways. The ultimate effect of the Dodd-Frank Act and any related or additional legislation or regulation is still unknown.
Further discussion about other risks of investing in the Fund may be found in the SAI.
FAIRHOLME CAPITAL MANAGEMENT, L.L.C. (THE MANAGER)
The Manager is located at 4400 Biscayne Blvd., 9
th
Floor, Miami, FL 33137. The Manager is a Delaware limited liability company and is registered with the Securities
and Exchange Commission (the SEC) as an investment adviser under the Investment Advisers Act of 1940, as amended. As of December 31, 2012, the Manager reported assets under management in excess of $8.9 billion.
The Managers principal business is to provide financial management and advisory services to individuals, corporations, partnerships,
pooled investment vehicles and other entities throughout the world. Under a separate investment management agreement with the Company, on behalf of the Fund (the Investment Management Agreement), the Manager manages the Funds
investment portfolio and manages, or arranges to manage, all other business affairs of the Fund.
Pursuant to the Investment
Management Agreement, the Company pays a management fee to the Manager for its provision of investment advisory and operating services to the Fund. The management fee is paid at an annual rate equal to 1.00% of the daily average net assets of the
Fund. In addition, the Manager is responsible for paying the Funds expenses for the following services: transfer agency, fund accounting, fund administration, custody, legal, audit, compliance, directors fees, call center, fulfillment,
travel, insurance, rent, printing, postage and other office supplies. The Manager is not responsible for paying for the following costs and expenses of the Fund: commissions, brokerage fees and other transaction costs, taxes, interest, acquired fund
fees and related expenses, and extraordinary expenses, such as litigation expenses. Acquired fund fees are those expenses that are incurred indirectly by the Fund as a result of its investment in shares of one or more investment companies, which may
include money market funds.
A discussion of the factors that the Companys Board of Directors (the Board)
considered in approving the Investment Management Agreement will be included in the Funds annual report to shareholders for the fiscal year ended November 30, 2012.
Portfolio Manager
Bruce R. Berkowitz is
responsible for the day-to-day management of the Funds portfolio. Mr. Berkowitz is the President and a Director of the Company. Mr. Berkowitz has been Managing Member and Chief Investment Officer of the Manager since its inception in
1997. Mr. Berkowitz also serves as a Director and Chairman of the Board of Directors of The St. Joe Company, which is listed on the New York Stock Exchange (NYSE). Mr. Berkowitz has over 30 years of investment management
experience.
The Company does not directly compensate any personnel of the Manager, including the portfolio manager. The SAI
provides additional information about the compensation of the portfolio manager, as well as (i) other accounts managed by the portfolio manager, and (ii) the portfolio managers ownership of Fund shares.
Conflicts of Interest
In addition to acting as the investment adviser of the Fund, the Manager serves as the investment adviser to the other two series of the Company, pooled investment vehicles and individual, corporate, and
retirement accounts for U.S. and non-U.S. clients. Although it is the policy of the Manager to treat all clients fairly and equitably, and the Manager has adopted policies and procedures that are reasonably designed to ensure that no particular
client is disadvantaged by the activities of other clients, there are inherent conflicts of interest that may, from time to time, affect the Fund.
The Manager has adopted policies and procedures that are intended to address conflicts of interest relating to the allocation of investment opportunities. Portfolio holdings, position sizes, and industry
and sector exposures tend to be similar across similar accounts, minimizing the potential for conflicts of interest relating to the allocation of investment opportunities. Investment opportunities may, however, be allocated differently among
accounts due to the particular characteristics of an account, such as size of the account, cash position, tax status, risk tolerance, and investment restrictions or for other reasons. In addition, as a consequence of size, investment powers, and
founding documents, other accounts managed or advised by the Manager may pursue strategies not available to the Fund and may invest in securities in which the Fund does not participate. In some circumstances, the Fund may pursue strategies or
purchase investments that are not pursued by or purchased for other accounts managed by the Manager. As a result of pursuing different strategies and objectives, the performance of other accounts may differ materially from the performance of the
Fund.
7
The Manager and the Company have adopted Codes of Ethics that are designed to detect and
prevent conflicts of interest when personnel of the Manager own, buy or sell securities that may be owned by, or bought or sold for, clients of the Manager. Personal securities transactions by an employee may raise a potential conflict of interest
when an employee owns or trades in a security that is owned or considered for purchase or sale by a client, or recommended for purchase or sale by an employee to a client.
BUYING AND SELLING SHARES OF THE FUND - INVESTING IN THE FUND
Effective as of the close of business on February 28, 2013, the Fund will suspend the sale of shares to new investors, including new investors seeking to purchase Fund shares directly from the Fund or
indirectly through financial intermediaries.
Shares of the Fund will remain available for purchase to existing shareholders. The Fund retains the right to make exceptions to the suspension of the sale of its shares to new investors, and reserves
the right to subsequently commence selling its shares to new investors. Investors may request information by calling Fund Shareholder Servicing (Shareholder Services) at 1-866-202-2263.
Determining Share Prices
Shares of the Fund are offered at the Funds per share NAV. The Funds per share NAV is calculated by (1) adding the value of the Funds investments, cash, and other assets,
(2) subtracting the Funds liabilities, and then (3) dividing the result by the number of shares outstanding for the Fund. The Funds per share NAV is computed on all days on which the NYSE is open for business and is based on
closing prices or fair value of the Funds portfolio securities as of the close of regular trading hours on the NYSE (currently 4:00 p.m., Eastern Time). The Funds NAV is calculated as soon as practicable following the close of regular
trading on the NYSE. In the event that the NYSE closes early, the Funds NAV will be determined based on the prices of the Funds portfolio securities at the time the NYSE closes.
The Fund values its securities at their current market value determined on the basis of market quotations or, if market quotations are not
readily available or are unreliable, at fair value as determined by the Manager in accordance with the valuation policies and procedures established by and under the general supervision of the Board. The Manager may use fair value pricing under
circumstances that include when the prices or values available do not represent the fair value of the instrument, the early closing of the exchange on which a security is traded or suspension of trading in the security. In addition, under certain
circumstances to discourage potential arbitrage market timing in Fund shares and in accordance with Companys valuation procedures, the Manager may use fair value pricing for securities traded in non-U.S. markets.
To the extent that the Fund holds securities traded in foreign markets that close prior to U.S. markets, significant events, including
company-specific developments or broad market moves, may affect the value of foreign securities held by the Fund between the time the foreign market closes and the time the Fund calculates its daily NAV. This is because the Fund calculates its NAV
based on closing prices or fair values of the Funds portfolio securities as of the close of trading on the NYSE, which gives rise to the possibility that events may have occurred in the interim that would affect the value of these securities.
Consequently, the Funds NAV may be affected during a period when shareholders are unable to purchase or redeem their Fund shares. While fair value pricing may be more commonly used with foreign equity securities, it may also be used with
thinly-traded domestic securities, fixed-income securities or other assets held by the Fund.
Fair value pricing involves
subjective judgments and it is possible that the fair value determined for a security is materially different than the value that could be realized upon the sale of that security.
Opening and Adding to Your Account
You
can invest in the Fund by mail, wire transfer, and through participating financial service professionals. After you have established your account and made your first purchase, you may also make subsequent purchases by telephone, online at
www.fairholmefunds.com or through an automatic investment plan. Any questions you may have can be answered by calling Shareholder Services at 1-866-202-2263.
To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person
who opens an account.
As requested on the account application (Application), you must supply your full name,
date of birth, social security number or taxpayer identification number, and permanent street address. Mailing addresses containing only a P.O. Box will not be accepted. For certain entities opening an account, such as trusts, estates, corporations,
partnerships or other organizations, identifying documentation is required. If you need additional assistance when completing the Application, please call 1-866-202-2263 and a representative from Shareholder Services will help you.
The Fund may accept or reject an account without explanation. If the Fund has questions about your identity or the identity of any entity
seeking to open an account, it may disallow transactions for the account until confirming information is received. The Fund reserves the right to close any account within five business days if requested information or documentation is not received,
or if an identity is not verified. The Fund will not be responsible for any losses or damages (including lost investment opportunities) resulting from any restriction placed upon your account or for closing your account. By opening an account, you
acknowledge and agree to comply with these procedures, and accept responsibility for any losses or damages resulting from their implementation.
8
Purchasing Shares by Mail
To make your initial investment in the Fund, complete the Application, make a check payable to The Fairholme Focused Income Fund, and mail
the completed Application and check to:
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U.S. Mail:
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Fairholme Funds, Inc.
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c/o BNY Mellon Investment Servicing (US) Inc.
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P.O. Box 9692
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Providence, Rhode Island 02940-9692
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Overnight:
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Fairholme Funds, Inc.
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c/o BNY Mellon Investment Servicing (US) Inc.
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4400 Computer Drive
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Westborough, Massachusetts 01581-1722
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The Fund and its service providers do not consider the U.S. Postal Service or other independent
delivery services to be their agents and take no responsibility for their actions.
To make subsequent purchases, make a check
payable to The Fairholme Focused Income Fund and mail the check to the above-mentioned address. On the check, be sure to include your name and account number.
Purchasing Shares by Wire Transfer
Before you wire funds for an initial investment, the Funds transfer agent, BNY Mellon Investment Servicing (US) Inc. (the
Transfer Agent), must have received a completed Application with respect to your investment. You may send an Application to the Transfer Agent by mail or overnight delivery service. If you plan to wire funds on the same day you open your
account, the Fund may accept a fax copy of the Application; however, the Transfer Agent will still require the original Application. Upon receipt of your completed Application, the Transfer Agent will establish an account for you and assign an
account number.
Prior to sending wire transfers, please contact Shareholder Services at 1-866-202-2263 for specific
wiring instructions and to facilitate prompt and accurate credit upon receipt of your wire.
Wired funds must be received
prior to the close of regular trading on the NYSE (currently 4:00 p.m., Eastern Time), to be eligible for same day pricing. The Fund and its service providers are not responsible for any consequences of delays resulting from the banking or Federal
Reserve wire systems, or from incomplete wiring instructions.
Purchasing Shares Through Financial
Service Organizations
Certain financial service organizations, including broker-dealers, investment advisers, and
banks (collectively, Financial Service Organizations), have made arrangements with the Fund so that an investor may purchase, redeem or exchange Fund shares through such organizations. In certain situations, a Financial Service
Organization may designate another financial entity or agent to receive purchase, redemption or exchange orders relating to Fund shares. The Fund will be deemed to have received purchase, redemption or exchange instructions when the Financial
Service Organization or its agent receives the instructions, provided that the instructions are in Proper Form (as defined in the subsection in this Prospectus entitled Buying and Selling Shares of the Fund-Investing in the Fund,
Miscellaneous Purchase Information), and have been transmitted in a timely manner. Orders transmitted through Financial Service Organizations that are received prior to the close of regular trading on the NYSE (currently 4:00 p.m., Eastern
Time), will be priced at the Funds per share NAV next calculated following the close of regular trading on that day. If you are a client of a Financial Service Organization, such organization may charge a separate transaction fee or a fee for
administrative services in connection with investments in the Fund and may impose different account minimums and other requirements. These fees and requirements would be in addition to those imposed by the Fund. The minimum subsequent investment
amounts with respect to the Fund may be waived for subsequent investments made through omnibus account arrangements.
If you
are investing through a Financial Service Organization, please refer to its program materials for any additional special provisions or conditions that may be different from those described in this Prospectus. (For example, some or all of the
services and privileges described may not be available to you.) Financial Service Organizations have the responsibility for transmitting purchase orders and funds, facilitating exchanges between shares of the Fund and shares of the other two series
of the Company, The Fairholme Fund and The Fairholme Allocation Fund, and crediting the Financial Service Organizations customers accounts following redemptions, in a timely manner in accordance with their customer agreements and this
Prospectus. If for any reason your Financial Service Organization is not able to accommodate your purchase request, please call Shareholder Services at 1-866-202-2263 to find out how you can purchase Fund shares.
At its own expense, the Manager pays certain Financial Service Organizations fees for providing distribution and distribution-related
services and/or for performing certain administrative and shareholder servicing functions for the benefit of Fund shareholders. These payments can create an incentive for Financial Service Organizations to recommend the purchase of Fund shares over
other investment opportunities. In addition, at its own expense, the Manager pays the distributor of the Funds shares a fee in connection with its services.
9
Purchasing Shares Through Automatic Investment Plan
Subsequent to your initial investment, you may make additional purchases at regular intervals through the Automatic Investment Plan (the
AIP). The AIP provides a convenient method to have money deducted directly from your checking or savings account for investment in shares of the Fund. In order to participate in the AIP, your financial institution must be a member of the
Automated Clearing House (ACH) network; however, the account being debited may not be a mutual fund or pass through account. Each purchase under the AIP must be a minimum of $250 per month. If your bank rejects your payment,
the Transfer Agent will charge a fee, currently $25, to your account. To begin participating in the AIP, please complete the AIP section on the Application or call Shareholder Services at 1-866-202-2263. Any request to change or terminate your AIP
should be submitted to the Transfer Agent at least five business days prior to your desired effective date. The Fund may alter, modify, amend or terminate the AIP at any time, and will notify you at least 30 days in advance if it does so.
Purchasing Shares by Telephone
To purchase shares by telephone, an account authorizing such purchases must be established prior to your call. Your initial purchase of
Fund shares may not be made by telephone. Each telephone purchase of Fund shares must be for a minimum of $2,500 for regular accounts and $1,000 for IRA accounts. Shares purchased by telephone will be purchased at the per share NAV next
determined after the Transfer Agent receives the purchase order. Please call Shareholder Services at 1-866-202-2263 for further details.
You may make telephone purchases if you have an account at a bank that is a member of the ACH network. Most transfers are completed within two business days of your call. To preserve flexibility, the
Company may revise or eliminate the ability to purchase Fund shares by phone, or may charge a fee for such service, although the Company does not currently expect to charge such a fee.
Purchasing Shares Online
To purchase
shares online, an account authorizing such purchases must be established prior to your first transaction. Your initial purchase of shares may not be made online. Each online purchase of Fund shares must be for a minimum of $2,500 for regular and
$1,000 for IRA accounts. Shares purchased online will be purchased at the per share NAV next determined after the Transfer Agent receives the purchase order. Please call Shareholder Services at 1-866-202-2263 for further details.
You may make online purchases if you have an account at a bank that is a member of the ACH network. Most transfers are completed within
two business days of your call. To preserve flexibility, the Company may revise or eliminate the ability to purchase Fund shares online. See the sub-section of this Prospectus titled General Information Transacting in Shares by
Telephone or Online below.
Miscellaneous Purchase Information
The Fund reserves the right to refuse to accept any Application or any purchase order. The Manager may waive the minimum investment
amounts in its discretion. Purchase orders will not be accepted unless they are in Proper Form. Proper Form, with respect to purchase orders, generally means that an acceptable form of payment must accompany the purchase
order, and the purchase order must currently include:
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(1)
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Your name and account number;
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(3)
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The name of the Fund in which you wish to purchase shares (i.e., The Fairholme Focused Income Fund);
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(4)
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The number of shares to be purchased or the dollar value of the amount to be purchased;
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(5)
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Any required signatures of all account owners exactly as they are registered on the account;
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(6)
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Any required signatures, medallion guaranteed; and
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(7)
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Any supporting legal documentation that is required in the case of estates, trusts, corporations, or partnerships, and certain other types of
accounts.
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Proper Form requirements may be modified to reflect appropriate regulations, industry
practices or other requirements of the Fund. Acceptable forms of payment include: wire transfer from, or check drawn on, a U.S. bank, savings and loan association or credit union. All checks must be in U.S. dollars. The Fund will not accept payment
in cash or money orders. The Fund does not accept cashier checks in amounts of less than $10,000. To prevent check fraud, the Fund will not accept third party checks, Treasury checks, credit card checks, travelers checks or starter checks for
the purchase of Fund shares. The Fund is unable to accept post-dated checks, post-dated online bill pay checks, or any conditional order or payment.
The Transfer Agent will charge a fee, currently $25, against a shareholders account, in addition to any loss sustained by the Fund, for any payment that is returned. It is the policy of the Fund to
not accept Applications or purchase orders under certain circumstances or in amounts considered disadvantageous to shareholders. The Fund reserves the right to reject any Application.
A purchase order placed with the Transfer Agent in Proper Form received on a business day prior to the close of regular trading on the
NYSE (currently 4:00 p.m., Eastern Time), will be processed on the day it is received. A purchase order in Proper Form received after the close of regular trading on the NYSE (currently 4:00 p.m., Eastern Time), will be processed on the following
business day.
10
If you place an order to purchase Fund shares through a securities broker or
intermediary and you place your order in Proper Form before the close of regular trading on the NYSE (currently 4:00 p.m., Eastern Time), on any business day in accordance with its procedures, your order will be processed at the NAV per share next
calculated following the close of regular trading on the NYSE that day, provided that the securities broker or intermediary transmits your order to the Transfer Agent in a timely manner in accordance with the rules established by the Fund and
current regulatory requirements. The securities broker or intermediary must send to the Transfer Agent immediately available funds in the amount of the purchase price within one business day of placing the order.
After you have established your account and made your first purchase, you may also make subsequent purchases by telephone or online.
Please note that all telephone orders are subject to verification.
Consistent with current regulatory requirements, it is
permissible for financial intermediaries and retirement plan record keepers to aggregate mutual fund orders received prior to the close of regular trading on the NYSE (currently 4:00 p.m., Eastern Time), and transmit them to the Transfer Agent after
4:00 p.m., Eastern Time.
Policies Regarding Frequent Trading of Fund Shares
In the opinion of the Manager and the Board, short-term trading of Fund shares creates risks for the Fund and its shareholders, including
disruptions in carrying out the Funds investment strategies, increases in administrative and transactions costs, and potential dilution from traders successful at seeking short-term profits.
A portion of the Funds portfolio may be allocated to investments in foreign securities and such allocation may cause the Fund to be
susceptible to short-term trading strategies. This is because foreign securities are typically traded on markets that close before the time that the Fund calculates its NAV, typically at 4:00 p.m., Eastern Time, which gives rise to the possibility
that developments may have occurred in the interim that would affect the value of these securities. The time zone differences among international stock markets can allow a shareholder engaging in a short-term trading strategy to exploit differences
in Fund share prices that are based on closing prices of foreign securities established some time before the Fund calculates its own share price. It is intended that the use of the Companys fair value pricing procedures will result in
adjustments to closing market prices of foreign securities that reflect what is believed to be the fair value of those securities at the time the Fund calculates its NAV. The Fund expects, but there can be no guarantee, that the use of fair value
pricing, in addition to the market timing policies discussed below, will significantly reduce a shareholders ability to engage in strategies that are detrimental to other Fund shareholders.
The ability to detect and curtail excessive trading practices may be limited by operational systems and technological limitations. In
addition, the Fund receives purchase, exchange, and redemption orders through financial intermediaries and cannot always know or reasonably detect excessive trading that may be facilitated by these financial intermediaries or by the use of omnibus
account arrangements offered by these financial intermediaries to investors. Omnibus account arrangements are common forms of holding shares of the Fund, particularly among certain financial intermediaries, such as brokers and retirement plans.
These arrangements often permit the financial intermediary to aggregate its clients transactions and ownership positions. In these circumstances, the identity of the shareholders often is not known to the Fund The Fund has entered into
agreements with financial intermediaries to ensure that comparable surveillance and reporting procedures are applied by such financial intermediaries to omnibus accounts as will be applied to non-omnibus accounts. However, there is no guarantee that
the reporting and surveillance procedures will be the same across all financial intermediaries or that they will be successful in detecting abusive market timing practices.
The Company has adopted policies and procedures with respect to market timing and the frequent purchase and redemption of Fund shares. Under these policies and procedures, the Fund will rely on the Chief
Compliance Officer of the Company to work in conjunction with the Transfer Agent (or another agent of the Fund) to monitor trading patterns that may constitute abusive market timing activities. The Chief Compliance Officer will make the final
determination regarding whether a particular trading pattern constitutes abusive market timing. If the Chief Compliance Officer determines that impermissible market timing has occurred, future purchases may be restricted or prohibited. However,
sales of Fund shares back to the Fund or redemptions will continue as permitted by the terms disclosed in this Prospectus.
HOW TO SELL (REDEEM) YOUR SHARES
You may sell your shares at any time. You may request the sale of your shares either by mail, by telephone or online at
www.fairholmefunds.com. See the sub-section of this Prospectus titled General Information Transacting in Shares by Telephone or Online below.
Proper Form with respect to redemption requests currently means that the redemption requests must generally include:
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(1)
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Your name and account number;
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(2)
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The name of the Fund from which you wish to redeem shares (i.e., The Fairholme Focused Income Fund);
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(3)
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The number of shares to be redeemed or the dollar value of the amount to be redeemed;
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11
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(4)
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All required signatures of all account owners exactly as they are registered on the account;
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(5)
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Any required signatures, medallion guaranteed; and
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(6)
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Any supporting legal documentation that is required in the case of estates, trusts, corporations, or partnerships, and certain other types of
accounts.
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Proper Form requirements may be modified to reflect appropriate regulations, industry
practices or other requirements of the Fund or the Transfer Agent. A redemption order placed with the Transfer Agent in Proper Form received prior to the close of regular trading on the NYSE (currently 4:00 p.m., Eastern Time), will be processed on
the day it is received. A redemption order in Proper Form received on a business day after the close of regular trading on the NYSE (currently 4:00 p.m., Eastern Time), will be processed on the following business day. The redemption price you
receive will be the Funds per share NAV next calculated after receipt of the redemption request in Proper Form.
If you
place an order to redeem Fund shares through a securities broker or intermediary and you place your order in Proper Form before the close of regular trading on the NYSE (currently 4:00 p.m., Eastern Time), on any business day in accordance with its
procedures, your order will be processed at the NAV per share next calculated following the close of regular trading on the NYSE that day, provided that the securities broker or intermediary transmits your order to the Transfer Agent in a timely
manner in accordance with the rules established by the Fund and current regulatory requirements.
Payment of redemption
proceeds will generally be made within three business days of the valuation date unless otherwise expressly agreed by the parties at the time of the transaction. If you purchase your shares by check and then redeem your shares before your check has
cleared, the Fund may hold your redemption proceeds until your check clears or for 15 days, whichever comes first.
Selling Shares by Mail
Sale requests should be mailed via U.S. mail or overnight courier service to:
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U.S. Mail:
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Fairholme Funds, Inc.
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c/o BNY Mellon Investment Servicing (US) Inc.
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P.O. Box 9692
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Providence, Rhode Island 02940-9692
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Overnight:
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Fairholme Funds, Inc.
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c/o BNY Mellon Investment Servicing (US) Inc.
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4400 Computer Drive
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Westborough, Massachusetts 01581-1722
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The Fund and its service providers do not consider the U.S. Postal Service or other independent
delivery services to be their agents and take no responsibility for their actions.
Signature Guarantee
Requirements
A medallion signature guarantee is required to redeem shares in the following situations:
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If ownership is changed on your account;
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When redemption proceeds are sent to any person, address or bank account not on record;
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Written requests to wire redemption proceeds (if not previously authorized on the account);
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When establishing or modifying certain services on an account;
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If a change of address was received by the Transfer Agent within the last 15 days; or
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For all redemptions in excess of $50,000 from any shareholder account.
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In addition to the situations described above, each of the Fund and the Transfer Agent reserves the right to require a medallion signature
guarantee in other instances based on the circumstances relative to the particular situation.
Selling
Shares by Telephone
If you elected to use telephone redemption on your Application when you initially purchased shares
(or subsequently, in accordance with the Funds and the Transfer Agents procedures for doing so), you may redeem up to a $50,000 value of Fund shares by calling Shareholder Services at 1-866-202-2263. Investors may have a check sent to
the address of record, proceeds may be wired to a shareholders bank account of record, or funds may be sent via electronic funds transfer through the ACH network to the bank account of record. Wires are currently subject to a $15 fee. There is
no charge if redemption proceeds are sent via the ACH system and credit is generally available within three business days. If a request has been made to change the address of the account and was received by the Fund or the Transfer Agent within 15
days of the redemption request, you may not redeem by telephone. Once a telephone transaction has been placed, it cannot be canceled or modified.
The Transfer Agent employs certain procedures designed to confirm that instructions communicated by telephone are genuine. Such procedures may be modified from time to time and may include requiring some
form of personal identification prior to
12
acting upon telephonic instructions, providing written confirmations of all such transactions, and/or tape recording all telephonic instructions. Assuming procedures such as the above have been
followed, neither the Fund nor the Transfer Agent will be liable for any loss, cost or expense for acting upon telephone instructions that are believed to be genuine. The Company shall have the authority, as your agent, to redeem shares in your
account to cover any such loss. As a result of this policy, you will bear the risk of any loss unless the Fund failed to follow procedures such as those outlined above. If the Fund failed to follow such procedures, it may be liable for losses that
result from such failure.
Selling Shares Online
If you elected to establish online account access, you may redeem Fund shares up to $50,000 in value by visiting the Funds website
at www.fairholmefunds.com. Investors may have a check sent to the address of record, proceeds may be wired to a shareholders bank account of record, or funds may be sent via electronic funds transfer through the ACH network to the bank account
of record. Wires are subject to a fee, currently $15. There is no charge if redemption proceeds are sent via the ACH system and credit is generally available within three business days. If a request has been made to change the address of the account
and was received by the Fund or the Transfer Agent within 15 days of the redemption request, you may not redeem online via check to the address of record. Once an online transaction has been placed, it cannot be canceled or modified.
The Transfer Agent employs certain procedures designed to confirm that instructions communicated online are genuine. Such procedures may
be modified from time to time and may include requiring some form of personal identification prior to acting upon online instructions and providing written confirmations of all such transactions. Assuming procedures such as the above have been
followed, neither the Fund nor the Transfer Agent will be liable for any loss, cost or expense for acting upon online transactions that are believed to be genuine. The Company shall have the authority, as your agent, to redeem shares in your account
to cover any such loss. As a result of this policy, you will bear the risk of any loss unless the Fund has failed to follow procedures such as those outlined above. If the Fund fails to follow such procedures, it may be liable for losses that result
from such failure. Please call Shareholder Services at 1-866-202-2263 for further details.
Wiring
Redemption Proceeds
You may request that the redemption proceeds be wired to your designated bank if it is a member bank
or a correspondent of a member bank of the Federal Reserve System. Wires are subject to a fee, currently $15.
Redemption at the Option of the Fund
If the value of the shares in your account falls below $2,000, the Fund may
notify you that, unless your account is increased to $2,000 in value, it will redeem all of your shares and close the account by paying you the redemption proceeds and any dividends and distributions declared and unpaid at the date of redemption.
You will have 30 days after notice to bring the account up to $2,000 before any action is taken. This right of redemption shall not apply if the value of your account drops below $2,000 as the result of market action. The Fund also reserves the
right to cause the redemption of any shareholder if it believes that continued ownership of Fund shares by such shareholder may adversely affect the Fund or its other shareholders.
Redemptions In-Kind
The Fund reserves
the right to satisfy a redemption request by distributing portfolio securities. The Fund has committed pursuant to its Rule 18f-1 election to pay redeeming shareholders in cash for all redemptions less than $250,000 or 1% of the NAV of the Fund
within any 90-day period.
Exchange Privileges
Shareholders may exchange Fund shares for shares of the other series of the Company, The Fairholme Fund and The Fairholme Allocation Fund,
subject to the minimum investment requirements of the fund for which shares are to be exchanged. Requests to exchange shares can be made in writing, by phone or online. The Fund and the Transfer Agent employ procedures, including providing written
confirmations, reasonably designed to ensure the genuineness of instructions received from any person with appropriate account information. If the Fund or the Transfer Agent fail to employ such procedures, they may be liable for losses due to
unauthorized or fraudulent instructions. Exchange redemptions and purchases are processed simultaneously at the share prices next determined after the exchange order is received. The Fund reserves the right to reject any exchange order. Exchanges
generally have the same tax consequences as ordinary sales and purchases.
INCOME
DIVIDENDS AND DISTRIBUTIONS
Income dividends paid by the Fund are derived from the Funds net investment income.
The Fund intends to declare and pay net investment income distributions (if any) quarterly in March, June, September and December. The Funds net investment income is generally made up of interest accrued and paid on debt obligations held in
the Funds portfolio and dividends received from any preferred stocks held in the Funds portfolio.
The Fund
realizes capital gains when it sells a security for more than it paid and a capital loss when it sells a security for less than it paid. The Fund intends to make distributions of its net realized capital gains (after any reductions for capital loss
carry forwards) annually, if required.
13
Unless you elect in writing to have your dividends and distributions paid in cash, your
dividends and distributions will be reinvested in additional shares of the Fund. You may change the manner in which your dividends and distributions are paid at any time by writing to the Transfer Agent.
TAX CONSIDERATIONS
The Fund intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, so as to be relieved of federal income tax on its capital gains and net
investment income currently distributed to its shareholders.
Dividends from investment income and distributions of net
short-term capital gains are generally taxable to you as ordinary income. Distributions attributable to qualified dividend income received by the Fund may be eligible for preferential tax rates. Distributions of capital gains are taxable based on
the Funds holding period, either shortor long-term, regardless of the length of time that you have held shares in the Fund. Dividends and distributions are generally taxable, whether you receive them in cash or they are reinvested in
additional shares of the Fund.
For federal income tax purposes, you will be advised annually as to the types of dividends and
distributions paid by the Fund.
A redemption or exchange of Fund shares is a taxable event and, accordingly, a capital gain or
loss may be recognized. You are encouraged to consult a tax adviser regarding the effect of federal, state, local, and foreign taxes on an investment in the Fund.
Cost Basis Reporting.
As part of the Energy Improvement and Extension Act of 2008, mutual funds are required to report to the Internal Revenue Service (IRS) the cost
basis of shares acquired by a shareholder on or after January 1, 2012 (covered shares) and subsequently redeemed. These requirements do not apply to investments through a tax-deferred arrangement, such as a 401(k) plan or
an individual retirement plan. The cost basis of a share is generally its purchase price adjusted for dividends, return of capital, and other corporate actions. Cost basis is used to determine whether a sale of the shares results in a gain
or loss. If you redeem covered shares during any year, then the Fund will report the cost basis of such covered shares to the IRS and you on Form 1099-B.
The Fund will permit you to elect from among several IRS-accepted cost basis methods to calculate the cost basis of your covered shares. If you do not affirmatively elect a cost basis method, then the
Funds default cost basis calculation method, which is currently the Average Cost method, will be applied to your account(s). The cost basis method elected or applied may not be changed after the settlement date of a sale of Fund shares.
If you hold Fund shares through a broker (or another nominee), please contact that broker (nominee) with respect to the
reporting of cost basis and available elections for your account.
You are encouraged to consult your tax advisor
regarding the application of the cost basis reporting rules and, in particular, which cost basis calculation method you should elect.
GENERAL INFORMATION
Transacting in
Shares by Telephone or Online.
Your ability to purchase, sell or exchange shares, or to otherwise communicate about the Fund, Fund shares or your account, by telephone or online is dependent on the equipment, software, systems, data, and
services provided by various third parties. You should be aware that the Internet is an unsecured, unstable, and unregulated environment. The Fund cannot guarantee that any communication transmitted or transaction conducted by telephone or online
will be completely secure. In addition, there may be delays, malfunctions or other disruptions. If this occurs, or if a telephone number or website is unavailable to transact in shares of the Fund, you should use another method described in this
Prospectus to complete the transaction.
None of the Fund, any of its affiliates or the Transfer Agent will be liable for any
delays or malfunctions or for unauthorized interception or access to communications or account information, provided the Fund and its service providers have followed their respective procedures addressing telephone and online privileges. In
addition, none of the Fund, any of its affiliates or the Transfer Agent will be liable for any loss, liability, cost or expense for following instructions communicated by telephone or through the Internet, including fraudulent or unauthorized
instructions, provided that the Fund or its service provider accepting the instructions reasonably believes the instructions were genuine.
Electronic Delivery of Documents.
Electronic copies of account statements, prospectuses, privacy notices, and annual and semi-annual reports are available through the Funds website.
Shareholders can sign up for electronic delivery of such documents by enrolling in the Funds electronic delivery program. To enroll, please visit www.fairholmefunds.com, click on the GO DIRECT tab and follow the instructions. If
you need assistance, call Shareholder Services at 1-866-202-2263.
Share Certificates.
The Fund will not issue
certificates evidencing ownership of shares. Instead, your account will be credited with the number of shares purchased, relieving you of responsibility for safekeeping of certificates, and the need to deliver them upon redemption. Written
confirmations are issued for all share transactions.
14
Performance Comparisons and Other Information.
In reports or other
communications to investors, or in advertising material, the Fund may describe general economic and market conditions affecting the Fund and may compare its performance with other mutual funds as listed in the rankings prepared by nationally
recognized rating services and financial publications that monitor mutual fund performance. The Fund may also, from time to time, compare its performance to one or more appropriate market or economic indices. Publications other than those
distributed by the Fund may contain comparisons of the Funds performance to the performance of various indices and investments for which reliable data is widely available. These publications may also include averages, performance rankings or
other information prepared by recognized organizations providing mutual fund statistics. The Fund is not responsible for the accuracy of any data published by third party organizations.
Codes of Ethics.
The Board has approved the Codes of Ethics (Codes) of the Company and the Manager concerning the
trading activities of certain personnel. The Board is responsible for overseeing the implementation of the Companys Code. The Codes govern investment personnel who may have knowledge of the investment activities of the Fund. The Codes require
these investment personnel to file regular reports concerning their personal securities transactions and prohibit certain activities that might result in harm to the Fund. The Company and the Manager have filed copies of their respective Codes with
the SEC. Copies of the Codes may be reviewed and copied at the SECs Public Reference Room in Washington, DC. The Codes are also available on the SECs EDGAR database at the SECs website (www.sec.gov). Copies may be obtained, after
paying a duplicating fee, by electronic request (publicinfo@sec.gov) or by writing the SECs Public Reference Section, Washington, DC 20549-1520.
Anti-Money Laundering Procedures.
The Board has approved procedures designed to prevent and detect attempts to launder money as required under the USA PATRIOT Act. The day-to-day
responsibility for monitoring and reporting any such activities has been delegated to the Transfer Agent, subject to the oversight and supervision of the Board.
Identity Theft Procedures.
The Board has approved procedures designed to prevent and detect identity theft. The day-to-day responsibility for monitoring and reporting any such activities has
been delegated to the Transfer Agent, subject to the oversight and supervision of the Board.
Proxy Voting Policies and
Procedures.
The Company has adopted proxy voting policies and procedures under which the Company votes proxies relating to securities held by the Fund (Proxy Voting Policy). The Companys primary consideration in its Proxy
Voting Policy is the financial interest of the Fund and its shareholders. The Proxy Voting Policy is included as an exhibit to the SAI, which is available upon request and without charge by calling Shareholder Services at 1-866-202-2263.
Information regarding how proxies related to the Funds portfolio holdings were voted during the 12-month period ending
June 30th will be available, without charge, upon request by calling Shareholder Services at 1-866-202-2263, and on the SECs website at www.sec.gov.
Portfolio Holdings Disclosure Policy.
The Company has established a policy with respect to the disclosure of the Funds portfolio holdings. A description of this policy is provided in the
SAI.
Notice Regarding Unclaimed Property.
If no activity occurs in your account within the time period
specified by applicable state law, your property may be transferred to the appropriate state.
15
FINANCIAL HIGHLIGHTS
The Financial Highlights table is intended to help you understand the Funds financial performance for the period from commencement
of operations (December 31, 2009) through the fiscal year ended November 30, 2012. Certain information reflects financial results for a single share. The total return in the table represents the rate that an investor would have earned on an
investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by the Funds independent registered public accounting firm, whose report, along with the Funds financial statements, is
included in the Funds annual report, which is available upon request.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year
Ended
November 30, 2012
|
|
|
For the Fiscal Year
Ended
November 30, 2011
|
|
|
For the Period
From Commencement
of Operations
(December 31,
2009)
Through November 30, 2010
|
|
Net Asset Value,
Beginning of Period
|
|
|
$9.71
|
|
|
|
$10.70
|
|
|
|
$10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
(1)
|
|
|
0.97
|
|
|
|
0.64
|
|
|
|
0.45
|
|
Net Realized and Unrealized Gain (Loss) on Investments
|
|
|
0.31
|
|
|
|
(0.95
|
)
|
|
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from Investment Operations
|
|
|
1.28
|
|
|
|
(0.31
|
)
|
|
|
0.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
From Net Investment Income
|
|
|
(0.97
|
)
|
|
|
(0.64
|
)
|
|
|
(0.20
|
)
|
From Realized Capital Gains
|
|
|
|
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Dividends and Distributions
|
|
|
(0.97
|
)
|
|
|
(0.68
|
)
|
|
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Asset Value, End of Period
|
|
|
$10.02
|
|
|
|
$9.71
|
|
|
|
$10.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return
|
|
|
13.45
|
%
|
|
|
(3.24
|
)%
|
|
|
9.05
|
%
(2)
|
Ratios/Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets, End of Period (in 000s)
|
|
|
$257,430
|
|
|
|
$299,224
|
|
|
|
$364,235
|
|
Ratio of Expenses to Average Net Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Expenses Waived
|
|
|
1.00
|
%
|
|
|
1.00
|
%
|
|
|
1.00
|
%
(3)
|
After Expenses Waived
|
|
|
0.91
|
%
|
|
|
0.67
|
%
|
|
|
0.50
|
%
(3)
|
Ratio of Net Investment Income to Average Net Assets
|
|
|
9.53
|
%
|
|
|
5.96
|
%
|
|
|
4.69
|
%
(3)
|
Portfolio Turnover Rate
|
|
|
8.27
|
%
|
|
|
91.67
|
%
|
|
|
77.03
|
%
(2)
|
(1)
Based on average shares outstanding.
16
APPENDIX A
BOND RATINGS
Moodys Investors Service, Inc.
Aaa
Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.
Aa
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A
Obligations rated A are considered upper-medium grade and are subject to low credit risk.
Baa
Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess
certain speculative characteristics.
Ba
Obligations rated Ba are judged to have speculative elements and are subject
to substantial credit risk.
B
Obligations rated B are considered speculative and are subject to high credit risk.
Caa
Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.
Ca
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery
of principal and interest.
C
Obligations rated C are the lowest rated class and are typically in default,
with little prospect for recovery of principal or interest.
Absence of Rating
When no rating has been
assigned or where a rating has been withdrawn, it may be for reasons unrelated to the creditworthiness of the issue. Should no rating be assigned, the reason may be one of the following:
|
(a)
|
An application for rating was not received or accepted.
|
|
(b)
|
The issue or issuer belongs to a group of securities or entities that are not rated as a matter of policy.
|
|
(c)
|
There is a lack of essential data pertaining to the issue or issuer.
|
|
(d)
|
The issue was privately placed, in which case the rating is not published in Moodys publications.
|
Withdrawal may occur if new and material circumstances arise, the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a bond is called for redemption; or for other reasons.
Note
Moodys appends numerical modifiers, 1, 2 and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Standard & Poors Ratings Services
AAA
The
obligor has an extremely strong capacity to meet financial commitments. This is the highest rating assigned by S&P.
AA
The obligor has a very strong capacity to meet financial commitments and differs from the highest-rated obligations
only to a small degree.
A
The obligor has a strong capacity to meet financial commitments, but is somewhat
more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories.
BBB
The obligor exhibits adequate protection parameters; however, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to
meet its financial commitments.
BB; B; CCC; CC; and C
Obligations rated
BB, B, CCC, CC, and C are
regarded as having significant speculative characteristics. Although such obligations will likely have some quality and protective attributes, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB
The obligor is less vulnerable to nonpayment than other speculative issues, but faces major ongoing
uncertainties or exposure to adverse business, financial, and economic conditions which may lead to the obligors inadequate capacity to meet its financial commitments.
B
The obligor is more vulnerable to nonpayment, but currently has the capacity to meet its financial commitments. Adverse business, financial, and economic conditions will likely impair
the obligors capacity or to meet its financial commitments.
CCC
An obligation rated CCC is currently
vulnerable and dependent upon favorable business, financial, and economic conditions to meet financial commitments. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its
financial commitments.
17
CC
An obligation rated CC is currently highly vulnerable.
C
A rating of C is assigned to obligations that are currently highly vulnerable to nonpayment, obligations that have
payment arrearages, or obligations of an issuer that is the subject of a bankruptcy petition or similar action which have no experienced a payment on default. The C rating may be given to subordinated debt, preferred stock or obligations on which
cash payments have been suspended in keeping with the instruments terms or when preferred stock is the subject of a distressed change offer.
D
An obligation rated D is in payment default. The rating is used when payments on an obligation are not made on the date due, unless S&P believes that such payments will be made
within five business days. The D rating will be used upon the filing of a bankruptcy petition or taking of similar action and upon completion of a distressed exchange offer.
Plus (+) or Minus ()
The ratings from AA to CCC may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
NR
This indicates that no rating has been
requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular obligation as a matter of policy.
18
|
|
|
You can register for e-mail delivery of important Fund documents, including the SAI, shareholder reports, and other information, instead of receiving documents through the
mail. By registering for E-Delivery, you will receive e-mail notifications immediately when shareholder documents become available online. Sign up today at www.fairholmefunds.com, or by contacting your financial advisor.
|
|
|
FOR MORE INFORMATION
Additional information regarding the Funds investment strategies, policies, service providers, and other matters is included in the SAI. The
SAI, dated , 2013, has been filed with the SEC and is incorporated by reference into this Prospectus.
Additional information about the Funds investments is available in the Funds annual and semi-annual reports to shareholders, and the
Funds audited financial information is available in the Funds annual report to shareholders. In the annual report to shareholders, you will find a discussion of the market conditions and investment strategies that significantly affected
the Funds performance during the last fiscal year.
The SAI and the Funds annual and semi-annual reports to shareholders are
available, without charge, upon request. For shareholder inquiries, or to request a copy of the SAI, the annual report, the semi-annual report to shareholders or other information about the Fund, please contact the Company at:
FAIRHOLME FUNDS, INC.
c/o
BNY Mellon Investment Servicing (US) Inc.
P.O. Box 9692 Providence, Rhode Island 02940-9692
1.866.202.2263
A copy of the
requested document(s) will be mailed to you within three business days after the receipt of your request. The SAI, annual report, and semi-annual report to shareholders are also available at
www.fair
holmefunds.com
.
Information about the Fund (including the SAI) can also be reviewed and copied at the SECs Public Reference Room in Washington, DC.
Information concerning the operation of the Public Reference Room may be obtained by calling the SEC at 1.202.551.8090. Reports and other information about the Fund are also available on the EDGAR Database on the SECs website (www.sec.gov).
Copies of this information can be obtained, after paying a duplicating fee, by electronic request (publicinfo@sec.gov), or by writing the SECs Public Reference Section, Washington, DC 20549-1520.
Investment Company Act No. 811-09607
THE FAIRHOLME FUND
Ticker: FAIRX
THE FAIRHOLME FOCUSED INCOME FUND
Ticker: FOCIX
THE FAIRHOLME ALLOCATION FUND
Ticker: FAAFX
STATEMENT OF ADDITIONAL INFORMATION
, 2013
Series of
FAIRHOLME FUNDS, INC.
(the Company)
4400 Biscayne Blvd.
Miami, FL 33137
TELEPHONE: 1-866-202-2263
Website: www.fairholmefunds.com
This Statement of Additional Information
(SAI) is not a prospectus and should be read in conjunction with the prospectus of each of The Fairholme Fund (The Fairholme Fund), The Fairholme Focused Income Fund (The Income Fund), and The Fairholme Allocation
Fund (The Allocation Fund), (each a Fund and collectively, the Funds), dated , 2013 (the Prospectus).
The audited financial statements of each Fund for the fiscal year ended November 30, 2012 are included in the Funds annual
reports to shareholders (the Annual Report). The Annual Report is incorporated into this SAI by reference. You may obtain a copy of the Prospectus and the Annual Report, free of charge, by writing to Fairholme Funds, Inc. c/o BNY Mellon
Investment Servicing (US) Inc., P.O. Box 9692, Providence, Rhode Island 02940-9692, by calling Fund Shareholder Services at 1-866-202-2263, or by visiting the Companys website: www.fairholmefunds.com.
1
TABLE OF CONTENTS
2
INTRODUCTION
The Company was incorporated in Maryland on October 8, 1999 and is registered with the Securities and Exchange Commission
(SEC) as an open-end management investment company under the Investment Company Act of 1940, as amended (1940 Act). The Company currently has three series, The Fairholme Fund, The Income Fund, and The Allocation Fund. All of
the Funds are described in this SAI.
The Fairholme Fund commenced operations on December 29, 1999. The Income Fund
commenced operations on December 31, 2009. The Allocation Fund commenced operations on December 31, 2010. Each Fund is non-diversified, which means that it may concentrate its investments in a smaller number of companies than a diversified
fund. Each Fund offers one class of shares.
The Companys Board of Directors (the Board or the
Directors) oversees the affairs of the Company. The Board has delegated the day-to-day management and operations of the Funds to Fairholme Capital Management, L.L.C. (the Manager).
INVESTMENT POLICIES AND SECURITIES AND INVESTMENT OPTIONS
Each Funds investment objective and principal investment strategies are detailed in the Prospectus. This section provides additional
information about the principal investment strategies and risks of the Funds as well as other investment strategies that the Funds may pursue and the risks associated therewith.
The following investment options apply to
all Funds
:
Asset-Backed Securities
. The Funds may invest in asset-backed securities. The securitization techniques used to develop
mortgage-related securities are being applied to a broad range of financial assets. Through the use of trusts and special purpose corporations, various types of assets, including automobile loans and leases, credit card receivables, home equity
loans, equipment leases, and trade receivables, are being securitized in structures similar to the structures used in mortgage securitizations. For example, the Funds may invest in collateralized debt obligations (CDOs), which include
collateralized bond obligations (CBOs), collateralized loan obligations (CLOs), and other similarly structured securities. CBOs and CLOs are types of asset-backed securities. A CBO is a trust, which is backed by a diversified
pool of high-risk, below investment grade fixed-income securities. A CLO is a trust typically collateralized by a pool of loans, which may include, among others, domestic and foreign senior secured loans, senior unsecured loans, and subordinate
corporate loans, including loans that may be rated below investment grade or equivalent unrated loans.
Asset-backed
securities are subject to risks associated with changes in interest rates, prepayment of underlying obligations, and default by borrowers. The risk of default includes a borrowers failure to make timely interest and principal payments when due
and to maintain the underlying collateral. In its capacity as purchaser of an asset-backed security, a Fund would generally have no recourse to the entity that originated the loans in the event of default by the borrower. Asset-backed securities may
be subject to greater risk of default during periods of economic downturn. Each type of asset-backed security also entails unique risks depending on the type of assets involved and the legal structure used. In some transactions, the value of the
asset-backed security is dependent on the performance of a third party acting as credit enhancer or servicer. Furthermore, in some transactions (such as those involving the securitization of vehicle loans or leases) it may be administratively
burdensome to perfect the interest of the security issuer in the underlying collateral and the underlying collateral may become damaged or stolen.
Cash Reserves
. Although the Funds will normally hold a focused portfolio of securities, the Funds are not required to be fully invested and may maintain a significant portion of their total
assets in cash and securities generally considered to be cash equivalents, including U.S. Government securities, money market funds, commercial paper, repurchase agreements, and other high quality money market instruments. From time to time, cash
and cash reserves may also include foreign securities, including short-term obligations of foreign governments or other high quality foreign money market instruments. The Funds and the Manager believe that a certain amount of liquidity in each
Funds portfolio is desirable to meet operating requirements and to take advantage of new investment opportunities. Under adverse market or other conditions, when a Fund is unable to find sufficient investment opportunities meeting its criteria
for investment, cash and cash reserves may comprise a large percentage of the Funds total assets. When a Fund holds a significant portion of its assets in cash and cash reserves, the Fund may not meet its investment objective and the
Funds performance may be negatively affected.
3
Common Stock
.
Shares of common stock represent units of ownership in a
corporation. Owners of common stock are typically entitled to vote on the selection of directors and other important matters as well as to receive dividends on their holdings (if applicable). In the event of liquidation of the corporation, the
claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock. Increases and decreases in earnings are usually reflected in a corporations stock price, so shares
of common stock generally have the greatest appreciation and depreciation potential of all corporate securities.
Convertible Securities
.
Traditional convertible securities include corporate bonds, notes, and preferred stock that
may be converted into or exchanged for common stock and/or other securities that also provide an opportunity for equity participation. These securities are generally convertible either at a stated price or a stated rate (that is, for a specific
number of shares of common stock or other security). As with other fixed-income securities, the price of a convertible security to some extent varies inversely with interest rates. While providing a fixed-income stream (generally higher in yield
than the income derivable from a common stock but lower than that afforded by a non-convertible debt security), a convertible security also affords the investor an opportunity, through its conversion feature, to participate in the capital
appreciation of the common stock into which it is convertible. As the market price of the underlying common stock declines, convertible securities tend to trade increasingly on a yield basis, and so may not experience market value declines to the
same extent as the underlying common stock. When the market price of the underlying common stock increases, the price of a convertible security tends to rise as a reflection of the value of the underlying common stock. To obtain such a higher yield,
the Funds may be required to pay for a convertible security an amount in excess of the value of the underlying common stock. Common stock acquired by a Fund upon conversion of a convertible security will generally be held for so long as such stocks
are anticipated to provide the Fund with opportunities that are consistent with the Funds investment objectives and policies.
Credit Default Swap Agreements
.
The buyer in a credit default swap contract is obligated to pay the seller a periodic stream of payments over the term of the
contract in return for a contingent payment upon the occurrence of a credit event with respect to an underlying reference obligation. Generally, a credit event means bankruptcy, failure to pay, obligation acceleration or restructuring. A Fund may be
either the buyer or seller in the transaction. If a Fund is a seller, the Fund receives a fixed rate of income throughout the term of the contract, which typically is between one month and ten years, provided that no credit event occurs. If a credit
event occurs, a Fund typically must pay the contingent payment to the buyer, which will be either (i) the par value (face amount) of the reference obligation, in which case the Fund will receive the reference obligation in return,
or (ii) an amount equal to the difference between the par value and the current market value of the reference obligation. The periodic payments previously received by the Fund, coupled with the value of any reference obligation received, may be
less than the full amount it pays to the buyer, resulting in a loss of value to the Fund. If a Fund is a buyer and no credit event occurs, the Fund will lose its periodic stream of payments over the term of the contract. However, if a credit event
occurs, the buyer typically receives the face amount for a reference obligation that may have little or no value.
Credit
default swaps may involve greater risks than if a Fund had invested in the reference obligation directly. Credit default swaps are subject to general market risk, liquidity risk, and credit risk.
Debt Securities
.
The Funds may invest in corporate and U.S. Government debt securities. Corporate debt securities
include debt obligations offered by public or private corporations either registered or unregistered. The market value of such securities may fluctuate in response to interest rates and the creditworthiness of the issuer. The Funds may invest in
debt securities that are non-investment grade or are in default.
U.S. Government debt securities include direct obligations
of the U.S. Government and obligations issued by U.S. Government agencies and instrumentalities. Although certain securities issued by the U.S. Government, its agencies or instrumentalities are backed by the full faith and credit of the U.S.
Government, others are supported only by the credit of that agency or instrumentality. There is no guarantee that the U.S. Government will provide support to such agencies or instrumentalities and such securities may involve risk of loss of
principal and interest. In addition, a security backed by the U.S. Treasury or the full faith and credit of the U.S. Government is guaranteed only as to the timely payment of interest and principal when held to maturity. The current market prices
for such securities are not guaranteed and will fluctuate. Certain U.S. Government agency securities or securities of U.S. Government-sponsored entities are backed by the right of the issuer to borrow from the U.S. Treasury, or are supported only by
the credit of the issuer or instrumentality. While the U.S. Government provides financial support to those U.S. Government-sponsored agencies or instrumentalities, no assurance can be given that it will always do so and those securities are neither
guaranteed nor issued by the U.S. Government. In the case of securities backed by the full faith and credit of the U.S. Government, shareholders are primarily exposed to interest rate risk.
4
Depository Receipts
.
American Depository Receipts, or ADRs, are
depository receipts typically issued by a U.S. bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. Global Depository Receipts, or GDRs, European Depository Receipts, or EDRs, and other types of
depository receipts are typically issued by non-U.S. banks or trust companies and evidence ownership of underlying securities issued by either a U.S. or a non-U.S. company. Generally, depository receipts in registered form are designed for use in
the U.S. securities markets, and depository receipts in bearer form are designed for use in securities markets outside of the United States. For purposes of determining the country of issuance, investments in depository receipts of either type are
deemed to be investments in the underlying securitie
s.
Depository receipts may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted. In addition, the issuers of the stock of unsponsored depository receipts are not obligated to disclose material information in the United States and, therefore, there may
not be a correlation between such information and the market value of the depository receipts.
Derivatives.
Each
Fund may, but is not required to, use derivatives for risk management purposes or as part of its investment strategies. Derivatives are financial contracts whose value depends on, or is derived from, the value of an underlying asset, reference rate
or index. A Fund may use derivatives to earn income and enhance returns, to hedge or adjust the risk profile of its portfolio, to replace more traditional direct investments, and to obtain exposure to otherwise inaccessible markets.
The Funds may invest in futures, options, and swaps. Derivatives may be (i) standardized, exchange-traded contracts or
(ii) customized, privately negotiated contracts. Exchange-traded derivatives tend to be more liquid and subject to less credit risk than those that are privately negotiated.
A Funds use of derivatives may involve risks that are different from, or possibly greater than, the risks associated with investing
directly in securities or other more traditional instruments. These risks include the risk that the value of a derivative instrument may not correlate perfectly, or at all, with the value of the assets, reference rates, or indexes that they are
designed to track. Other risks include: the possible absence of a liquid secondary market for a particular instrument and possible exchange-imposed price fluctuation limits, either of which may make it difficult or impossible to close out a position
when desired; the risk that adverse price movements in an instrument can result in a loss substantially greater than the Funds initial investment in that instrument (in some cases, the potential loss is unlimited); and the risk that the
counterparty will not perform its obligations.
The Funds may use the following types of derivatives.
|
|
|
Futures Contracts and Options on Futures Contracts.
A futures contract is a standardized, exchange-traded agreement that obligates the
buyer to buy and the seller to sell a specified quantity of an underlying asset (or settle for cash the value of a contract based on an underlying asset, rate or index) at a specific price on the contract maturity date. Options on futures contracts
are options that call for the delivery of futures contracts upon exercise. A Fund may purchase or sell futures contracts and options thereon to hedge against changes in interest rates, securities (through index futures or options) or currencies. A
Fund may also purchase or sell futures contracts for foreign currencies or options for non-hedging purposes as a means of making direct investments in foreign currencies.
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Options.
An option is an agreement that, for a premium payment or fee, gives the option holder (the buyer) the right but not the
obligation to buy (a call option) or sell (a put option) the underlying asset (or settle for cash an amount based on an underlying asset, rate or index) at a specified price (the exercise price) during a period of time or on
a specified date. Investments in options are considered speculative. A Fund may lose the premium paid for them if the price of the underlying security or other asset decreased or remained the same (in the case of a call option) or increased or
remained the same (in the case of a put option). If a put or call option purchased by a Fund were permitted to expire without being sold or exercised, its premium would represent a loss to the Fund. A Funds investments in options may include
the following:
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Options on Foreign Currencies.
A Fund may invest in options on foreign currencies that are privately negotiated or traded on U.S. or
foreign exchanges for hedging purposes to protect against declines in the U.S. dollar value of foreign
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currency denominated securities held by the Fund and against increases in the U.S. dollar cost of securities to be acquired. The purchase of an option on a foreign currency may constitute an
effective hedge against fluctuations in exchange rates, although if rates move adversely, a Fund may forfeit the entire amount of the premium plus related transaction costs. A Fund may also invest in options on foreign currencies for non-hedging
purposes as a means of making direct investments in foreign currencies.
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Options on Securities.
A Fund may purchase or write a put or call option on securities. A Fund will only exercise an option it purchased
if the price of the security was less (in the case of a put option) or more (in the case of a call option) than the exercise price. If a Fund does not exercise an option, the premium it paid for the option will be lost. Normally, a Fund will write
covered options (
i.e.
, an option for securities the Fund owns), but may write an uncovered call option for cross-hedging purposes.
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Options on Securities Indices.
An option on a securities index is similar to an option on a security except that, rather than taking or
making delivery of a security at a specified price, an option on a securities index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the chosen index is greater than (in the case of a
call) or less than (in the case of a put) the exercise price of the option.
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Swap Transactions.
A swap is an agreement that obligates two parties to exchange a series of cash flows at specified intervals (payment
dates) based upon or calculated by reference to changes in specified prices or rates for a specified amount of an underlying asset (the notional principal amount). Most swaps are entered into on a net basis (
i.e
., the two payment
streams are netted out, with a fund receiving or paying, as the case may be, only the net amount of the two payments). Payments received by a Fund from swap agreements will result in taxable income, either as ordinary income or capital gains. Except
for currency swaps, the notional principal amount is used solely to calculate the payment streams but is not exchanged. With respect to currency swaps, actual principal amounts of currencies may be exchanged by the counterparties at the initiation,
and again upon the termination, of the transaction.
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Foreign (Non-U.S.) Securities
. The Funds may
invest in securities of non-U.S. companies, including depository receipts and similar equity securities, corporate debt securities and short-term debt obligations of foreign governments, and other foreign money market instruments.
Short-term debt obligations of foreign governments acquired by The Fairholme Fund will generally have a maturity of six months or less
and a credit rating of A or better by Standard & Poors (S&P) or a similar rating by another nationally recognized statistical rating organization (NRSRO). Other debt securities of non-U.S.
companies may be purchased by The Fairholme Fund without regard to NRSRO ratings. See Credit Risk, Interest Rate Risk and Investment in High Yield Securities below for a description of the risks of investing in
debt and other fixed-income securities.
Investments in foreign companies involve certain risks not typically associated
with investing in domestic companies. An investment in a foreign company may be affected by changes in currency rates and in exchange control regulations. There may be less publicly available information about a foreign company than about a domestic
company and foreign companies may not be subject to the same degree of regulation as U.S. companies. Foreign companies, including foreign service providers used by the Funds in connection with these investments, generally are not subject to uniform
accounting, auditing, and financial reporting standards. Dividends and interest on foreign securities may be subject to foreign withholding taxes. Such taxes may reduce the net return to Fund shareholders. Foreign securities are often denominated in
a currency other than the U.S. dollar. Accordingly, the Funds will be subject to the risks associated with fluctuations in currency values. Fluctuations in the exchange rates between the U.S. dollar and foreign currencies may negatively affect the
value of a Funds investments in foreign securities. In connection with investments in foreign securities, there is the possibility of expropriation, confiscation, taxation, currency blockage, transaction processing delays or restrictions, or
political or social instability that could negatively affect the Funds and the value of an investment in the Funds.
Illiquid and Restricted Securities
. Each Fund may not invest more than 15% of its net assets in illiquid securities. A security
shall be deemed illiquid if it cannot be disposed of within seven days at approximately
6
the amount at which the security is valued by a Fund. Illiquid securities may be difficult to sell promptly at an acceptable price because of a lack of an available market and other factors. The
sale of some illiquid and other types of securities may be subject to legal restrictions. A Fund that invests in illiquid securities may not be able to sell such securities and may not be able to realize their full value upon sale. Because illiquid
securities may present a greater risk of loss than other types of securities, the Funds will not invest in such securities in excess of the limits set forth above.
The Funds may invest in securities acquired in a privately negotiated transaction from the issuer or a holder of the issuers securities. Such securities may not be distributed publicly without
registration under the Securities Act of 1933, as amended (the Securities Act). Restricted securities (securities subject to legal or contractual restrictions on resale) may be illiquid. Some restricted securities may be treated as
liquid, although they may be less liquid than registered securities traded on established secondary markets.
Restricted
and illiquid securities are valued by the Manager in accordance with procedures approved by the Board in a manner intended to reflect the fair market value of such securities. Securities that are subject to substantial market and credit risk may
have greater liquidity risk.
Investment Companies
. The Funds may not acquire securities issued by other investment
companies, except as permitted by the 1940 Act and the rules and regulations thereunder or any exemption order or regulatory guidance thereunder. As a shareholder of another investment company, a Fund would bear its pro rata portion of that
companys advisory fees and other expenses. Such fees and expenses will be borne indirectly by the Funds shareholders.
Loan Participations and Assignments (Bank Debt)
. The Funds may invest in bank debt, which includes interests in loans to companies or their affiliates undertaken to finance a capital restructuring
or in connection with recapitalizations, acquisitions, leveraged buyouts, refinancings or other financially leveraged transactions and may include loans which are designed to provide temporary or bridge financing to a borrower pending the sale of
identified assets, the arrangement of longer-term loans or the issuance, and sale of debt obligations. These loans, which may bear fixed or floating rates, have generally been arranged through private negotiations between a corporate borrower, and
one or more financial institutions (Lenders), including banks. The Funds investment may be in the form of participations in loans (Participations) or of assignments of all or a portion of loans from third parties
(Assignments).
A Fund has the right to receive payments of principal, interest, and any fees to which it is
entitled only from the Lender selling Participations and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Participations, a Fund generally will have no right to enforce compliance by the borrower with
the terms of the loan agreement relating to the loan, nor any rights of set-off against the borrower, and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the Participation. Thus, a Fund assumes the
credit risk of both the borrower and the Lender that is selling the Participation. In addition, in connection with purchasing Participations, a Fund generally will have no role in negotiating or effecting amendments, waivers, and consents with
respect to the loans underlying the Participations. In the event of the insolvency of the Lender, a Fund may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the borrower.
In certain cases, the rights and obligations acquired by a Fund through the purchase of an Assignment may differ from, and be more
limited than, those held by the assigning selling institution. Assignments are sold strictly without recourse to the selling institutions, and the selling institutions will generally make no representations or warranties to the Fund about the
underlying loan, the borrowers, the documentation of the loans or any collateral securing the loans.
Investments in
Participations and Assignments involve additional risks, including the risk of nonpayment of principal and interest by the borrower, the risk that any loan collateral may become impaired, and that a Fund may obtain less than the full value for the
loan interests sold because they may be illiquid. Purchasers of loans depend primarily upon the creditworthiness of the borrower for payment of interest and repayment of principal. If scheduled interest or principal payments are not made, the value
of the instrument may be adversely affected.
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Investments in loans through direct assignment of a financial institutions interests
with respect to a loan may involve additional risks. For example, if a loan is foreclosed, a Fund could become part owner of any collateral, and would bear the costs and liabilities associated with owning and disposing of the collateral.
A loan is often administered by a bank or other financial institution that acts as agent for all holders. The agent administers the terms
of the loan, as specified in the loan agreement. Unless, under the terms of the loan or other indebtedness, a Fund has direct recourse against the borrower, the Fund may have to rely on the agent to apply appropriate credit remedies against a
borrower. If assets held by the agent for the benefit of a Fund were determined to be subject to the claims of the agents general creditors, the Fund might incur certain costs and delays in realizing payment on the loan or loan participation
and could suffer a loss of principal or interest.
Interests in loans are also subject to additional liquidity risks.
Loans are generally subject to legal or contractual restrictions on resale. Loans are not currently listed on any securities exchange or automatic quotation system, but are traded by banks and other institutional investors engaged in loan
syndication. As a result, no active market may exist for some loans, and to the extent a secondary market exists for other loans, such market may be subject to irregular trading activity, wide bid/ask spreads, and extended trade settlement periods.
Consequently, a Fund may have difficulty disposing of Assignments or Participations in response to a specific economic event such as deterioration in the creditworthiness of the borrower, which can result in a loss. In such market situations, it may
be more difficult for a Fund to assign a value to Assignments or Participations when valuing the Funds securities and calculating the net asset value (NAV) of the Fund.
Margin Purchases
. The Funds may not purchase securities on margin, except (i) as otherwise permitted under rules adopted by
the SEC under the 1940 Act or by guidance regarding the 1940 Act, or interpretations thereof, and (ii) that the Funds may obtain such short-term credits as are necessary for the clearance of portfolio transactions, and may make margin payments
in connection with futures contracts, options, forward contracts, swaps, and other financial instruments.
Preferred
Stock
. The Funds may invest in shares of preferred stock. These investments include convertible preferred stock, which includes an option for the holder to convert the preferred stock into the issuers common stock under certain conditions,
among which may be the specification of a future date when the conversion must begin, a certain number of common shares per preferred shares, or a certain price per share for the common stock. Convertible preferred stock tends to be more volatile
than non-convertible preferred stock, because its value is related to the price of the issuers common stock as well as the dividends payable on the preferred stock. Preferred shares generally pay dividends at a specified rate and generally
have preference over common shares in the payments of dividends and the liquidation of an issuers assets. Dividends on preferred shares are generally payable at the discretion of the issuers board of directors. Accordingly, shareholders
may suffer a loss of value if dividends are not paid. The market prices of preferred shares are also sensitive to changes in interest rates and in the issuers creditworthiness. Accordingly, shareholders may experience a loss of value due to
adverse interest rate movements or a decline in the issuers credit rating.
Real Estate Investment Trusts
.
The Funds may invest in real estate investment trusts (REITs). Equity REITs invest directly in real property while mortgage REITs invest in mortgages on real property. REITs may be subject to certain risks associated with the direct
ownership of real estate, including declines in the value of real estate, risks related to general and local economic conditions, overbuilding and increased competition, increases in property taxes and operating expenses, and variations in rental
income. REITs pay dividends to their shareholders based upon available funds from operations. It is quite common for these dividends to exceed a REITs taxable earnings and profits, resulting in the excess portion of such dividends being
designated as a return of capital. The Funds intend to include the gross dividends from such REITs in their distributions to shareholders and, accordingly, a portion of the Funds distributions may also be designated as a return of capital. A
Fund will indirectly bear its proportionate share of expenses incurred by REITs in which the Fund invests in addition to the expenses incurred directly by the Fund.
Repurchase Agreements
. Each Fund may invest a portion of its assets in repurchase agreements (Repos) with broker-dealers, banks, and other financial institutions, provided that the
Funds custodian at all times has possession of the securities serving as collateral for the Repos or has proper evidence of book entry receipt of said securities. In a Repo, a Fund purchases securities subject to the sellers simultaneous
agreement to repurchase those securities from the Fund at a specified price and time (as short as one day and as long as several weeks). The repurchase price reflects an agreed-upon interest rate during the time of investment. The collateral may
consist of cash items, U.S.
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Government debt securities, securities that, at the time the Repo is entered into, are rated in the highest rating category by the requisite NRSROs, or unrated securities that are of comparable
quality. A Repo exposes a Fund to the risk that the party that sells the securities will default on its obligation to repurchase those securities. If that happens, the Fund can lose money because it may not be able to sell the securities at the
agreed-upon time and price or because the securities may lose value before they can be sold. If an institution with whom a Fund has entered into a Repo enters insolvency proceedings, the resulting delay, if any, in the Funds ability to
liquidate the securities serving as collateral could cause the Fund some loss if the securities declined in value prior to liquidation. To minimize the risk of such loss, the Funds will enter into Repos only with institutions and dealers considered
creditworthy.
Rights and Warrants
. The Funds may invest in rights or warrants. Rights and warrants entitle the holder
to buy equity securities at a specific price for a specific period of time. Rights and warrants may be considered more speculative than certain other types of investments in that they do not entitle a holder to dividends or voting rights with
respect to the underlying securities that may be purchased nor do they represent any rights in the assets of the issuing company. Also, the value of a right or warrant does not necessarily change with the value of the underlying securities and a
right or warrant ceases to have value if it is not exercised prior to the expiration date.
Short Sales
. The Funds may
engage in short sale transactions as a part of overall portfolio management or to offset a potential decline in the value of a security. A short sale involves the sale of a security that a Fund does not own, or if the Fund owns the security, is not
to be delivered upon consummation of the sale. When a Fund makes a short sale of a security that it does not own, it must borrow from a broker-dealer the security sold short and deliver the security to the broker-dealer upon conclusion of the short
sale.
If the price of the security sold short increases between the time of the short sale and the time a Fund replaces the
borrowed security, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a short-term capital gain. Although a Funds gain is limited to the price at which it sold the security short, its potential loss is
theoretically unlimited.
When-Issued Securities and Delayed-Delivery Transactions
. The Funds may purchase securities
on a when-issued basis, and they may purchase or sell securities for delayed-delivery. These transactions occur when securities are purchased or sold by a Fund with payment and delivery taking place at some future date. A Fund may enter into such
transactions when, in the Managers opinion, doing so may secure an advantageous yield and/or price to the Fund that might otherwise be unavailable. The Funds have not established any limit on the percentage of assets they may commit to such
transactions. To minimize the risks of entering into these transactions, the Funds will maintain a segregated account with their custodian consisting of cash, or other high-grade liquid debt securities, denominated in U.S. dollars or non-U.S.
currencies, in an amount equal to the aggregate fair market value of their commitments to such transactions.
The following
investment options apply to
The Fairholme Fund only
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Control and Other Substantial Positions
. The
Fairholme Fund may make investments in the securities of a company for the purpose of affecting the management or control of the company, subject to applicable legal restrictions with respect to the investment.
These investments impose additional risks for The Fairholme Fund other than a possible decline in the value of the investments. The
Fairholme Fund, individually or together with other accounts managed by the Manager, may obtain a controlling or other substantial position in a public or private company (each, a Portfolio Company). Should The Fairholme Fund and other
accounts managed by the Manager obtain such a position, the Manager may be required to make filings with the SEC concerning holdings in the Portfolio Company. The application of statutory and regulatory requirements to The Fairholme Fund, or to the
Manager and its affiliates, could restrict activities contemplated by The Fairholme Fund, or by the Manager and its affiliates, with respect to a Portfolio Company or limit the time and the manner in which The Fairholme Fund is able to dispose of
its holdings or hedge such holdings. The Fairholme Fund or the Manager and its affiliates may be required to obtain relief from the SEC or its staff prior to engaging in certain activities with respect to a Portfolio Company that could be deemed a
joint arrangement under the 1940 Act.
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The Fairholme Fund may incur substantial expenses when taking control or other substantial
positions in a company, and there is no guarantee that such expenses can be recouped. In addition, The Fairholme Funds investments could be frozen in minority positions and The Fairholme Fund could incur substantial losses.
The Fairholme Fund could be exposed to various legal claims by governmental entities, or by a Portfolio Company, its security holders and
its creditors, arising from, among other things, The Fairholme Funds status as an insider or control person of a Portfolio Company or from the Managers designation of directors to serve on the boards of directors of a Portfolio Company.
Such legal claims include claims that The Fairholme Fund or the Manager (as a controlling person) is liable for securities laws violations by the Portfolio Company or environmental damage or product defects caused by the Portfolio Company or failure
to supervise the Portfolio Company. Such legal claims also include claims that The Fairholme Fund, as a control person or significant shareholder of the Portfolio Company, has a fiduciary responsibility to other shareholders in connection with The
Fairholme Funds voting or investment decisions with respect to its holdings of the Portfolio Companys shares. Notwithstanding the foregoing, neither The Fairholme Fund nor the Manager intends to have unilateral control of any Portfolio
Company, and may be unable to control the timing or occurrence of an exit strategy for any Portfolio Company.
Special
Situations
. From time to time, The Fairholme Fund intends to invest in special situations, which may involve purchases of securities, including equity securities, fixed-income securities (which may include high yield debt securities or
junk bonds), and securities of companies that are in default. A special situation arises when, in the opinion of the Manager, the securities of a company will, within a reasonably estimated time, appreciate in value due to company
specific developments that are independent of general business or market conditions. Such developments and situations include liquidations, reorganizations, recapitalizations, mergers, material litigation, technological breakthroughs, and new
management or management policies. Although large and well-known companies may be involved, special situations often involve greater risk than is found in the normal course of investing. See Credit Risk, Interest Rate Risk
and Investment in High Yield Securities below for a description of the risks of investing in debt and other fixed-income securities.
ADDITIONAL INFORMATION ABOUT INVESTMENT OPTIONS AND RISKS
Future Developments
. The Funds may take advantage of other investment practices that are not currently contemplated for use by the Funds, or are not available but may yet be developed, to the
extent such investment practices are consistent with the Funds investment objectives and legally permissible for the Funds. Such investment practices, if they arise, may involve risks that exceed those involved in the activities described
above.
Master-Feeder Option
. Notwithstanding their other investment policies, the Funds may seek to achieve their
investment objectives by investing substantially all net assets in another investment company having the same investment objective and substantially the same investment policies and restrictions as those of the Funds. Although such an investment may
be made in the sole discretion of the Directors, a Funds shareholders will be given 30 days prior notice of any such investment. There is no current intent to make such an investment.
Portfolio Turnover
. While the Funds strategies typically do not generate high portfolio turnover, the portfolio turnover
rates of each Fund are expected to vary materially from year to year, and future rates may exceed those of previous years. The Fairholme Fund had an annual portfolio turnover rate of 1.57% and 43.95% for the fiscal years ended November 30, 2012
and November 30, 2011, respectively. The Income Fund had an annual portfolio turnover rate of 8.27% and 91.67% for the fiscal years ended November 30, 2012 and November 30, 2011. The Allocation Fund had an annual portfolio turnover
rate of 26.96% and 41.60% for the fiscal years ended November 30, 2012 and for the period from its commencement of operations (December 31, 2010) through November 30, 2011, respectively.
High portfolio turnover in any year will result in the payment by a Fund of above-average transaction costs and could result in the
payment by shareholders of above-average taxes on realized investment gains. Distributions to shareholders of such investment gains, to the extent they consist of short-term capital gains, will be considered ordinary income for federal income tax
purposes.
Portfolio turnover rate is calculated by dividing (1) the lesser of purchases or sales of portfolio securities
for the fiscal year by (2) the monthly average of the value of portfolio securities (excluding short-term securities and U.S.
10
Government debt securities) owned during the fiscal year. A 100% turnover rate would occur if all the securities in a Funds portfolio, with the exception of securities whose maturities at
the time of acquisition were one year or less, were sold, and either repurchased or replaced within one year.
Certain Risk
Considerations
. The following disclosure supplements the risk disclosure included in the Prospectus.
Credit
Risk
. The Funds investments are subject to credit risk. An issuers credit quality depends on its ability to pay interest on and repay its debt and other obligations. Defaulted securities or those expected to default are subject
to additional risks in that the securities may become subject to a plan or reorganization that can diminish or eliminate their value. The credit risk of a security may also depend on the credit quality of any bank or financial institution that
provides credit enhancement for the security. The Funds do not rely on third party credit ratings to select their investments.
Interest Rate Risk
. The Funds investments are subject to interest rate risk, which is the risk that the value of a
security will decline because of a change in general interest rates. Investments subject to interest rate risk usually decrease in value when interest rates rise and rise in value when interest rates decline. Also, fixed-income securities with
longer maturities typically experience a more pronounced change in value when interest rates change.
Investment in High
Yield Securities
. The Funds investments in securities that are rated below investment grade by one or more NRSRO or rating agency (
i.e
., Ba3 and lower by Moodys Investors Service, Inc. (Moodys) or
BBand lower by S&P and Fitch Investors Services, Inc. (Fitch)) or, if not rated, determined by the Manager to be of equivalent quality (high yield securities), are subject to greater risk of loss of principal and
interest than higher-rated securities. High yield securities are also generally considered to be subject to greater market risk than higher-rated securities and the capacity of issuers of high yield securities to pay interest and repay principal is
more likely to weaken than is that of issuers of higher-rated securities in times of deteriorating economic conditions or rising interest rates. In addition, high yield securities may be more susceptible to real or perceived adverse economic
conditions than investment grade securities.
Although the Manager does not rely on the ratings of rating agencies in
selecting such investments, debt securities rated Ba (including Ba1, Ba2 and Ba3) by Moodys or BB (including BB+ and BB-) by S&P and Fitch are judged to have speculative elements or to be predominantly speculative with respect to the
issuers ability to pay interest and repay principal. Debt securities rated B (including B1, B2, B3, B+ and B-) by Moodys, S&P, and Fitch are judged to have highly speculative characteristics or to be predominantly speculative. Such
securities may have small assurance of interest and principal payments. Securities rated Baa (including Baa1, Baa2 and Baa3) by Moodys are also judged to have speculative characteristics.
The market for high yield securities may be less liquid than the market for higher-rated securities, which can adversely affect the
prices at which high yield securities can be sold. Adverse publicity and investor perceptions about high yield securities, whether or not based on fundamental analysis, may tend to decrease the market value and liquidity of these securities. To the
extent there is no established secondary market for high yield securities, the Funds may experience difficulty in valuing such securities and, in turn, the Funds assets.
Although the Manager will attempt to reduce the risk inherent in investing in high yield securities through credit analysis and attention to current developments and other trends affecting fixed-income
securities, losses may occur. Certain high yield securities in which the Funds may invest may contain call or buy-back features that permit the issuers thereof to call or repurchase such securities. Such securities may present risks based on
prepayment expectations. If an issuer exercises such a provision, the Funds income may decline as a result of a loss of the higher income from such securities.
Ratings of fixed-income securities by the NRSROs are a generally accepted barometer of credit risk, although the Manager does not rely on credit ratings in selecting investments. Ratings are subject to
certain limitations. The rating of a security is heavily weighted by past developments and does not necessarily reflect probable future conditions. There is frequently a lag between the time a rating is assigned and the time it is updated. In
addition, there may be varying degrees of difference in the credit risk of securities within each rating category. Some securities are rated by more than one NRSRO, and the ratings assigned to the security by the rating agencies may differ. In such
an event and for purposes of determining compliance with restrictions on investments for the Funds, if a security is rated by two or more rating agencies, the Manager will deem the security to be rated at the highest rating.
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Unless otherwise indicated, references to securities ratings by one rating agency in this
SAI shall include the equivalent rating by another rating agency.
DISCLOSURE OF PORTFOLIO
HOLDINGS
The Funds have adopted policies and procedures reasonably designed to prevent selective disclosure of the
Funds portfolio holdings to third parties. Portfolio holdings are generally disclosed as required by law or regulation on a quarterly basis through reports to shareholders or filings with the SEC within 60 days after quarter end. Each Fund may
also make certain disclosures for legitimate business purposes, such as to provide information to service providers or broker-dealers in connection with their performing services for the Fund, as long as the recipient of such disclosures has been
notified, or has executed an agreement recognizing, that such recipient is subject to a duty of confidentiality and may not trade in securities on the basis of any non-public information that may be included in the disclosures. Each Fund reserves
the right to request from a disclosure recipient or its senior officers certifications that such recipient will use the information only in a manner that is consistent with the Funds portfolio holdings disclosure policy and procedures and any
applicable confidentiality agreement. Consistent with the foregoing, each of the following service providers of each Fund has been approved to receive information concerning the Funds portfolio holdings, and is subject to an arrangement with
the Fund, pursuant to which the provider receives holdings information relating to the services provided: (i) the Funds independent registered public accounting firm; (ii) the Funds custodian; (iii) the Funds
transfer agent, administrator, and fund accountant; and (iv) the Funds financial printer. Information is provided to these service providers as needed, including daily, in order for the service provider to perform its services for a Fund
and with no time lag. Service providers are prohibited from using the portfolio holdings information for trading purposes and from sharing the portfolio holdings information, unless specifically authorized.
In addition, the executive officers of the Company (or the Chief Compliance Officers designee) (each an Authorized
Person) may authorize disclosure of a Funds portfolio holdings to other persons only after determining that the disclosure of non-public portfolio holdings is not impermissible under applicable law or regulation, and after considering
the anticipated benefits and costs to the Fund and its shareholders, the purpose of the disclosure, and any potential conflicts of interest between the Fund and its shareholders and the interests of the Manager and any of its affiliates. Authorized
Persons must report any disclosure authorizations to the Board. The Directors will review at least annually information regarding the nature of any such disclosures and recipients. If the Directors determine that any such disclosure was
inappropriate, the Directors will take such action as they deem necessary and appropriate to protect the interests of shareholders.
The Funds believe the foregoing policies and procedures reduce the likelihood that conflicts of interest will arise between shareholders and affiliates of the Funds. Both the Manager and the Funds have
Codes of Ethics that govern conflicts of interest and that are designed to minimize the possibility that employees of the Funds or the Manager will act in a manner that is inconsistent with their respective duties to the Funds and Fund shareholders.
No employee of the Funds, the Manager, or any of the Managers affiliates receives any compensation whatsoever in connection with proper disclosure of Fund portfolio holdings information.
INVESTMENT RESTRICTIONS
The restrictions listed below are fundamental policies of each Fund and may be changed only with the approval of a majority of the outstanding voting securities of the Fund as defined in the 1940 Act. As
provided in the 1940 Act, a vote of a majority of the outstanding voting securities of a Fund means the affirmative vote of the lesser of (A) more than 50% of the outstanding shares of the Fund, or (B) 67% or more of the shares of the Fund
present at a meeting, if more than 50% of the shares are represented at the meeting in person or by proxy. Except with respect to borrowing, changes in the values of a Funds assets as a whole will not cause a violation of the following
investment restrictions so long as percentage restrictions are observed by the Fund at the time it purchases any security.
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(1)
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The Fund may not concentrate investments in an industry, as concentration may be defined under the 1940 Act or the rules and regulations thereunder
(as such statute, rules or regulations may be amended from time to time) or by guidance regarding, interpretations of, or exemptive orders under, the 1940 Act or the rules or regulations thereunder published by appropriate regulatory authorities.
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(2)
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The Fund may not issue any senior security (as that term is defined in the 1940 Act) or borrow money, except to the extent permitted by the 1940 Act
or the rules and regulations thereunder (as such statute, rules or regulations may be amended from time to time) or by guidance regarding, or interpretations of, or exemptive orders under, the 1940 Act or the rules or regulations thereunder
published by appropriate regulatory authorities.
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For the purposes of this restriction,
margin and collateral arrangements, including, for example, with respect to permitted borrowings, options, futures contracts, options on futures contracts, and other derivatives such as swaps, are not deemed to involve the issuance of a senior
security.
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(3)
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The Fund may not act as an underwriter of securities, except that the Fund may acquire restricted securities under circumstances in which, if such
securities were sold, the Fund might be deemed to be an underwriter for purposes of the Securities Act.
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(4)
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The Fund may not make loans, except through (i) the purchase of debt obligations in accordance with their investment objective and policies;
(ii) the lending of portfolio securities; (iii) the use of repurchase agreements; or (iv) the making of loans to affiliated funds, each as permitted under the 1940 Act, the rules and regulations thereunder (as such statutes, rules or
regulations may be amended from time to time), or by guidance regarding, and interpretations of, or exemptive orders under, the 1940 Act.
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(5)
|
The Fairholme Fund and The Income Fund
. The Fund may not purchase or sell commodities, except that the Fund may enter into futures contracts,
options on futures contracts, and privately-negotiated contracts for the current or future delivery of commodities.
|
The Allocation Fund
. The Fund may purchase or sell commodities or options thereon to the extent permitted by applicable law.
|
(6)
|
The Fund may not purchase or sell real estate, except that it may dispose of real estate acquired as a result of the ownership of securities or
other instruments. This restriction does not prohibit the Fund from investing in securities or other instruments backed by real estate or in securities of companies engaged in the real estate business.
|
INVESTMENT MANAGER
Information about the Manager, Fairholme Capital Management, L.L.C., is set forth in the Prospectus. This section contains additional information about the Manager and the portfolio manager.
Bruce R. Berkowitz is considered to be a control person of the Manager. Membership interests in the Manager are held by Gables
Investment Partnership, LLLP and East Lane, LLC. Mr. Berkowitz is the Managing Member of the Manager, Gables Investment GP, LLC, general partner of Gables Investment Partnership, LLLP, and the sole limited partner of Gables
Investment Partnership, LLLP. Mr. Berkowitz is also the Managing Member of East Lane, LLC.
Portfolio Management
The table below identifies the portfolio manager, the number of accounts managed by the portfolio manager, and the
total assets in such accounts, within each of the following categories: registered investment companies and separate accounts. The portfolio manager does not manage other pooled investment vehicles. Information in the table is shown as of
November 30, 2012. Asset amounts are approximate and have been rounded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered Investment Companies
|
|
|
Separate Accounts
|
|
Portfolio Manager
|
|
Number of
Accounts
|
|
|
Total Assets*
|
|
|
Number of
Accounts
|
|
|
Total
Assets**
|
|
Bruce R. Berkowitz
|
|
|
3
|
|
|
$
|
7.5 billion
|
|
|
|
200
|
|
|
$
|
1.1 billion
|
|
*
|
Reflects the total assets of The Fairholme Fund, The Income Fund, and The Allocation Fund.
|
**
|
Certain of the separate accounts invest a portion or all of their assets in one or more of the Funds. The total assets reflected above for such
accounts exclude account assets invested in the Funds. Account assets invested in the Funds are included in the total assets of the Funds set forth under Registered Investment Companies.
|
13
Conflicts of Interest
The Manager serves as the investment adviser for the Funds, pooled investment vehicles and separate accounts. The Manager seeks to treat
all clients fairly and equitably and has adopted policies and procedures reasonably designed to ensure that no client is disadvantaged over another where more than one client has the ability to invest in similar securities or participate in similar
investment opportunities. Although many clients of the Manager have assets managed with the same overall investment philosophy, not all clients use the same specific investment strategies to achieve their goals. Some clients, for example, are
permitted to invest without regard to liquidity and may pursue strategies that are not available to the Funds. In addition, separate account and/or pooled investment vehicle clients may be more concentrated in specific securities or industries than
the Funds, which are limited by the 1940 Acts restrictions on such concentration. Furthermore, different clients of the Manager have different restrictions on their permitted investment activities, whether by statute, contract or instruction
of the client. As a consequence of employing differing strategies and taking into account total asset size and investment restrictions, among other applicable factors, the portfolio holdings and investment performance of the Managers clients
may materially differ.
Portfolio Manager Compensation
The Company does not directly compensate any personnel of the Manager, including the portfolio manager. Currently,
Mr. Berkowitzs compensation from the Manager is in the form of a fixed guaranteed payment and a share of the Managers total profits.
As of November 30, 2012, the Manager only received asset-based fees for its advisory services to its clients. The portfolio manager is not compensated based directly on the performance of the Funds
or the value of each Funds respective assets.
Ownership of Fund Securities
As of the fiscal year ended November 30, 2012, Mr. Berkowitz and his immediate family members owned shares of The Fairholme Fund
worth in excess of $1,000,000, shares of The Income Fund worth in excess of $1,000,000, and shares of The Allocation Fund worth in excess of $1,000,000.
As of December 31, 2012, officers and employees of the Manager, collectively owned shares of The Fairholme Fund worth $343 million, shares of The Income Fund worth $31 million and shares of The Allocation
Fund worth $88 million.
THE INVESTMENT MANAGEMENT AGREEMENTS
The Company has entered into an Investment Management Agreement with the Manager on behalf of each Fund (each, a Management
Agreement and collectively, the Management Agreements). Under the terms of each Management Agreement, the Manager manages the investment operations of the Fund in accordance with the Funds investment policies and
restrictions. The Manager furnishes an investment program for each Fund; determines what investments should be purchased, sold, and held; and makes changes in the investments of the Fund. At all times, the Managers actions on behalf of the
Funds are subject to the overall supervision and review of the Board. The Manager also manages investments for other clients whose objectives and strategies may result in conflicts of interest with the Funds. The Board has been advised of such
potential conflicts and believes that the Manager has adequate policies and procedures designed to minimize the impact of any such conflicts on the Funds portfolio.
14
Pursuant to each Management Agreement, the Manager provides, or arranges to provide,
administrative and all other services necessary to manage the business and day-to-day operational needs of the Fund including: transfer agency, fund accounting, fund administration, custody, legal, audit, compliance, certain directors fees,
call center, fulfillment, travel, insurance, rent, printing, postage, and other office supplies. Under each Management Agreement, the Fund retains responsibility for portfolio commission expenses, acquired fund fees and expenses, and other
extraordinary expenses, if any, including, litigation costs.
In consideration of the investment management and operating
services provided by the Manager under each Management Agreement, the Company pays the Manager a management fee at an annual rate equal to 1.00% of the daily average net assets of each of The Fairholme Fund, The Income Fund, and The Allocation Fund.
Under each Management Agreement, the Manager may, with the Boards approval, employ third parties, including affiliated
service providers, to assist it in performing the various services required by the Fund. The Manager is responsible for compensating such parties.
Each Management Agreement provides that the Manager shall not be liable for any loss suffered by the Fund or its shareholders as a consequence of any act or omission in connection with services under the
Management Agreement, except by reason of the Managers willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations and duties.
Each Management Agreement provides for an initial term of two years and thereafter may continue in effect from year to year if its continuance is approved at least annually (i) by the Board or by
vote of a majority of the outstanding voting securities of the Fund and (ii) by vote of a majority of the directors who are not parties to such agreement or interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval. Each Management Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act).
For the fiscal years ended November 30, 2012, November 30, 2011, and November 30, 2010, the Company paid $75,477,154, $149,711,510, and $143,769,746, respectively, in fees to the Manager
pursuant to the Management Agreement of The Fairholme Fund.
For the fiscal year ended November 30, 2012, the Manager was
entitled to $2,827,600 in fees pursuant to the Management Agreement of The Income Fund. Pursuant to a then-effective agreement to waive a portion of its management fees, the Manager waived a portion of such fees for this period in the amount of
$249,582, and accordingly received fees for such period in the amount of $2,578,018. For the fiscal year ended November 30, 2011, the Manager was entitled to $4,260,112 in fees pursuant to the Management Agreement of The Income Fund. Pursuant
to a then-effective agreement to waive a portion of its management fees, the Manager waived a portion of such fees for this period in the amount of $1,399,457, and accordingly received fees for such period in the amount of $2,860,655. For the period
beginning December 31, 2009 (the date on which The Income Fund commenced operations) through November 30, 2010, the Manager was entitled to $2,067,850 in fees pursuant to The Income Funds Management Agreement. Pursuant to a
then-effective agreement to waive a portion of its management fees, the Manager waived a portion of such fees for this period in the amount of $1,033,925, and accordingly received fees for such period in the amount of $1,033,925.
For the fiscal year ended November 30, 2012, the Manager was entitled to $2,727,767 in fees pursuant to the Management Agreement of
The Allocation Fund. Pursuant to a then-effective agreement to waive a portion of its management fees, the Manager waived a portion of such fees for this period in the amount of $225,673, and accordingly received fees for such period in the amount
of $2,502,094. For the period beginning December 31, 2010 (the date on which The Allocation Fund commenced operations) through November 30, 2011, the Manager was entitled to $1,696,495 in fees pursuant to the Management Agreement of The
Allocation Fund. Pursuant to a then-effective agreement to waive a portion of its management fees, the Manager waived a portion of such fees for this period in the amount of $424,124, and accordingly received fees for such period in the amount of
$1,272,371.
15
DIRECTORS AND OFFICERS
The Board of the Company is responsible for overseeing and establishing policies regarding the management, conduct, and operation of each
Funds business. The Directors and Officers of the Company are listed below.
|
|
|
|
|
|
|
|
|
|
|
Name, Age
& Address+
|
|
Position(s)
Held with
the
Company
|
|
Term of Office
& Length of
Time Served**
|
|
Principal Occupation(s)
During Past 5
Years§
|
|
Number of
Portfolios
in Fund
Complex
Overseen
by Director
|
|
Other Current
Directorships
Held by Director
|
Interested Directors and Officers
|
|
|
|
|
|
|
Bruce R. Berkowitz*
Age 54
|
|
Director, President
|
|
Mr. Berkowitz has
served as a
Director of
the Company since
December 15,
1999.
|
|
Managing Member,
Fairholme Capital
Management, L.L.C.
since October 1997.
|
|
3
|
|
Director and
Chairman of the
Board of Directors,
The St. Joe Co.
|
|
|
|
|
|
|
Cesar L. Alvarez, Esq.*
Age 65
|
|
Director
|
|
Mr. Alvarez has
served as a
Director of the
Company since
May 19, 2008.
|
|
Executive Chairman
of Greenberg
Traurig, LLP since
2010; Chief
Executive Officer of
Greenberg Traurig,
LLP from October
1997 to
2010.
|
|
3
|
|
Chairman, Board of
Directors, Mednax,
Inc.; Co-Leading
Director, Watsco,
Inc.; Vice Chairman,
Knight Foundation;
Director, The St.
Joe
Co.
|
|
Independent Directors^
|
|
|
|
|
|
|
Terry L. Baxter
Age 67
|
|
Director
|
|
Mr. Baxter has
served as a
Director of the
Company since
May 19, 2008.
|
|
Chairman of the
Board, CEO, Source
One (retired);
President of White
Mountain Holdings
(retired).
|
|
3
|
|
Director, Main Street
America Group
|
|
|
|
|
|
|
Howard S. Frank
Age 71
|
|
Director
|
|
Mr. Frank has
served as a
Director of the
Company since
May 7, 2007.
|
|
Vice Chairman,
Chief Operating
Officer and
Director, Carnival
Corporation & plc.
|
|
3
|
|
Director, Steamship
Mutual Trust;
Director, New World
Symphony; Director,
The St. Joe Co.
|
|
|
|
|
|
|
Avivith Oppenheim, Esq.
Age 62
|
|
Director
|
|
Ms. Oppenheim
has served as a
Director of the
Company since
December 15,
1999.
|
|
Attorney-at-Law.
|
|
3
|
|
None.
|
|
|
|
|
|
|
Leigh Walters, Esq.
Age 66
|
|
Director
|
|
Mr. Walters has
served as a
Director of the
Company since
December 15,
1999.
|
|
Vice-President and
Director, Valcor
Engineering
Corporation.
Attorney-at-Law.
|
|
3
|
|
Director, Valcor
Engineering
Corporation
|
+
|
Unless otherwise indicated, the address of each Director of the Company is c/o Fairholme Capital Management, L.L.C., 4400 Biscayne Blvd., 9
th
Floor, Miami, FL 33137.
|
16
*
|
Each of Mr. Berkowitz and Mr. Alvarez has an affiliation with the Manager, and accordingly is considered an interested person,
as defined in the 1940 Act.
|
**
|
Each Director serves for an indefinite term. Each officer serves for an annual term and until his or her successor is elected and qualified.
|
§
|
The information reported includes the principal occupation during the last five years for each Director, which relates to the professional
experiences, attributes, and skills relevant to each Directors qualifications to serve on the Board of the Company.
|
^
|
A Director who is not considered an interested person, as defined in the 1940 Act.
|
|
|
|
|
|
|
|
Officers of the Company
|
|
|
|
|
Name, Age
& Address+
|
|
Position Held
with the Company
|
|
Term of Office & Length of
Time
Served**
|
|
Principal Occupation(s) During Past 5 Years
|
Fred Fraenkel
Age 63
|
|
Vice President
|
|
Mr. Fraenkel has served as Vice President of the Company since January 2013.
|
|
Chief Research Officer, Fairholme Capital Management, L.L.C. since October 2011; Vice Chairman Beacon Trust Company from 2008 to 2011; Chairman of Milennium 3
Capital from 2000 to 2008.
|
|
|
|
|
Wayne Kellner
Age 43
|
|
Treasurer
|
|
Mr. Kellner has served as Treasurer of the Company since March 2012.
|
|
Chief Financial Officer, Fairholme Capital Management, L.L.C. since January 2012; Treasurer, Fairholme Capital Management, L.L.C. from January 2011 to December
2011; Tax Principal, Rothstein Kass from 2006 to 2010.
|
|
|
|
|
Paul R. Thomson
Age 56
|
|
Chief Compliance Officer and Secretary
|
|
Mr. Thomson has served as Chief Compliance Officer of the Company since April 2010 and has served as Secretary since June 2011. Mr. Thomson previously served as
Chief Compliance Officer from November 2008 to January 2009.
|
|
Chief Compliance Officer, Fairholme Capital Management, L.L.C. since April 2010; Chief Financial Officer, Fairholme Capital Management, L.L.C. from January 2008
to January 2012; Managing Director and former Chief Financial Officer of Colliers-Seeley, Inc. from 2004 to 2007.
|
+
|
Unless otherwise indicated, the address of each officer of the Company is c/o Fairholme Capital Management, L.L.C., 4400 Biscayne Blvd., 9th Floor,
Miami, FL 33137.
|
**
|
Each officer serves for an annual term and until his or her successor is elected and qualified.
|
Leadership Structure and the Board of Directors
The Board is responsible for overseeing the business affairs of the Company, including the business affairs of the Funds. The Board is composed of six Directors currently, four of whom are not
interested persons (as defined in the 1940 Act) of the Funds (the Independent Directors). In addition to four regularly scheduled meetings per year, the Independent Directors meet regularly in executive sessions among
themselves and with Fund counsel to consider a variety of matters affecting the Funds. These sessions generally occur prior to, and following, scheduled Board
17
meetings and at such other times as the Independent Directors may deem necessary. As discussed in further detail below, the Board has established three standing committees to assist the Board in
performing its oversight responsibilities: the Audit Committee, the Nominating Committee, and the Proxy Voting Committee. The Board is responsible for overseeing the Manager and other service providers with respect to the services they provide to
the Company and the Funds in accordance with the provisions of the 1940 Act and other applicable laws.
The Companys
By-Laws do not set forth any specific qualifications to serve as a Director. The Nominating Committee Charter (Charter) sets forth a number of factors the Nominating Committee will take into account in considering candidates for
membership on the Board, including: (i) the candidates knowledge in matters relating to the investment company industry; (ii) any experience possessed by the candidate as a director/trustee or senior officer of other public
companies; (iii) the candidates educational background; (iv) the candidates reputation for high ethical standards and personal and professional integrity; (v) any specific financial, technical or other expertise possessed
by the candidate, and the extent to which such expertise would complement the Boards existing mix of skills and qualifications; (vi) the candidates perceived ability to contribute to the on-going functions of the Board, including
the candidates ability and commitment to attend meetings regularly, work collaboratively with other members of the Board, and carry out his or her duties in the best interests of the Funds; and (vii) such other factors as the committee
determines to be relevant in light of the existing composition of the Board and any anticipated vacancies or other factors. In addition, in evaluating a candidate for nomination or election as a Director, the Nominating Committee will take into
account the contribution that the candidate would be expected to make to the diverse mix of experience, qualifications, attributes, and skills that the Nominating Committee believes contributes to good governance for the Funds. The Charter also sets
forth certain factors that the Nominating Committee may take into account in evaluating potential conflicts of interest. The Chairman of the Board is not an Independent Director. The Funds do not have a lead Independent Director. The Chairmans
role is to set the agenda at each Board meeting, preside at all meetings of the Board and to act as a liaison with service providers, officers, attorneys, and other Directors generally between meetings. The Chairman may also perform other such
functions as may be determined by the Board.
Among the attributes or skills common to all Directors are their ability to
review critically, evaluate, question, and discuss information provided to them, to interact effectively with the other Directors, Manager, other service providers, counsel and the independent registered public accounting firm, and to exercise
effective and independent business judgment in the performance of their duties as Directors. Each Directors ability to perform his or her duties effectively has been attained through the Directors business, consulting, public service
and/or academic positions, and through experience from service as a board member of the Funds, public companies or other organizations as set forth in the preceding Directors and Officers table. Each Directors ability to perform his or her
duties effectively also has been enhanced by his or her educational background, professional training, and/or other life experiences.
The Boards leadership structure is appropriate in light of the characteristics and circumstances of the Company and the Funds, including factors such as the Funds investment strategy and
style, the net assets of the Funds, the committee structure of the Company, and the management, distribution, and other service arrangements of the Funds. The current leadership structure permits the Board to exercise informed and independent
judgment over matters under its purview, and it allocates areas of responsibility among service providers, committees of Directors, and the full Board in a manner that enhances effective oversight. The Board believes that having a majority of
Independent Directors is appropriate and in the best interest of the Funds, and that the Board leadership by Mr. Berkowitz provides the Board with valuable corporate and financial insights that assist the Board as a whole with the
decision-making process. At the Boards discretion, the leadership structure of the Board may be changed at any time, including in response to changes in circumstances or the characteristics of the Funds.
In addition to the current directorships listed in the chart above, Mr. Berkowitz held the following directorships during the past
five years: Director of White Mountains Insurance Group, Ltd. from 2004 to April 2010; Director of AmeriCredit Corp. from December 2008 to November 2009; Director and Chairman of TAL International Group from November 2004 to February 2009; and
Trustee of First Union Real Estate Mortgage Investments from 2000 to March 2008.
18
Risk Oversight
The Funds are subject to a number of risks, including investment, compliance, operational, and valuation risks. Day-to-day risk management
functions are subsumed within the responsibilities of the Manager and the other service providers (depending on the nature of the risk) that conduct or carry out the Funds investment management and business affairs.
Risk oversight is part of the Boards general oversight of the Funds and is addressed as part of various Board and Committee
activities. The Board recognizes that it is not possible to identify all of the risks that may affect a Fund or to develop processes and controls to eliminate or mitigate their occurrence or effects. The Board has appointed a Chief Compliance
Officer who oversees the implementation and testing of the Funds compliance program and reports to the Board regarding compliance matters concerning the Funds and their principal service providers. As part of the Boards periodic review
of the Funds advisory and other service provider agreements, the Board may consider risk management aspects of the service providers operations and the functions for which they are responsible. As part of its regular oversight of the
Funds, the Board, directly or through a Committee, interacts with and reviews reports from the Manager, and the Funds administrator, Chief Compliance Officer, independent registered public accounting firm, and other providers, as appropriate,
regarding risks faced by the Funds and relevant risk functions. The Board may, at any time and in its discretion, change the manner in which it conducts its risk oversight role.
Audit Committee
The Board has formed an Audit Committee to oversee the financial reporting of the Funds, nominate independent auditors to conduct audits of the Funds financial statements, and perform other related
duties. The Audit Committee has adopted a charter to govern such activities. The Audit Committee met two times during the fiscal year ended November 30, 2012. The members of the Audit Committee are: Howard S. Frank (Chairperson), Terry L.
Baxter, Avivith Oppenheim, and Leigh Walters.
Nominating Committee
The Board has formed a Nominating Committee (Nominating Committee). The Nominating Committee will recommend nominees to the
Board for election and periodically review the composition of the Board. The Nominating Committee did not meet during the fiscal year ended November 30, 2012. The Nominating Committee does not consider nominees recommended by shareholders as
candidates for Board membership. The members of the Nominating Committee are: Avivith Oppenheim (Chairperson), Terry L. Baxter, Howard S. Frank, and Leigh Walters.
Proxy Voting Committee
The Board has established a Proxy
Voting Committee. The Proxy Voting Committee considers proxies involving potential conflicts of interest and requests for waivers of the proxy voting policy. The Proxy Voting Committee did not meet during the fiscal year ended November 30,
2012. The members of the Proxy Voting Committee are: Leigh Walters (Chairperson), Terry L. Baxter, Avivith Oppenheim, and Howard S. Frank.
Compensation
During the fiscal year ended
November 30, 2012, each Director who is not an employee of the Manager received an annual retainer of $90,000 with an additional $50,000 paid to the Chairman of the Audit Committee. All Directors are permitted reimbursement for any
out-of-pocket expenses incurred in connection with attendance at meetings. Pursuant to its obligations to the Company under the Management Agreement, the Manager is responsible for paying compensation, if any, to each of the Companys Directors
who are entitled to receive compensation from the Company.
19
The table below sets forth the compensation paid to Directors by the Company during the
fiscal year ended November 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AGGREGATE
COMPENSATION
FROM THE FUNDS
(PAID BY THE
MANAGER)
|
|
|
PENSION OR
RETIREMENT
BENEFITS
ACCRUED AS PART OF
FUNDS EXPENSES
|
|
ESTIMATED
ANNUAL
BENEFITS UPON
RETIREMENT
|
|
TOTAL
COMPENSATION
PAID TO
DIRECTOR
|
|
Cesar L. Alvarez
|
|
$
|
90,000
|
|
|
-0-
|
|
-0-
|
|
$
|
90,000
|
|
Bruce R. Berkowitz
|
|
|
-0-
|
|
|
-0-
|
|
-0-
|
|
|
-0-
|
|
Terry L. Baxter^
|
|
$
|
90,000
|
|
|
-0-
|
|
-0-
|
|
$
|
90,000
|
|
Howard S. Frank^
|
|
$
|
140,000
|
|
|
-0-
|
|
-0-
|
|
$
|
140,000
|
|
Avivith Oppenheim^
|
|
$
|
90,000
|
|
|
-0-
|
|
-0-
|
|
$
|
90,000
|
|
Leigh Walters^
|
|
$
|
90,000
|
|
|
-0-
|
|
-0-
|
|
$
|
90,000
|
|
^
|
Directors who are not interested persons of the Company as defined under the 1940 Act.
|
Director Ownership of Fund Shares
As of December 31, 2012, the Directors beneficially owned equity securities in the Funds in the following amounts:
|
|
|
|
|
|
|
|
|
NAME OF DIRECTOR
|
|
DOLLAR RANGE OF
SHARES HELD IN
THE FAIRHOLME
FUND
|
|
DOLLAR RANGE OF
SHARES HELD IN
THE INCOME
FUND
|
|
DOLLAR RANGE OF
SHARES HELD IN
THE ALLOCATION
FUND
|
|
AGGREGATE DOLLAR
RANGE OF SHARES HELD IN
ALL FUNDS OVERSEEN
BY
DIRECTOR
|
Cesar L. Alvarez
|
|
Over $100,000
|
|
none
|
|
none
|
|
Over $100,000
|
Bruce R. Berkowitz
|
|
Over $100,000
|
|
Over $100,000
|
|
Over $100,000
|
|
Over $100,000
|
Terry L. Baxter^
|
|
Over $100,000
|
|
none
|
|
none
|
|
Over $100,000
|
Howard S. Frank^
|
|
Over $100,000
|
|
none
|
|
Over $100,000
|
|
Over $100,000
|
Avivith Oppenheim^
|
|
Over $100,000
|
|
Over $100,000
|
|
Over $100,000
|
|
Over $100,000
|
Leigh Walters^
|
|
Over $100,000
|
|
Over $100,000
|
|
Over $100,000
|
|
Over $100,000
|
^
|
Directors who are not interested persons of the Company as defined under the 1940 Act.
|
As of December 31, 2012, the Officers and Directors of the Company (and their affiliates), as a group, owned approximately 10,900,000
shares or approximately 4.7% of The Fairholme Funds outstanding shares, approximately 3,200,000 shares or approximately 12.6% of The Income Funds outstanding shares, and approximately 9,400,000 shares or approximately 34.3% of The
Allocation Funds outstanding shares.
CONTROL PERSONS AND SHAREHOLDERS OWNING OVER 5%
OF FUND SHARES
As of December 31, 2012, the following persons owned 5% or more of The Fairholme Funds
outstanding shares.
|
|
|
|
|
|
|
|
|
|
|
NAME OF SHAREHOLDER
|
|
NUMBER
OF
FAIRHOLME FUND
SHARES OWNED
|
|
|
% OWNERSHIP
OF
TOTAL FAIRHOLME
FUND SHARES
|
|
|
TYPE OF OWNERSHIP
|
National Financial Services Corp.
200 Liberty Street
One World Financial Center
New York, NY 10281-1003
|
|
|
62,586,540
|
|
|
|
27.14
|
%
|
|
Record
|
|
|
|
|
Charles Schwab
101 Montgomery Street
San Francisco, CA 94104-4151
|
|
|
40,702,227
|
|
|
|
17.65
|
%
|
|
Record
|
20
As of December 31, 2012, the following persons owned 5% or more of The Income
Funds outstanding shares.
|
|
|
|
|
|
|
|
|
|
|
NAME OF SHAREHOLDER
|
|
NUMBER OF
INCOME FUND
SHARES OWNED
|
|
|
% OWNERSHIP OF
TOTAL INCOME
FUND SHARES
|
|
|
TYPE OF OWNERSHIP
|
National Financial Services Corp.
200 Liberty Street
One World Financial Center
New York, NY 10281-1003
|
|
|
8,374,430
|
*
|
|
|
32.91
|
%
|
|
Record
|
|
|
|
|
Charles Schwab
101 Montgomery Street
San Francisco, CA 94104-4151
|
|
|
3,780,569
|
|
|
|
14.86
|
%
|
|
Record
|
|
|
|
|
Bruce R. Berkowitz
|
|
|
3,198,336
|
|
|
|
12.6
|
%
|
|
Beneficial
|
As of December 31, 2012, the following persons owned 5% or more of The Allocation Funds outstanding shares.
|
|
|
|
|
|
|
|
|
|
|
NAME OF SHAREHOLDER
|
|
NUMBER OF
ALLOCATION FUND
SHARES OWNED
|
|
|
% OWNERSHIP OF
TOTAL ALLOCATION FUND
SHARES
|
|
|
TYPE OF OWNERSHIP
|
National Financial Services Corp.
200 Liberty Street
One World Financial Center
New York, NY 10281-1003
|
|
|
13,020,250
|
*
|
|
|
47.54
|
%
|
|
Record
|
|
|
|
|
Charles Schwab
101 Montgomery Street
San Francisco, CA 94104-4151
|
|
|
4,596,552
|
|
|
|
16.78
|
%
|
|
Record
|
|
|
|
|
Strafe & Co
FBO East Lane LLC
PO Box 6924
Newark, DE 19714-6924
|
|
|
3,108,087
|
*
|
|
|
11.35
|
%
|
|
Record
|
|
|
|
|
First Clearing LLC
2801 Market Street
St. Louis, MO 63103
|
|
|
1,707,085
|
|
|
|
6.23
|
%
|
|
Record
|
|
|
|
|
Bruce R. Berkowitz
|
|
|
9,262,051
|
|
|
|
33.8
|
%
|
|
Beneficial
|
*
|
The total number of The Income Fund shares and The Allocation Fund shares owned by National Financial Services Corp. and Strafe & Co. include
the shares beneficially owned by Bruce R. Berkowitz in the respective Fund.
|
A shareholder who
beneficially owns, directly or indirectly, more than 25% of a Funds voting securities may be deemed to control (as defined in the 1940 Act) the Fund.
PURCHASING AND REDEEMING SHARES
Purchases
and redemptions of a Funds shares will be made at NAV per share. Each Fund calculates its NAV per share based on closing prices or fair value of the Funds portfolio securities as of the close of regular trading on the New York Stock
Exchange (NYSE) (currently 4:00 p.m., Eastern Time) on each business day the NYSE is open for business.
For
purposes of computing the NAV of a share of a Fund, securities traded on securities exchanges are valued at the last quoted sales price at the time of valuation or, lacking any reported sales on that day, at the last bid price. Securities not traded
or dealt in upon any securities exchange for which over-the-counter market quotations are readily available generally shall be valued at the last quoted sales price (if adequate trading volume is present) or, otherwise at the last bid price.
The ordinary pricing procedures used by each Fund to value its portfolio securities are described in greater detail in the
Funds valuation procedures.
21
The value of a foreign security is ordinarily determined as of the close of trading on the
foreign stock exchange on which the security is primarily traded, or as of the close of trading on the NYSE, if earlier. The value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect at the close of the NYSE on
the day that the value of the foreign security is determined. If no sale is reported at that time, the foreign security will be valued at the last bid price. In certain circumstances, the Manager shall make a fair value determination with respect to
foreign securities, if in the Managers judgment, the value of such a security does not represent the fair market value of the security.
When the Funds hold securities traded in foreign markets that are open when U.S. markets are closed, significant events, including company specific developments or broad foreign market moves may affect
the value of foreign securities held by the Funds. Consequently, a Funds NAV may be affected during a period when shareholders are unable to purchase or redeem their shares in the Fund. While fair value pricing may be more commonly used with
foreign equity securities, it may also be used with thinly-traded domestic securities, fixed income securities or other assets held by the Funds.
A Funds share price is calculated by subtracting its liabilities from the closing fair market value of its total assets and then dividing the result by the total number of shares outstanding on that
day. Fund liabilities include accrued expenses and dividends payable, and its total assets include the market value of the portfolio securities as well as income accrued but not yet received. Since a Fund generally does not charge sales fees, the
NAV per share is the offering price for shares of the Fund. The price per share for a purchase order or redemption request is the NAV per share next determined after receipt of the order.
An example of how The Fairholme Fund calculated its total offering price per share as of December 31, 2012 is as follows:
|
|
|
|
|
The Fairholme Fund Total Net Assets
divided by
The Fairholme Fund Total Shares Outstanding
|
|
=
|
|
The Fairholme Fund
NAV Per
Share
|
|
|
|
$7,252,572,670
divided by
230,664,854
|
|
=
|
|
$31.44 Per Share
|
An example of how The Income Fund calculated its total offering price per share as of December
31, 2012 is as follows:
|
|
|
|
|
The Income Fund Total Net Assets
divided by
The Income Fund Total Shares Outstanding
|
|
=
|
|
The Income Fund
NAV Per
Share
|
|
|
|
$241,292,102
divided by
25,480,498
|
|
=
|
|
$9.47
Per Share
|
An example of how The Allocation Fund calculated its total offering price per share as of
December 31, 2012 is as follows:
|
|
|
|
|
The Allocation Fund Total Net Assets
divided by
The Allocation Fund Total Shares Outstanding
|
|
=
|
|
The Allocation Fund
NAV Per
Share
|
|
|
|
$256,338,007
divided by
27,389,259
|
|
=
|
|
$9.36
Per Share
|
22
The right of redemption may not be suspended or the date of payment upon redemption
postponed for more than seven days after shares are tendered for redemption, except for any period during which the NYSE is closed (other than customary weekend and holiday closings) or during which the SEC determines that trading
thereon is restricted, or for any period during which an emergency (as determined by the SEC) exists as a result of which disposal by the Funds of securities owned by them is not reasonably practicable or as a result of which it is
not reasonably practicable for the Funds fairly to determine the value of their net assets, or for such other periods as the SEC may by order permit for the protection of security holders of the Funds.
TAX INFORMATION
The information set forth in the Prospectus and the following discussion relate solely to U.S. federal income tax law and assumes that the Funds qualify to be taxed as a regulated investment company (as
discussed below). Such information is only a summary of certain key federal income tax considerations and is based on current law. No attempt has been made to present a complete explanation of the federal tax treatment of the Funds or their
shareholders. Investors are encouraged to consult their own tax advisers with respect to the specific tax consequences of being a shareholder in the Funds, including the effect and applicability of federal, state, local, and foreign tax laws to
their own particular situations.
Qualification as a Regulated Investment Company.
Each of the Funds intends to
qualify as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended, so as to be relieved of federal income tax on its capital gains and net investment income currently distributed to its
shareholders. To qualify as a RIC, a Fund must, among other requirements, derive at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities, or
other income derived with respect to its business of investing in such stock or securities, or net income derived from interests in certain publicly traded partnerships.
If for any tax year a Fund does not qualify as a RIC, all of its taxable income will be subject to tax at regular corporate rates without any deduction for dividends paid to shareholders, and the
dividends will be taxable to shareholders as ordinary income to the extent of the Funds current and accumulated earnings and profits. Failure to qualify as a RIC would thus have a negative impact on the Funds income and performance. It
is possible that a Fund will not qualify as a RIC in any given tax year.
If a Fund qualifies as a RIC and distributes at
least 90% of its investment company taxable income (taxable interest, dividends, net short-term capital gains, and other taxable ordinary income, net of expenses), the Fund will not be subject to federal income tax on the investment company taxable
income and net capital gain (the excess of net long-term capital gains over net short-term capital losses) distributed. However, the Fund would be subject to corporate income tax on any undistributed income other than tax-exempt income from
municipal securities.
Each of the Funds intends to distribute to shareholders, at least annually, substantially all net
investment income and any net capital gain. Dividends from net investment income and distributions from any net realized capital gains are reinvested in additional shares of the Funds unless the shareholder has requested in writing to have them paid
by check.
Excise Tax
. Each of the Funds will avoid the 4% federal excise tax that would otherwise apply to certain
undistributed income for a given calendar year if it makes timely distributions to shareholders equal to the sum of (i) 98% of its ordinary income for such year, (ii) 98.2% of its capital gain net income for the twelve-month period ending
on October 31 (or November 30 if elected by the Fund) of such year, and (iii) any ordinary income or capital gain net income from the preceding calendar year that was not distributed during such year. For this purpose, income or gain
retained by a Fund that is subject to corporate income tax will be considered to have been distributed by the Fund during such year. Each of the Funds intends to make sufficient distributions to avoid liability for the excise tax. A Fund may be
required to liquidate portfolio investments to make sufficient distributions to avoid excise tax liability.
23
Taxation of the Non-Corporate Shareholder
. Distributions of a Funds
investment company taxable income are taxable to you as ordinary income. A portion of a Funds distributions may be treated as qualified dividend income, which may be taxable to individuals, trusts, and estates at the lower federal
tax rates applicable to long-term capital gains. A distribution is treated as qualified dividend income to the extent that a Fund received dividend income from taxable domestic corporations and certain qualified foreign corporations, provided that
holding period and other requirements are met. To the extent a Funds distributions are attributable to other sources, such as interest or capital gains, the distributions are not treated as qualified dividend income.
Distributions of a Funds net short-term capital gains are taxable to you as ordinary income. Distributions of a Funds net
long-term capital gains are taxable to you as long-term capital gains. Long-term is defined as securities held for more than one year at the time of the sale or exchange. Short-term is defined as securities held for one year or less at the time of
sale or exchange.
Distributions that do not constitute ordinary income dividends or capital gain dividends will be treated as
a return of capital. A return of capital distribution reduces your tax basis in the shares and is treated as gain from the sale of the shares to the extent your basis would be reduced below zero.
All distributions will be treated in the manner described above regardless of whether the distribution is paid in cash or reinvested in
additional shares of a Fund.
Taxable distributions generally are included in a shareholders gross income for the
taxable year in which they are received. However, dividends declared in October, November, and December and made payable to shareholders of record in such month will be deemed to have been received on December 31st if paid by a Fund during the
following January.
Distributions by a Fund will result in a reduction in the fair market value of the Funds shares.
Should a distribution reduce the fair market value below a shareholders cost basis, such distribution would be taxable to the shareholder as ordinary income or as a long-term capital gain, even though, from an investment standpoint, it may
constitute a partial return of capital. In particular, investors should be careful to consider the tax implications of buying shares of a Fund just prior to a distribution. The price of such shares includes the amount of any forthcoming distribution
so that those investors may receive a return of investment upon distribution which will, nevertheless, be taxable to them.
A
portion of a Funds income may qualify for the dividends-received deduction available to corporate shareholders to the extent that the Funds income is derived from qualifying dividends from domestic corporations. Because a Fund may earn
other types of income, such as interest, income from securities loans, non-qualifying dividends, and short-term capital gains, the percentage of dividends from a Fund that qualifies for the deduction generally will be less than 100%. Each Fund will
notify corporate shareholders annually of the percentage of the Funds dividends that qualifies for the dividends received deduction.
If a shareholder fails to furnish his/her social security or other taxpayer identification number or to certify properly that it is correct, a Fund may be required to withhold federal income tax at the
rate of 28% (backup withholding) from dividend, capital gain, and redemption payments to him/her. Dividend and capital gain payments may also be subject to backup withholding if the shareholder fails to certify properly that he or she is not subject
to backup withholding due to the under-reporting of certain income. Each Fund will send each shareholder a notice in January describing the tax status of dividends and capital gain distributions for the prior year.
In general, you will recognize a gain or loss on a sale or exchange of shares of a Fund in an amount equal to the difference between the
amount of your net sales proceeds and your tax basis in the shares. All or a portion of any such loss may be disallowed if you purchase (for example, by reinvesting dividends) other shares of the Fund within 30 days before or after the sale or
exchange. If disallowed, the loss will be reflected in an upward adjustment to the basis of the shares purchased. In general, any gain or loss will be capital gain or loss if you held your Fund shares as capital assets. Any capital gain or loss will
be treated as long-term capital gain or loss if you held the Fund shares for more than one year at the time of the sale or exchange. Any capital loss arising from the sale or exchange of shares held for one year or less is treated as a long-term
capital loss to the extent of the amount of distributions of net capital gain received on such shares.
24
Foreign Taxes
. Income received by a Fund from sources within foreign countries may be
subject to foreign income taxes, including withholding taxes.
Capital Loss Carryforwards
. At November 30,
2012, The Fairholme Fund and The Income Fund had net short-term capital loss carryforwards for federal income tax purposes of $181,952,431 and $282,275 respectively, which are available to reduce future required distributions of net capital gains to
shareholders through 2019. The Income Fund has $8,916,060 of short-term capital loss and The Allocation Fund has $13,196,405 short-term and $2,290,763 long-term capital loss carryforward which would carry forward indefinitely.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for each Fund are made by the Manager. In placing purchase and sale orders for portfolio securities for a Fund, it is the policy of the Manager to seek the best
execution of orders at the most favorable price. In selecting brokers to effect portfolio transactions, the determination of what is expected to result in the best execution at the most favorable price involves a number of considerations. Among
these are the Managers evaluation of the broker-dealers efficiency in executing and clearing transactions, the rate of commission or the size of the broker-dealers spread, the size and difficulty of the order, the nature of the
market for the security, and operational capabilities of the broker-dealer. The Manager will not take into account the sale of shares of a Fund when selecting brokers to execute portfolio transactions.
The Manager may purchase or sell portfolio securities on behalf of each Fund in agency or principal transactions. In agency transactions,
the Fund generally pays brokerage commissions. In principal transactions, the Fund generally does not pay commissions. However, the price paid for the security may include an undisclosed commission or mark-up or selling concessions. The Manager
normally purchases fixed-income securities on a net basis from primary market makers acting as principals for the securities. The Manager may purchase certain money market instruments directly from an issuer without paying commissions or discounts.
Over-the-counter securities are generally purchased and sold directly with principal market makers who retain the difference in their cost in the security and its selling price. In some instances, the Manager feels that better prices are available
from non-principal market makers who are paid commissions directly.
For the fiscal years ended November 30,
2012, November 30, 2011, and November 30, 2010, The Fairholme Fund paid brokerage commissions of $2,906,945, $8,727,292, and $7,113,569, respectively. For the fiscal years ended November 30, 2012 and November 30, 2011, The
Income Fund paid brokerage commissions of $8,923 and $62,331, respectively. For the fiscal period beginning on December 31, 2009 (commencement of operations) through November 30, 2010, The Income Fund paid brokerage commissions of $16,324.
For the fiscal year ended November 30, 2012, The Allocation Fund paid brokerage commissions of $46,212. For the fiscal period beginning on December 31, 2010 (commencement of operations) through November 30, 2011, The Allocation Fund
paid brokerage commissions of $104,872.
The Manager may combine transaction orders placed on behalf of each Fund with
orders placed on behalf of any other advisory client, including any partnership or private account where principals and employees of the Manager have an interest, for the purposes of obtaining a more favorable transaction price. If an aggregated
trade is not completely filled, the Manager allocates the trade among the participating Fund and other advisory clients, as applicable, on a pro rata basis or in accordance with such other allocation method that, in the opinion of the Manager, will
result in fairness to all participants. Exceptions to such policies are permitted on a case-by-case basis when judged by the Manager to be fair and reasonable to the participating accounts. Since a Funds strategy may differ from those of other
advisory clients, it is possible the Fund may not participate in certain aggregated trades or may purchase or sell securities not owned by other advisory clients, and advisory clients may purchase or own securities not purchased or owned by the
Fund.
As of the fiscal year ended November 30, 2012, The Fairholme Fund held securities of the following regular
broker-dealers or their parents:
|
|
|
|
|
Name of Regular Broker or
Dealer or Parent (Issuer)
|
|
Aggregate
Value ($)
|
|
Bank of America Corp.
|
|
|
804,645,168
|
|
|
|
|
|
|
25
As of the fiscal period ended November 30, 2012, The Income Fund did not hold
securities of regular broker-dealers or their parents.
As of the fiscal year ended November 30, 2012, The
Allocation Fund held securities of the following regular broker-dealers or their parents:
|
|
|
|
|
Name of Regular Broker or
Dealer or Parent (Issuer)
|
|
Aggregate
Value ($)
|
|
Bank of America Warrants, $13.30 Strike Price, 1 sh/wts, Expire 01/16/2019
|
|
|
23,340,093
|
|
JP Morgan Warrants, $42.42 Strike Price, 1 sh/wts, Expire 10/28/2018
|
|
|
8,005,700
|
|
PERSONAL TRADING BY THE PORTFOLIO MANAGER AND OTHER INSIDERS
Pursuant to Section 17(j) of the 1940 Act and Rule 17j-1 thereunder, the Funds and the Manager have adopted Codes of
Ethics (Codes) restricting personal securities trading by certain persons who are affiliated with the Funds and/or the Manager. These Codes are on public file and are available from the SEC. While the Codes permit personal transactions
by these persons in securities held or to be acquired by the Funds, under certain circumstances, the Codes prohibit and are designed to prevent fraudulent activity in connection with such personal transactions.
CUSTODIAN
The Bank of New York Mellon, located at One Wall Street, New York, NY 10286, is custodian for the securities and cash of the Funds. Under the Custody Agreement, the custodian holds the Funds
portfolio securities in safekeeping and keeps all necessary records and documents relating to its duties.
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc. (BNY Mellon), 760 Moore Road, King of
Prussia, Pennsylvania 19406, serves as Transfer Agent to the Funds pursuant to a Transfer Agency Services Agreement among the Company, the Manager (with respect to the compensation section only), and BNY Mellon.
Under the Transfer Agency Services Agreement, BNY Mellon provided customary services of a transfer agent and dividend-paying agent
including: (1) receiving and processing orders to purchase or redeem shares; and (2) mailing shareholder reports and prospectuses to current shareholders.
ADMINISTRATION AND ACCOUNTING SERVICES
BNY
Mellon provides administration and accounting services to the Funds pursuant to an Administration and Accounting Services Agreement among the Funds, the Manager (with respect to the compensation section only), and BNY Mellon. Under the
Administration and Accounting Services Agreement, BNY Mellon provides, among other things, the following services: portfolio accounting and valuation, expense accrual and payment, financial reporting, tax accounting, and assistance with compliance
monitoring.
26
BNY Mellon receives an administration and accounting services fee calculated as a
percentage of each Funds average daily net assets, which will be billed to the Manager on a monthly basis. For the fiscal years ended November 30, 2012, November 30, 2011, and November 2010, BNY Mellon received $227,857, $618,020,
and $619,421, respectively, in fees pursuant to the Administration and Accounting Services Agreement with respect to The Fairholme Fund. For the fiscal years ended November 30, 2012, November 30, 2011 and for the period from
December 31, 2009 (the date on which The Income Fund commenced operations) to November 30, 2010, BNY Mellon received 18,882, $51,683 and $59,922 in fees pursuant to the Administration and Accounting Services Agreement with respect to The
Income Fund. For the fiscal year ended November 30, 2012 and for the period from December 31, 2010 (the date on which The Allocation Fund commenced operations) to November 30, 2011, BNY Mellon received $16,342 and $44,005,
respectively, in fees pursuant to the Administration and Accounting Services Agreement with respect to The Allocation Fund.
BNY Mellon also provides state registration and filing services to the Funds pursuant to a State Filing Services Agreement among the Funds, the Manager (with respect to the compensation section only), and
BNY Mellon. BNY Mellon receives a state filing services fee based upon the number of state securities notice filings. This fee is billed to the Manager on a monthly basis.
PRINCIPAL UNDERWRITER
Fairholme Distributors, LLC, serves as principal underwriter for the Funds pursuant to a Distribution Agreement for the limited purpose of acting as statutory underwriter to facilitate the registration
and distribution of shares of the Funds. Fairholme Distributors, LLC, is located at 400 Berwyn Park, 899 Cassatt Road, Berwyn, PA 19312.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
serves as each Funds independent registered public accounting firm.
GENERAL INFORMATION
The Companys Charter permits the Board to issue 1,100,000,000 shares of common stock, 700,000,000 shares of which have been classified as shares of common stock of The Fairholme Fund, 200,000,000
shares of which have been classified as shares of common stock of The Income Fund, and 200,000,000 shares of which have been classified as shares of common stock of The Allocation Fund. The Board has the power to designate one or more separate and
distinct series and/or classes of shares of common stock and to classify or reclassify any unissued shares with respect to such series.
Shareholders of each Fund are entitled: to one vote per full share; to such distributions as may be declared by the Companys Board out of funds legally available from the Fund; and upon liquidation,
to participate ratably in the assets available for distribution from the Fund.
There are no conversion or sinking fund
provisions applicable to the shares, and shareholders have no preemptive rights and may not cumulate their votes in the election of directors. The shares are redeemable and are fully transferable. All shares issued and sold by the Funds will be
fully paid and non-assessable.
According to the law of Maryland under which the Company is incorporated and the
Companys By-laws, the Company is not required to hold an annual meeting of shareholders unless required under the 1940 Act. Accordingly, the Company does not intend to hold annual shareholder meetings unless required under the 1940 Act.
Shareholders have the right to call a meeting of shareholders for the purpose of voting to remove directors. The Company will call a meeting of shareholders for the purpose of voting upon the question of removal of a director or directors when
requested in writing to do so by record holders of at least 10% of a Funds outstanding shares.
27
PROXY VOTING POLICIES AND PROCEDURES
The Board has approved proxy voting policies and procedures for the Company. A copy of the Companys proxy voting policies and
procedures is attached to this SAI as
Appendix A
. These procedures set forth guidelines and procedures for the voting of proxies relating to securities held by the Funds. Each Funds proxy voting records are maintained and are
available for inspection. The Board is responsible for overseeing the implementation of the procedures. Information regarding how each Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is
available (i) without charge upon request, by calling Shareholder Services at 1-866-202-2263; or by writing to the Company c/o BNY Mellon Investment Servicing (US) Inc., P.O. Box 9692, Providence, Rhode Island 02940-9692 and (ii) on the
SECs website at http://www.sec.gov.
FINANCIAL STATEMENTS
The audited financial statements of each Fund for the fiscal year ended November 30, 2012, and the report of each Funds
independent registered public accounting firm, are incorporated herein by reference to the Annual Report. The Annual Report was filed on Form N-CSR with the SEC
on , 2013. The Annual Report is available without charge upon request by calling Shareholder Services at 1-866-202-2263, or by
visiting the Companys website at www.fairholmefunds.com.
28
APPENDIX A
PROXY VOTING POLICY OF FAIRHOLME FUNDS, INC.
PREFACE
Fairholme Funds, Inc. (the Company) is registered with the Securities and Exchange Commission (the Commission) as an open-end management investment company under the 1940 Act. The
Company is a series company, meaning that it can offer an indefinite number of series of Company shares (each such series a Fund and together the Funds). The Company currently offers shares of three Funds, but may offer
shares of additional Funds in the future. This policy applies equally with respect to the Companys currently existing Funds and any future Funds that may be offered by the Company.
The Companys affairs are generally managed by its Board of Directors (the Board or the
Directors). Among its obligations to each Funds shareholders, the Board is responsible for voting all proxies related to securities held in each Funds investment portfolio. The Board, consistent with its fiduciary duties and
pursuant to applicable rules and regulations promulgated under the 1940 Act, has designed this proxy voting policy (the Policy) to reflect its commitment to vote all proxies in a manner consistent with the best interests of the
Funds shareholders. The Board or its designated agent(s), consistent with their duty of care, will monitor corporate actions for those securities issuers who have called upon their shareholders to vote proxies or attend shareholder meetings
for the purpose of voting upon issues. Consistent with its duty of loyalty, the Board or its designated agent(s) will, in all cases, vote such proxies in a manner designed to promote shareholders best interests.
KEY PROXY VOTING ISSUES
1.
General Policies
All proxy solicitations
shall be reviewed on an issuer-by-issuer basis, and each item for which a vote is sought shall be considered in the context of the company under review and the various economic impacts such item may have on a Funds stated investment
objectives. The Board or its designated agent(s) will give great weight to the views of the issuers management, and in most cases will vote in favor of managements recommendations unless it is apparent, after reasonable inquiry, that to
vote in accordance with management recommendations would likely have a negative impact on a Funds shareholder value or conflict with the Funds policies regarding management and corporate governance. In such cases, the Board or its
designated agent(s) will engage in an independent analysis of the impact that the proposed action will have on shareholder values and will vote such items in accordance with their good faith conclusions as to the course of action that will best
benefit Fund shareholders.
2.
Boards of Directors
Electing directors is one of the most important rights of stock ownership that company shareholders can exercise. The
Company believes that directors should act in the long-term interests of their shareholders and the company as a whole. Generally, when called upon by an issuer to vote for one or more directors, the Board or its designated agent(s) will vote in
favor of director nominees that have expressed and/or demonstrated a commitment to the interest of the companys shareholders. The Board or its designated agent(s) will consider the following factors in deciding how to vote proxies relating to
director elections:
|
|
|
In re-electing incumbent directors, the long-term performance of the company relative to its peers shall be the key factor in whether the Board or
its designated agent(s) votes to re-elect the director(s) The Board or its designated agent(s) will not vote to re-elect a director if the company has had consistently poor performance relative to its peers in the industry, unless the
director(s) has/have taken or is/are attempting to take tangible steps to improve the companys performance.
|
|
|
|
Whether the slate of director nominees promotes a majority of independent directors on the full board The Board believes that it is in the
best interest of all company shareholders to have, as a majority, directors that are independent of management.
|
|
|
|
A director nominees attendance at less than 75% of required meetings frequent non-attendance at board meetings will be grounds for
voting against re-election.
|
|
|
|
Existence of any prior SEC violations and/or other criminal offenses The Board will not vote in favor of a director nominee who, to Board or
its designated agent(s) actual knowledge, is the subject of SEC or other criminal enforcement actions.
|
29
The Board believes that it is in the shareholders best interests to
have knowledgeable and experienced directors serving on a companys board. To this end, the Board believes that companies should be allowed to establish director compensation packages that are designed to attract and retain such directors. When
called upon to vote for director compensation proposals, the Board or its designated agent(s) will consider whether such proposals are reasonable in relation to the companys performance and resources, and are designed to attract qualified
personnel yet do not overburden the company or result in a windfall to the directors. The Board or its designated agent(s) will carefully consider proposals that seek to impose reasonable limits on director compensation.
In all other issues that may arise relating to directors, the Board or its designated agent(s) will vote against any
proposal that clearly benefits directors at the expense of shareholders (excepting reasonable compensation to directors), and in favor of all proposals that do not unreasonably abrogate the rights of shareholders. As previously stated, each issue
will be analyzed on an item-by-item basis.
3.
Corporate Governance
Corporate governance issues may include the following: (i) corporate defenses, (ii) corporate restructuring
proposals, (iii) proposals affecting the capital structure of a company, (iv) proposals regarding executive compensation, or (v) proposals regarding the independent auditors of the company. When called upon to vote on such items, the
Board or its designated agent(s) shall consider, without limitation, the following factors:
i.
Corporate Defenses
. Although the Board or its designated agent(s) will review each proposal on a
case-by-case basis, the Board or its designated agent(s) will generally vote against management proposals that (a) seek to insulate management from all threats of change in control, (b) provide the board with veto power against all
takeover bids, (c) allow management or the board of the company to buy shares from particular shareholders at a premium at the expense of the majority of shareholders, or (d) allow management to increase or decrease the size of the board
at its own discretion. The Board or its designated agent(s) will only vote in favor of those proposals that do not unreasonably discriminate against a majority of shareholders, or greatly alter the balance of power between shareholders, on one side,
and management and the board, on the other.
ii.
Corporate Restructuring
. These may include
mergers and acquisitions, spin-offs, asset sales, leveraged buy-outs and/or liquidations. In determining how to vote on these types of proposals, the Board or its designated agent(s) will consider the following factors: (a) whether the proposed
action represents the best means of enhancing shareholder values, (b) whether the companys long-term prospects will be positively affected by the proposal, (c) how the proposed action will impact corporate governance and/or
shareholder rights, (d) how the proposed deal was negotiated, (e) whether all shareholders receive equal/fair treatment under the terms of the proposed action, and/or (f) whether shareholders could realize greater value through
alternative means.
iii.
Capital Structure
. Proposals affecting the capital structure of a
company may have significant impact on shareholder value, particularly when they involve the issuance of additional stock. As such, the Board or its designated agent(s) will vote in favor of proposals to increase the authorized or outstanding stock
of the company only when management provides persuasive business justification for the increase, such as to fund acquisitions, recapitalization or debt restructuring. The Board or its designated agent(s) will vote against proposals that unreasonably
dilute shareholder value or create classes of stock with unequal voting rights if, over time, it is believed that such action may lead to a concentration of voting power in the hands of few insiders.
iv.
Executive Compensation
. The Board believes executives should be compensated at a reasonable rate
and that companies should be free to offer attractive compensation packages that encourage high performance in executives because, over time, it will increase shareholder values. The Board also believes however, that executive compensation should,
to some extent, be tied to the performance of the company. Therefore, the Board or its designated agent(s) will vote in favor of proposals that provide challenging performance objectives to company executives and which serve to motivate executives
to better performance. The Board or its designated agent(s) will vote against all proposals that offer unreasonable benefits to executives whose past performance has been less than satisfactory.
30
The Board or its designated agent(s) will vote against shareholder proposals
that summarily restrict executive compensation without regard to the companys performance, and will generally vote in favor of shareholder proposals that seek additional disclosures on executive compensation.
v.
Independent Registered Public Accounting Firm.
The engagement, retention and termination of a
companys independent auditors must be approved by the companys audit committee, which typically includes only those independent directors who are not affiliated with or compensated by the company, except for directors fees. In
reliance on the audit committees recommendation, the Board or its designated agent(s) generally will vote to ratify the employment or retention of a companys independent auditors unless the Board or its designated agent(s) is aware that
the auditor is not independent or that the auditor has, in the past, rendered an opinion that was neither accurate nor indicative of the companys financial position.
4.
Shareholder Rights
State law provides shareholders of a company with various rights, including cumulative voting, appraisal rights, the
ability to call special meetings, the ability to vote by written consent and the ability to amend the charter or bylaws of the company. When called upon to vote on such items, the Board or its designated agent(s) will carefully analyze all proposals
relating to shareholder rights and will vote against proposals that seek to eliminate existing shareholder rights or restrict the ability of shareholders to act in a reasonable manner to protect their interest in the company. In all cases, the Board
or its designated agent(s) will vote in favor of proposals that best represent the long-term financial interest of Fund shareholders.
5.
Social and Environmental Issues
When called
upon to vote on items relating to social and environmental issues, the Board or its designated agent(s) will consider the following factors:
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Whether the proposal creates a stated position that could negatively affect the companys reputation and/or operations, or leave it vulnerable
to boycotts and other negative consumer responses;
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The percentage of assets of the company that will be devoted to implementing the proposal;
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Whether the issue is more properly dealt with through other means, such as through governmental action;
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Whether the company has already dealt with the issue in some other appropriate way; and
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What other companies have done in response to the issue.
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While the Board generally supports shareholder proposals that seek to create good corporate citizenship, the Board or its designated agent(s) will vote against proposals that would tie up a large
percentage of the assets of the company. The Board believes that such proposals are inconsistent with its duty to seek long-term value for each Funds shareholders. The Board or its designated agent(s) will also evaluate all proposals seeking
to bring to an end certain corporate actions to determine whether the proposals adversely affect the ability of the company to remain profitable. The Board or its designated agent(s) will generally vote in favor of proposals that enhance or do not
negatively impact long-term shareholder values.
31
PROXY VOTING PROCEDURES
of
FAIRHOLME FUNDS, INC.
1.
The Proxy Voting Officers
The Board has
designated the President and Secretary of the Company (the Proxy Voting Officers) as the persons responsible for voting all proxies relating to securities held in each series (each, a Fund) of Fairholme Funds, Inc.
(Company), subject to the authority of the Proxy Voting Committee (as defined herein) set forth in Section 2 below. Either Proxy Voting Officer may act on behalf of a Fund, and there shall be no requirement that both Proxy Voting
Officers vote together. The Proxy Voting Officers may divide or determine responsibility for acting under this Policy in any manner they see fit. The Proxy Voting Officers shall take all reasonable efforts to monitor corporate actions, obtain all
information sufficient to allow an informed vote on a pending matter, and ensure that all proxy votes are cast in a timely fashion and in a manner consistent with this Policy.
If, in the Proxy Voting Officers reasonable belief, it is in the best interest of each Funds shareholders to
cast a particular vote in a manner that is contrary to this Policy, the Proxy Officer shall submit a request for a waiver to the Proxy Voting Committee (as defined below) stating the facts and reasons for the Proxy Voting Officers belief. The
Proxy Voting Officer shall proceed to vote the proxy in accordance with the decision of the Proxy Voting Committee.
In addition, if, in the Proxy Voting Officers reasonable belief, it is in the best interest of the Funds shareholders to abstain from voting on a particular proxy solicitation, the Proxy
Voting Officer shall make a record summarizing the reasons for the Proxy Voting Officers belief and shall present such summary to the Board along with other reports required in Section 4 below.
2.
Proxy Voting Committee
The Board has formed a proxy voting committee (the Proxy Voting Committee), which is composed solely of the
independent directors of the Company, to evaluate and determine (i) requests for waivers of this Policy and (ii) proxy solicitations that present a potential conflict of interest as discussed in Section 3 below.
3.
Conflict of Interest Transactions
The Proxy Voting Officer shall submit to the Proxy Voting Committee all proxy solicitations that, in the Proxy Voting
Officers reasonable belief, present a conflict between the interests of the Funds shareholders on one hand, and those of a Director, Officer, Adviser, Sub-Adviser (if any), Principal Underwriter or any of its affiliated persons/entities
(each, an Affiliated Entity). Conflict of interest transactions include situations where:
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an Affiliated Entity promotes a proxy proposal or is deemed to be the beneficial owner of 10% or more of a class of the issuers securities to
which the proxy relates;
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an Affiliated Entity has a business or personal relationship with the participant of a proxy contest such as members of the issuers management
or the soliciting shareholder(s), when such relationship is of such closeness and intimacy that it would reasonably be construed to be of such nature that it would negatively affect the judgment of the Affiliated Entity;
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an Affiliated Entity provides brokerage, underwriting, insurance or banking or other services to the issuer whose management is soliciting proxies;
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an Affiliated Entity has a personal or business relationship with a candidate for directorship; or
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an Affiliated Entity manages a pension plan or administers an employee benefit plan of the issuer, or intends to pursue an opportunity to do so.
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In all such cases, the materials submitted to the Proxy Voting Committee shall include the name of the
Affiliated Entity whose interests in the transaction are believed to conflict with the interests of the Fund, a brief description of the conflict, and any other information in the Proxy Voting Officers possession that would enable the Proxy
Voting Committee to make an informed decision on the matter. The Proxy Voting Committee may seek the recommendation of an independent third party with respect to any such matter. The Proxy Voting Officer shall vote the proxy in accordance with the
direction of the Proxy Voting Committee.
32
4.
Report to the Board of Directors
The Proxy Voting Officers shall compile and present to the Board a quarterly report of all proxy solicitations received by
each Fund, including for each proxy solicitation; (i) the name of the issuer; (ii) the exchange ticker symbol for the security; (iii) the CUSIP number; (iv) the shareholder meeting date; (v) a brief identification of the
matter voted; (vi) whether the matter was proposed by the management or by a security holder; (vii) whether the Proxy Voting Officer cast his/her vote on the matter and if not, an explanation of why no vote was cast; (viii) how the
vote was cast (i.e., for or against the proposal); (ix) whether the vote was cast for or against management; and (x) whether the vote was consistent with this Policy, and if inconsistent, an explanation of why the vote was cast in such
manner.
5.
Responding to Shareholders Request for Proxy Voting Disclosure
Consistent with the Companys Proxy Voting Policy, the Company shall, not later
than August 31 of each year, submit a complete proxy voting record to be filed with the Securities and Exchange Commission for the twelve-month period ending June 30
th
of such year on SEC Form N-PX. The Funds proxy voting record is available (i) on the SECs
website at http://www.sec.gov, and (ii) without charge, to shareholders of the Funds by calling the Companys toll-free number as listed in its current Prospectus. The Company shall respond to all shareholder requests for records within
three business days of such request by first-class mail or other means designed to ensure prompt delivery.
6.
Record Keeping
In connection with the Companys Proxy Voting Policy, the Proxy Voting Officers shall maintain a record of the
following:
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Copies all proxy solicitations received by each Fund, including a brief summary of the name of the issuer, the exchange ticker symbol, the CUSIP
number, and the shareholder meeting date;
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a reconciliation of the proxy solicitations received and number of shares held by each Fund in the soliciting issuer;
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the analysis undertaken to ensure that the vote cast is consistent with this Policy;
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copies, if any, of any waiver request submitted to the Proxy Voting Committee along with the Proxy Voting Committees final determination
relating thereto;
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copies, if any, of all documents submitted to the Proxy Voting Committee relating to conflict of interest situations along with the Proxy Voting
Committees final determinations relating thereto;
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copies of any other documents created or used by the Proxy Voting Officer in determining how to vote the proxy;
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copies of all votes cast;
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copies of all quarterly summaries presented to the Board; and
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copies of all shareholder requests for a Funds proxy voting record and responses thereto.
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All records required to be maintained under the Companys Proxy Voting Policy shall be maintained in the manner and for such period
as is consistent with other records required to be maintained by the Company pursuant to applicable rules and regulations promulgated under the 1940 Act.
33
FAIRHOLME FUNDS, INC.
PART C
OTHER INFORMATION
ITEM 28. EXHIBITS
(a)
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ARTICLES OF INCORPORATION
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(1)
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ARTICLES OF INCORPORATION Incorporated by reference to Post-Effective Amendment No. 23 to the Registration Statement on Form N-1A, filed on March 30,
2011.
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(2)
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ARTICLES SUPPLEMENTARY Incorporated by reference to Post-Effective Amendment No. 8 to the Registration Statement on Form N-1A, filed on March 28, 2006.
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(3)
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ARTICLES SUPPLEMENTARY Incorporated by reference to Post-Effective Amendment No. 8 to the Registration Statement on Form N-1A, filed on March 28, 2006.
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(4)
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ARTICLES SUPPLEMENTARY Incorporated by reference to Post-Effective Amendment No. 9 to the Registration Statement on Form N-1A, filed on May 19, 2006.
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(5)
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ARTICLES SUPPLEMENTARY Incorporated by reference to Post-Effective Amendment No. 11 to the Registration Statement on Form N-1A, filed on March 29,
2007.
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(6)
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ARTICLES SUPPLEMENTARY Incorporated by reference to Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A, filed on March 26,
2008.
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(7)
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ARTICLES SUPPLEMENTARY Incorporated by reference to Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A, filed on March 26,
2008.
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(8)
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ARTICLES SUPPLEMENTARY Incorporated by reference to Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A, filed on March 26,
2008.
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(9)
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ARTICLES SUPPLEMENTARY Incorporated by reference to Post-Effective Amendment No. 15 to the Registration Statement on Form N-1A, filed on January 23,
2009.
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(10)
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ARTICLES SUPPLEMENTARY Incorporated by reference to Post-Effective Amendment No. 18 to the Registration Statement on Form N-1A, filed on December 18,
2009.
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(11)
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ARTICLES SUPPLEMENTARY Incorporated by reference to Post-Effective Amendment No. 21 to the Registration Statement on Form N-1A, filed on October 26,
2010.
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(12)
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ARTICLES SUPPLEMENTARY Incorporated by reference to Post-Effective Amendment No. 21 to the Registration Statement on Form N-1A, filed on October 26,
2010.
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(13)
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ARTICLES SUPPLEMENTARY Incorporated by reference to Post-Effective Amendment No. 22 to the Registration Statement on Form N-1A, filed on December 21,
2010.
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(14)
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CERTIFICATE OF CORRECTION Incorporated by reference to Post-Effective Amendment No. 23 to the Registration Statement on Form N-1A, filed on March 30,
2011.
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(b)
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AMENDED AND RESTATED BY-LAWS Incorporated by reference to Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A, filed on
March 26, 2008.
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(c)
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INSTRUMENTS DEFINING RIGHTS OF SHAREHOLDERS None, See Articles of Incorporation.
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(d) (1)
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INVESTMENT MANAGEMENT AGREEMENT (Fairholme Fund) Incorporated by reference to Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A,
filed on May 23, 2008.
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(2)
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INVESTMENT MANAGEMENT AGREEMENT (Fairholme Focused Income Fund) Incorporated by reference to Post-Effective Amendment No. 17 to the Registration Statement
on Form N-1A, filed on October 21, 2009.
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(3)
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INVESTMENT MANAGEMENT AGREEMENT (Fairholme Allocation Fund) Incorporated by reference to Post-Effective Amendment No. 25 to the Registration Statement on
Form N-1A, filed on March 29, 2012.
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(e) (1)
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DISTRIBUTION AGREEMENT Filed herewith.
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(2)
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STANDARD DEALER AGREEMENT Incorporated by reference to Post-Effective Amendment No. 25 to the Registration Statement on Form N-1A, filed on March 29,
2012.
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(f)
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BONUS OR PROFIT SHARING CONTRACTS None.
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(g) (1)
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CUSTODIAN SERVICES AGREEMENT Incorporated by reference to Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A, filed on
March 13, 2009.
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(2)
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FOREIGN CUSTODY AGREEMENT DATED MAY 9, 2011 Incorporated by reference to Post-Effective Amendment No. 25 to the Registration Statement on Form N-1A, filed
on March 29, 2012.
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(3)
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AMENDMENT TO THE CUSTODIAN SERVICES AGREEMENT DATED NOVEMBER 1, 2011 Incorporated by reference to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A, filed on March 29, 2012.
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(h)
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OTHER MATERIAL CONTRACTS
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(1) (i)
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ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT Incorporated by reference to Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A,
filed on March 13, 2009.
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(ii)
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EXHIBIT A TO THE ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT Incorporated by reference to Post-Effective Amendment No. 22 to the Registration Statement
on Form N-1A, filed on December 21, 2010.
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(iii)
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AMENDMENT TO THE ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT DATED NOVEMBER 1, 2011 Incorporated by reference to Post-Effective Amendment No. 25 to the
Registration Statement on Form N-1A, filed on March 29, 2012.
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(2) (i)
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TRANSFER AGENT SERVICES AGREEMENT Incorporated by reference to Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A, filed on
March 13, 2009.
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(ii)
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EXHIBIT A TO THE TRANSFER AGENT SERVICES AGREEMENT Incorporated by reference to Post-Effective Amendment No. 22 to the Registration Statement on Form N-1A,
filed on December 21, 2010.
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(iii)
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AMENDMENT TO THE TRANSFER AGENCY SERVICES AGREEMENT DATED NOVEMBER 1, 2011 Incorporated by reference to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A, filed on March 29, 2012.
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(3)
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POWER OF ATTORNEY for Howard Frank Incorporated by reference to Post-Effective Amendment No. 25 to the Registration Statement on Form N-1A, filed on
March 29, 2012.
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(4)
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POWER OF ATTORNEY for Avivith Oppenheim Incorporated by reference to Post-Effective Amendment No. 25 to the Registration Statement on Form N-1A, filed on
March 29, 2012.
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(5)
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POWER OF ATTORNEY for Leigh Walters Incorporated by reference to Post-Effective Amendment No. 25 to the Registration Statement on Form N-1A, filed on
March 29, 2012.
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(6)
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POWER OF ATTORNEY for Cesar Alvarez Incorporated by reference to Post-Effective Amendment No. 25 to the Registration Statement on Form N-1A, filed on
March 29, 2012.
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(7)
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POWER OF ATTORNEY for Terry Baxter Incorporated by reference to Post-Effective Amendment No. 25 to the Registration Statement on Form N-1A, filed on
March 29, 2012.
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(i)
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LEGAL OPINION & CONSENT To be filed by amendment.
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(j)
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To be filed by amendment.
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(k)
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OMITTED FINANCIAL STATEMENTS Not applicable.
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(l)
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INITIAL CAPITAL AGREEMENTS Incorporated by reference to Pre-Effective Amendment No. 2 to Original Registration Statement on Form N-1A, filed on
December 29, 1999.
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(m)
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RULE 12b-1 PLAN Not Applicable.
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(n)
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RULE 18f-3 PLAN Not Applicable.
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(1)
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AMENDED CODE OF ETHICS FOR THE COMPANY DATED JULY 21, 2011 Incorporated by reference to Post-Effective Amendment No. 25 to the Registration Statement on
Form N-1A, filed on March 29, 2012.
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(2)
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AMENDED CODE OF ETHICS FOR THE MANAGER DATED JULY 21, 2011 Incorporated by reference to Post-Effective Amendment No. 25 to the Registration Statement on
Form N-1A, filed on March 29, 2012.
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ITEM 29. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
There are no persons controlled by or under common control with the Registrant.
ITEM 30. INDEMNIFICATION
(a) General. The Articles of Incorporation of Fairholme
Funds, Inc. (the Company) provide that, to the fullest extent permitted by Maryland and federal statutory and decisional law, as amended or interpreted, no director or officer of the Company shall be personally liable to the Company or
the holders of shares for money damages for breach of fiduciary duty as a director and each director and officer shall be indemnified by the Company; provided, however, that nothing herein shall be deemed to protect any director or officer of the
Company against any liability to the Company or the holders of shares to which such director or officer would otherwise be subject by reason of breach of the directors or officers duty of loyalty to the Company or its stockholders, for
acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of law or for any transaction from which the director derived any improper personal benefit.
Article VI of the By-Laws of the Company provides that the Company shall indemnify to the fullest extent required or permitted under Maryland law or the
Investment Company Act of 1940, as amended (the 1940 Act) as either may be amended from time to time, any individual who is a director or officer of the Company and who, by reason of his or he position was, is or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter collectively referred to as a Proceeding) against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by such director or officer in connection with such Proceeding, to the fullest extent that such indemnification may be lawful under Maryland law or the 1940 Act.
(b) Disabling Conduct. No director or officer shall be protected against any liability to the Company or its shareholders if such director or officer
would be subject to such liability by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office (such conduct hereinafter referred to as Disabling Conduct).
Article 2-418 of the General Corporation Laws of Maryland provides that no indemnification of a director or officer may be made unless:
(1) there is a final decision on the merits by a court or other body before whom the Proceeding was brought that the director or officer to be indemnified was not liable by reason of Disabling Conduct; or (2) in the absence of such a
decision, there is a reasonable determination, based upon a review of the facts, that the director or officer to be indemnified was not liable by reason of Disabling Conduct, which determination shall be made by: (i) the board of directors by a
majority vote of a quorum consisting of directors not, at the time, parties to the proceeding, or, if such a quorum cannot be obtained, then by a majority vote of a committee of the board consisting solely of one or more directors not, at the time,
parties to such proceeding and who were duly designated to act in the matter by a majority vote of the full board in which the designated directors who are parties may participate; (ii) special legal counsel selected by the board of directors
or a committee of the board by vote as set forth in subparagraph (i) of this paragraph, or, if the requisite quorum of the full board cannot be obtained therefore and the committee cannot be established, by a majority vote of the full board in
which directors who are parties may participate; or (iii) the stockholders.
(c) Standard of Conduct. The Company may not indemnify any
director if it is proved that: (1) the act or omission of the director was material to the cause of action adjudicated in the Proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty; or
(2) the director actually received an improper personal benefit; or (3) in the case of a criminal proceeding, the director had reasonable cause to believe that the act or omission was unlawful. No indemnification may be made under Maryland
law unless authorized for a specific proceeding after a determination has been made, in accordance with Maryland law, that indemnification is permissible in the circumstances because the requisite standard of conduct has been met.
(d) Required Indemnification. A director or officer who is successful, on the merits or otherwise, in the defense of any Proceeding shall be indemnified
against reasonable expenses incurred by the director or officer in connection with the Proceeding. In addition, under Maryland law, a court of appropriate jurisdiction may order indemnification under certain circumstances.
(e) Advance Payment. The Company may pay any reasonable expenses so incurred by any director or officer in
defending a Proceeding in advance of the final disposition thereof to the fullest extent permissible under Maryland law. Such advance payment of expenses shall be made only upon the undertaking by such director or officer to repay the advance unless
it is ultimately determined that such director or officer is entitled to indemnification, and only if one of the following conditions is met: (1) the director or officer to be indemnified provides a security for his undertaking; (2) the
Company shall be insured against losses arising by reason of any lawful advances; or (3) there is a determination, based on a review of readily available facts, that there is reason to believe that the director or officer to be indemnified
ultimately will be entitled to indemnification, which determination shall be made by: (i) a majority of a quorum of directors, none of whom is an interested person of the Company, as defined in Section 2(a)(19) of the 1940 Act,
or a party to the Proceeding; or (ii) an independent legal counsel in a written opinion.
(f) Insurance. To the fullest extent permitted
by Maryland law and Section 17(h) of the 1940 Act, the Company may purchase and maintain insurance on behalf of any officer or director of the Company, against any liability asserted against him or her and incurred by him or her in and arising
out of his or her position, whether or not the Company would have the power to indemnify him or her against such liability.
ITEM 31.
BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
None.
ITEM 32. PRINCIPAL UNDERWRITER
(a) None.
(b) The following are the Officers and Managers of Fairholme Distributors, LLC (the Distributor).
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Name
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Principal Business Address
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Positions and Offices
with the Distributor
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Positions and Offices
with the Registrant
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Mark A. Fairbanks
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Three Canal Plaza, Suite 100
Portland, ME 04101
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President and Manager
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None
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Richard J. Berthy
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Three Canal Plaza, Suite 100
Portland, ME 04101
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Vice President, Treasurer
and Manager
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None
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Bruno S. DiStefano
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899 Cassatt Road
400 Berwyn
Park, Suite 110
Berwyn, PA 19312
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Vice President
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None
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Ronald C. Berge
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899 Cassatt Road
400 Berwyn
Park, Suite 110
Berwyn, PA 19312
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Vice President
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None
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Susan K. Moscaritolo
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899 Cassatt Road
400 Berwyn
Park, Suite 110
Berwyn, PA 19312
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Vice President and Chief
Compliance Officer
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None
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Lisa S. Clifford
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Three Canal Plaza, Suite 100
Portland, ME 04101
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Vice President and
Managing Director of
Compliance
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None
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Jennifer E. Hoopes
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Three Canal Plaza, Suite 100
Portland, ME 04101
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Secretary
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None
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Nishant Bhatnagar
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Three Canal Plaza, Suite 100
Portland, ME 04101
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Assistant Secretary
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None
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(c) Not applicable.
ITEM 33. LOCATION OF ACCOUNTS AND RECORDS
The books and records required to be maintained by Section 31(a) of the 1940 Act are maintained in the following locations:
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Records Relating to
:
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Are located at:
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Administration and Accounting Services and Transfer Agency Services
|
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BNY Mellon Investment Servicing (US) Inc.
760 Moore Road
King of Prussia, PA 19406
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Investment Advisory Services
|
|
Fairholme Capital Management, L.L.C.
4400 Biscayne Blvd.
Miami, FL 33137
|
|
|
Custody Services
|
|
The Bank of New York Mellon
One Wall Street
New York, NY
10286
|
|
|
Distribution of Fund Shares
|
|
Fairholme Distributors, LLC
400 Berwyn Park, Suite 110
899 Cassatt
Road
Berwyn, PA 19312
|
ITEM 34.
|
MANAGEMENT SERVICES
|
None
None
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (1933 Act), and the Investment
Company Act of 1940, as amended, the Registrant has duly caused this Post-Effective Amendment to its Registration Statement to be signed on its behalf by the undersigned, duly authorized, in the city of Miami and State of Florida, on the 29
th
day of January, 2013.
|
|
|
FAIRHOLME FUNDS, INC.
|
|
|
|
|
/s/ Bruce R. Berkowitz
|
By:
|
|
BRUCE R. BERKOWITZ
|
|
|
President
|
Pursuant to the requirements of the 1933 Act, this Post-Effective Amendment to the
Registrants Registration Statement has been signed below by the following persons in the capacities and on the date indicated:
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
/s/ Bruce R. Berkowitz
Bruce R. Berkowitz
|
|
President & Director
|
|
January 29, 2013
|
|
|
|
/s/ Wayne Kellner
Wayne Kellner
|
|
Treasurer
|
|
January 29, 2013
|
|
|
|
/s/ Howard S. Frank *
Howard S. Frank
|
|
Director
|
|
January 29, 2013
|
|
|
|
/s/ Avivith Oppenheim, Esq.*
Avivith Oppenheim, Esq.
|
|
Director
|
|
January 29, 2013
|
|
|
|
/s/ Leigh Walters, Esq.*
Leigh Walters, Esq.
|
|
Director
|
|
January 29, 2013
|
|
|
|
/s/ Terry L. Baxter*
Terry L. Baxter
|
|
Director
|
|
January 29, 2013
|
|
|
|
/s/ Cesar L. Alvarez*
Cesar L. Alvarez
|
|
Director
|
|
January 29, 2013
|
|
|
|
|
|
* By
|
|
/s/ Bruce R. Berkowitz
|
|
|
Bruce R. Berkowitz
Attorney-in-Fact (pursuant to powers of attorney previously filed with the Securities and Exchange Commission)
|
SCHEDULE OF EXHIBITS TO FORM N-1A
Fairholme Funds, Inc.
|
|
|
Exhibit
Number
|
|
Exhibit
|
|
|
Ex.28.e.1
|
|
DISTRIBUTION AGREEMENT
|
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