N-Q 1 d337075dnq.htm FAIRHOLME FUNDS, INC. Fairholme Funds, Inc.

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-Q

 

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED

MANAGEMENT INVESTMENT COMPANY

Investment Company Act file number 811-09607

 

 

Fairholme Funds, Inc.

(Exact name of registrant as specified in charter)

 

 

4400 Biscayne Blvd., 9th Floor

Miami, FL 33137

(Address of principal executive offices) (Zip code)

 

 

Bruce R. Berkowitz

4400 Biscayne Blvd., 9th Floor

Miami, FL 33137

(Name and address of agent for service)

 

 

Registrant’s telephone number, including area code: 1-866-202-2263

Date of fiscal year end: November 30

Date of reporting period: February 29, 2012

Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than 60 days after the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the information provided on Form N-Q in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

 

 

 


Item 1. Schedule of Investments.

The Schedule of Investments is attached herewith.


THE FAIRHOLME FUND

 

 

SCHEDULE OF INVESTMENTS

February 29, 2012 (unaudited)

 

 

Shares

          

        Value        

 
   DOMESTIC EQUITY SECURITIES — 73.4%   
   COMMERCIAL FINANCE — 8.1%   
  16,358,129      

CIT Group Inc. (a)(b)

   $ 665,939,432   
     

 

 

 
   DIVERSIFIED BANKS — 8.0%   
  81,607,015      

Bank of America Corp.

     650,407,910   
     

 

 

 
   DIVERSIFIED HOLDING COMPANIES — 7.9%   
  2,532      

Berkshire Hathaway, Inc., Class A (a)

     298,608,888   
  12,186,350      

Leucadia National Corp.

     347,189,111   
     

 

 

 
        645,797,999   
     

 

 

 
   MULTI-LINE INSURANCE — 30.0%   
  84,130,225      

American International Group, Inc. (a)

     2,458,285,175   
     

 

 

 
   REAL ESTATE MANAGEMENT & DEVELOPMENT — 4.4%   
  23,136,502      

The St. Joe Co. (a)(b)(c)(d)(e)

     361,547,176   
     

 

 

 
   RETAIL DEPARTMENT STORES — 12.1%   
  14,212,673      

Sears Holdings Corp. (a)(b)

     990,054,801   
     

 

 

 
   SPECIALTY RETAIL-HOME IMPROVEMENT — 0.2%   
  641,893      

Orchard Supply Hardware Stores Corp., Class A (a)(b)

     17,292,623   
     

 

 

 
   SURETY INSURANCE — 2.7%   
  20,501,100      

MBIA, Inc. (a)(b)

     221,001,858   
     

 

 

 

 
 

TOTAL DOMESTIC EQUITY SECURITIES
(COST $6,543,088,192)

     6,010,326,974   
     

 

 

 
   FOREIGN EQUITY SECURITIES — 14.0%   
   CHINA — 14.0%   
   LIFE INSURANCE — 14.0%   
  302,221,000      

AIA Group Ltd.

     1,145,573,528   
     

 

 

 

 
 

TOTAL FOREIGN EQUITY SECURITIES
(COST $774,455,524)

     1,145,573,528   
     

 

 

 

The accompanying notes are an integral part of the schedule of investments.

 

1


THE FAIRHOLME FUND

 

 

SCHEDULE OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

 

Shares

          

        Value        

 
   DOMESTIC PREFERRED EQUITY SECURITIES — 0.0%   
   SPECIALTY RETAIL-HOME IMPROVEMENT — 0.0%   
  641,893      

Orchard Supply Hardware Stores Corp., Preferred, Zero Coupon, Series A (a)(b)

   $ 1,315,883   
     

 

 

 

 
 

TOTAL DOMESTIC PREFERRED EQUITY SECURITIES
(COST $1,263,535)

     1,315,883   
     

 

 

 
   WARRANTS — 7.8%   
   MULTI-LINE INSURANCE — 2.2%   
  21,588,480      

American International Group, Inc., Vested, Strike Price $45.00, Expire 01/19/2021 (a)(f)

     178,536,730   
     

 

 

 
   REAL ESTATE INVESTMENT TRUSTS — 5.1%   
  40,634,357      

General Growth Properties, Inc., Vested, Strike Price $9.56, Expire 11/09/2017 (a)(c)(d)(e)(f)

     420,045,475   
     

 

 

 
   REAL ESTATE MANAGEMENT & DEVELOPMENT — 0.5%   
  1,896,270      

Howard Hughes Corp., Vested, Strike Price $50.00, Expire 11/09/2017 (a)(c)(d)(e)(f)

     39,816,740   
     

 

 

 

 
 

TOTAL WARRANTS
(COST $351,676,339)

     638,398,945   
     

 

 

 

Principal

              
   DOMESTIC CORPORATE BONDS — 0.5%   
   REGIONAL BANKS — 0.1%   
  $12,308,000      

Emigrant Bancorp, Inc. 6.250%, 06/15/2014 (c)

     11,234,742   
     

 

 

 

The accompanying notes are an integral part of the schedule of investments.

 

2


THE FAIRHOLME FUND

 

 

SCHEDULE OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

 

Principal

          

      Value    

 
   SURETY INSURANCE — 0.4%   
  

MBIA, Inc.

  
  $17,932,000      

7.000%, 12/15/2025 (b)

   $ 13,986,960   
  13,859,000      

7.150%, 07/15/2027 (b)

     10,810,020   
  11,580,000      

5.700%, 12/01/2034 (b)(c)

     7,608,060   
     

 

 

 
        32,405,040   
     

 

 

 

 
 

TOTAL DOMESTIC CORPORATE BONDS
(COST $44,594,724)

     43,639,782   
     

 

 

 
   U.S. GOVERNMENT OBLIGATIONS — 1.8%   
  25,000,000           U.S. Treasury Bills 0.091%, 03/15/2012 (g)      24,999,115   
  25,000,000           U.S. Treasury Bills 0.089%, 04/19/2012 (g)      24,996,971   
  25,000,000           U.S. Treasury Bills 0.101%, 04/26/2012 (g)      24,996,072   
  25,000,000           U.S. Treasury Bills 0.086%, 05/10/2012 (g)      24,996,350   
  25,000,000           U.S. Treasury Bills 0.076%, 05/17/2012 (g)      24,995,725   
  25,000,000           U.S. Treasury Bills 0.085%, 05/24/2012 (g)      24,995,325   
     

 

 

 

 
 

TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $149,978,956)

     149,979,558   
     

 

 

 

Shares

             
   MONEY MARKET FUNDS — 2.6%   
  209,184,047      

Fidelity Institutional Money Market Funds - Money Market Portfolio, 0.250% (h)

     209,184,047   
     

 

 

 

 
 

TOTAL MONEY MARKET FUNDS
(COST $209,184,047)

     209,184,047   
     

 

 

 

 
 

TOTAL INVESTMENTS — 100.1%
(COST $8,074,241,317)

     8,198,418,717   

 

                                     LIABILITIES IN EXCESS OF OTHER ASSETS — (0.1)%

     (4,582,878
     

 

 

 

 

NET ASSETS — 100.0%

   $   8,193,835,839   
     

 

 

 

 

 

(a) 

Non-income producing security.

(b) 

Affiliated Company. See Note 3.

(c) 

Security fair valued under procedures approved by the Board of Directors. The procedures may include: a) utilizing the average bid of independent broker/dealer quotes, b) utilizing the average bid of independent broker/dealer quotes and observable market prices on the day of valuation, c) using simulation models, and d) the Manager’s estimates of the discount necessary to reflect the current and existing restrictions on the Manager transacting in the securities. The value of these securities totals $840,252,193, which represents 10.25% of The

The accompanying notes are an integral part of the schedule of investments.

 

3


THE FAIRHOLME FUND

 

 

SCHEDULE OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

Fairholme Fund’s net assets. Such securities may be classified as Level 2 measurements if the determination of fair value is based primarily on the use of significant observable inputs and Level 3 measurements if the determination of fair value is based primarily on the use of significant unobservable inputs.

(d) 

Security is deemed an illiquid security under procedures approved by the Board of Directors.

(e) 

Restricted or controlled security under procedures approved by the Board of Directors. The value of these securities totals $821,409,391, which represents 10.02% of The Fairholme Fund’s net assets. Information related to these securities is as follows:

 

Acquisition

Shares

  

Issuer

               Acquisition             
Date(s)
   Acquisition
Cost
     02/29/2012
Carrying
Value
Per Unit
 

23,136,502

  

The St. Joe Co.

   12/12/2007-10/13/2010    $ 607,609,975       $ 15.6267   

40,634,357

  

General Growth Properties, Inc., Warrants, Vested, Strike Price $9.56, Expire 11/09/2017

   05/10/2010      -         10.3372   

1,896,270

  

Howard Hughes Corp., Warrants, Vested, Strike Price $50.00, Expire 11/09/2017

   11/05/2010      -         20.9974   

 

(f) 

Warrants have terms and conditions based on dividends paid and other events that may lower the strike price and raise the shares per warrant conversion ratio. Reported strike prices and conversion ratios are as of the date of this report. All share-to-warrant conversion ratios are currently 1:1, excluding the General Growth Properties, Inc. warrants, which on February 29, 2012 had a conversion ratio of 1:1.0979.

(g) 

Rates shown are the effective yields based on the purchase price. The calculation assumes the security is held to maturity.

(h) 

Annualized based on the 1-day yield as of February 29, 2012.

The accompanying notes are an integral part of the schedule of investments.

 

4


THE FAIRHOLME FOCUSED INCOME FUND

 

 

SCHEDULE OF INVESTMENTS

February 29, 2012 (unaudited)

 

 

Shares

          

        Value        

 
   DOMESTIC PREFERRED EQUITY SECURITIES — 0.9%   
   DIVERSIFIED BANKS — 0.5%   
  57,200      

Wells Fargo & Co., Preferred, 8.000%, Series J

   $ 1,673,100   
     

 

 

 
   MULTI-LINE INSURANCE — 0.4%   
  23,500      

American International Group, Inc., Preferred, 6.450%, Series A-4 (a)

     558,595   
  21,800      

American International Group, Inc., Preferred, 7.700% (a)

     560,478   
     

 

 

 
        1,119,073   
     

 

 

 

 
 

TOTAL DOMESTIC PREFERRED EQUITY SECURITIES
(COST $2,411,235)

     2,792,173   
     

 

 

 
   WARRANTS — 1.7%   
   MULTI-LINE INSURANCE — 0.1%   
  23,212      

American International Group, Inc., Vested, Strike Price $45.00, Expire 01/19/2021 (b)(c)

     191,963   
     

 

 

 
   REAL ESTATE INVESTMENT TRUSTS — 1.5%   
  437,072      

General Growth Properties, Inc., Vested, Strike Price $9.56, Expire 11/09/2017 (b)(c)(d)(e)(f)

     4,518,101   
     

 

 

 
   REAL ESTATE MANAGEMENT & DEVELOPMENT — 0.1%   
  20,397      

Howard Hughes Corp., Vested, Strike Price $50.00, Expire 11/09/2017 (b)(c)(d)(e)(f)

     428,284   
     

 

 

 

 
 

TOTAL WARRANTS
(COST $378,123)

     5,138,348   
     

 

 

 

The accompanying notes are an integral part of the schedule of investments.

 

5


THE FAIRHOLME FOCUSED INCOME FUND

 

 

SCHEDULE OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

 

Principal

          

        Value        

 
   DOMESTIC CORPORATE BONDS — 90.5%   
   CAPITAL MARKETS — 3.2%   
  $10,000,000      

Jefferies Group, Inc. 7.750%, 03/15/2012

   $ 9,978,125   
     

 

 

 
   COMMERCIAL FINANCE — 7.6%   
  

CIT Group Inc.

  
  9,308,090      

7.000%, 05/01/2016 (d)

     9,320,190   
  14,000,000      

7.000%, 05/01/2017

     14,000,000   
     

 

 

 
        23,320,190   
     

 

 

 
   REGIONAL BANKS — 22.5%   
  58,500,000      

Emigrant Bancorp, Inc. 6.250%, 06/15/2014 (d)

     53,398,800   
  6,000,000      

Regions Financial Corp. 4.875%, 04/26/2013

     6,090,000   
  10,000,000      

Regions Financial Corp., Subordinate Debenture 6.375%, 05/15/2012 (d)

     10,069,000   
     

 

 

 
        69,557,800   
     

 

 

 
   RETAIL DEPARTMENT STORES — 16.9%   
  60,000,000      

Sears Holdings Corp. 6.625%, 10/15/2018

     52,200,000   
     

 

 

 
   SURETY INSURANCE — 40.3%   
  60,600,000      

MBIA Insurance Corp., Subordinate Debenture 14.000%, 01/15/2033 (a)

     39,087,000   
  

MBIA, Inc.

  
  8,486,000      

6.400%, 08/15/2022 (d)

     6,538,463   
  7,105,000      

7.000%, 12/15/2025

     5,541,900   
  49,716,000      

7.150%, 07/15/2027

     38,778,480   
  47,500,000      

6.625%, 10/01/2028 (d)

     34,675,000   
     

 

 

 
        124,620,843   
     

 

 

 

 
 

TOTAL DOMESTIC CORPORATE BONDS
(COST $282,003,710)

     279,676,958   
     

 

 

 

The accompanying notes are an integral part of the schedule of investments.

 

6


THE FAIRHOLME FOCUSED INCOME FUND

 

 

SCHEDULE OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

 

Shares

          

        Value        

 
   MONEY MARKET FUNDS — 4.9%   
  15,125,622      

Fidelity Institutional Money Market Funds - Money Market Portfolio, 0.250% (g)

   $ 15,125,622   
     

 

 

 

 
 

TOTAL MONEY MARKET FUNDS
(COST $15,125,622)

     15,125,622   
     

 

 

 

 
 

TOTAL INVESTMENTS — 98.0%
(COST $299,918,690)

     302,733,101   
  

OTHER ASSETS IN EXCESS OF LIABILITIES — 2.0%

     6,239,526   
     

 

 

 
  NET ASSETS — 100.0%    $ 308,972,627   
     

 

 

 

 

 

(a) 

Variable rate security. The rate shown is as of February 29, 2012.

(b) 

Warrants have terms and conditions based on dividends paid and other events that may lower the strike price and raise the shares per warrant conversion ratio. Reported strike prices and conversion ratios are as of the date of this report. All share-to-warrant conversion ratios are currently 1:1, excluding the General Growth Properties, Inc. warrants, which on February 29, 2012 had a conversion ratio of 1:1.0979.

(c) 

Non-income producing security.

(d) 

Security fair valued under procedures approved by the Board of Directors. The procedures may include: a) utilizing the average bid of independent broker/dealer quotes, b) utilizing the average bid of independent broker/dealer quotes and observable market prices on the day of valuation, and c) using simulation models. The value of these securities totals $118,947,838, which represents 38.50% of The Income Fund’s net assets. Such securities may be classified as Level 2 measurements if the determination of fair value is based primarily on the use of significant observable inputs and Level 3 measurements if the determination of fair value is based primarily on the use of significant unobservable inputs.

(e) 

Restricted or controlled security under procedures approved by the Board of Directors. The value of these securities totals $4,946,385, which represents 1.60% of The Income Fund’s net assets. Information related to these securities is as follows:

 

Acquisition
Shares

  

Issuer

   Acquisition
Date
   Acquisition
Cost
   02/29/2012
Carrying

Value
Per Unit
 
437,072   

General Growth Properties, Inc., Warrants, Vested, Strike Price $9.56, Expire 11/09/2017

   05/10/2010    $-    $ 10.3372   
20,397   

Howard Hughes Corp., Warrants, Vested, Strike Price $50.00, Expire 11/09/2017

   11/05/2010      -      20.9974   

The accompanying notes are an integral part of the schedule of investments.

 

7


THE FAIRHOLME FOCUSED INCOME FUND

 

 

SCHEDULE OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

 

(f)

Security is deemed an illiquid security under procedures approved by the Board of Directors.

(g) 

Annualized based on the 1-day yield as of February 29, 2012.

The accompanying notes are an integral part of the schedule of investments.

 

8


THE FAIRHOLME ALLOCATION FUND

 

 

SCHEDULE OF INVESTMENTS

February 29, 2012 (unaudited)

 

 

Shares

          

        Value        

 
  

DOMESTIC EQUITY SECURITIES — 70.0%

  
  

CAPITAL MARKETS — 5.3%

  
  975,000      

Jefferies Group, Inc.

   $ 16,302,000   
     

 

 

 
  

COMMERCIAL FINANCE — 0.8%

  
  63,400      

CIT Group Inc. (a)

     2,581,014   
     

 

 

 
  

DIVERSIFIED HOLDING COMPANIES — 5.1%

  
  543,400      

Leucadia National Corp.

     15,481,466   
     

 

 

 
  

MULTI-LINE INSURANCE — 20.0%

  
  2,102,900      

American International Group, Inc. (a)

     61,446,738   
     

 

 

 
  

RETAIL DEPARTMENT STORES — 10.7%

  
  472,100      

Sears Holdings Corp. (a)

     32,886,486   
     

 

 

 
  

SPECIALTY RETAIL-HOME IMPROVEMENT — 0.1%

  
  8,070      

Orchard Supply Hardware Stores Corp., Class A (a)

     217,418   
     

 

 

 
  

SURETY INSURANCE — 28.0%

  
  7,982,400      

MBIA, Inc. (a)

     86,050,272   
     

 

 

 

 
 

TOTAL DOMESTIC EQUITY SECURITIES
(COST $190,977,357)

     214,965,394   
     

 

 

 
  

DOMESTIC PREFERRED EQUITY SECURITIES — 0.0%

  
  

SPECIALTY RETAIL-HOME IMPROVEMENT — 0.0%

  
  8,070      

Orchard Supply Hardware Stores Corp., Preferred, Zero Coupon, Series A (a)

     16,544   
     

 

 

 

 
 

TOTAL DOMESTIC PREFERRED EQUITY SECURITIES
(COST $14,067)

     16,544   
     

 

 

 

The accompanying notes are an integral part of the schedule of investments.

 

9


THE FAIRHOLME ALLOCATION FUND

 

 

SCHEDULE OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

 

Shares

          

        Value        

 
  

WARRANTS — 13.8%

  
  

DIVERSIFIED BANKS — 12.5%

  
  5,570,428      

Bank of America Corp., Vested, Strike Price $13.30, Expire 01/16/2019 (a)(b)

   $ 21,334,739   
  484,700      

JPMorgan Chase & Co., Vested, Strike Price $42.42, Expire 10/28/2018 (a)(b)

     5,695,225   
  1,180,495      

Wells Fargo & Co., Vested, Strike Price $34.01, Expire 10/28/2018 (a)(b)

     11,261,922   
     

 

 

 
        38,291,886   
     

 

 

 
  

MULTI-LINE INSURANCE — 1.3%

  
  507,515      

American International Group, Inc., Vested, Strike Price $45.00, Expire 01/19/2021 (a)(b)

     4,197,149   
     

 

 

 

 
 

TOTAL WARRANTS
(COST $37,764,625)

     42,489,035   
     

 

 

 

Principal

             
  

DOMESTIC CORPORATE BONDS — 3.4%

  
  

REGIONAL BANKS — 3.4%

  
  $11,400,000      

Emigrant Bancorp, Inc. 6.250%, 06/15/2014 (c)

     10,405,920   
     

 

 

 

 
 

TOTAL DOMESTIC CORPORATE BONDS
(COST $10,395,684)

     10,405,920   
     

 

 

 
  

U.S. GOVERNMENT OBLIGATIONS — 3.3%

  
  5,000,000      

U.S. Treasury Bills 0.086%, 05/10/2012 (d)

     4,999,270   
  5,000,000      

U.S. Treasury Bills 0.085%, 05/24/2012 (d)

     4,999,065   
     

 

 

 

 
 

TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $9,998,172)

     9,998,335   
     

 

 

 

The accompanying notes are an integral part of the schedule of investments.

 

10


THE FAIRHOLME ALLOCATION FUND

 

 

SCHEDULE OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

 

Shares

          

        Value        

 
   MONEY MARKET FUNDS — 7.7%   
  23,817,821      

Fidelity Institutional Money Market Funds - Money Market Portfolio, 0.250% (e)

   $ 23,817,821   
     

 

 

 

 
 

TOTAL MONEY MARKET FUNDS
(COST $23,817,821)

     23,817,821   
     

 

 

 
   MISCELLANEOUS INVESTMENTS — 1.8%(f)   

 

     (COST $5,295,740)

     5,520,259   
     

 

 

 

 
 

TOTAL INVESTMENTS — 100.0%
(COST $278,263,466)

     307,213,308   
           LIABILITIES IN EXCESS OF OTHER ASSETS — 0.0%      (85,876
     

 

 

 
  NET ASSETS — 100.0%    $ 307,127,432   
     

 

 

 

 

 

(a)

Non-income producing security.

(b)

Warrants have terms and conditions based on dividends paid and other events that may lower the strike price and raise the shares per warrant conversion ratio. Reported strike prices and conversion ratios are as of the date of this report. All share-to-warrant conversion ratios are currently 1:1.

(c)

Security fair valued under procedures approved by the Board of Directors. The procedures may include: a) utilizing the average bid of independent broker/dealer quotes, b) utilizing the average bid of independent broker/dealer quotes and observable market prices on the day of valuation, and c) using simulation models. The value of this security totals $10,405,920, which represents 3.39% of The Allocation Fund’s net assets. Such securities may be classified as Level 2 measurements if the determination of fair value is based primarily on the use of significant observable inputs.

(d)

Rates shown are the effective yields based on the purchase price. The calculation assumes the security is held to maturity.

(e)

Annualized based on the 1-day yield as of February 29, 2012.

(f)

Represents previously undisclosed unrestricted securities, which The Allocation Fund has held for less than one year.

The accompanying notes are an integral part of the schedule of investments.

 

11


FAIRHOLME FUNDS, INC.

 

 

NOTES TO SCHEDULES OF INVESTMENTS

February 29, 2012 (unaudited)

 

Note 1. Significant Accounting Policies

The Fairholme Fund’s (“The Fairholme Fund”), The Fairholme Focused Income Fund’s (“The Income Fund”), and The Fairholme Allocation Fund’s (“The Allocation Fund”) (each a “Fund” and collectively the “Funds”) investments are reported at fair value as defined by U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The Funds generally determine their net assets value as of approximately 4:00 p.m. Eastern Time each day the New York Stock Exchange is open.

A description of the valuation techniques applied to the Funds’ securities measured at fair value on a recurring basis follows:

Security Valuation:

Equity securities (common and preferred stocks): Securities traded on a national securities exchange or reported on the NASDAQ national market are generally valued at the official closing price of, or at the last reported sale price on the exchange or market on which the securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized in Level 1 of the fair value hierarchy. Fairholme Capital Management, LLC (the “Manager”) may also employ other valuation methods which the Manager believes would provide a more accurate indication of fair value. In these situations, if the inputs are observable, the valuation will be categorized in Level 2 of the fair value hierarchy, otherwise they would be categorized in Level 3. As of February 29, 2012, equity investments of The St. Joe Co. valued at $361,547,176 (4.41% of net assets) in The Fairholme Fund are fair valued by the Manager due to a trading restriction. The value is calculated by applying a discount to the official closing price on the day of valuation. These investments are reflected as being fair valued under procedures approved by the Board of Directors (the “Board”) in the Schedules of Investments.

Fixed-income securities (corporate bonds, convertible bonds and asset backed securities): The fair value of corporate bonds, convertible bonds, and asset backed securities are estimated using market quotations when readily available, but may also be estimated by various methods when no such market quotations exist and when the Manager believes these other methods reflect the fair value of such securities. These methods may consider recently executed transactions in securities of the issuer or comparable issuers and market price valuations from independent pricing services and/or brokers where observable. Where the Manager deems it appropriate to do so, such as when independent prices are unavailable or not deemed to be representative of fair value, fixed income securities will be fair valued in good faith. As of February 29, 2012,

 

12


FAIRHOLME FUNDS, INC.

 

 

NOTES TO SCHEDULES OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

fixed income investments valued at $18,842,802 (0.23% of net assets), $114,001,453 (36.90% of net assets), and $10,405,920 (3.39% of net assets) in The Fairholme Fund, The Income Fund, and The Allocation Fund, respectively, are valued by the Manager utilizing the average bid of independent broker/dealer quotes or the average bid of independent broker/dealer quotes and observable market prices on the day of valuation. These investments are reflected as being fair valued under procedures approved by the Board in the Schedules of Investments. Although most corporate bonds are categorized in Level 2 of the fair value hierarchy, in instances where lower relative weight is placed on transaction prices, quotations, or similar observable inputs, they are categorized in Level 3.

Open-end mutual funds: Investments in open-end mutual funds including money market funds are valued at their closing net asset value each business day and are categorized in Level 1 of the fair value hierarchy.

Short-term securities: Investments in securities with maturities of less than sixty days when acquired or long-term securities, which are within sixty days of maturity are estimated by using the amortized cost method of valuation, which the Manager and the Board have determined will approximate fair value. To the extent the inputs are observable and timely, the values would be categorized in Level 2 of the fair value hierarchy.

Restricted securities: Depending on the relative significance of valuation inputs, these instruments may be classified in either Level 2 or Level 3 of the fair value hierarchy.

Warrants: The Funds may invest in warrants, which may be acquired either through a direct purchase, included as part of a private placement, or pursuant to corporate actions. Warrants entitle, but do no obligate, the holder to buy equity securities at a specific price for a specific period of time. 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 warrant does not necessarily change with the value of the underlying securities and a warrant ceases to have value if it is not exercised prior to its expiration date. Warrants traded on a security exchange are valued at the official closing price on the valuation date and are classified as Level 1 of the fair value hierarchy. Over the counter (OTC) warrants are valued using simulation models utilizing the market value of the underlying security, expiration date of the warrants, the volatility of the underlying security, strike price of the warrants, the risk-free interest rate at the valuation date, and other inputs are classified as Level 3 of the fair value hierarchy.

 

13


FAIRHOLME FUNDS, INC.

 

 

NOTES TO SCHEDULES OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

The Manager may determine the fair valuation of a security when market quotations are insufficient or not readily available, when securities are determined to be illiquid or restricted, or when in the judgment of the Manager the prices or values available do not represent the fair value of the instrument. Factors which may cause the Manager to make such a judgment include the following: (a) only a bid price or an asked price is available; (b) the spread between bid and asked prices is substantial; (c) the liquidity of the securities; (d) the frequency of sales; (e) the thinness of the market; (f) the size of reported trades; and (g) actions of the securities markets, such as the suspension or limitation of trading; and (h) bona fide bids or offers made to the Manager by independent third parties.

The inputs and valuation techniques used to measure fair value of the Funds’ investments are summarized into three levels as described in the hierarchy below:

 

Ÿ  Level 1 —   quoted prices in active markets for identical securities;
Ÿ  Level 2 —   other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.); and
Ÿ  Level 3 —   significant unobservable inputs (including the Funds’ determinations as to the fair value of investments).

The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. The summary of the Funds’ investments by inputs used to value the Funds’ investments as of February 29, 2012 is as follows:

 

14


FAIRHOLME FUNDS, INC.

 

 

NOTES TO SCHEDULES OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

     Valuation Inputs         
     Level 1 –
Quoted Prices
     Level 2 – Other
Significant
Observable Inputs
     Level 3 -
Significant
Unobservable
Inputs
     Total
Fair Value
at 02/29/2012
 

THE FAIRHOLME FUND

           

ASSETS:

           

INVESTMENTS (Fair Value):

           

Domestic Equity Securities

           

Real Estate Management & Development

   $       $ 361,547,176       $       $ 361,547,176   

Other*

     5,648,779,798                         5,648,779,798   

Foreign Equity Securities*

     1,145,573,528                         1,145,573,528   

Domestic Preferred Equity Securities*

     1,315,883                         1,315,883   

Warrants

           

Multi-Line Insurance

     178,536,730                         178,536,730   

Real Estate Investment Trusts

                     420,045,475         420,045,475   

Real Estate Management & Development

                     39,816,740         39,816,740   

Domestic Corporate Bonds

             43,639,782                 43,639,782   

U.S. Government Obligations

             149,979,558                 149,979,558   

Money Market Funds

     209,184,047                         209,184,047   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL INVESTMENTS

   $ 7,183,389,986       $ 555,166,516       $ 459,862,215       $ 8,198,418,717   
  

 

 

    

 

 

    

 

 

    

 

 

 

THE INCOME FUND

           

ASSETS:

           

INVESTMENTS (Fair Value):

           

Domestic Preferred Equity Securities*

   $ 2,792,173       $       $       $ 2,792,173   

Warrants

           

Multi-Line Insurance

     191,963                         191,963   

Real Estate Investment Trusts

                     4,518,101         4,518,101   

Real Estate Management & Development

                     428,284         428,284   

Domestic Corporate Bonds

             279,676,958                 279,676,958   

Money Market Funds

     15,125,622                         15,125,622   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL INVESTMENTS

   $ 18,109,758       $ 279,676,958       $ 4,946,385       $ 302,733,101   
  

 

 

    

 

 

    

 

 

    

 

 

 

THE ALLOCATION FUND

           

ASSETS:

           

INVESTMENTS (Fair Value):

           

Domestic Equity Securities*

   $ 214,965,394       $       $       $ 214,965,394   

Domestic Preferred Equity Securities*

     16,544                         16,544   

Warrants*

     42,489,035                         42,489,035   

Domestic Corporate Bonds

             10,405,920                 10,405,920   

U.S. Government Obligations

             9,998,335                 9,998,335   

Money Market Funds

     23,817,821                         23,817,821   

Miscellaneous Investments

     5,056,411         463,848                 5,520,259   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL INVESTMENTS

   $ 286,345,205       $ 20,868,103       $       $ 307,213,308   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

Industry classifications for these categories are detailed in the Schedules of Investments.

 

15


FAIRHOLME FUNDS, INC.

 

 

NOTES TO SCHEDULES OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

The Funds had no significant transfers between Level 1 and Level 2 during the period ended February 29, 2012.

The following is a reconciliation of Level 3 investments for which significant unobservable inputs were used to determine fair value:

 

     THE FAIRHOLME FUND  
     Assets:
Investments (Fair Value)
 
    
     Warrants         
     Real Estate
Investment
Trusts
     Real Estate
Management
& Development
     Total Level 3
Investments
 

Balance as of 11/30/2011

   $ 339,268,437       $ 35,943,608       $ 375,212,045   

Change in unrealized appreciation/depreciation

     80,777,038         3,873,132         84,650,170   

Purchases

                       

Sales

                       

Transfers into Level 3 (1)

                       

Transfers out of Level 3 (1)

                       
  

 

 

    

 

 

    

 

 

 

Balance as of 02/29/2012

   $ 420,045,475       $ 39,816,740       $ 459,862,215   
  

 

 

    

 

 

    

 

 

 

Net change in unrealized appreciation/depreciation during the period on Level 3 investments held at 02/29/2012

   $ 80,777,038       $ 3,873,132       $ 84,650,170   
  

 

 

    

 

 

    

 

 

 

 

(1) 

The Fairholme Fund’s policy is to recognize transfers into and transfers out of Level 3 as of the beginning of the reporting period.

 

     THE INCOME FUND  
     Assets:
Investments (Fair Value)
 
     Warrants         
     Real Estate
Investment
Trusts
     Real Estate
Management
& Development
     Total Level 3
Investments
 

Balance as of 11/30/2011

   $ 3,649,245       $ 386,623       $ 4,035,868   

Change in unrealized appreciation/depreciation

     868,856         41,661         910,517   

Purchases

                       

Sales

                       

Transfers into Level 3 (1)

                       

Transfers out of Level 3 (1)

                       
  

 

 

    

 

 

    

 

 

 

Balance as of 02/29/2012

   $ 4,518,101       $ 428,284       $ 4,946,385   
  

 

 

    

 

 

    

 

 

 

Net change in unrealized appreciation/depreciation during the period on Level 3 investments held at 02/29/12

   $ 868,856       $ 41,661       $ 910,517   
  

 

 

    

 

 

    

 

 

 

 

(1) 

The Income Fund’s policy is to recognize transfers into and transfers out of Level 3 as of the beginning of the reporting period.

 

16


FAIRHOLME FUNDS, INC.

 

 

NOTES TO SCHEDULES OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

Recent Accounting Standards: In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04 “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”)”. ASU No. 2011-04 includes common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU No. 2011-04 will require reporting entities to disclose the following information for fair value measurements categorized within Level 3 of the fair value hierarchy: quantitative information about the unobservable inputs used in the fair value measurement, the valuation processes used by the reporting entity and a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs. In addition, ASU No. 2011-04 will require reporting entities to make disclosures about amounts and reasons for all transfers in and out of Level 1 and Level 2 fair value measurements. The new and revised disclosures are effective for interim and annual reporting periods beginning after December 15, 2011. At this time, the Manager is evaluating the implications of ASU No. 2011-04 and its impact on the financial statements.

Warrants: As of February 29, 2012, the Funds’ investments in warrants are presented within the Schedules of Investments.

The Fairholme Fund’s, The Income Fund’s, and The Allocation Fund’s warrant positions during the period November 30, 2011 through February 29, 2012 had an average monthly market value of approximately $557,985,918, $4,656,397, and $30,934,983, respectively.

Note 2. Tax Matters

For U.S. federal income tax purposes, the cost of securities owned, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation (depreciation) of investments at February 29, 2012 were as follows:

 

     Cost      Gross Unrealized
Appreciation
     Gross Unrealized
Depreciation
    Net Unrealized
Appreciation
 

The Fairholme Fund

   $ 8,079,049,071       $ 1,151,506,008       $ (1,032,136,362   $ 119,369,646   

The Income Fund

     299,918,690         9,430,663         (6,616,252     2,814,411   

The Allocation Fund

     278,348,236         29,809,600         (944,528     28,865,072   

The difference between book basis and tax basis net unrealized appreciation in the Funds is attributable primarily to the tax deferral of losses on wash sales.

 

17


FAIRHOLME FUNDS, INC.

 

 

NOTES TO SCHEDULES OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

Note 3. Transactions in Shares of Affiliates

Portfolio companies in which a Fund owns 5% or more of the outstanding voting securities are considered affiliated companies of the Fund. The aggregate fair value of all securities of affiliated companies held in The Fairholme Fund as of February 29, 2012 amounted to $2,289,556,813 representing 27.94% of net assets. There were no affiliated companies of The Income Fund and The Allocation Fund as of February 29, 2012.

Transactions in the Fairholme Fund during the period ended February 29, 2012 in which the issuer was an “affiliated person” are as follows:

 

18


FAIRHOLME FUNDS, INC.

 

 

NOTES TO SCHEDULES OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

 

The Fairholme Fund

   November 30, 2011      Gross Additions  
     Shares/
Par Value
     Cost      Shares/
Par Value
     Cost  

CIT Group Inc.

     16,358,129       $ 529,205,589               $   

MBIA, Inc.

     20,501,100         186,282,116                   

Orchard Supply Hardware Stores Corp., Class A(a)

                     641,893         40,499,020   

Sears Holdings Corp.

     14,212,673         1,122,444,166                   

The St. Joe Co.

     23,136,502         607,609,975                   

Orchard Supply Hardware Stores Corp., Preferred, Zero Coupon, Series A(a)

                     641,893         1,263,535   

MBIA, Inc. 7.000%, 12/15/2025

   $ 17,932,000         13,889,379       $           

MBIA, Inc. 7.150%, 07/15/2027

   $ 13,859,000         11,585,909       $           

MBIA, Inc. 5.700%, 12/01/2034

   $ 11,580,000         7,886,742       $           
     

 

 

       

 

 

 

Total

      $ 2,478,903,876          $ 41,762,555   
     

 

 

       

 

 

 

(a) Security received in Spin-Off from Sears Holdings Corp. Security was not held in the portfolio at November 30, 2011.

 

19


FAIRHOLME FUNDS, INC.

 

 

NOTES TO SCHEDULES OF INVESTMENTS (continued)

February 29, 2012 (unaudited)

 

 

Gross Deductions     February 29, 2012            

Shares/

Par Value

  Cost     Shares/
Par Value
    Cost     Fair Value     Realized
Gain (Loss)
  Investment
Income
 
  —   $        16,358,129      $ 529,205,589      $ 665,939,432      $—   $   
  —            20,501,100        186,282,116        221,001,858        —       
  —            641,893        40,499,020        17,292,623        —       
  —     41,762,555        14,212,673        1,080,681,611        990,054,801        —       
  —            23,136,502        607,609,975        361,547,176        —       
  —            641,893        1,263,535        1,315,883        —       
$—          $ 17,932,000        13,923,432        13,986,960        —     312,095   
$—          $ 13,859,000        11,602,634        10,810,020        —     246,398   
$—          $ 11,580,000        7,899,296        7,608,060        —     164,113   
 

 

 

     

 

 

   

 

 

   

 

 

 

 

 
  $ 41,762,555        $ 2,478,967,208      $ 2,289,556,813      $—   $ 722,606   
 

 

 

     

 

 

   

 

 

   

 

 

 

 

 

For additional information regarding the accounting policies of the Funds and the most recent federal income tax information, refer to the most recent financial statements in the N-CSR filing at www.sec.gov.

 

20


Item 2. Controls and Procedures.

 

  (a)

The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).

 

  (b)

There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Item 3. Exhibits.

Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

(Registrant) Fairholme Funds, Inc.
By (Signature and Title)*   /s/    BRUCE R. BERKOWITZ        
  Bruce R. Berkowitz, President
  (principal executive officer)

Date 4/24/12

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By (Signature and Title)*   /s/    BRUCE R. BERKOWITZ        
  Bruce R. Berkowitz, President
  (principal executive officer)

Date 4/24/12

 

By (Signature and Title)*   /s/    WAYNE KELLNER        
  Wayne Kellner, Treasurer
  (principal financial officer)

Date 4/24/12

 

*

Print the name and title of each signing officer under his or her signature.