N-CSRS 1 d352975dncsrs.htm FAIRHOLME FUNDS, INC. Fairholme Funds, Inc.

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

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: May 31, 2012

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR 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 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. Reports to Stockholders.

The Report to Shareholders is attached herewith.


LOGO


 

LOGO

LOGO

FAIRHOLME FUND

No-lode,non-diversified funds

SEMI-ANNUAL REPORT

For the Six Months Ended May 31, 2012

THE FAIRHOLME FUND (FAIRX)

Seeking long-term growth of capital

THE FAIRHOLME FOCUSED INCOME FUND (FOCIX)

Seeking current income and capital preservation

THE FAIRHOLME ALLOCATION FUND (FAAFX)

Seeking long-term total return

MANAGED BY FAIRHOLME CAPITAL MANAGEMENT

1.866.202.2263 • fairholmefunds.com

 


FAIRHOLME FUNDS, INC.

TABLE OF CONTENTS

May 31, 2012

 

     Page  

MANAGEMENT DISCUSSION & ANALYSIS

  

FUND PERFORMANCE:

  

THE FAIRHOLME FUND

     3   

THE FAIRHOLME FOCUSED INCOME FUND

     4   

THE FAIRHOLME ALLOCATION FUND

     5   

MANAGEMENT DISCUSSION & ANALYSIS REPORT

     6   

EXPENSE EXAMPLE

     10   

THE FAIRHOLME FUND:

  

SCHEDULE OF INVESTMENTS

     11   

STATEMENT OF ASSETS & LIABILITIES

     13   

STATEMENT OF OPERATIONS

     14   

STATEMENTS OF CHANGES IN NET ASSETS

     15   

FINANCIAL HIGHLIGHTS

     16   

THE FAIRHOLME FOCUSED INCOME FUND:

  

SCHEDULE OF INVESTMENTS

     17   

STATEMENT OF ASSETS & LIABILITIES

     19   

STATEMENT OF OPERATIONS

     20   

STATEMENTS OF CHANGES IN NET ASSETS

     21   

FINANCIAL HIGHLIGHTS

     22   

THE FAIRHOLME ALLOCATION FUND:

  

SCHEDULE OF INVESTMENTS

     23   

STATEMENT OF ASSETS & LIABILITIES

     25   

STATEMENT OF OPERATIONS

     26   

STATEMENTS OF CHANGES IN NET ASSETS

     27   

FINANCIAL HIGHLIGHTS

     28   

NOTES TO FINANCIAL STATEMENTS

     29   

ADDITIONAL INFORMATION

     38   

 

2


FAIRHOLME FUNDS, INC.

CUMULATIVE PERFORMANCE (Unaudited)

May 31, 2002 — May 31, 2012

 

THE FAIRHOLME FUND VS. THE S&P 500 INDEX

INITIAL INVESTMENT OF $10,000

 

LOGO

 

The Fairholme Fund commenced operations on December 29, 1999. The chart above presents the performance of a $10,000 investment for up to ten years to the latest semi-annual period ended May 31, 2012.

The following notes pertain to the chart above as well as to the performance table included in the Management Discussion & Analysis Report. Performance information in this report represents past performance and is not a guarantee of future results. The investment return and principal value of an investment in The Fairholme Fund will fluctuate, so that an investor’s shares when redeemed may be worth more or less than their original cost. Current performance may be higher or lower than the performance quoted within. The performance information does not reflect the taxes an investor would pay on The Fairholme Fund distributions or upon redemption of The Fairholme Fund shares. Any questions you have regarding the latest month-end performance can be obtained by calling Shareholder Services at 1-866-202-2263.

Data for both the S&P 500 Index and The Fairholme Fund are presented assuming all dividends and distributions have been reinvested and do not reflect any taxes that might have been incurred by a shareholder as a result of The Fairholme Fund distributions. The S&P 500 Index is a widely recognized, unmanaged index of 500 of the largest companies in the United States as measured by market capitalization and does not reflect any investment management fees or transaction expenses, nor the effects of taxes, fees or other charges.

 

3


FAIRHOLME FUNDS, INC.

CUMULATIVE PERFORMANCE (Unaudited)

Inception through May 31, 2012

 

THE INCOME FUND VS.

THE BARCLAYS CAPITAL U.S. AGGREGATE BOND INDEX

INITIAL MINIMUM INVESTMENT OF $25,000

 

LOGO

The Fairholme Focused Income Fund (“The Income Fund”) commenced operations on December 31, 2009. The chart above presents the performance of a $25,000 investment from inception to the latest semi-annual period ended May 31, 2012.

The following notes pertain to the chart above as well as to the performance table included in the Management Discussion & Analysis Report. Performance information in this report represents past performance and is not a guarantee of future results. The investment return and principal value of an investment in The Income Fund will fluctuate, so that an investor’s shares when redeemed may be worth more or less than their original cost. Current performance may be higher or lower than the performance quoted within. The performance information does not reflect the taxes an investor would pay on The Income Fund distributions or upon redemption of The Income Fund shares. Any questions you have regarding the latest month-end performance can be obtained by calling Shareholder Services at 1-866-202-2263.

Data for both the Barclays Capital U.S. Aggregate Bond Index and The Income Fund are presented assuming all dividends and distributions have been reinvested and do not reflect any taxes that might have been incurred by a shareholder as a result of The Income Fund distributions. The Barclay’s 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 and does not reflect any investment management fees or transaction expenses, nor the effects of taxes, fees or other charges.

 

4


FAIRHOLME FUNDS, INC.

CUMULATIVE PERFORMANCE (Unaudited)

Inception through May 31, 2012

 

THE ALLOCATION FUND vs. THE BARCLAYS CAPITAL U.S.

AGGREGATE BOND INDEX AND THE S&P 500 INDEX

INITIAL MINIMUM INVESTMENT OF $25,000

 

LOGO

The Fairholme Allocation Fund (“The Allocation Fund”) commenced operations on December 31, 2010. The chart above presents the performance of a $25,000 investment from inception to the latest semi-annual period ended May 31, 2012.

The following notes pertain to the chart above as well as to the performance table included in the Management Discussion & Analysis Report. Performance information in this report represents past performance and is not a guarantee of future results. The investment return and principal value of an investment in The Allocation Fund will fluctuate, so that an investor’s shares when redeemed may be worth more or less than their original cost. Current performance may be higher or lower than the performance quoted within. The performance information does not reflect the taxes an investor would pay on The Allocation Fund distributions or upon redemption of The Allocation Fund shares. Any questions you have regarding the latest month-end performance can be obtained by calling Shareholder Services at 1-866-202-2263.

Data for the Barclays Capital U.S. Aggregate Bond Index, the S&P 500 Index and The Allocation Fund are presented assuming all dividends and distributions have been reinvested and do not reflect any taxes that might have been incurred by a shareholder as a result of The Allocation Fund distributions. 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. The S&P 500 Index is a widely recognized, unmanaged index of 500 of the largest companies in the United States as measured by market capitalization and does not reflect any investment management fees or transaction expenses, nor the effects of taxes, fees or other charges.

 

5


FAIRHOLME FUNDS, INC.

MANAGEMENT DISCUSSION & ANALYSIS

For the Six Months Ended May 31, 2012

The Fairholme Fund, The Income Fund, and The Allocation Fund (each a “Fund” and collectively, the “Funds”) shares outstanding and unaudited net asset value per share (“NAV”) at May 31, 2012, the end of the Funds’ second fiscal quarter of 2012, and NAVs at other pertinent dates, were as follows:

 

     

05/31/2012

Shares

Outstanding

    

05/31/2012

NAV

(unaudited)

    

11/30/2011

NAV

(audited)

    

05/31/2011

NAV

(unaudited)

 

The Fairholme Fund

     263,788,120       $ 26.70       $ 25.10       $ 32.82   

The Income Fund

     28,033,491       $ 9.98       $ 9.71       $ 11.18   

The Allocation Fund

     27,969,187       $ 8.74       $ 8.29       $ 9.17   

At June 30, 2012, the unaudited NAVs of the The Fairholme Fund, The Income Fund, and The Allocation Fund were $28.87, $10.07, and $9.57 per share, respectively.

Performance figures below are shown for the Funds as of the Funds’ semi-annual period ended May 31, 2012 and do not match calendar year figures for the period ended June 30, 2012 cited in the Portfolio Manager’s report.

 

The Fairholme Fund

Performance

to 05/31/2012

  

Six

Months

   

One

Year

   

Five

Years

   

Ten

Years

   

Since

Inception

12/29/1999

 

Cumulative:

          

The Fairholme Fund

     10.49     -15.50     -3.91     107.50     245.21

S&P 500

     6.23     -0.41     -4.52     49.97     12.76

Annualized:

          

The Fairholme Fund

       -15.50     -0.80     7.57     10.49

S&P 500

       -0.41     -0.92     4.14     0.97

For the six months ended May 31, 2012, The Fairholme Fund outperformed the S&P 500 Index (“S&P 500”) by 4.26 percentage points while over the last year the S&P 500 outperformed The Fairholme Fund by 15.09 percentage points. From inception, The Fairholme Fund outperformed the S&P 500 by 9.52 percentage points per annum or on a cumulative basis 232.45 percentage points over twelve years and five months.

 

The Income Fund

Performance

to 05/31/2012

   Six
Months
    One
Year
    Since
Inception
12/31/2009
 

Cumulative:

      

The Income Fund

     7.71     -3.08     13.66

Barclays Bond Index

     3.46     7.12     17.57

Annualized:

      

The Income Fund

       -3.08     5.44

Barclays Bond Index

       7.12     6.93

For the six months ended May 31, 2012, The Income Fund outperformed the Barclays Capital U.S. Aggregate Bond Index (“Barclays Bond Index”) by 4.25 percentage points while over the last year the Barclays Bond Index outperformed The Income Fund by 10.20 percentage points. From inception, the Barclays Bond Index outperformed The Income Fund by 1.49 percentage points per annum or on a cumulative basis 3.91 percentage points over two years and five months.

 

6


FAIRHOLME FUNDS, INC.

MANAGEMENT DISCUSSION & ANALYSIS (continued)

For the Six Months Ended May 31, 2012

 

The Allocation Fund

Performance

to 05/31/2012

   Six
Months
    One
Year
    Since
Inception
12/31/2010
 

Cumulative:

      

The Allocation Fund

     5.43     -4.69     -12.60

S&P 500

     6.23     -0.41     7.38

Barclays Bond Index

     3.46     7.12     10.36

Annualized:

      

The Allocation Fund

       -4.69     -9.07

S&P 500

       -0.41     5.15

Barclays Bond Index

       7.12     7.21

For the six months ended May 31, 2012, The Allocation Fund outperformed the Barclays Bond Index by 1.97 percentage points and was outperformed by the S&P 500 by 0.80 percentage points while over the last year the Barclays Bond Index and S&P 500 outperformed The Allocation Fund by 11.81 and 4.28 percentage points, respectively. From inception, the Barclays Bond Index and S&P 500 outperformed The Allocation Fund by 16.28 and 14.22 percentage points per annum, respectively, or on a cumulative basis 22.96 and 19.98 percentage points over one year and five months.

In the opinion of Fairholme Capital Management, L.L.C. (the “Manager”), performance over short intervals is likely to be less meaningful than performance over longer periods. Further, shareholders should note that the S&P 500 and the Barclays Bond Index are unmanaged indices incurring no fees, expenses, or tax effects and are shown solely to compare the Funds’ performance to that of unmanaged and diversified indices.

Continuing economic recovery in financial services and insurance-related sectors contributed to each Fund’s overall performance. The fact that securities decline in value does not always indicate that the Manager believes these securities to be less attractive — in fact, the Manager believes that some price declines present buying opportunities. However, shareholders are cautioned that it is possible that some securities mentioned in this discussion may no longer be held by the Funds subsequent to the end of the fiscal period and that the Funds may have made significant new purchases that are not yet required to be disclosed. It is the Funds’ general policy not to disclose portfolio holdings other than when required by relevant law or regulation.

The Funds have different objectives, capitalizations, and considerations that may or may not lead to differing compositions of issuers, securities within an issuer, and cash levels within each Fund. The Manager invests the Funds’ assets in securities to the extent it finds reasonable investment opportunities in accordance with its Prospectus, and may invest a significant portion of the Funds’ assets in liquid, low-risk securities or cash. The Manager views such liquidity as a strategic asset and may invest a significant portion of cash and liquid assets in other more risky securities at any time, particularly in situations where markets are weak or a particular security declines sharply. At May 31, 2012, the Funds’ liquidity (consisting of cash, commercial paper, deposit accounts, U.S. Treasury Bills and money-market funds) represented 7.2%, 11.0%, and 6.4% of The Fairholme Fund, The Income Fund, and The Allocation Fund total net assets, respectively. Since inception, the Funds have held liquid, low-risk securities or cash for periods without negatively influencing performance, although there is no guarantee that future performance will not be negatively affected by the Funds’ liquidity.

 

7


FAIRHOLME FUNDS, INC.

MANAGEMENT DISCUSSION & ANALYSIS (continued)

For the Six Months Ended May 31, 2012

 

The following charts show the top ten holdings by issuer and top ten holdings categories of the Funds at May 31, 2012, listed by their percentage of the Funds’ net assets. Portfolio holdings are subject to change without notice.

 

The Fairholme Fund

Top Ten Holdings by Issuer*

(% of Net Assets)

 

 

American International Group, Inc.

     36.8%   

Sears Holdings Corp.

     10.0%   

AIA Group Ltd.

     8.8%   

Bank of America Corp.

     8.5%   

CIT Group Inc.

     6.6%   

General Growth Properties, Inc.

     6.3%   

The St. Joe Co.

     5.1%   

Leucadia National Corp.

     3.5%   

MBIA, Inc.

     3.0%   

Howard Hughes Corp.

     0.7%   
  

 

 

 
     89.3%   
  

 

 

 

The Income Fund

Top Holdings by Issuer*

(% of Net Assets)

 

 

MBIA, Inc.

     37.4%   

Emigrant Bancorp, Inc.

     19.3%   

Sears Holdings Corp.

     18.6%   

International Lease Finance Corp.

     2.9%   

Regions Financial Corp.

     2.1%   

General Growth Properties, Inc.

     1.7%   

Wells Fargo & Co.

     0.6%   

American International Group, Inc.

     0.5%   

Howard Hughes Corp.

     0.2%   
  

 

 

 
     83.3%   
  

 

 

 

The Allocation Fund

Top Ten Holdings by Issuer*

(% of Net Assets)

 

 

MBIA, Inc.

     29.3%   

American International Group, Inc.

     20.4%   

Sears Holdings Corp.

     9.5%   

Bank of America Corp.

     7.6%   

Jefferies Group, Inc.

     5.3%   

Leucadia National Corp.

     5.1%   

Wells Fargo & Co.

     4.8%   

Emigrant Bancorp, Inc.

     4.3%   

JPMorgan Chase & Co.

     1.9%   

The Hartford Financial Services Group, Inc.

     0.5%   
  

 

 

 
     88.7%   
  

 

 

 

The Fairholme Fund

Top Ten Categories

(% of Net Assets)

 

 

Multi-Line Insurance

     36.8%   

Retail Department Stores

     10.0%   

Life Insurance

     8.8%   

Diversified Banks

     8.5%   

Cash and Cash Equivalents**

     7.2%   

Commercial Finance

     6.6%   

Real Estate Investment Trust

     6.3%   

Real Estate Management & Development

     5.8%   

Diversified Holding Companies

     3.5%   

Surety Insurance

     3.0%   
  

 

 

 
     96.5%   
  

 

 

 

The Income Fund

Top Categories

(% of Net Assets)

 

 

Surety Insurance

     37.4%   

Regional Banks

     21.4%   

Retail Department Stores

     18.6%   

Cash and Cash Equivalents**

     11.0%   

Commercial Services & Supplies

     2.9%   

Real Estate Investment Trust

     1.7%   

Diversified Banks

     0.6%   

Multi-Line Insurance

     0.5%   

Real Estate Management & Development

     0.2%   
  

 

 

 
     94.3%   
  

 

 

 

The Allocation Fund

Top Categories

(% of Net Assets)

 

 

Surety Insurance

     29.3%   

Multi-Line Insurance

     20.9%   

Diversified Banks

     14.3%   

Retail Department Stores

     9.5%   

Cash and Cash Equivalents**

     6.4%   

Capital Markets

     5.3%   

Diversified Holding Companies

     5.1%   

Regional Banks

     4.3%   

Specialty Retail — Home Improvement

     0.1%   
  

 

 

 
     95.2%   
  

 

 

 
 

 

* Excludes cash, commercial paper, U.S. Treasury Bills (where applicable), and money market funds.
** Includes cash, commercial paper, U.S. Treasury Bills (where applicable), and money market funds.

 

8


FAIRHOLME FUNDS, INC.

MANAGEMENT DISCUSSION & ANALYSIS (continued)

For the Six Months Ended May 31, 2012

 

The Funds’ Officers, the Board of Directors (the “Board” or the “Directors”) and the Manager are aware that large cash inflows or outflows may adversely affect the Funds’ performance. Such flows are monitored and appropriate actions are contemplated for when such flows could negatively impact performance.

The Funds may invest in non-U.S. securities and securities of corporations domiciled outside of the United States. Holding such securities may expose a Fund to adverse changes resulting from foreign currency fluctuations or other potential risks as described in the Funds’ Statement of Additional Information.

Not all dispositions or additions to the portfolios are material, and, while the Funds and the Manager have long-term objectives, it is possible that a security sold or purchased in one period will be purchased or sold in a subsequent period. Generally, the Manager determines to buy and sell based on its estimates of the absolute and relative intrinsic values and fundamental dynamics of a particular corporation and its industry. However, certain strategies of the Manager in carrying out the Funds’ policies may result in shorter holding periods. Investors are further cautioned not to rely on short-term results.

The Funds are considered to be “non-diversified” under the Investment Company Act of 1940, as amended (the “1940 Act”), which means that the Funds can invest a greater percentage of their assets in fewer securities than a diversified fund. The Funds may also have a greater percentage of their assets invested in particular industries than a diversified fund, exposing the Funds to the risk of unanticipated industry conditions as well as risks specific to a single company or security.

The Independent Directors continue to believe that it is in the best interests of the Funds’ shareholders to have Mr. Berkowitz serve as Chairman of the Board given: his long-term relative performance; his experience, commitment, and significant personal investment in the Funds; the present constitution of the Directors and policies; and current rules and regulations. At May 31, 2012, a majority of the Directors are independent of the Manager, no stock option or restricted stock plans exist, Officers receive no direct compensation from the Funds, and Directors affiliated with the Manager receive no compensation for being Directors.

The Officers and the Directors of The Fairholme Fund, The Income Fund, and The Allocation Fund, hold an aggregate 10,938,971, 3,007,401, and 8,412,137 shares, respectively, at May 31, 2012. While there is no requirement that Officers and Directors own shares of the Funds, such holdings are believed to help align shareholder interests. Since inception, the Funds have been advised by the Manager. Certain Directors and Officers of the Funds are also Members and Officers of the Manager. For more complete information about the Funds, or to obtain a current Prospectus, please visit www.fairholmefunds.com or call Shareholder Services at 1-866-202-2263.

 

9


FAIRHOLME FUNDS, INC.

EXPENSE EXAMPLE

For the Six Month Period from December 1, 2011

through May 31, 2012 (unaudited)

As a Fund shareholder, you incur direct and indirect costs. Direct costs include, but are not limited to, transaction fees at some broker-dealers, custodial fees for retirement accounts, redemption fees (on The Fairholme Fund and The Allocation Fund shares redeemed within 60 days of purchase), and wire transfer fees. You also incur indirect costs that include, but are not limited to, management fees paid to the Manager.

The following example is intended to help you understand your indirect costs (also referred to as “ongoing costs” and measured in dollars) when investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual funds. This example is based on an investment of $1,000 invested in The Fairholme Fund, The Income Fund, and The Allocation Fund at December 1, 2011 and held for the entire six month period ending May 31, 2012.

Actual Expenses

The first line of the tables below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you had invested at the beginning of the period, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During the Period” to estimate the expenses you paid on your Fund holdings during this period.

Hypothetical Example for Comparison Purposes

The second line of the tables provides information about hypothetical account values and hypothetical expenses based on each Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual returns for the period presented. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses that you paid for the period presented. However, you may use this information to compare ongoing costs of investing in the Funds with the ongoing costs of investing in other funds. To do so, compare this 5% hypothetical example with the 5% examples that appear in the shareholder reports of other funds.

Please note that the column titled “Expenses Paid During the Period” in the tables below is meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees (if any), or other direct costs. Therefore, the second line of the tables is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these direct costs were included, your total costs would be higher.

 

     Beginning
Account  Value
December 1, 2011
     Ending
Account  Value
May 31, 2012
     Annualized
Expense
Ratio*
    Expenses Paid
During  the Period
December 1, 2011
Through
May 31, 2012**
 

The Fairholme Fund

          

Actual

   $ 1,000.00       $ 1,104.90         1.01   $ 5.31   

Hypothetical
(5% return before expenses)

   $ 1,000.00       $ 1,019.95         1.01   $ 5.10   
  

 

 

    

 

 

    

 

 

   

 

 

 

The Income Fund

          

Actual

   $ 1,000.00       $ 1,077.10         0.83   $ 4.31   

Hypothetical
(5% return before expenses)

   $ 1,000.00       $ 1,020.85         0.83   $ 4.19   
  

 

 

    

 

 

    

 

 

   

 

 

 

The Allocation Fund

          

Actual

   $ 1,000.00       $ 1,054.30         0.84   $ 4.31   

Hypothetical
(5% return before expenses)

   $ 1,000.00       $ 1,020.80         0.84   $ 4.24   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

* In the case of The Income Fund and The Allocation Fund, the annualized expense ratio is calculated taking into account the management fee waiver. In both cases, the management fee waiver expired on March 29, 2012.
** Expenses are equal to each Fund’s annualized expense ratio, multiplied by the average account value over the period, multiplied by 183 days/366 days (to reflect the one-half year period).

 

10


THE FAIRHOLME FUND

SCHEDULE OF INVESTMENTS

May 31, 2012 (unaudited)

 

Shares

          Value  
  

DOMESTIC EQUITY
SECURITIES — 70.1%

  
  

COMMERCIAL FINANCE — 6.6%

  
  13,597,029      

CIT Group Inc. (a)(b)

   $ 464,882,422   
     

 

 

 
  

DIVERSIFIED BANKS — 8.5%

  
  81,607,015      

Bank of America Corp.

     599,811,560   
     

 

 

 
  

DIVERSIFIED HOLDING
COMPANIES — 3.5%

  
  12,186,350      

Leucadia National Corp.

     247,626,632   
     

 

 

 
  

MULTI-LINE
INSURANCE — 33.7%

  
  81,327,425      

American International
Group, Inc. (a)

     2,373,134,261   
     

 

 

 
  

REAL ESTATE MANAGEMENT & DEVELOPMENT — 5.1%

  
  23,136,502      

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

     358,405,239   
     

 

 

 
  

RETAIL DEPARTMENT
STORES — 10.0%

  
  14,212,673      

Sears Holdings Corp. (a)(b)

     702,106,046   
     

 

 

 
  

SPECIALTY RETAIL-HOME IMPROVEMENT — 0.1%

  
  605,293      

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

     10,199,192   
     

 

 

 
  

SURETY INSURANCE — 2.6%

  
  20,501,100      

MBIA, Inc. (a)(b)

     183,894,867   
     

 

 

 

 
 

TOTAL DOMESTIC EQUITY SECURITIES
(COST $6,102,291,790)

     4,940,060,219   
     

 

 

 
  

FOREIGN EQUITY
SECURITIES — 8.8%

  
   CHINA — 8.8%   
   LIFE INSURANCE — 8.8%   
  190,751,000      

AIA Group Ltd.

     621,783,059   
     

 

 

 

 
 

TOTAL FOREIGN EQUITY SECURITIES
(COST $488,411,178)

     621,783,059   
     

 

 

 

Shares

          Value  
  

DOMESTIC PREFERRED EQUITY SECURITIES — 0.0%

  
  

SPECIALTY RETAIL-HOME IMPROVEMENT — 0.0%

  
  601,693      

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

   $ 932,625   
     

 

 

 

 
 
 

TOTAL DOMESTIC PREFERRED EQUITY
SECURITIES
(COST $1,146,825)

     932,625   
     

 

 

 
  

WARRANTS — 10.1%

  
  

MULTI-LINE INSURANCE — 3.1%

  
  21,588,480      

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

     220,202,496   
     

 

 

 
  

REAL ESTATE INVESTMENT
TRUSTS — 6.3%

  
  40,634,357      

General Growth Properties, Inc., Vested, Strike Price $9.519, Expire 11/09/2017 (a)(c)(d)(e)(f)

     440,025,388   
     

 

 

 
  

REAL ESTATE MANAGEMENT & DEVELOPMENT — 0.7%

  
  1,896,270      

Howard Hughes Corp.,

  
  

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

     47,663,315   
     

 

 

 

 
 

TOTAL WARRANTS
(COST $351,676,339)

     707,891,199   
     

 

 

 

Principal

             
  

DOMESTIC CORPORATE
BONDS — 0.6%

  
  

REGIONAL BANKS — 0.2%

  
  $12,308,000      

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

     11,351,668   
     

 

 

 
 

 

The accompanying notes are an integral part of the financial statements.

 

11


THE FAIRHOLME FUND

SCHEDULE OF INVESTMENTS (continued)

May 31, 2012 (unaudited)

 

Principal

        Value  
  

SURETY INSURANCE — 0.4%

  
  

MBIA, Inc.

  
$17,932,000   

7.000%, 12/15/2025 (b)

   $ 12,014,440   
13,859,000   

7.150%, 07/15/2027 (b)

     9,216,235   
11,580,000   

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

     6,716,400   
     

 

 

 
        27,947,075   
     

 

 

 

TOTAL DOMESTIC CORPORATE BONDS
(COST $44,770,478)

     39,298,743   
     

 

 

 
     
  

COMMERCIAL PAPER — 0.7%

AUTO MANUFACTURERS — 0.7%

  
50,000,000   

Ford Motor Co.
0.550%, 06/01/2012 (g)

     50,000,000   
     

 

 

 

TOTAL COMMERCIAL PAPER
(COST $50,000,000)

     50,000,000   
     

 

 

 
  

U.S. GOVERNMENT
OBLIGATIONS — 1.8%

  
25,000,000   

U.S. Treasury Bills 0.075%, 06/21/2012 (g)

     24,998,958   
25,000,000   

U.S. Treasury Bills 0.088%, 08/09/2012 (g)

     24,997,475   
25,000,000   

U.S. Treasury Bills 0.095%, 08/16/2012 (g)

     24,997,225   
Principal           Value  
  $25,000,000      

U.S. Treasury Bills
0.081%, 08/23/2012 (g)

   $ 24,996,250   
  25,000,000      

U.S. Treasury Bills
0.075%, 08/30/2012 (g)

     24,995,775   
     

 

 

 

 
 

TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $124,980,395)

     124,985,683   
     

 

 

 

Shares

             
     
  

MONEY MARKET FUNDS — 4.7%

  
  332,264,012      

Fidelity Institutional Money Market Funds - Money Market Portfolio, 0.240% (h)

     332,264,012   
     

 

 

 

 
 

TOTAL MONEY MARKET FUNDS
(COST $332,264,012)

     332,264,012   
     

 

 

 

 
 

TOTAL INVESTMENTS — 96.8%
(COST $7,495,541,017)

   $ 6,817,215,540   
  

OTHER ASSETS IN EXCESS OF LIABILITIES — 3.2%

     225,852,325   
     

 

 

 

 

NET ASSETS — 100.0%

   $ 7,043,067,865   
     

 

 

 
 

 

(a)

Non-income producing security.

(b)

Affiliated Company. See Note 7.

(c)

Security fair valued under procedures approved by the 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 $864,162,010, which represents 12.27% of The 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 Directors.

(e)

Restricted or controlled security under procedures approved by the Directors. The value of these securities totals $846,093,942, which represents 12.01% of The Fairholme Fund’s net assets. Information related to these securities is as follows:

 

Acquisition

Shares

  

Issuer

   Acquisition Date(s)    Acquisition
Cost
     05/31/2012
Carrying Value
Per Unit
 
23,136,502    The St. Joe Co.    12/12/2007-10/13/2010    $ 607,609,975       $ 15.4909   
40,634,357   

General Growth Properties, Inc., Warrants,
Vested, Strike Price $9.519,
Expire 11/09/2017

   05/10/2010      —           10.8289   
1,896,270   

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

   11/05/2010      —           25.1353   

 

(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 May 31, 2012 had a conversion ratio of 1:1.1031.
(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 May 31, 2012.

The accompanying notes are an integral part of the financial statements.

 

12


THE FAIRHOLME FUND

STATEMENT OF ASSETS & LIABILITIES

May 31, 2012 (unaudited)

 

Assets

  

Investments, at Fair Value:

  

Unaffiliated Issuers (Cost — $5,132,945,968)

   $ 5,068,848,074   

Affiliated Issuers (Cost — $2,362,595,049)

     1,748,367,466   
  

 

 

 

Total Investments, at Fair Value
(Cost — $7,495,541,017)

     6,817,215,540   

Cash

     3,155,510   

Receivable for Investments Sold

     234,984,359   

Receivable for Capital Shares Sold

     4,017,851   

Dividends and Interest Receivable

     2,504,087   
  

 

 

 

Total Assets

     7,061,877,347   
  

 

 

 

Liabilities

  

Payable for Capital Shares Redeemed

     12,448,080   

Accrued Management Fees

     6,361,402   
  

 

 

 

Total Liabilities

     18,809,482   
  

 

 

 

NET ASSETS

   $ 7,043,067,865   
  

 

 

 

Net Assets Consist of:

  

Paid-In-Capital

   $ 8,088,415,819   

Distributions in Excess of Net Investment Income

     (40,292,139

Net Accumulated Realized Loss on Investments and Foreign Currency Related Transactions

     (326,730,338

Net Unrealized Depreciation on Investments and Foreign Currency Related Translations

     (678,325,477
  

 

 

 

NET ASSETS

   $ 7,043,067,865   
  

 

 

 

Shares of Common Stock Outstanding* ($0.0001 par value)

     263,788,120   
  

 

 

 

Net Asset Value, Offering and Redemption Price Per Share ($7,043,067,865 / 263,788,120 shares)

   $ 26.70   
  

 

 

 

 

* 700,000,000 shares authorized in total.

The accompanying notes are an integral part of the financial statements.

 

13


THE FAIRHOLME FUND

STATEMENT OF OPERATIONS (unaudited)

 

     For the
Six Months Ended
May 31, 2012
 

Investment Income

  

Interest — Unaffiliated Issuers

   $ 1,042,877   

Interest — Affiliated Issuers

     1,582,580   

Dividends — Unaffiliated Issuers

     13,243,057   
  

 

 

 

Total Investment Income

     15,868,514   
  

 

 

 

Expenses

  

Management Fees

     38,858,723   

Other Expenses

     292,458   
  

 

 

 

Total Expenses

     39,151,181   
  

 

 

 

Net Investment Loss

     (23,282,667
  

 

 

 

Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Related Transactions

  

Net Realized Gain (Loss) on Investments

  

Unaffiliated Issuers

     54,229,160   

Affiliated Issuers

     (17,075,601

Net Realized Loss on Foreign Currency Related Transactions

     (662

Net Change in Unrealized Appreciation on Investments and Foreign Currency Related Translations

     755,722,665   
  

 

 

 

Net Realized and Unrealized Gain on Investments and Foreign Currency Related Transactions

     792,875,562   
  

 

 

 

NET INCREASE IN NET ASSETS FROM OPERATIONS

   $ 769,592,895   
  

 

 

 

The accompanying notes are an integral part of the financial statements.

 

14


THE FAIRHOLME FUND

STATEMENTS OF CHANGES IN NET ASSETS

 

     For the
Six Months Ended
May 31, 2012
(unaudited)
    For the
Fiscal Year Ended
November 30, 2011
 

CHANGE IN NET ASSETS

    

From Operations

    

Net Investment Loss

   $ (23,282,667   $ (33,469,437

Net Realized Gain (Loss) on Investments and Foreign Currency Related Transactions

     37,152,897        (366,929,655

Net Change in Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Related Translations

     755,722,665        (2,604,264,053
  

 

 

   

 

 

 

Net Increase (Decrease) in Net Assets from Operations

     769,592,895        (3,004,663,145
  

 

 

   

 

 

 

From Dividends and Distributions to Shareholders

    

Net Investment Income

     —          (195,136,284

Net Realized Capital Gains from Investment Transactions

     —          (838,210,865

Return of Capital

     (276,800,371     —     
  

 

 

   

 

 

 

Net Decrease in Net Assets from Dividends and Distributions

     (276,800,371     (1,033,347,149
  

 

 

   

 

 

 

From Capital Share Transactions

    

Proceeds from Sale of Shares

     447,467,827        4,326,090,664   

Shares Issued in Reinvestment of Dividends and Distributions

     250,020,401        939,524,411   

Redemption Fees

     364,520        2,714,993   

Cost of Shares Redeemed

     (2,162,871,773     (10,062,106,880
  

 

 

   

 

 

 

Net Decrease in Net Assets from Shareholder Activity

     (1,465,019,025     (4,793,776,812
  

 

 

   

 

 

 

NET ASSETS

    

Net Decrease in Net Assets

     (972,226,501     (8,831,787,106

Net Assets at Beginning of Period

     8,015,294,366        16,847,081,472   
  

 

 

   

 

 

 

Net Assets at End of Period

   $ 7,043,067,865      $ 8,015,294,366   
  

 

 

   

 

 

 

Distributions in Excess of Net Investment Income at End of Period

   $ (40,292,139   $ (17,009,472
  

 

 

   

 

 

 

SHARES TRANSACTIONS

    

Issued

     16,312,335        127,523,200   

Reinvested

     10,652,155        27,554,666   

Redeemed

     (82,474,610     (328,478,267
  

 

 

   

 

 

 

Net Decrease in Shares

     (55,510,120     (173,400,401
  

 

 

   

 

 

 

Shares Outstanding at Beginning of Period

     319,298,240        492,698,641   
  

 

 

   

 

 

 

Shares Outstanding at End of Period

     263,788,120        319,298,240   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the financial statements.

 

15


THE FAIRHOLME FUNDS

FINANCIAL HIGHLIGHTS

 

   

For the

Six Months Ended
May 31, 2012

    For the Fiscal Year Ended November 30,  
    (unaudited)     2011     2010     2009     2008     2007  

NET ASSET VALUE, BEGINNING OF PERIOD

  $ 25.10      $ 34.19      $ 28.90      $ 20.95      $ 32.30      $ 29.40   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment Operations

           

Net Investment Income (Loss)(1)

    (0.08     (0.07     0.33        0.28        0.13        0.26   

Net Realized and Unrealized Gain (Loss) on Investments

    2.59        (6.95     5.22        8.20        (10.79 )(2)      3.05 (2) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total from Investment Operations

    2.51        (7.02     5.55        8.48        (10.66     3.31   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends and Distributions

           

From Net Investment Income

    —          (0.39     (0.27     (0.11     (0.22     (0.24

From Realized Capital Gains

    —          (1.69     —          (0.43     (0.48     (0.17

From Return of Capital

    (0.91     —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Dividends and Distributions

    (0.91     (2.08     (0.27     (0.54     (0.70     (0.41
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Redemption Fees(1)

    0.00 (3)      0.01        0.01        0.01        0.01 (2)      0.00 (2)(3) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET ASSET VALUE, END OF PERIOD

  $ 26.70      $ 25.10      $ 34.19      $ 28.90      $ 20.95      $ 32.30   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL RETURN

    10.49 %(4)      (22.10 )%      19.37     41.48     (33.69 )%      11.42

Ratio/Supplemental Data

           

Net Assets, End of Period (in 000’s)

  $ 7,043,068      $ 8,015,294      $ 16,847,081      $ 10,558,010      $ 6,696,139      $ 6,463,009   

Ratio of Expenses to Average Net Assets

    1.01 %(5)(6)      1.01 %(7)      1.00     1.00     1.01 %(8)      1.00

Ratio of Net Investment Income (Loss) to Average Net Assets

    (0.60 )%(6)      (0.22 )%      1.02     1.14     0.44     0.85

Portfolio Turnover Rate

    0.00 %(4)      43.95     88.74     71.09     81.35     14.10

 

(1)

Based on average shares outstanding.

(2) 

Redemption fees per share, which were initially reported as a component of net realized and unrealized gain (loss) on investments per share, were reclassified to conform to the current presentation and are separately reported.

(3)

Redemption fees represent less than $0.01. (4) Not Annualized.

(5)

0.01% is attributable to registration fees for securities borne by The Fairholme Fund outside of the 1.00% management fee.

(6) 

Annualized.

(7)

0.01% is attributable to legal expenses borne by The Fairholme Fund outside of the 1.00% management fee.

(8) 

0.01% is attributable to shareholder meeting expenses borne by The Fairholme Fund outside of the 1.00% management fee.

The accompanying notes are an integral part of the financial statements.

 

16


THE FAIRHOLME FOCUSED INCOME FUND

SCHEDULE OF INVESTMENTS

May 31, 2012 (unaudited)

 

Shares

        Value  
  

DOMESTIC PREFERRED EQUITY
SECURITIES — 1.0%

  
   DIVERSIFIED BANKS — 0.6%   
57,200   

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

   $  1,662,804   
     

 

 

 
  

MULTI-LINE

INSURANCE — 0.4%

  
23,500   

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

     563,060   
21,800   

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

     555,682   
     

 

 

 
        1,118,742   
     

 

 

 

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

     2,781,546   
     

 

 

 
   WARRANTS — 2.0%   
  

MULTI-LINE

INSURANCE — 0.1%

  
23,212   

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

     236,762   
     

 

 

 
  

REAL ESTATE INVESTMENT
TRUSTS — 1.7%

  
437,072   

General Growth Properties, Inc.,
Vested, Strike Price $9.519,
Expire 11/09/2017 (b)(c)(d)(e)(f)

     4,733,009   
     

 

 

 
  

REAL ESTATE MANAGEMENT &
DEVELOPMENT — 0.2%

  
20,397   

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

     512,685   
     

 

 

 

TOTAL WARRANTS
(COST $378,123)

     5,482,456   
     

 

 

 

Principal

        Value  
  

DOMESTIC CORPORATE
BONDS — 80.3%

  
  

COMMERCIAL SERVICES &
SUPPLIES — 2.9%

  
$8,000,000   

International Lease Finance Corp.
5.750%, 05/15/2016 (d)

   $ 8,028,000   
     

 

 

 
   REGIONAL BANKS — 21.4%   
58,500,000   

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

     53,954,550   
6,000,000   

Regions Financial Corp.
4.875%, 04/26/2013 (d)

     6,064,200   
     

 

 

 
        60,018,750   
     

 

 

 
  

RETAIL DEPARTMENT
STORES — 18.6%

  
60,000,000   

Sears Holdings Corp.
6.625%, 10/15/2018 (d)

     52,086,000   
  

SURETY INSURANCE — 37.4%

  
60,600,000   

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

     30,906,000   
  

MBIA, Inc.

  
8,486,000   

6.400%, 08/15/2022 (d)

     5,706,835   
7,105,000   

7.000%, 12/15/2025

     4,760,350   
49,716,000   

7.150%, 07/15/2027

     33,061,140   
47,500,000   

6.625%, 10/01/2028 (d)

     30,176,750   
     

 

 

 
        104,611,075   
     

 

 

 

TOTAL DOMESTIC CORPORATE BONDS
(COST $247,894,425)

     224,743,825   
     

 

 

 
  

COMMERCIAL PAPER — 3.6%

  
  

AUTO MANUFACTURERS — 3.6%

  
10,000,000   

Ford Motor Co.
0.550%, 06/01/2012 (g)

     10,000,000   
     

 

 

 

TOTAL COMMERCIAL PAPER
(COST $10,000,000)

     10,000,000   
     

 

 

 
 

 

The accompanying notes are an integral part of the financial statements.

 

17


THE FAIRHOLME FOCUSED INCOME FUND

SCHEDULE OF INVESTMENTS (continued)

May 31, 2012 (unaudited)

 

 

Shares

        Value  
 

MONEY MARKET FUNDS — 7.4%

  
20,810,805  

  Fidelity Institutional Money
Market Funds — Money
Market Portfolio, 0.240% (h)

   $ 20,810,805   
    

 

 

 

TOTAL MONEY MARKET FUNDS
(COST $20,810,805)

     20,810,805   
    

 

 

 
 

MISCELLANEOUS
INVESTMENTS — 3.1%(d)(i)
(Cost $8,696,242)

     8,680,436   
    

 

 

 
         Value  

TOTAL INVESTMENTS — 97.4%
(COST $290,190,830)

   $  272,499,068   

OTHER ASSETS IN EXCESS OF
LIABILITIES — 2.6%

     7,374,116   
    

 

 

 

NET ASSETS — 100.0%

   $ 279,873,184   
    

 

 

 
 

 

(a) 

Variable rate security. The rate shown is as of May 31, 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 May 31, 2012 had a conversion ratio of 1:1.1031.

(c) 

Non-income producing security.

(d) 

Security fair valued under procedures approved by the 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 $169,942,465, which represents 60.72% 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 Directors. The value of these securities totals $5,245,694, which represents 1.87% of The Income Fund’s net assets. Information related to these securities is as follows:

Acquisition

Shares

  

Issuer

   Acquisition
Date
     Acquisition
Cost
     05/31/2012
Carrying Value
Per Unit
 
437,072   

General Growth Properties, Inc., Warrants,
Vested, Strike Price $9.519,
Expire 11/09/2017

     05/10/2010       $ —         $ 10.8289   
20,397   

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

     11/05/2010         —           25.1353   
(f)

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

(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 May 31, 2012.

(i) 

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

The accompanying notes are an integral part of the financial statements.

 

18


THE FAIRHOLME FOCUSED INCOME FUND

STATEMENT OF ASSETS & LIABILITIES

May 31, 2012 (unaudited)

 

Assets

  

Investments, at Fair Value (Cost — $290,190,830)

   $ 272,499,068   

Cash

     560,315   

Dividends and Interest Receivable

     7,650,357   

Receivable for Capital Shares Sold

     31,677   
  

 

 

 

Total Assets

     280,741,417   
  

 

 

 

Liabilities

  

Payable for Capital Shares Redeemed

     627,083   

Accrued Management Fees

     241,150   
  

 

 

 

Total Liabilities

     868,233   
  

 

 

 

NET ASSETS

   $ 279,873,184   
  

 

 

 

Net Assets Consist of:

  

Paid-In-Capital

   $ 302,642,300   

Accumulated Undistributed Net Investment Income

     4,346,536   

Net Accumulated Realized Loss on Investments and Foreign Currency Related Transactions

     (9,423,890

Net Unrealized Depreciation on Investments and Foreign Currency Related Translations

     (17,691,762
  

 

 

 

NET ASSETS

   $ 279,873,184   
  

 

 

 

Shares of Common Stock Outstanding* ($0.0001 par value)

     28,033,491   
  

 

 

 

Net Asset Value, Offering and Redemption Price Per Share
($279,873,184 / 28,033,491 shares)

   $ 9.98   
  

 

 

 
* 

200,000,000 shares authorized in total.

The accompanying notes are an integral part of the financial statements.

 

19


THE FAIRHOLME FOCUSED INCOME FUND

STATEMENT OF OPERATIONS (unaudited)

 

     For the
Six Months Ended
May 31, 2012
 

Investment Income

  

Interest

   $ 15,123,297   

Dividends

     97,129   
  

 

 

 

Total Investment Income

     15,220,426   
  

 

 

 

Expenses

  

Management Fees

     1,501,572   
  

 

 

 

Less: Management Fee Waiver

     (249,582
  

 

 

 

Net Expenses

     1,251,990   
  

 

 

 

Net Investment Income

     13,968,436   
  

 

 

 

Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Related Transactions

  

Net Realized Loss on Investments

     (9,141,615

Net Change in Unrealized Appreciation on Investments and Foreign Currency Related Translations

     18,632,736   
  

 

 

 

Net Realized and Unrealized Gain on Investments and Foreign Currency Related Transactions

     9,491,121   
  

 

 

 

NET INCREASE IN NET ASSETS FROM OPERATIONS

   $ 23,459,557   
  

 

 

 

The accompanying notes are an integral part of the financial statements.

 

20


THE FAIRHOLME FOCUSED INCOME FUND

STATEMENTS OF CHANGES IN NET ASSETS

 

     For the
Six Months Ended
May 31, 2012
(unaudited)
    For the
Fiscal Year Ended
November 30, 2011
 

CHANGE IN NET ASSETS

    

From Operations

    

Net Investment Income

   $ 13,968,436      $ 25,394,044   

Net Realized Loss on Investments and Foreign Currency Related Transactions

     (9,141,615     (202,229

Net Change in Unrealized Appreciation
(Depreciation) on Investments and Foreign
Currency Related Translations

     18,632,736        (44,625,687
  

 

 

   

 

 

 

Net Increase (Decrease) in Net Assets from Operations

     23,459,557        (19,433,872
  

 

 

   

 

 

 

From Dividends and Distributions to Shareholders

    

Net Investment Income

     (14,119,037     (24,764,705

Net Realized Capital Gains from Investment Transactions

     —          (1,303,780
  

 

 

   

 

 

 

Net Decrease in Net Assets from Dividends and Distributions

     (14,119,037     (26,068,485
  

 

 

   

 

 

 

From Capital Share Transactions

    

Proceeds from Sale of Shares

     39,515,790        314,120,403   

Shares Issued in Reinvestment of Dividends and Distributions

     12,399,726        23,479,746   

Cost of Shares Redeemed

     (80,606,916     (357,108,236
  

 

 

   

 

 

 

Net Decrease in Net Assets from Shareholder Activity

     (28,691,400     (19,508,087
  

 

 

   

 

 

 

NET ASSETS

    

Net Decrease in Net Assets

     (19,350,880     (65,010,444

Net Assets at Beginning of Period

     299,224,064        364,234,508   
  

 

 

   

 

 

 

Net Assets at End of Period

   $ 279,873,184      $ 299,224,064   
  

 

 

   

 

 

 

Accumulated Undistributed Net Investment Income at End of Period

   $ 4,346,536      $ 4,497,137   
  

 

 

   

 

 

 

SHARES TRANSACTIONS

    

Issued

     3,886,860        28,561,964   

Reinvested

     1,230,480        2,237,086   

Redeemed

     (7,887,511     (34,047,999
  

 

 

   

 

 

 

Net Decrease in Shares

     (2,770,171     (3,248,949

Shares Outstanding at Beginning of Period

     30,803,662        34,052,611   
  

 

 

   

 

 

 

Shares Outstanding at End of Period

     28,033,491        30,803,662   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the financial statements.

 

21


THE FAIRHOLME FOCUSED INCOME FUND

FINANCIAL HIGHLIGHTS

 

     For the
Six Months Ended
May 31, 2012
(unaudited)
    For the
Fiscal Year Ended
November 30, 2011
    For the
Period Ended
November 30, 2010(1)
 

NET ASSET VALUE, BEGINNING OF PERIOD

   $ 9.71      $ 10.70      $ 10.00   
  

 

 

   

 

 

   

 

 

 

Investment Operations

      

Net Investment Income(2)

     0.48        0.64        0.45   

Net Realized and Unrealized Gain (Loss) on Investments

     0.27        (0.95     0.45   
  

 

 

   

 

 

   

 

 

 

Total from Investment Operations

     0.75        (0.31     0.90   
  

 

 

   

 

 

   

 

 

 

Dividends and Distributions

      

From Net Investment Income

     (0.48     (0.64     (0.20

From Realized Capital Gains

     —          (0.04     —     
  

 

 

   

 

 

   

 

 

 

Total Dividends and Distributions

     (0.48     (0.68     (0.20
  

 

 

   

 

 

   

 

 

 

NET ASSET VALUE, END OF PERIOD

   $ 9.98      $ 9.71      $ 10.70   
  

 

 

   

 

 

   

 

 

 

TOTAL RETURN

     7.71 %(3)      (3.24 )%      9.05 %(3) 

Ratio/Supplemental Data

      

Net Assets, End of Period (in 000’s)

   $ 279,873      $ 299,224      $ 364,235   

Ratio of Expenses to Average Net Assets:

      

Before Expenses Waived

     1.00 %(4)      1.00     1.00 %(4) 

After Expenses Waived

     0.83 %(4)      0.67     0.50 %(4) 

Ratio of Net Investment Income to Average Net Assets

     9.30 %(4)      5.96     4.69 %(4) 

Portfolio Turnover Rate

     7.35 %(3)      91.67     77.03 %(3) 

 

(1)

The Income Fund commenced operations on December 31, 2009.

(2)

Based on average shares outstanding.

(3)

Not Annualized.

(4)

Annualized.

The accompanying notes are an integral part of the financial statements.

 

22


THE FAIRHOLME ALLOCATION FUND

SCHEDULE OF INVESTMENTS

May 31, 2012 (unaudited)

 

Shares

        Value  
  

DOMESTIC EQUITY
SECURITIES — 67.6%

  
  

CAPITAL MARKETS — 5.3%

  
975,000   

Jefferies Group, Inc.

   $ 13,026,000   
     

 

 

 
  

DIVERSIFIED HOLDING
COMPANIES — 5.1%

  
612,100   

Leucadia National Corp.

     12,437,872   
     

 

 

 
  

MULTI-LINE INSURANCE — 18.3%

  
1,532,900   

American International Group, Inc. (a)

     44,730,022   
     

 

 

 
  

RETAIL DEPARTMENT
STORES — 9.5%

  
472,100   

Sears Holdings Corp. (a)

     23,321,740   
     

 

 

 
  

SPECIALTY RETAIL-HOME
IMPROVEMENT — 0.1%

  
8,070   

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

     135,987   
     

 

 

 
  

SURETY INSURANCE — 29.3%

  
7,982,400   

MBIA, Inc. (a)

     71,602,128   
     

 

 

 

TOTAL DOMESTIC EQUITY SECURITIES
(COST $174,103,562)

     165,253,749   
     

 

 

 
  

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)

     12,509   
     

 

 

 

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

     12,509   
     

 

 

 

Shares

        Value  
  

WARRANTS — 16.9%

  
  

DIVERSIFIED BANKS — 14.3%

  
5,570,428   

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

   $ 18,549,525   
484,700   

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

     4,677,355   
1,280,495   

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

     11,844,578   
     

 

 

 
        35,071,458   
     

 

 

 
  

MULTI-LINE INSURANCE — 2.6%

  
507,515   

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

     5,176,653   
114,900   

Hartford Financial Services Group, Inc.,
Vested, Strike Price $9.649,
Expire 06/26/2019 (a)(b)

     1,114,530   
     

 

 

 
        6,291,183   
     

 

 

 

TOTAL WARRANTS
(COST $40,214,650)

     41,362,641   
     

 

 

 

Principal

           
  

DOMESTIC CORPORATE
BONDS — 4.3%

  
  

REGIONAL BANKS — 4.3%

  
$11,400,000   

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

     10,514,220   
     

 

 

 

TOTAL DOMESTIC CORPORATE BONDS
(COST $10,493,849)

     10,514,220   
     

 

 

 
 

 

The accompanying notes are an integral part of the financial statements.

 

23


THE FAIRHOLME ALLOCATION FUND

SCHEDULE OF INVESTMENTS (continued)

May 31, 2012 (unaudited)

 

Shares           Value  
 

MONEY MARKET FUNDS — 6.4%

  
  15,557,686     

Fidelity Institutional Money Market Funds – Money Market Portfolio, 0.240% (d)

   $ 15,557,686   
    

 

 

 

 
 

TOTAL MONEY MARKET FUNDS
(COST $15,557,686)

     15,557,686   
    

 

 

 
     Value  

MISCELLANEOUS INVESTMENTS — 4.7%(e)
(COST $16,046,952)

   $ 11,625,251   
  

 

 

 

TOTAL INVESTMENTS — 99.9%
(COST $256,430,766)

     244,326,056   

OTHER ASSETS IN EXCESS OF
LIABILITIES — 0.1%

     209,918   
  

 

 

 

NET ASSETS — 100.0%

   $ 244,535,974   
  

 

 

 
 

 

 

(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 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 $10,514,220, which represents 4.30% 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) 

Annualized based on the 1-day yield as of May 31, 2012.

(e) 

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 financial statements.

 

24


THE FAIRHOLME ALLOCATION FUND

STATEMENT OF ASSETS & LIABILITIES

May 31, 2012 (unaudited)

 

Assets

  

Investments, at Fair Value (Cost — $256,430,766)

   $ 244,326,056   

Receivable for Capital Shares Sold

     362,483   

Dividends and Interest Receivable

     330,828   
  

 

 

 

Total Assets

     245,019,367   
  

 

 

 

Liabilities

  

Payable to Custodian

     183,212   

Payable for Capital Shares Redeemed

     75,224   

Accrued Management Fees

     224,957   
  

 

 

 

Total Liabilities

     483,393   
  

 

 

 

NET ASSETS

   $ 244,535,974   
  

 

 

 

Net Assets Consist of:

  

Paid-In-Capital

   $ 271,838,551   

Accumulated Net Investment Loss

     (843,515

Net Accumulated Realized Loss on Investments and Foreign Currency Related Transactions

     (14,354,352

Net Unrealized Depreciation on Investments and Foreign Currency Related Translations

     (12,104,710
  

 

 

 

NET ASSETS

   $ 244,535,974   
  

 

 

 

Shares of Common Stock Outstanding* ($0.0001 par value)

     27,969,187   
  

 

 

 

Net Asset Value, Offering and Redemption Price Per Share ($244,535,974 / 27,969,187 shares)

   $ 8.74   
  

 

 

 

 

* 200,000,000 shares authorized in total.

The accompanying notes are an integral part of the financial statements.

 

25


THE FAIRHOLME ALLOCATION FUND

STATEMENT OF OPERATIONS (unaudited)

 

     For the
Six Months  Ended
May 31, 2012
 

Investment Income

  

Interest

   $ 575,286   

Dividends

     262,762   
  

 

 

 

Total Investment Income

     838,048   
  

 

 

 

Expenses

  

Management Fees

     1,395,943   
  

 

 

 

Less: Management Fees Waiver

     (225,673
  

 

 

 

Net Expenses

     1,170,270   
  

 

 

 

Net Investment Loss

     (332,222
  

 

 

 

Realized and Unrealized Gain on Investments and Foreign Currency Related Transactions

  

Net Realized Gain on Investments

     1,230,977   

Net Change in Unrealized Appreciation on Investments and Foreign Currency Related Translations

     10,848,439   
  

 

 

 

Net Realized and Unrealized Gain on Investments and Foreign Currency Related Transactions

     12,079,416   
  

 

 

 

NET INCREASE IN NET ASSETS FROM OPERATIONS

   $ 11,747,194   
  

 

 

 

The accompanying notes are an integral part of the financial statements.

 

26


THE FAIRHOLME ALLOCATION FUND

STATEMENTS OF CHANGES IN NET ASSETS

 

     For the
Six Months  Ended
May 31, 2012
(unaudited)
    For the
Period  Ended
November 30, 2011(1)
 

CHANGE IN NET ASSETS

    

From Operations

    

Net Investment Loss

   $ (332,222   $ (511,267

Net Realized Gain (Loss) on Investments and Foreign Currency Related Transactions

     1,230,977        (15,585,355

Net Change in Unrealized Appreciation (Depreciation) on Investments and Foreign Currency Related Translations

     10,848,439        (22,953,149
  

 

 

   

 

 

 

Net Increase (Decrease) in Net Assets from Operations

     11,747,194        (39,049,771
  

 

 

   

 

 

 

From Capital Share Transactions

    

Proceeds from Sale of Shares

     88,642,821        308,704,162   

Redemption Fees

     13,450        71,160   

Cost of Shares Redeemed

     (67,989,401     (57,603,641
  

 

 

   

 

 

 

Net Increase in Net Assets from Shareholder Activity

     20,666,870        251,171,681   
  

 

 

   

 

 

 

NET ASSETS

    

Net Increase in Net Assets

     32,414,064        212,121,910   

Net Assets at Beginning of Period

     212,121,910        —     
  

 

 

   

 

 

 

Net Assets at End of Period

   $ 244,535,974      $ 212,121,910   
  

 

 

   

 

 

 

Accumulated Net Investment Loss at End of Period

   $ (843,515   $ (511,293
  

 

 

   

 

 

 

SHARES TRANSACTIONS

    

Issued

     9,543,059        32,332,438   

Redeemed

     (7,157,395     (6,748,915
  

 

 

   

 

 

 

Net Increase in Shares

     2,385,664        25,583,523   

Shares Outstanding at Beginning of Period

     25,583,523        —     
  

 

 

   

 

 

 

Shares Outstanding at End of Period

     27,969,187        25,583,523   
  

 

 

   

 

 

 

 

(1) 

The Allocation Fund commenced operations on December 31, 2010.

The accompanying notes are an integral part of the financial statements.

 

27


THE FAIRHOLME ALLOCATION FUND

FINANCIAL HIGHLIGHTS

 

     For the
Six Months  Ended
May 31, 2012
(unaudited)
    For the Period
Ended
November 30, 2011(1)
 

NET ASSET VALUE, BEGINNING OF PERIOD

   $ 8.29      $ 10.00   
  

 

 

   

 

 

 

Investment Operations

    

Net Investment Loss(2)

     (0.01     (0.02

Net Realized and Unrealized Gain (Loss) on Investments

     0.46        (1.69
  

 

 

   

 

 

 

Total from Investment Operations

     0.45        (1.71
  

 

 

   

 

 

 

Redemption Fees(2)

     0.00 (3)      0.00 (3) 
  

 

 

   

 

 

 

NET ASSET VALUE, END OF PERIOD

   $ 8.74      $ 8.29   
  

 

 

   

 

 

 

TOTAL RETURN

     5.43 %(4)      (17.10 )%(4) 

Ratio/Supplemental Data

    

Net Assets, End of Period (in 000’s)

   $ 244,536      $ 212,122   

Ratio of Expenses to Average Net Assets:

    

Before Expenses Waived

     1.00 %(5)      1.00 %(5) 

After Expenses Waived

     0.84 %(5)      0.75 %(5) 

Ratio of Net Investment Loss to Average Net Assets

     (0.24 )%(5)      (0.30 )%(5) 

Portfolio Turnover Rate

     10.88 %(4)      41.60 %(4) 

 

(1) 

The Allocation Fund commenced operations on December 31, 2010.

(2) 

Based on average shares outstanding.

(3) 

Redemption fees represent less than $0.01.

(4) 

Not Annualized.

(5) 

Annualized.

The accompanying notes are an integral part of the financial statements.

 

28


FAIRHOLME FUNDS, INC.

NOTES TO FINANCIAL STATEMENTS

May 31, 2012 (unaudited)

Note 1. Organization

Fairholme Funds, Inc. (the “Company”), a Maryland corporation, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Company’s Articles of Incorporation permit the Board of Directors of the Company (the “Board” or the “Directors”) to issue 1,100,000,000 shares of common stock at $.0001 par value. 700,000,000 shares have been allocated to The Fairholme Fund, 200,000,000 shares have been allocated to The Fairholme Focused Income Fund (“The Income Fund”), and 200,000,000 shares have been allocated to The Fairholme Allocation Fund (“The Allocation Fund”). The Fairholme Fund, The Income Fund, and The Allocation Fund (each a “Fund” and collectively the “Funds”) are non-diversified funds. The Funds may have a greater percentage of their assets invested in particular securities than a diversified fund, exposing the Funds to the risk of unanticipated industry conditions as well as risks specific to a single company or the securities of a single company. Each Fund has different objectives, capitalizations, and considerations that may or may not lead to differing compositions of issuers, securities within an issuer, and cash levels within each 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.

The Fairholme Fund’s investment objective is to provide long-term growth of capital. Under normal circumstances, The Fairholme Fund seeks to achieve its investment objective by investing in a focused portfolio of equity and fixed-income securities. The proportion of The Fairholme Fund’s assets invested in each type of asset class will vary from time to time based upon Fairholme Capital Management, L.L.C.’s (the “Manager”) assessment of general market and economic conditions. The Fairholme Fund may invest in, and may shift frequently among, the asset classes and market sectors. The equity securities in which The Fairholme Fund may invest include common and preferred stock (including convertible preferred stock), partnership interests, business trust shares, interests in real estate investment trusts (“REITs”), rights and warrants to subscribe for the purchase of equity securities, and depository receipts. The Fairholme Fund may invest in equity securities without regard to the jurisdictions in which the issuers of the securities are organized or situated and without regard to the market capitalizations or sectors of such issuers. The fixed-income securities in which The Fairholme Fund may invest include U.S. corporate debt securities, non-U.S. corporate debt securities, bank debt (including bank loans and participations), U.S. government and agency debt securities, short-term debt obligations of foreign governments, and foreign money market instruments. Except for its investments in short-term debt obligations of foreign governments, The Fairholme Fund may invest in fixed-income securities regardless of maturity or the rating of the issuer of the security. The Fairholme Fund may also invest in “special situations” to achieve its objective. “Special situation” investments may include equity securities or fixed-income securities, such as corporate debt, which may be in a distressed position as a result of economic or company specific developments. Although The Fairholme Fund normally holds a focused portfolio of equity and fixed-income securities, The Fairholme 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 Manager serves as investment adviser to The Fairholme Fund.

The Income Fund’s investment objective is to seek current income, other forms of cash distributions, and capital preservation. Under normal circumstances, The Income Fund seeks to achieve its investment objective by investing in a focused portfolio of cash distributing securities. To maintain maximum flexibility, the securities in which The Income Fund may invest include corporate debt securities of issuers in the U.S. and foreign countries, bank debt (including bank loans and loan 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 REITs. Although The Income Fund normally holds a focused portfolio of securities, The Income 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 Manager serves as investment adviser to The Income Fund.

The Allocation Fund’s investment objective is to seek long-term total return from capital appreciation and income. Under normal circumstances, The Allocation Fund seeks to achieve its investment objective by investing opportunistically in a focused portfolio of investments in the equity, fixed-income and cash, and cash-equivalent asset classes. The proportion of The Allocation Fund’s portfolio invested in each asset class will vary from time to time based on the Manager’s assessment

 

29


FAIRHOLME FUNDS, INC.

NOTES TO FINANCIAL STATEMENTS (continued)

May 31, 2012 (unaudited)

 

of relative fundamental values of securities and other investments in the asset class, the attractiveness of investment opportunities within each asset class, general market and economic conditions, and expected future returns of other investment opportunities. The Allocation Fund seeks to capitalize on anticipated fluctuations in the financial markets by changing the mix of The Allocation Fund’s holdings in the targeted asset classes. The Allocation Fund uses the Manager’s focused value-based approach. The Allocation 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 Manager serves as investment adviser to The Allocation Fund.

There is no guarantee that the Funds will meet their objectives.

Note 2. Significant Accounting Policies

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 asset 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, 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 classified in Level 1 of the fair value hierarchy. 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 classified in Level 2 of the fair value hierarchy, otherwise they would be classified in Level 3. As of May 31, 2012 equity investments of The St. Joe Co. valued at $358,405,239 (5.09% 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 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 is 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 May 31, 2012, fixed income investments valued at $18,068,068 (0.26% of net assets), $164,696,771 (58.85% of net assets), and $10,514,220 (4.30% 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 pursuant to procedures approved by the Board in the Schedules of Investments. Although most corporate bonds are classified 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 classified 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 classified 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

 

30


FAIRHOLME FUNDS, INC.

NOTES TO FINANCIAL STATEMENTS (continued)

May 31, 2012 (unaudited)

 

and the Board have determined will approximate fair value. To the extent the inputs are observable and timely, the values would be classified 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 not 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 market value of the underlying security, expiration date of the warrants, volatility of the underlying security, strike price of the warrants, risk-free interest rate at the valuation date, and other inputs are classified as Level 3 of the fair value hierarchy.

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; (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:

 

   

Level 1 — quoted prices in active markets for identical securities;

 

   

Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.); and

 

   

Level 3 — significant unobservable inputs (including the Manager’s determination 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 May 31, 2012 is as follows:

 

31


FAIRHOLME FUNDS, INC.

NOTES TO FINANCIAL STATEMENTS (continued)

May 31, 2012 (unaudited)

 

     Valuation Inputs         
     Level 1 – Quoted
Prices
     Level 2 – Other
Significant
Observable Inputs
     Level 3 –
Significant
Unobservable
Inputs
     Total
Fair Value
at 05/31/2012
 

THE FAIRHOLME FUND

           

ASSETS:

           

INVESTMENTS (Fair Value):

           

Domestic Equity Securities

           

Real Estate Management &

           

Development

   $ —         $ 358,405,239       $ —         $ 358,405,239   

Other*

     4,581,654,980         —           —           4,581,654,980   

Foreign Equity Securities*

     621,783,059         —           —           621,783,059   

Domestic Preferred Equity Securities*

     932,625         —           —           932,625   

Warrants

           

Multi-Line Insurance

     220,202,496         —           —           220,202,496   

Real Estate Investment Trusts

     —           —           440,025,388         440,025,388   

Real Estate Management &

           

Development

     —           —           47,663,315         47,663,315   

Domestic Corporate Bonds

     —           39,298,743         —           39,298,743   

Commercial Paper

     —           50,000,000         —           50,000,000   

U.S. Government Obligations

     —           124,985,683         —           124,985,683   

Money Market Funds

     332,264,012         —           —           332,264,012   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL INVESTMENTS

   $ 5,756,837,172       $ 572,689,665       $ 487,688,703       $ 6,817,215,540   
  

 

 

    

 

 

    

 

 

    

 

 

 

THE INCOME FUND

           

ASSETS:

           

INVESTMENTS (Fair Value):

           

Domestic Preferred Equity Securities*

   $ 2,781,546       $ —         $ —         $ 2,781,546   

Warrants

           

Multi-Line Insurance

     236,762         —           —           236,762   

Real Estate Investment Trusts

     —           —           4,733,009         4,733,009   

Real Estate Management &

           

Development

     —           —           512,685         512,685   

Domestic Corporate Bonds

     —           224,743,825         —           224,743,825   

Commercial Paper

     —           10,000,000         —           10,000,000   

Money Market Funds

     20,810,805         —           —           20,810,805   

Miscellaneous Investments

     —           8,680,436         —           8,680,436   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL INVESTMENTS

   $ 23,829,113       $ 243,424,261       $ 5,245,694       $ 272,499,068   
  

 

 

    

 

 

    

 

 

    

 

 

 

THE ALLOCATION FUND

           

ASSETS:

           

INVESTMENTS (Fair Value):

           

Domestic Equity Securities*

   $ 165,253,749       $ —         $ —         $ 165,253,749   

Domestic Preferred Equity Securities*

     12,509         —           —           12,509   

Warrants*

     41,362,641         —           —           41,362,641   

Domestic Corporate Bonds

     —           10,514,220         —           10,514,220   

Money Market Funds

     15,557,686         —           —           15,557,686   

Miscellaneous Investments

     10,565,928         1,059,323         —           11,625,251   
  

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL INVESTMENTS

   $ 232,752,513       $ 11,573,543       $ —         $ 244,326,056   
  

 

 

    

 

 

    

 

 

    

 

 

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

The Funds had no significant transfers between Level 1 and Level 2 during the period ended May 31, 2012.

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

 

32


FAIRHOLME FUNDS, INC.

NOTES TO FINANCIAL STATEMENTS (continued)

May 31, 2012 (unaudited)

 

     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(1)

     100,756,951         11,719,707         112,476,658   

Purchases

     —           —           —     

Sales

     —           —           —     

Transfers into Level 3 (2)

     —           —           —     

Transfers out of Level 3 (2)

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Balance as of 05/31/2012

   $ 440,025,388       $ 47,663,315       $ 487,688,703   
  

 

 

    

 

 

    

 

 

 

Net change in unrealized appreciation during the period on Level 3 investments held at 05/31/2012(1)

   $ 100,756,951       $ 11,719,707       $ 112,476,658   
  

 

 

    

 

 

    

 

 

 
     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(1)

     1,083,764         126,062         1,209,826   

Purchases

     —           —           —     

Sales

     —           —           —     

Transfers into Level 3 (2)

     —           —           —     

Transfers out of Level 3 (2)

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Balance as of 05/31/2012

   $ 4,733,009       $ 512,685       $ 5,245,694   
  

 

 

    

 

 

    

 

 

 

Net change in unrealized appreciation during the period on Level 3 investments held at 05/31/2012(1)

   $ 1,083,764       $ 126,062       $ 1,209,826   
  

 

 

    

 

 

    

 

 

 

 

(1)

Net change in unrealized appreciation on investments is included in the related amounts in the Statement of Operations.

(2)

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

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 classified 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. Management is evaluating the impact of ASU No. 2011-04 on the financial statements and disclosures.

In December 2011, FASB issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities”. ASU 2011-11 requires disclosures to make financial statements that are prepared under U.S. GAAP more comparable to those prepared under IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of assets and liabilities as well as instruments and transactions subject to

 

33


FAIRHOLME FUNDS, INC.

NOTES TO FINANCIAL STATEMENTS (continued)

May 31, 2012 (unaudited)

 

an agreement similar to a master netting arrangement. In addition, ASU 2011-11 requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. New disclosures are required for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. Management is evaluating the impact of ASU 2011-11 on the financial statements and disclosures.

Warrants: The Funds’ investments in warrants as of May 31, 2012, are presented within the Schedules of Investments.

The Fairholme Fund’s, The Income Fund’s, and The Allocation Fund’s warrant positions during the six months ended May 31, 2012 had an average monthly market value of approximately $642,099,544, $5,132,173, and $37,936,223, respectively.

As of May 31, 2012, the value of warrants with equity risk exposure is $707,891,199, $5,482,456, and $41,362,641 for The Fairholme Fund, The Income Fund, and The Allocation Fund, respectively, and is included with Investments at Fair Value on the Statement of Assets and Liabilities. For the six months ended May 31, 2012, the effect of the net change in unrealized appreciation of warrants with equity risk exposure held of $200,557,757, $1,304,531, and $7,385,210, for The Fairholme Fund, The Income Fund, and The Allocation Fund, respectively, is included with the Net Change in Unrealized Appreciation on Investments and Foreign Currency Related Translations on the Statements of Operations.

Dividends and Distributions: The Fairholme Fund and The Allocation Fund intend to distribute substantially all of their net investment income (if any) as dividends to their respective shareholders on an annual basis in December. The Income Fund intends to declare and pay net investment income distributions, if any, quarterly in March, June, September, and December. The Fairholme Fund, The Income Fund, and The Allocation Fund intend to distribute any net long-term capital gains and any net short-term capital gains at least once a year. If the total dividends and distributions made in any tax year exceeds net investment income and accumulated realized capital gains, a portion of the total distribution may be treated as a tax return of capital.

Foreign Currency Translation: The books and records of the Funds are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on the following basis: (i) fair value of investment securities, assets, and liabilities at the current rate of exchange; and (ii) purchases and sales of investment securities, income, and expenses at the relevant rates of exchange prevailing on the respective dates of such transactions. The Funds do not isolate that portion of gains and losses on investment securities which is due to changes in the foreign exchange rates from that which is due to changes in the market prices of such securities.

Estimates: The preparation of financial statements in conformity with U.S. GAAP requires the Funds to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of both contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.

Redemption Fee: The Fairholme Fund and The Allocation Fund assess a 2% fee on the proceeds of The Fairholme Fund and The Allocation Fund shares that are redeemed within 60 days of their purchase. The redemption fee is paid to The Fairholme Fund and The Allocation Fund, as applicable, for the benefit of remaining shareholders and is recorded as paid-in capital. The redemption fees retained by The Fairholme Fund during the six months ended May 31, 2012 and the fiscal year ended November 30, 2011 amounted to $364,520 and $2,714,993, respectively. The redemption fees retained by The Allocation Fund during the six months ended May 31, 2012 and the period ended November 30, 2011 amounted to $13,450 and $71,160, respectively.

Other: The Funds account for security transactions on the trade date for financial statement purposes. The specific identification method is used for determining gains or losses for financial statements and income tax purposes. Dividend income is recorded on the ex-dividend date net of foreign taxes withheld where recovery is uncertain and interest income is recorded on an accrual basis. Discounts and premiums on securities purchased are amortized over the life of the respective securities using the effective yield method. Securities denominated in currencies other than U.S. dollars are subject to changes in value due to fluctuation in exchange rates. The Funds may invest in countries that require governmental approval for the repatriation of

 

34


FAIRHOLME FUNDS, INC.

NOTES TO FINANCIAL STATEMENTS (continued)

May 31, 2012 (unaudited)

 

investment income, capital, or the proceeds of sales of securities by foreign investors. In addition, if there is deterioration in a country’s balance of payments or for other reasons, a country may impose temporary restrictions on foreign capital remittances abroad.

The Funds paid commissions, other brokerage fees, and security registration expenses during the period.

Note 3. Related Party Transactions

The Manager is a Delaware limited liability company and is registered with the Securities and Exchange Commission as an investment adviser. The Manager’s principal business and occupation is to provide investment management and advisory services to individuals, corporations, and other institutions throughout the world. Pursuant to an Investment Management Agreement, each Fund pays a management fee to the Manager for its provision of investment advisory and operating services to the Fund. Subject to applicable waivers or limitations, the management fee is paid at an annual rate equal to 1.00% of the daily average net assets of each of the Funds. Under the Investment Management Agreements, the Manager is responsible for paying all of the Funds’ expenses, including 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, except for commissions, brokerage fees, and other transaction costs, taxes, interest, litigation expenses, and related expenses, and other extraordinary expenses.

Effective March 29, 2012, the Manager’s contractual management fee waiver/expense reimbursement for The Income Fund and The Allocation Fund expired. Prior to March 29, 2012, the Manager had contractually agreed to waive a portion of its management fee and/or limit each Fund’s operating expenses (excluding taxes, interest, brokerage commissions, acquired fund fees and expenses, expenses incurred in connections with any merger or reorganization and extraordinary expenses such as litigation) so that the Fund’s operating expenses, after such waiver or limitation payment, would not exceed an annual rate of 0.75% of the Fund’s daily average net assets for the period March 30, 2011 to March 29, 2012 for The Income Fund and for the period December 29, 2010 to March 29, 2012 for The Allocation Fund. With regard to The Income Fund only and for the period December 31, 2009 to March 30, 2011, the Manager had contractually agreed to waive a portion of its management fee and/or limit the Fund’s operating expenses (excluding those expenses noted above) so that the Fund’s operating expenses, after such waiver or limitation payment, would not exceed an annual rate of 0.50% of the Fund’s daily average net assets. The Manager may be reimbursed for fee waivers and/or expense limitation payments made in any fiscal year of The Income Fund and The Allocation Fund over the following three fiscal years of such Fund. Any such reimbursement is subject to the Board’s review and approval. A reimbursement may be requested by the Manager if the aggregate amount paid by the Fund for operating expenses for such fiscal year, taking into account any reimbursement, does not exceed the fee waiver/expense limitation in place at the time of the initial waiver or reimbursement of the amount by the Manager. For the six months ended May 31, 2012, the Manager may request reimbursement of up to the following:

 

     The Income Fund      The Allocation Fund  

For the period ended November 30, 2010, expiring November 30, 2013:

   $ 1,033,925       $ —     

For the period ended November 30, 2011, expiring November 30, 2014:

     1,399,457         424,124   

For the period ended May 31, 2012, expiring November 30, 2015:

     249,582         225,673   
  

 

 

    

 

 

 
   $ 2,682,964       $ 649,797   
  

 

 

    

 

 

 

The Manager earned $38,858,723 from The Fairholme Fund, $1,501,572 from The Income Fund, and $1,395,943 from The Allocation Fund for its services during the six months ended May 31, 2012. The Manager waived $249,582 and $225,673 of the amount of the management fees earned from The Income Fund and The Allocation Fund, respectively.

Certain Directors and Officers of the Funds are also Members and Officers of the Manager or its affiliates.

 

35


FAIRHOLME FUNDS, INC.

NOTES TO FINANCIAL STATEMENTS (continued)

May 31, 2012 (unaudited)

 

Note 4. Investments

For the six months ended May 31, 2012, aggregated purchases and sales of investment securities other than short-term investments were as follows:

 

     Purchases      Sales  

The Fairholme Fund

   $ —         $ 1,889,463,424   

The Income Fund

     19,904,952         67,598,274   

The Allocation Fund

     44,005,110         26,930,934   

Note 5. Tax Matters

Federal Income Taxes: Each Fund intends to qualify each year as a “Regulated Investment Company” under Subchapter M of the Internal Revenue Code of 1986, as amended. By so qualifying, each Fund will not be subject to federal income taxes to the extent that it distributes all of its net investment income and any realized capital gains.

For U.S. federal income tax purposes, the cost of securities owned, gross unrealized appreciation, gross unrealized depreciation, and net unrealized depreciation of investments at May 31, 2012 were as follows:

 

     Cost      Gross Unrealized
Appreciation
     Gross Unrealized
Depreciation
    Net Unrealized
Depreciation
 

The Fairholme Fund

   $ 7,500,300,976       $ 759,306,673       $ (1,442,392,109   $ (683,085,436

The Income Fund

     290,190,830         5,897,332         (23,589,094     (17,691,762

The Allocation Fund

     256,515,536         5,315,457         (17,504,937     (12,189,480

The difference between book basis and tax basis net unrealized depreciation, if any, is primarily attributable to the tax deferral of losses on wash sales.

The Funds’ tax basis capital gains are determined only at the end of each fiscal year. Therefore, the components of distributable earnings will be included in the Annual Report dated November 30, 2012.

The Manager has analyzed the Funds’ tax positions taken on federal income tax returns for all open tax years (current and prior three tax years) and has concluded that there are no uncertain tax positions that require recognition of a tax liability. The Funds’ federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired (the current year and the prior year) are subject to examination by the Internal Revenue Service and state departments of revenue.

Note 6. Dividends and Distributions to Shareholders

Ordinary income and capital gain distributions are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP.

The tax character of dividends and distributions paid by the Funds were as follows:

 

     The Fairholme Fund      The Income Fund  
     For the
Six Months Ended
May 31, 2012
     For the
Fiscal Year Ended
November 30, 2011
     For the
Six Months Ended
May 31, 2012
     For the
Fiscal Year Ended
November 30, 2011
 

Dividends and Distributions paid from:

           

Ordinary Income*

   $ —         $ 199,071,043       $ 14,119,037       $ 26,068,485   

Long-Term Capital Gain

     —           834,276,106         —           —     

Return of Capital

     276,800,371         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 276,800,371       $ 1,033,347,149       $ 14,119,037       $ 26,068,485   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* Inclusive of short-term capital gains

 

36


FAIRHOLME FUNDS, INC.

NOTES TO FINANCIAL STATEMENTS (continued)

May 31, 2012 (unaudited)

 

There were no dividends or distributions paid by The Allocation Fund during the six months ended May 31, 2012 or during the period ended November 30, 2011.

Note 7. Transactions in Shares of Affiliates

Portfolio companies in which a Fund owns 5% or more of the outstanding voting securities of the company are considered affiliates of the Fund. The aggregate fair value of all securities of affiliates held in The Fairholme Fund as of May 31, 2012 amounted to $1,748,367,466, representing 24.82% of the Fund’s net assets. There were no affiliates of The Income Fund or The Allocation Fund as of May 31, 2012.

Transactions in The Fairholme Fund during the six months ended May 31, 2012 in which the issuer was an affiliate are as follows:

 

The Fairholme Fund

   November 30, 2011      Gross Additions      Gross Deductions      May 31, 2012               
     Shares/
Par Value
     Shares/
Par Value
     Shares/
Par Value
     Shares/
Par Value
     Fair Value      Realized
Gain (Loss)
    Investment
Income
 

CIT Group, Inc.

     16,358,129         —           2,761,100         13,597,029       $ 464,882,422       $ (14,248,872   $ —     

MBIA, Inc.

     20,501,100         —           —           20,501,100         183,894,867         —          —     

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

     —           641,893         36,600         605,293         10,199,192         (2,784,099     —     

Sears Holdings Corp.

     14,212,673         —           —           14,212,673         702,106,046         —          —     

The St. Joe Co.

     23,136,502         —           —           23,136,502         358,405,239         —          —     

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

     —           641,893         40,200         601,693         932,625         (42,630     —     

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

   $ 17,932,000       $ —         $ —         $ 17,932,000         12,014,440         —          696,353   

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

   $ 13,859,000       $ —         $ —         $ 13,859,000         9,216,235         —          530,952   

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

   $ 11,580,000       $ —         $ —         $ 11,580,000         6,716,400         —          355,275   
              

 

 

    

 

 

   

 

 

 

Total

               $ 1,748,367,466       $ (17,075,601   $ 1,582,580   
              

 

 

    

 

 

   

 

 

 

 

(a) 

Security received in spin-off from Sears Holdings Corp. Security was not held in the portfolio at November 30, 2011.

Note 8. Indemnifications

Under the Company’s organizational documents, its Officers and Directors are indemnified against certain liabilities arising out of the performance of their duties to the Funds. In the normal course of business the Company or the Funds enter into contracts that contain a variety of representations and customary indemnifications. The Funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds that have not yet occurred. However, based on their experience to date, the Funds expect the risk of loss to be remote.

 

37


FAIRHOLME FUNDS, INC.

ADDITIONAL INFORMATION

May 31, 2012 (unaudited)

Proxy Voting Policies, Procedures and Records (unaudited)

The Company has adopted policies and procedures that provide guidance and set forth parameters for the voting of proxies relating to securities held in each Fund’s portfolio. A description of these policies and procedures, and records of how the Funds voted proxies relating to their portfolio securities during the most recent twelve month period ended June 30, 2011, are available to you upon request and free of charge by writing to the Fairholme Funds, Inc., c/o BNY Mellon Investment Servicing (US) Inc., P.O. Box 9692, Providence, RI, 02940 or by calling Shareholder Services at 1-866-202-2263. They may also be obtained by visiting the Securities and Exchange Commission (“SEC”) website at www.sec.gov. The Company shall respond to all shareholder requests for records within three business days of its receipt of such request by first-class mail or other means designed to ensure prompt delivery.

N-Q Filing (unaudited)

The Company files a complete schedule of the Funds’ portfolio holdings on Form N-Q for the fiscal quarters ending February 28 (February 29 during leap year) and August 31. The Form N-Q filing must be made within 60 days of the end of the quarter. The Forms N-Q relating to each Fund’s portfolio investments are available on the SEC’s website at www.sec.gov, or may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC (call 1-800-732-0330 for information on the operation of the Public Reference Room).

 

38


 

LOGO

 

OFFICERS

 

•   Bruce R. Berkowitz

President

 

•   Wayne Kellner

Treasurer

 

•   Paul R. Thomson

Chief Compliance Officer and Secretary

 

BOARD OF DIRECTORS

 

•   Cesar L. Alvarez, Esq.

 

•   Terry L. Baxter

 

•   Bruce R. Berkowitz

 

•   Howard S. Frank

 

•   Avivith Oppenheim, Esq.

 

•   Leigh Walters, Esq.

 

•   Investment Manager

Fairholme Capital Management, L.L.C.

4400 Biscayne Boulevard

Miami, FL 33137

 

•   Dividend Paying Agent Transfer Agent

BNY Mellon Investment Servicing (US)Inc.

760 Moore Road

King of Prussia, PA 19406

 

•   Custodian

The Bank of New York Mellon

1 Wall Street

New York, NY 10286

 

•   Independent Registered Public Accounting Firm

Deloitte & Touche LLP

1700 Market Street

Philadelphia, PA 19103

 

•   Legal Counsel

Seward & Kissel, LLP

901 K Street NW

Washington, DC 20001

 

THIS REPORT IS PROVIDED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF FAIRHOLME FUNDS, INC. IT IS NOT INTENDED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUNDS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS, WHICH CONTAINS MORE INFORMATION ON FEES, CHARGES AND OTHER EXPENSES AND SHOULD BE READ CAREFULLY BEFORE INVESTING OR SENDING MONEY. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. SHARES OF THE FUNDS ARE DISTRIBUTED BY FAIRHOLME DISTRIBUTORS, LLC.

   LOGO


Item 2. Code of Ethics.

Not applicable.

 

Item 3. Audit Committee Financial Expert.

Not applicable.

 

Item 4. Principal Accountant Fees and Services.

Not applicable.

 

Item 5. Audit Committee of Listed Registrants.

Not applicable.

 

Item 6. Investments.

 

(a) Schedule of investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this Form.

 

(b) Not applicable.

 

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

Not applicable.


Item 8. Portfolio Managers of Closed-End Management Investment Companies.

Not applicable.

 

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

Not applicable.

 

Item 10. Submission of Matters to a Vote of Security Holders.

There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant’s board of directors, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item.

 

Item 11. 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 the 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 second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

Item 12. Exhibits.

 

(a)(1)    Not applicable.
(a)(2)    Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto as Exhibits (a)(2)(i) and (a)(2)(ii).
(a)(3)    Not applicable.


(b)    Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto as Exhibit (b).


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.

 

Fairholme Funds, Inc.
By:   /s/    Bruce R. Berkowitz        
 

Bruce R. Berkowitz, President

(principal executive officer)

Date   August 6, 2012

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:   /s/    Bruce R. Berkowitz        
 

Bruce R. Berkowitz, President

(principal executive officer)

Date   August 6, 2012
By:   /s/    Wayne Kellner        
 

Wayne Kellner, Treasurer

(principal financial officer)

Date   August 6, 2012