AS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION
ON 12/03/99
FILE NOS: 811-09607
333-88517
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [1]
Post-Effective Amendment No. [ ]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. [1]
(Check appropriate box or boxes.)
FAIRHOLME FUNDS, INC.
-------------------------------
(Exact name of Registrant as Specified in Charter)
51 JFK PARKWAY
SHORT HILLS, NJ 07078
------------------------
(Address of Principal Executive Office)
973-379-6557
------------------
(Registrant's Telephone Number, including Area Code)
MR. BRUCE R. BERKOWITZ
FAIRHOLME CAPITAL MANAGEMENT LLC
51 JFK PARKWAY
SHORT HILLS, NJ 07078
---------------------------------------
(Name and Address of Agent for Service)
Please send copy of communications to:
MR. DAVID D. JONES, ESQ.
DAVID JONES & ASSOC., P.C.
799 STATE STREET, PMB 234
POTTSTOWN, PA 19464
------------
Approximate Date of Proposed Public Offering: As soon as practicable following
effective date.
Registrant declares that it is registering an indefinite number or amount of its
securities by this Registration Statement.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall became
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
TOTAL NUMBER OF PAGES _____
EXHIBIT INDEX BEGINS
ON PAGE ___________
<PAGE>
FAIRHOLME FUNDS, INC.
CONTENTS OF PEA # 1
This Registration document is comprised of the following:
1. Cover Sheet
2. Contents of Registration Statement
3. Prospectus for the Fairholme Fund
4. Statement of Additional Information for the Fairholme Fund
5. Part C of Form N-1A
6. Signature Page
7. Exhibits
<PAGE>
==============================
DECEMBER 27, 1999
PROSPECTUS
==============================
THE FAIRHOLME FUND
(the "Fund")
A SERIES OF FAIRHOLME FUNDS, INC.
(the "Company")
51 JFK Parkway
Short Hills, NJ 07078
1-800-___-____
- --------------------------------------------------------------------------------
AS WITH ALL MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
THE FUND
What is the Fund's Investment Objective?....................... 3
What are the Fund's Primary Investment Strategies?............. 3
What are the Principal Risks of Investing in the Fund?......... 4
How Has the Fund Performed in the Past?........................ 5
What are the Fund's Fees And Expenses?......................... 5
An Example of Fund Expenses Over Time.......................... 6
THE FUND'S INVESTMENT ADVISER
The Adviser.................................................... 6
The Portfolio Manager.......................................... 7
HOW TO BUY AND SELL SHARES
Investing In The Fund.......................................... 7
Determining Share Prices....................................... 7
Plan of Distribution........................................... 7
Minimum Investment Amounts..................................... 7
Opening and Adding To Your Account............................. 8
Purchasing Shares By Mail...................................... 8
Purchasing Shares By Wire Transfer............................. 8
Purchases through Financial Service Organizations.............. 9
Purchasing Shares By Automatic Investment Plan................. 9
Purchasing Shares By Telephone................................. 9
Miscellaneous Purchase Information............................. 10
How to Sell (Redeem) Your Shares............................... 10
By Mail........................................................ 10
Signature Guarantees........................................... 11
By Telephone................................................... 11
By Wire........................................................ 12
Redemption At The Option Of The Fund........................... 12
DIVIDENDS AND DISTRIBUTIONS......................................... 12
TAX CONSIDERATIONS.................................................. 12
GENERAL INFORMATION................................................. 13
FOR MORE INFORMATION................................................ 14
<PAGE>
THE FUND
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is long-term growth of capital.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
The Adviser attempts to achieve the Fund's investment objective by:
o investing in common stocks without restrictions regarding market
capitalization;
o normally investing at least 75% of the Fund's total assets in US
common stocks; and
o holding a focused portfolio of no more than 25 stocks.
The Fund's Adviser believes that the Fund's investment objective is best
achieved by investing in companies that exhibit the potential for
significant growth over the long term. The Adviser defines long-term as a
time horizon of at least three years. To identify companies that have
significant growth potential, the Adviser generally employs fundamental
analytical techniques to determine the value of a company and then compares
those results to the company's current share price. Companies that are
trading at significant discounts to their perceived value are segregated
into a pool of qualifying companies. The Adviser will then choose not more
than 25 companies from that pool which exhibit some or all of the following
criteria:
o highly qualified management;
o strong franchise;
o consistent free cash flow;
o high returns on invested capital;
o excellent prospects for growth;
o low price-to-book value or tangible asset value; and
o low price-to-earnings ratio ("P/E").
By utilizing these analytical approaches, the Fund's Adviser plans to have
the Fund purchase shares of good businesses at reasonable prices.
The Fund may invest up to 25% of its total assets in foreign securities
that are traded on a U.S. exchange, either directly or in the form of
American Depository Receipts ("ADRs"). The Fund will only invest in ADRs
that are issuer sponsored. Sponsored ADRs typically are issued by a U.S.
bank or trust company and evidence ownership of underlying securities
issued by a foreign corporation.
Temporary Defensive Positions- Ordinarily, the Fund's portfolio will be
invested primarily in common stocks. However, the Fund is not required to
be fully invested in common stocks and, in fact, usually maintains some
portion of its total assets in cash. Under adverse market conditions, cash
may represent a significant percentage of the Fund's total net assets. The
Fund usually invests its cash in U.S. Government debt instruments, other
unaffiliated mutual funds (money market funds) and repurchase agreements.
During times when the Fund holds a
3
<PAGE>
significant portion of its net assets in cash, it will not be investing
according to its investment objective, and the Fund's performance may be
negatively affected as a result.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?
General Risks- All investments are subject to inherent risks, and the Fund
is no exception. Accordingly, you may lose money by investing in the Fund.
When you sell your Fund shares, they may be worth less than what you paid
for them because the value of the Fund's investments will vary from
day-to-day, reflecting changes in market conditions, interest rates and
numerous other factors.
Stock Market Risk- The stock market tends to trade in cyclical price
patterns, and prices generally may fall over sustained periods of time. The
Fund invests primarily in common stocks, so the Fund will be subject to the
risks associated with common stocks, including price volatility and the
creditworthiness of the issuing company.
Small To Medium-Cap Stock Risks- The Fund may invest in companies with
small to medium market capitalizations (generally less than $6 billion).
Because these companies are relatively small compared to large-cap
companies, may be engaged in business mostly within their own geographic
region, and may be less well-known to the investment community, they can
have more volatile share prices. Also, small companies often have less
liquidity, less management depth, narrower market penetrations, less
diverse product lines, and fewer resources than larger companies. As a
result, their stock prices often react more strongly to changes in the
marketplace.
Foreign Securities Risk- Investments in foreign securities involve greater
risks compared to domestic investments for the following reasons:
o Foreign companies are not subject to the regulatory requirements of
U.S. companies, so there may be less publicly available information
about foreign issuers than U.S. companies.
o Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards.
o Dividends and interest on foreign securities may be subject to foreign
withholding taxes. Such taxes may reduce the net return to Fund
shareholders.
o Foreign securities are often denominated in a currency other than the
U.S. dollar. Accordingly, the Fund will be subject to the risks
associated with fluctuations in currency values.
o Although the Fund will only invest in foreign issuers that are
domiciled in nations considered to have stable and friendly
governments, there is the possibility of expropriation, confiscation,
taxation, currency blockage or political or social instability which
could negatively affect the Fund.
Focused Portfolio Risk- The Fund is classified as "non-diversified" under
the federal securities laws. This means that the Fund has the ability to
concentrate a relatively high percentage of its investments in the
securities of a small number of companies. Investing in this manner makes
4
<PAGE>
the Fund more susceptible to a single economic, political or regulatory
event than a more diversified fund might be. Also, a change in the value of
a single company will have a more pronounced effect on the Fund than such a
change would have on a more diversified fund.
Management Risk- Acting as investment adviser to the Fund is a new position
for the Adviser, and the Fund has no operating history.
Year 2000 Risks- As with other mutual funds, financial and business
organizations and individuals around the world, the Fund could be adversely
affected if the computer systems used by the Adviser and the Fund's other
service providers don't properly process and calculate date-related
information and data from and after January 1, 2000. This is commonly known
as the "Year 2000" or "Y2K" problem. The Adviser is taking steps to address
the Y2K problem with respect to the computer systems that it uses and to
obtain assurances that comparable steps are being taken by the Fund's other
major service providers. The Adviser will also monitor the companies in
which the Fund invests for evidence of their Y2K preparedness. However,
there can be no assurance that the Fund's portfolio will not be adversely
affected by the Y2K problem. Further, foreign issuers may not be as well
prepared for the Y2K problem as U.S. issuers, and this may pose additional
risk to the Fund.
HOW HAS THE FUND PERFORMED IN THE PAST?
Because this is a new Fund that does not yet have an operating history, a
performance bar chart and table describing the Fund's annual performance
and comparing that performance to appropriate indices is not yet available.
WHAT ARE THE FUND'S FEES AND EXPENSES?
This table describes the fees and expenses you may pay if you buy and hold
shares of the Fund.
================================================
Shareholder Fees:
-----------------
(fees paid directly from your investment)
Maximum Sales Charge (Load)
Imposed on Purchases NONE
Maximum Deferred Sales NONE
Charge (Load)
Maximum Sales Charge (Load) NONE
Imposed on Reinvested Dividends
And other Distributions
Redemption Fees NONE4
================================================
================================================
Annual Fund Operating Expenses:
-------------------------------
(expenses that are deducted from Fund assets)
Management Fees1 1.00%
Distribution (12b-1) Fees2 0.00%
Other Expenses3 0.00%
------------------------------------------------
Total Annual
Fund Operating Expenses 1.00%
================================================
1. Management fees include a fee of 0.50% for investment advisory services and
0.50% for administrative and other services. Both fees are paid to the
Fund's Adviser pursuant to separate agreements for each service.
2. Although the Fund's Board of Director's has adopted a Plan of Distribution
under Rule 12b-1 of the Investment Company Act of 1940, the Plan has not
been implemented and the Fund has no intention of implementing the Plan
during the Fund's first fiscal year.
5
<PAGE>
3. The Fund's Adviser is responsible for paying all the Fund's expenses except
taxes, interest, litigation expenses and other extraordinary expenses.
Because the Fund believes that it will not incur any of these expenses
during its first fiscal year, no expenses are included in this category.
4. The Fund's Custodian may charge a fee on amounts redeemed and sent to you
by wire transfer.
AN EXAMPLE OF EXPENSES OVER TIME:
This Example below is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated, reinvest all dividends and distributions, and then redeem all your
shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
ONE YEAR THREE YEARS
-------- -----------
$ 160 $ 504
THE FUND'S INVESTMENT ADVISER
The Adviser
- -----------
Fairholme Capital Management, LLC (the "Adviser"), 51 JFK Parkway, Short Hills,
NJ 07078 serves as investment adviser to the Fund. The Adviser is a Delaware
limited liability company and is registered with the Securities and Exchange
Commission as an investment adviser.
The Adviser's principal business and occupation is to provides financial
management and advisory services to individuals, corporations, and other
institutions throughout the United States. The Adviser has been investment
adviser to the Fund since its inception. The Adviser manages the investment
portfolio and business affairs of the Fund under an Investment Advisory
Agreement with the Fund, and manages, or arranges to manage, the daily
operations of the Fund under an Operating Services Agreement.
For its advisory and administrative services to the Fund, the Company pays to
the Adviser, on the last day of each month, annualized fees equal to 1.00%
(0.50% of which are investment advisory fees) of the average net assets of the
Fund, such fees to be computed daily based upon the daily average net assets of
the Fund.
The Portfolio Manager
- ---------------------
Mr. Bruce Berkowitz is Managing Director of the Adviser and acts as the
portfolio manager for the Fund. Mr. Berkowitz is also President of Fairholme
Funds, Inc. (the "Company"). Mr. Berkowitz has been Managing Director, and the
Chief Investment Officer of the Adviser since the Adviser's inception in 1994.
As of September 30, 1999, the Adviser managed in excess of $800 million in
client assets.
6
<PAGE>
HOW TO BUY AND SELL SHARES OF THE FUND
INVESTING IN THE FUND
Determining Share Prices
- ------------------------
Shares of the Fund are offered at each share's net asset value ("NAV"). NAV per
share is calculated by adding the value of Fund investments, cash and other
assets, subtracting Fund liabilities, and then dividing the result by the number
of shares outstanding. The Fund generally determines the total value of its
shares by using market prices for the securities comprising its portfolio.
Securities for which quotations are not available and any other assets are
valued at fair market value as determined in good faith by the Adviser, subject
to the review and supervision of the Board of Directors. The Fund's per share
NAV is computed on all days on which the New York Stock Exchange ("NYSE") is
open for business at the close of regular trading hours on the Exchange,
currently 4:00 p.m. Eastern time. In the event that the NYSE closes early, the
share price will be determined as of the time of closing.
Distribution Fees
- -----------------
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 under the
1940 Act (the "12b-1 Plan") for its shares, pursuant to which the Fund pays the
Adviser a monthly fee for shareholder servicing expenses of 0.25% per annum of
the Fund's average daily net assets. The Adviser may, in turn, pay such fees to
third parties for eligible services provided by those parties to the Fund.
The Fund has not implemented the 12b-1 Plan and does not foresee doing so during
its first fiscal year. The Board adopted the Plan so that, if and when
necessary, the Fund would have available to it sufficient resources to pay third
parties who provide eligible services to the Fund.
If the 12b-1 Plan is implemented in the future, you should be aware that if you
hold your shares for a substantial period of time afterwards, you may indirectly
pay more than the economic equivalent of the maximum front-end sales charge
allowed by the National Association of Securities Dealers due to the recurring
nature of Distribution (12b-1) fees.
Minimum Investment Amounts
- --------------------------
Payments for Fund shares should be in U.S. dollars, and in order to avoid fees
and delays, should be drawn on a U.S. bank. Fund management may reject any
purchase order for Fund shares and may waive the minimum investment amounts in
its sole discretion.
Your purchase of Fund shares is subject to the following minimum investment
amounts:
MINIMUM MINIMUM
TYPE OF INVESTMENT SUBSEQUENT
ACCOUNT TO OPEN ACCOUNT INVESTMENTS
- --------------------------------------------------------------------------------
REGULAR $2,500 $1,000
IRAs $1,000 $ 100
- --------------------------------------------------------------------------------
7
<PAGE>
AUTOMATIC INVESTMENT PLAN MEMBERS
MINIMUM MINIMUM
TYPE OF INVESTMENT SUBSEQUENT
ACCOUNT TO OPEN ACCOUNT INVESTMENTS
- --------------------------------------------------------------------------------
REGULAR $2,500 $100 per month minimum
IRAs $1,000 $100 per month minimum
- --------------------------------------------------------------------------------
Opening and Adding To Your Account
- ----------------------------------
You can invest in the Fund by mail, wire transfer and through participating
financial service professionals. After you have established your account and
made your first purchase, you may also make subsequent purchases by telephone.
You may also invest in the Fund through an automatic payment plan. Any questions
you may have can be answered by calling 1-800-___-____.
Purchasing Shares By Mail
- -------------------------
To make your initial investment in the Fund, simply complete the Application
Form included with this Prospectus, make a check payable to the Fairholme Fund,
and mail the Form and check to:
Fairholme Funds, Inc.
c/o Mutual Shareholder Services
1301 East 9th Street, Suite 1005
Cleveland, OH 44114
To make subsequent purchases, simply make a check payable to the Fairholme Fund
and mail the check to the above-mentioned address. Be sure to note your Fund
account number on the check.
Your purchase order, if accompanied by payment, will be processed upon receipt
by Mutual Shareholder Services, the Fund's Transfer Agent. If the Transfer Agent
receives your order and payment by the close of regular trading on the NYSE
(currently 4:00 p.m. Eastern time), your shares will be purchased at the Fund's
NAV calculated at the close of regular trading on that day. Otherwise, your
shares will be purchased at the NAV determined as of the close of regular
trading on the next business day.
Purchasing Shares by Wire Transfer
- ----------------------------------
To make an initial purchase of shares by wire transfer, you need to take the
following steps:
1. Call 1-800-___-____ to inform us that a wire is being sent.
2. Obtain an account number from the Transfer Agent.
3. Fill out and mail or fax an Account Application to the Transfer Agent
4. Ask your bank to wire funds to the account of:
UMB Bank, N.A., ABA #: 123456789
Credit: Fairholme Funds, Inc., Acct. #:123456789
Further credit: The Fairholme Fund,
Acct # [Your Account number]
8
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Include your name(s), address and taxpayer identification number or Social
Security number on the wire transfer instructions. The wire should state that
you are opening a new Fund account.
To make subsequent purchases by wire, ask your bank to wire funds using the
instructions listed above, and be sure to include your account number on the
wire transfer instructions.
If you purchase Fund shares by wire, you must complete and file an Application
Form with the Transfer Agent before any of the shares purchased can be redeemed.
Either fill out and mail the Application Form included with this prospectus, or
call the transfer agent and they will send you an application. You should
contact your bank (which will need to be a commercial bank that is a member of
the Federal Reserve System) for information on sending funds by wire, including
any charges that your bank may make for these services.
Purchases through Financial Service Organizations
- -------------------------------------------------
You may purchase shares of the Fund through participating brokers, dealers, and
other financial professionals. Simply call your investment professional to make
your purchase. If you are a client of a securities broker or other financial
organization, such organizations may charge a separate fee for administrative
services in connection with investments in Fund shares and may impose account
minimums and other requirements. These fees and requirements would be in
addition to those imposed by the Fund. If you are investing through a securities
broker or other financial organization, please refer to its program materials
for any additional special provisions or conditions that may be different from
those described in this Prospectus (for example, some or all of the services and
privileges described may not be available to you). Securities brokers and other
financial organizations have the responsibility of transmitting purchase orders
and funds, and of crediting their customers' accounts following redemptions, in
a timely manner in accordance with their customer agreements and this
Prospectus.
Purchasing Shares by Automatic Investment Plan
- ----------------------------------------------
You may purchase shares of the Fund through an Automatic Investment Plan
("Plan"). The Plan provides a convenient way for you to have money deducted
directly from your checking, savings, or other accounts for investment in shares
of the Fund. You can take advantage of the Plan by filling out the Automatic
Investment Plan application on page __ of this Prospectus. You may only select
this option if you have an account maintained at a domestic financial
institution which is an Automatic Clearing House member for automatic
withdrawals under the Plan. The Fund may alter, modify, amend or terminate the
Plan at any time, and will notify you at least 30 days in advance if it does so.
For more information, call the Transfer Agent at 1-800-___-____.
Purchasing Shares by Telephone
- ------------------------------
In order to be able to purchase shares by telephone, your account authorizing
such purchases must have been established prior to your call. Your initial
purchase of shares may not be made by telephone. Shares purchased by telephone
will be purchased at the per share NAV next determined at the close of business
on the day that the Transfer Agent receives receives your order for shares. Call
the Transfer Agent for details.
You may make purchases by telephone only if you have an account at a bank that
is a member of the Automated Clearing House. Most transfers are completed within
three business days of your call. To preserve flexibility, the Company may
revise or eliminate the ability to purchase Fund shares by phone, or may charge
a fee for such service, although the Company does not currently expect to charge
such a fee.
9
<PAGE>
The Fund's Transfer Agent employs certain procedures designed to confirm that
instructions communicated by telephone are genuine. Such procedures may include,
but are not limited to, requiring some form of personal identification prior to
acting upon telephonic instructions, providing written confirmations of all such
transactions, and/or tape recording all telephonic instructions. Assuming
procedures such as the above have been followed, neither the Transfer Agent nor
the Fund will be liable for any loss, cost, or expense for acting upon telephone
instructions that are believed to be genuine. The Company shall have authority,
as your agent, to redeem shares in your account to cover any such loss. As a
result of this policy, you will bear the risk of any loss unless the Fund has
failed to follow procedures such as the above. However, if the Fund fails to
follow such procedures, it may be liable for such losses.
Miscellaneous Purchase Information
- ----------------------------------
The Fund reserves the right to refuse to accept applications under circumstances
or in amounts considered disadvantageous to shareholders. Applications will not
be accepted unless they are accompanied by payment in U.S. funds. Payment must
be made by wire transfer, check or money order drawn on a U.S. bank, savings and
loan association or credit union. The Fund's custodian may charge a fee against
your account, in addition to any loss sustained by the Fund, for any payment
check returned to the custodian for insufficient funds. If you place an order
for Fund shares through a securities broker, and you place your order in proper
form before 4:00 p.m. Eastern time on any business day in accordance with their
procedures, your purchase will be processed at the NAV calculated at 4:00 p.m.
on that day, provided the securities broker transmits your order to the Transfer
Agent before 5:00 p.m. Eastern time. The securities broker must send to the
Transfer Agent immediately available funds in the amount of the purchase price
within three business days of placing the order.
HOW TO SELL (REDEEM) YOUR SHARES
You may sell your shares at any time. You may request the sale of your shares
either by mail, by telephone or by wire.
By Mail
- -------
Sale requests should be mailed via U.S. mail or overnight courier service to:
Mutual Shareholder Services
1301 East 9th Street, Suite 1005
Cleveland, OH 44114
The redemption price you receive will be the Fund's per share NAV next
calculated after receipt of all required documents in "Good Order".
"Good order" means that your redemption request must include:
1. Your account number.
2. The number of shares to be sold (redeemed) or the dollar value of the
amount to be redeemed.
3. The signatures of all account owners exactly as they are registered on the
account.
4. Any required signature guarantees.
5. Any supporting legal documentation that is required in the case of estates,
trusts, corporations or partnerships and certain other types of accounts.
Payment of redemption proceeds will be made no later than the third business day
after the valuation date unless otherwise expressly agreed by the parties at the
time of the transaction. If you purchase your shares by check and then redeem
your shares before your check has cleared, the Fund may hold your redemption
proceeds until your check clears, or for 15 days, whichever comes first.
10
<PAGE>
Signature Guarantees --
- -----------------------
A signature guarantee of each owner is required to redeem shares in the
following situations, for all size transactions:
o if you change the ownership on your account;
o when you want the redemption proceeds sent to a different address than is
registered on the account;
o if the proceeds are to be made payable to someone other than the account's
owner(s);
o any redemption transmitted by federal wire transfer to your bank; and
o if a change of address request has been received by the Fund or the
Transfer Agent within 15 days previous to the request for redemption.
In addition, signature guarantees are required for all redemptions of $25,000 or
more from any Fund shareholder account. A redemption will not be processed until
the signature guarantee, if required, is received by the Transfer Agent.
Signature guarantees are designed to protect both you and the Fund from fraud.
To obtain a signature guarantee, you should visit a bank, trust company, member
of a national securities exchange, other broker-dealer, or other eligible
guarantor institution. (Notaries public cannot provide signature guarantees.)
Guarantees must be signed by an authorized person at one of these institutions
and be accompanied by the words, "Signature Guarantee."
By Telephone
- ------------
You may redeem your shares in the Fund by calling the Transfer Agent at
1-800-___-____ if you elected to use telephone redemption on your account
application when you initially purchased shares. Redemption proceeds must be
transmitted directly to you or to your pre-designated account at a domestic
bank. You may not redeem by telephone if a change of address request has been
received by the Fund or the Transfer Agent within 15 days prior to the request
for redemption. During periods of substantial economic or market changes,
telephone redemptions may be difficult to implement. If you are unable to
contact the Transfer Agent by telephone, shares may be redeemed by delivering
your redemption request in person or by mail. In addition, interruptions in
telephone service may mean that you will be unable to effect a redemption by
telephone exactly when desired.
By Wire
- -------
You may request the redemption proceeds be wired to your designated bank if it
is a member bank or a correspondent of a member bank of the Federal Reserve
System. The Fund's Custodian may charges a fee to your account for outgoing
wires.
Redemption At The Option Of The Fund
- ------------------------------------
If the value of the shares in your account falls to less than $2000, the Fund
may notify you that, unless your account is increased to $2000 in value, it will
redeem all your shares and close the account by paying you the redemption
proceeds and any dividends and distributions declared and unpaid at the date of
redemption. You will have thirty days after notice to bring the account up to
$2000 before any action is taken. This right of redemption shall not apply if
the value of your account drops below $2000 as the result of market action. The
Fund reserves this right because of the expense to the Fund of maintaining
relatively small accounts.
11
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DIVIDENDS AND DISTRIBUTIONS
Dividends paid by the Fund are derived from its net investment income. Net
investment income will be distributed at least annually. The Fund's net
investment income is made up of dividends received from the stocks it holds, as
well as interest accrued and paid on any other obligations that might be held in
its portfolio.
The Fund realizes capital gains when it sells a security for more than it paid
for it. The Fund may make distributions of its net realized capital gains (after
any reductions for capital loss carry forwards), generally, once a year.
Unless you elect to have your distributions paid in cash, your distributions
will be reinvested in additional shares of the Fund. You may change the manner
in which your dividends are paid at any time by writing to the Transfer Agent.
TAX CONSIDERATIONS
The Fund intends to qualify as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended, so as to be relieved of
federal income tax on its capital gains and net investment income currently
distributed to its shareholders.
Dividends from investment income and net short-term capital gains are generally
taxable to you as ordinary income. Distributions of long-term capital gains are
taxable as long-term capital gains regardless of the length of time shares in
the Fund have been held. Distributions are taxable, whether received in cash or
reinvested in shares of the Fund.
You will be advised annually of the source of distributions for federal income
tax purposes.
A redemption of shares is a taxable event and, accordingly, a capital gain or
loss may be recognized. You should consult a tax adviser regarding the effect of
federal, state, local, and foreign taxes on an investment in the Fund.
GENERAL INFORMATION
The Fund will not issue stock certificates evidencing shares. Instead, your
account will be credited with the number of shares purchased, relieving you of
responsibility for safekeeping of certificates and the need to deliver them upon
redemption. Written confirmations are issued for all purchases of shares.
In reports or other communications to investors, or in advertising material, the
Fund may describe general economic and market conditions affecting the Fund and
may compare its performance with other mutual funds as listed in the rankings
prepared by Lipper Analytical Services, Inc. or similar nationally recognized
rating services and financial publications that monitor mutual fund performance.
The Fund may also, from time to time, compare its performance to the one or more
appropriate indices.
12
<PAGE>
FOR MORE INFORMATION
Additional information about the Fund is available in the Fund's Statement of
Additional Information (SAI). The SAI contains more detailed information on all
aspects of the Fund. A current SAI, dated December 27, 1999, has been filed with
the SEC and is incorporated by reference into this prospectus.
To receive information concerning the Fund, or to request a copy of the SAI or
other documents relating to the Fund, please contact the Fund at:
Fairholme Funds, Inc.
c/o Mutual Shareholder Services
1301 East 9th Street, Suite 1005
Cleveland, OH 44114
1-800-___-____
A copy of your requested document(s) will be sent to you within three days of
your request.
You may also receive information concerning the Fund, or request a copy of the
SAI or other documents relating to the Fund, by contacting the Securities and
Exchange Commission:
IN PERSON: at the SEC's Public Reference Room in Washington, D.C.
BY PHONE: 1-800-SEC-0330
BY MAIL: Public Reference Section, Securities and Exchange Commission,
Washington, D.C. 20549-6009 (duplicating fee required)
ON THE INTERNET: www.sec.gov
Investment Company Act No.
811-09607
<PAGE>
Part B
STATEMENT OF ADDITIONAL INFORMATION
Dated December 27, 1999
FAIRHOLME FUNDS, INC.
51 JFK Parkway
Short Hills, NJ 07078
1-800-___-____
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus of the Fairholme Fund ("Fund"), dated
December 27, 1999. You may obtain a copy of the Prospectus, free of charge, by
writing to Fairholme Funds, Inc. ("Company") c/o Mutual Shareholder Services,
1301 East 9th Street, Cleveland, OH 44114, or by calling 1-800-___-____.
TABLE OF CONTENTS
The Fund's Investment Policies, Objectives And Securities Options....... 2
Investment Restrictions................................................. 6
Investment Adviser...................................................... 7
Directors and Officers ............................................... 8
Performance Information................................................. 9
Purchasing and Redeeming Shares......................................... 10
Tax Information......................................................... 10
Portfolio Transactions.................................................. 12
Custodian............................................................... 12
Transfer Agent.......................................................... 13
Administration.......................................................... 13
Distributor............................................................. 13
Independent Accountants................................................. 14
Legal Counsel........................................................... 14
General Information..................................................... 14
Distribution Plan....................................................... 15
Financial Statements.................................................... 15
<PAGE>
THE FUND'S INVESTMENT POLICIES, OBJECTIVES AND SECURITIES OPTIONS
The Fund's investment objectives and the manner in which the Fund pursues its
investment objectives are generally discussed in the prospectus. This section
provides information concerning the Fund's additional investment policies,
objectives and securities in which the Fund may invest but which are not part of
the Fund's primary investment strategies.
The Fund is a non-diversified Fund, meaning that the Fund can concentrate its
investments in a smaller number of companies than a more diversified fund. The
Fund normally will invest at least 75% of total assets in common stock of U.S.
companies and ADRs of foreign companies, and will normally hold a focused
portfolio consisting of not more than 25 stocks. The Fund may also invest in a
variety of other securities. These other types of securities in which the Fund
may invest are listed below, along with any restrictions on such investments,
and, where necessary, a brief discussion of any risks unique to the particular
security.
REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in real estate investment
trusts (REITs). Equity REITs invest directly in real property while mortgage
REITs invest in mortgages on real property. REITs may be subject to certain
risks associated with the direct ownership of real estate, including declines in
the value of real estate, risks related to general and local economic
conditions, overbuilding and increased competition, increases in property taxes
and operating expenses, and variations in rental income. REITs pay dividends to
their shareholders based upon available funds from operations. It is quite
common for these dividends to exceed the REITs taxable earnings and profits
resulting in the excess portion of such dividends being designated as a return
of capital. The Fund intends to include the gross dividends from such REITs in
its distribution to its shareholders and, accordingly, a portion of the Fund's
distributions may also be designated as a return of capital. The Fund will not
invest more than 20% of its assets in REITS.
FOREIGN SECURITIES. The Fund may invest up to 25% of its total net assets in the
common stock of foreign issuers traded on U.S. exchanges. The Fund may also
invest in foreign securities in the form of American Depository Receipts (ADRs).
The Fund will only invest in ADRs that are issuer sponsored. Sponsored ADRs
typically are issued by a U.S. bank or trust company and evidence ownership of
underlying securities issued by a foreign corporation.
Investments in foreign companies involve certain risks not typically associated
with investing in domestic companies. An investment may be affected by changes
in currency rates and in exchange control regulations. There may be less
publicly available information about a domestic company than about a domestic
company, because foreign companies are not subject to the regulatory
requirements of U.S. companies. Foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards. Dividends and
interest on foreign securities may be subject to foreign withholding taxes. Such
taxes may reduce the net return to Fund shareholders. Foreign securities are
often denominated in a currency other than the U.S. dollar. Accordingly, the
Fund will be subject to the risks associated with fluctuations in currency
values. Although the Fund will only invest in foreign issuers that are domiciled
in nations considered to have stable and friendly governments, there is the
possibility of expropriation, confiscation, taxation, currency blockage or
political or social instability which could negatively affect the Fund.
2
<PAGE>
PREFERRED STOCK. The Fund may invest in preferred stock. Preferred stock
generally pays dividends at a specified rate and generally has preference over
common stock in the payments of dividends and the liquidation of the issuer's
assets. Dividends on preferred stock are generally payable at the discretion of
the issuer's board of directors. Accordingly, shareholders may suffer a loss of
value if dividends are not paid. The market prices of preferred stocks are also
sensitive to changes in interest rates and in the issuer's creditworthiness.
Accordingly, shareholders may experience a loss of value due to adverse interest
rate movements or a decline in the issuer's credit rating.
CONVERTIBLE SECURITIES. Traditional convertible securities include corporate
bonds, notes and preferred stocks that may be converted into or exchanged for
common stock, and other securities that also provide an opportunity for equity
participation. These securities are generally convertible either at a stated
price or a stated rate (that is, for a specific number of shares of common stock
or other security). As with other fixed income securities, the price of a
convertible security to some extent varies inversely with interest rates. While
providing a fixed-income stream (generally higher in yield than the income
derivable from a common stock but lower than that afforded by a non-convertible
debt security), a convertible security also affords the investor an opportunity,
through its conversion feature, to participate in the capital appreciation of
the common stock into which it is convertible. As the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis and so may not experience market value declines to
the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the price of a convertible security tends to
rise as a reflection of the value of the underlying common stock. To obtain such
a higher yield, the Fund may be required to pay for a convertible security an
amount in excess of the value of the underlying common stock. Common stock
acquired by the Fund upon conversion of a convertible security will generally be
held for so long as the Advisor anticipates such stock will provide the Fund
with opportunities which are consistent with the Fund's investment objectives
and policies.
DEBT SECURITIES. The Fund may invest in U.S. Government debt securities. U.S.
Government securities include direct obligations of the U.S. Government and
obligations issued by U.S. Government agencies and instrumentalities. The market
value of such securities fluctuates in response to interest rates and the
creditworthiness of the issuer. In the case of securities backed by the full
faith and credit of the United States Government, shareholders are only exposed
to interest rate risk.
Credit Risk- A debt instrument's credit quality depends on the issuer's
ability to pay interest on the security and repay the debt: the lower the
credit rating, the greater the risk that the security's issuer will
default. The credit risk of a security may also depend on the credit
quality of any bank or financial institution that provides credit
enhancement for the security.
Interest Rate Risk- All debt securities face the risk that their principal
value will decline because of a change in interest rates. Generally,
investments subject to interest rate risk will decrease in value when
interest rates rise and will rise in value when interest rates decline.
Also, the longer a security has until it matures, the more pronounced will
be a change in its value when interest rates change.
3
<PAGE>
MONEY MARKET MUTUAL FUNDS. The Fund may invest in securities issued by other
registered investment companies. As a shareholder of another registered
investment company, the Fund would bear its pro rata portion of that company's
advisory fees and other expenses. Such fees and expenses will be borne
indirectly by the Fund's shareholders.
REPURCHASE AGREEMENTS. The Fund may invest a portion of its assets in repurchase
agreements ("Repos") with broker-dealers, banks and other financial
institutions, provided that the Fund's custodian at all times has possession of
the securities serving as collateral for the Repos or has proper evidence of
book entry receipt of said securities. In a Repo, the Fund purchases securities
subject to the seller's simultaneous agreement to repurchase those securities
from the Fund at a specified time (usually one day) and price. The repurchase
price reflects an agreed-upon interest rate during the time of investment. All
Repos entered into by the Fund must be collateralized by U.S. Government
Securities, the market values of which equal or exceed 102% of the principal
amount of the money invested by the Fund. If an institution with whom the Fund
has entered into a Repo enters insolvency proceedings, the resulting delay, if
any, in the Fund's ability to liquidate the securities serving as collateral
could cause the Fund some loss if the securities declined in value prior to
liquidation. To minimize the risk of such loss, the Fund will enter into Repos
only with institutions and dealers considered creditworthy.
Repurchase Agreement Risk- A repurchase agreement exposes the Fund to the
risk that the party that sells the securities will default on its
obligation to repurchase those securities. If that happens the Fund can
lose money because: (i) it may not be able to sell the securities at the
agreed-upon time and price; and (ii) the securities may lose value before
they can be sold.
CASH RESERVES. The Fund may hold a significant portion of its net assets in
cash, either to maintain liquidity or for temporary defensive purposes.
RESTRICTED AND ILLIQUID SECURITIES. The Fund will not invest more than 15% of
its net assets in securities that the Adviser determines to be illiquid.
Illiquid securities are securities that may be difficult to sell promptly at an
acceptable price because of a lack of an available market and other factors. The
sale of some illiquid and other types of securities may be subject to legal
restrictions. Because illiquid and restricted securities may present a greater
risk of loss than other types of securities, the Fund will not invest in such
securities in excess of the limits set forth above.
The Fund may also invest in securities acquired in a privately negotiated
transaction from the issuer or a holder of the issuer's securities and which may
not be distributed publicly without registration under the Securities Act of
1933.
Restricted and illiquid securities are valued in such manner as the Fund's Board
of Directors ("Board" or "Directors") in good faith deems appropriate to reflect
the fair market value of such securities.
4
<PAGE>
SPECIAL SITUATIONS. The Fund intends to invest in special situations from time
to time. A special situation arises when, in the opinion of Fund management, the
securities of a company will, within a reasonably estimated time period, be
accorded market recognition at an appreciated value solely by reason of a
development particularly or uniquely applicable to that company and regardless
of general business conditions or movements of the market as a whole. Such
developments and situations include, but are not limited to: liquidations,
reorganizations, recapitalizations or mergers, material litigation,
technological breakthroughs, and new management or management policies. Although
large and well-known companies may be involved, special situations often involve
much greater risk than is found in the normal course of investing. To minimize
these risks, the Fund will not invest in special situations unless the target
company has at least three years of continuous operations (including
predecessors), or unless the aggregate value of such investments is not greater
than 25% of the Fund's total net assets (valued at the time of investment).
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. The Fund may purchase
securities on a when-issued basis, and it may purchase or sell securities for
delayed-delivery. These transactions occur when securities are purchased or sold
by the Fund with payment and delivery taking place at some future date. The Fund
may enter into such transactions when, in the Adviser's opinion, doing so may
secure an advantageous yield and/or price to the Fund that might otherwise be
unavailable. The Fund has not established any limit on the percentage of assets
it may commit to such transactions, but to minimize the risks of entering into
these transactions, the Fund will maintain a segregated account with its
custodian consisting of cash, or other high-grade liquid debt securities,
denominated in U.S. dollars or non-U.S. currencies, in an amount equal to the
aggregate fair market value of its commitments to such transactions.
MASTER-FEEDER OPTION. Notwithstanding its other investment policies, the Fund
may seek to achieve its investment objective by investing all of its investable
net assets in another investment company having the same investment objective
and substantially the same investment policies and restrictions as those of the
Fund. Although such an investment may be made in the sole discretion of the
Directors, the Fund's shareholders will be given 30 days prior notice of any
such investment. There is no current intent to make such an investment.
PORTFOLIO TURNOVER. The Fund has no operating history and therefore has no
annual reportable portfolio turnover. The Fund will generally purchase and sell
securities without regard to the length of time the security has been held.
Accordingly, it can be expected that the rate of portfolio turnover may be
substantial. The Fund expects that its annual portfolio turnover rate will not
exceed 100% under normal conditions. However, there can be no assurance that the
Fund will not exceed this rate, and the portfolio turnover rate may vary from
year to year.
High portfolio turnover in any year will result in the payment by the Fund of
above-average transaction costs and could result in the payment by shareholders
of above-average amounts of taxes on realized investment gains. Distributions to
shareholders of such investment gains, to the extent they consist of short-term
capital gains, will be considered ordinary income for federal income tax
purposes.
5
<PAGE>
Portfolio turnover rate is calculated by dividing (1) the lesser of purchases or
sales of portfolio securities for the for the fiscal year by (2) the monthly
average of the value of portfolio securities owned during the fiscal year. A
100% turnover rate would occur if all the securities in the Fund's portfolio,
with the exception of securities whose maturities at the time of acquisition
were one year or less, were sold and either repurchased or replaced within one
year.
INVESTMENT RESTRICTIONS
The restrictions listed below are fundamental policies and may be changed only
with the approval of a "majority of the outstanding voting securities" of the
Fund as defined in the Investment Company Act of 1940 (the "1940 Act"). As
provided in the 1940 Act, a vote of a "majority of the outstanding voting
securities" of the Fund means the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of the Fund, or (2) 67% or more of the shares
of the Fund present at a meeting, if more than 50% of the shares are represented
at the meeting in person or by proxy. Except with respect to borrowing, changes
in values of the Fund's assets as a whole will not cause a violation of the
following investment restrictions so long as percentage restrictions are
observed by the Fund at the time it purchases any security.
The Fund will not:
1. With respect to 75% of its assets (valued at time of investment), normally
invest in more than 25 issuers.
2. Acquire securities of any one issuer that at the time of investment
represent more than 10% of the voting securities of the issuer.
3. Invest more than 25% of its assets (valued at time of investment) in
securities of companies in any one industry.
4. Borrow money, except from banks for temporary or emergency purposes in
amounts not exceeding 5% (valued at time of investment) of the value of the
Fund's assets at the time of borrowing.
5. Underwrite the distribution of securities of other issuers.
6. Invest in companies for the purpose of management or the exercise of
control.
7. Lend money (but this restriction shall not prevent the Fund from investing
in debt securities or repurchase agreements, or lend its portfolio
securities).
8. Issue senior securities.
9. Invest in commodities, futures contracts or options contracts.
10. Invest in oil, gas or other mineral exploration or development programs,
although it may invest in marketable securities of companies engaged in
oil, gas or mineral exploration.
6
<PAGE>
11. Purchase or sell real estate or real estate loans or real estate limited
partnerships, although it may invest in marketable securities of companies
that invest in real estate or interests in real estate.
The Fund has also adopted the following non-fundamental restrictions that may be
changed by the Board without shareholder approval:
The Fund may not:
1. Make margin purchases.
2. Invest more than 15% of its net assets (valued at time of investment) in
securities that are not readily marketable.
3. Acquire securities of other investment companies except as permitted by the
Investment Company Act of 1940.
4. Pledge, mortgage or hypothecate its assets, except for temporary or
emergency purposes and then to an extent not greater than 5% of its total
assets (valued at time of investment).
5. Invest more than 5% of the Fund's assets (valued at time of investment) in
securities of companies with less than 3 years continuous operations,
including predecessors.
INVESTMENT ADVISER
Information on the Fund's investment adviser, Fairholme Capital Management, LLC
(the "Adviser"), is set forth in the prospectus. This section contains
additional information concerning the Adviser.
The Adviser manages the investment portfolio and the general business affairs of
the Fund pursuant to an investment services agreement with the Fund dated
December 15, 1999. Mr. Bruce R. Berkowitz is Managing Director and Chief
Investment Officer of the Adviser, Mr. Michael J. Senior is Chief Operating
Officer of the Adviser. Both persons serve as Directors and Officers of the
Company. Mr. Berkowitz is portfolio manager for the Fund.
The Investment Advisory Agreement.
- ----------------------------------
The Company has entered into an Investment Advisory Agreement ("Advisory
Agreement") with the Adviser. Under the terms of the Advisory Agreement, the
Adviser manages the investment operations of the Fund in accordance with the
Fund's investment policies and restrictions. The Adviser furnishes an investment
program for the Fund, determines what investments should be purchased, sold and
held, and makes changes on behalf of the Company in the investments of the Fund.
At all times the Adviser's actions on behalf of the Fund are subject to the
overall supervision and review of the Board.
The Advisory Agreement provides that the Adviser shall not be liable for any
loss suffered by the Fund or its shareholders as a consequence of any act or
omission in connection with services under the Advisory Agreement, except by
reason of the Adviser's willful misfeasance, bad faith, gross negligence, or
reckless disregard of its obligations and duties.
7
<PAGE>
The Advisory Agreement has a term of two years, but may be continued thereafter
from year to year so long as its continuance is approved at least annually (a)
by the vote of a majority of the Directors of the Fund who are not "interested
persons" of the Fund or the Adviser cast in person at a meeting called for the
purpose of voting on such approval, and (b) by the Board of Directors as a whole
or by the vote of a majority (as defined in the 1940 Act) of the outstanding
shares of the Fund.
The Advisory Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
For its investment advisory services to the Fund, the Company pays to the
Adviser, on the last day of each month, an annualized fee equal to 0.50% of
average net assets of the Fund, such fee to be computed daily based upon the
daily average net assets of the Fund.
The Operating Services Agreement
- --------------------------------
The Company has also entered into an Operating Services Agreement with the
Adviser ("Services Agreement"). Under the terms of the Services Agreement, the
Adviser provides, or arranges to provide, day-to-day operational services to the
Fund including, but not limited to:
1. accounting 6. custodial
2. administrative 7. fund share distribution
3. legal (except litigation) 8. shareholder reporting
4. dividend disbursing and transfer agent 9. sub-accounting, and
5. registrar 10. record keeping services
For its services to the Fund under the Services Agreement, the Fund pays to the
Adviser, on the last day of each month, an annualized fee equal to 0.50% of
average net asset value of the Fund, such fee to be computed daily based upon
the net asset value of the Fund.
Under the Services Agreement, the Adviser may, with the Company's permission,
employ third parties to assist it in performing the various services required of
the Fund. The Adviser is responsible for compensating such parties.
The effect of the Advisory Agreement and the Operating Services Agreement
together is to place a "cap" on the Fund's normal operating expenses at 1.00%.
The only other expenses which may be incurred by the Fund are brokerage fees,
taxes, legal fees relating to Fund litigation, and other extraordinary expenses.
DIRECTORS AND OFFICERS
The Board Of Directors ("Board" or "Directors") has overall responsibility for
conduct of the Company's affairs. The day-to-day operations of the Fund are
managed by the Adviser, subject to the Bylaws of the Company and review by the
Board. The Directors of the Company, including those Directors who are also
officers, are listed below.
8
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupation for
Name, Age with Fund The Last Five Years
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bruce R. Berkowitz*; President, Managing Member, Fairholme Capital
(Age 41) Director Management, LLC, a registered investment
51 JFK Parkway adviser, since October, 1997. Managing
Short Hills, NJ 07078 Director, Smith Barney Asset Management,
12/93 through 10/97. BA degree, University
of Massachusetts at Amherst, 1980.
Michael J. Senior* Secretary/Treasurer Chief Operating Officer, Fairholme Capital
(Age 49) Director Management, LLC, a registered investment
51 JFK Parkway adviser, since May, 1998. Michael J. Senior
Short Hills, NJ 07078 Inc., a financial consulting firm, from 5/89
through 4/98. BBA degree, City College of New
York, 1972.
Joel L. Uchenick Director Senior Partner, the marketing firm of
(Age __) Sherbrooke Associates. BA degree,
52 Waltham Street University of Massachusetts at Amherst,
Topsfield, MA 1970. MBA, McGill University of Montreal
1979.
Avivith Oppenheim, Esq. Director Privately practicing Attorney at Law.
(Age ) BSW degree, McGill University of
140 Mountain Ave. Montreal, 1971. MSW degree, McGill
Springfield, NJ. University, Montreal, 1972. JD degree,
Yeshiva University, New York, NY, 1988.
Leigh Walters Director Director, Vice President, Valcor
(Age ) Engineering Corp., and engineering
2 Lawrence Road Firm. BA degree, Temple University,
Springfield, NJ Philadelphia, PA, 1968. JD degree,
John Marshall School of Law, Chicago, IL
1973.
</TABLE>
* Indicates an "interested person" as defined in the 1940 Act.
9
<PAGE>
The table below sets forth the compensation anticipated to be paid by the
Company to each of the directors of the Company during the fiscal year ending
November 30, 2000.*
Name of Director Compensation Pension Annual Total Compensation
from Corp Benefits Benefits Paid to Director
- --------------------------------------------------------------------------------
Bruce R. Berkowitz $0.00 $0.00 $0.00 $0.00
Micheal J. Senior $0.00 $0.00 $0.00 $0.00
Joel L. Uchenick $0.00 $0.00 $0.00 $0.00
Avivith Oppenheim $0.00 $0.00 $0.00 $0.00
Leigh Walters $0.00 $0.00 $0.00 $0.00
* Pursuant to its obligations to the Company under the Services Agreement, the
Adviser is responsible for paying compensation, if any, to each of the Company's
Independent Directors during the fiscal year ending November 30, 2000.
Control Persons and Shareholders Owning in Excess of 5% of Fund Shares
- ----------------------------------------------------------------------
The Adviser intends to purchase all of the outstanding shares of the Fund prior
to the Fund's effective date, and will accordingly be deemed to then control the
Fund.
PERFORMANCE INFORMATION
From time to time the Fund may quote total return figures. "Total Return" for a
period is the percentage change in value during the period of an investment in
Fund shares, including the value of shares acquired through reinvestment of all
dividends and capital gains distributions. "Average Annual Total Return" is the
average annual compounded rate of change in value represented by the Total
Return Percentage for the period.
Average Annual Total Return is computed as follows: P(1+T)[n] = ERV
Where: P = a hypothetical initial investment of $1000]
T = average annual total return
n = number of years
ERV = ending redeemable value of shares at the end of the period
The Fund's performance is a function of conditions in the securities markets,
portfolio management, and operating expenses. Although information such as that
shown above is useful in reviewing the Fund's performance and in providing some
basis for comparison with other investment alternatives, it should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.
In sales literature, the Fund's performance may be compared with that of market
indices and other mutual funds. In addition to the above computations, the Fund
might use comparative performance as computed in a ranking determined by Lipper
Analytical Services, Morningstar, Inc., or that of another service.
10
<PAGE>
PURCHASING AND REDEEMING SHARES
Purchases and redemptions of the Fund's shares will be made at net asset value
("NAV"). The Fund's NAV is determined on days on which the New York Stock
Exchange ("NYSE") is open for trading. For purposes of computing the NAV of a
share of the Fund, securities traded on security exchanges, or in the
over-the-counter market in which transaction prices are reported, are valued at
the last sales price at the time of valuation or, lacking any reported sales on
that day, at the most recent bid quotations. Securities for which quotations are
not available and any other assets are valued at a fair market value as
determined in good faith by the Adviser, subject to the review and supervision
of the Board. The price per share for a purchase order or redemption request is
the NAV next determined after receipt of the order.
The Fund is open for business on each day that the NYSE is open. The Fund's
share price or NAV is normally determined as of 4:00 p.m., Eastern time. The
Fund's share price is calculated by subtracting its liabilities from the closing
fair market value of its total assets and dividing the result by the total
number of shares outstanding on that day. Fund liabilities include accrued
expenses and dividends payable, and its total assets include the market value of
the portfolio securities as well as income accrued but not yet received. Since
the Fund generally does not charge sales or redemption fees, the NAV is the
offering price for shares of the Fund.
TAX INFORMATION
The Fund intends to qualify as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code of 1986, as amended, so as to be
relieved of federal income tax on its capital gains and net investment income
currently distributed to its shareholders. To qualify as a RIC, the Fund must,
among other things, derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities, or other income derived with respect to
its business of investing in such stock or securities.
If the Fund qualifies as a RIC and distributes at least 90% of its net
investment income, the Fund will not be subject to Federal income tax on the
income so distributed. However, the Fund would be subject to corporate income
tax on any undistributed income other than tax-exempt income from municipal
securities.
The Fund intends to distribute to shareholders, at least annually, substantially
all net investment income and any net capital gains realized from sales of the
Fund's portfolio securities. Dividends from net investment income and
distributions from any net realized capital gains are reinvested in additional
shares of the Fund unless the shareholder has requested in writing to have them
paid by check.
If shares are purchased shortly before a record date for a distribution, the
shareholder will, in effect, receive a return of a portion of his investment,
but the distribution will be taxable to him even if the net asset value of the
shares is reduced below the shareholder's cost. However, for federal income tax
purposes the original cost would continue as the tax basis.
11
<PAGE>
If a shareholder fails to furnish his social security or other tax
identification number or to certify properly that it is correct, the Fund may be
required to withhold federal income tax at the rate of 31% (backup withholding)
from dividend, capital gain and redemption payments to him. Dividend and capital
gain payments may also be subject to backup withholding if the shareholder fails
to certify properly that he is not subject to backup withholding due to the
under-reporting of certain income.
Taxation of the Shareholder. Taxable distributions generally are included in a
shareholder's gross income for the taxable year in which they are received.
However, dividends declared in October, November and December and made payable
to shareholders of record in such month will be deemed to have been received on
December 31st if paid by the Fund during the following January.
Distributions by the Fund will result in a reduction in the fair market value of
the Fund's shares. Should a distribution reduce the fair market value below a
shareholder's cost basis, such distribution would be taxable to the shareholder
as ordinary income or as a long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares of the Fund just prior to a distribution. The price of such shares
include the amount of any forthcoming distribution so that those investors may
receive a return of investment upon distribution which will, nevertheless, be
taxable to them.
Dividends. A portion of the Fund's income may qualify for the dividends-received
deduction available to corporate shareholders to the extent that the Fund's
income is derived from qualifying dividends. Because the Fund may earn other
types of income, such as interest, income from securities loans, non-qualifying
dividends, and short-term capital gains, the percentage of dividends from the
Fund that qualifies for the deduction generally will be less than 100%. The Fund
will notify corporate shareholders annually of the percentage of Fund dividends
that qualifies for the dividend received deductions.
A portion of the Fund's dividends derived from certain U.S. Government
obligations may be exempt from state and local taxation. Short-term capital
gains are distributed as dividend income. The Fund will send each shareholder a
notice in January describing the tax status of dividends and capital gain
distributions for the prior year.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the Fund are made by the Adviser. In
placing purchase and sale orders for portfolio securities for the Fund, it is
the policy of the Adviser to seek the best execution of orders at the most
favorable price. In selecting brokers to effect portfolio transactions, the
determination of what is expected to result in the best execution at the most
favorable price involves a number of largely judgmental considerations. Among
these are the Adviser's evaluation of the broker's efficiency in executing and
clearing transactions, the rate of commission or the size of the broker-dealer's
"spread", the size and difficulty of the order, the nature of the market for the
security, operational capabilities of the broker-dealer, and the research and
other services provided.
12
<PAGE>
The Adviser may purchase or sell portfolio securities on behalf of the Fund in
agency or principal transactions. In agency transactions, the Fund generally
pays brokerage commissions. In principal transactions, the Fund generally does
not pay commissions. However, the price paid for the security may include an
undisclosed commission or "mark-up" or selling concessions. The Adviser normally
purchases fixed-income securities on a net basis from primary market makers
acting as principals for the securities. The Adviser may purchase certain money
market instruments directly from an issuer without paying commissions or
discounts. Over-the-counter securities are generally purchased and sold directly
with principal market makers who retain the difference in their cost in the
security and its selling price. In some instances, the Adviser feels that better
prices are available from non-principal market makers who are paid commissions
directly.
The Adviser may combine transaction orders placed on behalf of the Fund with
orders placed on behalf of any other fund or private account managed by the
Adviser for the purpose of obtaining a more favorable transaction price. If an
aggregated trade is not completely filled, then the Adviser typically allocates
the trade among the funds or accounts, as applicable, on a pro rata basis based
upon account size. Exemptions are permitted on a case-by-case basis when judged
by the Adviser to be fair and reasonable to the funds or accounts involved.
Trading by the Portfolio Manager
- --------------------------------
Pursuant to Section 17(j) of the 1940 Act and Rule 17j-1 thereunder, the Fund,
the Adviser, and the Distributor have adopted Codes of Ethics restricting
personal securities trading by the Fund's Portfolio Manager. These Codes are on
public file, and are available from the Securities and Exchange Commission.
While the Codes permit personal transactions by the Portfolio Manager in
securities held or to be acquired by the Fund, the Codes prohibit and are
designed to prevent fraudulent activity in connection with such personal
transactions.
CUSTODIAN
UMB Bank, N.A., 1010 Grand Boulevard, Kansas City, Missouri 64106 ("UMB"), acts
as custodian for the Fund. As such, UMB holds all securities and cash of the
Fund, delivers and receives payment for securities sold, receives and pays for
securities purchased, collects income from investments and performs other
duties, all as directed by officers of the Company. UMB does not exercise any
supervisory function over management of the Fund, the purchase and sale of
securities or the payment of distributions to shareholders.
TRANSFER AGENT
Mutual Shareholder Services, 123 Main Street, Cleveland, OH 44114 ("MSS") acts
as transfer, dividend disbursing, and shareholder servicing agent for the Fund
pursuant to a written agreement with the Company and the Adviser. Under the
agreement, MSS is responsible for administering and performing transfer agent
functions, dividend distribution, shareholder administration, and maintaining
necessary records in accordance with applicable rules and regulations.
For the services to be rendered as transfer agent, the Adviser shall pay MSS an
annual fee, paid monthly, based on the average net assets of the Fund, as
determined by valuations made as of the close of each business day of the month.
13
<PAGE>
ADMINISTRATION
MSS also performs certain administrative tasks administrator for the Fund
pursuant to a written agreement with the Company and Adviser. MSS supervises all
aspects of the operations of the Fund except those reserved by the Fund's
investment adviser under it's service agreements with the Company. MSS is
responsible for:
(a) calculating the Fund's net asset value;
(b) preparing and maintaining the books and accounts specified in Rule 31a-1;
and 31a-2 of the Investment Company Act of 1940;
(c) preparing financial statements contained in reports to stockholders of the;
Fund
(d) preparing the Fund's federal and state tax returns;
(e) preparing reports and filings with the Securities and Exchange Commission;
(f) preparing filings with state Blue Sky authorities; and
(g) maintaining the Fund's financial accounts and records.
For the services to be rendered as administrator, the Adviser shall pay MSS an
annual fee, paid monthly, based on the average net assets of the Fund, as
determined by valuations made as of the close of each business day of the month.
DISTRIBUTOR
Maxus Securities Corp. ("Maxus"), 1301 East 9th Street, Cleveland, OH 44114,
acts as the principal underwriter of the Fund's shares pursuant to a written
agreement with the Fund and the Adviser ("Distribution Agreement").
Pursuant to the Distribution Agreement, Maxus facilitates the registration of
the Funds' shares under state securities laws and assists in the sale of shares.
For providing underwriting services to the Fund, PU is paid an annual fixed fee
by the Adviser .
The Adviser shall bear the expense of all filing or registration fees incurred
in connection with the registration of the Fund's shares under state securities
laws.
The Distribution Agreement may be terminated by either party upon 60 days' prior
written notice to the other party.
INDEPENDENT ACCOUNTANTS
McCurdy & Associates CPA's, Inc., 27955 Clemens Road, Westlake, OH 44145, will
serve as the Company's independent auditors for its first fiscal year.
LEGAL COUNSEL
David Jones & Assoc., P.C., 799 State Street, PMB 234, Pottstown, PA 19464, has
passed on certain matters relating to this registration statement and acts as
counsel to the Company.
14
<PAGE>
GENERAL INFORMATION
Fairholme Funds, Inc., an open-end diversified management investment company,
was incorporated in Maryland on September 30, 1999. The Fund is a
non-diversified series of the Company. The affairs of the Company are managed by
a Board of Directors. The Board has delegated the day-to-day operations of the
Fund to the Adviser, which operates the Fund under the Board's general
supervision.
The Company's Articles of Incorporation permit the Board to issue 100,000,000
shares of common stock. 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.
Currently, the Fund is the only series of shares being offered by the Company.
Shareholders are entitled to: one vote per full share; to such distributions as
may be declared by the Company's Board of Directors out of funds legally
available; and upon liquidation, to participate ratably in the assets available
for distribution.
There are no conversion or sinking fund provisions applicable to the shares, and
shareholders have no preemptive rights and may not cumulate their votes in the
election of directors. The shares are redeemable and are fully transferable. All
shares issued and sold by the Fund will be fully paid and nonassessable.
According to the law of Maryland under which the Company is incorporated, and
the Company's Bylaws, the Company is not required to hold an annual meeting of
shareholders unless required to do so under the Investment Company Act of 1940.
Accordingly, the Company will not hold annual shareholder meetings unless
required to do so under the Act. Shareholders do have the right to call a
meeting of shareholders for the purpose of voting to remove directors. The
Company will call a meeting of shareholders for the purpose of voting upon the
question of removal of a director or directors when requested in writing to do
so by record holders of at least 10% of the Fund's outstanding common shares.
DISTRIBUTION PLAN
As noted in the Fund's Prospectus, the Fund has adopted a plan pursuant to Rule
12b-1 under the 1940 Act (collectively, the "Plan") whereby the Fund may pay a
fee of 0.25% per annum of the Fund's average daily net assets to the Adviser and
others for providing personal service and/or maintaining shareholder accounts
relating to the distribution of the Fund's shares. The fees are paid on a
monthly basis, based on the Fund's average daily net assets.
Pursuant to the Plan, the Adviser receives from the Fund a fee each month equal
to 0.25% per annum of average net assets. The Adviser uses such fees to pay for
expenses incurred in the distribution and promotion of the Fund's shares,
including but not limited to, printing of prospectuses and reports used for
sales purposes, preparation and printing of sales literature and related
expenses, advertisements, and other distribution-related expenses as well as any
distribution or service fees paid to securities dealers or others who have
executed a dealer agreement with the distributor. Any expense of distribution in
excess of 0.25% per annum will be borne by the Adviser without any additional
payments by the Fund. You should be aware that it is possible that Plan accruals
will exceed the actual expenditures by the Adviser for eligible services.
Accordingly, such fees are not strictly tied to the provision of such services.
15
<PAGE>
The Plan also provides that to the extent that the Fund, the Adviser, or other
parties on behalf of the Fund, or the Adviser make payments that are deemed to
be payments for the financing of any activity primarily intended to result in
the sale of shares issued by the Fund within the context of Rule 12b-1, such
payments shall be deemed to be made pursuant to the Plans. In no event shall the
payments made under the Plan, plus any other payments deemed to be made pursuant
to the Plan, exceed the amount permitted to be paid pursuant to the Conduct
Rules of the National Association of Securities Dealers, Inc.
The Board of Directors has determined that a consistent cash flow resulting from
the sale of new shares is necessary and appropriate to meet redemptions and to
take advantage of buying opportunities without having to make unwarranted
liquidations of portfolio securities. The Board therefore believes that it will
likely benefit the Fund to have monies available for the direct distribution
activities of the Adviser in promoting the sale of the Fund's shares, and to
avoid any uncertainties as to whether other payments constitute distribution
expenses on behalf of the Fund. The Board of Directors, including the non-
interested Directors, has concluded that in the exercise of their reasonable
business judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders.
The Plan has been approved by the Funds' Board of Directors, including all of
the Directors who are non-interested persons as defined in the 1940 Act. The
Plan must be renewed annually by the Board of Directors, including a majority of
the Directors who are non-interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Plan. The votes must be
cast in person at a meeting called for that purpose. It is also required that,
during the period in which the Plan is in effect, the selection and nomination
of non-interested Directors be done only by the non-interested Directors. The
Plan and any related agreements may be terminated at any time, without any
penalty:
(1) by vote of a majority of the non-interested Directors on not more than 60
days' written notice,
(2) by the Adviser on not more than 60 days' written notice,
(3) by vote of a majority of the Fund's outstanding shares, on 60 days' written
notice, and
(4) automatically by any act that terminates the Advisory Agreement with the
Adviser.
The Adviser or any dealer or other firm may also terminate their respective
agreements at any time upon written notice.
The Plan and any related agreement may not be amended to increase materially the
amounts to be spent for distribution expenses without approval by a majority of
the Fund's outstanding shares, and all material amendments to the Plan or any
related agreements shall be approved by a vote of the non-interested Directors,
cast in person at a meeting called for the purpose of voting on any such
amendment.
16
<PAGE>
The Adviser is required to report in writing to the Board of Directors of the
Fund, at least quarterly, on the amounts and purposes of any payment made under
the Plans, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the Plans should be continued.
Although the Plan has been adopted by the Board of Directors, the Board has
decided not to implement the Plan for at least the Fund's first fiscal year, in
order to minimize the ongoing expenses of the Fund during the Fund's start-up
phase. The Board will implement the Plan when and if circumstances so warrant.
FINANCIAL STATEMENTS
Audited financial statements with respect to the pre-operating period of the
Fund are included as an exhibit to this document.
<PAGE>
PART C
------
OTHER INFORMATION
Item 23. Financial Statements and Exhibits
(a) Articles of Incorporation---Filed on October 6, 1999 as Exhibit 23A to
Initial Registration Statement, and incorporated herein by reference.
(b) By-Laws--- Filed on October 6, 1999 as Exhibit 23B to Initial Registration
Statement, and incorporated herein by reference.
(c) Instruments defining rights of Shareholders--- None, See Articles of
Incorporation.
(d) Investment Advisory Contracts--- Filed on October 6, 1999 as Exhibit 23D to
Initial Registration Statement, and incorporated herein by reference.
(e) Underwriting Contracts--- Filed herewith as Exhibit 23E
(f) Bonus or Profit Sharing Contracts--- None
(g) Custodian Agreements--- Filed herewith as Exhibit 23G
(h) Other Material Contracts---
(1) Operating Services Agreement--- Filed on October 6, 1999 as Exhibit
23H(1) to Initial Registration Statement, and incorporated herein by
reference.
(2) Transfer Agency Agreement--- Filed herewith as Exhibit 23H(2).
(i) Legal Opinion--- Filed herewith as Exhibit 23I
(j) Other opinions--- *
(k) Omitted Financial statements--- None
(l) Initial Capital Agreements--- *
(m) Rule 12b-1 Plan--- Filed herewith as Exhibit 23M.
(n) Financial Data Schedule--- Not Applicable
(o) Rule 18f-3 Plan-- None
* To be filed by amendment
<PAGE>
Item 24. Persons Controlled by or Under Common Control With Registrant
-------------------------------------------------------------
There are no persons controlled by or under common control with the
Fund.
Item 25. Indemnification
---------------
(a) General. The Articles of Incorporation (the "Articles") of the
Corporation provide that to the fullest extent permitted by Maryland
and federal statutory and decisional law, as amended or interpreted,
no director or officer of this Corporation shall be personally liable
to the Corporation or the holders of shares for money damages for
breach of fiduciary duty as a director and each director and officer
shall be indemnified by the Corporation; provided, however, that
nothing herein shall be deemed to protect any director or officer of
the Corporation against any liability to the Corporation or the
holders of shares to which such director or officer would otherwise be
subject by reason of breach of the director's or officer's duty of
loyalty to the Corporation or its stockholders, for acts or omissions
not in good faith or which involved intentional misconduct or a
knowing violation of law or for any transaction from which the
director derived any improper personal benefit.
The By-Laws of the Corporation, Article VI, provide that the
Corporation shall indemnify to the fullest extent required or
permitted under Maryland law or The Investment Company Act of 1940, as
either may be amended from time to time, any individual who is a
director or officer of the Corporation and who, by reason of his or
her position was, is or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter
collectively referred to as a "Proceeding") against judgments,
penalties, fines, settlements and reasonable expenses actually
incurred by such director or officer in connection with such
Proceeding, to the fullest extent that such indemnification may be
lawful under Maryland law or the Investment Company Act of 1940.
(b) Disabling Conduct. No director or officer shall be protected against
any liability to the Corporation or its shareholders if such director
or officer would be subject to such liability by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office (such conduct
hereinafter referred to as "Disabling Conduct").
Article 2-418 of the General Corporation Laws of Maryland provides
that no indemnification of a director or officer may be made unless:
(1) there is a final decision on the merits by a court or other body
before whom the Proceeding was brought that the director or officer to
be indemnified was not liable by reason of Disabling Conduct; or (2)
in the absence of such a decision, there is a reasonable
determination, based upon a review of the facts, that the director or
officer to be indemnified was not liable by reason of Disabling
Conduct, which determination shall be made by: (i) the vote of a
majority of a quorum of directors who are neither "interested persons"
of the Corporation as defined in Section 2(a)(19) of the Investment
Company Act of 1940, nor parties to the Proceeding; or (ii) an
independent legal counsel in a written opinion.
<PAGE>
(c) Standard of Conduct. The Corporation may not indemnify any director if
it is proved that: (1) the act or omission of the director was
material to the cause of action adjudicated in the Proceeding and (i)
was committed in bad faith or (ii) was the result of active and
deliberate dishonesty; or (2) the director actually received an
improper personal benefit; or (3) in the case of a criminal
proceeding, the director had reasonable cause to believe that the act
or omission was unlawful. No indemnification may be made under
Maryland law unless authorized for a specific proceeding after a
determination has been made, in accordance with Maryland law, that
indemnification is permissible in the circumstances because the
requisite standard of conduct has been met.
(d) Required Indemnification. A director or officer who is successful, on
the merits or otherwise, in the defense of any Proceeding shall be
indemnified against reasonable expenses incurred by the director or
officer in connection with the Proceeding. In addition, under Maryland
law, a court of appropriate jurisdiction may order indemnification
under certain circumstances.
(e) Advance Payment. The Corporation may pay any reasonable expenses so
incurred by any director or officer in defending a Proceeding in
advance of the final disposition thereof to the fullest extent
permissible under Maryland law. Such advance payment of expenses shall
be made only upon the undertaking by such director or officer to repay
the advance unless it is ultimately determined that such director or
officer is entitled to indemnification, and only if one of the
following conditions is met: (1) the director or officer to be
indemnified provides a security for his undertaking; (2) the
Corporation shall be insured against losses arising by reason of any
lawful advances; or (3) there is a determination, based on a review of
readily available facts, that there is reason to believe that the
director or officer to be indemnified ultimately will be entitled to
indemnification, which determination shall be made by: (i) a majority
of a quorum of directors who are neither "interested persons" of the
Corporation, as defined in Section 2(a)(19) of the Investment Company
Act of 1940, nor parties to the Proceeding; or (ii) an independent
legal counsel in a written opinion.
(f) Insurance. To the fullest extent permitted by Maryland law and Section
17(h) of the Investment Company Act of 1940, the Corporation may
purchase and maintain insurance on behalf of any officer or director
of the Corporation, against any liability asserted against him or her
and incurred by him or her in and arising out of his or her position,
whether or not the Corporation would have the power to indemnify him
or her against such liability.
Item 26. Business and Other Connections of Investment Adviser
----------------------------------------------------
None.
Item 27. Principal Underwriter
---------------------
Maxus Securities Corp., 1301 East 9th Street, Cleveland, OH 44115
("Maxus"), acts as principal underwriter for the Fund. Maxus is a
registered broker-dealer, and offers underwriting services to a number
of mutual funds nationwide.
<PAGE>
Pursuant to its agreement with the Fund, Maxus offers shares of the
Fund to the public on a continuous basis. Maxus is not obligated to
sell any fixed number of shares, but only to sell shares to fill
orders as received by Maxus.
Neither Maxus nor any person affiliated with Maxus is an affiliated
person of the Fund.
Item 28. Location of Accounts and Records
--------------------------------
The books and records of the Fund, other than the accounting and
transfer agency (including dividend disbursing) records, are
maintained by the Fund at 51 JFK Parkway, Short Hills, NJ 07078. The
Fund's accounting and transfer agency records are maintained at Mutual
Shareholder Services 123 Main Street, Cleveland, OH 44114.
Item 29. Management Services
-------------------
None
Item 30. Undertakings
------------
The Registrant undertakes to file an amendment to the registration
statement with certified financial statements showing the initial
capital received before accepting subscriptions from more than 25
persons in the event the Fund chooses to raise its initial capital
under Section 14(a)(3) of the Investment Company Act of 1940.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, hereunto duly
authorized in Washington, DC on the 6th day of December, 1999.
FAIRHOLME FUNDS, INC.
/s/ Bruce R. Berkowitz
- ----------------------
By: BRUCE R. BERKOWITZ
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
FAIRHOLME FUNDS, INC.
NAME TITLE DATE
- --------------------------------------------------------------------------------
/s/ Bruce R. Berkowitz President & December 6, 1999
- ------------------------------ Director
BRUCE R. BERKOWITZ
/s/ Michael J. Senior Secretary/ December 6, 1999
- ------------------------------ Treasurer
MICHAEL J. SENIOR Director
/S/ Joel L. Uchenick Director December 6, 1999
- ------------------------------
JOEL L. UCHENICK
/S/ Avivith Oppenheimer, Esq. Director December 6, 1999
- ------------------------------
AVIVITH OPPENHEIMER, ESQ.
/S/ Leigh Walters Director December 6, 1999
- ------------------------------
LEIGH WALTERS
<PAGE>
EXHIBIT INDEX
EXHIBIT 23E- Underwriting Agreement of Fairholme Funds, Inc.
EXHIBIT 23G- Custodian Agreement of Fairholme Funds, Inc.
EXHIBIT 23H(2) Investment Company Services Agreement of Fairholme Funds, Inc.
EXHIBIT 23I Legal Opinion of Counsel
EXHIBIT 23M Plan of Distribution Pursuant to Rule 12b-1.
EXHIBIT 23E
UNDERWRITING AGREEMENT
THIS AGREEMENT is made as of December 15, 1999, by and between Fairholme
Funds, Inc., a Maryland corporation (the "Fund"), Fairholme Capital Management,
LLC, a Delaware limited liability company (the "Adviser"), and B/D Holdings Inc,
a Nevada corporation ("Underwriter").
WHEREAS, the Fund is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "Act"); and
WHEREAS, the Adviser has registered with the Securities and Exchange
Commission as an investment adviser under the Investment Advisers Act of 1940,
as amended; and
WHEREAS, the Fund is authorized by its Articles of Incorporation and
by-laws to issue separate Portfolio of shares representing interests in separate
investment portfolios (the "Portfolios"), and
WHEREAS, The Fund has authorized the issuance of shares of beneficial
interest ("Shares") in the Portfolios which are identified on Exhibit B attached
hereto, which Exhibit B may be amended from time to time by mutual agreement of
the Fund, Adviser and Underwriter, and;
WHEREAS, Adviser and the Fund have entered into a previous contract wherein
Adviser is responsible for providing certain services to the Fund, a copy of
which is attached hereto as Exhibit 1 and incorporated herein by reference, and;
WHEREAS, Adviser is authorized, pursuant to the contract described above
with the Fund, to enter into contracts with third parties and engage such
parties to provide services to the Fund, and;
WHEREAS, Underwriter is a broker-dealer registered with the Securities and
Exchange Commission and a member of the National Association of Securities
Dealers, Inc., (the "NASD"); and
NOW, THEREFORE, in consideration of the promises and agreements of the
parties contained herein, the parties agree as follows:
1. APPOINTMENT. The Fund and Adviser hereby appoint Underwriter as
exclusive agent for the distribution of Shares of the Portfolio(s) in the states
listed in Exhibit A hereto, and Underwriter hereby accepts such appointment
under the terms of this Agreement. Notwithstanding any other provision hereof,
the Fund may terminate, suspend or withdraw the offering of Shares of any
Portfolio whenever, in its sole discretion, it deems such action to be
desirable.
2. SALE AND REPURCHASE OF SHARES.
(a) Underwriter, as agent for the Fund, will sell Shares to the public
against orders therefor at the net asset value, all such sales to comply with
the provisions of the Act and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder.
(b) Underwriter will also have the right to take, as agent for the Fund,
all actions, which, in Underwriter's judgement, are necessary to carry into
effect the distribution of the Shares.
(c) The net asset value of the Shares of each Portfolio (or Class of Shares
of a Portfolio) shall be determined in the manner provided in the Registration
Statement, and when determined shall be applicable to transactions as provided
for in the Registration Statement. The net asset value of the Shares of each
Portfolio (or each Class of Shares of a Portfolio) shall be calculated by the
Fund or by another entity on behalf of the Fund. Underwriter shall have no duty
to inquire into or liability for the accuracy of the net asset value per share
is calculated.
(d) On every sale, the Fund shall receive the applicable net asset value of
the Shares promptly, but in no event later than the third business day following
the date on which Underwriter shall have received an order for the purchase of
the Shares.
(e) Upon receipt of purchase instructions, Underwriter will transmit such
instructions to the Fund or its transfer agent for registration of the Shares
purchased.
(f) Nothing in the Agreement shall prevent Underwriter or any affiliated
person (as defined in the Act) of Underwriter from acting as underwriter or
distributor for any other person, firm or corporation (including other
investment companies) or in any way limit or restrict Underwriter or any such
affiliated person from buying, selling or trading any securities for its or
their own account or for the accounts of others for whom it or they may be
acting; provided, however, that Underwriter expressly represents that it will
undertake no activities which, in its judgment, will adversely affect the
performance of its obligations to the Fund under this Agreement.
(g) Underwriter, as agent of the Fund and for the account of the
Portfolio(s), may repurchase the Shares at such prices and upon such terms and
conditions as shall be specified in the Fund's Registration Statement. At the
end of each business day, the Underwriter shall notify the Fund and the Fund's
transfer agent of the number of Shares redeemed for each Portfolio, and the
identity of the shareholders or dealers offering Shares for repurchase. Upon
such notice, the Fund shall pay the Underwriter the net asset value of the
redeemed shares in cash or in the form of a credit against monies due the Fund
from the Underwriter as proceeds from the sale of Shares. The Fund reserves the
right to suspend such repurchase right upon written notice to the Underwriter.
The Underwriter further agrees to act as agent for the Fund to receive and
transmit promptly to the Fund's transfer agent, shareholder and dealer requests
for redemption of Shares in the Porfolio(s).
3. SALES OF SHARES BY THE FUND. The Fund reserves the right to issue or
sell Shares of the Portfolio(s) directly to the public at any time.
4. BASIS OF SALE OF SHARES. Underwriter does not agree to sell any specific
number of Shares. Underwriter, as agent for the Fund, undertakes to sell Shares
of the Portfolio(s) on a best effort basis only against orders therefor.
5. COMPLIANCE WITH NASD AND GOVERNMENT RULES.
(a) Underwriter will conform to the Rules of Fair Practice of the NASD and
the securities laws of any jurisdiction in which it sells Shares of the
Portfolio(s).
(b) The Fund and the Adviser agree to furnish to the Underwriter sufficient
copies of any agreements, plans or other materials it intends to use in
connection with sales of Shares in adequate time for the Underwriter to file and
clear them with the proper authorities before they are put in use, and not to
use them until so filed and cleared.
(c) Underwriter, at its own expense, will qualify as dealer or broker, or
otherwise, under all applicable State or federal laws required in order that
Shares may be sold in such States as may be mutually agreed upon by the parties,
except for expenses described in Exhibit A hereto, which will be paid by the
Adviser.
(d) Underwriter shall not make, or permit any representative, broker or
dealer to make, in connection with any sale or solicitation of a sale of the
Shares, any representations concerning the Shares except those contained in the
Fund's then current prospectus and statement of additional information covering
the Shares and in printed information approved by the Fund as information
supplemental to such prospectus and statement of additional information. Copies
of the Fund's then effective prospectus and statement of additional information
and any such printed supplemental information will be supplied by the Adviser to
Underwriter in reasonable quantities upon request.
6. RECORDS TO BE SUPPLIED BY FUND. The Fund shall furnish to Underwriter
copies of all information, financial statements and other papers which
Underwriter may reasonably request for use in connection with the distribution
of Shares of the Portfolio(s).
7. EXPENSES TO BE BORNE BY ADVISER. The Adviser will bear the following
expenses:
(a) preparation, setting in type, printing of sufficient copies of the
prospectus and statement of additional information for distribution to
shareholders, and the distribution to shareholders of the prospectus and
statement of additional information;
(b) preparation, printing and distribution of reports and other
communications to shareholders;
(c) registration of the Shares under the federal securities law;
(d) qualification of the Shares for sale in the jurisdictions designated by
Fund, Adviser and Underwriter;
(e) maintaining facilities for the issue and transfer of the Shares;
(f) supplying information, prices and other data to be furnished by the
Fund under this Agreement; and
(g) any original issue taxes or transfer taxes applicable to the sale or
delivery of the Shares of certificates therfor.
8. INDEMNIFICATION.
(a) The Fund agrees to indemnify, defend and hold the Underwriter, its
officers, and directors, and any person who controls the Underwriter within the
meaning of Section 15 of the Securities Act of 1933 Act (the "1933 Act") or
Section 20 of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
free and harmless from and against any and all claims, demands or liabilities
and expenses (including the cost of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in connection therewith)
which the Underwriter, its officers, directors or any such controlling persons
may incur under the 1933 Act, the 1934 Act, or under common law or otherwise,
arising out of or based upon any untrue statement of a material fact contained
in the Registration Statement or Prospectus or arising out of or based upon any
alleged omission to state a material fact required to be stated in either
thereof or necessary to make the statements in either thereof not misleading,
except insofar as such claims, demands, liabilities or expenses arise out of or
are based upon any such untrue statement or omission or alleged untrue statement
or omission made in reliance upon and in conformity with information furnished
in writing by the Underwriter to the Fund for use in the Registration Statement.
The Underwriter agrees to comply with all of the applicable terms and provisions
of the 1934 Act.
(b) The Underwriter agrees to indemnify, defend, and hold the Fund, its
officers, directors, employees shareholders and agents, and any person who
controls the Fund within the meaning of Section 15 of the 1933 Act of Section 20
of the 1934 Act, free and harmless from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or defending
against such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which the Fund, its directors, officers, employees,
shareholders and agents, or any such controlling person may incur under the 1933
Act, the 1934 Act or under common law or otherwise arising out of or based upon
any untrue statement of a material fact contained in information furnished in
writing by the Underwriter to the Fund for use in the Registration Statement, or
arising out of or based upon any omission or alleged omission to state a
material fact in connection with such information required to be stated in the
Registration Statement necessary to make such information not misleading.
(c) A party seeking indemnification hereunder (the Indemnitee) shall give
prompt written notice to the party from whom indemnification is sought
("Indemnitor") of a written assertion or claim of any threatened or pending
legal proceeding which may be subject to indemnity under this Section; provided,
however, that failure to notify the Indemnitor of such written assertion or
claim shall not relieve the indemnitor of any liability arising from this
Section. The Indemnitor shall be entitled, if it so elects, to assume the
defense of any suit brought to enforce a claim subject to this Agreement and
such defense shall be conducted by counsel chosen by the Indemnitor and
satisfactory to the Indemnitee; provided, however, that if the defendants
include both the Indemnitee and the Indemnitor, and the Indemnitee shall have
reasonably concluded that there may be one or more legal defenses available to
it which are different from or additional to those available to the Indemnitor
("conflict of interest"), the Indemnitor shall have the right to select separate
counsel to defend such claim on behalf of the Indemnitee. In the event that the
Indemnitor elects to assume the defense of any suit pursuant to the preceding
sentence and retains counsel satisfactory to the Indemnitee, the Indemnitee
shall bear the fees and expenses of additional counsel retained by it except for
reasonable investigation costs which shall be borne by the Indemnitor. If the
Indemnitor (i) does not elect to assume the defense of a claim, (ii) elects to
assume the defense of a claim but chooses counsel that is not satisfactory to
the Indemnitee or (iii) has no right to assume the defense of a claim because of
a conflict of interest, the Indemnitor shall advance or reimburse the
Indemnitee, at the election of the Indemnitee, reasonable fees and disbursements
of any counsel retained by Indemnitee, including reasonable investigation costs.
9. ADVANCES OF EXPENSES. The Adviser shall advance attorney's fees or other
expenses incurred by a Covered Person in defending a proceeding only to the
extent permitted by 1933 Act and the Act.
10. TERMINATION AND AMENDMENT OF THIS AGREEMENT. This Agreement shall
automatically terminate, without the payment of any penalty, in the event of its
assignment. This Agreement may be amended only if such amendment is approved (i)
by Underwriter, (ii) either by action of the Board of Directors of the Fund or
at a meeting of the Shareholders of the Fund by the affirmative vote of a
majority of the outstanding Shares, and (iii) by a majority of the Directors of
the Fund who are not interested persons of the Fund or of Underwriter, by vote
cast in person at a meeting called for the purpose of voting on such approval.
Either the Fund or Underwriter may at any time terminate this Agreement on sixty
(60) days' written notice delivered or mailed by registered mail, postage
prepaid, to the other party.
11. EFFECTIVE PERIOD OF THIS AGREEMENT. This Agreement shall take effect
upon its execution and shall remain in full force and effect for a period of ONE
year from the date of its execution (unless terminated automatically as set
forth in paragraph 10 and from year to year thereafter), subject to annual
approval (i) by Underwriter, (ii) by the Board of Directors of the Fund or a
vote of a majority of the outstanding Shares, and (iii) by a majority of the
Directors of the Fund who are not interested persons of the Fund or of
Underwriter, by vote cast in person at a meeting called for the purpose of
voting on such approval.
12. LIMITATION OF FUND'S LIABILITY. The Term "Fairholme Funds" means and
refers to the directors and officers from time to time serving under the Fund's
Articles of Incorporation as the same may subsequently thereto have been, or
subsequently hereto be, amended. It is expressly agreed that the obligations of
the Fund hereunder shall not be binding upon any of the Directors, Shareholders,
nominees, officers, agents or employees of the Fund personally, but bind only
the property of the Fund, as provided in Fund's Articles of Incorporation. The
execution and delivery of this Agreement have been authorized by the Directors
and Shareholders of the Fund and signed by the officers of the Fund and Adviser,
acting as such, and neither such authorization by such Directors and
Shareholders, nor such execution and delivery by such officers shall be deemed
to have been made by any of them individually or to impose any liability on them
personally, but shall bind only the trust property of the Fund as provided in
its Articles of Incorporation. A copy of the Articles of Incorporation of the
Fund is on file with the Secretary of State of Maryland.
13. SUCCESSOR INVESTMENT COMPANY. Unless this Agreement has been terminated
in accordance with Paragraph 10, the terms and provisions of this Agreement
shall become automatically applicable to any investment company which is a
successor to the Fund as a result of a reorganization, recapitalization or
change of domicile.
14. SEVERABILITY. In the event any provision of this Agreement is
determined to be void or unenforceable, such determination shall not affect the
remainder of this Agreement, which shall continue to be in force.
15. QUESTIONS OF INTERPRETATION.
(a) This Agreement shall be governed by the laws of the State of Ohio.
(b) Any question of interpretation of any term or provision of this
Agreement having a counterpart in or otherwise derived from a term or provision
of the Act shall be resolved by reference to such term or provision of the Act
and to interpretation thereof, if any, by the United States courts or in the
absence of any controlling decision of any such court, by rules, regulations or
orders of the Securities and Exchange Commission issued pursuant to said Act. In
addition, where the effect of a requirement of the Act, reflected in any
provision of this Agreement is revised by rule, regulation or order of the
Securities and Exchange Commission, such provision shall be deemed to
incorporate the effect of such rule, regulation or order.
16. NOTICES. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice. Until
further notice to the other party, it is agreed that for this purpose the
address of the Fund and the Adviser shall be 51 JFK Parkway, Short Hills, NJ
07078 and of the Underwriter shall be 1301 East Ninth Street, Suite 3600,
Cleveland, Ohio 44114.
17. COUNTERPARTS. This Agreement may be in one or more counterparts, each
of which shall be deemed an original but all of which together shall constitute
one and the same instrument.
18. BINDING EFFECT. Each of the undersigned expressly warrants and
represents that he has the full power and authority to sign this Agreement on
behalf of the party indicated, and that his signature will operate to bind the
party indicated to the foregoing terms.
19. FORCE MAJEURE. If Underwriter shall be delayed in its performance of
services or prevented entirely or in part from performing services due to causes
or events beyond its control, including and without limitation, acts of God,
interruption of power or other utility, transportation or communication
services, acts of civil or military authority, sabotages, national emergencies,
explosion, flood, accident, earthquake or other catastrophe, fire, strike or
other labor problems, legal action, present or future law, governmental order,
rule or regulation, or shortages or suitable parts, materials, labor or
transportation, such delay or non-performance shall be excused and a reasonable
time for performance in connection with the Agreement shall be extended to
include the period of such delay or non-performance.
IN WITNESS WHEREOF, the Fund, Adviser and Underwriter have each caused this
Agreement to be signed on its behalf, all as of the day and year first above
written.
ATTEST: B/D HOLDINGS INC
_________________________ By: __________________________
Name: ________________________
Title: _______________________
ATTEST FAIRHOLME FUNDS, INC.
__________________________ By: __________________________
Name: Bruce R. Berkowitz
------------------------------
Title: President, Director
------------------------------
ATTEST FAIRHOLME CAPITAL MANAGEMENT, LLC
__________________________ By: __________________________
Name: Michael J. Senior
------------------------------
Title: Chief Financial Officer
------------------------------
<PAGE>
UNDERWRITING AGREEMENT
EXHIBIT A
The following is a list of the states in which B/D Holdings Inc will act as
underwriter for the Portfolio(s) of the Fund, and the amount of expenses that
Adviser will pay on behalf of B/D Holdings Inc.
STATE EXPENSES
----- --------
<PAGE>
UNDERWRITING AGREEMENT
EXHIBIT B
The following Portfolios are hereby made subject to the underwriting
Agreement dated December 15th, 1999 , with B/D Holdings, Inc. ("Underwriter"),
Fairholme Capital Management, LLC and Fairholme Funds, Inc., and each agree to
be bound by all the terms and conditions contained in said Agreement:
THE FAIRHOLME FUND
ATTEST FAIRHOLME FUNDS, INC.
_________________________ By: __________________________
Name: Bruce R. Berkowitz
Title: President, Director
ATTEST: B/D HOLDINGS INC
_________________________ By: __________________________
Name: ________________________
Title: _______________________
Attest: FAIRHOLME CAPITAL MANAGEMENT, LLC
_________________________ By: __________________________
Name: Micheal J. Senior
Title: Chief Financial Officer
EXHIBIT 23G
CUSTODY AGREEMENT
DATED DECEMBER 15, 1999
BETWEEN
UMB BANK, N.A.
AND
FAIRHOLME FUNDS, INC.
AND
FAIRHOLME CAPITAL MANAGEMENT, LLC
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
1. Appointment of Custodian 1
2. Definitions 1
(a) Securities 1
(b) Assets 1
(c) Instructions and Special Instructions 1
3. Delivery of Corporate Documents 2
4. Powers and Duties of Custodian and Domestic Subcustodian 2
(a) Safekeeping 3
(b) Manner of Holding Securities 3
(c) Free Delivery of Assets 4
(d) Exchange of Securities 4
(e) Purchases of Assets 4
(f) Sales of Assets 5
(g) Options 5
(h) Futures Contracts 6
(i) Segregated Accounts 6
(j) Depositary Receipts 6
(k) Corporate Actions, Put Bonds, Called Bonds, Etc. 6
(l) Interest Bearing Deposits 7
(m) Foreign Exchange Transactions 7
(n) Pledges or Loans of Securities 8
(o) Stock Dividends, Rights, Etc. 8
(p) Routine Dealings 8
(q) Collections 8
(r) Bank Accounts 9
(s) Dividends, Distributions and Redemptions 9
(t) Proceeds from Shares Sold 9
(u) Proxies and Notices; Compliance with the Shareholders
Communication Act of 1985 9
(v) Books and Records 9
(w) Opinion of Fund's Independent Certified Public Accountants 10
(x) Reports by Independent Certified Public Accountants 10
(y) Bills and Others Disbursements 10
5. Subcustodians 10
(a) Domestic Subcustodians 10
(b) Foreign Subcustodians 10
(c) Interim Subcustodians 11
(d) Special Subcustodians 11
(e) Termination of a Subcustodian 11
(f) Certification Regarding Foreign Subcustodians 11
6. Standard of Care 12
(a) General Standard of Care 12
(b) Actions Prohibited by Applicable Law, Events
Beyond Custodian's Control, Armed
Conflict, Sovereign Risk, etc. 12
(c) Liability for Past Records 12
(d) Advice of Counsel 12
(e) Advice of the Fund and Others 12
(f) Instructions Appearing to be Genuine 13
(g) Exceptions from Liability 13
<PAGE>
7. Liability of the Custodian for Actions of Others 13
(a) Domestic Subcustodians 13
(b) Liability for Acts and Omissions of Foreign Subcustodians 13
(c) Securities Systems, Interim Subcustodians, Special
Subcustodians, Securities 13
Depositories and Clearing Agencies
(d) Defaults or Insolvency's of Brokers, Banks, Etc. 14
(e) Reimbursement of Expenses 14
8. Indemnification 14
(a) Indemnification by Fund 14
(b) Indemnification by Custodian 14
9. Advances 14
10. Liens 15
11. Compensation 15
12. Powers of Attorney 15
13. Termination and Assignment 15
14. Additional Funds 15
15. Notices 16
16. Miscellaneous 16
<PAGE>
CUSTODY AGREEMENT
This agreement made as of this 15TH day of December, 1999, between UMB
Bank, n.a., a national banking association with its principal place of business
located at Kansas City, Missouri (hereinafter "Custodian"), Fairholme Capital
Management, LLC, a Delaware limited liability company operating as an investment
adviser and registered as such with the Securities and Exchange Commission
(hereinafter "Adviser"), and Fairholme Funds, Inc., a Maryland corporation
(hereinafter the "Fund").
WITNESSETH:
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended; and
WHEREAS, the Adviser has registered with the Securities and Exchange
Commission as an investment adviser under the Investment Advisers Act of 1940,
as amended; and
WHEREAS, the Fund is authorized by its Articles of Incorporation and
by-laws to issue separate series of shares representing interests in separate
investment portfolios (the "Portfolios"), and
WHEREAS, The Fund has authorized the issuance of the Portfolios which are
identified on Appendix B attached hereto, which Appendix B may be amended from
time to time by mutual agreement of the Fund, Adviser and Custodian, and;
WHEREAS, Adviser and the Fund have entered into a previous contract wherein
Adviser is responsible for providing certain services to the Fund, a copy of
which is attached hereto as Exhibit 1 and incorporated herein by reference, and;
WHEREAS, Adviser is authorized, pursuant to the contract described above
with the Fund, to enter into contracts with third parties and engage such
parties to provide services to the Fund, and;
WHEREAS, Adviser, with the consent of the Fund, desires to appoint
Custodian as custodian for the custody of Assets (as hereinafter defined) owned
by each of the Portfolios listed on Appendix B hereof, together with such
additional Portfolios as may later be added by the Fund and which shall be made
parties to this Agreement by the amendment of Appendix B hereto, which Assets
are to be held in such accounts as Custodian may establish from time to time for
each Portfolio; and
WHEREAS, Custodian is willing to accept such appointment on the terms and
conditions hereof.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties hereto, intending to be legally bound, mutually covenant and agree
as follows:
1. APPOINTMENT OF CUSTODIAN.
The Adviser and the Fund hereby constitutes and appoints the Custodian as
custodian of Assets belonging to each Portfolio which have been or may be from
time to time deposited with the Custodian. Custodian accepts such appointment as
a custodian and agrees to perform the duties and responsibilities of Custodian
as set forth herein on the conditions set forth herein.
<PAGE>
2. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the meanings
so indicated:
(a) "Security" or "Securities" shall mean stocks, bonds, bills, rights,
script, warrants, interim certificates and all negotiable or nonnegotiable paper
commonly known as Securities and other instruments or obligations.
(b) "Assets" shall mean Securities, monies and other property held by the
Custodian for the benefit of a Fund.
(c)(1) "Instructions", as used herein, shall mean: (i) a tested telex, a
written (including, without limitation, facsimile transmission) request,
direction, instruction or certification signed or initialed by or on behalf of a
Fund by an Authorized Person; (ii) a telephonic or other oral communication from
a person the Custodian reasonably believes to be an Authorized Person; or (iii)
a communication effected directly between an electro-mechanical or electronic
device or system (including, without limitation, computers) on behalf of a Fund.
Instructions in the form of oral communications shall be confirmed by the
appropriate Fund by tested telex or in writing in the manner set forth in clause
(i) above, but the lack of such confirmation shall in no way affect any action
taken by the Custodian in reliance upon such oral Instructions prior to the
Custodian's receipt of such confirmation. Each Fund authorizes the Custodian to
record any and all telephonic or other oral Instructions communicated to the
Custodian.
(c)(2) "Special Instructions", as used herein, shall mean Instructions
countersigned or confirmed in writing by the Treasurer or any Assistant
Treasurer of a Fund or any other person designated by the Treasurer of such Fund
in writing, which countersignature or confirmation shall be included on the same
instrument containing the Instructions or on a separate instrument relating
thereto.
(c)(3) Instructions and Special Instructions shall be delivered to the
Custodian at the address and/or telephone, facsimile transmission or telex
number agreed upon from time to time by the Custodian and each Fund.
(c)(4) Where appropriate, Instructions and Special Instructions shall be
continuing instructions.
3. DELIVERY OF CORPORATE DOCUMENTS.
Each of the parties to this Agreement represents that its execution does
not violate any of the provisions of its respective charter, articles of
incorporation, articles of association or bylaws and all required corporate
actions to authorize the execution and delivery of this Agreement have been
taken.
The Fund has furnished the Custodian with copies, properly certified or
authenticated, with all amendments or supplements thereto, of the following
documents:
(a) Certificate of Incorporation (or equivalent document) of the Fund as
in effect on the date hereof;
(b) By-Laws of the Fund as in effect on the date hereof;
(c) Resolutions of the Board of Directors of the Fund appointing the
Custodian and approving the form of this Agreement; and
(d) The Fund's current prospectus and statement of additional information.
The Fund shall promptly furnish the Custodian with copies of any updates,
amendments or supplements to the foregoing documents.
In addition, the Fund has delivered or will promptly deliver to the
Custodian, copies of the Resolution(s) of its Board of Directors or Trustees and
all amendments or supplements thereto, properly certified or authenticated,
designating certain officers or employees of the Fund who will have continuing
authority to certify to the Custodian: (a) the names, titles, signatures and
scope of authority of all persons authorized to give Instructions or any other
notice, request, direction, instruction, certificate or instrument on behalf of
the Fund, and (b) the names, titles and signatures of those persons authorized
to countersign or confirm Special Instructions on behalf of the Fund (in both
cases collectively, the "Authorized Persons" and individually, an "Authorized
Person"). Such Resolutions and certificates may be accepted and relied upon by
the Custodian as conclusive evidence of the facts set forth therein and shall be
considered to be in full force and effect until delivery to the Custodian of a
similar Resolution or certificate to the contrary. Upon delivery of a
certificate which deletes or does not include the name(s) of a person previously
authorized to give Instructions or to countersign or confirm Special
Instructions, such persons shall no longer be considered Authorized Persons
authorized to give Instructions or to countersign or confirm Special
Instructions. Unless the certificate specifically requires that the approval of
anyone else will first have been obtained, the Custodian will be under no
obligation to inquire into the right of the person giving such Instructions or
Special Instructions to do so. Notwithstanding any of the foregoing, no
Instructions or Special Instructions received by the Custodian from the Fund
will be deemed to authorize or permit any director, trustee, officer, employee,
or agent of the Fund to withdraw any of the Assets of the Fund upon the mere
receipt of such authorization, Special Instructions or Instructions from such
director, trustee, officer, employee or agent.
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN.
Except for Assets held by any Subcustodian appointed pursuant to Sections
5(b), (c), or (d) of this Agreement, the Custodian shall have and perform the
powers and duties hereinafter set forth in this Section 4. For purposes of this
Section 4 all references to powers and duties of the "Custodian" shall also
refer to any Domestic Subcustodian appointed pursuant to Section 5(a).
(a) Safekeeping.
The Custodian will keep safely the Assets of each Portfolio which are
delivered to it from time to time. The Custodian shall not be responsible for
any property of a Portfolio held or received by such Portfolio and not delivered
to the Custodian.
(b) Manner of Holding Securities.
(1) The Custodian shall at all times hold Securities of each Portfolio
either: (i) by physical possession of the share certificates or other
instruments representing such Securities in registered or bearer form; or (ii)
in book-entry form by a Securities System (as hereinafter defined) in accordance
with the provisions of sub-paragraph (3) below.
(2) The Custodian may hold registerable portfolio Securities which have
been delivered to it in physical form, by registering the same in the name of
the appropriate Portfolio or its nominee, or in the name of the Custodian or its
nominee, for whose actions such Portfolio and Custodian, respectively, shall be
fully responsible. Upon the receipt of Instructions, the Custodian shall hold
such Securities in street certificate form, so called, with or without any
indication of fiduciary capacity. However, unless it receives Instructions to
the contrary, the Custodian will register all such portfolio Securities in the
name of the Custodian's authorized nominee. All such Securities shall be held in
an account of the Custodian containing only assets of the appropriate Portfolio
or only assets held by the Custodian as a fiduciary, provided that the records
of the Custodian shall indicate at all times the Portfolio or other customer for
which such Securities are held in such accounts and the respective interests
therein.
<PAGE>
(3) The Custodian may deposit and/or maintain domestic Securities owned by
a Portfolio in, and the Fund hereby approves use of: (a) The Depository Trust
Company; (b) The Participants Trust Company; and (c) any book-entry system as
provided in (i) Subpart O of Treasury Circular No. 300, 31 CFR 306.115, (ii)
Subpart B of Treasury Circular Public Debt Series No. 27-76, 31 CFR 350.2, or
(iii) the book-entry regulations of federal agencies substantially in the form
of 31 CFR 306.115. Upon the receipt of Special Instructions, the Custodian may
deposit and/or maintain domestic Securities owned by a Portfolio in any other
domestic clearing agency registered with the Securities and Exchange Commission
("SEC") under Section 17A of the Securities Exchange Act of 1934 (or as may
otherwise be authorized by the SEC to serve in the capacity of depository or
clearing agent for the Securities or other assets of investment companies) which
acts as a Securities depository. Each of the foregoing shall be referred to in
this Agreement as a "Securities System", and all such Securities Systems shall
be listed on the attached Appendix A. Use of a Securities System shall be in
accordance with applicable Federal Reserve Board and SEC rules and regulations,
if any, and subject to the following provisions:
(i) The Custodian may deposit the Securities directly or through one or
more agents or Subcustodians which are also qualified to act as custodians for
investment companies.
(ii) The Custodian shall deposit and/or maintain the Securities in a
Securities System, provided that such Securities are represented in an account
("Account") of the Custodian in the Securities System that includes only assets
held by the Custodian as a fiduciary, custodian or otherwise for customers.
(iii) The books and records of the Custodian shall at all times identify
those Securities belonging to any one or more Portfolios which are maintained in
a Securities System.
(iv) The Custodian shall pay for Securities purchased for the account of a
Portfolio only upon (a) receipt of advice from the Securities System that such
Securities have been transferred to the Account of the Custodian in accordance
with the rules of the Securities System, and (b) the making of an entry on the
records of the Custodian to reflect such payment and transfer for the account of
such Portfolio. The Custodian shall transfer Securities sold for the account of
a Portfolio only upon (a) receipt of advice from the Securities System that
payment for such Securities has been transferred to the Account of the Custodian
in accordance with the rules of the Securities System, and (b) the making of an
entry on the records of the Custodian to reflect such transfer and payment for
the account of such Portfolio. Copies of all advices from the Securities System
relating to transfers of Securities for the account of a Portfolio shall be
maintained for such Portfolio by the Custodian. The Custodian shall deliver to a
Portfolio on the next succeeding business day daily transaction reports that
shall include each day's transactions in the Securities System for the account
of such Portfolio. Such transaction reports shall be delivered to such Portfolio
or any agent designated by the Fund pursuant to Instructions, by computer or in
such other manner as the Fund and Custodian may agree.
(v) The Custodian shall, if requested by the Fund pursuant to Instructions,
provide a Portfolio with reports obtained by the Custodian or any Subcustodian
with respect to a Securities System's accounting system, internal accounting
control and procedures for safeguarding Securities deposited in the Securities
System.
(vi) Upon receipt of Special Instructions, the Custodian shall terminate
the use of any Securities System on behalf of a Portfolio as promptly as
practicable and shall take all actions reasonably practicable to safeguard the
Securities of such Portfolio maintained with such Securities System.
(c) Free Delivery of Assets.
Notwithstanding any other provision of this Agreement, and except as
provided in Section 3 hereof, the Custodian, upon receipt of Special
Instructions, will undertake to make free delivery of Assets, provided such
Assets are on hand and available, in connection with a Portfolio 's transactions
and to transfer such Assets to such broker, dealer, Subcustodian, bank, agent,
Securities System or otherwise as specified in such Special Instructions.
<PAGE>
(d) Exchange of Securities.
Upon receipt of Instructions, the Custodian will exchange portfolio
Securities held by it for a Portfolio for other Securities or cash paid in
connection with any reorganization, recapitalization, merger, consolidation, or
conversion of convertible Securities, and will deposit any such Securities in
accordance with the terms of any reorganization or protective plan.
Without Instructions, the Custodian is authorized to exchange Securities
held by it in temporary form for Securities in definitive form, to surrender
Securities for transfer into a name or nominee name as permitted in Section
4(b)(2), to effect an exchange of shares in a stock split or when the par value
of the stock is changed, to sell any fractional shares, and, upon receiving
payment therefor, to surrender bonds or other Securities held by it at maturity
or call.
(e) Purchases of Assets.
(1) Securities Purchases. In accordance with Instructions, the Custodian
shall, with respect to a purchase of Securities, pay for such Securities out of
monies held for a Portfolio 's account for which the purchase was made, but only
insofar as monies are available therein for such purpose, and receive the
portfolio Securities so purchased. Unless the Custodian has received Special
Instructions to the contrary, such payment will be made only upon receipt of
Securities by the Custodian, a clearing corporation of a national Securities
exchange of which the Custodian is a member, or a Securities System in
accordance with the provisions of Section 4(b)(3) hereof. Notwithstanding the
foregoing, upon receipt of Instructions: (i) in connection with a repurchase
agreement, the Custodian may release funds to a Securities System prior to the
receipt of advice from the Securities System that the Securities underlying such
repurchase agreement have been transferred by book-entry into the Account
maintained with such Securities System by the Custodian, provided that the
Custodian's instructions to the Securities System require that the Securities
System may make payment of such funds to the other party to the repurchase
agreement only upon transfer by book-entry of the Securities underlying the
repurchase agreement into such Account; (ii) in the case of Interest Bearing
Deposits, currency deposits, and other deposits, foreign exchange transactions,
futures contracts or options, pursuant to Sections 4(g), 4(h), 4(l), and 4(m)
hereof, the Custodian may make payment therefor before receipt of an advice of
transaction; and (iii) in the case of Securities as to which payment for the
Security and receipt of the instrument evidencing the Security are under
generally accepted trade practice or the terms of the instrument representing
the Security expected to take place in different locations or through separate
parties, such as commercial paper which is indexed to foreign currency exchange
rates, derivatives and similar Securities, the Custodian may make payment for
such Securities prior to delivery thereof in accordance with such generally
accepted trade practice or the terms of the instrument representing such
Security.
(2) Other Assets Purchased. Upon receipt of Instructions and except as
otherwise provided herein, the Custodian shall pay for and receive other Assets
for the account of a Portfolio as provided in Instructions.
(f) Sales of Assets.
(1) Securities Sold. In accordance with Instructions, the Custodian will,
with respect to a sale, deliver or cause to be delivered the Securities thus
designated as sold to the broker or other person specified in the Instructions
relating to such sale. Unless the Custodian has received Special Instructions to
the contrary, such delivery shall be made only upon receipt of payment therefor
in the form of: (a) cash, certified check, bank cashier's check, bank credit, or
bank wire transfer; (b) credit to the account of the Custodian with a clearing
corporation of a national Securities exchange of which the Custodian is a
member; or (c) credit to the Account of the Custodian with a Securities System,
in accordance with the provisions of Section 4(b)(3) hereof. Notwithstanding the
foregoing, Securities held in physical form may be delivered and paid for in
accordance with "street delivery custom" to a broker or its clearing agent,
against delivery to the Custodian of a receipt for such Securities, provided
that the Custodian shall have taken reasonable steps to ensure prompt collection
of the payment for, or return of, such Securities by the broker or its clearing
agent, and provided further that the Custodian shall not be responsible for the
selection of or the failure or inability to perform of such broker or its
clearing agent or for any related loss arising from delivery or custody of such
Securities prior to receiving payment therefor.
(2) Other Assets Sold. Upon receipt of Instructions and except as otherwise
provided herein, the Custodian shall receive payment for and deliver other
Assets for the account of a Portfolio as provided in Instructions.
(g) Options.
(1) Upon receipt of Instructions relating to the purchase of an option or
sale of a covered call option, the Custodian shall: (a) receive and retain
confirmations or other documents, if any, evidencing the purchase or writing of
the option by a Portfolio; (b) if the transaction involves the sale of a covered
call option, deposit and maintain in a segregated account the Securities (either
physically or by book-entry in a Securities System) subject to the covered call
option written on behalf of a Portfolio; and (c) pay, release and/or transfer
such Securities, cash or other Assets in accordance with any notices or other
communications evidencing the expiration, termination or exercise of such
options which are furnished to the Custodian by the Options Clearing Corporation
(the "OCC"), the securities or options exchanges on which such options were
traded, or such other organization as may be responsible for handling such
option transactions.
(2) Upon receipt of Instructions relating to the sale of a naked option
(including stock index and commodity options), the Custodian, the Fund and the
broker-dealer shall enter into an agreement to comply with the rules of the OCC
or of any registered national securities exchange or similar organizations(s).
Pursuant to that agreement and the Fund's Instructions, the Custodian shall: (a)
receive and retain confirmations or other documents, if any, evidencing the
writing of the option; (b) deposit and maintain in a segregated account,
Securities (either physically or by book-entry in a Securities System), cash
and/or other Assets; and (c) pay, release and/or transfer such Securities, cash
or other Assets in accordance with any such agreement and with any notices or
other communications evidencing the expiration, termination or exercise of such
option which are furnished to the Custodian by the OCC, the securities or
options exchanges on which such options were traded, or such other organization
as may be responsible for handling such option transactions. The Fund and the
broker-dealer shall be responsible for determining the quality and quantity of
assets held in any segregated account established in compliance with applicable
margin maintenance requirements and the performance of other terms of any option
contract.
(h) Futures Contracts.
Upon receipt of Instructions, the Custodian shall enter into a futures
margin procedural agreement among the Fund, the Custodian and the designated
futures commission merchant (a "Procedural Agreement"). Under the Procedural
Agreement the Custodian shall: (a) receive and retain confirmations, if any,
evidencing the purchase or sale of a futures contract or an option on a futures
contract by a Portfolio; (b) deposit and maintain in a segregated account cash,
Securities and/or other Assets designated as initial, maintenance or variation
"margin" deposits intended to secure such Portfolio 's performance of its
obligations under any futures contracts purchased or sold, or any options on
futures contracts written by such Portfolio, in accordance with the provisions
of any Procedural Agreement designed to comply with the provisions of the
Commodity Futures Trading Commission and/or any commodity exchange or contract
market (such as the Chicago Board of Trade), or any similar organization(s),
regarding such margin deposits; and (c) release Assets from and/or transfer
Assets into such margin accounts only in accordance with any such Procedural
Agreements. The Fund and such futures commission merchant shall be responsible
for determining the type and amount of Assets held in the segregated account or
paid to the broker-dealer in compliance with applicable margin maintenance
requirements and the performance of any futures contract or option on a futures
contract in accordance with its terms.
<PAGE>
(i) Segregated Accounts.
Upon receipt of Instructions, the Custodian shall establish and maintain on
its books a segregated account or accounts for and on behalf of a Portfolio,
into which account or accounts may be transferred Assets of such Portfolio,
including Securities maintained by the Custodian in a Securities System pursuant
to Paragraph (b)(3) of this Section 4, said account or accounts to be maintained
(i) for the purposes set forth in Sections 4(g), 4(h) and 4(n) and (ii) for the
purpose of compliance by such Portfolio with the procedures required by the SEC
Investment Company Act Release Number 10666 or any subsequent release or
releases relating to the maintenance of segregated accounts by registered
investment companies, or (iii) for such other purposes as may be set forth, from
time to time, in Special Instructions. The Custodian shall not be responsible
for the determination of the type or amount of Assets to be held in any
segregated account referred to in this paragraph, or for compliance by the Fund
with required procedures noted in (ii) above.
(j) Depositary Receipts.
Upon receipt of Instructions, the Custodian shall surrender or cause to be
surrendered Securities to the depositary used for such Securities by an issuer
of American Depositary Receipts or International Depositary Receipts
(hereinafter referred to, collectively, as "ADRs"), against a written receipt
therefor adequately describing such Securities and written evidence satisfactory
to the organization surrendering the same that the depositary has acknowledged
receipt of instructions to issue ADRs with respect to such Securities in the
name of the Custodian or a nominee of the Custodian, for delivery in accordance
with such instructions.
Upon receipt of Instructions, the Custodian shall surrender or cause to be
surrendered ADRs to the issuer thereof, against a written receipt therefor
adequately describing the ADRs surrendered and written evidence satisfactory to
the organization surrendering the same that the issuer of the ADRs has
acknowledged receipt of instructions to cause its depository to deliver the
Securities underlying such ADRs in accordance with such instructions.
(k) Corporate Actions, Put Bonds, Called Bonds, Etc.
Upon receipt of Instructions, the Custodian shall: (a) deliver warrants,
puts, calls, rights or similar Securities to the issuer or trustee thereof (or
to the agent of such issuer or trustee) for the purpose of exercise or sale,
provided that the new Securities, cash or other Assets, if any, acquired as a
result of such actions are to be delivered to the Custodian; and (b) deposit
Securities upon invitations for tenders thereof, provided that the consideration
for such Securities is to be paid or delivered to the Custodian, or the tendered
Securities are to be returned to the Custodian.
Notwithstanding any provision of this Agreement to the contrary, the
Custodian shall take all necessary action, unless otherwise directed to the
contrary in Instructions, to comply with the terms of all mandatory or
compulsory exchanges, calls, tenders, redemptions, or similar rights of security
ownership, and shall notify the Fund of such action in writing by facsimile
transmission or in such other manner as the Fund and Custodian may agree in
writing.
The Fund agrees that if it gives an Instruction for the performance of an
act for a Portfolio on the last permissible date of a period established by any
optional offer or on the last permissible date for the performance of such act,
the Fund shall hold the Bank harmless from any adverse consequences in
connection with acting upon or failing to act upon such Instructions.
(l) Interest Bearing Deposits.
Upon receipt of Instructions directing the Custodian to purchase interest
bearing fixed term and call deposits (hereinafter referred to, collectively, as
"Interest Bearing Deposits") for the account of a Portfolio, the Custodian shall
purchase such Interest Bearing Deposits in the name of such Portfolio with such
banks or trust companies, including the Custodian, any Subcustodian or any
subsidiary or affiliate of the Custodian (hereinafter referred to as "Banking
Institutions"), and in such amounts as the Fund may direct pursuant to
Instructions. Such Interest Bearing Deposits may be denominated in U.S. dollars
or other currencies, as such Portfolio may determine and direct pursuant to
Instructions. The responsibilities of the Custodian to the Fund for Interest
Bearing Deposits issued by the Custodian shall be that of a U.S. bank for a
similar deposit. With respect to Interest Bearing Deposits other than those
issued by the Custodian, (a) the Custodian shall be responsible for the
collection of income and the transmission of cash to and from such accounts; and
(b) the Custodian shall have no duty with respect to the selection of the
Banking Institution or for the failure of such Banking Institution to pay upon
demand.
(m) Foreign Exchange Transactions.
(l) The Fund hereby appoints the Custodian as its agent in the execution of
all currency exchange transactions. The Custodian agrees to provide exchange
rate and U.S. Dollar information, in writing, to the Fund. Such information
shall be supplied by the Custodian at least by the business day prior to the
value date of the foreign exchange transaction, provided that the Custodian
receives the request for such information at least two business days prior to
the value date of the transaction.
(2) Upon receipt of Instructions, the Custodian shall settle foreign
exchange contracts or options to purchase and sell foreign currencies for spot
and future delivery on behalf of and for the account of a Portfolio with such
currency brokers or Banking Institutions as such Portfolio may determine and
direct pursuant to Instructions. If, in its Instructions, a Portfolio does not
direct the Custodian to utilize a particular currency broker or Banking
Institution, the Custodian is authorized to select such currency broker or
Banking Institution as it deems appropriate to execute the Portfolio 's foreign
currency transaction.
(3) The Fund accepts full responsibility for its use of third party foreign
exchange brokers and for execution of said foreign exchange contracts and
understands that the Fund shall be responsible for any and all costs and
interest charges which may be incurred as a result of the failure or delay of
its third party broker to deliver foreign exchange. The Custodian shall have no
responsibility or liability with respect to the selection of the currency
brokers or Banking Institutions with which a Portfolio deals or the performance
of such brokers or Banking Institutions.
(4) Notwithstanding anything to the contrary contained herein, upon receipt
of Instructions the Custodian may, in connection with a foreign exchange
contract, make free outgoing payments of cash in the form of U.S. Dollars or
foreign currency prior to receipt of confirmation of such foreign exchange
contract or confirmation that the countervalue currency completing such contract
has been delivered or received.
(5) The Custodian shall not be obligated to enter into foreign exchange
transactions as principal. However, if the Custodian has made available to a
Portfolio its services as a principal in foreign exchange transactions and
subject to any separate agreement between the parties relating to such
transactions, the Custodian shall enter into foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Portfolio, with the Custodian as principal.
(n) Pledges or Loans of Securities.
(1) Upon receipt of Instructions from the Fund, the Custodian will release
or cause to be released Securities held in custody to the pledgees designated in
such Instructions by way of pledge or hypothecation to secure loans incurred by
a Portfolio with various lenders including but not limited to UMB Bank, n.a.;
provided, however, that the Securities shall be released only upon payment to
the Custodian of the monies borrowed, except that in cases where additional
collateral is required to secure existing borrowings, further Securities may be
released or delivered, or caused to be released or delivered for that purpose
upon receipt of Instructions. Upon receipt of Instructions, the Custodian will
pay, but only from funds available for such purpose, any such loan upon
re-delivery to it of the Securities pledged or hypothecated therefor and upon
surrender of the note or notes evidencing such loan. In lieu of delivering
collateral to a pledgee, the Custodian, on the receipt of Instructions, shall
transfer the pledged Securities to a segregated account for the benefit of the
pledgee.
(2) Upon receipt of Special Instructions, and execution of a separate
Securities Lending Agreement, the Custodian will release Securities held in
custody to the borrower designated in such Instructions and may, except as
otherwise provided below, deliver such Securities prior to the receipt of
collateral, if any, for such borrowing, provided that, in case of loans of
Securities held by a Securities System that are secured by cash collateral, the
Custodian's instructions to the Securities System shall require that the
Securities System deliver the Securities of the appropriate Portfolio to the
borrower thereof only upon receipt of the collateral for such borrowing. The
Custodian shall have no responsibility or liability for any loss arising from
the delivery of Securities prior to the receipt of collateral. Upon receipt of
Instructions and the loaned Securities, the Custodian will release the
collateral to the borrower.
(o) Stock Dividends, Rights, Etc.
The Custodian shall receive and collect all stock dividends, rights, and
other items of like nature and, upon receipt of Instructions, take action with
respect to the same as directed in such Instructions.
(p) Routine Dealings.
The Custodian will, in general, attend to all routine and mechanical
matters in accordance with industry standards in connection with the sale,
exchange, substitution, purchase, transfer, or other dealings with Securities or
other property of each Portfolio except as may be otherwise provided in this
Agreement or directed from time to time by Instructions from the Fund. The
Custodian may also make payments to itself or others from the Assets for
disbursements and out-of-pocket expenses incidental to handling Securities or
other similar items relating to its duties under this Agreement, provided that
all such payments shall be accounted for to the appropriate Portfolio.
(q) Collections.
The Custodian shall (a) collect amounts due and payable to each Portfolio
with respect to portfolio Securities and other Assets; (b) promptly credit to
the account of each Portfolio all income and other payments relating to
portfolio Securities and other Assets held by the Custodian hereunder upon
Custodian's receipt of such income or payments or as otherwise agreed in writing
by the Custodian and any particular Portfolio; (c) promptly endorse and deliver
any instruments required to effect such collection; and (d) promptly execute
ownership and other certificates and affidavits for all federal, state, local
and foreign tax purposes in connection with receipt of income or other payments
with respect to portfolio Securities and other Assets, or in connection with the
transfer of such Securities or other Assets; provided, however, that with
respect to portfolio Securities registered in so-called street name, or physical
Securities with variable interest rates, the Custodian shall use its best
efforts to collect amounts due and payable to any such Portfolio. The Custodian
shall notify the Fund in writing by facsimile transmission or in such other
manner as the Fund and Custodian may agree in writing if any amount payable with
respect to portfolio Securities or other Assets owed to a Portfolio is not
received by the Custodian when due. The Custodian shall not be responsible for
the collection of amounts due and payable with respect to portfolio Securities
or other Assets that are in default.
(r) Bank Accounts.
Upon Instructions, the Custodian shall open and operate a bank account or
accounts on the books of the Custodian; provided that such bank account(s) shall
be in the name of the Custodian or a nominee thereof, for the account of one or
more Portfolio s, and shall be subject only to draft or order of the Custodian.
The responsibilities of the Custodian to any one or more such Portfolios for
deposits accepted on the Custodian's books shall be that of a U.S. bank for a
similar deposit.
<PAGE>
(s) Dividends, Distributions and Redemptions.
To enable each Portfolio to pay dividends or other distributions to
shareholders of each such Portfolio and to make payment to shareholders who have
requested repurchase or redemption of their shares of each such Portfolio
(collectively, the "Shares"), the Custodian shall release cash or Securities
insofar as available. In the case of cash, the Custodian shall, upon the receipt
of Instructions, transfer such funds by check or wire transfer to any account at
any bank or trust company designated by each such Portfolio in such
Instructions. In the case of Securities, the Custodian shall, upon the receipt
of Special Instructions, make such transfer to any entity or account designated
by each such Portfolio in such Special Instructions.
(t) Proceeds from Shares Sold.
The Custodian shall receive funds representing cash payments received for
shares issued or sold from time to time by each Portfolio, and shall credit such
funds to the account of the appropriate Portfolio. The Custodian shall notify
the appropriate Portfolio of Custodian's receipt of cash in payment for shares
issued by such Portfolio by facsimile transmission or in such other manner as
the Fund and the Custodian shall agree. Upon receipt of Instructions, the
Custodian shall: (a) deliver all federal funds received by the Custodian in
payment for shares as may be set forth in such Instructions and at a time agreed
upon between the Custodian and such Portfolio; and (b) make federal funds
available to a Portfolio as of specified times agreed upon from time to time by
the Fund and the Custodian, in the amount of checks received in payment for
shares which are deposited to the accounts of such Fund.
(u) Proxies and Notices; Compliance with the Shareholders Communication Act
of 1985.
The Custodian shall deliver or cause to be delivered to the Fund all forms
of proxies, all notices of meetings, and any other notices or announcements
affecting or relating to Securities owned by a Portfolio that are received by
the Custodian, any Subcustodian, or any nominee of either of them, and, upon
receipt of Instructions, the Custodian shall execute and deliver, or cause such
Subcustodian or nominee to execute and deliver, such proxies or other
authorizations as may be required. Except as directed pursuant to Instructions,
neither the Custodian nor any Subcustodian or nominee shall vote upon any such
Securities, or execute any proxy to vote thereon, or give any consent or take
any other action with respect thereto.
The Custodian will not release the identity of any Portfolio to an issuer
which requests such information pursuant to the Shareholder Communications Act
of 1985 for the specific purpose of direct communications between such issuer
and any such Portfolio unless the Fund directs the Custodian otherwise in
writing.
(v) Books and Records.
The Custodian shall maintain such records relating to its activities under
this Agreement as are required to be maintained by Rule 31a-1 under the
Investment Company Act of 1940 ("the 1940 Act") and to preserve them for the
periods prescribed in Rule 31a-2 under the 1940 Act. These records shall be open
for inspection by duly authorized officers, employees or agents (including
independent public accountants) of the Fund during normal business hours of the
Custodian.
The Custodian shall provide accountings relating to its activities under
this Agreement as shall be agreed upon by the Fund and the Custodian.
(w) Opinion of Fund's Independent Certified Public Accountants.
The Custodian shall take all reasonable action as the Fund may request to
obtain from year to year favorable opinions from the Fund's independent
certified public accountants with respect to the Custodian's activities
hereunder and in connection with the preparation of the Fund's periodic reports
to the SEC and with respect to any other requirements of the SEC.
(x) Reports by Independent Certified Public Accountants.
At the request of the Fund, the Custodian shall deliver to the Fund a
written report prepared by the Custodian's independent certified public
accountants with respect to the services provided by the Custodian under this
Agreement, including, without limitation, the Custodian's accounting system,
internal accounting control and procedures for safeguarding cash, Securities and
other Assets, including cash, Securities and other Assets deposited and/or
maintained in a Securities System or with a Subcustodian. Such report shall be
of sufficient scope and in sufficient detail as may reasonably be required by
the Fund and as may reasonably be obtained by the Custodian.
(y) Bills and Other Disbursements.
Upon receipt of Instructions, the Custodian shall pay, or cause to be paid,
all bills, statements, or other obligations of a Portfolio.
5. SUBCUSTODIANS.
From time to time, in accordance with the relevant provisions of this
Agreement, the Custodian may appoint one or more Domestic Subcustodians, Foreign
Subcustodians, Special Subcustodians, or Interim Subcustodians (as each are
hereinafter defined) to act on behalf of any one or more Portfolios. A Domestic
Subcustodian, in accordance with the provisions of this Agreement, may also
appoint a Foreign Subcustodian, Special Subcustodian, or Interim Subcustodian to
act on behalf of any one or more Portfolios. For purposes of this Agreement, all
Domestic Subcustodians, Foreign Subcustodians, Special Subcustodians and Interim
Subcustodians shall be referred to collectively as "Subcustodians".
(a) Domestic Subcustodians.
The Custodian may, at any time and from time to time, appoint any bank as
defined in Section 2(a)(5) of the 1940 Act or any trust company or other entity,
any of which meet the requirements of a custodian under Section 17(f) of the
1940 Act and the rules and regulations thereunder, to act for the Custodian on
behalf of any one or more Portfolios as a subcustodian for purposes of holding
Assets of such Portfolio(s) and performing other functions of the Custodian
within the United States (a "Domestic Subcustodian"). The Fund shall approve in
writing the appointment of the proposed Domestic Subcustodian; and the
Custodian's appointment of any such Domestic Subcustodian shall not be effective
without such prior written approval of the Fund. Each such duly approved
Domestic Subcustodian shall be listed on Appendix A attached hereto, as it may
be amended, from time to time.
(b) Foreign Subcustodians.
The Custodian may at any time appoint, or cause a Domestic Subcustodian to
appoint, any bank, trust company or other entity meeting the requirements of an
"eligible foreign custodian" under Section 17(f) of the 1940 Act and the rules
and regulations thereunder to act for the Custodian on behalf of any one or more
Portfolios as a subcustodian or sub-subcustodian (if appointed by a Domestic
Subcustodian) for purposes of holding Assets of the Portfolio(s) and performing
other functions of the Custodian in countries other than the United States of
America (hereinafter referred to as a "Foreign Subcustodian" in the context of
either a subcustodian or a sub-subcustodian); provided that the Custodian shall
have obtained written confirmation from the Fund of the approval of the Board of
Directors or other governing body of the Fund (which approval may be withheld in
the sole discretion of such Board of Directors or other governing body or
entity) with respect to (i) the identity of any proposed Foreign Subcustodian
(including branch designation), (ii) the country or countries in which, and the
securities depositories or clearing agencies (hereinafter "Securities
Depositories and Clearing Agencies"), if any, through which, the Custodian or
any proposed Foreign Subcustodian is authorized to hold Securities and other
Assets of a Portfolio, and (iii) the form and terms of the subcustodian
agreement to be entered into with such proposed Foreign Subcustodian. Each such
duly approved Foreign Subcustodian and the countries where and the Securities
Depositories and Clearing Agencies through which they may hold Securities and
other Assets of the Portfolio(s) shall be listed on Appendix A attached hereto,
as it may be amended, from time to time. The Fund shall be responsible for
informing the Custodian sufficiently in advance of a proposed investment which
is to be held in a country in which no Foreign Subcustodian is authorized to
act, in order that there shall be sufficient time for the Custodian, or any
Domestic Subcustodian, to effect the appropriate arrangements with a proposed
Foreign Subcustodian, including obtaining approval as provided in this Section
5(b). In connection with the appointment of any Foreign Subcustodian, the
Custodian shall, or shall cause the Domestic Subcustodian to, enter into a
subcustodian agreement with the Foreign Subcustodian in form and substance
approved by the Fund. The Custodian shall not consent to the amendment of, and
shall cause any Domestic Subcustodian not to consent to the amendment of, any
agreement entered into with a Foreign Subcustodian, which materially affects any
Portfolio's rights under such agreement, except upon prior written approval of
the Fund pursuant to Special Instructions.
(c) Interim Subcustodians.
Notwithstanding the foregoing, in the event that a Portfolio shall invest
in an Asset to be held in a country in which no Foreign Subcustodian is
authorized to act, the Custodian shall notify the Fund in writing by facsimile
transmission or in such other manner as the Fund and the Custodian shall agree
in writing of the unavailability of an approved Foreign Subcustodian in such
country; and upon the receipt of Special Instructions from the Fund, the
Custodian shall, or shall cause its Domestic Subcustodian to, appoint or approve
an entity (referred to herein as an "Interim Subcustodian") designated in such
Special Instructions to hold such Security or other Asset.
(d) Special Subcustodians.
Upon receipt of Special Instructions, the Custodian shall, on behalf of a
Portfolio, appoint one or more banks, trust companies or other entities
designated in such Special Instructions to act for the Custodian on behalf of
such Portfolio as a subcustodian for purposes of: (i) effecting third-party
repurchase transactions with banks, brokers, dealers or other entities through
the use of a common custodian or subcustodian; (ii) providing depository and
clearing agency services with respect to certain variable rate demand note
Securities, (iii) providing depository and clearing agency services with respect
to dollar denominated Securities, and (iv) effecting any other transactions
designated by such Portfolio in such Special Instructions. Each such designated
subcustodian (hereinafter referred to as a "Special Subcustodian") shall be
listed on Appendix A attached hereto, as it may be amended from time to time. In
connection with the appointment of any Special Subcustodian, the Custodian shall
enter into a subcustodian agreement with the Special Subcustodian in form and
substance approved by the Fund in Special Instructions. The Custodian shall not
amend any subcustodian agreement entered into with a Special Subcustodian, or
waive any rights under such agreement, except upon prior approval pursuant to
Special Instructions.
(e) Termination of a Subcustodian.
The Custodian may, at any time in its discretion upon notification to the
Fund, terminate any Subcustodian of a Portfolio in accordance with the
termination provisions under the applicable subcustodian agreement, and upon the
receipt of Special Instructions, the Custodian will terminate any Subcustodian
in accordance with the termination provisions under the applicable subcustodian
agreement.
(f) Certification Regarding Foreign Subcustodians.
Upon request of the Fund, the Custodian shall deliver to the Fund a
certificate stating: (i) the identity of each Foreign Subcustodian then acting
on behalf of the Custodian; (ii) the countries in which and the Securities
Depositories and Clearing Agencies through which each such Foreign Subcustodian
is then holding cash, Securities and other Assets of a Portfolio; and (iii) such
other information as may be requested by the Fund, and as the Custodian shall be
reasonably able to obtain, to evidence compliance with rules and regulations
under the 1940 Act.
<PAGE>
6. STANDARD OF CARE.
(a) General Standard of Care.
The Custodian shall be liable to the Fund for all losses, damages and
reasonable costs and expenses suffered or incurred by a Portfolio resulting from
the negligence or willful misfeasance of the Custodian; provided, however, in no
event shall the Custodian be liable for special, indirect or consequential
damages arising under or in connection with this Agreement.
(b) Actions Prohibited by Applicable Law, Events Beyond Custodian's
Control, Sovereign Risk, Etc.
In no event shall the Custodian or any Domestic Subcustodian incur
liability hereunder (i) if the Custodian or any Subcustodian or Securities
System, or any subcustodian, Securities System, Securities Depository or
Clearing Agency utilized by the Custodian or any such Subcustodian, or any
nominee of the Custodian or any Subcustodian (individually, a "Person") is
prevented, forbidden or delayed from performing, or omits to perform, any act or
thing which this Agreement provides shall be performed or omitted to be
performed, by reason of: (a) any provision of any present or future law or
regulation or order of the United States of America, or any state thereof, or of
any foreign country, or political subdivision thereof or of any court of
competent jurisdiction (and neither the Custodian nor any other Person shall be
obligated to take any action contrary thereto); or (b) any event beyond the
control of the Custodian or other Person such as armed conflict, riots, strikes,
lockouts, labor disputes, equipment or transmission failures, natural disasters,
or failure of the mails, transportation, communications or power supply; or (ii)
for any loss, damage, cost or expense resulting from "Sovereign Risk." A
"Sovereign Risk" shall mean nationalization, expropriation, currency
devaluation, revaluation or fluctuation, confiscation, seizure, cancellation,
destruction or similar action by any governmental authority, de facto or de
jure; or enactment, promulgation, imposition or enforcement by any such
governmental authority of currency restrictions, exchange controls, taxes,
levies or other charges affecting a Portfolio's Assets; or acts of armed
conflict, terrorism, insurrection or revolution; or any other act or event
beyond the Custodian's or such other Person's control.
(c) Liability for Past Records.
Neither the Custodian nor any Domestic Subcustodian shall have any
liability in respect of any loss, damage or expense suffered by a Portfolio,
insofar as such loss, damage or expense arises from the performance of the
Custodian or any Domestic Subcustodian in reliance upon records that were
maintained for such Portfolio by entities other than the Custodian or any
Domestic Subcustodian prior to the Custodian's employment hereunder.
(d) Advice of Counsel.
The Custodian and all Domestic Subcustodians shall be entitled to receive
and act upon advice of counsel of its own choosing on all matters. The Custodian
and all Domestic Subcustodians shall be without liability for any actions taken
or omitted in good faith pursuant to the advice of counsel.
(e) Advice of the Fund and Others.
The Custodian and any Domestic Subcustodian may rely upon the advice of the
Fund and upon statements of the Fund's accountants and other persons believed by
it in good faith to be expert in matters upon which they are consulted, and
neither the Custodian nor any Domestic Subcustodian shall be liable for any
actions taken or omitted, in good faith, pursuant to such advice or statements.
<PAGE>
(f) Instructions Appearing to be Genuine.
The Custodian and all Domestic Subcustodians shall be fully protected and
indemnified in acting as a custodian hereunder upon any Resolutions of the Board
of Directors or Trustees, Instructions, Special Instructions, advice, notice,
request, consent, certificate, instrument or paper appearing to it to be genuine
and to have been properly executed and shall, unless otherwise specifically
provided herein, be entitled to receive as conclusive proof of any fact or
matter required to be ascertained from the Fund hereunder a certificate signed
by any officer of the Fund authorized to countersign or confirm Special
Instructions.
(g) Exceptions from Liability.
Without limiting the generality of any other provisions hereof, neither the
Custodian nor any Domestic Subcustodian shall be under any duty or obligation to
inquire into, nor be liable for:
(i) the validity of the issue of any Securities purchased by or for any
Portfolio, the legality of the purchase thereof or evidence of ownership
required to be received by any such Portfolio, or the propriety of the decision
to purchase or amount paid therefor;
(ii) the legality of the sale of any Securities by or for any Portfolio, or
the propriety of the amount for which the same were sold; or
(iii) any other expenditures, encumbrances of Securities, borrowings or
similar actions with respect to any Portfolio's Assets;
and may, until notified to the contrary, presume that all Instructions or
Special Instructions received by it are not in conflict with or in any way
contrary to any provisions of the Fund's Articles of Incorporation or By-Laws or
votes or proceedings of the shareholders, trustees, partners or directors of the
Fund, or the Fund's currently effective Registration Statement on file with the
SEC.
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS.
(a) Domestic Subcustodians
The Custodian shall be liable for the acts or omissions of any Domestic
Subcustodian to the same extent as if such actions or omissions were performed
by the Custodian itself.
(b) Liability for Acts and Omissions of Foreign Subcustodians.
The Custodian shall be liable to the Fund for any loss or damage to a
Portfolio caused by or resulting from the acts or omissions of any Foreign
Subcustodian to the extent that, under the terms set forth in the subcustodian
agreement between the Custodian or a Domestic Subcustodian and such Foreign
Subcustodian, the Foreign Subcustodian has failed to perform in accordance with
the standard of conduct imposed under such subcustodian agreement and the
Custodian or Domestic Subcustodian recovers from the Foreign Subcustodian under
the applicable subcustodian agreement.
(c) Securities Systems, Interim Subcustodians, Special Subcustodians,
Securities Depositories and Clearing Agencies.
The Custodian shall not be liable to the Fund for any loss, damage or
expense suffered or incurred by a Portfolio resulting from or occasioned by the
actions or omissions of a Securities System, Interim Subcustodian, Special
Subcustodian, or Securities Depository and Clearing Agency unless such loss,
damage or expense is caused by, or results from, the negligence or willful
misfeasance of the Custodian.
<PAGE>
(d) Defaults or Insolvency's of Brokers, Banks, Etc.
The Custodian shall not be liable for any loss, damage or expense suffered
or incurred by the Fund resulting from or occasioned by the actions, omissions,
neglects, defaults or insolvency of any broker, bank, trust company or any other
person with whom the Custodian may deal (other than any of such entities acting
as a Subcustodian, Securities System or Securities Depository and Clearing
Agency, for whose actions the liability of the Custodian is set out elsewhere in
this Agreement) unless such loss, damage or expense is caused by, or results
from, the negligence or willful misfeasance of the Custodian.
(e) Reimbursement of Expenses.
The Adviser agrees to reimburse the Custodian for all out-of-pocket
expenses incurred by the Custodian in connection with this Agreement, but
excluding salaries and usual overhead expenses.
8. INDEMNIFICATION.
(a) Indemnification by Fund.
Subject to the limitations set forth in this Agreement, the Fund agrees to
indemnify and hold harmless the Custodian and its nominees from all losses,
damages and expenses (including attorneys' fees) suffered or incurred by the
Custodian or its nominee caused by or arising from actions taken by the
Custodian, its employees or agents in the performance of its duties and
obligations under this Agreement, including, but not limited to, any
indemnification obligations undertaken by the Custodian under any relevant
subcustodian agreement; provided, however, that such indemnity shall not apply
to the extent the Custodian is liable under Sections 6 or 7 hereof.
If the Fund requires the Custodian to take any action with respect to
Securities of a portfolio, which action involves the payment of money or which
may, in the opinion of the Custodian, result in the Custodian or its nominee
assigned to the Portfolio being liable for the payment of money or incurring
liability of some other form, the Fund, as a prerequisite to requiring the
Custodian to take such action, shall provide indemnity to the Custodian in an
amount and form satisfactory to it.
(b) Indemnification by Custodian.
Subject to the limitations set forth in this Agreement and in addition to
the obligations provided in Sections 6 and 7, the Custodian agrees to indemnify
and hold harmless the Fund from all losses, damages and expenses suffered or
incurred by any Portfolio caused by the negligence or willful misfeasance of the
Custodian.
9. ADVANCES.
In the event that, pursuant to Instructions, the Custodian or any
Subcustodian, Securities System, or Securities Depository or Clearing Agency
acting either directly or indirectly under agreement with the Custodian (each of
which for purposes of this Section 9 shall be referred to as "Custodian"), makes
any payment or transfer of funds on behalf of any Portfolio as to which there
would be, at the close of business on the date of such payment or transfer,
insufficient funds held by the Custodian on behalf of any such Portfolio, the
Custodian may, in its discretion without further Instructions, provide an
advance ("Advance") to any such Portfolio in an amount sufficient to allow the
completion of the transaction by reason of which such payment or transfer of
funds is to be made. In addition, in the event the Custodian is directed by
Instructions to make any payment or transfer of funds on behalf of any Portfolio
as to which it is subsequently determined that such Portfolio has overdrawn its
cash account with the Custodian as of the close of business on the date of such
payment or transfer, said overdraft shall constitute an Advance. Any Advance
shall be payable by the Portfolio on behalf of which the Advance was made on
demand by Custodian, unless otherwise agreed by the Fund and the Custodian, and
shall accrue interest from the date of the Advance to the date of payment by
such Portfolio to the Custodian at a rate agreed upon in writing from time to
time by the Custodian and the Fund. It is understood that any transaction in
respect of which the Custodian shall have made an Advance, including but not
limited to a foreign exchange contract or transaction in respect of which the
Custodian is not acting as a principal, is for the account of and at the risk of
the Portfolio on behalf of which the Advance was made, and not, by reason of
such Advance, deemed to be a transaction undertaken by the Custodian for its own
account and risk. The Custodian and the Fund acknowledge that the purpose of
Advances is to finance temporarily the purchase or sale of Securities for prompt
delivery in accordance with the settlement terms of such transactions or to meet
emergency expenses not reasonably foreseeable by a Portfolio. The Custodian
shall promptly notify the Fund of any Advance. Such notification shall be sent
by facsimile transmission or in such other manner as the Fund and the Custodian
may agree.
10. LIENS.
The Bank shall have a lien on the Property in the Custody Account to secure
payment of fees and expenses for the services rendered under this Agreement. If
the Bank advances cash or securities to the Fund for any purpose or in the event
that the Bank or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of its duties hereunder, except such as may arise from its or its nominee's
negligent action, negligent failure to act or willful misconduct, any Property
at any time held for the Custody Account shall be security therefor and the Fund
hereby grants a security interest therein to the Bank. The Fund shall promptly
reimburse the Bank for any such advance of cash or securities or any such taxes,
charges, expenses, assessments, claims or liabilities upon request for payment,
but should the Fund fail to so reimburse the Bank, the Bank shall be entitled to
dispose of such Property to the extent necessary to obtain reimbursement. The
Bank shall be entitled to debit any account of the Fund with the Bank including,
without limitation, the Custody Account, in connection with any such advance and
any interest on such advance as the Bank deems reasonable.
11. COMPENSATION.
The Adviser will pay to the Custodian such compensation as is agreed to in
writing by the Custodian, the Adviser and the Fund from time to time. Such
compensation, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section 7(e), shall be billed to the Adviser and
paid in cash to the Custodian. In the event that the Adviser shall be more than
30 days delinquent in the payment of compensation to the Custodian, the
Custodian shall be entitled to deduct such compensation, on a pro rata basis,
from the assets of each Portfolio.
12. POWERS OF ATTORNEY.
Upon request, the Fund shall deliver to the Custodian such proxies, powers
of attorney or other instruments as may be reasonable and necessary or desirable
in connection with the performance by the Custodian or any Subcustodian of their
respective obligations under this Agreement or any applicable subcustodian
agreement.
13. TERMINATION AND ASSIGNMENT.
The Fund or the Custodian may terminate this Agreement by notice in
writing, delivered or mailed, postage prepaid (certified mail, return receipt
requested) to the other not less than 90 days prior to the date upon which such
termination shall take effect. Upon termination of this Agreement, the Adviser
shall pay to the Custodian such fees as may be due the Custodian hereunder as
well as its reimbursable disbursements, costs and expenses paid or incurred. In
the event that the Adviser shall be more than 30 days delinquent in the payment
of such fees to the Custodian, the Custodian shall be entitled to deduct such
fees, on a pro rata basis, from the assets of each Portfolio. Upon termination
of this Agreement, the Custodian shall deliver, at the terminating party's
expense, all Assets held by it hereunder to the Fund or as otherwise designated
by the Fund by Special Instructions. Upon such delivery, the Custodian shall
have no further obligations or liabilities under this Agreement except as to the
final resolution of matters relating to activity occurring prior to the
effective date of termination.
This Agreement may not be assigned by the Custodian, the Adviser or the
Fund without the respective consent of the other, duly authorized by a
resolution by its Board of Directors or Trustees. 14. ADDITIONAL PORTFOLIOS.
Additional Portfolios may become subject to this Agreement, or existing
Portfolios may be deleted from this Agreement, after the date hereof by an
instrument in writing to such effect signed by the Fund and the Custodian. If a
Portfolio or Portfolios shall become subject to or deleted from this Agreement,
there shall be delivered to each party an Appendix B or an amended Appendix B,
signed by the Fund and the Custodian, deleting or adding such Portfolio or
Portfolios, as the case may be. The termination of this Agreement as to less
than all of the Portfolios shall not affect the obligations of the Custodian and
the Fund hereunder as set forth on the signature page hereto and in Appendix B
as revised from time to time.
15. NOTICES.
As to the Fund, notices, requests, instructions and other writings
delivered to Fairholme Funds, Inc., One North Church Street, Schenectady, NY
12305, Attn: James W, Denney, postage prepaid, or to such other address as the
Fund may have designated to the Custodian in writing, shall be deemed to have
been properly delivered or given to the Fund.
Notices, requests, instructions and other writings delivered to the
Securities Administration department of the Custodian at its office at 928 Grand
Blvd., 10th Floor, Attn: Bonnie Johnson, Kansas City, Missouri 64106, or mailed
postage prepaid, to the Custodian's Securities Administration department, Post
Office Box 226, Attn: Bonnie Johnson, Kansas City, Missouri 64141, or to such
other addresses as the Custodian may have designated to each Fund in writing,
shall be deemed to have been properly delivered or given to the Custodian
hereunder; provided, however, that procedures for the delivery of Instructions
and Special Instructions shall be governed by Section 2(c) hereof.
16. MISCELLANEOUS.
(a) This Agreement is executed and delivered in the State of Missouri and
shall be governed by the laws of such state.
(b) All of the terms and provisions of this Agreement shall be binding
upon, and inure to the benefit of, and be enforceable by the respective
successors and assigns of the parties hereto.
(c) No provisions of this Agreement may be amended, modified or waived, in
any manner except in writing, properly executed by both parties hereto;
provided, however, Appendix A may be amended from time to time as Domestic
Subcustodians, Foreign Subcustodians, Special Subcustodians, and Securities
Depositories and Clearing Agencies are approved or terminated according to the
terms of this Agreement.
(d) The captions in this Agreement are included for convenience of
reference only, and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(e) This Agreement shall be effective as of the date of execution hereof.
(f) This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
(g) The following terms are defined terms within the meaning of this
Agreement, and the definitions thereof are found in the following sections of
the Agreement:
Term Section
---- -------
Account 4(b)(3)(ii)
ADR'S 4(j)
Advance 9
Assets 2(b)
Authorized Person 3
Banking Institution 4(1)
Domestic Subcustodian 5(a)
Foreign Subcustodian 5(b)
Instruction 2(c)(1)
Interim Subcustodian 5(c)
Interest Bearing Deposit 4(1)
Liens 10
OCC 4(g)(1)
Person 6(b)
Procedural Agreement 4(h)
SEC 4(b)(3)
Securities 2(a)
Securities Depositories and Clearing Agencies 5(b)
Securities System 4(b)(3)
Shares 4(s)
Sovereign Risk 6(b)
Special Instruction 2(c)(2)
Special Subcustodian 5(d)
Subcustodian 5
1940 Act 4(v)
(h) If any part, term or provision of this Agreement is held to be illegal,
in conflict with any law or otherwise invalid by any court of competent
jurisdiction, the remaining portion or portions shall be considered severable
and shall not be affected, and the rights and obligations of the parties shall
be construed and enforced as if this Agreement did not contain the particular
part, term or provision held to be illegal or invalid.
(i) This Agreement constitutes the entire understanding and agreement of
the parties hereto with respect to the subject matter hereof, and accordingly
supersedes, as of the effective date of this Agreement, any custodian agreement
heretofore in effect between the Fund and the Custodian.
IN WITNESS WHEREOF, the parties hereto have caused this Custody Agreement
to be executed by their respective duly authorized officers.
FAIRHOLME FUNDS, INC.
Attest:_________________________ By:___________________________
Name: Bruce R. Berkowitz
Title: President, Director
Date:_________________________
UMB BANK, N.A.
Attest: By:___________________________
Name: Ralph R. Santoro
Title: Senior Vice President
Date: ________________________
FAIRHOLME CAPITAL MANAGEMENT, LLC
Attest:_________________________ By:__________________________
Name: Micheal J. Senior
Title: Chief Financial Officer
Date:________________________
<PAGE>
APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
Brown Brothers Harriman & Co. (Foreign Securities Only)
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant Trust Company
SPECIAL SUBCUSTODIANS:
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
- --------- --------------------- -----------------
Euroclear
FAIRHOLME FUNDS, INC. UMB BANK, N.A.
By: ____________________________ By: ____________________________
Name: Bruce R. Berkowitz Name: Ralph R. Santoro
Title: President, Director Title: Senior Vice President
Date: __________________________ Date: __________________________
FAIRHOLME CAPITAL MANAGEMENT, LLC
BY: ____________________________
Name: Micheal J. Senior
Title: Chief Financial Officer
<PAGE>
APPENDIX B
CUSTODY AGREEMENT
The following Portfolios are hereby made subject to the Custody Agreement
dated December 15th , 1999 , with UMB Bank, n.a. ("Custodian"), Fairholme
Capital Management, LLC and Fairholme Funds, Inc., and agree to be bound by all
the terms and conditions contained in said Agreement:
THE FAIRHOLME FUND
FAIRHOLME FUNDS, INC.
Attest:_________________________ By:___________________________
Name: Bruce R. Berkowitz
Title: President, Director
Date:_________________________
UMB BANK, N.A.
Attest: By:___________________________
Name: Ralph R. Santoro
Title: Senior Vice President
Date: ________________________
FAIRHOLME CAPITAL MANAGEMENT, LLC
Attest:_________________________ By:__________________________
Name: Micheal J. Senior
Title: Chief Financial Officer
Date:________________________
EXHIBIT 23H(2)
INVESTMENT COMPANY SERVICES AGREEMENT
FOR
FAIRHOLME FUNDS, INC.
THIS AGREEMENT, dated as of the _______ day of __________________, 1999, is
made by and between Fairholme Capital Management, LLC , a Delaware limited
liability company ("Adviser"), Fairholme Funds, Inc. (the "Fund"), a corporation
duly organized and existing under the laws of the State of Maryland and
operating as an open-end, management investment company registered under the
Investment Company Act of 1940, as amended (the "Act"), and Mutual Shareholder
Services, LLC ("MSS") a limited liability company duly organized under the laws
of the State of Ohio (collectively, the "Parties").
RECITALS:
WHEREAS, The Fund is authorized by its Articles of Incorporation and
by-laws to issue separate series of shares representing interests in separate
investment portfolios (the "Portfolios"), and
WHEREAS, The Fund has authorized the issuance of the Portfolios which are
identified on Schedule "C" attached hereto, which Schedule "C" may be amended
from time to time by mutual agreement of the Fund, Adviser and MSS, and;
WHEREAS, Adviser and the Fund have entered into a previous contract wherein
Adviser is responsible for providing certain services to the Fund, and;
WHEREAS, Adviser is authorized, pursuant to its agreement with the Fund, to
enter into contracts with third parties and engage such parties to provide
services to the Fund on Adviser's behalf, and;
WHEREAS, the Parties desire to enter into an agreement whereby MSS will
provide the services to the Fund as specified herein and set forth in particular
in Schedule "A", which is attached hereto and made a part hereof;
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, and in exchange for good and valuable consideration, the
sufficiency and receipt of which is hereby acknowledged, the Parties hereto,
intending to be legally bound, do hereby agree as follows:
<PAGE>
GENERAL PROVISIONS
SECTION 1, APPOINTMENT.
Adviser and the Fund hereby appoint MSS as servicing agent for the Fund and
MSS hereby accepts such appointment. In order that MSS may perform its duties
under the terms of this Agreement, the Board of Directors of the Fund shall
direct the officers, Adviser, legal counsel, independent accountants and
custodian of the Fund to cooperate fully with MSS and, upon request of MSS, to
provide such information, documents and advice relating to the Fund which MSS
requires to execute its responsibilities hereunder. In connection with its
duties, MSS shall be entitled to rely, and will be held harmless by the Fund
when acting in reasonable reliance, upon any instruction, advice or document
relating to the Fund as provided to MSS by any of the aforementioned persons on
behalf of the Fund. All fees charged by any such persons acting on behalf of the
Fund will be deemed an expense of the Fund.
Any services performed by MSS under this Agreement will conform to the
requirements of:
(a) the provisions of the Act and the Securities Act of 1933, as amended, and
any rules or regulations in force thereunder;
(b) any other applicable provision of state and federal law;
(c) the provisions of the Fund's Articles of Incorporation and by-laws as
amended from time to time and delivered to MSS;
(d) any policies and determinations of the Board of Directors of the Fund which
are communicated to MSS, and
(e) the policies of the Fund as reflected in the Fund's Registration Statement
as filed with the U.S. Securities and Exchange Commission.
Nothing in this Agreement will prevent MSS or any officer thereof from
providing the same or comparable services for or with any other person, firm or
corporation. While the services supplied to the Fund may be different than those
supplied to other persons, firms or corporations, MSS will provide the Fund
equitable treatment in supplying services. The Fund recognizes that it will not
receive preferential treatment from MSS as compared with the treatment provided
to other MSS clients.
SECTION 2. DUTIES AND OBLIGATIONS OF MSS.
Subject to the provisions of this Agreement, MSS will provide to the Fund
the specific services as set forth in Schedule "A" attached hereto.
<PAGE>
SECTION 3. DEFINITIONS.
For purposes of this Agreement:
"Certificate" will mean any notice, instruction, or other instrument in
writing, authorized or required by this Agreement. To be effective, such
Certificate shall be given to and received by the custodian and shall be
signed on behalf of the Fund by any two of its designated officers, and the
term Certificate shall also include Instructions communicated to the
custodian by MSS.
"Custodian" will refer to that agent which provides safekeeping of the
assets of the Fund.
"Instructions" will mean communications containing instructions transmitted
by electronic or telecommunications media including, but not limited to,
Industry Standardization for Institutional Trade Communications,
computer-to-computer interface, dedicated transmission line, facsimile
transmission (which may be signed by an officer or unsigned) and tested
telex.
"Oral Instruction" will mean an authorization, instruction, approval, item
or set of data, or information of any kind transmitted to MSS in person or
by telephone, telegram, telecopy or other mechanical or documentary means
lacking original signature, by a person or persons reasonably identified to
MSS to be a person or persons so authorized by a resolution of the Board of
Trustees of the Fund or an officer or director of Adviser to give Oral
Instructions to MSS on behalf of the Fund.
"Shareholders" will mean the registered owners of the shares of the Fund in
accordance with the share registry records maintained by MSS for the Fund.
"Shares" will mean the issued and outstanding shares of the Fund.
"Signature Guarantee" will mean the guarantee of signatures by an "eligible
guarantor institution" as defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Eligible guarantor
institutions include banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies
and savings associations. Broker-dealers guaranteeing signatures must be
members of a clearing corporation or maintain net capital of at least
$100,000. Signature guarantees will be accepted from any eligible guarantor
institution that participates in a signature guarantee program.
"Written Instruction" will mean an authorization, instruction, approval,
item or set of data or information of any kind transmitted to MSS in an
original writing containing an original signature or a copy of such
document transmitted by telecopy including transmission of such signature
reasonably identified to MSS to be the signature of a person or persons so
authorized by a resolution of the Board of Trustees of the Fund, or so
identified by the Fund or by ADVISER to give Written Instructions to MSS on
behalf of the Fund.
Concerning Oral and Written Instructions For all purposes under this
Agreement, MSS is authorized to act upon receipt of the first of any
Written or Oral Instruction it receives from the Fund or its agents. In
cases where the first instruction is an Oral Instruction that is not in the
form of a document or written record, a confirmatory Written Instruction or
Oral Instruction in the form of a document or written record shall be
delivered. In cases where MSS receives an Instruction, whether Written or
Oral, to enter a portfolio transaction onto the Fund's records, the Fund
shall cause the broker/dealer executing such transaction to send a written
confirmation to the Custodian.
MSS shall be entitled to rely on the first Instruction received. For any
act or omission undertaken by MSS in compliance therewith, MSS shall be free of
liability and fully indemnified and held harmless by the Fund and Adviser
provided however, that in the event a Written or Oral Instruction received by
MSS is countermanded by a subsequent Written or Oral Instruction received prior
to MSS acting upon such countermanded Instruction, MSS shall act upon such
subsequent Written or Oral Instruction. The sole obligation of MSS with respect
to any follow-up or confirmatory Written Instruction or Oral Instruction in
documentary or written form shall be to make reasonable efforts to detect any
discrepancy between the original Instruction and such confirmation and to report
such discrepancy to the Fund. The Fund shall be responsible for, and bear the
expense of, taking any action, including any reprocessing, necessary to correct
any discrepancy or error. To the extent such action requires MSS to act, the
Fund or Adviser shall give MSS specific Written Instruction as to the action
required.
The Fund will file with MSS a certified copy of each resolution of the
Fund's Board of Trustees authorizing execution of Written Instructions or the
transmittal of Oral Instructions as provided above.
SECTION 4. INDEMNIFICATION.
(a) MSS, its directors, officers, employees, shareholders, and agents will be
liable for any loss suffered by the Fund resulting from the willful
misfeasance, bad faith, negligence or reckless disregard on the part of MSS
in the performance of its obligations and duties under this Agreement.
(b) Any director, officer, employee, shareholder or agent of MSS who may be or
become an officer, director, employee or agent of the Fund or Adviser will
be deemed, when rendering services to the Fund or acting on any business of
the Fund (other than services or business in connection with MSS's duties
hereunder), to be rendering such services to or acting solely for the Fund
and not as a director, officer, employee, shareholder or agent of, or under
the control or direction of MSS even though such person may be receiving
compensation from MSS.
(c) The Fund agrees to indemnify and hold MSS harmless, together with its
directors officers, employees, shareholders and agents from and against any
and all claims, demands, expenses and liabilities (whether with or without
basis in fact or law) of any and every nature which MSS may sustain or
incur or which may be asserted against MSS by any person by reason of or as
a result of:
(i) any action taken or omitted to be taken by MSS except claims, demands,
expenses and liabilities arising from willful misfeasance, bad faith,
negligence or reckless disregard on the part of MSS in the performance
of its obligations and duties under this Agreement; or
(ii) any action taken or omitted to be taken by MSS in reliance upon any
Certificate, instrument, order or stock certificate or other document
reasonably believed by MSS to be genuine and signed, countersigned or
executed by any duly authorized person, upon the Oral Instructions or
Written Instructions of an authorized person of the Fund or Adviser,
or upon the Written opinion of legal counsel for the Fund, Adviser or
MSS; or
(iii)the offer or sale of shares of the Fund to any person, natural or
otherwise, which is in violation of any state or federal law.
(d) Adviser agrees to indemnify and hold MSS harmless, together with its
directors officers, employees, shareholders and agents from and against any
and all claims, demands, expenses and liabilities (whether with or without
basis in fact or law) of any and every nature which MSS may sustain or
incur or which may be asserted against MSS by any person by reason of or as
a result of:
(1) any action taken or omitted to be taken by MSS except claims, demands,
expenses and liabilities arising from willful misfeasance, bad faith,
negligence or reckless disregard on the part of MSS in the performance
of its obligations and duties under this Agreement; or
(2) any action taken or omitted to be taken by MSS in reliance upon any
Certificate, instrument, order or stock certificate or other document
reasonably believed by MSS to be genuine and signed, countersigned or
executed by any duly authorized person, upon the Oral Instructions or
Written Instructions of an authorized person of the Fund or Adviser,
or upon the Written opinion of legal counsel for the Fund, Adviser or
MSS ;or
(3) the offer or sale of shares of the Fund to any person, natural or
otherwise, which is in violation of any state or federal law.
If a claim is made against MSS as to which MSS may seek indemnity under
this Section, MSS will notify the Fund or Adviser promptly after receipt of any
written assertion of such claim threatening to institute an action or proceeding
with respect thereto and will notify the Fund or Adviser promptly of any action
commenced against MSS within ten (10) days after MSS has been served with a
summons or other legal process. Failure to notify the Fund or Adviser will not,
however, relieve the Fund or Adviser from any liability, which either may have
on account of the indemnity under this Section so long as the Fund or Adviser
has not been prejudiced in any material respect by such failure.
The Parties will cooperate in the control of the defense of any action,
suit or proceeding in which MSS is involved and for which indemnity is being
sought from the Fund or Adviser to MSS. The Fund may negotiate the settlement of
any action; suit or proceeding, subject to MSS's approval, which approval will
not be unreasonably withheld by MSS. MSS reserves the right, but not the
obligation, to participate in the defense or settlement of a claim, action or
proceeding by use of its own counsel. Costs or expenses incurred by MSS in
connection with, or as a result of such participation, will be borne solely by
the Fund if:
(i) MSS has received an opinion of counsel from counsel to the Fund
stating that the use of counsel to the Fund by MSS would present an
impermissible conflict of interest;
(ii) the defendants in, or targets of, any such action or proceeding
include both MSS and the Fund, and legal counsel to MSS has reasonably
concluded that there are legal defenses available to it which are
different from or additional to those available to the Fund or which
may be adverse to or inconsistent with defenses available to the Fund
(in which case the Fund will not have the right to direct the defense
of such action on behalf of MSS, or
(iii)the Fund authorizes MSS to employ separate counsel at the expense of
the Fund.
(e) The terms of this Section will survive the termination of this Agreement
<PAGE>
Section 5. Representations and Warranties.
(a) MSS represents and warrants that:
(i) it is a limited liability company duly organized and existing and in
good standing under the laws of Ohio;
(ii) it is empowered under applicable laws and by its Certificate of
Organization and by-laws to enter into and perform this Agreement;
(iii)all requisite corporate proceedings have been taken to authorize MSS
to enter into and perform this Agreement;
(iv) it has and will continue to have access to the facilities, personnel
and equipment required to fully perform its duties and obligations
hereunder;
(v) no legal or administrative proceedings have been instituted or
threatened which would impair MSS's ability to perform its duties and
obligations under this Agreement;
(vi) its entrance into this Agreement shall not cause a material breach or
be in material conflict with any other agreement or obligation of MSS
or any law or regulation applicable to it;
(vii)it is registered as a transfer agent under Section 17A(c)(2) of the
Exchange Act
(viii) this Agreement has been duly authorized by MSS and, when executed
and delivered, will constitute a valid, legal and binding obligation
of MSS, enforceable in accordance with its terms.
(b) The Fund represents and warrants that:
(i) it is a corporation duly organized and existing and in good standing
under the laws of the State of Maryland;
(ii) it is empowered under applicable laws and by its Articles of
Incorporation and by-laws to enter into and perform this Agreement;
(iii)all requisite proceedings have been taken to authorize the Fund to
enter into and perform this Agreement;
(iv) no legal or administrative proceedings have been instituted or
threatened which would impair the Fund's ability to perform its duties
and obligations under this Agreement;
(v) the Fund's entrance into this Agreement shall not cause a material
breach or be in material conflict with any other agreement or
obligations of the Fund, or any law or regulation applicable to
either;
(vi) the Shares are properly registered or otherwise authorized for
issuance and sale;
(vii)this Agreement has been duly authorized by the Fund and, when
executed and delivered, will constitute a valid, legal and binding
obligation of the Fund, enforceable in accordance with its terms.
(c) Adviser represents and warrants that:
(ix) it is a limited liability company duly organized and existing and in
good standing under the laws of Delaware;
(x) it is empowered under applicable laws and by its Certificate of
Organization and by-laws to enter into and perform this Agreement;
(xi) all requisite corporate proceedings have been taken to authorize MSS
to enter into and perform this Agreement;
(xii)it has and will continue to have access to the facilities, personnel
and equipment required to fully perform its duties and obligations
hereunder;
(xiii) no legal or administrative proceedings have been instituted or
threatened which would impair Adviser's ability to perform its duties
and obligations under this Agreement;
(xiv)its entrance into this Agreement shall not cause a material breach or
be in material conflict with any other agreement or obligation of
Adviser or any law or regulation applicable to it;
(xv) this Agreement has been duly authorized by Adviser and, when executed
and delivered, will constitute a valid, legal and binding obligation
of Adviser, enforceable in accordance with its terms.
(d) Delivery of Documents
The Fund will furnish or cause to be furnished to MSS the following
documents (i) current Prospectus and Statement of Additional Information; (ii)
most recent Annual Report; (iii) most recent Semi-Annual Report for registered
investment companies on Form N-SAR (iv) certified copies of resolutions of the
Fund's Board of Directors/Trustees authorizing the execution of Written
Instructions or the transmittal of Oral Instructions and those persons
authorized to give such Instructions.
(e) Record Keeping and Other Information
MSS will create and maintain all records required of it pursuant to its
duties hereunder and as set forth in Schedule "A" in accordance with all
applicable laws, rules and regulations, including records required by Section
31(a) of the Act. All such records will be the property of the Fund and will be
available during regular business hours for inspection, copying, and use by the
Fund. Where applicable, such records will be maintained by MSS for the periods
and in the places required by Rule 31a-2 under the Act. Upon termination of this
Agreement, MSS will deliver all such records to the Fund or such other person or
persons as the Fund may designate.
<PAGE>
In case of any request or demand for the inspection of the Share records of the
Fund, MSS shall notify the Fund and secure instructions permitting or refusing
such inspection. MSS may, however, exhibit such records to any person in any
case where MSS is advised by its counsel in writing that it may be held liable
for failure to do so.
SECTION 6. COMPENSATION.
Adviser agrees to pay MSS compensation for its services, and to reimburse
it for expenses at the rates, times, manner and amounts as set forth in Schedule
"B" attached hereto and incorporated herein by reference. Adviser further agrees
to pay MSS compensation as may be set forth in any amendments to such Schedule
"B" when agreed upon in writing by the Parties. In addition, Adviser agrees to
reimburse MSS for any out-of-pocket expenses paid by MSS on behalf of the Fund
within five (5) calendar days of Adviser's receipt of an invoice therefor.
For the purpose of determining fees payable to MSS, the value of the Fund's
net assets will be computed at the times and in the manner specified in the
Fund's Prospectus and Statement of Additional Information then in effect.
During the term of this Agreement, should the Fund seek services or
functions in addition to those outlined below or in Schedule "A" attached
hereto, a written amendment to this Agreement specifying the additional services
and corresponding compensation will be executed by the Parties.
In the event that Adviser is more that thirty (30) days delinquent in its
payments of monthly billings in connection with this Agreement (with the
exception of specific amounts which may be contested in good faith by the
Adviser or fund), this Agreement may be terminated upon thirty (30) days written
notice to the Fund and Adviser by MSS. The Adviser and/or Fund must notify MSS
in writing of any contested amounts within five (5) calendar days of receipt of
a billing for such amounts. Disputed amounts are not due and payable while they
are being disputed.
SECTION 7. DAYS OF OPERATION.
Nothing contained in this Agreement is intended to or will require MSS in
any capacity hereunder, to perform any functions or duties on any holiday, day
of special observance or another day on which the New York Stock Exchange
("NYSE") is closed. Functions or duties normally scheduled to be performed on
such days will be performed on the next succeeding business day on which the
NYSE is open. Notwithstanding the foregoing, MSS will compute the net asset
value of the Fund on each day required pursuant to Rule 22c-1 under the Act.
<PAGE>
SECTION 8. ACTS OF GOD, ETC.
MSS will not be liable or responsible for delays or errors caused by acts of God
or by reason of circumstances beyond its control, including, acts of civil or
military authority, national emergencies, labor difficulties, mechanical
breakdown, insurrection, war, riots, or failure or unavailability of
transportation, communication, or power supply, fire, flood or other
catastrophe.
In the event of equipment failures beyond MSS's control, MSS will, at no
additional expense to the Fund, take reasonable steps to minimize service
interruptions, but will have no liability with respect thereto. The foregoing
obligation will not extend to computer terminals located outside of premises
maintained by MSS wherein MSS has entered into and maintains in effect
agreements making reasonable provision for emergency use of electronic data
processing equipment to the extent appropriate equipment is available.
SECTION 9. INSPECTION AND OWNERSHIP OF RECORDS.
In the event of a request or demand for inspection of the records of the
Fund, MSS will use its best efforts to notify the Fund and to secure
instructions from the Fund permitting or refusing such inspection. MSS may,
however, make such records available for inspection to any person in any case
where it is advised in writing by its counsel that it may be held liable for
failure to do so after notice to the Fund.
MSS recognizes that the records it maintains for the Fund are the property
of the Fund and such records be surrendered to the Fund upon written notice to
MSS as outlined under Section 10(c) below. The Adviser is responsible for the
payment in advance of any fees owed to MSS. MSS agrees to maintain the records
and all other information of the Fund in a confidential manner and will not use
such information for any purpose other that the performance of MSS's duties
under this Agreement.
SECTION 10. DURATION AND TERMINATION.
(a) The initial term of this Agreement will be for a period of one (1) year,
commencing on the date hereinabove first written (the "Effective Date") and
will continue thereafter subject to termination by either party as set
forth in subsection (c) below.
(b) The fee schedules set forth in Schedule "B" attached hereto will be fixed
for the initial term commencing on the Effective Date of this Agreement and
will continue thereafter subject to their review and any adjustment.
(c) After the initial term of this Agreement, any Party may terminate this
Agreement upon ninety days (90) prior written notice to the other parties
(the "Notice Date"). The date upon which this Agreement shall be terminated
is referred to herein as the Termination Date. The period of time between
the Notice Date and the Termination Date is hereby identified as the
"Notice Period". Any time up to, but not later that fifteen (15) days prior
to the Termination Date, Adviser will pay to MSS such compensation as may
be due as of the Termination Date and will likewise reimburse MSS for any
out-of-pocket expenses and disbursements reasonably incurred or expected to
by incurred by MSS up to and including the Termination Date.
(d) In connection with the termination of this Agreement, if a successor to any
of MSS's duties or responsibilities under this Agreement is designated by
the Fund by written notice to MSS, MSS will promptly, on the Termination
Date and upon receipt by MSS of any payments owed to it as set forth in
Section 10(c) above, transfer to the successor, at the Fund's expense, all
records which belong to the Fund and will provide appropriate, reasonable
and professional cooperation in transferring such records to the named
successor.
(e) Should the Fund desire to move any of the services outlined in this
Agreement to a successor prior to the Termination Date, MSS shall make a
good faith effort to facilitate the conversion on such prior date. However,
there can be no guarantee that MSS will be able to facilitate such
conversion of services prior to the end of the Notice Period. Should
services be converted to a successor prior to the end of the Notice Period,
or if the Fund is liquidated or its assets merged or purchased or the like
with another entity, payment of fees to MSS shall be accelerated to a date
prior to the conversion or termination of services and calculated as if
such services had remained at MSS until the expiration of the Notice Period
and shall be calculated at the asset levels on the Notice Date.
(f) Notwithstanding any other provisions of Paragraph 10, in the event the Fund
deregisters as an Investment Company with the United States Securities and
the Exchange Commission ("SEC"), this Agreement may be terminated by the
Fund upon ninety (90) days written notice to MSS. The Termination Date
shall be ninety (90) days after the receipt of such notice by MSS. Any time
up to, but not later than fifteen (15) days prior to the Termination Date,
the Fund will pay to MSS such compensation as may be due as of the
Termination Date and will likewise reimburse MSS for any out-of-pocket
expenses and disbursements reasonably incurred or expected to be incurred
by MSS up to and including the Termination Date.
(g) Notwithstanding the foregoing, this Agreement may be terminated at any time
by either Party in the event of a material breach by the other Party
involving negligence, willful misfeasance, bad faith or a reckless
disregard of a Party's obligations and duties under this Agreement,
provided that such breach shall have remained unremedied for sixty (60)
days or more after receipt by the breaching Party of written specification
thereof.
<PAGE>
Section 11. Rights of Ownership. All computer programs and procedures
developed to perform services required to be provided by MSS under this
Agreement are the property of MSS. All records and other data except such
computer programs and procedures are the exclusive property of the Fund, and all
such other records and data will be furnished to the Fund in an appropriate form
as soon as practicable after termination of this Agreement for any reason.
Section 12. Amendments to Documents. The Fund will furnish MSS with written
copies of any amendments to, or changes in, The Fund's Articles of
incorporation, by-laws, Prospectus or Statement of Additional Information within
a reasonable time prior to such amendments or changes becoming effective. In
addition, the Fund agrees that no amendments will be made to the Prospectus or
Statement of Additional Information of the Fund which might have the effect of
changing the procedures employed by MSS in providing the services agreed to
hereunder or which amendment might affect the duties of MSS hereunder, unless
the Fund first obtains MSS's approval of such amendments or changes.
Section 13. Confidentiality. The Parties hereto agree that any
non-public information obtained hereunder concerning the other Party is
confidential and may not be disclosed to any other person without the prior
written consent of the other Party, except as may be required by applicable law
or at the request of the U.S. Securities and Exchange Commission or other
governmental agency. MSS agrees that it will not use any non-public information
for any purpose other than performance or its duties or obligations hereunder.
The obligations of the Parties under this Section will survive the termination
of this Agreement. The Parties further agree that a breach of this Section would
irreparably damage the other Party, and accordingly agree that each Party shall
be entitled, without bond or other security, to secure an injunction or
injunctions against the offending Party to halt or prevent breaches of this
Section.
Section 14. Notices. Except as otherwise provided in this Agreement, any
notice or other communication required by or permitted to be given in connection
with this Agreement shall be in writing and shall be delivered in person or sent
by first class mail, postage prepaid or by prepaid overnight delivery service to
the respective parties as follows:
If to the Fund: If to Adviser:
- --------------- --------------
Fairholme Funds, Inc. Fairholme Capital Management, LLC
51 JFK Parkway 51 JFK Parkway
Short Hills, NJ 07078 Short Hills, NJ 07078
Attn: Michael Senior Attn: Michael Senior
If to MSS:
- ----------
Mutual Shareholder Services, LLC
1301 East Ninth Street, Suite 1005
Cleveland, Ohio 44114-1800
Attention: Gregory B. Getts, Ph.D.
Section 15. Amendments. No provision of this Agreement may be amended or
modified in any manner except by a written agreement properly authorized and
executed by the Parties. This Agreement may be amended from time to time by
supplemental agreement executed by the Parties, and the compensation stated in
Schedule "B" attached hereto may be adjusted accordingly as mutually agreed
upon.
Section 16. Authorization. The Parties represent and warrant to each other
that the execution and delivery of this Agreement by the undersigned officer of
each Party has been duly and validly authorized; and when duly executed, this
Agreement will constitute a valid, legally binding and fully enforceable
obligation of each Party.
Section 17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which when so executed will be deemed to be an original,
but such counterparts will together constitute but one and the same instrument.
Section 18. Assignment. This Agreement will extend to and be binding upon
the Parties hereto and their respective successors and assigns; provided,
however, that this Agreement will not be assignable by the Fund or Adviser
without the consent of MSS or by MSS without the written consent of the Fund and
Adviser, which consent shall be authorized or approved by a resolution by its
respective Boards of Directors/Trustees.
Section 19. Governing Law. This Agreement will be governed by the laws of
the State of Ohio and the exclusive venue of any action arising under this
Agreement will be Cuyahoga County, Ohio.
Section 20. Severability. If any part, term, or provision of this Agreement
is held by a court of competent jurisdiction to be illegal, in conflict with any
law or otherwise invalid, the remaining portion or portions of the Agreement
shall be considered severable and unaffected by such ruling, and the rights and
obligations of the parties will be construed and enforced as if the Agreement
did not contain the particular part, term or provision held to be illegal or
invalid, provided that the Agreement is not thereby materially impaired.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement, together
with Schedules "A", "B", "C" attached, to be signed by their duly authorized
officers as of the day and year first above written.
FAIRHOLME CAPITAL
FAIRHOLME FUNDS, INC. MANAGEMENT, LLC
- ------------------------ -------------------------------
By: Bruce R. Berkowitz By: Michael Senior
President, Trustee Chief Financial Officer
MUTUAL SHAREHOLDER SERVICES, LLC
- -----------------------------
By: Gregory B. Getts, Ph.D.
President
<PAGE>
SCHEDULE A
ACCOUNTING SERVICES PROVIDED BY MSS
o Journalize each portfolio's investment, capital share, and income and
expense activities.
o Verify investment buy/sell trade tickets when received from the Adviser.
o Maintain individual ledgers for investment securities.
o Maintain historical tax lots for each security.
o Reconcile cash and investment balances of each Portfolio with the
custodian, and provide the advisor with the beginning cash balance
available for investment purposes.
o Update the cash availability throughout the day as required by the advisor.
o Post to and prepare each Portfolio's Statement of Assets and Liabilities
and Statement of operations.
o Calculate expenses payable pursuant to the Fund's various contractual
obligations.
o Control all disbursements from the Fund on behalf of each Portfolio and
authorize such disbursements upon instructions of the Fund
o Calculate capital gains and losses.
o Determine each portfolio's net income
o At the Portfolio's expense, obtain security market prices or if such market
prices are not readily available, then obtain such prices from services
approved by the advisor, and in either case calculate the market or fair
value of each Portfolio's investments.
o Where applicable, calculate the amortized cost value of debt instruments.
o Transmit or mail a copy of the portfolio valuations to the advisor.
o Compute the net asset value of each portfolio.
o Compute each Portfolio's yields, total returns, expense ratios and
portfolio turnover rate.
o Prepare and monitor the expense accruals and notify Fund management of any
proposed adjustments.
o Prepare semi-annual financial statements, which will include, without
limitation, the Schedule of Investments, the Statement of Assets and
Liabilities, the Statement of Operations, the Statement of Changes in Net
Assets, the Cash Statement, and the Schedule of Capital Gains and Losses.
o Prepare monthly security transactions listings.
o Prepare monthly broker security transactions summaries.
o Assist in the preparation of support schedules necessary for completion of
Federal and State tax returns.
o Assist in the preparation and filing of the Fund's annual and semi-annual
reports with the SEC on Form N-SAR.
o Assist in the preparation of the Fund's annual and semi-annual reports to
shareholders and proxy statements.
o Determine the amount of dividends and other distributions payable to
shareholders as necessary to, among other things, maintain the
qualification of the Fund as a regulated investment company of each
portfolio of the Fund under the Code.
o Provide other accounting services as may be agreed upon from time to time
in writing by the Fund and MSS.
ADMINISTRATIVE SERVICES PROVIDED BY MSS
o Prepare and file the following Federal and State reports:
o Form N-SAR, Semi-annual report for Registered Investment Companies.
o The Fund's Annual and Semi-annual Report.
o Rule 24f-2 Notice- filing regarding sales of securities.
o Ongoing monitoring and filing of State Blue Sky Registrations.
o Prepare and file such reports, applications and documents as may be
necessary or desirable to register the Fund's shares with the Federal and
State securities authorities, and monitor the sale of Fund shares for
compliance with Federal and State securities laws.
o Coordinate and mail reports to shareholders, including the annual report to
shareholders, and coordinate mailing Prospectuses, notices, proxy
statements, proxies and other reports to shareholders.
o Monitor and pay Fund bills, maintain Fund budget and report budget expenses
and variances to Fund management.
o Monitor the Fund's compliance with the investment restrictions and
limitations imposed by State Blue Sky Laws and applicable regulations
thereunder, the fundamental and non-fundamental investment policies and
limitations set forth in the Fund's Prospectus and Statement of Additional
Information, and the investment restrictions and limitations necessary for
each portfolio of the Fund to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended, or any
successor statute.
o Prepare and distribute to shareholders notices announcing the declaration
of dividends and other distributions to shareholders.
o Provide other administrative services as may be agreed from time to time in
writing by the Fund and MSS.
TRANSFER AGENT, SHAREHOLDER SERVICING AGENT AND DIVIDEND DISBURSING AGENT
SERVICES PROVIDED BY MSS
o Examine and process new accounts, subsequent payments, liquidations,
exchanges, transfers, telephone transactions, check redemptions, automatic
withdrawals, and wire order trades.
o Reinvest or pay dividends and make other distributions.
o Answer investor and dealer telephone and/or written inquiries, except as
otherwise agreed by the Transfer Agent and the Fund.
o Process and confirm address changes.
o Process standard account record changes as required, i.e., Dividend Codes,
etc.
o Safely store source documents for transactions, such as account
applications and correspondence.
o Perform backup withholding for those accounts requiring such action in
accordance with Federal regulations.
o Solicit missing taxpayer identification numbers.
o Provide remote access inquiry to Fund records via Fund supplied hardware
(Fund responsible for connection line and monthly fees).
o Maintain the following shareholder information in such a manner as the
Transfer Agent shall determine:
o Name and address, including zip code.
o Balance of shares
o Number of shares, issuance date of each share outstanding, and cancellation
date of each share no longer outstanding, if issued.
o Balance of dollars available for redemption.
o Dividend Code (daily accrual, etc.)
o Type of account code.
o Establishment date indicating the date an account was opened, carrying
forward pre-conversion data as available.
o Original establishment date for accounts opened by exchange.
o W-9 withholding status and periodic reporting.
o State of residence code.
o Social Security or taxpayer identification number, and indication of
certification.
o Historical transactions on the account for the last 18 months, or such
other period as mutually agreed to from time to time.
o Indication as to whether telephone transactions are permitted for an
account.
o Beneficial owner code, i.e., male, female, joint tenant, etc.
o Provide the following reports and statements:
o Prepare daily journals for Fund reflecting all shares and dollar activity
for the previous day.
o Supply information monthly for Fund's preparation of Blue Sky Reporting.
o Supply monthly purchase, redemption and liquidation information for use in
Fund's N-SAR report.
o Provide monthly average daily balance reports for the Fund.
o Prepare and mail copies of summary statements to dealers and investment
advisors.
o Mail cumulative transaction confirmation statements to investors whenever a
transaction occurs and quarterly.
o Address and mail periodic financial reports and statements to investors.
o Compute, prepare and furnish all necessary reports to governmental
authorities: Forms 1099R, 1099DIV, 1099B, 1042, 5498 and 1042S.
o Enclose various marketing materials provided by the Fund in statement
mailings.
o Prepare and mail confirmation statements to dealers as required.
o Prepare certified list of stockholders for proxy mailings.
<PAGE>
SCHEDULE B
COMPENSATION SCHEDULE
FOR SERVICES PROVIDED BY MSS
ACCOUNTING FEES
If the average value of each Portfolio
is between the following Yearly Fee Monthly Fee
- --------------------------------------------------------------------------------
$ 0.00 25,000,000 21,000 1,750
$ 25,000,000 50,000,000 30,500 2,542
$ 50,000,000 75,000,000 36,250 3,021
$ 75,000,000 100,000,000 42,000 3,500
$100,000,000 125,000,000 47,750 3,979
$125,000,000 150,000,000 53,500 4,458
$150,000,000+ 59,250 4,938
SHAREHOLDER SERVICING FEES
$11.50 annual fee per shareholder with a minimum monthly fee of $775.00.
BLUE SKY SERVICING FEES
$100.00 per state per filing
EXAMPLE OF CALCULATING MONTHLY CHARGES FOR SMALL NEW FUND
Monthly Fees
Approximate Total Net Assets 2,000,000 1,750
No. of Shareholders 150 775
Blue Sky States __ ----
--------
2,525
Less 45% discount* 1,136
Discounted monthly fee 1,389
Discounted Annual Fee 16,665
*Discount calculated as follows:
60% 0.00 500,000
50% 500,000 1,000,000
45% 1,000,000 2,000,000
40% 2,000,000 3,000,000
35% 3,000,000 4,000,000
30% 4,000,000 5,000,000
25% 5,000,000 6,000,000
20% 6,000,000 7,000,000
15% 7,000,000 8,000,000
10% 8,000,000 9,000,000
5% 9,000,000 10,000,000
0% 10,000,000+
<PAGE>
SCHEDULE C
PORTFOLIOS COVERED BY THIS AGREEMENT
THE FAIRHOLME FUND
EXHIBIT 23I
DAVID JONES & ASSOC., P.C.
799 State Street, PMB 234
Pottstown, PA 19464
(610) 718-5382 (phone)
(610) 528-5391 (fax)
[email protected] (e-mail)
Fairholme Funds, Inc. December 6, 1999
51 JFK Parkway
Short Hills, NJ 07078
Dear Sirs:
As counsel to Fairholme Funds, Inc. (the "Company"), a corporation organized
under the laws of the State of Maryland, I have been asked to render my opinion
with respect to the issuance of an indefinite number of shares of beneficial
interest of the Company (the "Shares") representing proportionate interests in
the Fairholme Fund (the "Fund"). The Shares of the Fund are a series of the
Company consisting of one class of shares, all as more fully described in the
Prospectus and Statement of Additional Information contained in the Registration
Statement on Form N-1A, to which this opinion is an exhibit, to be filed with
the Securities and Exchange Commission.
I have examined the Company's Articles of Incorporation, the Prospectus and
Statement of Additional Information contained in the Registration Statement, and
such other documents, records and certificates as deemed necessary for the
purposes of this opinion.
Based on the foregoing, I am of the opinion that the Shares, when issued,
delivered and paid for in accordance with the terms of the Prospectus and
Statement of Additional Information, will be legally issued, fully paid, and
non-assessable by the Company.
Further, I give my permission to include this opinion as an exhibit to the
Company's Registration Statement on Form N-1A.
Very Truly Yours,
David D. Jones
Attorney & Counselor at Law
EXHIBIT 23M
PLAN OF DISTRIBUTION
PURSUANT TO RULE 12B-1
WHEREAS, Fairholme Funds, Inc., an corporation organized and existing under the
laws of the Commonwealth of Maryland (the "Company"),engages in business as an
open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the"1940 Act"); and
WHEREAS, the Company is authorized to issue an unlimited number of shares of
beneficial interest (the "Shares"), in separate series representing the
interests in separate funds of securities and other assets (the "Portfolio");
and
WHEREAS, the Company offers the following Portfolios:
The Fairholme Fund; and
WHEREAS, the Directors of the Company as a whole, and the Directors who are not
interested persons of the Company, as defined in the 1940 Act, and who have no
direct or indirect financial interest in the operation of this Plan of
Distribution Pursuant to Rule 12b-1 (the "Plan") or in any agreement relating
hereto (the "Non-Interested Directors"), having determined, in the exercise of
their reasonable business judgment and in light of their fiduciary duties under
state law and under Section 36(a) and (b) of the 1940 Act, that there is a
reasonable likelihood that the Plan will benefit the Company and its
shareholders, have approved the Plan by votes cast at a meeting called for the
purpose of voting hereon and on any agreements related hereto; and
NOW, THEREFORE, the Company hereby adopts this Plan in accordance with Rule
12b-1 under the 1940 Act, on the following terms and conditions:
1. Distribution and Servicing Activities. Subject to the supervision of the
Directors of the Company, the Company may, directly or indirectly, engage
in any activities primarily intended to result in the sale of Shares of
each Portfolio of the Company, which activities may include, but are not
limited to, the following:
(a) payments to the Company 's Adviser and to securities dealers and others in
respect of the sale of Shares of each series;
(b) payment of compensation to and expenses of personnel (including personnel
of organizations with which the Company has entered into agreements related
to this Plan) who engage in or support distribution of Shares of each
Portfolio or who render shareholder support services not otherwise provided
by the Company 's transfer agent, administrator, or custodian, including
but not limited to, answering inquiries regarding the Company, processing
shareholder transactions, providing personal services and/or the
maintenance of shareholder accounts, providing other shareholder liaison
services, responding to shareholder inquiries, providing information on
shareholder investments in each Portfolio, and providing such other
shareholder services as the Company may reasonably request;
(c) formulation and implementation of marketing and promotional activities,
including, but not limited to, direct mail promotions and television,
radio, newspaper, magazine and other mass media advertising;
(d) preparation, printing and distribution of sales literature;
(e) preparation, printing and distribution of prospectuses and statements of
additional information and reports of the Company for recipients other than
existing shareholders of the Company; and
(f) obtaining such information, analyses and reports with respect to marketing
and promotional activities as the Company may, from time to time, deem
advisable.
The Company is authorized to engage in the activities listed above, and in
any other activities primarily intended to result in the sale of Shares of
each Portfolio of the Company, either directly or through other persons
with which the Company has entered into agreements related to this Plan.
2. Maximum Expenditures. During the period in which this Plan is effective,
the Company shall pay to Fairholme Capital Management, LLC (the "Adviser")
a monthly fee for distribution and shareholder servicing activities in an
amount calculated at the rate of 0.25% per annum of the average daily net
asset value of the Shares of each Portfolio of the Trust. Notwithstanding
the foregoing, the expenditures to be made by the Company pursuant to this
Plan and the basis upon which payment of such expenditures will be made
shall be determined by the Directors of the Company, and in no event may
such expenditures paid by the Company exceed an amount calculated at the
rate of 0.25% of the average annual net assets of the Shares of each
Portfolio of the Company, nor may such expenditures paid as service fees to
any person who sells Shares of any Portfolio of the Company exceed an
amount calculated at the rate of 0.25% of the average annual net asset
value of such Shares. At the request of the Adviser, such payments for
distribution and shareholder servicing activities may be made directly by
the Company to other persons with which the Company has entered into
agreements related to this Plan.
3. Term and Termination. (a) This Plan shall become effective as of the 15th
day of December, 1999. Unless terminated as herein provided, this Plan
shall continue in effect for one year from the date hereof and shall
continue in effect for successive periods of one year thereafter, but only
so long as each such continuance is specifically approved by votes of a
majority of both (i) the Directors of the Company and (ii) the
Non-Interested Directors, cast in person at a meeting called for the
purpose of voting on such approval. (b) This Plan may be terminated at any
time with respect to any series of the Company by a vote of a majority of
the Non-Interested Directors or by a vote of a majority of the outstanding
voting securities of the Shares of such series as defined in the 1940 Act.
4. Amendments. This Plan may not be amended to increase materially the maximum
expenditures permitted by Section 2 hereof for any series of the Company
unless such amendment is approved by a vote of the majority of the
outstanding voting securities of the Shares of such series, as defined in
the 1940 Act, with respect to which a material increase in the amount of
expenditures is proposed, and no material amendment to this Plan shall be
made unless approved in the manner provided for annual renewal of this Plan
in Section 3(a) hereof.
5. Selection and Nomination of Trustees. While this Plan is in effect, the
selection and nomination of the Non-Interested Directors of the Company
shall be committed to the discretion of such Non-Interested Directors.
6. Quarterly Reports. The Treasurer of the Company shall provide to the
Directors of the Company, and the Directors shall review quarterly, a
written report of the amounts expended pursuant to this Plan and any
related agreements and the purposes for which such expenditures were made.
7. Record keeping. The Company shall preserve copies of this Plan and any
related agreements and all reports made pursuant to Section 6 hereof, for a
period of not less than six years from the date of this Plan. Any such
related agreements or such reports for the first two years will be
maintained in an easily accessible place.
8. Limitation of Liability. Any obligations of the Company hereunder shall not
be binding upon any of the Directors, officers or shareholders of the
Company personally, but shall bind only the assets and property of the
Company. The term "Fairholme Funds" means and refers to the Directors from
time to time serving under the Articles of Incorporation of the Company, a
copy of which is on file with the Secretary of The Commonwealth of
Maryland. The execution of this Plan has been authorized by the Directors,
and this Plan has been signed on behalf of the Company by an authorized
officer of the Company, acting as such and not individually, and neither
such authorization by such Directors nor such execution by such officer
shall be deemed to have been made by any of them individually or to impose
any liability on any of them personally, but shall bind only the assets and
property of the Company as provided in the Agreement and Articles of
Incorporation.
IN WITNESS THEREOF, the Directors of the Company, including a majority of the
Non-Interested Directors, have adopted this Plan at a meeting held on December
15, 1999, and have further directed that the Plan be made effective as of a date
to be determined by the Board in the future.
FAIRHOLME FUNDS, INC.
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Bruce R. Berkowitz
President
