SEMI-ANNUAL REPORT
THE FAIRHOLME FUND
A No-Load Capital Appreciation Fund
May 31, 2000
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THE FAIRHOLME FUND
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Semi-Annual Report Ended May 31, 2000
Dear Fellow Shareholder:
Welcome to the Fund, which commenced operations on December 30, 1999. The Fund's
performance for the interim period ended May 31, 2000 and the comparable
performance for the Standard & Poor's 500 Index are shown below:
The Fairholme Fund Standard and Poor's 500 Relative Performance
------------------- ------------------------- ----------------------
+12.1% -2.9% +15.0%
Our goal is to provide you with superior investment performance by purchasing
common stocks of businesses with durable competitive positions, predictable cash
earnings, high returns on capital, and owner oriented management. We will only
invest in such companies when they are valued at a discount to intrinsic value,
which we define as our estimate of the cash a business will generate in the
future. In our reports to you, we will tell you what we would want to know if
our positions were reversed.
The Fund uses a non-diversified style of portfolio management. We believe it is
preferable to own a small number of companies researched extensively rather than
a broad list that could dilute our efforts, focus, and performance.
Our short-term results, whether up or down, should not be considered meaningful.
A concentrated portfolio is likely to be more volatile than a diversified mutual
fund, however, volatility is not synonymous with business risk. We cannot
control volatility, but we can minimize business risk through careful research
and analysis. In fact, periodic price declines in some of our major holdings may
aid our goal of superior long-term growth as they give us an opportunity to
increase holdings at cheaper prices.
Currently, over 50% of the Fund is invested in companies participating in the
property/casualty insurance industry. These companies fall within our circle of
competence and were bought at multi-year lows. Good insurance companies compound
net worth rapidly when they both underwrite profitably and invest wisely. Such
companies have earned 20% returns on book value and we paid near book. Our
second largest individual position is Household International, a leader in
consumer finance, another unappreciated industry. At the end of the period,
approximately 15% of the Fund's assets are cash equivalents, giving us the
ability to take advantage of opportunities that may arise. Our industry focus
will change over time as we find other businesses meeting our criteria at the
right price.
Although new, The Fairholme Fund is a continuation of the investment strategies
used by its adviser, Fairholme Capital Management, whose investment principals
average over 15 years of research and portfolio management experience. As we
start out, a significant percentage of the Fund's assets have come from the
employees of Fairholme Capital Management. We believe this helps properly align
our interests with yours.
Sincerely,
Bruce R. Berkowitz Peter A. Russ Michael J. Senior
Keith D. Trauner Lawrence Pitkowsky Seth Finkelstein
June 23, 2000
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THE FAIRHOLME FUND
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<TABLE>
<CAPTION>
Schedule of Investments
May 31, 2000 (UNAUDITED)
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Shares/Principal Amt. - % of Assets Market Value Shares/Principal Amt. - % of Assets Market Value
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<S> <C> <C> <C>
COMMON STOCKS
Amusement Parks - 0.65% Security Brokers and Dealers - 3.10%
2,000 Cedar Fair - LP $ 40,125 9,500 Jefferies Group Inc. $ 191,781
---------- -----------
Property and Casualty Insurance - 24.69% Title Insurance - 9.30%
12,500 Leucadia National* 325,781 1,600 Alleghany Corp.* 266,000
951 Markel Contingent Value Rights* 6,419 20,000 Fidelity National 310,000
1,651 Markel Corp.* 237,641 -----------
11,000 Mercury General Corp. 280,500 576,000
7,400 RLI Corp 269,175 Diversified Holding Company - 20.10%
700 Wesco Financial Corp. 170,100
1,700 Ltd. White Mountains Ins. Group 240,019 660 Berkshire Hathaway Cl B* 1,244,760
---------- -----------
1,529,635
Home Construction - 2.15% Total for Common Stock - 77.22% 4,783,088
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15,000 Clayton Homes Inc. 133,125 MISCELLANEOUS INVESTMENTS - 4.34%
Gold Ores - 1.17% 25,000 Boulder Total Return Fund 268,750
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Newspapers: Publishing and or Printing - 3.64% U.S. Government Obligations -3.80%
450 Washington Post Co. Cl. B 225,225 80,000 1 Year T-Bill 5.815%, 2-01-2001 76,802
---------- 80,000 4 Month T-Bill 5.59%, 6-29-2000 79,634
Personal Credit Institutions - 10.62% 80,000 6 Month T-Bill 5.725%, 8-24-2000 78,907
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14,000 Household International 658,000 235,343
---------- Money Market Funds - 5.12%
Real Estate Investment Trusts - 1.81%
317,082 UMB Money Market 317,082
4,000 Aegis Realty Inc. 39,750 -----------
1,000 Tanger Factory Outlet 23,312
3,000 Town & Country Trust 49,125 TOTAL INVESTMENTS - 90.48% 5,604,263
---------- (Cost - $5,131,076) -----------
$ 112,187
OTHER ASSETS LESS LIABILITIES - 9.52% 589,996
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NET ASSETS - 100.00% $ 6,194,259
<FN>
* Non-Income Producing Securities
</FN>
</TABLE>
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THE FAIRHOLME FUND
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Statement of Assets and Liabilities
May 31, 2000 (UNAUDITED)
Assets:
Investment Securities at Market Value $ 5,604,263
(Identified Cost - $5,131,076)
Cash 869,146
Receivables:
Dividends and Interest 3,667
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Total Assets 6,477,076
Liabilities:
Accrued Expenses 4,288
Payable for securities purchased 278,529
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Total Liabilities 282,817
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Net Assets $ 6,194,259
Net Assets Consist of:
Capital Paid In $ 5,703,674
Undistributed Net Investment Income 6,726
Accumulated Realized Gain (Loss) on Investments - Net 10,672
Unrealized Appreciation/(Depreciation) in Value
of Investments Based on Identified Cost - Net 473,187
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Net Assets for 552,719 Shares Outstanding $ 6,194,259
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Per Share Net Asset Value and Redemption Price
($6,194,259/552,719 shares)
$ 11.21
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THE FAIRHOLME FUND
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Statement of Operations
December 30, 1999* to May 31, 2000 (UNAUDITED)
Investment Income:
Dividends $ 7,790
Interest 10,019
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Total Investment Income 17,809
Expenses:
Management Fees (Note 2) 11,083
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Total Expenses 11,083
Net Investment Income 6,726
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Realized and Unrealized Gain (Loss) on Investments:
Realized Gain (Loss) on Investments 10,672
Unrealized Appreciation (Depreciation) on Investments 473,187
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Net Realized and Unrealized Gain (Loss) on Investments 483,859
Net Increase (Decrease) in Net Assets from Operations $ 490,585
* Commencement of Operations
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THE FAIRHOLME FUND
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Statement of Changes in Net Assets
December 30, 1999* to May 31, 2000 (UNAUDITED)
CHANGE IN NET ASSETS:
From Operations:
Net Investment Income $ 6,726
Net Realized Gain (Loss) on Investments 10,672
Net Unrealized Appreciation (Depreciation) 473,187
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Increase (Decrease) in Net Assets from Operations 490,585
From Distributions to Shareholders:
Net Investment Income 0
Net Realized Gain (Loss) from Security Transactions 0
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Net Increase (Decrease) from Distributions 0
From Capital Share Transactions:
Proceeds From Sale of Shares 5,660,627
Shares Issued on Reinvestment of Dividends 0
Cost of Shares Redeemed (56,953)
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Net Increase from Shareholder Activity 5,603,674
NET ASSETS:
Net Increase in Net Assets 6,094,259
Net Assets at Beginning of Period 100,000
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Net Assets at End of Period $ 6,194,259
SHARE TRANSACTIONS:
Issued 548,589
Reinvested 0
Redeemed (5,871)
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Net Increase (Decrease) in Shares 542,719
Shares Outstanding at Beginning of Period 10,000
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Shares Outstanding at End of Period 552,719
* Commencement of Operations
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THE FAIRHOLME FUND
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Financial Highlights
December 30, 1999* to May 31, 2000 (UNAUDITED)
Selected data for a share outstanding throughout the period.
Net Asset Value at Beginning of Period $ 10.00
Net Investment Income 0.02
Net Gains or Losses on Securities (Realized and Unrealized) 1.19
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Total from Investment Operations 1.21
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Dividends (From Net Investment Income) 0.00
Distributions (From Capital Gains) 0.00
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Total Distributions 0.00
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Net Asset Value at End of Period $ 11.21
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Total Return 12.10%
Ratios/Supplemental Data:
Net Assets at End of Period (Thousands) $ 6,194
Ratio of Expenses to Average Net Assets ** 0.41 %
Ratio of Net Income to Average Net Assets ** 0.25 %
Portfolio Turnover Rate 13.38 %
* Commencement of Operations
** Annualized
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THE FAIRHOLME FUND
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Notes to Financial Statements
May 31, 2000 (Unaudited)
Note 1. Organization
Fairholme Funds Inc. (the "Company") is registered under the Investment Company
Act of 1940, as amended, as a non-diversified, open-end management Investment
Company. The Company's Articles of Incorporation permit the Board to issue
100,000,000 shares of common stock. The Board of Directors 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 the respect
to such series. Shares of one series have been authorized, which shares
constitute the interests in the The Fairholme Fund (the "Fund"). The Fund's
investment objective is to provide long-term capital appreciation. The Fund
seeks to achieve its objective by investing in common stocks without
restrictions regarding market capitalization. The Fund will Invest 75% of total
net assets in U.S. common stocks and intends to hold a focused portfolio of no
more than 25 stocks.
Note 2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: Securities, which are traded on any exchange or on the
NASDAQ over-the-counter market, are valued at the last quoted sale price.
Lacking a last sale price, a security is valued at its last bid price except
when, in the Adviser's opinion, the last bid price does not accurately reflect
the current value of the security. All other securities for which
over-the-counter market quotations are readily available are valued at their
last bid price. When market quotations are not readily available, when the
Adviser determines the last bid price does not accurately reflect the current
value or when restricted securities are being valued, such securities are valued
as determined in good faith by the Adviser, in conformity with guidelines
adopted by and subject to review of the Directors of the Company.
Fixed income securities generally are valued by using market quotations, but may
be valued on the basis of prices furnished by a pricing service when the Adviser
believes such prices accurately reflect the fair market value of such
securities. A pricing service utilizes electronic data processing techniques
based on yield spreads relating to securities with similar characteristics to
determine prices for normal institutional-size trading units of debt securities
without regard to sale or bid prices. When prices are not readily available from
a pricing service, or when restricted or illiquid securities are being valued,
securities are valued at fair value as determined in good faith by the Adviser,
subject to review of the Directors of the Company. Short term investments in
fixed income securities with maturities of less than 60 days when acquired, or
which subsequently are within 60 days of maturity, are valued by using the
amortized cost method of valuation, which the Adviser has determined will
represent fair value.
Federal Income Taxes: The Fund intends to qualify each year as a "Regulated
Investment Company" under the Internal Revenue Code of 1986, as amended. By so
qualifying, the Fund will not be subject to federal income taxes to the extent
that it distributes substantially all of its net investment income and any
realized capital gains.
Dividends and Distributions: The Fund intends to distribute substantially all of
its net investment income as dividends to its shareholders on an annual basis.
The Fund intends to distribute its net long-term capital gains and its net
short-term capital gains at least once a year.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements; and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Other: The Fund follows industry practice and records security transactions on
the trade date. The specific identification method is used for determining gains
or losses for financial statements and income tax purposes. Dividend income is
recorded on the ex-dividend date and interest income is recorded on an accrued
basis. Discounts and premiums on securities purchased are amortized over the
life of the respective securities.
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Note 3. Investment Advisory Agreement
Fairholme Capital Management, L.L.C (the "Adviser"), 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 provide financial
management and advisory services to individuals, corporations, and other
institutions throughout the United States. The Fund pays the Adviser for its
advisory and administrative services, an annualized management fee equal to
1.00% (0.50% of which are investment advisory fees and 0.50% for administrative
and other services) of the average net assets of the Fund, such fees to be
computed daily based upon the daily average net assets of the Fund.
Note 4. Capital Stock and Distribution
Distribution to shareholders is recorded on the ex-dividend date. Payments in
excess of net investment income or of accumulated net realized gains reported in
the financial statements are due primarily to book/tax differences. Payments due
to permanent differences have been charged to distributions in excess of net
investment income or realized gains.
Note 5. Investments
For the period ending May 31, 2000 purchases and sales of investment securities,
other than short-term investments, aggregated $4,961,670 and $393,895
respectively. The gross unrealized appreciation for all securities totaled
$514,108 and the gross unrealized depreciation for all securities totaled
($40,921) or a net unrealized appreciation of $473,187. The aggregate cost of
securities for federal income tax purposes at May 31, 2000 was $5,131,076.
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Board of Directors
Bruce R. Berkowitz
Avivith Oppenheim, Esq.
Michael J. Senior
Joel L. Uchenick
Leigh Walters, Esq.
Officers
Bruce R. Berkowitz, President
Michael J. Senior, Secretary & Treasurer
Investment Adviser
Fairholme Capital Management, L.L.C.
51 JFK Parkway
Short Hills, NJ 07078
Dividend Paying Agent,
Shareholders' Servicing Agent,
Transfer Agent
Mutual Shareholder Services
1301 E. 9th St., Suite 1005
Cleveland, OH 44114
Custodian
UMB Bank N.A.
1010 Grand Blvd.
Kansas City, MO 64106
Counsel
David Jones & Associates P.C.
4747 Research First Dr., Suite 180
The Woodlands, TX 77381
Independent Auditors
McCurdy & Associates CPAs, Inc.
27955 Clemens Rd
Westlake, OH 44145
This report has been prepared for the information of shareholders of The
Fairholme Fund.
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