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SCHEDULE
14A INFORMATION
Proxy
Statement Pursuant to Section 14(a) of the
Securities
Exchange Act of 1934
Filed by
the
Registrant /X/
Filed by
a Party other than the
Registrant /
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Check the
appropriate box:
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Preliminary
Proxy Statement
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Confidential,
for Use of the Commission
Only
(as permitted by Rule 14a-6(e)(2))
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Definitive
Proxy Statement
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Definitive
Additional Materials
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Soliciting
Material Pursuant to Section
240.14a-12
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Fairholme
Funds, Inc.
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(Name
of Registrant as Specified In Its Charter)
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(Name
of Person(s) Filing Proxy Statement,
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if
other than the Registrant)
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Payment
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Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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(1) Title
of each class of securities to which transaction
applies:
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(2) Aggregate
number of securities to which transaction applies:
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(3) Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
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(4) Proposed
maximum aggregate value of transaction:
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previously. Identify the previous filing by registration
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filing.
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SK 22146 0003
867068
FAIRHOLME
FUNDS, INC.
4400
Biscayne Blvd.
9th
Floor
Miami, FL
33137
April __, 2008
Dear
Stockholders:
The Board
of Directors (the “Board” or the “Directors”) of Fairholme Funds, Inc. (the
“Company”) is pleased to invite you to the Annual Meeting of Stockholders (the
“Meeting”) to be held at the offices of the Company, 4400 Biscayne Blvd., 9th
Floor, Miami, FL 33137, on May 19, 2008. The accompanying Notice of
Annual Meeting of Stockholders and Proxy Statement present several proposals to
be considered at the Meeting.
At the
Meeting, you will be asked to elect seven Directors of the Company, including
the five existing Directors of the Company and two new candidates, who have been
nominated to serve as Directors of the Company.
You will
also be asked to consider and approve several proposals that are intended to
update the fundamental investment policies of the Fairholme Fund (the “Fund”),
the sole series of the Company. Fundamental policies are restrictions
that under federal law can only be changed by a stockholder vote. If
approved, the proposals will remove or replace restrictions that are no longer
applicable or necessary, and will allow the Fund more investment flexibility in
achieving its existing objectives.
Finally,
you will be asked to consider and approve an amended and restated investment
advisory agreement (the “Management Agreement”) between Fairholme Capital
Management, L.L.C. (the “Manager”) and the Company. The Management
Agreement combines the terms and fees of the existing Investment Advisory and
Operating Services Agreements between the Company and the Manager into one
all-encompassing document. If approved, the Management Agreement will
result in an increased fee attributable to investment advisory and other
services payable to the Manager by the Fund, which will be totally offset by
termination of the existing operating services fee charged for such
services. Adopting this proposal will not increase the Fund’s overall
expense ratio. (Stockholders should also note that the Company has
voluntarily terminated the Fund’s Rule 12b-1 plan under which the Fund could
have initiated a Rule 12b-1 fee to assist in distributing the Fund’s
shares.)
Based on
the information presented to the Directors at their meeting on March 18, 2008,
the Directors concluded that it was in the best interests of the Company and its
stockholders to approve the proposals described above and present them to
stockholders for their approval. In connection therewith, the
Directors unanimously recommend that you vote “FOR” each proposal.
The
Company welcomes your attendance at the Meeting. If you are unable to
attend, the Company encourages you to vote promptly by proxy. The
Altman Group, Inc. (the “Proxy Solicitor”), a proxy solicitation firm, has been
selected to assist in the proxy solicitation process. If the Company
has not received your proxy as the date of the Meeting approaches, you may
receive a telephone call from the Proxy Solicitor reminding you to vote by
proxy. No matter how many shares you own, your vote is
important.
Sincerely,
Bruce R. Berkowitz
President
QUESTIONS
AND ANSWERS
THE
FAIRHOLME FUNDS, INC.
PROXY
Q. WHY
DID THE COMPANY SEND ME THIS BOOKLET?
A. This
booklet contains the Notice of Annual Meeting of Stockholders (the “Notice”) and
Proxy Statement that provide you with information you should review before
voting on the Proposals that will be presented at the Annual Meeting of
Stockholders (the “Meeting”) of Fairholme Funds, Inc. (the
“Company”). This booklet also contains a proxy card (“Proxy
Card”) on which you can record your vote. You are receiving these
proxy materials because you own shares of the Fairholme Fund, the sole series of
the Company (the “Fund”). As a stockholder, you have the right to
vote on the various proposals described in the Proxy Statement.
Q. WHO
IS ASKING FOR MY VOTE?
A. The
Board of Directors of the Company (the “Board” or the “Directors”) requests that
you vote at the Meeting on the following proposals (collectively, the
“Proposals”):
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·
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A
proposal to elect seven Directors of the
Company;
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·
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A
proposal to replace or eliminate certain of the Fund’s fundamental
investment policies; and
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·
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A
proposal to approve the amended and restated investment advisory agreement
(“Management Agreement”) between the Company, on behalf of the Fund, and
Fairholme Capital Management, L.L.C. (the
“Manager”).
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Q. HOW
DOES THE BOARD RECOMMEND I VOTE?
A. The
Board recommends that you vote “FOR” each Proposal.
Q. WHO
IS ELIGIBLE TO VOTE?
A.
Stockholders of record at the close of business on April 4, 2008 (the “Record
Date”) are entitled to vote at the Meeting or any adjournment of the
Meeting. If you owned shares on the Record Date, you have the right
to vote, even if you later redeemed the shares.
Q. WHAT
ROLE DOES THE BOARD PLAY?
A. The
Board oversees the management of the Company. Each Director has an
obligation to act in what he or she believes to be the best interests of the
Company and its stockholders. The background of each nominee for
Director is described in the Proxy Statement.
Q. WHY
IS THE FUND PROPOSING TO REPLACE OR ELIMINATE ITS FUNDAMENTAL INVESTMENT
POLICIES?
A. The federal law applicable
to mutual funds requires certain policies of the Fund to be fundamental, which
means that they cannot be changed without a stockholder vote. Based
on recommendations from the Board, in consultation with the Manager and Fund
counsel, the Fund proposes to replace or eliminate its fundamental policies
primarily because the policies are no longer required by law, because the
policies are
unnecessary, or because the current formulation of a policy does not accord with
statutes or regulations affecting the policy.
These
proposals would update the Fund’s policies and make them more consistent with
existing statutory and regulatory requirements and the Fund’s
objectives. The Fund would continue to be managed in accordance with
the investment strategies described in its prospectus and statement of
additional information as such documents are updated from time to
time.
Q.
WHY ARE THE DIRECTORS RECOMMENDING THAT STOCKHOLDERS APPROVE THE MANAGEMENT
AGREEMENT?
A. Based
on the information they received at their meeting on March 18, 2008, the
Directors considered and approved the proposed Management Agreement as in the
best interests of the Fund and its stockholders, subject to further approval by
the Fund’s stockholders.
The
Management Agreement simplifies and combines the terms and fees of both the
existing Investment Advisory Agreement and the existing Operating Services
Agreement between the Company, on behalf of the Fund, and the
Manager. Under the existing Investment Advisory Agreement, the Fund
pays an advisory fee to the Manager at an annual rate of 0.50% of the daily
average net asset value (“NAV”) of the Fund for the Manager’s management of the
Fund’s portfolio. Under the separate Operating Services Agreement,
the Fund pays an operating services fee to the Manager at an annual rate of
0.50% of the daily average NAV of the Fund for the Manager’s provision and
oversight of certain operational services to the Fund.
As a
result of the combination of the terms and fees of the existing Investment
Advisory Agreement and the Operating Services Agreement, the Fund will pay the
Manager a fee under the Management Agreement at an annual rate of 1.00% for its
provision of the combined services, an amount equal to the total fees paid under
each of the existing agreements. Although, as a result of moving the
fees formerly attributable to operating services to the Management Agreement,
the fees attributable to investment advisory services will increase, the total
fees payable to the Manager by the Fund will remain the
same. Approving the Management Agreement will not result in an
increase to Fund’s expense ratio or an increase in total fees payable to the
Manager.
Q. WILL
THE PROPOSALS MATERIALLY CHANGE THE NATURE OF MY INVESTMENT?
A. No. While
the Proposals concerning the Fund’s fundamental policies are intended to grant
the Fund more operational and investment flexibility, the Proposals are not
intended to materially change the nature of your investment. The
Manager intends to manage the Fund pursuant to substantially the same
philosophy, objectives, and investment strategies it has employed to
date. If the Manager were to change its management of the Fund
materially, the Fund would provide you prior notice of such change so that you
could determine at that time whether the Fund continued to be a suitable
investment for you.
The
Proposal concerning the Management Agreement would not affect the total expenses
of the Fund since the increase in the advisory fee under the Management
Agreement will be offset by equivalent decreases in other fees and expenses
currently paid by the Fund.
Q. HOW
CAN I VOTE MY SHARES?
A. Please
follow the instructions included on the enclosed Proxy Card.
Q. WHAT
IF I WANT TO REVOKE MY PROXY?
A. You
can revoke your proxy at any time prior to its exercise by (i) giving written
notice to the Secretary of the Company at 4400 Biscayne Blvd, 9th Floor,
Miami, FL 33137, (ii) by signing and submitting another proxy of a later date,
or (iii) by personally voting at the Meeting.
Q. WHAT NUMBER DO I CALL IF I HAVE
QUESTIONS REGARDING THE PROXY?
A. Please
call (__) ___-____ if you have questions.
FAIRHOLME
FUNDS, INC.
4400
Biscayne Blvd.
9th
Floor
Miami, FL
33137
NOTICE
OF ANNUAL MEETING OF STOCKHOLDERS
SCHEDULED
FOR MAY 19, 2008
To the
Stockholders of Fairholme Funds, Inc. (the “Company”) and its sole series, the
Fairholme Fund (the “Fund”):
Notice is
hereby given that the Annual Meeting of Stockholders of the Company (the
“Meeting”) will be held at the offices of the Company, 4400 Biscayne Blvd., 9th
Floor, Miami, FL 33137, on May 19, 2008, at 2:00 p.m., Eastern Time, to consider
and vote on the following Proposals, all of which are described in the
accompanying Proxy Statement dated April __, 2008:
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1.
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The
election of seven Directors, each such Director to serve a term of
indefinite duration and until his or her successor is duly elected and
qualifies;
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2.
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The
replacement or elimination of the Fund’s fundamental investment
policies;
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3.
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The
approval of the amended and restated investment advisory agreement
(“Management Agreement”) between the Company, on behalf of the Fund, and
Fairholme Capital Management, L.L.C. (the “Manager”);
and
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In
addition, stockholders will be asked to consider and vote on any other business
that may properly come before the Meeting and any postponement or adjournment
thereof.
Any
stockholder of record at the close of business on April 4, 2008 is entitled to
notice of, and to vote at, the Meeting or any adjournment
thereof. Proxies are being solicited on behalf of the Board of
Directors of the Company. Each stockholder who does not expect to
attend the Meeting in person is requested to complete, date, sign and promptly
return the enclosed Proxy Card, or to submit voting instructions by telephone at
(___) ___-____ or via the Internet as described on the enclosed Proxy
Card.
The
Board of Directors recommends that you vote “FOR” each Proposal.
By Order
of the Board of Directors,
Bruce R. Berkowitz
President
Miami,
FL
April __,
2008
YOUR
VOTE IS IMPORTANT
Please
indicate your voting instructions on the enclosed Proxy Card, sign and date it,
and return it in the envelope provided, which needs no postage if mailed in the
United States. You may also authorize (by telephone or through the
Internet) a proxy to vote your shares. To do so, please follow the
instructions on the enclosed Proxy Card. Your vote is very important
no matter how many shares you own. Please complete, date, sign and
return your Proxy Card promptly in order to save the Fund the additional cost of
further proxy solicitation and in order for the Meeting to be held as
scheduled.
TABLE OF
CONTENTS
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Page
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Introduction
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[__]
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The
Proposals
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[__]
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Proposal
One -- Election of
Directors
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[__]
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Proposal
Two -- Replacement or Elimination
of Certain of the Fund’s
Fundamental
Investment Policies
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[__]
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Proposal
Three -- Amendments to the Advisory Agreement
and Increase to the Investment Advisory Fee
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[__]
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Independent
Registered Public Accounting Firm
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[__]
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Proxy
Voting and Stockholder Meetings
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[__]
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Other
Information
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[__]
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Officer
Information
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[__]
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Stock Ownership
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[__]
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Information
about the Fund’s Manager and Administrator
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[__]
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Submission of Proposals for Next
Meeting of Stockholders
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[__]
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Other Matters
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[__]
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Reports to
Stockholders
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[__]
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Appendix
A -- Additional
Information Regarding Nominees
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[__]
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Appendix
B -- Nominating and
Corporate Governance Committee Charter
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[__]
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Appendix
C -- Management
Agreement
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[__]
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Appendix
D -- Stock
Ownership
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[__]
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PROXY
STATEMENT
(dated
April __, 2008)
FAIRHOLME
FUNDS, INC.
4400
Biscayne Blvd.
9th
Floor
Miami, FL
33137
ANNUAL
MEETING OF STOCKHOLDERS
May 19,
2008
INTRODUCTION
This
Proxy Statement is furnished in connection with the solicitation of proxies on
behalf of the Board of Directors (the “Board”) of Fairholme Funds, Inc. (the
“Company”) and its sole series, the Fairholme Fund (the “Fund”) to be voted at
the Annual Meeting of Stockholders of the Company (the “Meeting”) or at any
postponement or adjournment thereof. The Meeting is scheduled
to be held at the offices of the Company, 4400 Biscayne Blvd., 9th Floor, Miami,
FL 33137, on May 19, 2008, at 2:00 p.m., Eastern Time.
The Board
has fixed the close of business on April 4, 2008 as the record date (the “Record
Date”) for the determination of stockholders entitled to notice of, and to vote
at, the Meeting and any postponement or adjournment thereof. As of
the Record Date, the Fund had ___________ shares of common stock
outstanding. Each share is entitled to one vote. Shares
may be voted in person or by proxy.
As a
stockholder of the Fund, you are being asked to consider and vote on the
following Proposals (collectively, the “Proposals”) concerning:
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1.
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The
election of seven Directors of the Company, each such Director to serve a
term of an indefinite duration and until his or her successor is duly
elected and qualifies.
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2.
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The
replacement or elimination of the Fund’s fundamental investment policies
with respect to:
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2.A.
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Senior
Securities and Borrowing Money
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2.B.
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Underwriting
Securities
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2.C.
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Concentration
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2.D.
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Investments
in Real Estate
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2.E.
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Investments
in Commodities
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2.F.
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Loans
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2.G.
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Limits
on Number of Issuers in Which the Fund Invests
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2.H.
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Investments
for the Purpose of Management or Control
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2.I.
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Acquisitions
of More than 10% of the Outstanding Voting Securities of an
Issuer
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2.J.
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Investments
in Oil, Gas or Other Mineral Exploration
Programs
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3.
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The
approval of the amended and restated investment advisory agreement
(“Management Agreement”) between the Company, on behalf of the Fund, and
Fairholme Capital Management, L.L.C. (the
“Manager”).
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In
addition, stockholders will be asked to consider and vote on any other business
that may properly come before the Meeting and any postponement or adjournments
thereof.
The
solicitation of proxies will be made primarily by mail and may also be made by
telephone or through the Internet. The cost of soliciting proxies
will be borne equally by the Company and the Manager. The Notice of
Annual Meeting of Stockholders, Proxy Statement, and Proxy Card are being mailed
to stockholders on or about April __, 2008.
PROPOSAL
ONE
Election of
Directors
At the
Meeting, stockholders will vote on the election of seven Directors of the
Company. Each Director elected at the Meeting will serve a term of
indefinite duration and until his or her successor is duly elected and
qualifies. The following individuals, who were recommended by the
executive officers of the Company to the Nominating and Corporate Governance
Committee, have been nominated by the Nominating and Corporate Governance
Committee for election as Director. It is the intention of the
persons named as proxies in the accompanying Proxy Card to vote “FOR” each
nominee named below for election as Director.
Cesar L.
Alvarez
Terry L.
Baxter
Bruce R.
Berkowitz
Howard S.
Frank
Avivith
Oppenheim
Keith D.
Trauner
Leigh
Walters
Except
for Cesar L. Alvarez and Terry L. Baxter, the nominees are existing Directors of
the Company. Each nominee has consented to serve as a Director. The
Board knows of no reason why any of the nominees would be unable to serve, but
in the event any nominee is unable to serve or for good cause will not serve,
the proxies received indicating a vote “FOR” such nominee will be voted for a
substitute nominee as the Board may recommend.
Certain
information concerning the nominees is set forth below:
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Principal
Occupation(s)
During
Past
Five Years
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Number
of Portfolios in Fund Complex Overseen by
Director
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Other
Directorships Held by Director
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INTERESTED
DIRECTOR
NOMINEES
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Cesar
L. Alvarez***; 60
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Not
Applicable
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Chief
Executive Officer of Greenberg Traurig, P.A. since 1997.
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None
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Chairman,
Board of Directors, Pediatrix Medical Group, Inc.; Co-Leading Director,
Watsco, Inc.; Director, Intrexon Corporation; Director, Texpack
Inc.
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Bruce
R. Berkowitz***;
49
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Since
December 29, 1999
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Managing
Member and Chief Investment Officer, Fairholme Capital Management, L.L.C.,
a registered investment adviser, since October 1997.
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1
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Director,
TAL International Group, Inc.; Director, White Mountains Insurance Group,
Ltd.
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Keith
D. Trauner***;
50
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Since
January, 2002
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Portfolio
Manager, Analyst and Chief Compliance Officer, Fairholme Capital
Management L.L.C., a registered investment adviser, since February
1999.
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1
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None
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INDEPENDENT
DIRECTOR
NOMINIEES
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Terry
L. Baxter; 62
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Not
Applicable
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Retired. Prior
thereto from 1993 to 2002, he served as President, Fund American
Enterprises; Chairman of the Board, Source One Mortgage Services Corp.;
and President of White Mountains Holdings.
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None
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Director,
Main Street American Group
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Howard
S. Frank;
66
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Since
May 7, 2007
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Vice
Chairman and Chief Operating Officer, Carnival Corporation &
plc.
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1
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Chairman,
Steamship Mutual Trust; Vice Chairman, New World
Symphony
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Avivith
Oppenheim, Esq.; 57
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Since
December 29, 1999
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Attorney-at-Law.
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1
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None
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Leigh
Walters, Esq.; 61
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Since
December 29, 1999
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Vice-President
and Director, Valcor Engineering Corporation.
Attorney-at-Law.
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1
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Director,
Valcor Engineering Corporation
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*
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Unless
otherwise indicated, the address of each Nominee is 4400 Biscayne Blvd.,
9th
Floor, Miami, FL 33137.
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**
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“Years
of Service” refers to the total number of years served as a
Director.
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***
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Mr.
Berkowitz, Mr. Trauner and Mr. Alvarez are each an interested person, as
defined in the Investment Company Act of 1940, as amended (“1940 Act”), of
the Company because of their affiliation with the
Manager.
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As of
March __, 2008, to the knowledge of Fund, the Directors and officers of the
Fund, both individually, and as a group, owned __% of the Fund’s
shares. Additional information related to the equity ownership of the
Directors in the Fund and the compensation they received from the Fund is
presented in Appendix
A. During the Fund’s most recently completed fiscal year, the
Directors as a group did not engage in the purchase or sale of more than 1% of
any class of securities of the Manager.
During
the Fund’s fiscal year ended November 30, 2007, the Board met six (6)
times. Each Director attended at least 75% of the total number of
meetings of the Board held during the Fund’s most recently completed fiscal year
(or, if not a Director for the entire fiscal year, during the period for which
he or she served) and, if a member, at least 75% of the total number of meetings
of the committees held during the period for which he or she
served. The Fund does not have a policy requiring a Director to
attend meetings of stockholders, but the Fund encourages such
attendance.
The Board
has three standing committees: an Audit Committee, a Nominating and Corporate
Governance Committee and a Proxy Voting Committee. The Audit
Committee is comprised of the three Independent Directors of the Company, Howard
S. Frank (Chairman), Avivith Oppenheim and Leigh Walters. Howard S.
Frank has been designated as the Fund’s audit committee financial
expert. The Audit Committee meets as needed to review the Fund’s
financial statements; to approve the selection of, and consult with, the Fund’s
independent auditors; to receive the Fund’s independent auditors’ reports on the
Fund’s financial statements and internal controls; to monitor the procedures in
place for regulatory compliance; and to perform other related
duties. The Audit Committee met three (3) times during the fiscal
year ended November 30, 2007.
The
Nominating and Corporate Governance Committee is comprised of the three
Independent Directors of the Company, Avivith Oppenheim (Chairperson), Leigh
Walters and Howard S. Frank. The Board has adopted a charter for the
Nominating and Corporate Governance Committee, a copy of which is included as
Appendix
B. Pursuant to the charter, the Nominating and Corporate
Governance Committee identifies, evaluates, selects and nominates candidates for
the Board and periodically reviews the composition of the Board. The
Nominating and Corporate Governance Committee also may set standards or
qualifications for Board members. The Nominating and Corporate
Governance Committee may consider candidates as Directors submitted by the
Fund’s current Board members, officers, investment adviser and other appropriate
sources. The Nominating and Corporate Governance Committee does not
consider candidates for Director submitted by stockholders. The
Nominating and Corporate Governance Committee met three (3) times during
the fiscal year ended November 30, 2007.
On March
18, 2008, the Nominating and Corporate Governance Committee nominated each of
the individuals set forth above, including Cesar L. Alvarez and Terry L. Baxter,
to serve as Directors of the Company and recommended that the Board approve such
nominations and present the nominees to the stockholders for their
approval.
In
January 2008, the Board formed a Proxy Voting Committee. The Proxy
Voting Committee is comprised of the three Independent Directors of the Company,
Avivith Oppenheim, Leigh Walters and Howard S. Frank. The Proxy
Voting Committee considers proxies with respect to securities held by the Fund
involving potential conflicts of interest between the Fund, on the one hand, and
the Manager, the Fund’s distributor and their affiliated entities, on the other
hand. The Committee also considers requests for waivers of the proxy
voting policy.
To
communicate with a Director, a stockholder must send a written communication to
the Fund’s principal office at 4400 Biscayne Blvd., 9th Floor, Miami, FL 33137,
addressed to the Director. All stockholder communications received in
accordance with this process will be forwarded to the individual Director to
whom the communication is addressed.
The
Board unanimously recommends that the stockholders vote “FOR” each of the
nominees listed above to serve as Director of the Company. Approval
of Proposal One requires the vote of a majority of the total votes cast at the
Meeting.
PROPOSAL
TWO
Replacement or Elimination
of the
Fund’s Fundamental
Investment Policies
The Fund
is required by the 1940 Act to disclose whether it has a policy regarding the
following: (1) diversification, as defined in the 1940 Act; (2) borrowing
money; (3) issuing senior securities; (4) underwriting securities issued by
other persons; (5) purchasing or selling real estate; (6) purchasing or selling
commodities; (7) making loans to other persons; and (8) concentrating
investments in any particular industry or group of industries. Under
the 1940 Act, each of these required policies (“Required Policies”) must be
designated as a “fundamental” policy, which means that it cannot be changed
without a stockholder vote. In addition to the Required Policies, the
Fund may designate any of its other investment policies as fundamental policies
(“Additional Policies”).
At a
Board of Directors meeting held on March 18, 2008 (the “Board Meeting”), the
Manager recommended to the Board that the Fund replace the Fund’s current
Required Policies with the new fundamental policies described below and
eliminate the Fund’s current Additional Policies. The Manager
expressed its belief that the current fundamental policies are outdated and, in
many cases, more restrictive than those required by the 1940 Act, the
regulations thereunder or the Securities and Exchange Commission (“SEC”) staff’s
interpretations with respect to the 1940 Act or the regulations
thereunder. The Manager explained that many of the Fund’s current
Additional Policies and portions of the Fund’s current Required Policies can be
traced back to federal or state securities law requirements that have
subsequently been made less restrictive or are no longer applicable to mutual
funds. For example, the National Securities Markets Improvement Act
of 1996 (“NSMIA”) preempted many investment restrictions formerly imposed by
state securities laws and regulations (these state laws and regulations are
often referred to as “blue sky” laws and regulations), so those state
requirements no longer apply. The Manager stated its belief that the
Fund’s current Required Policies and current Additional Policies unnecessarily
limit the investment strategies available to the Manager in managing the Fund’s
assets.
In
recommending the replacement of the Fund’s Required Policies, the Manager
explained that the Proposals were intended primarily to update the policies so
that they would track more closely the requirements of the 1940 Act or the
regulations thereunder, or the interpretations of the SEC’s staff with respect
to those requirements. In recommending the elimination of the Fund’s
current Additional Policies, the Manager noted that the current policies were
unnecessary and more restrictive than those required by the 1940 Act or the
regulations thereunder or the SEC staff’s interpretations thereof.
The
Manager explained to the Board that while approval of the Proposals would grant
the Manager greater operational and investment flexibility with respect to the
Fund’s portfolio, the Manager did not intend to materially diverge from its
current investment practices. The Manager concluded by noting that
the proposed fundamental policies were structured so that they would either: (i)
automatically adjust a Fund’s policy to the requirements of the then-prevailing
laws or regulations or (ii) permit the Manager to emphasize different strategies
or portfolio allocations in light of then-prevailing market conditions or
trends. In the latter instance, the Manager noted that stockholders
would be given appropriate notice in the event of a material change in the
Fund’s operation that results from the flexibility granted by the approval of a
Proposal.
After
considering the information presented at the Board Meeting, the Board approved
the Manager’s recommendations with respect to the Fund’s current Required
Policies and current Additional Policies and recommended that the Proposals be
presented to the Fund’s stockholders for their consideration and approval at the
Meeting. If the Proposals are approved by stockholders, only those
investment policies that the 1940 Act specifically requires to be fundamental
(i.e., Required
Policies), as described from Proposal 2.A. through Proposal 2.F. will remain
fundamental investment policies of the Fund.
Proposal
2A. Senior Securities and
Borrowing Money
Current
Fundamental Policies:
The
Fund’s current fundamental policies with respect to issuing senior securities
and borrowing money are as follows:
“The Fund
will not issue senior securities.”
“The Fund
will not borrow money, except from banks for temporary or emergency purposes in
amounts not exceeding 5% of the value of the Fund’s assets at the time of
borrowing.”
Proposed
New Fundamental Policy:
The Fund
proposes to replace the Fund’s current fundamental policies with respect to
issuing senior securities and borrowing money with the following new, combined
fundamental investment policy:
“The Fund
may not issue any senior security (as that term is defined in the 1940 Act) or
borrow money, except to the extent permitted by the 1940 Act or the rules and
regulations thereunder (as such statute, rules or regulations may be amended
from time to time) or by guidance regarding, or interpretations of, or exemptive
orders under, the 1940 Act or the rules or regulations thereunder published by
appropriate regulatory authorities.
For the
purposes of this restriction, margin and collateral arrangements, including, for
example, with respect to permitted borrowings, options, futures contracts,
options on futures contracts and other derivatives such as swaps, are not deemed
to involve the issuance of a senior security.”
Discussion
of the Proposal:
Under the
1940 Act, a mutual fund may not issue senior securities, except that it may
borrow from banks, for any purpose, up to 33 1/3% of its total
assets. Certain types of transactions entered into by a mutual fund,
including, among others, futures contracts, repurchase agreements, short sales,
and when-issued and delayed delivery transactions, may be considered by the SEC
staff to raise senior security issues. Under current SEC staff
interpretations, these transactions are not deemed to be prohibited by the 1940
Act provided that certain coverage requirements designed to protect stockholders
are met.
The
proposed fundamental policy clarifies that margin and collateral arrangements
entered into by the Fund would not be deemed to involve the issuance of a senior
security. In addition, the proposed policy would conform the Fund’s
policy more closely to the exact statutory and regulatory requirements regarding
senior securities and borrowing, as they exist from time to time. As
a result, the Fund could avoid the time and expense of obtaining stockholder
approval to change the policy in response to future changes in statutory or
regulatory requirements.
Proposal
2.B. Underwriting
Securities
Current
Fundamental Policy:
The
Fund’s current fundamental policy with respect to underwriting securities
offerings is as follows:
“The Fund
will not underwrite the distribution of securities of other
issuers.”
Proposed
New Fundamental Policy:
The Fund
proposes to replace the Fund’s current fundamental policy with respect to
underwriting securities offerings with the following new fundamental investment
policy:
“The Fund
may not act as an underwriter of securities, except that the Fund may acquire
restricted securities under circumstances in which, if such securities were
sold, the Fund might be deemed to be an underwriter for purposes of the
Securities Act of 1933, as amended.”
Discussion
of the Proposal:
The
proposed fundamental policy clarifies that the Fund is not prohibited from
acquiring “restricted securities” to the extent such investments are consistent
with the Fund’s investment objective, even if such investments may result in the
Fund being considered an underwriter under the federal securities
laws. Restricted securities are securities that have not been
registered under the Securities Act of 1933 (“Securities Act”) and are purchased
directly from the issuer or in the secondary market and may not be resold unless
registered under Securities Act or pursuant to an applicable exemption from such
registration. Restricted securities have historically been considered
a subset of illiquid securities (i.e., securities for which
there is no public market).
Because
it must maintain a certain amount of liquidity to meet redemption requests, the
Fund does not typically hold a significant amount of restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. The Fund has a non-fundamental policy,
which is consistent
with current SEC staff interpretations, restricting the Fund from maintaining
more than 15% of its net assets in illiquid securities. The proposed
policy would not affect this non-fundamental policy on investing in restricted
securities that are considered illiquid securities.
Proposal
2.C. Concentration
Current
Fundamental Policy:
The
Fund’s current fundamental policy with respect to concentrating investments in
an industry is as follows:
“The Fund
will not under normal circumstances invest less than 25% of its assets in a
single market sector. The market sectors in which the Fund invests
will change from time to time, but the Fund will not at any time invest more
than 25% of its assets in a single industry within that market
sector.”
Proposed
New Fundamental Policy:
The Fund
proposes to replace the Fund’s current fundamental policy with respect to
concentrating investments in an industry with the following new fundamental
investment policy:
“The Fund
may not concentrate investments in an industry, as concentration may be defined
under the 1940 Act or the rules and regulations thereunder (as such statute,
rules or regulations may be amended from time to time) or by guidance regarding,
interpretations of, or exemptive orders under, the 1940 Act or the rules or
regulations thereunder published by appropriate regulatory
authorities.”
Discussion
of the Proposal:
The 1940
Act does not define what constitutes “concentration” in an
industry. The SEC staff has, however, taken the position that
investments of more than 25% of a mutual fund’s total assets in one or more
issuers conducting their principal business activities in the same industry
(excluding the U.S. Government, its agencies or instrumentalities) constitutes
concentration.
Although
the Manager may manage the Fund so that it maintains a focused portfolio of
securities within a particular market sector, the proposed policy would limit
the extent to which the Fund could invest in securities of issuers in an
industry within that sector. The proposed policy would permit the
Fund to invest up to the prescribed limits under the 1940 Act and accompanying
SEC interpretations, as those limits are updated from time to time.
Proposal
2.D. Investments in Real
Estate
Current
Fundamental Policy:
The
Fund’s current fundamental policy with respect to investing in real estate is as
follows:
“The Fund
will not purchase or sell real estate, real estate loans or real estate
investment partnerships, although it may invest in marketable securities of
companies that invest in real estate or interests in real estate.”
Proposed
New Fundamental Policy:
The Fund
proposes to replace the Fund’s current fundamental policy with respect to
investing in real estate with the following new fundamental investment
policy:
“The Fund
may not purchase or sell real estate, except that it may dispose of real estate
acquired as a result of the ownership of securities or other instruments. This
restriction does not prohibit the Fund from investing in securities or other
instruments backed by real estate or in securities of companies engaged in the
real estate business.”
Discussion
of the Proposal:
Under its
current policy, the Fund may be restricted in its ability to sell real estate
even when ownership of the real estate results from a permissible investment of
the Fund. For instance, it is possible that the Fund could, as a
result of an investment in debt securities of a company that deals in real
estate, come to hold an interest in real estate in the event of a
default. The proposed policy would permit the Fund to sell real
estate when ownership of the real estate results from permissible
investments.
The
portion of the current policy limiting the Fund’s investment in real estate
limited partnerships was derived from state “blue sky” requirements that are no
longer applicable. The proposed policy would clarify that the Fund
may invest in securities or other instruments backed by real estate or in
securities of companies engaged in the real estate
business.
Proposal
2.E. Investments in
Commodities
Current
Fundamental Policy:
The
Fund’s current fundamental policy with respect to investing in commodities is as
follows:
“The Fund
will not invest in commodities, futures contracts or option
contracts.”
Proposed
Fundamental Policy:
The Fund
proposes to replace the Fund’s current fundamental policy with respect to
investing in commodities with the following new fundamental investment
policy:
“The Fund
may not purchase or sell commodities regulated by the Commodity Futures Trading
Commission under the Commodity Exchange Act or commodity contracts, except for
futures contracts and options on futures contracts.”
Discussion
of the Proposal:
The
proposed policy clarifies that the Fund may use commodity futures and options
thereon as well as option contracts. Options, futures contracts and
options on futures contracts are regularly used by many mutual funds and other
institutional investors and could, in the future, provide investment
opportunities for the Fund. At the present time, the Manager does not
intend to purchase such securities for the Fund, but believes that such
securities should be available to the extent permitted by statute, rule or
regulation.
Proposal
2.F. Loans
Current Fundamental
Policy:
The
Fund’s current fundamental policy with respect to lending money is as
follows:
“The Fund
will not lend money (but this restriction shall not prevent the Fund from
investing in debt securities or repurchase agreements, or lending its portfolio
securities).”
Proposed
Fundamental Policy:
The Fund
proposes to replace the Fund’s current fundamental policy with respect to
lending money with the following new fundamental investment policy:
“The Fund
may not make loans, except through (i) the purchase of debt obligations in
accordance with its investment objective and policies; (ii) the lending of
portfolio securities; (iii) the use of repurchase agreements; or (iv) the making
of loans to affiliated funds, each as permitted under the 1940 Act, the rules
and regulations thereunder (as such statutes, rules or regulations may be
amended from time to time), or by guidance regarding, and interpretations of, or
exemptive orders under, the 1940 Act.”
Discussion
of Proposal:
The
proposed policy clarifies that the Fund may enter into securities lending
arrangements and inter-fund lending arrangements to the extent permitted by the
1940 Act and the then-current SEC staff position. The SEC staff
currently limits loans of the Fund’s securities to one-third of the Fund’s
assets, including any collateral received from the loan, provided that loans are
100% collateralized by cash or cash equivalents.
The
proposed policy would automatically conform to the latest regulatory
requirements or SEC staff positions concerning loans by mutual
funds. The Fund would thereby avoid the need to solicit stockholder
approval of any future change to the policy designed to address the latest
regulatory requirement or SEC staff position concerning loans by mutual
funds.
Proposal
2.G. Limit on Number of Issuers
in Which the Fund Invests
Current Fundamental
Policy:
The
Fund’s current fundamental policy with respect to limiting the number of issuers
held in its portfolio is as follows:
“The Fund
will not invest in more than 25 issuers with respect to 75% of its
assets.”
Discussion of
Proposal:
The Fund
proposes to eliminate the current fundamental policy. Although the
Fund has complied with this policy since inception, the 1940 Act does not
require the Fund to have a fundamental policy with respect to
non-diversification, although it must be disclosed to
stockholders. The Fund is “non-diversified,” which means that it does
not meet the definition of “diversified” under the 1940 Act, and the Manager
intends to manage the Fund in accordance with this
classification. Having an arbitrary limit on the number of issuers
unnecessarily places limitations on the Fund and the Manager.
A
non-diversified mutual fund can become diversified if it operates as a
diversified fund for three years. Thereafter, the mutual fund cannot
change its classification status back to non-diversified without a stockholder
vote. It is the Fund’s intention to remain a non-diversified fund as
defined under the 1940 Act.
Proposal
2.H. Investments for the Purpose
of Management or Control
Current
Fundamental Policy:
The
Fund’s current fundamental policy with respect to investing for the purpose of
management or control of an issuer is as follows:
“The Fund
will not invest in companies for the purpose of management or the exercise of
control.”
Discussion
of Proposal:
The Fund
proposes to eliminate the current fundamental policy. The current
policy was designed to address state “blue sky” requirements that are no longer
applicable in light of NSMIA.
If this
Proposal were approved by stockholders, the Fund would have the ability to make
investments for the purpose of effecting the management or control of an issuer
and may, from time to time, make such investments, subject to applicable legal
restrictions with respect to such investments. The investment
flexibility permitted by the elimination of this policy would represent an
additional investment strategy available to the Manager in connection with its
management of the Fund.
Proposal
2.I. Acquisitions of More than
10% of the Outstanding Voting Securities of an Issuer
Current
Fundamental Policy:
The
Fund’s current fundamental policy with respect to acquiring more than 10% of the
outstanding voting securities of an issuer is as follows:
“The Fund
will not acquire securities of any one issuer that at the time of investment
represent more than 10% of the voting securities of the issuer.”
Discussion
of Proposal:
The Fund
proposes to eliminate the current fundamental policy. The current
policy was designed to address state “blue sky” requirements that are no longer
applicable in light of NSMIA. The Fund will, however, have to meet
certain periodic tests with respect to the amount of voting securities it can
acquire with respect to a portion of its portfolio in order to maintain its tax
status as a regulated investment company.
Proposal
2.J. Investments in Oil, Gas or
Other Mineral Exploration Programs
Current
Fundamental Policy:
The
Fund’s current fundamental policy with respect to investing in oil, gas or other
mineral exploration programs is as follows:
“The Fund
will not invest in oil, gas, or other mineral exploration or development
programs, although it may invest in marketable securities of companies engage in
oil, gas or mineral exploration.”
Discussion
of Proposal:
The Fund
proposes to eliminate the current fundamental policy. The current
policy was designed to address state “blue sky” requirements that are no longer
applicable in light of NSMIA.
The
Board unanimously recommends that you vote “FOR” each of the Proposals set forth
above (Proposal 2.A. through Proposal 2.J.).
Approval
of each of the Proposals set forth above (Proposal 2.A. through 2.J.) requires
the affirmative vote of the holders of a “majority of the outstanding voting
securities” of the Fund as defined in the 1940 Act, which means the lesser of
(i) 67% or more of the voting securities of the Fund present or represented by
proxy, if the holders of more than 50% of the outstanding voting securities are
present or represented by proxy, or (ii) more than 50% of the outstanding voting
securities of the Fund (“1940 Act Majority”).
If
the stockholders do not approve a Proposal regarding a fundamental investment
policy, the Fund’s current fundamental investment policy will remain the
same.
PROPOSAL
THREE
Management
Agreement
At the
Board Meeting, the Manager proposed that the Directors approve the Management
Agreement between the Company, on behalf of the Fund, and the
Manager. The Management Agreement, a copy of which is attached as
Appendix C,
combines the terms and fees of the existing Investment Advisory Agreement
between the Company, on behalf of the Fund, and the Manager and the existing
Operating Services Agreement between the Company, on behalf of the Fund, and the
Manager. As a result, adoption of the Management Agreement (i) would
result in an increase in the advisory fee payable by the Fund to the Manager
from an annual rate of 0.50% to an annual rate of 1.00%, based on average daily
net assets of the Fund and (ii) would incorporate the material terms of the
Operating Services Agreement. If stockholders approve the Proposal,
the Fund will terminate the Operating Services Agreement with the Manager and
eliminate the operating services fee at an annual rate of 0.50%, based on the
average daily net assets of the Fund, payable under that
Agreement. The
combination of the terms and fees of the existing Investment Advisory Agreement
and the Operating Services Agreement, resulting in the Management Agreement,
will not result in an increase to the overall fee amount payable by the Fund to
the Manager.
Based on
the information it received at the Board Meeting, the Board considered and
approved the Management Agreement, subject to its further approval by the Fund’s
stockholders. Please see “Board Considerations Regarding the
Management Agreement” for a discussion of the Board’s consideration in making
its recommendation.
Description of the Terms of
the Existing Investment Advisory Agreement and the Operating Services
Agreement
Under the
terms of the existing Investment Advisory Agreement, dated October 15, 1999 and
last submitted to, and approved by, stockholders on December 15, 1999, the
Manager serves as the investment adviser
and makes the investment decisions for the Fund and continuously reviews,
supervises and administers the Fund’s investment program subject to the
supervision of, and policies established by, the Directors. Under the
Investment Advisory Agreement, the Fund pays an advisory fee to the Manager at
an annual rate equal to 0.50% of the daily average net assets of the
Fund. The continuance of the Investment Advisory Agreement was most
recently considered and approved by the Board, in accordance with the
requirements of Section 15(c) of the 1940 Act, at its meeting on October 24,
2007.
In
addition to providing investment advisory services to the Fund, the Manager,
under the Operating Services Agreement, as amended through January 22, 2007,
manages, or arranges to manage, all other business affairs of the Fund,
including, but not limited to: (i) accounting services and functions, including
costs and expenses of any independent public accountants; (ii) non-litigation
related legal and compliance services, including the expenses of maintaining
registration and qualification of the Fund under federal state and any other
applicable laws and regulations; (iii) dividend disbursing agent, dividend
reinvestment agent, transfer agent, and registrar services and functions
(including answering inquiries related to stockholder accounts); (iv) custodian
and depository services and functions; (v) distribution, marketing, and/or
underwriting services; (vi) independent pricing services; (vii) preparation of
reports describing the operations of the Fund; (viii) sub-accounting and
recordkeeping services and functions; (ix) stockholder and board of directors
communication services and other communications to the Fund’s stockholders; (x)
other day-to-day administrative services and premiums for the fidelity bond
maintained by the Fund; and (xi) a call center in order to respond to
information and transaction requests from existing and potential stockholders of
the Fund (collectively, the “Operating Services”). The Manager, on
behalf of the Fund, has engaged various service providers, including U.S.
Bancorp Fund Services, LLC and Quasar Distributors, LLC, to provide many of the
foregoing Operating Services to the Fund and compensates those service providers
from the compensation it receives from the Fund under the Operating Services
Agreement.
Comparison of Current Fees
and Management Fee
The
Current Fees
The
Manager receives an advisory fee from the Fund pursuant to the Investment
Advisory Agreement at an annual rate of 0.50%, based on the average daily net
assets of the Fund (the “Advisory Fee”). For the most recent fiscal
year ended November 30, 2007, the Fund paid $25,972,441 in advisory fees to the
Manager. The Manager also receives an operating services fee from the
Fund pursuant to the Operating Services Agreement at an annual rate equal to
0.50% of the daily average net assets of the Fund (the “Operating Services
Fee”). For the most recent fiscal year ended November 30, 2007, the
Fund paid $25,972,441 to the Manager for its provision and oversight of
operational services to the Fund. Total fees of $51,944,882 were paid
to the Manager.
The
Management Fee
The
Manager will receive a management fee from the Fund pursuant to the Management
Agreement at an annual rate of 1.00% of the Fund’s average daily net assets (the
“Management Fee”). If the Management Fee had been in effect for the
most recent fiscal year ended November 30, 2007, the Fund would have paid
$51,944,882 to the Manager. Although the Management Fee would have
represented an increase of 100% in the Advisory Fee, such increase would have
been offset by the corresponding decrease of 100% in the Operating Services
Fee. If the Management Fee were in effect, the Operating Services
Agreement would have been terminated and the Fund would not have been obligated
to pay the Operating Services Fee to the Manager.
Description of the Terms of
the Management Agreement
The
Manager explained to the Board that, in addition to the Management Fee, the
Management Agreement incorporates the material terms of the Operating Services
Agreement. The Manager explained that, under the Management
Agreement, the Manager will remain responsible for providing, or arranging to
provide, each of the Operating Services.
Pro Forma Fee Table and
Expense Examples
The
following pro forma fee table and expense examples illustrate the impact of the
Management Fee on the Fund’s annual operating expenses. The fee table
and expense examples are designed to assist stockholders in evaluating the
Proposal. The table below compares the Fund’s operating expenses,
including the Advisory Fee and Operating Services Fee currently in place, for
the fiscal year ended November 30, 2007 to the Fund’s hypothetical operating
expenses for the same period assuming the Management Fee had been in
place.
|
|
|
|
With
Advisory Fee and Operating Services Fee
|
|
|
Advisory
Fee and Operating Services Fee/Management Fee
|
1.00%
|
1.00%
|
|
Distribution (12b-1) Fees
|
0.00%
|
0.00%
|
|
Other Expenses
|
0.00%
|
0.00%
|
|
Acquired Fund Fees and Expenses
|
0.01%
|
0.01%
|
|
Total Annual Fund Operating Expenses
|
1.01%
|
1.01%
|
The
following expense examples are intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual
funds. They assume that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. They also assume that your investment has a 5% return each year, that
the Fund’s operating expenses stay the same and that all dividends and
distributions are reinvested.
|
|
|
|
With
Advisory Fee and Operating Services Fee
|
|
|
After 1 Year
|
$ 103
|
$ 103
|
|
After 3 Years
|
$ 322
|
$ 322
|
|
After 5 Years
|
$ 558
|
$ 558
|
|
After 10 Years
|
$1,236
|
$1,236
|
As shown
in the fee tables and expense examples above, approval of the proposed Management
Agreement will not result in an increase to the total expenses of the Fund
because the increase to the Advisory Fee will be offset by an equivalent
decrease to the Operating Services Fee paid by the Fund under the Operating
Services Agreement.
Board Considerations
Regarding the Management Agreement
In March
2008, the Manager informed the Board that the Manager intended to request that
the Board consider and approve the Management Fee payable to the Manager
pursuant to the Management Agreement, which would incorporate the terms and fees
of the existing Investment Advisory Agreement and Operating Services Agreement.
To assist in its consideration of the Management Agreement, the Board requested
and received from the Manager, various written materials providing detailed
information about: (a) changes to the
Investment Advisory Agreement, which related to the services to be performed by
the Manager under the Management Agreement, and a general description of the
services to be performed for the Fund by the Manager pursuant to the Management
Agreement; (b) the level and structure of the investment management fee to be
paid by the Fund to the Manager under the Management Agreement; (c) the
Manager’s investment management personnel involved in the day-to-day investment
operations of the Fund; (d) the Fund’s historical investment performance
resulting from the Manager’s management of the Fund; (e) the Manager’s
operations and financial condition, as well as its profitability associated with
its management of the Fund; (f) the Manager’s brokerage practices (including any
soft dollar arrangements) and investment strategies; and (g) the Manager’s
comprehensive compliance program and the qualifications of its chief compliance
officer and compliance staff.
After
receiving and reviewing these materials, the Board discussed the Management
Agreement and the Manager’s proposal to increase the fee payable by the Fund to
the Manager under the Management Agreement. Representatives from the
Manager attended the Board Meeting and presented additional oral and written
information to the Board to assist the Board in its considerations.
The Board
then deliberated on the proposal, including the increase to the investment
advisory fee from the Current Fee to the Management Fee. The
Independent Directors met in executive session to discuss the Management
Agreement and the Management Fee. After such deliberations, the
Board, including a majority of the Independent Directors, unanimously determined
that it would be in the best interests of the Fund and its stockholders to
approve the Management Agreement and the increase to the fee payable by the Fund
to the Manager under the Management Agreement.
In
determining whether to approve the Management Agreement and to recommend its
approval to stockholders, the Board considered the following factors, in
addition to all other information it deemed relevant.
A. Nature
and Quality of Services Provided
The
Directors considered information provided by the Manager concerning the changes
to the Investment Advisory Agreement relating to the services to be performed
for the Fund by the Manager pursuant to the Management Agreement and information
concerning the nature, extent and quality of investment advisory and other
operational services to be provided, or overseen, by the Manager. The
Directors reviewed the information concerning the personnel responsible for the
day-to-day management of the Fund, the Manager’s research capability and overall
reputation and the Manager’s planned staffing levels. They considered
the Manager’s addition of new personnel and assurances from the Manager that it
would continue to have the expertise and resources necessary to provide the
advisory and administrative services required by the Fund. They also
considered the Manager’s commitment to the Fund as evidenced by the share
ownership in the Fund by the management/owners of the Manager.
The
Directors considered the Manager’s compliance policies and procedures, which
include policies designed to ensure the Fund’s compliance with its investment
objective, policies and restrictions and other laws and regulatory requirements
applicable to the Fund and to address the Manager’s conflicts of interest in
providing services to the Fund and to other advisory clients, including the
Manager’s allocation policies.
The
Directors did not compare the services provided by the Manager to the Fund with
the services provided by Manager to its other advisory accounts. They determined
not to compare these services because the services provided by the Manager to
its other advisory accounts are materially different from the services provided
by the Manager to the Fund. They noted that the services differ because the
Manager’s other advisory accounts have different investment strategies, can
invest in certain instruments to a greater extent than the Fund and require
different investor services.
Based on
this review, the Board concluded that the range and quality of services provided
by the Manager to the Fund were appropriate and were expected to continue under
the Management Agreement.
B. Investment
Performance
The
Directors considered information comparing the investment performance of the
Fund with the investment performance of its comparative index and other
similarly situated mutual funds. They reviewed information concerning the
securities held by the Fund that appreciated or depreciated by more than $25
million over the period beginning January 1, 2007 and ended December 31,
2007.
The
Directors considered that the Fund had outperformed its relevant index from
commencement of the 2007 fiscal year through November 30, 2007 by 6.86%. They
noted that since inception through November 30, 2007, the Fund had a cumulative
return of 261.17% compared to a cumulative return of 14.55% for the S&P 500
Index over the same period. The Directors noted that Morningstar Investments
(“Morningstar”), a mutual fund information clearinghouse, ranks the Fund as a
five-star fund in its large-cap blend category.
The
Directors reviewed information comparing the Fund’s performance with the
performance of similarly situated mutual funds selected by the Manager. They
noted that the Fund’s annualized returns of -3.61% from January 1, 2008 to March
11, 2008 and of 11.79% and 19.25% over the 3-year and 5-year periods,
respectively, were comparable to the average returns of the selected funds of
-9.77% from January 1, 2008 to March 11, 2008 and of 4.59% and 12.65% over
the 3-year and 5-year periods, respectively.
Based
upon these factors, the Directors concluded that the Manager had achieved
excellent performance and management results for the Fund for the reviewed
periods.
C. Management
Fee and Fund Expense Ratio
The
Directors considered information concerning the Management Fee and its effect on
the Fund’s overall expense ratio as well as information comparing the Management
Fee and the pro forma expense ratio of the Fund to the advisory fees and expense
ratios of other similarly situated mutual funds. The Directors noted
that the Management Fee would cover all expenses of the Fund, except certain
expenses such as brokerage commissions, acquired fund expenses and extraordinary
expenses. The Directors noted the Management Fee is comparable to the advisory
fees of the similarly situated mutual funds selected by the Manager and that the
Fund’s pro forma total annual expense ratio of 1.00% is comparable to the
average expense ratio (as calculated by Morningstar) of the low cost five-star
mutual funds included in materials and to the average expense ratio of the
similarly situated mutual funds selected by the Manager. They noted
that the low cost five-star mutual funds consisted of approximately 160 mutual
funds and excluded index funds and sector funds.
In
evaluating the Management Fee, the Directors took into account the demands,
complexity, and quality of the investment management of the Fund. The
Directors also considered information concerning the fees paid
by the Manager to the Fund’s service providers, such as the custodian, transfer
agent, administrator and fund accountant. They also considered
information regarding the Manager’s payment from its resources of certain
expenses for the benefit of Fund, including distribution expenses and
account-level expenses associated with certain omnibus accounts.
The
Directors did not compare the fees charged by the Manager to the Fund with the
fees charged by the Manager to its other advisory accounts. They determined not
to compare these fees because the services provided by the Manager to its other
advisory accounts are materially different from the services provided by the
Manager to the Fund. Although the Directors did not compare the fees charged by
the Manager to its other advisory accounts with the fees charged by the Manager
to the Fund, the Directors were advised that the total fees charged by the
Manager to the Fund were generally lower than the fees charged by the Manager to
its other advisory accounts.
After
considering the Management Fee and the Fund’s pro forma expense ratio relative
to the advisory fees and expense ratios of other similarly-situated mutual
funds, the Directors determined that the Management Fee was reasonable in light
of the investment advisory and operational services provided by or through the
Manager and the fees charged by other advisers to similar funds offering similar
services.
D. Profitability
The
Directors considered information regarding the Manager’s profitability in
connection with its receipt from the Fund of the Current Fee, including the
Operating Services Fee, and any differences due to the Management Fee. The
Directors noted that the information provided to them was estimated by the
Manager. They considered the Manager’s past profitability in light the Fund’s
overall expense ratio and performance and the services provided by or through
the Manager and concluded that the Manager’s profitability was not such as to
prevent them from approving the Management Agreement.
E. Economies
of Scale
The
Directors considered information concerning economies of scale and whether the
Management Fee might require adjustment in light of economies of scale. The
Directors reviewed the Fund’s increase in asset size resulting from both
appreciation and new stockholder accounts and determined that no modification of
the Management Fee was necessary in light of the fact that the Fund’s pro forma
expense ratio was less than or comparable to its peers and below the expense
ratio of the average actively-managed equity mutual fund.
F. Other
Items
The
Directors also considered the Manager’s agreement to bear one-half of the costs
and expenses associated with soliciting stockholders for their approval of the
Proposals included in the proxy statement, and the Board’s conclusion that it
was appropriate for the Manager to bear a portion of those costs and
expenses.
The
Directors also took into consideration the fact that the Fund terminated its
Rule 12b-1 Plan. They noted that, as a result of such termination,
the Fund would be required to present stockholders with a new Rule 12b-1 plan
and obtain their approval of the plan prior to the Fund compensating any person
for distribution services.
G. Conclusion
In
evaluating the aforementioned considerations, the Directors did not identify any
single factor as all-important or controlling in its evaluation of the
Management Agreement. In light of the Manager’s provision of advisory,
administrative and other services, the Fund’s performance, and the
reasonableness of the Fund’s overall expenses compared to its peers, the Board
of Directors, including all of the Independent Directors, concluded that the
Management Fee to be paid by the Fund to the Manager under the Management
Agreement was reasonable and in the best interests of the Fund and its
stockholders.
Certain Information about
the Manager
Membership
interests in the Manager are held by Bruce R. Berkowitz, Gables Investment
Partnership, LLLP and East Lane, LLC. The address for each of the
foregoing is 4400 Biscayne Blvd., 9th Floor, Miami, FL 33137. Mr.
Berkowitz controls Gables Investment Partnership, LLLP and East Lane,
LLC. He is the managing member of Gables Investment GP, LLC, the
general partner of Gables Investment Partnership, LLLP, and the sole limited
partner of Gables Investment Partnership, LLLP. The address of Gable
Investment GP, LLC is also 4400 Biscayne Blvd., 9th Floor, Miami, FL
33137. He is also the managing member of East Lane, LLC.
The
following chart sets forth information with respect to the name and principal
occupations of the managing member and executive officers of the
Manager. The address for each person is 4400 Biscayne Blvd., 9th
Floor, Miami, FL 33137. Mr. Berkowitz is also the President and a
Director of the Company. Mr. Keith D. Trauner is also a Director of
the Company.
|
|
Position
with the Manager and Principal Occupation
|
|
Bruce
R. Berkowitz
|
See
biography above (on page __).
|
|
Charles
Fernandez
|
See
biography below (on page __).
|
|
Paul
Thomson
|
See
biography below (on page __).
|
|
Keith
D. Trauner
|
See
biography above (on page __).
|
The
Board unanimously recommends that you vote “FOR” Proposal Three.
Approval
of Proposal Three requires the affirmative vote of the holders of a “majority of
the outstanding voting securities” of the Fund as defined in the 1940 Act, which
means the lesser of (i) 67% or more of the voting securities of the Fund present
or represented by proxy, if the holders of more than 50% of the outstanding
voting securities are present or represented by proxy, or (ii) more than 50% of
the outstanding voting securities of the Fund (“1940 Act
Majority”).
If
the stockholders do not approve the Proposal, the Investment Advisory Agreement
and the Operating Services Agreement will remain in effect.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Audit
Committee is responsible for the appointment, compensation, retention and
oversight of the work of the Fund’s independent registered public accounting
firm. At a meeting held on January 22, 2008, the Board by the vote,
cast in person, of a majority of the Directors, including a majority of the
Directors who are not “interested persons” of the Fund, approved Deloitte &
Touche LLP, independent registered public accounting firm (“Deloitte”), to audit
the Fund’s accounts for the fiscal year ending November 30, 2008.
Deloitte
has audited the Fund’s accounts for its last two fiscal years, and has
represented that it does not have any direct financial interest or any material
indirect financial interest in the Fund. Representatives of Deloitte
will be available at the Meeting to make a statement if they desire to do so and
to respond to appropriate questions from the stockholders.
The
following table sets forth the aggregate fees billed by Deloitte for the Fund’s
last two fiscal years for professional services rendered for: (i) the audit of
the Fund’s annual financial statements included in the Fund’s annual report(s)
to stockholders; (ii) assurance and related services that are reasonably related
to the performance of the audit of the Fund’s financial statements and are not
reported under (i); (iii) tax compliance, tax advice and tax return preparation;
and (iv) aggregate non-audit services provided to the Fund, the Manager and
entities that control, are controlled by or under common control with the
Manager that provide ongoing services to the Fund (“Service
Affiliates”).
|
|
|
Audit
|
Tax
|
All
Other Fees for Services Provided
|
All
Fees for Non-Audit Services Provided to the Fund, Manager and
|
|
2006
|
$41,340
|
$0
|
$7,500
|
$0
|
$0
|
|
2007
|
$43,917
|
$0
|
$7,875
|
$0
|
$0
|
The Audit
Committee policies and procedures require the pre-approval of all audit and
non-audit services provided to the Fund by the independent registered public
accounting firm. The Audit Committee policies and procedures also
require pre-approval of all audit and non-audit services provided to the Manager
and Service Affiliates to the extent that these services are directly related to
the operations or financial reporting of the Fund. All of the amounts
for Audit Fees, Audit-Related Fees and Tax Fees in the preceding table are for
services pre-approved by the Audit Committee. No Non-Audit Services
were provided to the Fund, the Manager and Service Affiliates for
2007. The Audit Committee policies and procedures require the Audit
Committee to consider whether a provision of any non-audit services not
pre-approved by the Audit Committee provided by the Fund’s independent
registered public accounting firm to the Manager and Service Affiliates is
compatible with maintaining the independent registered public accounting firm’s
independence.
PROXY
VOTING AND STOCKHOLDER MEETINGS
All
properly executed and timely received proxies will be voted in accordance with
the instructions marked thereon or otherwise provided
therein. Accordingly, unless instructions to the contrary are marked,
proxies will be voted (i) FOR the election of each of the nominees as a Director
(Proposal One),
(ii) FOR the replacement or elimination of certain of the Fund’s fundamental
investment restrictions (Proposal Two (2.A. -
2.J.)), and (iii) FOR the Management Agreement, which reflects an increase to
the current investment advisory fee paid by the Fund to the Manager (Proposal
Three). Any stockholder may revoke his or her proxy at any
time prior to its exercise by giving written notice to the Secretary of the
Company at 4400 Biscayne Blvd., 9th Floor,
Miami, FL 33137, by signing and submitting another proxy of a later date, or by
personally voting at the Meeting.
Properly
executed proxies may be returned with instructions to abstain from voting or to
withhold authority to vote (an “abstention”) or represent a broker “non-vote”
(which is a proxy from a broker or nominee indicating that the broker or nominee
has not received instructions from the beneficial owner or other person entitled
to vote shares on a particular matter with respect to which the broker or
nominee does not have discretionary power to vote).
The
approval of Proposal One requires the vote of a majority of the total votes cast
at the Meeting, assuming a quorum is present. For purposes of the
election of Directors, abstentions will not be counted as votes cast and will
have no effect on the result of the vote, although they will be considered
present for the purpose of determining the presence of a quorum. The
approval of Proposal Two and Proposal Three requires the affirmative vote of the
holders of a “majority of the outstanding voting securities” of the Fund, as
defined in the 1940 Act, which means the lesser of (i) 67% or more of the voting
securities of the Fund present or represented by proxy, if the holders of more
than 50% of the Fund’s outstanding voting securities are present or represented
by proxy, or (ii) more than 50% of the outstanding voting securities of the
Fund. For purposes of Proposal Two and Proposal Three, abstentions
and broker non-votes will have the effect of votes against the proposal,
although they will be considered present for purposes of determining the
presence of a quorum. If any matter other than the Proposals properly
comes before the Meeting, the shares represented by proxies will be voted on all
such other Proposals in the discretion of the person or persons voting the
proxies. The Fund has not received notice of, and is not otherwise
aware of, any other matter to be presented at the Meeting.
A quorum
for the Meeting will consist of the presence in person or by proxy of the
holders of record of one third (1/3RD) of the
outstanding shares entitled to vote at the Meeting. Whether or not a
quorum is present at the Meeting, if sufficient votes in favor of the position
recommended by the Board on any Proposal described in the Proxy Statement are
not timely received, any officer of the Fund present entitled to preside or act
as Secretary of the Meeting may, but is under no obligation to, with no other
notice than announcement at the Meeting, propose and vote for one or more
adjournments of the Meeting for up to 120 days after the Record Date to permit
further solicitation of proxies. The Meeting may be adjourned with
respect to fewer than all the Proposals in the Proxy Statement and a stockholder
vote may be taken on any one or more of the Proposals prior to any adjournment
if sufficient votes have been received for approval thereof. Shares
represented by proxies indicating a vote contrary to the position recommended by
a majority of the Board on a Proposal will be voted against adjournment as to
that Proposal.
The
Company has engaged The Altman Group, Inc. (the “Proxy Solicitor”), 60 East 42nd
Street, Suite 405, New York, New York 10165, to assist in soliciting proxies for
the Meeting. It is estimated that the Proxy Solicitor will receive a
management fee of $7,500 for its services, to be paid by the Manager and the
Company, plus reimbursement of additional proxy soliciation
expenses.
OTHER
INFORMATION
Officer
Information
Certain
information concerning the Company’s officers is set forth below. The
Company’s officers are elected by the Board and serve for a term of one year and
until his or her successor is duly elected and qualifies. The
earliest date for which an officer was elected to serve in that capacity is
presented below.
|
|
Position(s);
Year Elected
|
Principal
Occupation during the past five years
|
|
Bruce
R. Berkowitz;
49
|
President;
since the Company’s inception.
|
See
biography above (on page __).
|
|
Paul
R. Thomson;
51
|
Treasurer;
since January 2008
|
Various
positions, Managing Director and Chief Financial Officer of
Colliers-Seeley, Inc., a full service real estate brokerage firm,
2004-2007. Vice-President, Chief Financial Officer and Treasurer of Big
City Radio, Inc., a publicly traded owner and developer of radio stations,
since prior to 2003.
|
|
|
|
|
|
Charles
M. Fernandez;
46
|
Secretary;
since January 2008
|
President
of Lakeview Health Systems LLC, a privately-held healthcare company,
2003-2007. From 1999 to 2003, CEO of Big City Radio, Inc. From
1997 to 2003, held various positions with IVAX Corporation, a
publicly-traded manufacturer of generic drugs, serving most recently as a
Director and Chairman of the Audit Committee of the Board of
Directors.
|
|
|
|
|
|
Larry
S. Pitkowsky;
43
|
Vice
President;
since
March 2008
|
Chief
Executive Officer of FCM Services, Inc., an affiliate of the
Manager. Prior thereto, a member of the Fund’s portfolio
management team and a senior member of the Manager since prior to
2003.
|
|
|
|
|
|
Kathryn
Battistella;
35
|
Chief
Compliance Officer;
since
May 2006
|
Chief
Compliance Officer of the Company and employee of the Manager since May
2006. Prior thereto, Assistant Vice President – Relationship
Officer of Citigroup – Private Bank from August 2002 to
2006.
|
* The
address for each of the officers is 4400 Biscayne Blvd., 9th Floor,
Miami, FL 33137.
Stock
Ownership
Information
regarding person(s) who owned of record or were known by the Fund to
beneficially own 5% or more of the Fund’s shares on March __, 2008 is provided
in Appendix
D.
Information
About the Fund’s Manager and Administrator
As
discussed above, the Fund’s investment adviser is Fairholme Capital Management,
L.L.C., 4400 Biscayne Blvd., 9th Floor,
Miami, FL 33137. The Fund’s administrator is U.S. Bancorp Fund
Services, LLC (“USBFS”), P.O. Box 701, Milwaukee, WI 53201. USBFS
oversees the day-to-day administration and operations of the Fund and provides
transfer agency and related stockholder administrative services. The
Fund’s distributor is Quasar Distributors, LLC, an affiliate of USBFS, 615 East
Michigan Street, Milwaukee, WI 53202.
Submission
of Proposals for Next Meeting of Stockholders
The
Company does not hold stockholder meetings annually. Any stockholder
who wishes to submit a Proposal to be considered at the Company’s next meeting
of stockholders should send the Proposal to the Company so as to be received
within a reasonable time before the Board makes the solicitation relating to
such
meeting, in order to be included in the Company’s proxy statement and form of
proxy card relating to such meeting.
Other
Matters
The
Company’s management does not know of any matters properly to be presented at
the Meeting other than those mentioned in this Proxy Statement. If
any other matters properly come before the Meeting, the shares represented by
proxies will be voted with respect thereto in the discretion of the person or
persons voting the proxies.
Reports
to Stockholders
The
Company will furnish each person to whom this Proxy Statement is delivered with
a copy of its latest annual report to stockholders and its subsequent
semi-annual report to stockholders, if any, upon request and without
charge. To request a copy, please call Fund Shareholder Servicing
toll free at 1-866-202-2263, by writing to: Fairholme Funds, Inc., c/o U.S.
Bancorp Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201, or by downloading
from the Fund’s website: www.fairholmefunds.com.
By Order
of the Board of Directors,
Bruce R.
Berkowitz
President
APPENDIX
A
ADDITIONAL
INFORMATION REGARDING NOMINEES
Ownership of the Fund’s
Shares
The
dollar range of the Fund’s shares owned by each Director or nominee and the
aggregate dollar range of securities owned in the “family of investment
companies” are set forth below.
|
|
Dollar
Range of the Ownership of the Fund’s Shares as of December 31,
2007
|
Aggregate
Dollar Range in all Funds Overseen by Director or Nominee In Family of
Investment Companies as of
|
|
Interested
Director Nominee
|
|
|
|
Cesar
L. Alvarez+
|
None
|
None
|
|
Bruce
R. Berkowitz*
|
Over
$100,000
|
Over
$100,000
|
|
Keith
D. Trauner*
|
Over
$100,000
|
Over
$100,000
|
|
Independent
Director Nominee
|
|
|
|
Terry
L. Baxter+
|
None
|
None
|
|
Avivith
Oppenheim*
|
Over
$100,000
|
Over
$100,000
|
|
Leigh
Walters*
|
Over
$100,000
|
Over
$100,000
|
|
Howard
S. Frank*
|
Over
$100,000
|
Over
$100,000
|
+ Nominee.
* Nominee
and existing Director.
Compensation From the
Fund
During
the fiscal year ended 2007, each Director who is not an “interested person” of
the Fund (i.e., an
“Independent Director”) received an annual retainer of $30,000 with an
additional $7,500 paid to the Chairman of the Audit
Committee. Effective January 2008, the Board, upon the recommendation
of management, taking into account the Fund’s growth and increased oversight
requirements due to such growth, voted to increase (i) the annual retainer paid
to Independent Directors to $60,000 and (ii) the annual compensation of the
Chairman of the Audit Committee to $15,000. All Directors are
permitted reimbursement for any out-of-pocket expenses incurred in connection
with attendance at meetings. Pursuant to its obligations to the
Company under the Operating Services Agreement, the Manager is responsible for
paying compensation, if any, to each of the Company’s Independent
Directors. The table below sets forth the compensation paid to
Directors for the Fund’s fiscal year ended November 30, 2007:
The Fund
does not pay any fees or compensation to its officers or Interested Directors,
but the Independent Directors each receive compensation from the Fund as
described above. In addition, the Fund reimburses its Independent
Directors for reasonable travel or incidental expenses incurred by them in
connection with their attendance at Board meetings. The Fund offers
no retirement plan or other benefits to its Directors.
The
aggregate compensation paid by the Fund to the Directors during the Fund’s
fiscal year ended in 2007, is set forth below.
|
|
AGGREGATE
COMPENSATION FROM THE FUND
|
PENSION
OR RETIREMENT BENEFITS ACCRUED AS
PART
OF
|
ESTIMATED
ANNUAL BENEFITS UPON RETIREMENT
|
TOTAL
COMPENSATION PAID TO DIRECTOR
|
|
|
|
|
|
|
|
Bruce
R. Berkowitz
|
$-0-
|
$-0-
|
$-0-
|
$-0-
|
|
Keith
D. Trauner
|
$-0-
|
$-0-
|
$-0-
|
$-0-
|
|
Joel
Uchenick
|
$18,750
|
$-0-
|
$-0-
|
$18,750
|
|
Avivith
Oppenheim
|
$32,976
|
$-0-
|
$-0-
|
$32,976
|
|
Leigh
Walters
|
$32,521
|
$-0-
|
$-0-
|
$32,521
|
|
Howard
S. Frank
|
$26,250
|
$-0-
|
$-0-
|
$26,250
|
APPENDIX
B
FAIRHOLME
FUNDS, INC.
NOMINATING
AND CORPORATE GOVERNANCE COMMITTEE CHARTER
Nominating
and Corporate Governance Committee Membership
The
Nominating and Corporate Governance Committee of the Fairholme Funds, Inc. (the
“Corporation”) shall be composed of all of the Independent Directors of the
Corporation. Management, while not having representatives on the
Committee, will nonetheless be expected to have a role in the nominating process
by identifying and recommending potential candidates to the Committee for
consideration. The Board of Directors (“Board”) may remove or replace
any member of the Committee at any time in its sole discretion. The
members of the Committee will select from their number a
chairperson.
Board
Nominations and Functions
1. The
Committee shall recommend nominees to the Board for election to the
Board. The Committee shall evaluate each candidate’s qualifications
for Board membership and with respect to Independent Director nominees, the
Committee shall evaluate each such nominee’s independence from the investment
adviser, affiliates of the adviser and other principal service
providers. In determining a nominee’s qualifications for Board
membership, the Committee may take into account a wide variety of factors (with
no one factor being controlling) in considering candidates for membership on the
Board, including (but not limited to): (i) the candidate’s knowledge
in matters relating to the investment company industry; (ii) any experience
possessed by the candidate as a director/trustee or senior officer of other
public companies; (iii) the candidate’s educational background; (iv) the
candidate’s reputation for high ethical standards and personal and professional
integrity; (v) any specific financial, technical or other expertise possessed by
the candidate, and the extent to which such expertise would complement the
Board’s existing mix of skills and qualifications; (vi) the candidate’s
perceived ability to contribute to the on-going functions of the Board,
including the candidate’s ability and commitment to attend meetings regularly,
work collaboratively with other members of the Board and carry out his or her
duties in the best interests of the Corporation; and (vii) such other factors as
the Committee determines to be relevant in light of the existing composition of
the Board and any anticipated vacancies or other
factors. Additionally, with respect to evaluating candidates to serve
as an independent member, the Board shall consider the candidate’s ability to
qualify as an Independent Director for purposes of the Investment Company Act of
1940 and any other standards of independence that may be relevant to the
Corporation.
2. The
Committee shall periodically review the composition of the Board to determine
whether it may be appropriate to add individuals with different backgrounds or
skills from those already serving on the Board.
3. It
is currently the policy of the Committee not to consider nominees recommended by
stockholders as candidates for Board membership. The Committee will
periodically reevaluate the merits of this policy.
Corporate
Governance Oversight and Functions
1. The
Committee shall oversee the Corporation’s policies and procedures regarding
compliance with corporate governance policies.
2. The
Committee shall periodically review the Board governance procedures with respect
to the Corporation and shall recommend any appropriate changes to the
Board.
3. The
Committee shall have the resources and authority appropriate to discharge its
responsibilities, including authority to select, retain, terminate and approve
the fees and other retention terms of special counsel or other experts or
consultants, as it deems appropriate, without seeking approval of the Board or
management of the Corporation.
APPENDIX
C
FAIRHOLME
FUNDS, INC.
INVESTMENT
MANAGEMENT AGREEMENT
This
Agreement is made and entered into as of the ___ of May, 2008, by and between
Fairholme Funds, Inc., a Maryland corporation (the “Fund”), and Fairholme
Capital Management, L.L.C., a Delaware limited liability company
(“Manager”).
WHEREAS,
the Fund is an open-end management investment company, registered under the
Investment Company Act of 1940, as amended (the “Act”), and is authorized to
issue shares representing interests in the following series:
The
Fairholme Fund (the “Portfolio”); and
WHEREAS,
Manager is registered as an investment adviser under the Investment Advisers Act
of 1940 and engages in the business of asset management; and
WHEREAS,
the Fund desires to retain Manager to render certain investment management
services to the Fund and Manager is willing to render such
services;
NOW
THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
1. OBLIGATIONS
OF MANAGER
(A) INVESTMENT
ADVISORY SERVICES. Manager agrees to perform the following investment advisory
services (the “Investment Advisory Services”) for the Fund:
|
|
(1)
|
manage
the investment and reinvestment of the Portfolio's
assets;
|
|
|
(2)
|
continuously
review, supervise, and administer the investment program of the
Portfolio;
|
|
|
(3)
|
determine,
in its discretion, the securities to be purchased, retained or sold (and
implement those decisions);
|
|
|
(4)
|
maintain
books and records with respect to Manager's activities for the Fund,
including the Fund’s securities transactions, which the Fund is required
to maintain; and
|
|
|
(5)
|
render
regular reports to the Fund's officers and directors concerning Manager's
discharge of the foregoing
responsibilities.
|
Manager
shall discharge the foregoing responsibilities subject to the general
supervision and control of the officers and the directors of the Fund and in
compliance with such policies as the directors may from time to time establish,
and in compliance with the objectives, policies, and limitations of the
Portfolio set forth in the Fund's prospectus and statement of additional
information, as amended from time to time, and with all applicable laws and
regulations. All Investment Advisory Services to be furnished by Manager under
this Agreement may be furnished through the medium of any directors, officers or
employees of Manager or through such other parties as Manager may determine from
time to time.
(B) OPERATING
SERVICES. The Fund hereby retains Manager to provide, or, upon receipt of
written approval of the Fund arrange for other companies to provide, the
following services to the Portfolio in the manner and to the extent that such
services are reasonably necessary for the operation of the Portfolio
(collectively, the “Operating Services” and together with Investment Advisory
Services, the “Services”):
|
|
(1)
|
accounting
services and functions, including costs and expenses of any independent
public accountants;
|
|
|
(2)
|
non-litigation
related legal and compliance services, including the expenses of
maintaining registration and qualification of the Fund and the Portfolio
under federal, state and any other applicable laws and
regulations;
|
|
|
(3)
|
dividend
disbursing agent, dividend reinvestment agent, transfer agent, and
registrar services and functions (including answering inquiries related to
stockholder Portfolio accounts);
|
|
|
(4)
|
custodian
and depository services and
functions;
|
|
|
(5)
|
distribution,
marketing, and/or underwriting
services;
|
|
|
(6)
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independent
pricing services;
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(7)
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preparation
of reports describing the operations of the Portfolio, including the costs
of providing such reports to broker-dealers, financial institutions and
other organizations which render services and assistance in connection
with the distribution of shares of the
Portfolio;
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(8)
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sub-accounting
and recordkeeping services and functions (other than those books and
records required to be maintained by Manager under Paragraph 1(A) above,
including maintenance of stockholder records and stockholder information
concerning the status of their Portfolio accounts by investment advisors,
broker-dealers, financial institutions, and other organizations on behalf
of Manager;
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(9)
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stockholder
and board of directors communication services, including the costs of
preparing, printing and distributing notices of stockholders’ meetings,
proxy statements, prospectuses, statements of additional information,
Portfolio reports, and other communications to the Fund’s Portfolio
stockholders, as well as all expenses of stockholders’ and board of
directors’ meetings, including the compensation and reimbursable expenses
of the directors of the Fund;
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(10)
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other
day-to-day administrative services, including the costs of designing,
printing, and issuing certificates representing shares of the Portfolio,
and premiums for the fidelity bond maintained by the Fund pursuant to
Section 17(g) of the Act and rules promulgated thereunder (except for such
premiums as may be allocated to third parties, as insureds thereunder);
and
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(11)
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a
call center in order to respond to information and transaction requests
from existing and potential stockholders of the
Portfolio.
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Manager’s
obligation to provide any of the Operating Services directly to the Portfolio is
subject to Manager’s legal qualification to provide such Operating Service to
registered, open-end management investment companies, and nothing herein shall
require Manager to register with the Securities and Exchange Commission or any
state regulator in order to perform such Operating Service
directly.
Manager
shall not make payments for Portfolio distribution and marketing services, which
shall include payments in connection with the Operating Services set forth in
Paragraph 1(B)(5) above and may include payments in connection with the
Operating Services set forth in Paragraph 1(B)(11) above, from the compensation
Manager receives pursuant to this Agreement.
(C) EXCLUSIONS
FROM SERVICES. Except to the extent expressly assumed by Manager in Paragraphs
1(A) and 1(B) above and except to the extent required by law to be paid by the
Adviser, the Fund shall pay all costs and expenses in connection with its
operation and organization, including:
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(1)
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all
brokers’ commissions, issue and transfer taxes, and other costs chargeable
to the Fund or the Portfolio in connection with securities transactions to
which the Fund or the Portfolio is a party or in connection with
securities owned by the Fund or the
Portfolio;
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(2)
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the
interest on indebtedness, if any, incurred by the Fund or the
Portfolio;
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(3)
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the
taxes, including franchise, income, issue, transfer, business license, and
other corporate fees payable by the Fund or the Portfolio to federal,
state, county, city, or other governmental
agents;
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(4)
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the
expenses, including fees and disbursements of counsel, in connection with
litigation by or against the Fund or the Portfolio;
and
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(5)
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any
other extraordinary expense of the Fund or
Portfolio.
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(D) BOOKS
AND RECORDS. All books and records prepared and maintained by Manager for the
Fund under this Agreement shall be the property of the Fund and, upon request
therefor, Manager shall surrender to the Fund such of the books and records so
requested. Manager shall preserve for the periods prescribed by Rule 31a-2 under
the Act those records required by Rule 31a-1 that it retains for the
Fund.
(E) STAFF
AND FACILITIES. Manager agrees, at its own expense or at the expense of one or
more of its affiliates, to render the Services and to provide the office space,
furnishings, equipment and personnel as may be reasonably required in the
judgment of the Board of Directors of the Fund to perform the Services on the
terms and for the compensation provided herein. Manager shall authorize and
permit any of its officers, directors and employees, who may be elected as
directors or officers of the Fund, to serve in the capacities in which they are
elected.
2. PORTFOLIO
TRANSACTIONS. Manager is authorized to select the brokers or dealers that will
execute the purchases and sales of securities for the
Portfolio. Manager will seek the best execution of orders at the most
favorable price. In selecting brokers to effect portfolio
transactions, the determination of what is expected to result in the best
execution at the most favorable price involves a number of
considerations. Among these are the Manager's evaluation of the broker-dealer'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, and operational capabilities of the
broker-dealer. The Manager will not take into account the sale of
Fund shares when selecting brokers to execute portfolio
transactions.
3. Manager
may, in its discretion, purchase and sell portfolio securities from and to
brokers and dealers who provide the Portfolio and any other account over which
the Manager exercises investment discretion with research and brokerage services
(as those terms are defined in Section 28(e) of the Securities and Exchange Act
of 1934 and interpretations thereunder), and Manager may pay to these brokers
and dealers, in return for research and brokerage services, a higher commission
or spread than may be charged by other brokers and dealers for that transaction,
provided that Manager determines in good faith that such commission is
reasonable relative to the value of the research and brokerage services provided
by such broker or dealer as viewed in terms either of that particular
transaction or of the overall responsibility of Manager to the Fund and its
other clients. Manager will promptly communicate to the officers and the
directors of the Fund such information relating to portfolio transactions as
they may reasonably request.
4. COMPENSATION
OF MANAGER. The Fund will pay to Manager on the last day of each month a fee at
an annual rate equal to 1.00% of the daily average net asset value of the
Portfolio, such fee to be computed daily based upon the net asset value of the
Portfolio as determined by a valuation made in accordance with the Fund's
procedures for calculating Portfolio net asset value as described in the Fund's
Prospectus and/or Statement of Additional Information. During any period when
the determination of a Portfolio's net asset value is suspended by the directors
of the Fund, the net asset value of a share of the Portfolio as of the last
business day prior to such suspension shall, for the purpose of this Paragraph
3, be deemed to be net asset value at the close of each succeeding business day
until it is again determined.
5. STATUS
OF MANAGER. The services of Manager to the Fund are not to be deemed exclusive,
and Manager shall be free to render similar services to others so long as its
services to the Fund are not impaired thereby. Manager shall be deemed to be an
independent contractor and shall, unless otherwise expressly provided or
authorized, have no authority to act for or represent the Fund in any way or
otherwise be deemed an agent of the Fund. Nothing in this Agreement shall limit
or restrict the right of any director, officer or employee of Manager, who may
also be a director, officer, or employee of the Fund, to engage in any other
business or to devote his or her time and attention in part to the management or
other aspects of any other business, whether of a similar nature or a dissimilar
nature.
6. PERMISSIBLE
INTERESTS. Directors, agents, and stockholders of the Fund are or may be
interested in Manager (or any successor thereof) as directors, partners,
officers, or stockholders, or otherwise, and directors, partners, officers,
agents, and stockholders of Manager are or may be interested in the Fund as
directors, stockholders or otherwise; and Manager (or any successor) is or may
be interested in the Fund as a stockholder or otherwise.
7. LIABILITY
OF MANAGER. Manager assumes no responsibility under this Agreement other than to
render the services called for hereunder in good faith. Manager shall not be
liable for any error of judgment or for any loss suffered by the Fund in
connection with the matters to which this Agreement relates, except a loss
resulting from a breach of fiduciary duty with respect to receipt of
compensation for services (in which case any award of damages shall be limited
to the period and the amount set forth in Section 36(b)(3)) of the Act or a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of, or from reckless disregard by it of its obligations and
duties under, this Agreement.
8. TERM.
This Agreement shall become effective at such time as it shall have been
approved by stockholders of the Fund, in accordance with the requirements of the
Act, and, unless sooner terminated as provided herein, shall continue in effect
for two years and from year to year thereafter provided such continuance is
approved at least annually by (1) the vote of a majority of the Board of
Directors of the Fund or (2) a vote of a “majority” (as that term is defined in
the Act ) of the Fund's outstanding securities, provided that in either event
the continuance is also approved by the vote of a majority of the directors of
the Fund who are not parties to this Agreement or “interested persons” (as
defined in the Act) of any such party, which vote must be cast in person at
meeting called for the purpose of voting on such approval. Notwithstanding the
foregoing, this Agreement may be terminated by:
(A) the
Fund, at any time and without the payment of any penalty, upon 60 days prior
written notice to Manager; or
(B) Manager,
at any time and without payment of penalty, upon 60 days prior written notice to
the Fund.
(C) This
Agreement shall terminate immediately in the event of its assignment (within the
meaning of the Act and the rules thereunder). The terms of paragraph 6 of this
Agreement shall survive the termination of this Agreement.
9. 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 will be in writing and will 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 the Manager:
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|
Fairholme
Funds, Inc.
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Fairholme
Capital Management, LLC
|
|
4400
Biscayne Blvd.
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4400
Biscayne Blvd.
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|
9th
Floor
|
9th
Floor
|
|
Miami,
FL 33137
|
Miami,
FL 33137
|
|
[Bruce
R. Berkowitz]
|
[Charles
M. Fernandez]
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|
[President]
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[Chief
Operating Officer]
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|
|
10. AMENDMENTS.
No provision of this Agreement may be changed, waived, discharged or terminated
orally, but only by an instrument in writing signed by the parties hereto. No
material amendment of this Agreement shall be effective until approved by vote
of a majority of the outstanding voting securities of the Fund.
11. MISCELLANEOUS.
This Agreement shall be construed in accordance with the laws of the State of
Maryland and the applicable provisions of the Act. To the extent the
applicable law of the State of Maryland or any of the provisions herein conflict
with the applicable provisions of the Act, the latter shall control. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby.
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as
of the day and the year first written above.
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FAIRHOLME
CAPITAL
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FAIRHOLME
FUNDS, INC.
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MANAGEMENT,
LLC
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By:
[Bruce R. Berkowitz]
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By:
[Charles M. Fernandez]
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[President]
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[Chief
Operating Officer]
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ATTEST:
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ATTEST:
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By:
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_______________________________
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________________________
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Its:
Secretary
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Its:
Secretary
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[Corporate
Seal]
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|
[Corporate
Seal]
|
APPENDIX
D
STOCK
OWNERSHIP
The
following person(s) owned of record or were known by the Fund to beneficially
own 5% or more of the Fund’s shares as of March [__], 2008.
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%
Ownership of
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Name of Stockholder
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Number of Shares Owned
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Total Fund Shares
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Type of Ownership
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National
Financial
|
[____]
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[____]%
|
Record
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Services
Corp
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[address]
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Charles
Schwab
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[____]
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[____]%
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Record
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[address]
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FAIRHOLME
FUNDS, INC.
ANNUAL
MEETING OF STOCKHOLDERS
TO
BE HELD MAY 19, 2008
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|
THIS
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF FAIRHOLME FUNDS,
INC.
The
undersigned stockholder of the Fairholme Fund (the “Fund), the soles series of
Fairholme Funds, Inc. (the “Company”), hereby appoints Bruce R. Berkowitz and
Paul R. Thomson, or either of them, as proxies for the undersigned, with full
power of substitution in each of them, to attend the Annual Meeting of
Stockholders of the Company (the “Meeting”) to be held at 2:00 p.m., Eastern
Time, on May 19, 2008 at the offices of the Company, 4400 Biscayne Blvd, 9th Floor,
Miami, FL 33137, and any postponement or adjournment thereof, to cast on behalf
of the undersigned all votes that the undersigned is entitled to cast at the
Meeting and otherwise to represent the undersigned with all powers possessed by
the undersigned if personally present at such Meeting. The
undersigned hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and accompanying Proxy Statement and revokes any proxy heretofore
given with respect to the Meeting.
The Board
of Directors knows of no reason why any of the nominees for the Board of
Directors would be unable to serve, but in the event any nominee is unable to
serve or for good cause will not serve, the proxies received indicating a vote
in favor of such nominee with be voted for a substitute nominee as the Board of
Directors may recommend.
IF
THIS PROXY IS PROPERLY EXECUTED, THE VOTES ENTITLED TO BE CAST BY THE
UNDERSIGNED WILL BE CAST AS INSTRUCTED ON THE REVERSE SIDE HEREOF. IF
THE PROXY IS PROPERLY EXECUTED BUT NO INSTRUCTION IS GIVEN, THE VOTES ENTITLED
TO BE CAST BY THE UNDERSIGNED WILL BE CAST “FOR” THE ELECTION OF THE NOMINEES
REFERRED TO IN PROPOSAL ONE AS DIRECTORS AND IN THE DISCRETION OF THE PROXY
HOLDERS(S) ON ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING
OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF.
Please
refer to the Proxy Statement for a discussion of the Proposals.
PLEASE
VOTE, DATE AND SIGN AND RETURN THIS PROXY CARD PROMPTLY IF YOU ARE NOT VOTING
VIA THE INTERNET OR BY TELEPHONE. YOU MAY USE THE ENCLOSED
ENVELOPE.
Note: Please sign exactly as
name(s) appear(s) on the records of the Fund. Joint owners should
each sign personally. Trustees and other representatives should
indicate the capacity in which they sign, and where more than one name appears,
a majority must sign. If a corporation or another entity, the
signature should be that of an authorized officer who should state his or her
full title.
_________________________________________
Stockholder
sign here
_________________________________________
Co-owner
sign here
_________________________________________
Date
PLEASE
MARK BOXES BELOW IN BLUE OR BLACK INK AS FOLLOWS. Example: [ ]
| o |
To vote FOR all Proposals for
the Fund mark this box. No other vote is
necessary. |
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For
All
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Withhold
All
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For
All
Except
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1.
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To
Elect Directors for the Company
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/ /
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/ /
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/ /
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01. Cesar
L. Alvarez
02. Bruce
R. Berkowitz
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03. Keith
D. Trauner
04. Terry
L. Baxter
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05. Howard
S. Frank
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06. Avivith
Oppenheim
07. Leigh
Walters
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To
withhold authority to vote for any individual, mark the box “FOR ALL EXCEPT” and
write the nominee’s number on the line provided.
______________________________________________
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2.
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To
approve the replacement or elimination of
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For
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Withhold
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For
All
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the
following fundamental investment policies:
|
All
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All
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Except
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/ /
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/ /
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/ /
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To
withhold authority to vote for replacement or elimination of any of the
following policies, mark the box “FOR ALL EXCEPT” and check the appropriate
“AGAINST” box for the policy provided below.
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2.
A
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Senior
Securities and Borrowing Money
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For
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Against
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Abstain
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/ /
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/ /
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/ /
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2.
B.
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Underwriting
Securities
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For
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Against
|
Abstain
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/ /
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/ /
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/ /
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2.C.
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Concentration
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For
|
Against
|
Abstain
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/ /
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/ /
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/ /
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2.
D.
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Investments
in Real Estate
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For
|
Against
|
Abstain
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/ /
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/ /
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/ /
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2.
E.
|
Investments
in Commodities
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For
|
Against
|
Abstain
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/ /
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/ /
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/ /
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2.
F.
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Loans
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For
|
Against
|
Abstain
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/ /
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/ /
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/ /
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2.
G.
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Limits
on Number of Issuers in Which the Fund Invests
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For
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Against
|
Abstain
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2.
H.
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Investments
for the Purpose of Management or Control
|
For
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Against
|
Abstain
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/ /
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/ /
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/ /
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2.
I.
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Acquisitions
of More than 10% of the Outstanding
|
For
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Against
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Abstain
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Voting
Securities of an Issuer
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/ /
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/ /
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/ /
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2.
J.
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Investments
in Oil, Gas and Other Mineral
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For
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Against
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Abstain
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Exploration
Programs
|
/ /
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/ /
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/ /
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3.
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To
approve the Management Agreement.
|
For
|
Against
|
Abstain
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/ /
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/ /
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/ /
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4.
|
To
vote and otherwise represent the undersigned on any other matter that may
properly come before the meeting or any adjournment or postponement
thereof in the discretion of the proxy
holder(s).
|
SK 22146 0003 857885
v4