Table of Contents
As filed with the Securities and Exchange Commission on February 28, 2003
Registration No. 33-10472
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(X)
Pre-Effective Amendment No.
( )
Post-Effective Amendment No.
26
(X)
and
ACT OF 1940
Amendment No. 26 (X)
(Check appropriate box or boxes)
LONGLEAF PARTNERS FUNDS TRUST
(Exact name of registrant as specified in charter)
6410 Poplar Avenue; Suite 900
Memphis, TN 38119
(Address of principal executive offices)
| ANDREW R. McCARROLL, ESQ | Copy to: | |
| Southeastern Asset Mgmt., Inc. | ALAN ROSENBLAT, ESQ. | |
| 6410 Poplar Ave., Ste. 900 | Dechert Price & Rhoads | |
| Memphis, TN 38119 | 1775 Eye Street, N.W. | |
| Washington, D.C. 20006 |
(Name and address of agent for service)
Approximate Date of Proposed Public Offering May 1, 2003
It is proposed that this filing will become effective (check appropriate box)
o on pursuant to paragraph (b) of Rule 485
o 60 days after filing pursuant to paragraph (a)(1) of Rule 485
x on May 1, 2003 pursuant to paragraph (a)(1) of Rule 485
o 75 days after filing pursuant to paragraph (a)(2) of Rule 485
o on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
o this post-effective amendment designates a new effective date for a previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24f-2
Pursuant to Rule 24f-2(a) under the Investment Company Act of 1940, the Registrant hereby declares that an indefinite number or amount of shares of beneficial interest is being registered under the Securities Act of 1933. The $500 filing fee required by said Rule has been paid. The Notice required by Rule 24f-2(b)(1) under the Investment Company Act of 1940 with respect to the fiscal year ended December 31, 2002, was filed with the Securities & Exchange Commission on February 18, 2003, together with a registration fee for net sales for the period.
Table of Contents
Post-Effective Amendment No. 26
LONGLEAF PARTNERS FUNDS TRUST
Part A of the Registration Statement
Cross Reference Sheet Between Registration Statement
and Form of Prospectus
| Registration Statement | Prospectus Heading | |||
| Item Number and Caption | or Subheading | |||
|
|
|
|||
| Item 1. | Front and Back Cover Page | Face Page and Back Cover Page | ||
| Item 2. | Risk/Return Summary: Investments, Risks, and Performance |
Investment Objectives
Longleaf Partners Investment Strategy |
||
| Primary Investment Risks | ||||
| Item 3. | Risk/Return Summary: Fee Table | Specific Information on | ||
| Each Fund | ||||
| Partners Fund | ||||
| International Fund | ||||
| Small-Cap Fund | ||||
| Item 4. | Investment Objectives, Principal Investment Strategies, and Related Risks | Combined under same headings as Item 3 and also How We Achieve Our Investment Objectives; | ||
| Other Risks of Investing Which Apply to All Funds | ||||
| Item 5. | Management’s Discussion of Fund Performance | Contained in 2002 Annual Report to Shareholders | ||
| Item 6. | Management, Organization, and Capital Structure | Portfolio Management and Fund Operations | ||
| Item 7. | Shareholder Information | Shareholder Manual | ||
| Item 8. | Distribution Arrangements | Not Applicable | ||
| Item 9. | Financial Highlights Information | Financial Highlights Table | ||
Table of Contents
Post-Effective Amendment No. 26
LONGLEAF PARTNERS FUNDS TRUST
Part B of the Registration Statement
Cross Reference Sheet Between Registration Statement
and Form of Statement of Additional Information
| Registration Statement | Statement of Additional | |||
| Item Number and Caption | Information Heading or Subheading | |||
|
|
|
|||
| Item 10. | Cover Page and Table of Contents | Cover Page and Table of Contents | ||
| Item 11. | Fund History | Fund History | ||
| Item 12. | Description of the Fund and Its Investments and Risks | Investment Objectives and Policies | ||
| Description of the Funds | ||||
| Fundamental Policies and Restrictions | ||||
| Non-Fundamental Investment Restrictions | ||||
|
Additional
Information About Types
of Investments and Investment Techniques |
||||
| Portfolio Turnover | ||||
| Item 13. | Management of the Fund | Management of the Funds | ||
| Compensation Table | ||||
| Item 14. | Control Persons and Principal Holders of Securities | Control Persons and Principal Holders of Securities | ||
| Item 15. | Investment Advisory and Other Services | Investment Advisory Services | ||
| Fund Administration | ||||
| Other Service Providers | ||||
| Item 16. | Brokerage Allocation and Other Practices | Allocation of Brokerage Commissions | ||
| Item 17. | Capital Stock and Other Securities | Capital Stock and Indemnification Rights | ||
| Item 18. | Purchase, Redemption, and Pricing of Shares | Purchase, Redemption, and Pricing of Shares | ||
| Item 19. | Taxation of the Fund | Additional Tax Information | ||
| Item 20. | Underwriters | Not Applicable | ||
| Item 21. | Calculation of Performance Data | Investment Performance and Total Return | ||
| Item 22. | Financial Statements | Financial Statements | ||
Table of Contents
LONGLEAF PARTNERS FUNDS TRUST
PART A
INFORMATION REQUIRED IN THE PROSPECTUS
Table of Contents
Table of Contents
PROSPECTUS
May 1, 2003
LONGLEAF PARTNERS FUNDS
SM
Managed By:
SOUTHEASTERN ASSET MANAGEMENT, INC.
6410 Poplar Avenue, Suite 900
Memphis, TN 38119
(800) 445-9469
www.longleafpartners.com
LONGLEAF PARTNERS FUND
to be significantly undervalued.
LONGLEAF PARTNERS INTERNATIONAL FUND
undervalued.
LONGLEAF PARTNERS SMALL-CAP FUND
undervalued.
(Closed to new investors)
The Longleaf Partners Funds are registered with the Securities
and Exchange Commission (SEC). That registration does not imply
that the SEC endorses the Funds.
The SEC has not approved or disapproved these securities or
determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
Table of Contents
TABLE OF CONTENTS
Table of Contents
This Prospectus contains important information about the investment strategies,
risks, and fees of the Longleaf Partners Funds that you should consider before
making an investment. Please read it carefully and keep it on hand for future
reference.
You should be aware that the Funds:
RISK/RETURN SUMMARY
•
Are not bank deposits;
•
Are not guaranteed, endorsed, or insured by any financial
institution or governmental entity such as the Federal Deposit
Insurance Corporation (FDIC);
•
May not achieve their stated goals.
Table of Contents
Principal Investment Strategy
Governing Principles. The Longleaf Partners Funds represent an investment partnership between all Fund shareholders and the employees and affiliates of the Funds’ manager, Southeastern Asset Management, Inc. (“Southeastern”), who together are among the Funds’ largest owners. The following principles govern this investment partnership:
| • | We will treat your investment in Longleaf as if it were our own, | ||
| • | We will remain significant investors with you in Longleaf. | ||
| • | We will invest for the long term, while striving to maximize after-tax returns and to minimize business, financial, purchasing power, regulatory, and market risks. | ||
| • | We will choose our equity investments based on their discounts from our appraisals of their corporate intrinsic values, their financial strength, their management, their competitive position, and our assessment of their future earnings potential. | ||
| • | We will concentrate our assets in our best ideas. | ||
| • | We will not impose loads, holding periods, exit fees or 12b-l charges on our investment partners. | ||
| • | We will consider closing the Funds to new investors if closing would benefit existing shareholders. | ||
| • | We will discourage short-term speculators and market timers from joining us, the long-term investors in Longleaf. | ||
| • | We will continue our efforts to enhance shareholder services. | ||
| • | We will communicate with our investment partners as candidly as possible. |
Philosophy. We are value investors. We view equity investments as ownership in a business enterprise. The Funds seek to achieve superior long-term performance by acquiring equity securities of growing, financially sound companies managed by capable, honorable individuals at market prices significantly below our assessment of their business values. We sell stocks when they approach our appraisals. We determine business or intrinsic value through financial analysis and established disciplines which we have consistently applied over 28
4
Table of Contents
years. Equities purchased at prices substantially less than their intrinsic worth should protect capital from significant permanent loss and also should appreciate substantially if the market recognizes the company’s economic value.
Process. All of the Longleaf Partners Funds apply the same investment disciplines and appraisal methods. Our analysts, working as a team, seek competitively entrenched companies which can enhance their advantages and are operated by trustworthy, capable, shareholder-oriented managers. When the common stock is available at 60% or less of our conservative appraisals, and when the investment has been qualified, both quantitatively and qualitatively, we purchase a position for the Fund or Funds whose universe most closely fits the company.
Primary Investment Risks
That Apply To All Longleaf Funds
Market Fluctuation Risks . The Funds invest primarily in common stocks or securities convertible to common stocks. Equity investments are subject to declines in a company’s share price or in the overall stock market. The value of your investment in a Fund fluctuates daily with stock price movements. Investors who sell shares during market declines may create a permanent loss from a paper one. Loss of money is, therefore, a risk of investing in the Funds.
We attempt to mitigate the risk of permanent capital loss by buying businesses only when they are selling at substantially less than our appraisals of their values and by having long holding periods for these securities. Historically, the ability to hold shares through periods of volatility has protected long-term investors from permanent loss.
Business Ownership Risks. As partial owners of the companies in Longleaf’s portfolios, we face four main risks inherent in owning a business. First, the company’s operations must be successful. To minimize business risk, we look for companies with competitive advantages, which could include dominant market share, lowest cost structure, entrenched brand name, or similar qualities.
The second risk of owning a company is financial risk. To help ensure that a company can weather economic downturns and take advantage of opportunities, a company’s assets and cash flows should amply cover liabilities, annual working capital needs, and necessary capital replacements.
A company’s third risk is whether it can control and mitigate cost increases. We prefer to own businesses with strong purchasing power and the ability to pass cost increases on to customers.
5
Table of Contents
A company faces a fourth risk to its long-term success if a regulatory agency can dictate its markets and profits. Longleaf limits its ownership of businesses with regulatory risk.
Non-Diversification Risks. The Funds are non-diversified under federal securities laws and each Fund generally invests in 20 to 25 companies. As a result, each holding will have a greater impact on a Fund’s total return, and a Fund’s share value could fluctuate more than if more securities were held in the portfolios.
We believe that limiting the number of our holdings lowers the risk of losing capital and improves the long-term return opportunity, because the portfolios contain our most qualified ideas. We strive to know the companies and their managements extremely well. Owning fewer companies also enables each company to have a meaningful impact on our investment results.
The Funds plan to comply with the diversification standards for mutual funds set forth in the Internal Revenue Code. Under these standards, each Fund could own as few as twelve securities, but generally will have 20 to 25 companies in its portfolio. At the end of each quarter, at least half of each Fund’s portfolio must be diversified so that within the diversified basket less than 5% of a Fund’s total assets are invested in any company and a Fund owns less than 10% of any company’s voting securities. The remaining half of a Fund’s portfolio may contain positions which are over 5% of assets and are greater than 10% of a company’s voting securities.
Liquidity Risks. We take relatively large ownership positions in some companies that we find are particularly qualified. A Fund may own more than 5% of a company’s equity securities and may own up to 15% or more of some companies. Depending on market conditions and trading volume, disposing of such holdings could be more difficult than if the Fund owned a smaller amount. Because selling a large position may take longer, a Fund may be more susceptible to price fluctuations.
Foreign Investment Risks. The Partners and Small-Cap Funds may invest up to 30% of assets in foreign securities, and the International Fund may invest all of its assets in foreign securities. Foreign investment risks sometimes include political and economic changes, foreign withholding taxes, exchange controls, confiscation, foreign governmental restrictions, differences in accounting standards, more limited availability of public information, and currency fluctuations. We try to mitigate these risks through careful analysis of the economic and regulatory conditions in each country where we own an investment.
6
Table of Contents
Currency Hedging Risks. We focus on absolute returns generated by the local market performance of the equities we purchase. We often hedge our economic exposure to foreign currency to reduce the impact of foreign currency movements on these returns. This policy impacts our relative performance versus a similar unhedged portfolio. The relative returns of hedged positions improve when the dollar strengthens and decline when the dollar weakens.
Effective currency hedging can offset fluctuations caused by differences between foreign and U.S. currencies, and can isolate the portion of a security’s price fluctuation attributed to capital appreciation or depreciation. Not all foreign currencies can be effectively hedged, and the costs of hedging may outweigh the benefits. If our hedging strategy does not correlate well with market and currency movements, price volatility of the portfolio could increase. Currency hedging, considered separately, can result in losses, but these losses should be offset by gains in the local prices of the securities hedged.
Investment Objectives, Performance,
Fees, And Expense Information
The following sections include specific information on each Fund’s investment objectives and policies, historical performance, and expenses of ownership.
The bar charts illustrate volatility by showing the variability of Fund returns from year to year over the last decade. The total returns for the best and worst quarters indicate the historic short-term risks and rewards of investing in each Fund.
The average annual returns for the cumulative periods ended December 31, 2002 compared with several unmanaged market indices, highlight the benefits of compounding through longer term investing, and illustrate the effects of averaging negative returns in some periods with positive returns in others.
Each Fund’s particular investment objective and policies and the corresponding market conditions have affected performance during the reported periods. Historical returns illustrate how the Funds met the challenges of changing market conditions during prior periods. Past investment performance (before and after taxes) does not predict future performance and there is no assurance that we will achieve our investment objectives. See page 14 for an explanation of the after-tax calculations in the Fund performance sections which follow.
7
Table of Contents
LONGLEAF
PARTNERS
FUND
Initial Public Offering —April 8, 1987
Investment Objective —Long-term capital growth.
Investment Policy —The Partners Fund normally invests in the equity securities of a limited number of mid to large-cap companies. Most of these securities are listed on the major securities exchanges. Current income is not an objective.
The Fund may invest up to 30% of assets in foreign securities and up to 15% of assets in non-registered or illiquid securities.
PAST FUND PERFORMANCE
Total Return (%)
8
Table of Contents
PAST FUND PERFORMANCE
Longleaf Partners Fund
Fund Fees and Expenses
The following table shows the fees and expenses you may pay to buy and hold
shares of the Partners Fund. We do not impose any front-end or deferred sales
charges or redemption fees, and the Fund does not have a 12b-l Plan.
Example of Fund Expenses.
This example helps compare the cost of investing in
the Partners Fund with other mutual funds. The table shows what you would pay
in expenses over time, whether or not you sold your shares at the end of each
period. The example assumes a $10,000 investment, a 5% total return each year,
and no changes in expenses. This information is for comparison purposes only
and does not represent the Fund’s actual returns or expenses, which may be
higher or lower.
9
LONGLEAF PARTNERS
Initial Public Offering
—
October 26, 1998
Investment Objective
—Long-term capital growth through investment primarily in
the equity securities of international or foreign issuers.
Investment Policy
—The International Fund normally invests at least 65% of total
assets in the equity securities of international issuers domiciled or operating
primarily in at least three countries other than the United States. The Fund
does not limit the percentage of assets invested in any particular geographic
region or country. We may invest a significant portion of assets in a single
country, and may invest in both developed and emerging countries. The Fund may
also invest up to 15% of assets in non-registered or illiquid securities.
If investments meeting the Fund’s criteria are not available, we may invest the
Fund’s assets temporarily in obligations of the U.S. government and its
instrumentalities, or in other money market instruments.
Specific Risks of Investing in this Fund
The International Fund is designed for long-term investors who can accept
international investment risk. Although world economies are increasingly
integrated, market valuations vary with each country’s economic and political
conditions. Movements in foreign securities markets and, to the extent not
hedged, movements in foreign currencies where the Fund has exposure will affect
the Fund’s price per share and returns. Because the Fund hedges portions of its
portfolio against foreign currency exposure, its relative performance may
differ from that of unhedged portfolios or indices.
PAST FUND PERFORMANCE
Total Return (%)
10
Average Annual Total Returns
(for the periods ended December 31, 2002)
1 year
5 Years
10 years
1 year
5 Years
10 years
(8.34
)%
7.33
%
14.14
%
(22.15
)
(0.61
)
9.32
(28.57
)
(10.29
)
(0.10
)
12.38
12.32
12.46
Shareholder Transaction Fees and Expenses
(fees paid directly from your investment)
None
Annual Fund Operating Expenses
(expenses that are deducted
from Fund assets)
Management Fees
0.77%
12b-l Fees
None
Other Expenses
0.14
Administration
0.10
Other Operating Expenses
0.04
Total Annual Fund Operating Expenses
0.91%
1 Year
3 Years
5 Years
10 Years
$
298
$
518
$
1,150
Table of Contents
INTERNATIONAL FUND
Table of Contents
PAST FUND PERFORMANCE
Longleaf Partners Fund
Longleaf Partners International Fund
The following table shows the fees and expenses you may pay to buy and hold
shares of the International Fund. We do not impose any front-end or deferred
sales charges or redemption fees, and the Fund does not have a 12b-l Plan.
Example of Fund Expenses.
This example helps compare the cost of investing in
the International Fund with other mutual funds. The table shows what you would
pay in expenses over time, whether or not you sold your shares at the end of
each period. The example assumes a $10,000 investment, a 5% total return each
year, and no changes in expenses. This information is for comparison purposes
only and does not represent the Fund’s actual returns or expenses, which may be
higher or lower.
11
LONGLEAF PARTNERS
Initial Public Offering
—February 21, 1989
(Closed to new investors since July 31, 1997)
Investment Objective
—Long-term capital growth.
Investment Policy
—The Small-Cap Fund normally invests at least 80% of net
assets plus any borrowings for investment purposes in the equity securities,
including convertible securities, of a limited number of companies whose market
capitalizations at the time of purchase are within the range of companies in
the Russell 2000 Index, the S&P Small-Cap 600 Index, or the Wilshire Small-Cap
1750 Index.
Generally, portfolio companies will have a market capitalization greater than
$300 million. Current income is not an objective.
The Fund may also invest up to 30% of assets in foreign securities and up to
15% of assets in non-registered or illiquid securities.
Specific Risks of Investing in this Fund
Smaller companies may have more limited product lines, markets, and financial
resources than larger companies. In addition, their securities may trade less
frequently and in more limited volume than those of larger companies. Small-cap
stocks may be more volatile than those of larger companies and, where trading
volume is thin, our ability to dispose of such securities may be more limited.
PAST FUND PERFORMANCE CHART
12
Average Annual Total Returns
(for the periods ended December 31, 2002)
Since Initial
Public Offering
1 year
10/26/98
(16.51
)%
11.47
%
(15.94
)
(5.58
)
12.38
12.63
None
1.50
%
None
0.30
0.10
0.20
1.80
%*
*
The Fund has a contractual expense limitation of 1.75% of average net assets
per annum, excluding interest, taxes, brokerage commissions and
extraordinary expenses. This provision cannot be amended without
shareholder approval. Expenses subject to the limitation in 2002 were
1.69% of average net assets. The additional expenses not subject to the
limitation were dividend expenses on short sales and related transaction
expenses which must be included as expenses in the Fund’s Statement of
Operations under GAAP requirements.
1 Year
3 Years
$
585
Table of Contents
SMALL-CAP FUND
Table of Contents
PAST FUND PERFORMANCE
Longleaf Partners Small-Cap Fund
(for the periods ended December 31, 2002)
Fund Fees and Expenses
The following table shows the fees and expenses you may pay to buy and hold
shares of the Small-Cap Fund. We do not impose any front-end or deferred sales
charges or redemption fees, and the Fund does not have a 12b-l Plan.
Example of Fund Expenses.
This example helps compare the cost of investing in
the Small-Cap Fund with other mutual funds. The table shows what you would pay
in expenses over time, whether or not you sold your shares at the end of each
period. The example assumes a $10,000 investment, a 5% total return each year,
and no changes in expenses. This information is for comparison purposes only
and does not represent the Fund’s actual returns or expenses, which may be
higher or lower.
13
Method of Calculation of
The after-tax returns shown in the tables depicting Past Fund Performance on
pages 9, 11 and 13, were calculated under Securities and Exchange Commission
rules using the following assumptions:
14
Average Annual Total Returns
1 year
5 years
10 years
(3.74
)%
6.07
%
12.80
%
(20.48
)
(1.36
)
7.15
(28.57
)
(10.29
)
(0.10
)
12.38
12.32
12.46
None
0.81
%
None
0.14
0.10
0.04
0.95
%
1 Year
3 Years
5 Years
10 Years
$
311
$
540
$
1,198
Table of Contents
Returns After Taxes
•
Distributions were reinvested after deducting the taxes due
on the distributions.
•
Taxes due on distributions were calculated at the highest
historical individual federal income tax rate for each taxable
component of the distribution.
•
Holding periods were determined based on the actual
purchase and distribution dates.
•
Short-term capital gain rates were applied to the sale of
shares held for one year or less.
•
“Return After Taxes on Distributions” assumes you continue
to hold your shares at the end of the period.
•
“Return After Taxes on Distributions and Sale of Fund
Shares” assumes you sell your shares at the end of the period
and pay applicable federal taxes.
•
The calculations do not include state or local taxes, the
effects of phaseouts of certain exemptions, deductions, and
credits at various income levels, and the effects of alternative
minimum tax. As a result, actual after-tax returns depend on
an investor’s tax situation and may differ from those shown.
•
After-tax returns shown are not relevant to investors who
hold their Fund shares through tax-deferred arrangements,
such as 401 (k) plans or individual retirement accounts.
Table of Contents
DISCUSSION OF PRINCIPAL
INVESTMENT STRATEGIES
AND RELATED RISKS
Additional Information
on Types of Investments
International Fund . In selecting investments for the International Fund, a company is international if organized or headquartered outside the United States. A business organized or headquartered in the U.S. also qualifies as international if at least 50% of its assets are outside the U.S. or 50% of its gross income is from non-U.S. sources. The majority of investments generally are in companies located in Canada, Australia, and the developed countries of Europe, the Far East, and South America.
The Fund may also invest in U.S. or foreign closed-end investment companies which invest in particular countries or regions when direct investments in those areas would be difficult or less liquid. When appropriate, the Fund may invest in foreign governmental and commercial bonds, and in other foreign money market instruments.
How We Achieve Our Investment Objectives
Determining Business or Intrinsic Value . A company’s market price generally must be 60% or less of our appraisal to qualify for investment. Our research team appraises businesses by studying financial statements, regulatory information, trade publications, and other industry and corporate data, and by talking with corporate management, competitors, and suppliers.
We use two primary methods of appraisal. The first assesses the company’s liquidation value based on the current economic worth of corporate assets and liabilities. The second method determines the company’s ongoing value based on its ability to generate free cash flow after required capital expenditures and working capital needs. We calculate the present value of the projected free cash flows plus a terminal value, using a conservative discount rate. Our appraisal should represent the price that rational, independent buyers and sellers would negotiate in an arms length sale. We then check our appraisals against our data base of comparable historic transactions.
15
Table of Contents
Other Investment Criteria . In addition to significant undervaluation, we also look for the following when selecting investments:
| • | Good Business. A number of qualities characterize an attractive business. First, we must be able to understand both the fundamentals and the economics of a business. Second, a strong balance sheet helps protect a company during slow economic times and enables a business to seize opportunities when they arise. Third, a sustainable competitive advantage in market share, dominant brands, cost structure, or other areas, helps ensure the strength and growth of a company. Fourth, a business must be able to generate and grow free cash flow from operations. Finally, pricing power enables a company to pass cost increases to consumers rather than absorbing them in lower margins. | ||
| • | Good People. Managements of the businesses we own should have four primary qualities. They should be capable operators who can run the business profitably. They should be capable capital allocators who will build shareholder value through wisely reinvesting the free cash flow that the business generates. They should be shareholder oriented in their actions and decisions. They should have the proper incentives with much of their net worth tied to the company’s results. |
Although a company may not meet all the investment criteria above, we must be convinced that significant unrealized value is present before making an investment.
Allocation of Investment Ideas . When a company qualifies for purchase, we allocate the stock to the Funds whose investment objectives and policies most closely parallel the business. More than one Fund may own a single security. For example, an overseas company might be in both the International Fund and Partners Fund. If the Fund most closely aligned with a security is fully invested or otherwise unable to buy a position, another Fund might purchase that security.
How Companies Reach Intrinsic Value. We generally sell a holding when its market price reaches our appraisal. Undervalued businesses may reach their intrinsic worth in several ways.
| • | Market Realization. Over time the market may recognize the business’s true value. As companies with strong management and true earnings power report better earnings, the price of the stock generally rises. | ||
| • | Mergers and Acquisitions. Undervalued companies often attract acquirors, or large owners may seek a buyer. | ||
| • | Management Buy-Outs. Corporate management may obtain funding to buy out shareholders and take the company private. | ||
| • | Liquidations. A company may partially or fully liquidate its assets or operations through spin-offs of subsidiaries or sales of a portion of the business. |
16
Table of Contents
| • | Share Repurchase Programs. When a company’s stock is undervalued, repurchasing outstanding shares increases value per share. If repurchasing shares is the capital allocation choice with the highest return, management can grow the value of the business and shrink the number of owners sharing the returns. |
Portfolio Turnover. We are long-term owners, not traders or speculators. Generally, our time horizon when purchasing a company is three to five years. We will hold the stock as long as a margin of safety exists between price and value, and we remain confident in management’s ability to create additional value.
Portfolio turnover is generally less than 50%. There are no limits on portfolio turnover, however, and we sell portfolio holdings whenever we believe that sales would benefit shareholders.
Other Investments . All Funds may invest a portion of assets in cash equivalents and a wide variety of securities other than common stock, including preferred stock, debt securities, warrants, puts, calls, options, financial futures, and combinations of these instruments.
Cash Reserves. Generally, cash reserves and money market instruments do not exceed 15% of net assets. If, however, we have difficulty finding enough investments that meet our criteria, we may invest any portion of assets in money market instruments. Holding cash reserves can penalize short-term performance in rising markets, but during market declines cash allows us to purchase securities at discounted prices. When cash has previously approached levels as large as 20% for a prolonged period, we generally have closed the affected Funds. We would not allow cash reserves to exceed 35% of total assets except for temporary, defensive purposes.
Other Risks of Investing
Which Apply To All
Funds
The primary risks of investing in the Longleaf Partners Funds appear on pages 5-7 of this Prospectus. Those risks include general market conditions, business ownership, non-diversification, possible limited liquidity, foreign market, and foreign currency hedging risks. Other risks include the following:
Puts, Calls, Options, Short Sales and Financial Futures. The Funds may invest selectively in a wide variety of put and call options, financial futures, swaps, combinations of these techniques, and in other similar financial instruments and may engage in short sales. Generally, these investments or techniques are used for hedging purposes or as an alternative to owning the underlying security. When used in conjunction with each other, these techniques can reduce market risks. If used separately, these instruments or techniques have risks. Gains on invest-
17
Table of Contents
ments in options and futures and on short sales depend on correctly predicting the direction of stock prices, interest rates, and other economic factors. If a Fund were not able to close out its position, a significant loss could occur.
Restricted and Illiquid Securities . Each Fund may invest up to 15% of its net assets in unregistered and not readily marketable securities. Restricted or non-registered securities may be sold only in privately negotiated transactions or in limited amounts under other exemptions. A Fund might have to pay the registration expenses to sell such a position. When the securities are not saleable, adverse market conditions could lower the eventual sale price.
Bonds and Fixed Income Securities . The Funds may invest up to 15% of assets (at the time of purchase) in both investment and non-investment grade corporate and governmental bonds. High yield or non-investment grade bonds are more risky than investment grade securities. They may be less sensitive to interest rate changes, but may be more sensitive to economic downturns or adverse corporate developments.
More detailed information on investments and investment techniques appears in the Statement of Additional Information.
18
Table of Contents
PORTFOLIO MANAGEMENT AND FUND OPERATIONS
Investment Adviser. Southeastern Asset Management, Inc. (“Southeastern”) is the Funds’ investment adviser. Formed in 1975, the firm has 28 years of experience managing securities portfolios for institutional investors and individuals. Located in Memphis, Tennessee, Southeastern manages more than $16.5 billion in private account and mutual fund assets.
Code of Ethics. To align our interests with those of shareholders and prevent conflicts of interest, our Code of Ethics requires all employees and their spouses to limit their investments in publicly offered equity securities to shares of the Longleaf Partners Funds, unless granted prior clearance for other personal securities transactions. Employees must report their personal securities transactions quarterly. Any material violation of the Code of Ethics is reported to the Boards of the Funds. The Boards also review the administration of the Code of Ethics annually.
The independent Fund Trustees must invest a cumulative amount at least equal to their total Trustees’ fees in the Funds, and must obtain clearance before making other personal securities investments to avoid conflicts of interest.
Management Services . Southeastern manages the securities portfolios of the three Longleaf Partners Funds under an Investment Counsel Agreement initially effective in 1987. Southeastern also serves as Fund Administrator and provides administrative, business, legal and compliance services. The Funds are responsible for payment of all direct operating expenses, such as custodian and transfer agent fees, professional fees of outside lawyers and accounting firms, registration fees, trade association dues, printing, postage, insurance premiums, costs of outside pricing services, and the costs of computer programs dedicated to Fund operations.
19
Table of Contents
Advisory and Administration Fees
.
The Funds pay Southeastern the
following annual fees as a percentage of average net assets for the
services rendered:
Investment Counsel Fee
Administration Fee
Stated Fee
Actual 2002 Fee
Actual 2002 Fee
Partners Fund
1.00% on first $400 million in
average net assets; 0.75% on
balance
0.77%
0.10
%
International Fund
1.50% on average net assets
1.50%
0.10
%
Small-Cap Fund
1.00% on first $400 million in
average net assets; 0.75% on balance
0.81%
0.10
%
All of the Funds have a contractual expense limitation included in their investment counsel agreements with Southeastern, requiring Southeastern to reduce its fees to the extent necessary to limit normal annual operating expenses to a stated percentage of average net assets per annum, excluding interest, taxes, brokerage commissions, and extraordinary expenses. The investment counsel and fund administration fees are included in normal operating expenses. Shareholder approval is required to amend or remove these expense limitations. The expense limitation for the Partners and Small-Cap Funds is 1.50% of average net assets annually; the expense limitation for the International Fund is 1.75% of average net assets annually.
Portfolio Managers. Collectively, the following Southeastern personnel have shared responsibility for investment management decisions of the specified Funds’ portfolios. Background information on Mr. Hawkins and Mr. Cates appears on page 22. Mr. Buford has been employed by Southeastern since 1990. Mr. McDermott has been employed by Southeastern since 1998; from 1994-1998, he was employed by J.P. Morgan & Co. in San Francisco, Hong Kong, and Singapore as an Associate and Analyst.
20
Table of Contents
Name, Title, and Years
Fund Portfolio
with Southeastern
Responsibility
Funds
O. Mason Hawkins
Chairman of the Board and C.E.O.
Since 1975
Co-Portfolio Manager
ALL
G. Staley Gates
President
Since 1986
Co-Portfolio Manager
ALL
John B. Buford
Vice President —
Investments
Since 1990
Co-Portfolio Manager
Partners and Small-Cap Funds
E. Andrew McDermott, III
Vice President —
Investments
Since 1998
Assistant Portfolio Manager
International Fund
Fund Operations . Each Fund has a separate Board of Trustees which oversees all operations of the particular Fund. The same Trustees serve all of the Funds. A majority of the Trustees are independent of and are not affiliated with Southeastern. The investment and administrative functions for each Fund are performed or supervised by the officers and employees of Southeastern under investment advisory and fund administration agreements with each of the Funds. Information on employment experience and educational backgrounds of the Funds’ Trustees appears on the following pages.
Audit Committee . Mr. Melnyk serves as Chairman of the Audit Committee, which is composed of Messrs. Carpenter, Connell, Melnyk, Ray, and Steger. All members of the Audit Committee are classified as independent or “non-interested” Trustees. The Audit Committee has adopted a Charter, and holds a private meeting each year with representatives of the audit firm.
21
Table of Contents
Board of Trustees
O. Mason Hawkins, CFA*,
Chairman of the Board and Co-Portfolio Manager.
Founder and Director, Southeastern Asset Management, Inc. (since 1975).
Education:
B.S.B.A., Finance, University of Florida, 1970; M.B.A, University of Georgia, 1971.
G. Staley Cates, CFA*,
Trustee and Co-Portfolio Manager.
Southeastern Asset Management, Inc. (since 1986); President (since 1994).
Education:
B.B.A., Finance, University of Texas, 1986.
Margaret H. Child*,
Trustee.
Chief Marketing and Business Development Officer for a Boston law
firm, Boston, MA (since 1999); Director of Marketing, Arthur Andersen
L.L.P. (accounting firm), Atlanta, GA office (1998-1999), Memphis, TN
office (1991-1998).
Education:
B.A., Harvard College of Harvard University, 1978.
Chadwick H. Carpenter,
Trustee.
Private investor and consultant to software companies. Previously,
Senior Executive Officer at Progress Software Corporation (software
development for commercial applications), Bedford, MA (1983-1998).
Education:
B.S., Electrical Engineering, Massachusetts Institute of
Technology, 1971; M.S., Electrical Engineering, Massachusetts Institute
of Technology, 1972.
| * | Mr. Hawkins and Mr. Cates are directors and officers of Southeastern, which pays their compensation, and each is deemed to be a Trustee who is an “interested” person as defined in Section 2(a)(19) of the Investment Company Act of 1940. Ms. Child is not affiliated with and receives no compensation from Southeastern. She performs certain administrative and operational functions for the Funds in Massachusetts, their state of organization, and accordingly could be deemed to be “interested.” |
22
Table of Contents
Daniel W. Connell, Jr.,
Trustee.
Senior Vice President—Marketing, Jacksonville Jaguars, Ltd. (National Football
League franchise), Jacksonville, FL (since 1994); Chairman, Jacksonville
Chamber of Commerce (1997); Commissioner, Jacksonville Economic Development
Commission; Advisory Director, First Union National Bank of Florida.
Education:
B.S.B.A., University of Florida, 1970.
Steven N. Melnyk
,
Trustee.
Private investor and consultant. President, Riverside Golf Group, Inc.
(design, construction and operation of golf courses), Jacksonville, FL
(1987-Present); Golf commentator and sports marketing executive,
ABC Sports (since 1991); Founding director and former Chairman,
First Coast Community Bank, Fernandina Beach, FL; Winner of U.S.
Amateur Championship (1969); British Amateur Championship
(1971).
Education:
B.S.B.A., Industrial Management, University of Florida, 1969.
C. Barham Ray,
Trustee.
Chairman of the Board and Secretary, SSM Corporation (venture
capital firm), Memphis, TN (since 1974); Director, Financial Federal
Savings Bank, Memphis, TN.
Education:
B.A., Vanderbilt University, 1968; M.B.A., University of Virginia, 1973.
Perry C. Steger,
Trustee.
Director of Product Strategy, National Instruments, Inc. (measurement
and automation
products), Austin, Texas (since 1996). Founded Georgetown Systems, Inc. to
develop and market industrial automation software, which was acquired by
National Instruments, Inc. in April 1996. Project Manager at Steger & Bizzell
(consulting civil engineering firm), Austin, TX (1984-1990).
Education:
B.S., Civil Engineering, University of Texas, 1984.
| Supplemental information about the members of the Board of Trustees appears in the Statement of Additional Information, a separate document, which can be obtained without charge by calling (800) 445-9469 (option 1) or on our website at www.longleafpartners.com. |
23
Table of Contents
SHAREHOLDER MANUAL
General Information
Funds Open to New Shareholders. The Partners Fund and the International Fund are open to new shareholders. The Small-Cap Fund is closed to new shareholders unless you meet one of the exceptions outlined on page 27 and 28.
Minimum Initial Investment. The minimum initial investment for each account is $10,000. Exceptions to the investment minimum are outlined on page 27. Other than our $100 minimum for automatic monthly investment plans, there is no minimum amount required for subsequent investments. All purchases are subject to acceptance, and we may reject purchases to protect other shareholders.
Transfer Agent. PFPC of Westborough, Massachusetts, handles all shareholder purchases, redemptions and account changes. Please direct your requests and questions about your account to PFPC at (800) 445-9469 (option 0). Southeastern Asset Management, Inc. (“Southeastern”) does not process transactions and will forward any account maintenance correspondence and transaction instructions received in Memphis to PFPC. These items will be processed when they are received by PFPC.
Account Access Information. You may obtain personal account information on the Funds’ website, www.longleafpartners.com, by calling our automated information line, (800) 445-9469, option 3, or by calling our shareholder services associates at (800) 445-9469, option 0.
Frequent Trading. The Funds do not permit market-timing. Do not invest in the Funds if you are a market-timer. The Funds are intended for long-term investors. Frequent trading of Fund shares, also known as “market-timing,” is not permitted. Excessive trading into or out of a Fund may harm the Fund’s performance by disrupting portfolio management strategies and by increasing expenses. Accordingly, if you engage in this type of activity a Fund may suspend or terminate your trading privileges. A Fund may consider a shareholder’s history in any Fund, including trading history in other accounts under common ownership or control, in determining whether to suspend or terminate your trading privileges. All purchases are subject to acceptance by the Funds. The Funds reserve the right to reject any purchases it suspects to be market-timing.
Privacy Of Personal Information
The Longleaf Partners Funds collect nonpublic personal information about our shareholders from the following sources:
24
Table of Contents
| • | Information on applications or other forms, such as name, address, age, and social security number; and | ||
| • | Information about Longleaf transactions, such as purchase and redemption activity and account balances. |
We restrict access to nonpublic personal information to service providers involved in administering and servicing Longleaf accounts. Otherwise, we do not disclose nonpublic personal information about our present or former shareholders to third parties, except as permitted by law.
We and our service providers maintain physical, electronic and procedural safeguards in accord with federal regulations to protect the non-public personal information of Longleaf shareholders.
How To Open A New Account
Checks and wire transfers for investments received by the transfer agent before the close of the New York Stock Exchange are processed at that day’s closing price. Investments received after the close of the Exchange are priced at the next day’s closing price.
The Funds cannot accept post dated checks, third party checks, money orders or credit card convenience checks, nor can the Funds hold investments to be processed at a later date.
By Check :
| • | Complete and sign the application. | ||
| • | Make check payable to “Longleaf Partners Funds.” | ||
| • | Indicate on account application and check the amount to be invested in each fund. | ||
| • | Mail application and initial investment to: |
|
By U.S. Mail:
Longleaf Partners Funds P. O. Box 9694 Providence, RI 02940-9694 |
By overnight courier:
Longleaf Partners Funds c/o PFPC Inc. 101 Sabin Street Pawtucket, RI 02860 (508) 871-8800 |
By Wire Transfer:
| • | Call the Funds at (800) 445-9469 (option 0) to establish a new account. | ||
| • | Be prepared to provide all information required on the account application. | ||
| • | You will receive an account number. Please note this number on the top of your application. | ||
| • | Using your new account number, instruct your bank to wire funds as follows: | ||
|
Boston Safe Deposit & Trust Co.
Boston, MA ABA #011001234 DDA #301442 |
25
Table of Contents
|
Specify Longleaf Partners
Funds
#
#133 (Partners Fund) #136 (International Fund) #134 (Small-Cap Fund) |
|||
|
For credit to:
(your name as account is
registered)
Shareholder account #: (your account number) |
|||
| • | You must send a signed application to the transfer agent. Until the Funds receive your signed application, your account will be subject to back up withholding and no redemptions can be paid. |
Individual Retirement Accounts. Please request an IRA Application Kit to open a Traditional IRA, Roth IRA, SEP or Simple IRA. The kit contains an explanation of tax considerations, information on the Trustee, State Street Bank and Trust Co., and instructions for opening your retirement account. The minimum initial investment for an IRA account is $10,000. The minimum is usually satisfied primarily by transferring funds from an existing IRA or qualified retirement plan.
Additional Investments
There is no minimum required for subsequent investments, unless you have requested automatic monthly investment.
By Check . Send your check with the remittance stub from your account statement or with an instruction letter to our transfer agent, PFPC. Your communication must contain name, address, and account number. Designate on your check and remittance stub the particular Fund(s) in which you are investing. The Funds cannot accept post dated checks, third party checks, money orders or credit card convenience checks.
By Wire Transfer . Follow the wire instructions shown previously. These instructions also appear on the reverse side of your account statement.
By Telephone and Electronic Transfer. You may establish electronic transfer capabilities on your account application or by sending written instructions to our transfer agent. You must include a voided check. You may purchase shares of the Funds by calling the transfer agent at (800) 445-9469 (option 0) to initiate an electronic transfer from your bank account. Electronic transfers can only be made from bank checking accounts and not from Money Market Funds or other financial accounts. Your purchase price will be the net asset value computed on the next business day following your telephone purchase request. Your initial investment cannot be made by electronic transfer.
By Automatic Monthly Investment. You may establish an automatic monthly investment of $100 or more by completing the designated section on your account application or by sending written instructions to our transfer agent. You must include a voided check with your request. We do not charge a fee for this service. Consult your banking institution about any fees that it may charge. Electronic transfers can only be made from bank checking accounts and not from Money Market Funds or other financial accounts. Transfers will occur on the business day on or about the 21st of each month. You can stop or change the amount of your automatic monthly investment by calling us at (800) 445-9469
26
Table of Contents
(option 0). If stopped, you can restart your monthly investment by calling us at (800) 445-9469 (option 0) within 6 months of the time your automatic investment was stopped. You must send written instructions to make other changes to your automatic investment or to restart your automatic investment if it has been stopped for more than 6 months.
Certificates. If you would like to receive Fund share certificates for your investments, you must send a written request to our transfer agent. Your certificates will not be issued until 15 days after your purchase unless the shares were purchased through a wire transfer. You cannot redeem certificated shares until the certificates have been returned to the transfer agent. If you lose your certificates, you will need to purchase a lost certificate bond.
Returned Checks or Rejected Transfers. You are responsible for any expenses or losses incurred by the Funds if your check is returned or your electronic transfer order is rejected by your bank for any reason, including insufficient funds or a stop payment request. These expenses and losses include additional custodial and transfer agent fees as well as any loss the Funds incur on the cancellation of the shares issued for your account. If you are an existing shareholder, the Funds may collect these losses by redeeming the necessary amount from your account and may reject future purchases.
Exceptions To Investment
Minimum And Closed Funds
Prior Approval for Exceptions. Approval for exceptions must be obtained by calling Southeastern at (901) 761-2474 prior to making your investment.
Exceptions to $10,000 Investment Minimum. The following investors may open a new account in any open Fund with an initial investment of less than $10,000:
| • | Family members of shareholders who have at least $250,000 invested in one of the Longleaf Partners Funds may open one or more accounts in the same Fund for a $5,000 initial investment. | |
| • | Persons who are employed by or are individual participants in institutional accounts of at least $2,000,000 in one of the Funds or in an account managed by Southeastern may open one or more accounts in any of the open funds for an initial investment of $5,000. | |
| • | Employees of Southeastern and their family members and employees of Longleaf service providers may open new accounts with a $1,000 initial investment. |
Closed Fund Exceptions. The Small-Cap Fund closed to new investors on July 31, 1997. The following investors may open new accounts in this Fund for an initial investment of $10,000:
27
Table of Contents
| • | Immediate family members of shareholders of the Small-Cap Fund. | |
| • | Financial advisors and consultants having clients who have maintained accounts in the Small-Cap Fund since its closing date may add new clients. | |
| • | Institutions and affiliates of institutions having an investment advisory relationship with Southeastern of at least $2,000,000. | |
| • | Employees of Southeastern and their family members and employees of Longleaf service providers may open new accounts with a $1,000 initial investment. |
If you redeem your Small-Cap Fund account below the minimum initial investment amount of $10,000, you will not be allowed to make further investments unless that Fund reopens.
How To Redeem Shares
You may withdraw any portion of your account in a share or dollar amount at any time. We will send your redemption proceeds within one week of receipt of your redemption request in good order. To allow the Fund to plan for large redemptions in an orderly manner, we request that you notify us of anticipated redemptions of $1,000,000 or more at least 5 business days before sending the formal redemption request. We must have received a completed and signed account application or W-9 form before releasing your redemption.
Redemption and Exchanges By Telephone. Investors who have established telephone redemption and exchange privileges may redeem or make exchanges of up to $100,000 over the telephone. Telephone redemptions may not be made from IRA accounts. Accounts with address change requests within the last 30 days must submit written redemption instructions with a Medallion Signature Guarantee. The following procedures are applicable:
| • | You may establish telephone redemption and exchange privileges when completing the account application or you may request the service by sending a written request to our Transfer Agent. | |
| • | Call (800) 445-9469 (option 0) if you have established telephone redemption and exchange privileges on your account. | |
| • | Exchanges into new accounts must meet the $10,000 minimum. | |
| • | Proceeds of redemptions will be sent only to the address of record or in accordance with previously established bank instructions. | |
| • | Calls received before the close of the New York Stock Exchange receive that day’s price. | |
| • | Calls received after the close of the New York Stock Exchange receive the next day’s price. | |
| • | The Funds may not hold a redemption request to be processed at a later date. |
Please retain the confirmation number assigned to your telephone redemption or exchange as proof of your trade. You cannot change or cancel a telephone redemption or exchange request after the transaction has been placed.
28
Table of Contents
The transfer agent employs reasonable procedures to confirm that instructions received by telephone are genuine. When these procedures are followed, the Funds and the transfer agent are not liable for losses caused by such instructions. The Fund reserves the right to revise or terminate telephone redemption and exchange privileges at any time.
Redemptions By Letter. The following information must be included in a redemption request:
| • | Your account number; | ||
| • | Fund name—Partners Fund (#133); International Fund (#136); Small-Cap Fund (#134); | ||
| • | The amount of the redemption, specified in either dollars or shares; | ||
| • | The signatures of all owners, exactly as they are registered on the account; | ||
| • | Medallion Signature Guarantees for redemptions over $100,000 or if the proceeds will be sent to a destination not previously established on the account; | ||
| • | Fund Certificates, if any have been issued for the shares being redeemed; | ||
| • | Other supporting legal documents that may be required in cases of estates, corporations, trusts and certain other accounts. |
Please call our transfer agent at (800) 445-9469 (option 0) if you have questions about these requirements.
Redemption requests and required documentation should be sent as
follows:
By U.S. Mail:
By Overnight Courier:
Longleaf Partners Funds
Longleaf Partners Funds
P.O. Box 9694
c/o PFPC
Providence, RI 02940-9694
101 Sabin Street
Pawtucket, RI 02860
(508) 871-8800
Automatic Withdrawals. You may establish automatic withdrawals from your account by sending written instructions to the transfer agent. You may request withdrawals monthly, quarterly, semi-annually or annually. Withdrawals will be processed on or about the 21st day of the month they are scheduled to occur. You can stop or change the amount of your automatic withdrawal by calling us at (800) 445-9469 (option 0). If stopped, you can restart your automatic withdrawal by calling us at (800) 445-9469 (option 0) within 6 months of the time your systematic withdrawal was stopped. You must send written instructions to make other changes or to restart these withdrawals if they have been stopped for more than 6 months.
Collected Funds . Whether you are redeeming by telephone or in writing, the Funds must have received payment for the shares you are redeeming. The transfer agent will send payment for the amount of your redemption covered by collected funds. Any portion of a redemption request not covered by collected funds is not considered “in good
29
Table of Contents
order” and the transfer agent may delay payment of that portion of the redemption for up to 15 days from the date of purchase to ensure that collected funds have been received.
Redemption Price and Fees. Your redemption price will be the net asset value per share at the next market close after the receipt of your redemption request in good order. The redemption price may be more or less than the shares’ original cost. The Funds do not charge redemption fees.
Account Changes. You may change the address on your account by calling us at (800) 445-9469 (option 0), while accessing your account information on our website at www.longleafpartners.com, or by sending a written request to our transfer agent, PFPC. Other changes to your account registration or account privileges must be made in writing.
Medallion Signature Guarantee. A Medallion Signature Guarantee is required when:
| • | You are redeeming more than $100,000 or are requesting a transfer or exchange for more than $100,000. | ||
| • | You are requesting that a redemption be sent to an address or bank instructions other than those already established for your account. | ||
| • | You are requesting a transfer, rollover, or other distribution of more than $100,000 from your IRA account. | ||
| • | You are requesting changes to the ownership of an account with a value greater than $100,000. | ||
| • | Your partial redemption request is accompanied by a request to change your account registration or account privileges. | ||
| • | You are requesting a redemption within 30 days of a change of address. | ||
| • | You are adding or changing bank wire or electronic transfer instructions on your account. |
There may be circumstances in addition to those listed above that require a Medallion Signature Guarantee. Please contact us at (800) 445-9469 (option 0) if you have questions regarding these requirements.
Acceptable medallion guarantees may be obtained from banks or brokerage firms that are members of either the Securities Transfer Association Medallion Signature Program (STAMP), the New York Stock Exchange Medallion Signature Program (MSP), or the Stock Exchange Medallion Program (SEMP). The guarantee must be in original form, as photocopies or fax copies are not accepted. The surety bond coverage of the Medallion Signature Guarantee on your request must be equal to, or greater than, the value of the requested transaction, and the guarantee must have unlimited effectiveness. Notarization is not an acceptable Medallion Signature Guarantee.
Confirmations and Reports. If you invest directly with the Funds, you will receive a confirmation statement after each account transaction and a
30
Table of Contents
consolidated statement at the end of each calendar quarter. Please review your statement for accuracy and report any discrepancies to our transfer agent promptly. You will also receive tax documentation as required by the IRS. We publish quarterly, semi-annual and audited annual reports containing information on each Fund’s portfolio of investments. These reports are available on the Funds’ website at www.longleafpartners.com, or by calling us at (800) 445-9469 (Option 1).
Purchases and Redemptions Through Brokerage Firms and Other Authorized Institutions. You may purchase and redeem shares of the Funds through brokerage firms and other authorized institutions that have agreements with the Funds. Some firms charge transaction fees for their services. If you invest through an authorized firm, you must follow that firm’s procedures for buying and selling shares. The firm may designate other organizations to accept purchase and redemption orders on behalf of their clients. If the firm submits trades to the Fund in accordance with the Funds’ trading agreement, the Funds will use the time of day when the firm or its designee accepts the order to determine the time of purchase or redemption, and will process the order at the next closing price computed after acceptance. The brokerage firm or other authorized institution has the responsibility of sending prospectuses, financial reports, statements, and tax forms to its clients.
Broker/Dealer and Institutional Investments. Upon execution of formal trading agreements, the Funds will accept trade orders from members of the National Association of Securities Dealers (NASD) or other institutional investors. The Funds offer telephone and automated trading through our transfer agent. Institutional investors may also establish pre-authorized fax redemption privileges. Please contact Southeastern at (901)761-2474 to obtain more information about these trading options.
Full payment for all purchases must be received within one day of the trade date. The entity initiating the trade order will be responsible for any loss that results from non-settlement. All purchase minimums and other requirements outlined in the trade order agreements must be followed to remain in good standing. The Funds may withdraw trading privileges at any time if it is in their best interests.
Payment of Redemptions Exceeding $250,000. The Longleaf Partners Funds have made an election to pay in cash the first $250,000 of any shareholder’s redemptions during any 90 day period. For omnibus accounts of brokers, this commitment applies to each separate shareholder rather than to the omnibus account as a whole. As allowed by Rule 18f-1, we have reserved the right to pay the balance of any redemptions exceeding $250,000 by distributing portfolio securities rather than cash. We may elect to exercise this right for any reason, including lack of at least 5 business days advance notice for redemptions of $1,000,000 or more, or requests for redemptions of $1,000,000 or more involving shares which have not been held for at least 90 days prior to the date of the redemption. If securities in lieu of
31
Table of Contents
cash are distributed to you, you may incur brokerage commissions when selling the securities and the securities will be subject to prevailing market prices at the time of sale.
How Fund Shares Are Priced
The price at which you buy or sell your Fund shares is referred to as their net asset value or “NAV.” We calculate NAV by dividing the total value of a Fund’s assets less its liabilities by the number of shares outstanding. We determine the NAV once a day, at the close of regular trading on the New York Stock Exchange (usually at 4:00 p.m. Eastern time) on days the Exchange is open for business. The Exchange is closed for specified national holidays and on weekends.
The values of the Funds’ investments are based on their market values. Securities listed or traded on a securities exchange (U.S. or foreign), on the NASDAQ national market, or on any representative quotation system providing same day publication of actual prices are valued at the last sale price. If there are no transactions in the security that day, securities are valued at the midpoint between the closing bid and ask prices or, if there are no such prices, the prior day’s closing price. In the case of bonds and other fixed income securities, valuations may be furnished by a pricing service which takes into account factors in addition to quoted prices (such as trading characteristics, yield, quality, coupon rate, maturity, type of issue, and other market data relating to the priced security or other similar securities) where taking such factors into account would lead to a more accurate reflection of the fair value of such securities. Non-registered securities and securities with limited trading markets are valued in good faith by the Board of Trustees.
We usually price foreign securities at the latest market close in the foreign market, which may be at different times or days than the close of the New York Stock Exchange. If events occur which could materially affect the NAV between the close of the foreign market and normal pricing at the close of the New York Stock Exchange, we may price the foreign securities at fair value as determined by the Board of Trustees, consistent with any regulatory guidelines.
Because the Funds are closed on days that foreign markets may be open, the prices of foreign holdings may change and Fund NAV’s may change on days when investors do not have access to the Funds.
The Statement of Additional Information which is a separate document, contains more information on how we price portfolio securities.
Dividends and Distributions
We intend to qualify for favorable tax treatment under the federal Internal Revenue Code by satisfying the Internal Revenue Code diversification standards and by distributing to shareholders essentially all investment income and realized capital gains. The Funds’ investment
32
Table of Contents
income, comprised primarily of dividends on portfolio securities and interest from cash equivalents or bonds, is usually distributed in late December. Realized capital gains for the 12 months ended October 31 are usually distributed in November. Your income dividends and capital gains distributions will be reinvested in additional shares of the Funds unless you have chosen to receive them in cash. If you make an investment shortly before a dividend is declared, you will be taxed on the full dividend in the same manner as shareholders who have owned shares throughout the year.
Dividends and Capital Gains paid in cash can only be sent to your address of record or to existing bank instructions on your account. You may choose to change your election to have your distribution’s paid in cash or reinvested by calling us at (800) 445-9469 (option 0).
Taxes
This tax information is general and refers primarily to current federal income tax provisions. These provisions may change after publication of this Prospectus. We urge you to consult your own tax adviser about the status of distributions and redemptions as applied to your personal situation.
Taxes on Income Dividends and Capital Gains Distributions. Generally, the Funds are not taxed on dividends and capital gains distributed to shareholders. Unless your account is a tax advantaged account such as an Individual Retirement Account or you are a tax exempt organization, you are responsible for paying federal and possibly state income taxes on any dividends and capital gains distributions you receive, even if you reinvest your distribution in additional shares of the Funds. Fund dividends from net investment income and short-term capital gains are taxed at your ordinary income tax rate. Long-term capital gains from securities held by the Funds for one year or more are taxed at your applicable capital gains rate, currently a maximum of 20% for shares held for one year or more. IRS Form 1099-DIV, mailed to you after December 31, will report the federal tax category of these distributions.
Taxes on Sales of Fund Shares. If you redeem any Fund shares or if you exchange shares between Funds, the transaction is taxable and you may realize a capital gain or loss. The amount of the gain or loss is the difference between your tax basis and the amount received. The gain or loss is long-term for shares you have held for one year or more, and is short-term for shares held less than one year. You are responsible for reporting and paying any federal or state taxes which may be due.
Withholding. Federal law requires the Funds to withhold a portion of distributions and proceeds from redemptions if you have failed to provide a correct tax identification number or to certify that you are not subject to withholding. These certifications must be made on your application or on Form W-9, which may be requested from our transfer agent.
The Statement of Additional Information contains more information about tax issues relating to the Funds.
33
Table of Contents
Financial Highlights
The financial highlights table is intended to help you understand
each Fund’s financial performance for the past five years or, if shorter,
the period of the Fund’s operations. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an
Net
Gains
Net
(Losses) on
Asset
Securities
Total
Dividends
Distributions
Value
Net
Realized
from
from Net
from
Beginning
Investment
and
Investment
Investment
Capital
of Period
Income
Unrealized
Operations
Income
Gains
Partners Fund
Year ended Dec. 31,
2002
$
24.51
$
.04
$
(2.08
)
$
(2.04
)
$
(.04
)
$
(.14
)
2001
22.71
.20
2.13
2.33
(.20
)
(.33
)
2000
20.49
.15
3.94
4.09
(.15
)
(1.72
)
1999
24.39
.28
.34
.62
(.29
)
(4.23
)
1998
25.98
.25
3.22
3.47
(.25
)
(4.81
)
International Fund
Year ended Dec. 31,
2002
12.34
(.06
)
(1.99
)
(2.05
)
—
(.32
)
2001
12.06
.13
1.13
1.26
(.13
)
(.85
)
2000
12.02
.35
2.70
3.05
(.38
)
(2.63
)
1999
9.97
.06
2.38
2.44
(.06
)
(.33
)
October 26, 1998
(Initial Public Offering)
through December 31,
1998
9.15
(e)
.01
.82
.83
(.01
)
—
Small-Cap Fund
Year ended Dec. 31,
2002
21.68
.52
(1.32
)
(0.80
)
(.53
)
(.02
)
2001
22.62
.24
.90
1.14
(.24
)
(1.84
)
2000
20.20
.05
2.53
2.58
(.05
)
(.11
)
1999
21.95
.08
.79
.87
(.08
)
(2.54
)
1998
22.18
.17
2.54
2.71
(.17
)
(2.77
)
| (a) | Annualized | |
| (b) | Total return reflects the rate that an investor would have earned on investment in the Fund during each period, assuming reinvestment of all distributions. | |
| (c) | Capitalized on August 12, 1998 at $10.00. | |
| (d) | Aggregate, not annualized. | |
| (e) | Expenses presented net of fee waiver. The expense ratio before the waiver was 1.76% and 2.65% in 1999 and 1998, respectively. In 2002, 2001 and 2000, the expense ratio for expenses subject to the waiver was 1.69%, 1.73% and 1.74%, respectively. |
34
Table of Contents
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP, whose
report, along with the Funds’ financial statements, are included in the Statement of Additional Information
and annual report, which are available upon request.
Net
Ratio of
Asset
Ratio of
Net (Loss)
Return
Value
Net Assets
Expenses
Income to
Portfolio
of
Total
End of
Total
End of Period
to Average
Average
Turnover
Capital
Distributions
Period
Return(b)
(thousands)
Net Assets
Net Assets
Rate
$(.05)
$
(.23
)
$
22.24
(8.34
)%
$
4,787,662
.91
%
.17
%
19.57
%
–
(.53
)
24.51
10.34
4,509,042
.94
.89
18.43
–
(1.87
)
22.71
20.60
3,751,993
.93
.75
20.48
–
(4.52
)
20.49
2.18
3,622,109
.92
1.16
50.39
–
(5.06
)
24.39
14.28
3,685,300
.93
1.12
43.78
–
(.32
)
9.97
(16.51
)
1,086,714
1.80
(e)
(.68
)
15.86
–
(.98
)
12.34
10.47
834,010
1.82
(e)
1.17
32.44
–
(3.01
)
12.06
25.93
404,505
1.79
(e)
3.36
69.40
–
(.39
)
12.02
24.37
293,613
1.75
(e)
.60
50.32
–
(.01
)
9.97
9.02
(d)
75,572
1.75
(e)(d)
.10
(e)
24.05
–
(.55
)
20.33
(3.74
)
1,677,194
.95
2.43
16.91
–
(2.08
)
21.68
5.45
1,634,115
.96
1.14
40.39
–
(.16
)
22.62
12.80
1,476,973
.98
.24
21.94
–
(2.62
)
20.20
4.05
1,429,673
.97
.38
47.48
–
(2.94
)
21.95
12.71
1,355,364
1.01
.87
52.51
35
Table of Contents
Investment Counsel
Southeastern Asset Management, Inc.
6410 Poplar Avenue, Suite 900
Memphis, TN 38119
Transfer and Dividend Agent
PFPC Inc.
Westborough, MA
Custodian
State Street Bank & Trust Company
Boston, MA
Special Legal Counsel
Dechert
Washington, DC
Boston, MA
Independent Public Accountants
PricewaterhouseCoopers LLP
Baltimore, MD
Boston, MA
36
Table of Contents
(This page intentionally left blank)
Table of Contents
(This page intentionally left blank)
Table of Contents
This Prospectus does not constitute an offering in any jurisdiction in which such offering would not be lawful.
You can find more information about the investment objectives and policies, the risks of investing in the Longleaf Partners Funds, and more information on Fund operations in the Statement of Additional Information (SAI). The SAI is incorporated by reference in this Prospectus, and you may request a copy by visiting our website or calling (800) 445-9469 (option 1).
You can also find more information about the Longleaf Partners Funds in our annual and semi-annual reports to shareholders, which contain financial statements and which also discuss market conditions and investment strategies that significantly affected the Funds’ performance during the last fiscal year. To obtain a free copy of the latest annual or semi-annual report, please visit our website or call (800) 445-9469 (option 1).
The Securities and Exchange Commission maintains an Internet website that contains the Funds’ periodic financial reports to shareholders, amendments to its registration statement which include the Prospectus and Statement of Additional Information, and other required filings. An investor may review these materials free of charge by accessing the SEC’s website at http://www.sec.gov.
The Securities and Exchange Commission Investment Company Act File Number for the Longleaf Partners Funds is 811-4923.
MANAGED BY:
SOUTHEASTERN ASSET MANAGEMENT, INC.
6410 POPLAR AVE.
SUITE 900
MEMPHIS, TN 38119
www.longleafpartners.com
(800) 445-9469
LLP0502-Prospectus
Table of Contents
|
New Account Application
PLEASE PRINT. Remember to complete and sign section 10 on the reverse of this application and retain a copy.
1. Account Registration
o Individual
| OWNER’S SOCIAL SECURITY | BIRTHDAY (MO/DAY/YR) |
| o | Joint Tenant with Rights of Survivorship (unless otherwise noted) |
| JOINT OWNER’S SOCIAL SECURITY | BIRTHDAY (MO/DAY/YR) |
o Transfer on Death Beneficiary
If you reside in a State that has adopted the Uniform Transfer on Death Registration Act, you may designate a beneficiary who will automatically own the account assets upon your death, outside of probate or other court proceedings. The beneficiary has no rights to the account until after your death.
o Gift to Minor
| MINOR’S SOCIAL SECURITY NUMBER | MINOR’S BIRTHDAY (MO/DAY/YR) |
| o Trust | o Corporation o Partnership | o Other |
| TAXPAYER ID NUMBER | DATE OF TRUST AGREEMENT (MO/DAY/YR) |
2. Mailing Address
| ( ) | ( ) |
|
|
|
| DAYTIME PHONE | EVENING PHONE |
Are you a U.S. citizen? o Yes o No
| 3. | Initial Investment ($10,000 Minimum per Fund Account) |
NOTE: THE FUNDS DO NOT ACCEPT THIRD-PARTY CHECKS.
| o Partners Fund (#133) | $ |
| o International Fund (#136) | $ |
| o Small-Cap Fund (#134) | $ Closed 7/31/97 |
| Total | $ |
| o Check | Make payable to Longleaf Partners Funds and mail to the address at the top of this form. |
| o Wire |
Prior to wiring funds, call (800) 445-9469 to set
up an account. Wire as follows:
Boston Safe Deposit & Trust Co. Boston, Massachusetts ABA #011001234 DDA #301442 For Fund # (see above) For credit to: (your name as account is registered) Shareholder account #: (your account number) |
Note: You must send a completed application to the Fund. Your account will be subject to backup tax withholding and redemptions cannot be paid until the completed application has been received.
4. Dividends and Capital Gains Payments
All distributions will be reinvested in additional shares unless you select one or both options below:
o Pay all capital gains in cash.
o Pay all dividends in cash.
5. Bank Instructions
Please complete the following information if you would like assets transferred electronically between your bank checking account and the Funds.
| BANK NAME | CITY | STATE |
| ABA ROUTING # | ACCOUNT# |
(you MUST include a voided check)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Table of Contents
6. Automatic Monthly Investment
You must complete section 5 of this application . Please indicate the amount of your monthly investment in each fund. Our minimum monthly investment is $100 per Fund. Bank transfers will be processed on or about the 21 st of each month.
| o | Transfer the following amount(s) each month |
| Partners Fund (#133) | $ |
| International Fund (#136) | $ |
| Small-Cap Fund (#134) | $ |
| Total Monthly Investment | $ |
| Beginning Date |
|
| MM/YY |
(Automatic Investment Plans normally become active 20 business days after your application is processed.)
| 7. | Electronic Asset Transfer Options |
You must complete section 5 of this application . Please select the electronic asset transfer options you would like on your account if you would like redemptions and other distributions to be sent directly to your bank checking account. If you have provided bank instructions in section 5 and no option is selected, redemptions and cash distributions will be sent by ACH.
(Choose One)
o Send Redemptions by ACH
(Choose One)
o Send Cash Dividends and/or Capital Gains by ACH
8. Telephone Transaction Options
Purchases, redemptions and exchanges can be made by telephone. Unless declined, the telephone transaction options will be added to your account. Once initiated, telephone transactions can not be canceled.
| o |
Do Not Add Telephone Purchase
Purchases can be made by telephone and will be added to your account on the first business following your call. Purchases CAN NOT be made on the same day your call is placed . Purchases will be deducted from your checking account by electronic transfer. This option will not be added unless you complete section 5 of this application. |
|
| o |
Do Not Add Telephone Redemption
You can redeem up to $100,000 over the telephone. Larger redemptions must be made in writing and require a Medallion Signature Guarantee. Telephone redemptions can only be sent to the existing address or bank instructions on your account. |
|
| o |
Do Not Add Telephone Exchange
You can exchange up to $100,000 over the telephone between Fund accounts with identical registrations. Exchanges greater than $100,000 must be made in writing and require a Medallion Signature Guarantee. |
Client Identification Number (For Internal Use Only)
9. Duplicate Shareholder Statements
Please send a copy of my account statements to:
10. Signature
EACH INVESTOR MUST SIGN THIS SECTION.
Under penalties of perjury, I certify that:
| 1. | The number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be issued to me), and |
| 2. | I am not subject to backup withholding because (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding, and |
| 3. | I am a U.S. person (including a U.S. resident alien). |
| o | CROSS OUT ITEM 2, ABOVE, AND CHECK HERE IF YOU ARE SUBJECT TO BACKUP WITHHOLDING. |
| o | If I am a non-resident alien, by checking here I certify under penalties of perjury that I am not a U.S. citizen or resident alien and that I am an “exempt foreign person” as defined under IRS regulations. |
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED ABOVE.
By signing this application, I also certify that:
| • | I have received and read the prospectus for the Fund and I agree to its terms. I have the authority and legal capacity to purchase mutual fund shares, am of legal age and believe each investment to be suitable for me. |
| • | I understand that this Fund is not a bank, and Fund shares are not backed or guaranteed by any bank nor insured by the FDIC. |
| • | I ratify any instructions, including telephone instructions, given on this account. I understand that the Fund or PFPC will employ reasonable procedures to confirm the genuineness of my instructions. I agree that neither the Fund nor PFPC will be liable for any loss, cost, or expense for acting upon any instructions believed to be genuine and in accordance with reasonable procedures designed to prevent unauthorized transactions. |
| o | For corporations, partnerships, trusts and other institutional accounts, the following persons are, and will continue to be, authorized signers for this account unless the Fund receives instructions to the contrary. |
| At least | ||
|
|
||
| (insert number of required signatures) |
authorized signature(s) are required to execute transactions. If left blank, one authorized signer may execute transactions.
| SIGNATURE OF OWNER/AUTHORIZED SIGNER | (DATE) |
X
| SIGNATURE OF JOINT OWNER/AUTHORIZED SIGNER | (DATE) |
X
| (ADDITIONAL INSTITUTIONAL SIGNATURE) | (DATE) |
X
| (ADDITIONAL INSTITUTIONAL SIGNATURE) | (DATE) |
Table of Contents
PART B
INFORMATION REQUIRED IN THE
STATEMENT OF ADDITIONAL INFORMATION
LONGLEAF PARTNERS FUND
TABLE OF CONTENTS
|
• Fund History
|
1 | |||||
|
• Investment Objectives and Policies
|
1 | |||||
|
• Classification of Investment
Objectives and Restrictions
|
2 | |||||
|
• Fundamental Investment Restrictions
|
2 | |||||
|
• Non-Fundamental Investment
Restrictions
|
5 | |||||
|
• Additional Information About Types of
Investments and Investment Techniques
|
||||||
|
Repurchase Agreements
|
6 | |||||
|
Warrants
|
6 | |||||
|
Real Estate Investment Trusts
|
7 | |||||
|
Futures Contracts
|
7 | |||||
|
Options on Securities and Stock Indices
|
7 | |||||
|
Foreign Currency Contracts
|
9 | |||||
|
Lending of Portfolio Securities
|
10 | |||||
|
Swaps
|
10 | |||||
|
Short Sales
|
10 | |||||
|
• Portfolio Turnover
|
11 | |||||
|
• Boards of Trustees
|
12 | |||||
|
• Compensation Table
|
14 | |||||
|
• Ownership of Fund Shares by Trustees
|
15 | |||||
|
• Other Information Concerning the
Boards of Trustees
|
16 | |||||
|
• Control Persons and Principal Holders
of Securities
|
18 | |||||
|
• Investment Advisory Services
|
18 | |||||
|
• Fund Administration
|
19 | |||||
|
• Other Service Providers
|
20 | |||||
|
• Allocation of Brokerage Commissions
|
21 | |||||
|
• Capital Stock and Indemnification
Rights
|
22 | |||||
|
• Purchase, Redemption, and Pricing of
Shares
|
24 | |||||
|
• Additional Tax Information
|
25 | |||||
|
• Investment Performance and Total
Return
|
27 | |||||
|
• Table of Bond and Preferred Stock
Ratings
|
29 | |||||
|
• Financial Statements
|
||||||
|
Report of Independent Public Accountants
|
31 | |||||
|
Partners Fund Portfolio of Investments
|
32 | |||||
|
International Fund Portfolio of Investments
|
34 | |||||
|
Small-Cap Fund Portfolio of Investments
|
37 | |||||
|
Other Financial Statements
|
38 | |||||
Managed by
TELEPHONE (800) 445-9469; www.longleafpartners.com
THIS STATEMENT OF ADDITIONAL INFORMATION, DATED MAY 1, 2003, IS NOT A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF LONGLEAF PARTNERS FUNDS TRUST, DATED MAY 1, 2003, WHICH MAY BE OBTAINED WITHOUT CHARGE UPON REQUEST BY CALLING (800) 445-9469.
Table of Contents
LONGLEAF PARTNERS FUNDS TRUST
STATEMENT OF ADDITIONAL INFORMATION
LONGLEAF PARTNERS FUND
Organization. Longleaf Partners Funds Trust was organized on November 26, 1986 as a Massachusetts business trust under the name Southeastern Asset Management Value Trust. Its name was changed to Longleaf Partners Funds Trust on August 2, 1994. Its existing series or Funds and the dates of their initial public offerings are as follows:
| Longleaf Partners Fund (known as Southeastern Asset Management Value Trust prior to August 2, 1994) — Initial public offering — April 8, 1987. | |
| Longleaf Partners International Fund — Initial public offering — October 26, 1998. | |
| Longleaf Partners Small-Cap Fund (known as Southeastern Asset Management Small-Cap Fund prior to August 2, 1994) — Initial public offering — February 21, 1989; closed to new investors, effective July 31, 1997. |
Significance of Fund Names. The name “Longleaf”, derived from the longleaf pine, a majestic, sturdy tree indigenous to the southeastern United States, represents the qualities of strength and endurance. A second element of the name is the word “Partners.” In selecting portfolio investments, Southeastern Asset Management, Inc. (“Southeastern”), the Funds’ Investment Counsel, seeks corporate managers who would make exemplary long-term business partners. They should be properly incented, ownership vested, honest, shareholder oriented, operationally competent individuals who are capable of allocating corporate resources intelligently. The Funds endeavor to be supportive long-term “partners” with management of the companies in the portfolios. Correspondingly, Southeastern’s own partners, other personnel, and relatives, are major investors in the Funds. Management considers itself a “partner” with Fund shareholders in seeking long-term capital growth. The Funds desire loyal, long-term investors as shareholders who view themselves as “partners” with Fund management.
INVESTMENT OBJECTIVES AND POLICIES
Longleaf Partners Funds Trust is an open-end, management investment company with three series or Funds. Each series is operated as a separate mutual fund with its own particular investment objective. The investment objectives and general investment policies of each Fund are as follows:
Longleaf Partners Fund
Investment Objective — Long-term capital growth.
1
Table of Contents
Longleaf Partners International Fund
Investment Objective — Long-term capital growth through investment primarily in equity securities of international or foreign issuers.
Longleaf Partners Small-Cap Fund
Investment Objective — Long-term capital growth.
CLASSIFICATION OF INVESTMENT OBJECTIVES AND RESTRICTIONS
The Funds have adopted certain investment objectives and restrictions as “fundamental.” Those investment objectives and restrictions cannot be changed without approval of a majority of the outstanding voting securities. Under the Investment Company Act of 1940, “approval of a majority of the outstanding voting securities” means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the particular Fund or (2) 67% or more of the shares present at a shareholders’ meeting if more than 50% of the outstanding shares are represented at the meeting in person or by proxy.
The investment objectives of the Partners and Small-Cap Funds are fundamental. The investment objective of the International Fund is non-fundamental. The investment policies of all of the Funds, shown in the prior section, are not fundamental. In addition, as described in more detail in the following sections, certain investment restrictions are not fundamental. Non-fundamental investment objectives, policies, and restrictions may be changed by the respective Boards of Trustees without shareholder approval.
FUNDAMENTAL INVESTMENT RESTRICTIONS
Non-Diversification. The Funds are all classified as “non-diversified” under the federal securities laws. As a result, there are no diversification requirements under the Investment Company Act of 1940 or any other securities laws.
Internal Revenue Code Diversification Standards. The Partners Fund and the Small-Cap Fund have adopted as fundamental policy the diversification standards of the Internal Revenue Code which apply to regulated investment companies. The International Fund expects to apply these diversification standards but has not adopted them as fundamental policy.
Under the diversification standards of the Internal Revenue Code, a mutual fund has two “baskets” or groups of holdings — a diversified basket, which must comprise at least 50% of its total assets and a non-diversified basket, which includes the remainder of its assets. Within the diversified basket, consisting of at least 50% of a Fund’s total assets, a Fund may not purchase more than 10% of the outstanding voting securities of any one issuer or invest more than 5% of the value of its total assets in the securities of any one issuer, except for securities issued by the U.S. Government, and its agencies or instrumentalities. With respect to the remainder of its assets, a Fund may not invest more than 25% of the value of its total assets in
2
Table of Contents
Industry Concentration. The Partners Fund and Small-Cap Fund may not invest 25% or more of the value of their total assets in securities of issuers in any one industry. This restriction does not apply to obligations issued or guaranteed by the United States Government and its agencies or instrumentalities or to cash equivalents. Corporate commercial paper will not be used to concentrate investments in a single industry.
For purposes of defining what constitutes a single industry for purposes of the restriction applying to these Funds, each Fund will use the definitions for industries as set forth in the latest edition of the North American Industry Classification System (“NAICS”) or other publicly available information. Industry category groupings shown in the Funds’ printed financial reports sent to shareholders may contain more than one Industry Code, and these broader industry groupings are intended to be functionally descriptive presentations rather than being limited to a single NAICS industry category.
Other Investment Restrictions. The Funds have adopted other investment restrictions designated as fundamental, which cannot be changed without shareholder approval. The fundamental investment restrictions of the Partners and Small-Cap Funds are identical; the fundamental restrictions of the International Fund, formed in 1998, are phrased differently, and its fundamental restrictions are shown separately.
FUNDAMENTAL INVESTMENT RESTRICTIONS FOR PARTNERS AND
Except as specifically authorized, the Partners Fund and the Small-Cap Fund each may not:
| • | Borrow money, except that it may borrow from banks to increase its holdings of portfolio securities in an amount not to exceed 30% of the value of its total assets and may borrow for temporary or emergency purposes from banks and entities other than banks in an amount not to exceed 5% of the value of its total assets; provided that aggregate borrowing at any time may not exceed 30% of the Fund’s total assets less all liabilities and indebtedness not represented by senior securities. |
| • | Issue any senior securities, except that collateral arrangements with respect to transactions such as forward contracts, futures contracts, short sales or options, including deposits of initial and variation margin, shall not be considered to be the issuance of a senior security for purposes of this restriction; |
| • | Act as an underwriter of securities issued by other persons, except insofar as the Fund may be deemed an underwriter in connection with the disposition of securities; |
| • | Purchase or sell real estate, except that the Fund may invest in securities of companies that deal in real estate or are engaged in the real estate business, including real estate investment trusts, and securities secured by real estate or interests therein and the Fund may hold and sell real estate acquired through default, liquidation, or other distributions of an interest in real estate as a result of the Fund’s ownership of such securities; |
| • | Purchase or sell commodities or commodity futures contracts, except that the Fund may invest in financial futures contracts, options thereon and similar instruments; |
3
Table of Contents
| • | Make loans to other persons except through the lending of securities held by it (but not to exceed a value of one-third of total assets), through the use of repurchase agreements, and by the purchase of debt securities, all in accordance with its investment policies. |
FUNDAMENTAL INVESTMENT RESTRICTIONS FOR THE INTERNATIONAL FUND
The International Fund has adopted the following investment restrictions as fundamental. The text of the fundamental restriction is set forth in bold type; any comments following these fundamental restrictions are explanatory only and are not fundamental.
| • | Industry Concentration. The Fund will not purchase any security which would cause the Fund to concentrate its investments in the securities of issuers primarily engaged in any one industry except as permitted by the Securities and Exchange Commission. |
| Comment. The present position of the staff of the Division of Investment Management of the Securities and Exchange Commission is that a mutual fund will be deemed to have concentrated its investments in a particular industry if it invests 25% or more of its total assets in securities of companies in any single industry. This restriction does not apply to obligations issued or guaranteed by the United States Government and its agencies or instrumentalities or to cash equivalents. The Fund will comply with this position but will be able to use a different percentage of assets without seeking shareholder approval if the SEC should subsequently allow investment of a larger percentage of assets in a single industry. Such a change will not be made without providing prior notice to shareholders. | |
| • | Senior Securities. The Fund may not issue senior securities, except as permitted under the Investment Company Act of 1940 or any rule, order or interpretation under the Act. |
| Comment. Generally, a senior security is an obligation of a Fund which takes precedence over the claims of fund shareholders. The Investment Company Act generally prohibits a fund from issuing senior securities, with limited exceptions. Under SEC staff interpretations, funds may incur certain obligations (for example, to deliver a foreign currency at a future date under a forward foreign currency contract) which otherwise might be deemed to create a senior security, provided the fund maintains a segregated account containing liquid securities having a value at least equal to the future obligations. | |
| • | Borrowing. The Fund may not borrow money, except as permitted by applicable law. |
| Comment. In general, a fund may not borrow money, except that (i) a fund may borrow from banks (as defined in the Investment Company Act) in amounts up to 33 1/3% of its total assets (including the amount borrowed) less liabilities (other than borrowings), (ii) a fund may borrow up to 5% of its total assets for temporary or emergency purposes, (iii) a fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities, and (iv) a fund may not pledge its assets other than to secure such borrowings or, to the extent permitted by the Fund’s investment policies as set forth in its current prospectus and statement of additional information, in connection with hedging transactions, short sales, when-issued and forward commitment transactions and similar investment strategies. | |
| • | Underwriting. The Fund may not act as an underwriter of securities issued by others, except insofar as the Fund may be deemed an underwriter in connection with the disposition of portfolio securities. |
| Comment. Generally, a mutual fund may not be an underwriter of securities issued by others. However, an exception to this restriction enables the Fund to sell securities held in its portfolio, usually securities |
4
Table of Contents
| which were acquired in unregistered or “restricted” form, even though it otherwise might technically be classified as an underwriter under the federal securities laws in making such sales. | |
| • | Commodities. The Fund may not purchase or sell commodities or commodity contracts unless acquired as a result of ownership of securities or other instruments issued by persons that purchase or sell commodities or commodities contracts, but this restriction shall not prevent the Fund from purchasing, selling and entering into financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), options on financial futures contracts, warrants, swaps, forward contracts, foreign currency spot and forward contracts, or other derivative instruments that are not related to physical commodities. |
| Comment. The Fund has the ability to purchase and sell (write) put and call options and to enter into futures contracts and options on futures contracts for hedging and risk management and for other non-hedging purposes. Examples of non-hedging risk management strategies include increasing a Fund’s exposure to the equity markets of particular countries by purchasing futures contracts on the stock indices of those countries and effectively increasing the duration of a bond portfolio by purchasing futures contracts on fixed income securities. Hedging and risk management techniques, unlike other non-hedging derivative strategies, are not intended to be speculative but, like all leveraged transactions, involve the possibility of gains as well as losses that could be greater than the purchase and sale of the underlying securities. | |
| • | Lending. The Fund may not make loans to other persons except through the lending of securities held by it as permitted by applicable law, through the use of repurchase agreements, and by the purchase of debt securities, all in accordance with its investment policies. |
| • | Real Estate. The Fund may not purchase or sell real estate, except that the Fund may invest in securities of companies that deal in real estate or are engaged in the real estate business, including real estate investment trusts, and securities secured by real estate or interests therein and the Fund may hold and sell real estate acquired through default, liquidation, or other distributions of an interest in real estate as a result of the Fund’s ownership of such securities. |
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
All of the funds have also adopted the following non-fundamental investment restrictions which may be changed in the discretion of the Board of Trustees, without prior shareholder approval. Except as specifically authorized, the Funds may not:
| • | Purchase restricted (non-registered) or “illiquid” securities, including repurchase agreements maturing in more than seven days, if as a result, more than 15% of the Fund’s net assets would then be invested in such securities (excluding securities which are eligible for resale pursuant to Rule 144A under the Securities Act of 1933). |
| • | Acquire or retain securities of any investment company, except that the Fund may (a) acquire securities of investment companies up to the limits permitted by Sec. 12(d)(l) of the Investment Company Act of 1940 (for each holding, 5% of the Fund’s total assets, 3% of the company’s voting stock, with not more than 10% of the Fund’s total assets invested in all such investment companies) provided such acquisitions are made in the open market and there is no commission or profit to a dealer or sponsor other than the customary broker’s commission, and (b) may acquire securities of any investment company as part of a merger, consolidation or similar transaction. |
5
Table of Contents
| • | Make short sales of equity portfolio securities whereby the dollar amount of short sales at any one time would exceed 25% of the net assets of the Fund, and the value of securities of any one issuer in which the Fund is short would exceed, at the time an order is placed, the lesser of 5% of the value of the Fund’s net assets or 5% of the securities of any class of any issuer; provided that the Fund maintains collateral in a segregated account consisting of cash or liquid securities with a value equal to the current market value of the shorted securities, which is marked to market daily. If the Fund owns an equal amount of such securities or securities convertible into or exchangeable for, without payment of any further consideration, securities of the same issuer as, and equal in amount to, the securities sold short (which sales are commonly referred to as “short sales against the box”), such restrictions shall not apply. |
| • | Invest in puts, calls, straddles, spreads or any combination thereof, except that the Fund may (a) purchase and sell put and call options on securities and securities indexes, and (b) write covered put and call options on securities and securities indexes and combinations thereof; provided that the securities underlying such options are within the investment policies of the Fund and the value of the underlying securities on which options may be written at any one time does not exceed 25% of total assets. |
| • | Invest in oil, gas or other mineral exploration programs, development programs or leases, except that the Fund may purchase securities of companies engaging in whole or in part in such activities. |
| • | Pledge, mortgage or hypothecate its assets except in connection with borrowings which are otherwise permissible. |
| • | Purchase securities on margin, except short-term credits as are necessary for the purchase and sale of securities, provided that the deposit or payment of initial or variation margin in connection with futures contracts or related options will not be deemed to be a purchase on margin. |
ADDITIONAL INFORMATION ABOUT TYPES OF INVESTMENTS
6
Table of Contents
Equity REITs may be further characterized as operating companies or financing companies. To the extent that an equity REIT provides operational and management expertise to the properties held in its portfolio, the REIT generally exercises some degree of control over the number and identity of tenants, the terms of their tenancies, the acquisition, construction, repair and maintenance of properties and other operational issues. A mortgage REIT or an equity REIT that provides financing rather than operational and management expertise to the properties in its portfolio will generally not have control over the operations that are conducted on the real estate in which the REIT has an interest.
The Funds may also buy and sell index futures contracts with respect to any stock or bond index traded on a recognized stock exchange or board of trade. An index futures contract is a contract to buy or sell units of an index at a specified future date at a price agreed upon when the contract is made. The stock index futures contract specifies that no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the stock index at the expiration of the contract.
At the time one of the Funds purchases a futures contract, an amount of cash, U.S. Government securities, or other liquid securities equal to the market value of the futures contract will be deposited in a segregated account with the Fund’s Custodian. When writing a futures contract, the Fund will maintain with the Custodian similar liquid assets that, when added to the amounts deposited with a futures commission merchant or broker as margin, are equal to the market value of the instruments underlying the contract. Alternatively, the Fund may “cover” the position by owning the instruments underlying the contract (or, in the case of an index futures contract, a portfolio with a volatility substantially similar to that of the index on which the futures contract is based), or holding a call option permitting the Fund to purchase the same futures contract at a price no higher than the price of the contract written by the Fund (or at a higher price if the difference is maintained in liquid assets with the Custodian).
7
Table of Contents
The Funds may write a call or put option only if the option is “covered.” A call option on a security written by one of the Funds is covered if the Fund owns the underlying security subject to the call, has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration held in a segregated account by its Custodian) upon conversion or exchange of other securities held in its portfolio, or the call is otherwise covered with assets held in a segregated account. A call option on a security is also covered if the Fund holds a call on the same security and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Fund in cash, liquid securities or money market instruments in a segregated account with its Custodian. A put option on a security written by the Fund is covered if the Fund maintains similar liquid assets with a value equal to the exercise price in a segregated account with its Custodian, or holds a put on the same security and in the same principal amount as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written.
A Fund may cover call options on stock indices through a segregated account or by owning securities whose price changes, in the opinion of Southeastern, are expected to be similar to those of the index, or in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations. Nevertheless, where a Fund covers a call option on a stock index through ownership of securities, such securities may not match the composition of the index. In that event, the Fund will not be fully covered and could be subject to risk of loss in the event of adverse changes in the value of the index. A Fund may cover put options on stock indices by segregating assets equal to the option’s exercise price, or in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations.
A Fund will receive a premium from writing a put or call option, which increases its gross income in the event the option expires unexercised or is closed out at a profit. If the value of a security or an index on which a Fund has written a call option falls or remains the same, the Fund will realize a profit in the form of the premium received (less transaction costs) that could offset all or a portion of any decline in the value of the portfolio securities being hedged. If the value of the underlying security or index rises, however, the Fund will realize a loss in its call option position, which will reduce the benefit of any unrealized appreciation in the Fund’s stock investments. By writing a put option, the Fund assumes the risk of a decline in the underlying security or index. To the extent that the price changes of the portfolio securities being hedged correlate with changes in the value of the underlying security or index, writing covered put options on securities or indices will increase the Fund’s losses in the event of a market decline, although such losses will be offset in part by the premium received for writing the option.
A Fund may also purchase put options to hedge its investments against a decline in value. By purchasing a put option, the Fund will seek to offset a decline in the value of the portfolio securities being hedged through appreciation of the put option. If the value of the Fund’s investments does not decline as anticipated, or if the value of the option does not increase, the Fund’s loss will be limited to the premium paid for the option plus related transaction costs. The success of this strategy will depend, in part, on the accuracy of the correlation between the changes in value of the underlying security or index and the changes in value of the Fund’s security holdings being hedged.
8
Table of Contents
A Fund may purchase call options on individual securities to hedge against an increase in the price of securities that the Fund anticipates purchasing in the future. Similarly, a Fund may purchase call options to attempt to reduce the risk of missing a broad market advance, or an advance in an industry or market segment, at a time when the Fund holds uninvested cash or short-term debt securities awaiting investment. When purchasing call options, the Fund will bear the risk of losing all or a portion of the premium paid if the value of the underlying security or index does not rise.
There can be no assurance that a liquid market will exist when a Fund seeks to close out an option position. Trading could be interrupted, for example, because of supply and demand imbalances arising from a lack of either buyers or sellers, or the options exchange could suspend trading after the price has risen or fallen more than the maximum specified by the exchange. Although the Fund may be able to offset to some extent any adverse effects of being unable to liquidate an option position, it may experience losses in some cases as a result of such inability.
As part of the investment decision process, a Fund may enter into forward foreign currency exchange contracts (“forward contracts”) to seek to minimize the exposure from a change in the relationship between the U.S. dollar and foreign currencies. A forward contract is an obligation to purchase or sell a specific currency for an agreed price at a future date which is individually negotiated and privately traded by currency traders and their customers. A Fund may enter into a forward contract, for example, when it enters into a contract for the purchase or sale of a security denominated in a foreign currency in order to “lock in” the U.S. dollar price of the security. The Funds will segregate cash, cash equivalents or liquid securities sufficient to cover any commitments under these contracts. The segregated account will be marked-to-market daily. Each Fund may seek to hedge the foreign currency exposure risk to the full extent of its investment in foreign securities, but there is no requirement that all foreign securities be hedged against foreign currency exposure. Forward contracts may reduce the potential gain from a positive change in the relationship between the U.S. dollar and foreign currencies or, considered separately, may produce a loss.
A Fund may purchase and write put and call options on foreign currencies for the purpose of protecting against declines in the dollar value of foreign portfolio securities and against increases in the dollar cost of foreign securities to be acquired. As with other kinds of options, however, the writing of an option on foreign currency will constitute only a partial hedge, up to the amount of the premium received, and the Fund could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign currency may constitute an effective hedge against fluctuation in exchange rates although, in the event of rate movements adverse to the Fund’s position, the Fund may forfeit the entire amount of the premium plus related transaction costs.
A Fund may enter into exchange-traded contracts for the purchase or sale for future delivery of foreign currencies (“foreign currency futures”). This investment technique may be used to hedge against anticipated future changes in exchange rates which otherwise might adversely affect the value of the particular Fund’s portfolio securities or adversely affect the prices of securities that the Fund intends to purchase at a later date. The successful use of currency futures will usually depend on the Investment Counsel’s ability to forecast currency exchange rate movements correctly. Should exchange rates move in an
9
Table of Contents
The Funds may enter into these transactions to preserve a return or spread on a particular investment or portion of its assets, to protect against currency fluctuations, as a duration management technique, or to protect against any increase in the price of securities a Fund anticipates purchasing at a later date. These transactions may also be used to obtain the price performance of a security without actually purchasing the security in circumstances where, for example, the subject security is illiquid, is unavailable for direct investment or is available only on less attractive terms.
Swaps have risks associated with them, including possible default by the counterparty to the transaction, illiquidity and, where used for hedges, the risk that the use of a swap could result in losses greater than if the swap had not been employed.
Since short selling can result in profits when stock prices generally decline, the Funds can, to a certain extent, hedge the market risk to the value of its other investments and protect its equity in a declining market. When a portfolio company has a subsidiary which is partially publicly held, a short sale of the subsidiary’s shares can be used as a partial hedge to protect the value of the portfolio holding. However, the Funds could, at any given time, suffer both a loss on the purchase or retention of one security, if that security should decline in value, and a loss on a short sale of another security, if the security sold short should increase in value. When a short position is closed out, it may result in a short term capital gain or loss for federal income tax purposes. To the extent that in a generally rising market a Fund maintains short positions
10
Table of Contents
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of purchases or sales of a Fund’s portfolio securities for the year by the monthly average value of the portfolio securities. Securities with remaining maturities of one year or less at the date of acquisition are excluded from the calculation.
Portfolio turnover cannot be accurately predicted. The Funds’ investment philosophy contemplates holding portfolio securities for the long term, and portfolio turnover usually should be less than 50%. Portfolio turnover rates in excess of 50% generally occur because companies in the portfolio are acquired by other companies or reach their appraised or intrinsic value during the year and are sold. The proceeds of these sales may then be applied to purchase new positions having a lower price to value ratio. There are no specific limits on portfolio turnover, and investments will be sold without regard to the length of time held when investment considerations support such action. Turnover rates greater than 100% involve greater transaction costs.
The portfolio turnover rates of the Funds for the past three
years are as follows:
2002
2001
2000
19.57%
18.43%
20.48%
15.86%
32.44%
69.40%
16.91%
40.39%
21.94%
11
Table of Contents
BOARDS OF TRUSTEES
Each of the Funds is operated by its Board of Trustees, which implements policies and Fund operations through officers or employees of Southeastern Asset Management, Inc. (“Southeastern”). Day to day portfolio management and fund administration are provided by Southeastern in its capacity as Investment Counsel and as Fund Administrator under contracts which must be renewed annually, as required by the Investment Company Act of 1940.
12
Table of Contents
13
Table of Contents
2002 COMPENSATION TABLE
The following table provides information on fees paid to each Trustee for Board service during 2002:
| Aggregate Compensation from Each Fund | ||||||||||||||||
|
|
Total | |||||||||||||||
| Partners | International | Small-Cap | Compensation From | |||||||||||||
| Name | Fund | Fund | Fund | All Funds (2)(3) | ||||||||||||
|
|
|
|
|
|
||||||||||||
|
O. Mason Hawkins*
|
None | None | None | None | ||||||||||||
|
G. Staley Cates*
|
None | None | None | None | ||||||||||||
|
Margaret H. Child*
(1)
|
$ | 20,000 | $ | 15,000 | $ | 15,000 | $ | 50,000 | ||||||||
|
Chadwick H. Carpenter, Jr.
|
20,000 | 15,000 | 15,000 | 50,000 | ||||||||||||
|
Daniel W. Connell, Jr.
|
20,000 | 15,000 | 15,000 | 50,000 | ||||||||||||
|
Steven N. Melnyk
|
20,000 | 15,000 | 15,000 | 50,000 | ||||||||||||
|
C. Barham Ray
|
20,000 | 15,000 | 15,000 | 50,000 | ||||||||||||
|
Perry C. Steger
|
20,000 | 15,000 | 15,000 | 50,000 | ||||||||||||
* Interested Trustee
| (1) | Ms. Child is classified as an “interested” Trustee because she performs certain operational and administrative functions for the Funds in Massachusetts, their state of organization. She is not employed by Southeastern Asset Management, Inc. and accordingly receives no compensation from Southeastern. |
| (2) | The Funds have no pension or retirement plan for Trustees. |
| (3) | The Funds also reimburse the outside Trustees for lodging and travel expenses incurred in attending Board meetings. |
14
Table of Contents
OWNERSHIP OF FUND SHARES BY TRUSTEES
The following table provides information on the range of ownership of Fund shares at December 31, 2002 by individual members of the Funds’ Boards of Trustees.
| Aggregate Dollar Range of | ||||
| Equity Securities in All | ||||
| Registered Investment | ||||
| Companies Overseen by Trustee | ||||
| Dollar Range of Equity | in Family of Investment | |||
| Name of Director | Securities in Each Fund | Companies | ||
|
|
||||
| Affiliated or Interested Trustees | ||||
|
|
||||
| O. Mason Hawkins, CFA |
Partners Fund – Over $100,000
International Fund – Over $100,000 Small-Cap Fund – Over $100,000 |
Over $100,000 | ||
|
|
||||
| G. Staley Cates, CFA |
Partners Fund – Over $100,000
International Fund – Over $100,000 Small-Cap Fund – Over $100,000 |
Over $100,000 | ||
|
|
||||
| Margaret H. Child |
Partners Fund – Over $100,000
International Fund – Over $100,000 Small-Cap Fund – Over $100,000 |
Over $100,000 | ||
|
|
||||
| Independent or Non-Interested Trustees | ||||
|
|
||||
| Chadwick H. Carpenter, Jr. |
Partners Fund – Over $100,000
International Fund – Over $100,000 Small-Cap – Over $100,000 |
Over $100,000 | ||
|
|
||||
| Daniel W. Connell, Jr. |
Partners Fund – Over $100,000
International Fund – Over $100,000 Small-Cap Fund – Over $100,000 |
Over $100,000 | ||
|
|
||||
| Steven N. Melnyk |
Partners Fund – $50,001–$100,000
International Fund – $10,001–$50,000 Small-Cap Fund – $10,001–$50,000 |
Over $100,000 | ||
|
|
||||
| C. Barham Ray |
Partners Fund – Over $100,000
International Fund – $50,001–$100,000 Small-Cap Fund – Over $100,000 |
Over $100,000 | ||
|
|
||||
| Perry C. Steger |
Partners Fund – Over $100,000
International Fund – $10,001–$50,000 Small-Cap Fund – $10,001–$50,000 |
Over $100,000 | ||
|
|
||||
15
Table of Contents
OTHER INFORMATION CONCERNING THE BOARDS OF TRUSTEES
Board Committees. The Board has established an Audit Committee and has adopted a charter. Mr. Melnyk serves as Chairman. The Audit Committee, composed of all independent or non “interested” Trustees, reviews the audit plan and results of audits, and monitors the performance of the independent certified public accountants. The Committee met with representatives of the accounting firm in a formal meeting on March 5, 2003, after completion of the audit for the fiscal year ended December 31, 2002.
Factors Considered By The Boards Of Trustees In Recommending Approval Of The Investment Counsel Agreement And The Fund Administration Agreement With Southeastern Asset Management, Inc. The Boards of Trustees consider a wide range of factors in adopting the Investment Counsel Agreement and the Fund Administration Agreement and recommending ratification and extension of the terms of these Agreements by shareholders. These factors include: a review of the investment strategy employed by Southeastern as Investment Counsel; its investment reputation and success in implementing its philosophy in the management of institutional and private accounts since its formation in 1975; its financial and employment stability; its support in building Fund assets; the level of personal investment in the Funds by its principals; and the separate investment performance of each Fund for recent periods and since inception.
Under Southeastern’s investment philosophy, superior long-term performance can be achieved when positions in financially strong, well-managed companies are acquired at prices significantly below their business value and are sold when they approach their corporate worth. Using this approach, stocks are viewed as ownership units in a business enterprise which has an unrecognized business or “intrinsic” value subject to determination through careful securities analysis and the use of established disciplines consistently applied over long periods of time. Stocks which can be identified and purchased at a price significantly discounted from this intrinsic worth not only protect investment capital from significant loss but also facilitate major rewards when the true business value is ultimately recognized. Information on the investment performance of the Funds is shown on page 27, and similar information is considered each year by the Boards in comparison with relevant benchmarks.
The Boards also consider other support provided by Southeastern which goes beyond providing pure investment advice, such as the following:
Building of Fund Assets. Southeastern has been instrumental in building each Fund’s assets, particularly during the first several years of its life. Substantial investments had been made by Mr. Mason Hawkins, Chairman, other Southeastern personnel, and Southeastern’s profit sharing plan. At March 31, 2003, Southeastern’s directors, officers, employees, their family members and Southeastern’s profit sharing plan formed one of the largest group of related shareholders of each Fund. As a result, Southeastern’s officers and employees are personally investing as partners with other Fund shareholders, and are subject to the same risks and rewards.
Additionally, a number of large accounts are the result of Southeastern’s institutional contacts. Consultants and fee paid investment advisers who have long relationships with Southeastern and its other funds have recommended the Funds as an investment medium for individual or institutional clients. As a result, many large shareholders of the Fund have a prior relationship with Southeastern and have invested in the Funds because of an existing confidence level in Southeastern’s investment management capabilities.
16
Table of Contents
Possible Future Application of Expense Limitation. Should expenses of operation exceed the expense limitation, Southeastern would be required to continue the fee reduction which occurred during the first year of operations of each Fund. In the future, a decrease in assets and/or an increase in expenses could cause other reductions in management fees.
Possible Assumption of Loss on Processing Errors. Under the Fund Administration Agreement, Southeastern determines the daily per share net asset value of the Funds, a price used by the Fund’s transfer agent in processing shareholder purchases and redemptions. The Fund Administration Agreement contains normal language relieving Southeastern from monetary liability for processing errors caused by factors other than gross negligence or reckless disregard of its contractual responsibilities. However, it is possible that Southeastern could be required to absorb losses for pricing or processing errors caused by mistake or simple negligence. As a result, Southeastern might be required in the future to assume financial responsibility for any pricing or other processing losses which it might cause.
17
Table of Contents
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following table lists those shareholders owning directly or beneficially 5% or more of the outstanding shares of each Fund at March 31, 2003, and also shows the aggregate ownership of Fund and management company personnel, their relatives, and affiliated retirement plans and foundations:
|
Longleaf Partners Fund |
||||
|
Clients of Charles Schwab & Co., Inc., a
brokerage firm
|
||||
|
CTC Illinois Trust FBO Sun Microsystems Deferred
Retirement Savings Plan
|
||||
|
Clients of National Financial Services Corp., a
brokerage firm
|
||||
|
All Trustees of the Fund, all directors, officers
and employees of Southeastern Asset Management, Inc., and
relatives, affiliated retirement plans and foundations
|
||||
|
Longleaf Partners International Fund |
||||
|
Clients of Charles Schwab & Co., Inc., a
brokerage firm
|
||||
|
Henry R. Fett TTEE U/A DTD 12/20/99, 1999
Irrevocable US Annuity & Gift Trust; and Eternity Limited
|
||||
|
Clients of National Financial Services, Corp.,
a brokerage firm
|
||||
|
O. Mason Hawkins, Chairman of the Board of
Trustees
|
||||
|
All Trustees of the Fund, all directors, officers
and employees of Southeastern Asset Management, Inc., and
relatives, affiliated retirement plans and foundations
|
||||
|
Longleaf Partners Small-Cap Fund |
||||
|
Clients of Charles Schwab & Co., Inc., a
brokerage firm
|
||||
|
Clients of National Financial Services, Corp.,
a brokerage firm
|
||||
|
All Trustees of the Fund, all directors, officers
and employees of Southeastern Asset Management, Inc., and
relatives, affiliated retirement plans and foundations
|
||||
INVESTMENT ADVISORY SERVICES
Southeastern Asset Management, Inc. (“Southeastern”), an investment advisor registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940, is the Fund’s Investment Counsel. Southeastern is owned and controlled by its principal officers. Mr. O. Mason Hawkins, Chairman of the Board and Chief Executive Officer of Southeastern, owns a majority of its outstanding voting stock and is deemed to control the Company.
Formed in 1975, Southeastern manages institutional and individual assets in private or separate accounts as well as mutual funds, and is responsible for managing more than $16 billion in client assets. It has served as investment adviser to each of the Longleaf Partners Funds since their respective inception dates. Additional information with respect to the investment advisory function is contained in the Prospectus on pages 19 through 21.
The annual Investment Counsel fee for the Partners Fund and the Small-Cap Fund, calculated daily and paid monthly, is 1% of average daily net assets on the first $400 million and 0.75% of average daily net assets above $400 million. The annual Investment Counsel fee for the International Fund is 1.5% of average daily net assets.
All of the Funds have a contractual expense limitation, which is included in the Investment Counsel Agreement and cannot be changed without approval of shareholders. The expense limitation includes the
18
Table of Contents
Investment Counsel fees paid by each Fund for the last three
fiscal years are as follows:
2002
2001
2000
$
36,538,690
$
31,875,946
$
26,177,108
15,084,224
9,774,863
5,031,181
13,961,959
12,871,591
10,832,028
Southeastern serves as Fund Administrator under an agreement which is renewable annually, and in that capacity manages or performs all business and administrative operations of each Fund, including the following:
| • | Preparation and maintenance of all accounting records |
| • | Preparation or supervision of preparation and filing of required financial reports and tax returns |
| • | Federal and state securities registrations and reports of sales of shares |
| • | Calculation of daily net asset value per share |
| • | Preparation and filing of prospectuses, proxy statements, and reports to shareholders |
| • | General coordination and liaison among the Investment Counsel, the Custodian, the Transfer Agent, authorized dealers, other outside service providers, and regulatory authorities |
Each Fund pays an Administration Fee equal to 0.10% per annum of
the average daily net assets for the services provided by
Southeastern, which is accrued daily and paid monthly in
arrears. Administration fees paid by each Fund for the last
three fiscal years are as follows:
2002
2001
2000
$
4,738,498
$
4,116,798
$
3,356,948
1,005,616
651,658
335,412
1,728,263
1,582,881
1,310,937
All direct operating expenses are paid by that particular Fund. Such expenses include but are not limited to the following: (i) fees of the Custodian and Transfer Agent; (ii) compensation of the independent public accountants, outside legal counsel, and fees and travel expenses of the Trustees who are not officers or employees of Southeastern; (iii) any franchise, income and other taxes relating to the Funds or their securities; (iv) all filing fees and legal expenses incurred in qualifying and continuing the registrations of the shares for sale with the Securities and Exchange Commission and with any state regulatory agency; (v) insurance premiums and trade association dues; (vi) the costs of typesetting, printing and mailing to shareholders such documents as prospectuses, proxy statements, reports to shareholders, dividend notices and other communications; (vii) expenses of meetings of shareholders and meetings of the Boards of Trustees; (viii) external expenses related to pricing the Funds’ portfolio securities; and (ix) any extraordinary expenses such as expenses of litigation. The Funds are also responsible for the expenses of stationery,
19
Table of Contents
Terms of Operating Agreements. Each Fund has entered into agreements with Southeastern as Investment Counsel and separately as Fund Administrator, initially effective for a period of two years. Each agreement must be renewed each year prior to November 1 by the affirmative vote of a majority of the outstanding voting securities of each Fund or by a majority of the members of the Board of Trustees, including a majority of the Trustees who are not “interested” Trustees. Such Agreements will automatically terminate in the event of assignment as defined in the Investment Company Act of 1940. The Funds may terminate such Agreements, without penalty, upon 60 days’ written notice by a majority vote of the Board of Trustees or by a majority of the outstanding voting securities of the particular Fund.
Custodian of Fund Assets. State Street Bank and Trust Company, located at One Heritage Drive, North Quincy, MA 02171, serves as Custodian of the assets of each Fund. Where possible, the Custodian utilizes book entry records with securities depositories, which in turn may have book entry records with transfer agents of the issuers of the securities. With respect to U.S. Government issues the Custodian may utilize the book entry system of the Federal Reserve System. The Custodian is responsible for collecting the proceeds of securities sold and disbursement of the cost of securities purchased by the Funds. State Street Bank also serves as the foreign custody manager for the Funds with respect to foreign securities, using foreign sub-custodians which participate in its global custody network.
Transfer Agent. PFPC Inc. (“PFPC”), located at 4400 Computer Drive, Westborough, MA 01581-5120, an affiliate of The PNC Financial Services Group, Inc., is the transfer agent and dividend disbursing agent. PFPC maintains all shareholder accounts and records; processes all transactions including purchases, redemptions, transfers and exchanges; prepares and mails account confirmations, statements, tax forms, and correspondence; issues stock certificates; and handles all account inquiries.
Independent Public Accountants. PricewaterhouseCoopers LLP is the Fund’s independent public accounting firm. The Funds are served by the Baltimore office, located at 250 West Pratt Street, Suite 2100, Baltimore MD 21201, and by the Boston office, located at 160 Federal Street, Boston, MA 02110.
Legal Counsel. Dechert, a law firm with offices in major cities including Washington, Philadelphia, New York City, and Boston, is the Funds’ special legal counsel. The Funds are served by the Washington office, located at 1775 Eye Street, NW, Washington, DC 20006-2402, and the Boston office, located at Ten Post Office Square, South, Boston, MA 02109-4603. Andrew R. McCarroll, Vice President and General Counsel of Southeastern, and Michael J. Wittke, Vice President and Assistant General Counsel of Southeastern, perform legal services for the Funds under Southeastern’s contract as Fund Administrator.
Service Awards. In order to promote quality service for the benefit of Fund shareholders, Southeastern may give special recognition or financial rewards to employees of service providers such as the Funds’ transfer agent and fulfillment agent. Such reward programs are designed to recognize employees of these Fund service providers who excel in meeting our shareholders’ needs. Costs associated with these reward programs are paid by Southeastern.
20
Table of Contents
ALLOCATION OF BROKERAGE COMMISSIONS
Southeastern, in its capacity as Investment Counsel, is responsible under the supervision of the Board of Trustees for the selection of members of securities exchanges, brokers and dealers (referred to as “brokers”) for the execution of portfolio transactions and, when applicable, the negotiation of brokerage commissions. On behalf of each Fund, Southeastern is also responsible for investment decisions and for the placement and execution of purchase and sale orders through selected brokers. All investment decisions and placements of trades for the purchase and sale of portfolio securities are made in accordance with the following principles:
| 1. Purchase and sale orders are usually placed with brokers who are recommended by Southeastern and/or selected by management of the Fund as able to achieve “best execution” of such orders. “Best execution” means prompt and reliable execution at the most favorable security price, taking into account the following provisions. The determination of what may constitute best execution and price in the execution of a securities transaction by a broker involves a number of considerations, including, among others, the overall direct net economic result to the Fund (involving both price paid or received and any commissions and other costs paid), the efficiency with which the transaction is effected, the ability to effect the transaction in the future, the financial strength and stability of the broker, and the ability of the broker to commit resources to the execution of the trade. Such considerations are judgemental and are weighed by Southeastern and the Board of Trustees in determining the overall reasonableness of brokerage commissions. | |
| 2. In recommending or selecting brokers for portfolio transactions, Southeastern takes into account its past experience in determining those qualified to achieve “best execution.” | |
| 3. Southeastern is authorized to recommend and the Fund is authorized to allocate brokerage and principal purchase and sales transactions to brokers who have provided brokerage and research services, as such services are defined in Section 28(e) of the Securities Exchange Act of 1934 (the “1934 Act”), and for other services which benefit the Fund directly through reduction of the Fund’s expense obligations, such as a reduction in the Fund’s share of the lease charges for computer expenses. Southeastern could cause the Fund to pay a commission for effecting a securities transaction in excess of the amount another broker would have charged for effecting that transaction, if Southeastern in making the recommendation in question determines in good faith that the commission is reasonable in relation to the value of the brokerage and research services or other benefits provided the Fund by such broker. In reaching such determination, neither Southeastern nor the officer of the Fund making the decision is required to place a specific dollar value on the research or execution services of a broker. In demonstrating that such determinations were made in good faith, Southeastern and the officer of the Fund shall be prepared to show that all commissions were allocated and paid for purposes contemplated by the Fund’s brokerage policy; that any other benefits or services provided the Fund were in furtherance of lawful and appropriate obligations of the Fund; and that the commissions paid were within a reasonable range. Such determination shall be based on available information as to the level of commissions known to be charged by other brokers on comparable transactions, but there shall be taken into account the Fund’s policies (i) that paying the lowest commission is deemed secondary to obtaining a favorable price and (ii) that the quality, comprehensiveness and frequency of research studies which are provided for the Fund and Southeastern may be useful to Southeastern in performing its services under its Agreement with the Fund but are not subject to precise evaluation. Research services provided by brokers to the Fund or to Southeastern are considered to be supplementary to, and not in lieu of services required to be performed by Southeastern. |
21
Table of Contents
| 4. Purchases and sales of portfolio securities within the United States other than on a securities exchange are executed with primary market makers acting as principal, except where, in the judgment of Southeastern, better prices and execution may be obtained on a commission basis or from other sources. | |
| 5. Sales of a Fund’s shares by a broker are one factor among others to be taken into account in recommending and in deciding to allocate portfolio transactions (including agency transactions, principal transactions, purchases in underwritings or tenders in response to tender offers) for the account of the Fund to a broker, provided that the broker shall furnish “best execution”, as defined in paragraph 1 above, and that such allocation shall be within the scope of the Fund’s other policies as stated above; and provided further that in every allocation made to a broker in which the sale of Fund shares is taken into account, there shall be no increase in the amount determined, as set forth in paragraph 3 above, on the basis of best execution plus research services, without taking account of or placing any value upon such sales of Fund shares. |
Investment decisions for each Fund are made independently from those of the other Funds or accounts of other clients managed by Southeastern, but the same security may be held in the portfolios of more than one Fund or by a number of managed accounts. When several accounts and the Funds’ portfolios simultaneously purchase or sell the same security, the prices and amounts will be equitably allocated among all such accounts. In some situations this procedure could adversely affect the price or quantity of the security available to one or more of the Funds, but in other situations the ability to participate in larger volume transactions may enable a Fund to realize better executions, prices, and lower commissions.
Southeastern does not own an interest in any brokerage firm and
places trades for the Funds through non-affiliated brokerage
firms. Brokerage commissions paid by the Funds for the past
three years are as follows:
2002
2001
2000
$
3,963,379
$
3,993,047
1,964,609
1,497,645
2,956,751
464,133
CAPITAL STOCK AND INDEMNIFICATION RIGHTS
Longleaf Partners Funds Trust (the “Trust”) is a Massachusetts business trust which presently has three separate series or Funds. Each series issues its capital stock in the form of shares of beneficial interest having no par value. Each Fund may issue an unlimited number of shares of beneficial interest, all of which are of one class. Each share of each Fund has equal voting rights with all other shares of that Fund. Shares do not have cumulative voting rights, which means that holders of less than 50% of the outstanding shares cannot cumulate their total votes for all Trustees in order to elect a single Trustee, and the holders of more than 50% of the outstanding shares may elect 100% of the particular Fund’s Trustees.
A Massachusetts business trust is not required to hold annual meetings of shareholders. Annual meetings ordinarily will not be held unless so required by the provisions of the Investment Company Act of 1940, which would include such matters as amending the investment advisory agreement or electing new members of the Board of Trustees. The Board of Trustees may fill vacancies on the Board if at least two-thirds of the Trustees serving after the new appointment were elected by shareholders.
22
Table of Contents
Each share of beneficial interest represents an equal proportionate interest in the assets of the particular Fund with every other share and each share is entitled to a proportionate share of dividends and distributions of net income and capital gains belonging to that Fund when declared by the Board of Trustees. There are no preemptive, subscription, or conversion rights.
When a Fund has received payment of the net asset value per share, each share issued is fully paid and non-assessable. Under Massachusetts law, shareholders of a mutual fund which is a series of a Massachusetts business trust could, in theory, be held personally liable for certain obligations of the particular series. Our Declaration of Trust contains an express disclaimer of shareholder liability for obligations of each series, and this disclaimer is included in contracts between the Funds and third parties. The Declaration of Trust also provides for indemnification from the assets of each series for shareholder liability for covered acts or obligations should any shareholder be held personally liable under these provisions.
The Declaration of Trust and By-Laws provide that no Trustee or agent of any Fund shall be subject to any personal liability to the Fund or its shareholders for any action or failure to act, except for such person’s willful misfeasance, bad faith, gross negligence, or reckless disregard of the person’s duties. The Trust indemnifies each such person against all such losses other than the excepted losses. The agreements between the Trust and, respectively, the Investment Counsel and the Fund Administrator provide for indemnification and relieve each such entity of liability for any act or omission in the course of its performance under the particular agreement, including any mistake of judgment, in the absence of willful misfeasance, bad faith or gross negligence.
23
Table of Contents
PURCHASE, REDEMPTION, AND PRICING OF SHARES
The methods of purchasing and redeeming shares through the transfer agent, PFPC, are described on pages 24 through 31 of the Prospectus. Shares are offered and redeemed at the net asset value per share next computed after receiving a purchase order or a redemption request. Such calculations are made once a day, at the close of regular trading on the New York Stock Exchange, usually at 4:00 p.m. Eastern Time.
To compute net asset value per share, we value all Fund assets daily, including accruing dividends declared on portfolio securities and other rights to future income. Liabilities are accrued and subtracted from assets, and the resulting amount is dividend by the number of shares of beneficial interest then outstanding. The following formula illustrates this calculation:
|
|
||||||
|
Net Assets
|
equals | Net Asset Value Per Share | ||||
|
|
||||||
|
Shares Outstanding
|
||||||
The net asset value per share for each of the Longleaf Partners
Funds as shown in the Statements of Assets and Liabilities for
the year ended December 31, 2002, shown on page 39,
was calculated as follows:
Partners Fund
International Fund
Small-Cap Fund
$1,086,714,346
$1,677,194,095
= $22.24
= $9.97
= $20.33
109,023,414
82,506,659
In valuing Fund assets, we apply the following procedures:
| (1) | Portfolio securities listed or traded on a securities exchange, on the NASDAQ national market or any representative quotation system providing same day publication of actual prices, are valued at the last sale price. If there are no transactions in the security that day, securities are valued at the midpoint between the closing bid and ask prices or, if there are no such prices, the prior day’s closing price; |
| (2) | In the case of bonds and other fixed income securities, valuations may be furnished by a pricing service which takes into account factors in addition to quoted prices (such as trading characteristics, yield, quality, coupon rate, maturity, type of issue, and other market data relating to the priced security or other similar securities) where taking such factors into account would lend to a more accurate reflection of the fair value of such securities; |
| (3) | When market quotations are not readily available, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision of the Funds’ Trustees; |
| (4) | The fair value of short-term United States Government obligations and other debt securities will be determined on an amortized cost basis; and |
| (5) | The value of other assets, including restricted and not readily marketable securities, will be determined in good faith at fair value under procedures established by and under the general supervision of the Trustees. |
| (6) | Assets and liabilities initially expressed in foreign currencies will be converted into U.S. dollars using a method of determining a rate of exchange consistent with policies established by the Board of Trustees. |
24
Table of Contents
The Funds normally calculate net asset value as of the close of business of the New York Stock Exchange. Trading in securities on European and Far Eastern securities exchanges or in other foreign markets is normally completed at times when the New York Stock Exchange is not open for business. In addition, trading in such international markets may not take place on days when the New York Stock Exchange is open for business. Because of the different trading days or hours in the various foreign markets, the calculation of the Funds’ net asset value may not take place contemporaneously with the determination of the closing prices of some foreign securities on the particular foreign exchanges or in other foreign markets in which those securities are traded. The Funds follow the practice of converting closing market prices denominated in foreign currency to U.S. dollars using the mid-day currency exchange rates.
The Funds expect to follow their standard procedures in valuing foreign securities even though there may be interim market developments which could have an effect on the net asset value. However, should events occur which could materially or significantly affect the valuation of such securities between the time when their closing prices are determined in the usual manner and the time the net asset value is calculated, the Funds may, in the discretion of the Board of Trustees and consistent with any specific regulatory requirements, elect to value these securities at fair value as determined in good faith by the Board of Trustees.
ADDITIONAL TAX INFORMATION
Each Fund intends to qualify for favorable tax treatment applicable to regulated investment companies under Subchapter M of the Internal Revenue Code of 1986, as amended. Qualification does not involve supervision of management or investment practices or policies by the Internal Revenue Service. In order to qualify as a regulated investment company, a Fund must, among other things, derive at least 90% of its gross income from dividends, interest, payments with respect to proceeds from securities loans, gains from the sale or other disposition of securities and other income (including gains from options, futures and forward foreign currency contracts) derived with respect to its business of investing in such securities. Each Fund must also diversify its holdings so that, at the end of each quarter of its taxable year, (i) at least 50% of the market value of total assets is represented by cash, U.S. Government securities and other securities limited in respect of any one issuer to an amount not greater than 5% of the Fund’s total assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities of any one issuer (other than U.S. Government securities and regulated investment companies). Further, a Fund may invest not more than 25 percent of the value of its total assets in the securities of two or more issuers which the Fund controls and which are engaged in the same or similar trades or businesses or related trades or businesses.
If a Fund qualifies under the Internal Revenue Code for favorable tax treatment, it is not subject to federal income tax or state taxation in the Commonwealth of Massachusetts on its investment company taxable income and any net realized capital gains which are distributed to shareholders. Instead, shareholders other than tax exempt organizations are taxable at their federal income tax rates on the distributions declared, even if the distributions are reinvested in additional shares of the Funds. If a Fund should fail to qualify for favorable tax treatment under the Internal Revenue Code, the Fund itself would be subject to federal income tax and to taxation by the Commonwealth of Massachusetts on these amounts. To qualify again for favorable tax treatment under the Internal Revenue Code, the Fund must distribute all undistributed earnings and profits to shareholders, who then would be subject to taxation on the amounts distributed.
25
Table of Contents
Investment income received by the Funds from sources within foreign countries may be subject to foreign income taxes withheld at the source. The United States has entered into tax treaties with many foreign countries which entitle the Funds to a reduced rate of tax or exemption from tax on such income. It is not possible to determine the effective rate of foreign tax in advance, because the amount of assets to be invested within various countries is not known.
If a Fund owns shares in a foreign corporation that constitutes a “passive foreign investment company” for U.S. federal income tax purposes and the Fund does not elect or is not able to treat the foreign corporation as a “qualified electing fund” within the meaning of the Code, the Fund may be subject to U.S. federal income tax on a portion of any “excess distribution” it receives from the foreign corporation or any gain it derives from the disposition of such shares, even if such income is distributed as a dividend by the Fund to its U.S. shareholders. A Fund may also be subject to additional tax in the nature of an interest charge with respect to deferred taxes arising from such distributions or gains. Any tax paid by a Fund as a result of its ownership of shares in a “passive foreign investment company” will not give rise to any deduction or credit to the Fund or any shareholder. If a Fund owns shares in a “passive foreign investment company” and the Fund is able to treat the foreign corporation as a “qualified electing fund” under the Code or under special rules applicable to registered investment companies, the Fund may be required to include in its income each year a portion of the ordinary income and net realized capital gains and unrealized appreciation of the foreign corporation, even if this income is not distributed to the Fund. Any such income may be treated as ordinary income and would be subject to the distribution requirements described above, even if the Fund does not receive any amounts to distribute. Alternatively, the Fund may elect to “mark to market” shares in a “passive foreign investment company.” If this election is made, the stock in a “passive foreign investment company” is marked to market (treated as if it were sold) at the close of the Fund’s taxable year. If the “passive foreign investment company” stock is in an unrealized gain position at that time, the Fund will recognize the gain as ordinary income which is subject to the Fund’s distribution requirements. If the “passive foreign investment company” stock is in an unrealized loss position, the losses are permitted to be recognized, but only to the extent of “mark to market” gains previously taken into account on that stock.
26
Table of Contents
INVESTMENT PERFORMANCE AND TOTAL RETURN
Total Return Calculation. The average annual total return on an investment in shares of each of the Funds for a particular period is calculated using a specific formula required by the Securities & Exchange Commission. The formula takes into account any appreciation or depreciation in the portfolio, assumes reinvestment of all dividends and capital gains distributions, and then mathematically averages the return over the length of time covered by the calculation. The formula used for computing average annual total return, as specified by regulation, is as follows:
| “Average Annual Total Return” shall mean the average annual compounded rate of return, computed according to the following formula: |
p(1+T) to the nth power = ERV
P
=
a hypothetical initial investment of $1,000
T
=
average annual total return
n
=
number of years (or fractional portions thereof)
ERV
=
ending value of a hypothetical $1,000 investment
made at the beginning of the period (or fractional portion
thereof).
The average annual total returns of each of the Funds for the
years ended December 31 for the past ten years or since
inception, if shorter, are as follows:
Partners
International
Small-Cap
Fund
Fund
Fund
(8.34
)%
(16.51
)%
(3.74
)%
10.34
10.47
5.45
20.60
25.93
12.80
2.18
24.37
4.05
14.28
9.02
*
12.71
28.25
—
29.04
21.02
—
30.64
27.50
—
18.61
8.96
—
3.64
22.20
—
19.83
* Partial year
The average annual returns for each of the Funds for the
cumulative periods shown, ending on December 31, 2002, are
as follows:
7.33
%
14.14
11.47
6.07
12.80
27
Table of Contents
Investment Performance Information. The Funds may publish their total returns in advertisements and communications to shareholders. Total return information will include the average annual compounded rate of return for the one, five, and ten year periods (or since initial public offering) ended at the close of the most recent calendar quarter. Each Fund may also advertise or provide aggregate and average total return information for different periods of time, such as the latest calendar quarter or for the calendar year-to-date.
Each Fund may also compare its performance to that of widely recognized unmanaged stock market indices as well as other more specialized indices. The Funds may also compare their performance with that of other mutual funds having similar investment objectives and with the industry as a whole, as determined by outside services such as Lipper Analytical Services, Inc., CDA Technologies, Morningstar, Inc., and The Value Line Mutual Fund Survey. The Funds may also provide information on their relative rankings as published in such newspapers and magazines as The Wall Street Journal, Barron’s, Forbes, Business Week, Money, Financial World , and other similar publications.
Use of Total Return Information. Average annual total return information may be useful to investors in considering each Fund’s past investment performance. However, certain factors should be taken into account before basing an investment decision on this information. First, in comparing the Fund’s total return with the total return of any market indices for the same period, the investor should be aware that market indices are unmanaged and unhedged and contain different and generally more numerous securities than the Funds’ portfolios. Some market indices are not adjusted for reinvested dividends, and no adjustment is made in market indices for taxes payable on distributions. After tax calculations applicable to the Funds’ total returns are shown in the Prospectus on pages 9, 11, and 13.
An investment in the Funds is an equity investment. As a result, total returns will fluctuate over time, and the total return for any past period is not an indication or representation as to future rates of total return. When comparing each Fund’s total returns with those of other alternatives such as fixed income investments, investors should understand that an equity fund may be subject to greater market risks than are money market or fixed income investments, and that the Funds are designed for investors who are willing to accept such greater market risks for the possibility of realizing greater long-term gains. There is no assurance that the Funds’ investment objectives will be achieved.
28
Table of Contents
TABLE OF BOND AND PREFERRED STOCK RATINGS
Description of Moody’s Investors Service, Inc. corporate bond ratings:
Aaa — Bonds which are rated Aaa are judged to be the best quality. They carry the smallest degree of investment risk and are generally referred to as “gilt edge.” Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa — Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities.
A — Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the future.
Baa — Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba — Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B — Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.
Caa — Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest.
Moody’s applies the numerical modifiers 1, 2 and 3 to each generic rating classification from Aa through B. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.
Description of Moody’s Investors Service, Inc. preferred stock ratings:
aaa — An issue which is rated aaa is considered to be a top-quality preferred stock. This rating indicates good asset protection and the least risk of dividend impairment within the universe of convertible preferred stocks.
29
Table of Contents
aa — An issue which is rated aa is considered a high-grade preferred stock. This rating indicates that there is reasonable assurance that earnings and asset protection will remain relatively well maintained in the foreseeable future.
a — An issue which is rated a is considered to be an upper-medium grade preferred stock. While risks are judged to be somewhat greater than the aaa and aa classifications, earnings and asset protection are, nevertheless, expected to be maintained at adequate levels.
baa — An issue which is rated baa is considered to be a medium-grade preferred stock, neither highly protected nor poorly secured. Earnings and asset protection appear adequate at present but may be questionable over any great length of time.
ba — An issue which is rated ba is considered to have speculative elements, and its future cannot be considered well assured. Earnings and asset protection may be very moderate and not well safeguarded during adverse periods. Uncertainty of position characterizes preferred stocks in this class.
b — An issue which is rated b generally lacks the characteristics of a desirable investment. Assurance of dividend payments and maintenance of other terms of the issue over any long period of time may be small.
caa — An issue which is rated caa is likely to be in arrears on dividend payments. This rating designation does not purport to indicate the future status of payments.
Description of Standard & Poor’s Corporation corporate bond and preferred stock ratings:
AAA — Securities rated AAA have the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong.
AA — Securities rated AA have a very strong capacity to pay interest and repay principal and differ from the higher rated issues only in small degree.
A — Securities rated A have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than securities in higher rated categories.
BBB — Securities rated BBB are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for securities in this category than for securities in higher rated categories.
BB, B and CCC — Securities rated BB, B and CCC are regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB represents the lowest degree of speculation and CCC the highest degree of speculation. While such securities will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.
BB — Securities rated BB have less near-term vulnerability to default than other speculative issues. However, they face major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating.
B — Securities rated B have a greater vulnerability to default but currently have the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair
30
Table of Contents
CCC — Securities rated CCC have a currently identifiable vulnerability to default, and are dependent upon favorable business, financial and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, they are not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating.
Plus (+) or Minus (–): The ratings from A to CCC may be modified by the addition of a plus or minus sign to show relative standing within major rating categories.
The financial statements for the fiscal year ended December 31, 2002, audited by PricewaterhouseCoopers LLP, the Fund’s independent accountants, are included in the printed Annual Report to Shareholders of the Funds. The Financial Statements contained in the printed Annual Report, together with the Report of Independent Accountants dated January 31, 2003 are included as a part of this Statement of Additional Information on the following pages.
To the Board of Trustees and Shareholders of
In our opinion, the accompanying statements of assets and liabilities, including the portfolios of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Longleaf Partners Fund, Longleaf Partners International Fund, and Longleaf Partners Small-Cap Fund, (comprising Longleaf Partners Funds Trust, hereafter referred to as the “Funds”) at December 31, 2002, the results of each of their operations, the changes in each of their net assets and the financial highlights for each of the fiscal periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2002 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
31
Table of Contents
Partners Fund - PORTFOLIO OF INVESTMENTS
| Shares | Value | |||||||||||||||
|
|
|
|||||||||||||||
| Common Stock 85.1% | ||||||||||||||||
| Broadcasting and Cable 12.8% | ||||||||||||||||
| 6,283,890 | * | Comcast Corporation – Class A | $ | 148,111,287 | ||||||||||||
| 9,978,000 | * | Comcast Corporation – Class A Special | 225,403,020 | |||||||||||||
| 22,328,400 | * | General Motors Corporation – Class H | 238,913,880 | |||||||||||||
|
|
||||||||||||||||
| 612,428,187 | ||||||||||||||||
|
|
||||||||||||||||
|
Entertainment 6.5%
|
||||||||||||||||
| 19,046,000 | The Walt Disney Corporation | 310,640,260 | ||||||||||||||
|
Environmental Services 5.2%
|
||||||||||||||||
| 1,885,200 | * | Allied Waste Industries, Inc. | 18,852,000 | |||||||||||||
| 9,960,100 | Waste Management, Inc. (d) | 228,285,492 | ||||||||||||||
|
|
||||||||||||||||
| 247,137,492 | ||||||||||||||||
|
|
||||||||||||||||
|
Lodging 9.8%
|
||||||||||||||||
| 18,050,700 | Hilton Hotels Corporation | 229,424,397 | ||||||||||||||
| 7,360,000 | Marriott International, Inc. | 241,923,200 | ||||||||||||||
|
|
||||||||||||||||
| 471,347,597 | ||||||||||||||||
|
|
||||||||||||||||
|
Multi-Industry 10.0%
|
||||||||||||||||
| 5,000,000 | General Motors Corporation | 184,300,000 | ||||||||||||||
| 14,386,570 | Vivendi Universal SA (Foreign) (c) | 232,328,764 | ||||||||||||||
| 4,141,900 | Vivendi Universal SA ADR (Foreign) | 66,560,333 | ||||||||||||||
|
|
||||||||||||||||
| 483,189,097 | ||||||||||||||||
|
|
||||||||||||||||
|
Natural Resources 9.8%
|
||||||||||||||||
| 10,257,000 | * | Pioneer Natural Resources Company (b) | 258,989,250 | |||||||||||||
| 3,342,590 | Plum Creek Timber Company, Inc. | 78,885,124 | ||||||||||||||
| 2,900,000 | Rayonier Inc. (b) | 131,225,000 | ||||||||||||||
|
|
||||||||||||||||
| 469,099,374 | ||||||||||||||||
|
|
||||||||||||||||
| Property & Casualty Insurance 9.6% | ||||||||||||||||
| 12,057,000 | Aon Corporation | 227,756,730 | ||||||||||||||
| 61,148,000 | The NipponKoa Insurance Company, Ltd. (Foreign) (b) | 230,329,115 | ||||||||||||||
|
|
||||||||||||||||
| 458,085,845 | ||||||||||||||||
|
|
||||||||||||||||
|
Publishing 3.9%
|
||||||||||||||||
| 2,973,300 | Knight Ridder, Inc. | 188,061,225 | ||||||||||||||
|
Real Estate 2.6%
|
||||||||||||||||
| 13,284,900 | Trizec Properties, Inc. (b) | 124,745,211 | ||||||||||||||
32
Table of Contents
| Shares | Value | |||||||||||||||
|
|
|
|||||||||||||||
|
Restaurants 5.0%
|
||||||||||||||||
| 9,880,000 | * | Yum! Brands, Inc. | $ | 239,293,600 | ||||||||||||
|
Telecommunications 3.5%
|
||||||||||||||||
| 3,598,500 | Telephone and Data Systems, Inc. | 169,201,470 | ||||||||||||||
|
Transportation 6.4%
|
||||||||||||||||
| 5,615,000 | FedEx Corporation (c) | 304,445,300 | ||||||||||||||
|
|
||||||||||||||||
| Total Common Stocks (Cost $4,033,175,828) | 4,077,674,658 | |||||||||||||||
|
|
||||||||||||||||
| Principal | ||||||||||||||||
| Amount | ||||||||||||||||
|
|
||||||||||||||||
|
Corporate Bonds 6.9% |
||||||||||||||||
|
Telecommunications 6.9%
|
||||||||||||||||
| 230,000,000 | Level 3 Communications, Inc., 9% Junior Convertible Subordinated Notes due 7-15-12 (Cost $230,000,000) | 330,498,500 | ||||||||||||||
|
Short-Term Obligations 10.1% |
||||||||||||||||
| 181,532,000 | Repurchase Agreement with State Street Bank, 0.60% due 1-2-03, Repurchase price $181,535,026 (Collateralized by U.S. government agency securities) | 181,532,000 | ||||||||||||||
| 300,000,000 | U.S. Treasury Bills, 1.14%-1.23% due 1-2-03 to 1-30-03 | 299,858,972 | ||||||||||||||
|
|
||||||||||||||||
| 481,390,972 | ||||||||||||||||
|
|
||||||||||||||||
| Total Investments (Cost $4,744,566,800) (a) | 102.1 | % | 4,889,564,130 | |||||||||||||
| Other Assets and Liabilities, Net | (2.1 | ) | (101,902,473 | ) | ||||||||||||
|
|
|
|||||||||||||||
| Net Assets | 100.0 | % | $ | 4,787,661,657 | ||||||||||||
|
|
|
|||||||||||||||
| Net asset value per share | $22.24 | |||||||||||||||
|
|
||||||||||||||||
* Non-income producing security
| (a) | Also represents aggregate cost for federal income tax purposes. Aggregate unrealized appreciation and depreciation are $683,584,785 and $(538,587,455), respectively. |
| (b) | Affiliated Company. See Note 7. |
| Note: | Companies designated as “Foreign” are headquartered outside the U.S. and represent 11% of net assets. |
OPEN FORWARD CURRENCY CONTRACTS
| Currency | Currency Sold and | Currency | Unrealized | |||||||||
| Units Sold | Settlement Date | Market Value | Loss | |||||||||
|
|
|
|
|
|||||||||
| 215,000,000 |
Euro 6-27-03
|
$ | 224,055,881 | $ | (13,570,480 | ) | ||||||
| 11,500,000,000 |
Japanese Yen 3-28-03
|
97,226,166 | (7,056,896 | ) | ||||||||
| 14,500,000,000 |
Japanese Yen 6-27-03
|
122,997,288 | (1,697,365 | ) | ||||||||
|
|
|
|||||||||||
| $ | 444,279,335 | $ | (22,324,741 | ) | ||||||||
|
|
|
|||||||||||
33
Table of Contents
International Fund - PORTFOLIO OF INVESTMENTS
| Shares | Value | |||||||||||||||
|
|
|
|||||||||||||||
| Common Stock and Warrants 101.2% | ||||||||||||||||
| Automobiles 5.3% | ||||||||||||||||
| 1,224,000 | Renault SA (France) (d) | $ | 57,513,872 | |||||||||||||
|
Broadcasting and Cable 23.2%
|
||||||||||||||||
| 2,380,018 | The News Corporation Limited (Australia) | 15,385,217 | ||||||||||||||
| 1,385,000 | The News Corporation Limited ADR (Australia) (d) | 36,356,250 | ||||||||||||||
| 2,172,300 | Nippon Broadcasting System, Inc. (Japan) (b)(d) | 64,984,116 | ||||||||||||||
| 8,499,700 | Shaw Communications Inc. – Class B (Canada) (d) | 87,376,916 | ||||||||||||||
| 64,104 | * | SKY Perfect Communications Inc. (Japan) (d) | 48,616,836 | |||||||||||||
|
|
||||||||||||||||
| 252,719,335 | ||||||||||||||||
|
|
||||||||||||||||
|
Food 5.2%
|
||||||||||||||||
| 9,851,000 | Ezaki Glico Co., Ltd. (Japan) (b)(d) | 56,946,035 | ||||||||||||||
| Multi-Industry 18.8% | ||||||||||||||||
| 127,134,000 | * | BIL International Limited (Singapore) (b)(d) | 31,884,284 | |||||||||||||
| 1,167,900 | Brascan Corporation (Canada) | 23,471,848 | ||||||||||||||
| 5,358,000 | Fiat S.p.A. (Italy) (d) | 43,572,403 | ||||||||||||||
| 341,400 | * | Fiat Warrants 1-31-07 (Italy) | 101,381 | |||||||||||||
| 6,315,000 | Vivendi Universal SA (France) (d) | 101,980,955 | ||||||||||||||
| 209,000 | Vivendi Universal SA ADR (France) | 3,358,630 | ||||||||||||||
|
|
||||||||||||||||
| 204,369,501 | ||||||||||||||||
|
|
||||||||||||||||
|
Natural Resources 0.4%
|
||||||||||||||||
| 3,349,996 | * | Gendis Inc. (Canada) (b)(c) | 4,241,038 | |||||||||||||
|
Property & Casualty Insurance
19.4%
|
||||||||||||||||
| 712,700 | Fairfax Financial Holdings Limited (Canada) (d) | 54,636,724 | ||||||||||||||
| 1,000,000 | The Fuji Fire & Marine Insurance Company, Ltd. (Japan) | 1,904,441 | ||||||||||||||
| 27,016,000 | The NipponKoa Insurance Company, Ltd. (Japan) (d) | 101,762,468 | ||||||||||||||
| 9,016,000 | Sompo Japan Insurance Inc. (Japan) (d) | 52,650,948 | ||||||||||||||
|
|
||||||||||||||||
| 210,954,581 | ||||||||||||||||
|
|
||||||||||||||||
|
Publishing 3.5%
|
||||||||||||||||
| 3,763,000 | Hollinger International Inc. (Canada) (d) | 38,232,080 | ||||||||||||||
|
Real Estate 2.8%
|
||||||||||||||||
| 3,195,000 | Trizec Properties, Inc. (United States) (d) | 30,001,050 | ||||||||||||||
|
Restaurants 5.4%
|
||||||||||||||||
| 2,418,000 | * | Yum! Brands Inc. (United States) | 58,563,960 | |||||||||||||
34
Table of Contents
| Shares | Value | |||||||||||||||
|
|
|
|||||||||||||||
|
Retail 0.7%
|
||||||||||||||||
| 892,000 | Tokyo Style Co., Ltd. (Japan) (d) | $ | 7,561,742 | |||||||||||||
|
Technology 5.6%
|
||||||||||||||||
| 406,931 | Koninklijke (Royal) Philips Electronics N.V. (Netherlands) | 7,130,900 | ||||||||||||||
| 3,063,069 | Koninklijke (Royal) Philips Electronics N.V. ADR (Netherlands) | 54,155,060 | ||||||||||||||
|
|
||||||||||||||||
| 61,285,960 | ||||||||||||||||
|
|
||||||||||||||||
|
Telecommunications 10.9%
|
||||||||||||||||
| 4,930,400 | * | Amdocs Limited (Israel) | 48,416,528 | |||||||||||||
| 23,550,000 | Cable & Wireless plc (United Kingdom) (d) | 16,964,947 | ||||||||||||||
| 14,510 | Nippon Telegraph and Telephone Corporation (Japan) (d) | 52,699,166 | ||||||||||||||
|
|
||||||||||||||||
| 118,080,641 | ||||||||||||||||
|
|
||||||||||||||||
|
Total Common Stocks and Warrants
(Cost $1,270,912,408) |
1,100,469,795 | |||||||||||||||
|
|
||||||||||||||||
|
Short-Term Obligations 5.7% |
||||||||||||||||
| 36,612,000 | Repurchase Agreement with State Street Bank, 0.60% due 1-2-03, Repurchase price $36,612,610 (Collateralized by U.S. government agency securities) | 36,612,000 | ||||||||||||||
| 25,000,000 | U.S. Treasury Bill, 0.92% due 1-9-03 | 24,994,944 | ||||||||||||||
|
|
||||||||||||||||
| 61,606,944 | ||||||||||||||||
|
|
||||||||||||||||
| Total Investments (Cost $1,332,519,352) (a) | 106.9% | 1,162,076,739 | ||||||||||||||
| Shares | ||||||||||||||||
|
|
||||||||||||||||
| Common Stock Sold Short (5.9)% | ||||||||||||||||
|
Automobiles (5.9)%
|
||||||||||||||||
| (8,253,000 | ) |
Nissan Motor Co., Ltd. (Japan) (Proceeds
$50,459,598)
(a)
|
(5.9 | ) | (64,399,410 | ) | ||||||||||
| Other Assets and Liabilities, Net | (1.0 | ) | (10,962,983 | ) | ||||||||||||
|
|
|
|||||||||||||||
| Net Assets | 100.0% | $ | 1,086,714,346 | |||||||||||||
|
|
|
|||||||||||||||
| Net asset value per share | $9.97 | |||||||||||||||
|
|
||||||||||||||||
| (a) | Also represents aggregate cost for federal income tax purposes. Aggregate unrealized appreciation and depreciation are $54,253,675 and $(238,636,100), respectively. |
| (b) | Affiliated company. See Note 7. |
| (c) | Illiquid security. See Note 8. |
| (d) | All or a portion designated as collateral on forward currency contracts and short sales. See Note 10. |
| Note: | Country listed in parenthesis after each company indicates location of headquarters/primary operations. |
35
Table of Contents
OPEN FORWARD CURRENCY CONTRACTS
| Currency | Currency Sold and | Currency | Unrealized | |||||||||
| Units Sold | Settlement Date | Market Value | Gain/(Loss) | |||||||||
|
|
|
|
|
|||||||||
| 28,000,000 | British Pound 3-28-03 | $ | 44,802,844 | $ | (1,548,443 | ) | ||||||
| 162,000,000 | Canadian Dollar 3-28-03 | 102,191,331 | 1,393,104 | |||||||||
| 32,400,000 | Euro 3-28-03 | 33,878,314 | (4,422,084 | ) | ||||||||
| 79,200,000 | Euro 6-27-03 | 82,535,934 | (5,529,774 | ) | ||||||||
| 33,730,000,000 | Japanese Yen 3-28-03 | 285,168,571 | (16,704,137 | ) | ||||||||
| 12,330,000,000 | Japanese Yen 6-27-03 | 104,590,108 | (36,096 | ) | ||||||||
|
|
|
|||||||||||
| $ | 653,167,102 | $ | (26,847,430 | ) | ||||||||
|
|
|
|||||||||||
COUNTRY WEIGHTING OF
|
Japan
|
35.2 | % | ||
|
Canada
|
18.9 | |||
|
France
|
14.8 | |||
|
United States
|
8.0 | |||
|
Netherlands
|
5.6 | |||
|
Australia
|
4.7 | |||
|
Israel
|
4.4 | |||
|
Italy
|
4.0 | |||
|
Singapore
|
2.9 | |||
|
United Kingdom
|
1.5 | |||
|
|
||||
| 100.0 | % | |||
|
|
36
Table of Contents
Small-Cap Fund - PORTFOLIO OF INVESTMENTS
| Shares | Value | |||||||||||||||
|
|
|
|||||||||||||||
| Common Stock 78.7% | ||||||||||||||||
|
Beverages 3.0%
|
||||||||||||||||
| 3,776,600 | PepsiAmericas, Inc. | $ | 50,719,738 | |||||||||||||
|
Broadcasting and Cable 5.9%
|
||||||||||||||||
| 4,349,500 | * | Rogers Communications, Inc. (Foreign) | 40,798,310 | |||||||||||||
| 5,587,700 | Shaw Communications Inc. – Class B (Foreign) (c) | 57,441,556 | ||||||||||||||
|
|
||||||||||||||||
| 98,239,866 | ||||||||||||||||
|
|
||||||||||||||||
|
Commercial Lighting 4.0%
|
||||||||||||||||
| 2,140,300 | * | Genlyte Group Incorporated (b) | 66,691,748 | |||||||||||||
|
Construction Materials 4.1%
|
||||||||||||||||
| 2,822,200 | Texas Industries, Inc. (b) | 68,579,460 | ||||||||||||||
|
Data Processing 4.4%
|
||||||||||||||||
| 3,114,600 | * | NCR Corporation | 73,940,604 | |||||||||||||
|
Financial Services 7.0%
|
||||||||||||||||
| 383,622 | * | Alleghany Corporation (b) | 68,092,905 | |||||||||||||
| 2,089,600 | The MONY Group Inc. | 50,025,024 | ||||||||||||||
|
|
||||||||||||||||
| 118,117,929 | ||||||||||||||||
|
|
||||||||||||||||
|
Food Manufacturing 3.0%
|
||||||||||||||||
| 2,018,400 | * | Ralcorp Holdings, Inc. (b) | 50,742,576 | |||||||||||||
|
Grocery – Retail 2.7%
|
||||||||||||||||
| 3,394,100 | Ruddick Corporation (b) | 46,465,229 | ||||||||||||||
| Grocery – Wholesale 3.1% | ||||||||||||||||
| 8,000,000 | Fleming Companies, Inc. (b) | 52,560,000 | ||||||||||||||
| Lodging 4.7% | ||||||||||||||||
| 6,133,653 | Hilton Hotels Corporation | 77,958,730 | ||||||||||||||
|
Manufacturing 1.4%
|
||||||||||||||||
| 8,840,000 | * | U.S. Industries, Inc. (b) | 23,249,200 | |||||||||||||
|
Multi-Industry 3.6%
|
||||||||||||||||
| 3,000,000 | Brascan Corporation (Foreign) | 60,292,442 | ||||||||||||||
|
Natural Resources 6.9%
|
||||||||||||||||
| 1,495,000 | Deltic Timber Corporation (b) | 39,916,500 | ||||||||||||||
| 10,094,000 | TimberWest Forest Corp. (Foreign) (b)(c) | 76,672,996 | ||||||||||||||
|
|
||||||||||||||||
| 116,589,496 | ||||||||||||||||
|
|
||||||||||||||||
|
Property & Casualty Insurance
4.1%
|
||||||||||||||||
| 896,000 | Fairfax Financial Holdings Limited (Foreign) | 68,688,796 | ||||||||||||||
|
Publishing 4.3%
|
||||||||||||||||
| 7,042,000 | Hollinger International Inc. (Foreign) | 71,546,720 | ||||||||||||||
37
Table of Contents
| Shares | Value | |||||||||||||||
|
|
|
|||||||||||||||
|
Real Estate 7.4%
|
||||||||||||||||
| 2,435,700 | * | Catellus Development Corporation (c) | $ | 48,348,645 | ||||||||||||
| 2,271,675 | Forest City Enterprises, Inc. – Class A | 75,760,361 | ||||||||||||||
|
|
||||||||||||||||
| 124,109,006 | ||||||||||||||||
|
|
||||||||||||||||
|
Restaurants 4.3%
|
||||||||||||||||
| 2,978,100 | * | IHOP Corp. (b) | 71,474,400 | |||||||||||||
|
Retail 4.8%
|
||||||||||||||||
| 555,200 | * | The Neiman Marcus Group, Inc. – Class A (b) | 16,872,528 | |||||||||||||
| 2,333,700 | * | The Neiman Marcus Group, Inc. – Class B (b) | 63,780,021 | |||||||||||||
|
|
||||||||||||||||
| 80,652,549 | ||||||||||||||||
|
|
||||||||||||||||
| Total Common Stocks (Cost $1,392,434,904) | 1,320,618,489 | |||||||||||||||
|
|
||||||||||||||||
| Principal | ||||||||||||||||
| Amount | ||||||||||||||||
|
|
||||||||||||||||
|
Corporate Bonds 17.5% |
||||||||||||||||
| Telecommunications 17.5% | ||||||||||||||||
| 276,000,000 | Level 3 Communications, Inc., 9.125% Senior Notes due 5-1-08 | 178,020,000 | ||||||||||||||
| 34,080,000 | Level 3 Communications, Inc., 6% Convertible Subordinated Notes due 9-15-09 | 14,526,600 | ||||||||||||||
| 70,000,000 | Level 3 Communications, Inc., 9% Junior Convertible Subordinated Notes due 7-15-12 | 100,586,500 | ||||||||||||||
|
|
||||||||||||||||
| Total Corporate Bonds (Cost $212,726,606) | 293,133,100 | |||||||||||||||
|
|
||||||||||||||||
|
Short-Term Obligation 4.7% |
||||||||||||||||
| 28,599,000 | Repurchase Agreement with State Street Bank, 0.60% due 1-2-03, Repurchase Price $28,599,477 (Collateralized by U.S. government agency securities) | 28,599,000 | ||||||||||||||
| 50,000,000 | U.S. Treasury Bills, 1.19%-1.21% due 1-2-03 to 1-30-03 | 49,976,424 | ||||||||||||||
|
|
||||||||||||||||
| 78,575,424 | ||||||||||||||||
|
|
||||||||||||||||
| Total Investments (Cost $1,683,736,934) (a) | 100.9% | 1,692,327,013 | ||||||||||||||
| Other Assets and Liabilities, Net | (0.9 | ) | (15,132,918 | ) | ||||||||||||
|
|
|
|||||||||||||||
| Net Assets | 100.0% | $ | 1,677,194,095 | |||||||||||||
|
|
|
|||||||||||||||
| Net asset value per share | $20.33 | |||||||||||||||
|
|
||||||||||||||||
* Non-income producing security
| (a) | Also represents aggregate cost for federal income tax purposes. Aggregate unrealized appreciation and depreciation are $249,313,083 and $(240,723,004) respectively. |
| (b) | Affiliated company. See Note 7. |
| (c) | All or a portion designated as collateral for forward currency contracts. See Note 10. |
| Note: | Companies designated as “Foreign” represent 22% of net assets. |
OPEN FORWARD CURRENCY CONTRACTS
| Currency | Currency Sold and | Currency | Unrealized | |||||||||
| Units Sold | Settlement Date | Market Value | Loss | |||||||||
|
|
|
|
|
|||||||||
| 200,000,000 | Canadian Dollar 3-28-03 | $ | 126,162,137 | $ | (15,490 | ) | ||||||
|
|
|
|||||||||||
38
Table of Contents
Longleaf Partners Funds
| Partners | International | Small-Cap | ||||||||||||
| Fund | Fund | Fund | ||||||||||||
|
|
|
|
||||||||||||
| Assets: | ||||||||||||||
|
Investments:
|
||||||||||||||
|
Affiliated securities, at market value (cost
$722,487,583, $182,998,228 and $699,616,506, respectively)
(Note 2 and 7)
|
$ | 745,288,576 | $ | 158,055,473 | $ | 645,097,563 | ||||||||
|
Other securities, at market value (cost
$4,022,079,217, $1,149,521,124 and $984,120,428, respectively)
(Note 2)
|
4,144,275,554 | 1,004,021,266 | 1,047,229,450 | |||||||||||
|
|
|
|
||||||||||||
|
Total Investments
|
4,889,564,130 | 1,162,076,739 | 1,692,327,013 | |||||||||||
|
Cash
|
714 | 776 | 593 | |||||||||||
|
Receivable for:
|
||||||||||||||
|
Fund shares sold
|
11,825,589 | 21,323,014 | 6,570,803 | |||||||||||
|
Dividends and interest
|
9,283,636 | 188,760 | 8,543,704 | |||||||||||
|
Securities sold
|
8,500,938 | – | – | |||||||||||
|
Foreign tax reclaims
|
– | 173,594 | – | |||||||||||
|
Prepaid assets
|
193,134 | 59,440 | 75,662 | |||||||||||
|
|
|
|
||||||||||||
|
Total Assets
|
4,919,368,141 | 1,183,822,323 | 1,707,517,775 | |||||||||||
|
|
|
|
||||||||||||
|
Liabilities:
|
||||||||||||||
|
Payable for:
|
||||||||||||||
|
Securities purchased
|
99,909,000 | 2,092,484 | 27,101,175 | |||||||||||
|
Fund shares redeemed
|
5,534,445 | 2,076,374 | 1,747,854 | |||||||||||
|
Forward currency contracts (Note 2)
|
22,324,741 | 26,847,430 | 15,490 | |||||||||||
|
Securities sold short
|
– | 64,399,410 | – | |||||||||||
|
Investment counsel fee (Note 3)
|
3,137,763 | 1,377,919 | 1,183,900 | |||||||||||
|
Administration fee (Note 4)
|
407,044 | 91,861 | 146,529 | |||||||||||
|
Other accrued expenses
|
393,491 | 222,499 | 128,732 | |||||||||||
|
|
|
|
||||||||||||
|
Total Liabilities
|
131,706,484 | 97,107,977 | 30,323,680 | |||||||||||
|
|
|
|
||||||||||||
| $ | 4,787,661,657 | $ | 1,086,714,346 | $ | 1,677,194,095 | |||||||||
|
|
|
|
||||||||||||
|
Net Assets:
|
||||||||||||||
|
Net assets consist of:
|
||||||||||||||
|
Paid-in capital
|
$ | 4,717,173,882 | $ | 1,305,027,907 | $ | 1,693,878,822 | ||||||||
|
Accumulated net realized loss on investments and
foreign currency
|
(52,184,814 | ) | (7,098,969 | ) | (25,248,684 | ) | ||||||||
|
Unrealized gain (loss) on investments and foreign
currency
|
122,672,589 | (211,214,592 | ) | 8,563,957 | ||||||||||
|
|
|
|
||||||||||||
|
Net Assets
|
$ | 4,787,661,657 | $ | 1,086,714,346 | $ | 1,677,194,095 | ||||||||
|
|
|
|
||||||||||||
|
Net asset value per share
|
$22.24 | $9.97 | $20.33 | |||||||||||
|
|
|
|
||||||||||||
|
Fund shares issued and outstanding
|
215,310,183 | 109,023,414 | 82,506,659 | |||||||||||
39
Table of Contents
Longleaf Partners Funds
| Partners | International | Small-Cap | |||||||||||||
| Fund | Fund | Fund | |||||||||||||
|
|
|
|
|||||||||||||
| Investment Income: | |||||||||||||||
|
Income:
|
|||||||||||||||
|
Dividends from non-affiliates (net of foreign tax
withheld of $138,851, $1,571,054 and $357,777, respectively)
|
$ | 27,579,367 | $ | 8,090,320 | $ | 8,488,129 | |||||||||
|
Dividends from affiliates (net of foreign tax
withheld of $415,761, $187,528, and $0, respectively)
(Note 7)
|
6,531,982 | 1,061,899 | 9,309,425 | ||||||||||||
|
Interest
|
17,225,966 | 2,104,913 | 40,637,681 | ||||||||||||
|
|
|
|
|||||||||||||
|
Total income
|
51,337,315 | 11,257,132 | 58,435,235 | ||||||||||||
|
|
|
|
|||||||||||||
|
Expenses:
|
|||||||||||||||
|
Investment counsel fee (Note 3)
|
36,538,690 | 15,084,224 | 13,961,959 | ||||||||||||
|
Administration fee (Note 4)
|
4,738,498 | 1,005,616 | 1,728,263 | ||||||||||||
|
Transfer agent fees and expenses
|
1,081,376 | 257,120 | 385,728 | ||||||||||||
|
Prospectus and shareholder reports
|
374,274 | 124,600 | 97,817 | ||||||||||||
|
Custodian fees and expenses
|
171,854 | 290,837 | 27,939 | ||||||||||||
|
Trustees’ fees and expenses
|
127,328 | 97,385 | 97,488 | ||||||||||||
|
Registration fees
|
83,575 | 38,381 | 34,752 | ||||||||||||
|
Professional fees
|
55,219 | 58,250 | 38,802 | ||||||||||||
|
Dividend expenses on short sales
|
– | 677,768 | – | ||||||||||||
|
Short sale fees
|
– | 384,672 | – | ||||||||||||
|
Other
|
132,147 | 40,308 | 64,159 | ||||||||||||
|
|
|
|
|||||||||||||
|
Total expenses
|
43,302,961 | 18,059,161 | 16,436,907 | ||||||||||||
|
|
|
|
|||||||||||||
|
Net investment income (loss)
|
8,034,354 | (6,802,029 | ) | 41,998,328 | |||||||||||
|
|
|
|
|||||||||||||
|
Realized and unrealized gain(loss):
|
|||||||||||||||
|
Net realized gain(loss):
|
|||||||||||||||
|
Non-affiliated securities
|
186,047,859 | 7,223,366 | 12,635,988 | ||||||||||||
|
Affiliated securities (Note 7)
|
(230,308,035 | ) | (1,834,703 | ) | (39,768,195 | ) | |||||||||
|
Forward currency contracts
|
6,611,793 | 391,047 | 2,140,897 | ||||||||||||
|
Short sales
|
– | 8,347,110 | – | ||||||||||||
|
Foreign currency transactions
|
225,495 | 74,612 | (20,957 | ) | |||||||||||
|
|
|
|
|||||||||||||
|
Net gain (loss)
|
(37,422,888 | ) | 14,201,432 | (25,012,267 | ) | ||||||||||
|
|
|
|
|||||||||||||
|
Change in unrealized depreciation:
|
|||||||||||||||
|
Securities
|
(360,544,020 | ) | (152,742,258 | ) | (88,906,871 | ) | |||||||||
|
Other assets, liabilities and forwards
|
(36,861,172 | ) | (48,056,295 | ) | (284,563 | ) | |||||||||
|
|
|
|
|||||||||||||
|
Change in net unrealized depreciation
|
(397,405,192 | ) | (200,798,553 | ) | (89,191,434 | ) | |||||||||
|
|
|
|
|||||||||||||
|
Net realized and unrealized loss
|
(434,828,080 | ) | (186,597,121 | ) | (114,203,701 | ) | |||||||||
|
|
|
|
|||||||||||||
|
Net decrease in net assets resulting from
operations
|
$ | (426,793,726 | ) | $ | (193,399,150 | ) | $ | (72,205,373 | ) | ||||||
|
|
|
|
|||||||||||||
40
Table of Contents
Longleaf Partners Funds
| Partners Fund | ||||||||||
|
|
||||||||||
| Year Ended | ||||||||||
| December 31, | ||||||||||
|
|
||||||||||
| 2002 | 2001 | |||||||||
|
|
|
|||||||||
|
Operations:
|
||||||||||
|
Net investment income (loss)
|
$ | 8,034,354 | $ | 30,731,566 | ||||||
|
Net realized gain (loss) from investments and
foreign currency transactions
|
(37,422,888 | ) | 158,285,483 | |||||||
|
Net change in unrealized appreciation
(depreciation) of securities, other assets, liabilities and
forwards
|
(397,405,192 | ) | 205,805,129 | |||||||
|
|
|
|||||||||
|
Net increase (decrease) in net assets resulting
from operations
|
(426,793,726 | ) | 394,822,178 | |||||||
|
|
|
|||||||||
|
Distributions to shareholders:
|
||||||||||
|
From net investment income
|
(8,259,849 | ) | (31,173,633 | ) | ||||||
|
From net realized gain on investments
|
(28,185,518 | ) | (62,672,221 | ) | ||||||
|
From return of capital
|
(10,114,237 | ) | – | |||||||
|
|
|
|||||||||
|
Net decrease in net assets resulting from
distributions
|
(46,559,604 | ) | (93,845,854 | ) | ||||||
|
|
|
|||||||||
|
Capital share transactions (Note 6):
|
||||||||||
|
Net proceeds from sale of shares
|
1,453,401,002 | 1,006,388,732 | ||||||||
|
Net asset value of shares issued to shareholders
for reinvestment of shareholder distributions
|
43,132,436 | 87,688,818 | ||||||||
|
Cost of shares redeemed
|
(744,560,108 | ) | (638,005,470 | ) | ||||||
|
|
|
|||||||||
|
Net increase in net assets from fund share
transactions
|
751,973,330 | 456,072,080 | ||||||||
|
|
|
|||||||||
|
Total increase in net assets
|
278,620,000 | 757,048,404 | ||||||||
|
Net assets:
|
||||||||||
|
Beginning of year
|
4,509,041,657 | 3,751,993,253 | ||||||||
|
|
|
|||||||||
|
End of year
|
$ | 4,787,661,657 | $ | 4,509,041,657 | ||||||
|
|
|
|||||||||
|
Undistributed net investment income included in
net assets at end of year
|
$ – | $ | – | |||||||
|
|
|
|||||||||
41
Table of Contents
| International Fund | Small-Cap Fund | |||||||||||||
|
|
|
|||||||||||||
| Year Ended | Year Ended | |||||||||||||
| December 31, | December 31, | |||||||||||||
|
|
|
|||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||
|
|
|
|
|
|||||||||||
| $ | (6,802,029 | ) | $ | 7,624,719 | $ | 41,998,328 | $ | 17,674,036 | ||||||
| 14,201,432 | 59,226,475 | (25,012,267 | ) | 106,936,309 | ||||||||||
| (200,798,553 | ) | (28,964,489 | ) | (89,191,434 | ) | (45,433,613 | ) | |||||||
|
|
|
|
|
|||||||||||
| (193,399,150 | ) | 37,886,705 | (72,205,373 | ) | 79,176,732 | |||||||||
|
|
|
|
|
|||||||||||
| (83,988 | ) | (8,452,745 | ) | (42,311,595 | ) | (17,663,112 | ) | |||||||
| (31,425,152 | ) | (48,899,650 | ) | (1,477,386 | ) | (123,875,554 | ) | |||||||
| – | – | – | – | |||||||||||
|
|
|
|
|
|||||||||||
| (31,509,140 | ) | (57,352,395 | ) | (43,788,981 | ) | (141,538,666 | ) | |||||||
|
|
|
|
|
|||||||||||
| 752,201,333 | 541,383,580 | 437,050,487 | 328,048,754 | |||||||||||
| 29,677,681 | 53,975,644 | 38,955,103 | 134,240,959 | |||||||||||
| (304,266,316 | ) | (146,388,940 | ) | (316,932,146 | ) | (242,786,201 | ) | |||||||
|
|
|
|
|
|||||||||||
| 477,612,698 | 448,970,284 | 159,073,444 | 219,503,512 | |||||||||||
|
|
|
|
|
|||||||||||
| 252,704,408 | 429,504,594 | 43,079,090 | 157,141,578 | |||||||||||
| 834,009,938 | 404,505,344 | 1,634,115,005 | 1,476,973,427 | |||||||||||
|
|
|
|
|
|||||||||||
| $ | 1,086,714,346 | $ | 834,009,938 | $ | 1,677,194,095 | $ | 1,634,115,005 | |||||||
|
|
|
|
|
|||||||||||
| $ – | $83,988 | $ – | $ – | |||||||||||
|
|
|
|
|
|||||||||||
42
Table of Contents
Longleaf Partners Funds
Note 1. Organization
The Longleaf Partners Fund, Longleaf Partners International
Fund, and Longleaf Partners Small-Cap Fund (the
“Funds”) are non-diversified and each is a series of
Longleaf Partners Funds Trust, a Massachusetts business trust
which is registered as an open-end management investment company
under the Investment Company Act of 1940, as amended.
Note 2. Significant Accounting Policies
Management Estimates
Security Valuation
In the case of bonds and other fixed income securities, valuations may be furnished by a pricing service which takes into account factors in addition to quoted prices (such as trading characteristics, yield, quality, coupon rate, maturity, type of issue, and other market data relating to the priced security or other similar securities) where taking such factors into account would lead to a more accurate reflection of the fair value of such securities.
When market quotations are not readily available, portfolio securities are valued at their fair values as determined in good faith under procedures established by and under the general supervision of the Funds’ Trustees. In determining fair value, the Board considers all relevant qualitative and quantitative information available. These factors are subject to change over time and are reviewed periodically. Estimated values may differ from the values that would have been used had a ready market for the investment existed.
Repurchase agreements are valued at cost which, combined with accrued interest, approximates market. Short-term U.S. Government obligations are valued at amortized cost which approximates current market value.
The Funds determine NAV’s once a day, at the close of regular trading on the New York Stock Exchange (usually at 4:00 pm Eastern time) on days the Exchange is open for business. The Exchange is closed for specified national holidays and on weekends. We usually price foreign securities at the latest market close in the foreign market, which may be at different times or days than the close of the New York Stock Exchange. If events occur which could materially affect the NAV between the close of the foreign market and normal pricing at the close of the New York Stock Exchange, we may price the foreign securities at fair value as determined by the Board of Trustees, consistent with any regulatory guidelines.
43
Table of Contents
Accounting for Investments
Distributions to Shareholders
Federal Income Taxes
Foreign Currency Translations
The Funds do not isolate the portion of net realized and unrealized gains or losses in equity security investments which are attributable to changes in foreign exchange rates. Accordingly, the impact of such changes is included in the realized and unrealized gains or losses on the underlying equity securities.
Forward Currency Contracts
Risk of Forward Currency Contracts
44
Table of Contents
Repurchase Agreements
Short Sales
Note 3. Investment Counsel Agreement
Southeastern Asset Management, Inc. (“Southeastern”) serves as Investment Counsel to the Funds and receives annual compensation, computed daily and paid monthly, in accordance with the following schedule for the Partners Fund and Small-Cap Fund:
|
First $400 million of average daily net assets
|
1.00 | % | ||
|
In excess of $400 million
|
.75 | % |
For the Partners and Small-Cap Funds, Southeastern has agreed to reduce its fees on a pro rata basis to the extent that each Fund’s normal annual operating expenses (excluding taxes, interest, brokerage fees, and extraordinary expenses) exceed 1.5% of average annual net assets. No such reductions were necessary for the current year.
The International Fund fee is calculated at 1.5% per annum on all asset levels. For this Fund, Southeastern has agreed to reduce its fees on a pro rata basis to the extent that the Fund’s normal annual operating expenses (excluding taxes, interest, brokerage fees, and extraordinary expenses) exceed 1.75% of average annual net assets. No reduction was necessary for the current year.
Note 4. Fund Administrator
Southeastern also serves as the Fund Administrator and in this capacity is responsible for managing, performing or supervising the administrative and business operations of the Funds. Functions include the preparation of all registration statements, prospectuses, proxy statements, daily valuation of the portfolios and calculation of daily net asset values per share. The Funds pay a fee as compensation for these services, accrued daily and paid monthly, of 0.10% per annum of average daily net assets.
45
Table of Contents
Note 5. Investment Transactions
Purchases and sales of equity securities and corporate bonds for
the year (excluding short-term obligations) are summarized below:
Note 6. Shares of Beneficial Interest
Each Fund is authorized to issue unlimited shares of beneficial
interest with no par value. Transactions in shares of beneficial
interest were as follows:
Note 7. Affiliated Companies
Under Section 2(a)(3) of the Investment Company Act of 1940, a
portfolio company is defined as “affiliated” if a Fund
owns five percent or more of its voting stock. At
December 31, 2002, each Fund held at least five percent of
the outstanding voting stock of the following companies:
Purchases
Sales
$
1,621,541,533
$
831,788,116
690,802,962
148,680,150
530,827,312
270,361,688
Year Ended December 31, 2002
Partners
International
Small-Cap
Fund
Fund
Fund
60,816,773
65,977,437
19,792,275
1,965,535
3,133,865
1,900,418
(31,446,605
)
(27,651,586
)
(14,546,558
)
31,335,703
41,459,716
7,146,135
Year Ended December 31, 2001
Partners
International
Small-Cap
Fund
Fund
Fund
42,240,268
40,973,823
14,260,399
3,730,778
4,344,513
6,392,192
(27,244,107
)
(11,308,011
)
(10,577,404
)
18,726,939
34,010,325
10,075,187
%
Voting
Stock
7.3
%
8.8
10.5
8.9
9.3
6.8
20.8
6.6
46
Table of Contents
%
Voting
Stock
5.3
12.6
14.7
15.8
14.2
6.0
6.7
7.3
13.4
13.3
11.9
Note 8. Illiquid Security
The International Fund owns 3,349,996 shares of Gendis, Inc.
common stock, representing 20.8% of the total outstanding shares
of the company. Due to the limited trading volume and the
Fund’s large ownership stake, a portion of this position
may be illiquid. Gendis represents 0.4% of the International
Fund’s net assets at December 31, 2002.
Note 9. Related Ownership
At December 31, 2002, officers, employees of Southeastern
and their families, Fund trustees, the Southeastern retirement
plan and other affiliates owned more than 5% of the following
Funds:
Note 10. Collateral
Securities with the following aggregate value were segregated to
collateralize portfolio obligations at December 31, 2002:
Shares Owned
Percent of Fund
9,128,086
8.4
%
4,924,412
6.0
%
Value of
Segregated
Obligation
Assets
$
519,905,300
675,468,573
167,143,738
153,381,015
Note 11. Pending Class Action Claim
As a purchaser of Waste Management between June 11, 1998 and November 9, 1999 (the “Class Period”) the Longleaf Partners Fund is entitled to a portion of a class action settlement providing for payment (after fees and costs) of approximately $400 million to Waste Management shareholders who purchased during the Class Period. Using estimates of potential recovery provided in the claims materials, the Partners Fund could recover between $20 and $40 million, which translates into approximately $0.10 to $0.20 per share. Depending on the number of shareholders submitting claims, the actual recovery could be lower or higher.
47
Table of Contents
Note 12. Federal Income Taxes
Required fund distributions are based on income and capital gain amounts determined in accordance with federal income tax regulations, which differ from net investment income and realized gains recognized for financial reporting purposes. Accordingly, the character of distributions and composition of net assets for tax purposes differ from those reflected in the accompanying financial statements.
Distributions for the year ended December 31, 2002 were
subject to tax as follows:
Partners
International
Small-Cap
$
27,269,755
$
17,238,125
$
1,477,386
9,175,612
14,271,015
42,311,595
10,114,237
–
–
$
46,559,604
$
31,509,140
$
43,788,981
The tax-basis components of net assets at December 31, 2002
were as follows:
The tax loss carryforwards expire at 12-31-10.
Partners
International
Small-Cap
$
683,584,785
$
54,268,937
$
249,313,083
(538,587,455
)
(238,636,100
)
(240,733,636
)
144,997,330
(184,367,163
)
8,579,447
(64,268,711
)
(7,683,249
)
(25,264,174
)
(10,240,844
)
(26,263,149
)
–
4,717,173,882
1,305,027,907
1,693,878,822
$
4,787,661,657
$
1,086,714,346
$
1,677,194,095
48
Table of Contents
Longleaf Partners Funds
The presentation is for a share outstanding throughout each
period.
Net
Gains
Net
(Losses) on
Distri-
Asset
Securities
Total
Dividends
butions
Value
Net
Realized
From
from Net
from
Beginning
Investment
and
Investment
Investment
Capital
of Period
Income
Unrealized
Operations
Income
Gains
$
24.51
.04
(2.08
)
(2.04
)
(.04
)
(.14
)
22.71
.20
2.13
2.33
(.20
)
(.33
)
20.49
.15
3.94
4.09
(.15
)
(1.72
)
24.39
.28
.34
.62
(.29
)
(4.23
)
25.98
.25
3.22
3.47
(.25
)
(4.81
)
12.34
(.06
)
(1.99
)
(2.05
)
–
(.32
)
12.06
.13
1.13
1.26
(.13
)
(.85
)
12.02
.35
2.70
3.05
(.38
)
(2.63
)
9.97
.06
2.38
2.44
(.06
)
(.33
)
9.15
(c)
.01
.82
.83
(.01
)
–
21.68
.52
(1.32
)
(0.80
)
(.53
)
(.02
)
22.62
.24
.90
1.14
(.24
)
(1.84
)
20.20
.05
2.53
2.58
(.05
)
(.11
)
21.95
.08
.79
.87
(.08
)
(2.54
)
22.18
.17
2.54
2.71
(.17
)
(2.77
)
| (a) | Annualized |
| (b) | Total return reflects the rate that an investor would have earned on investment in the Fund during each period, assuming reinvestment of all distributions. |
| (c) | Capitalized on August 12, 1998 at $10.00. |
| (d) | Aggregate, not annualized. |
| (e) | Expenses presented net of fee waiver. The expense ratio before the waiver was 1.76% and 2.65% in 1999 and 1998, respectively. In 2002, 2001 and 2000, the expense ratio for expenses subject to the waiver was 1.69%, 1.73% and 1.74%, respectively (Note 2 and 3). |
49
Table of Contents
Longleaf Partners Funds
Ratio of
Net
Expenses
Ratio of
Asset
Net Assets
to
Net (Loss)
Return
Total
Value
End of
Average
Income to
Portfolio
of
Distri-
End of
Total
Period
Net
Average
Turnover
Capital
butions
Period
Return
(b)
(thousands)
Assets
Net Assets
Rate
$
(.05
)
$
(.23
)
$
22.24
(8.34
)%
$
4,787,662
.91
%
.17
%
19.57
%
–
(.53
)
24.51
10.34
4,509,042
.94
.89
18.43
–
(1.87
)
22.71
20.60
3,751,993
.93
.75
20.48
–
(4.52
)
20.49
2.18
3,622,109
.92
1.16
50.39
–
(5.06
)
24.39
14.28
3,685,300
.93
1.12
43.78
–
(.32
)
9.97
(16.51
)
1,086,714
1.80
(e)
(.68
)
15.86
–
(.98
)
12.34
10.47
834,010
1.82
(e)
1.17
32.44
–
(3.01
)
12.06
25.93
404,505
1.79
(e)
3.36
69.40
–
(.39
)
12.02
24.37
293,613
1.75
(e)
.60
50.32
–
(.01
)
9.97
9.02
(d)
75,572
1.75
(a)(e)
.10
(a)
24.05
–
(.55
)
20.33
(3.74
)
1,677,194
.95
2.43
16.91
–
(2.08
)
21.68
5.45
1,634,115
.96
1.14
40.39
–
(.16
)
22.62
12.80
1,476,973
.98
.24
21.94
–
(2.62
)
20.20
4.05
1,429,673
.97
.38
47.48
–
(2.94
)
21.95
12.71
1,355,364
1.01
.87
52.51
50
Table of Contents
| Investment Counsel | |
| Southeastern Asset Management, Inc. | |
| 6410 Poplar Avenue, Suite 900 | |
| Memphis, TN 38119 | |
| (901) 761-2474 | |
| Transfer and Dividend Agent | |
| PFPC Inc. | |
| 4400 Computer Drive | |
| Westborough, MA 01581 | |
| For Information about your account, | |
| call (800) 445-9469 | |
| Custodian | |
| State Street Bank & Trust Company, Boston, MA |
| Special Legal Counsel | ||
| Dechert, Washington, DC | ||
| Independent Public Accountants | ||
| PricewaterhouseCoopers LLP | ||
| Baltimore, MD and Boston, MA | ||
| No person has been authorized to give any further information or make any representations other than those contained in the Prospectus or this Statement of Additional Information. If given or made, such other information or representations must not be relied upon as having been authorized by the Fund, its Investment Counsel, or its Administrator. This Prospectus does not constitute an offering in any state where such an offering may not be lawfully made. |
| LONGLEAF | ||
| PARTNERS | ||
| FUNDS |
|
|
|
| MANAGED BY: | |
| SOUTHEASTERN ASSET | |
| MANAGEMENT, INC. | |
| 6410 POPLAR AVE. | |
| SUITE 900 | |
| MEMPHIS, TN 38119 | |
| (800) 445-9469 | |
| www.longleafpartners.com |
|
|
|
|
L ONGLEAF |
|
| P ARTNERS | |
| F UNDS SM |
| STATEMENT OF | |
| ADDITIONAL INFORMATION | |
| May 1, 2003 | |
|
|
|
| LONGLEAF PARTNERS FUND | |
| LONGLEAF PARTNERS | |
| INTERNATIONAL FUND | |
| LONGLEAF PARTNERS | |
| SMALL-CAP FUND | |
|
|
|
| Managed by | |
| Southeastern Asset Management, Inc. | |
| 6410 Poplar Avenue, Suite 900 | |
| Memphis, TN 38119 | |
|
|
|
| TELEPHONE (800) 445-9469 | |
| www.longleafpartners.com |
Table of Contents
PART C. OTHER INFORMATION
Item 23. Exhibits
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 26
Item 24 Persons Under Common Control With Registrant
Item 25 Indemnification
Section 4.8 of the By-Laws of the Registrant provides as follows:
“Section 4.8. Indemnification of Trustees, Officers, Employees and
Agents. (a) The Trust shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust) by
reason of the fact that he is or was a Trustee, officer, employee, or agent of
the Trust. The indemnification shall be against expenses, including attorneys’
fees, judgements, fines, and amounts paid in settlement, actually and
reasonably incurred by him in connection with the action, suit, or proceeding,
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Trust, and with respect to
any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendre or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Trust, and with
respect to any criminal action or proceeding, had reasonable cause to believe
that his conduct was unlawful.
(b) The Trust shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or on behalf of the Trust to obtain a judgment or decree in its favor
by reason of the fact that he is or was a Trustee, officer, employee, or agent
of the Trust. The indemnification shall be against expenses, including
attorneys’ fees actually and reasonably incurred by him in connection with the
defense or settlement of the action or suit, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Trust, except that no indemnification shall be made in respect of any
claim, issue, or matter as to which the person has been adjudged to be
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 26
liable for negligence or misconduct in the performance of his duty to the
Trust, except to the extent that the court in which the action or suit was
brought, or a court of equity in the county in which the Trust has its
principal office, determines upon application that, despite the
adjudication of
liability but in view of all circumstances of the case, the person is fairly
and reasonably entitled to indemnity for these expenses which the court shall
deem proper, provided such Trustee, officer, employee or agent is not adjudged
to be liable by reason of his willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office.
(c) To the extent that a Trustee, officer, employee, or agent of the
Trust has been successful on the merits or otherwise in defense of any action
suit or proceeding referred to in subsection (a) or (b) or in defense of any
claim, issue, or matter therein, he shall be indemnified against expenses,
including attorneys’ fees, actually and reasonably incurred by him in
connection therewith.
(d) (1) Unless a court orders otherwise, any indemnification under
subsections (a) or (b) of this section may be made by the Trust only as
authorized in the specific case after a determination that indemnification of
the Trustee, officer, employee, or agent is proper in the circumstances because
he has met the applicable standard of conduct set forth in subsections (a) or
(b).
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 26
(e) Expenses, including attorneys’ fees, incurred by a Trustee, officer,
employee or agent of the Trust in defending a civil or criminal action, suit or
proceeding may be paid by the Trust in advance of the final disposition thereof
if:
(f) The indemnification provided by this Section shall not
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 26
be deemed exclusive of any other rights to which a person may be entitled under
any by-law, agreement, vote of Shareholders or disinterested trustees or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding the office, and shall continue as to a person who
has ceased to be a Trustee, officer, employee, or agent and inure to the
benefit of the heirs, executors and administrators of such person; provided
that no person may satisfy any right of indemnity or reimbursement granted
herein or to which he may be otherwise entitled except out of the property of
the Trust, and no Shareholder shall be personally liable with respect to any
claim for indemnity or reimbursement or otherwise.
(g) The Trust may purchase and maintain insurance on behalf of any person
who is or was a Trustee, officer, employee, or agent of the Trust, against any
lability asserted against him and incurred by him in any such capacity, or
arising out of his status as such. However, in no event will the Trust
purchase insurance to indemnify any officer or Trustee against liability for
any act for which the Trust itself is not permitted to indemnify him.
(h) Nothing contained in this Section shall be construed to protect any
Trustee or officer of the Trust against any liability to the Trust or to its
security holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.”
Paragraph 9 of the Investment Counsel Agreement, provides that, except as
may otherwise be required by the Investment Company Act of 1940 or the rules
thereunder, neither the Investment Counsel nor its stockholders, officers,
directors, employees, or agents shall be subject to any liability incurred in
connection with any act or omission connected with or arising out of any
services rendered under the Agreement, including any mistake of judgment,
except by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of reckless disregard of its obligations
and duties under the Agreement. Similar provisions are contained in Paragraph
1.04(d) of the Fund Administration Agreement. Reference is made to such
agreements for the full text.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the “Securities Act”) may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 26
of expenses incurred or paid by a director, officer, or controlling person of
the registrant in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed by the Act and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes that is will apply the indemnification
provisions of its By-Laws in a manner consistent with Investment Company Act
Release No. 11330 so long as the interpretation of Section 17(h) and 17(i)
therein remains in effect.
Item 26 Business and Other Connections of Investment Counsel
Southeastern Asset Management, Inc., a corporation organized under the laws
of the State of Tennessee, offers investment advisory services to corporations,
endowment funds, retirement and pension plans and individual investors.
The following individuals are Trustees of the Registrant who are employed
by Southeastern Asset Management, Inc.:
The following individuals are officers of Southeastern Asset Management
Inc. who have responsibilities for investment company operations:
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 26
The address of Southeastern Asset Management, Inc. is 6410 Poplar Avenue
Suite 900; Memphis, TN 38119.
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 26
Item 27 Principal Underwriters
ITEM 28 Location of Accounts and Records
All accounts, books and other documents required by Section 31(a) of the
Investment Company Act of 1940 (other than those required to be maintained by
the custodian and transfer agent) are maintained in the physical possession of
Registrant’s Fund Administrator, Southeastern Asset Management, Inc., Suite 900,
6410 Poplar Avenue; Memphis, TN 38119. Transfer Agent records are maintained
in the possession of PPPC Inc., 4400 Computer Drive, Westborough, MA 01581.
ITEM 29 Management Services
Not applicable. (See section in the Prospectus entitled “Fund
Administrator”).
ITEM 30 Undertakings
(a) Subject to the terms and conditions of Section 15(d) of the
Securities Exchange Act of 1934, the undersigned Registrant hereby undertakes
to file with the Securities and Exchange Commission such supplementary and
periodic information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section, including an annual updating of the
registration statement within four months of the end of each fiscal year,
containing audited financial statements for the most recent fiscal year.
(b) Not applicable
(c) The information required by Item 5 of Form N-1A is set forth
in the audited Annual Report to shareholders of Registrant for each fiscal
year, which is the calendar year. Registrant hereby undertakes to furnish each
person to whom a Prospectus is delivered with a copy of the then current Annual
Report upon request and without charge.
SIGNATURES*
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant, Longleaf Partners Funds Trust, a
Massachusetts business trust (the Master Trust) now having three series or
portfolios, Longleaf Partners Fund, Longleaf Partners Small-Cap Fund, and
Longleaf Partners International Fund have duly caused this Post-Effective
Amendment No. 26 to the Registration Statement to be signed on their behalf by
the undersigned, thereunto duly authorized, in the City of Memphis and State of
Tennessee, on the 28th day of February, 2003.
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 26
SIGNATURES
(Continued)*
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 26 to the Registration Statement of Longleaf Partners Funds Trust
on Form N-1A has been signed below by the following persons in the capacities
and on the dates indicated:
(*) As of the date of execution of this
Post-Effective Amendment No. 26, the
Board of Trustees of each Series consists of eight individuals, as shown above.
Each Trustee is a Trustee of each Series, and each is signing this
Post-Effective Amendment on behalf of each such Series.
NOTICE
A Copy of the Declaration of Trust of Longleaf Partners Funds Trust (“the
Registrant”) is on file with the Secretary of the Commonwealth of Massachusetts
and notice is hereby given that this instrument is executed on behalf of the
Registrant by the above Trustees or officers of the Registrant in their
capacities as Trustees or as officers and not individually, and any obligations
arising out of this instrument are not binding upon any of the Trustees,
officers or shareholders individually, but instead are binding only upon the
assets and property of the Registrant.
(a).
Articles of Incorporation. Registrant is a Massachusetts business trust.
Re-Stated Declaration of Trust. Filed herewith.
(b).
Re-Stated By-Laws. Filed herewith.
(c).
Instruments Defining Rights of Security Holders. Stock Certificate;
Incorporated by reference from Post Effective Amendment No. 23, filed
August 1, 2000 (Accession Number 0000950144-00-009321).
(d).
Investment Advisory Contracts (with Southeastern Asset Management, Inc.)
(1)
Longleaf Partners Fund and Longleaf Partners Small-Cap Fund;
incorporated by reference from Post Effective Amendment No. 21,
filed February 26, 1999 (Accession Number 0000950144-99-002256);
amendments filed herewith.
(2)
Longleaf Partners International Fund; incorporated by reference from
Post-Effective Amendment No. 20, filed August 10, 1998 (Accession
Number 0000950144-98-009323); amendment filed herewith.
(e).
Underwriting Contracts. None; not applicable.
(f).
Bonus or Profit Sharing Contracts. None; not applicable.
(g).
Custodian Agreements. Custodian Agreement with State Street Bank and Trust
Company; incorporated by reference from Post Effective Amendment No. 21,
filed February 26, 1999 (Accession Number 0000950144-99-002256).
(h).
Other Material Contracts.
(1).
Fund Administration Agreement between Southeastern Asset
Management, Inc. and Longleaf Partners Fund and Longleaf Partners
Small-Cap Fund; incorporated by reference from Post Effective
Amendment No. 21, filed February 26, 1999 (Accession Number
0000950144-99-002256); amendments filed herewith.
(2).
Fund Administration Agreement between Southeastern Asset
Management, Inc. and Longleaf Partners International Fund;
incorporated by reference from Post Effective Amendment No. 20,
filed August 10, 1998 (Accession Number 0000950144-98-009323);
amendment filed herewith.
(3).
Transfer Agent Agreement with PFPC Inc.; filed herewith.
Incorporated by reference from Post Effective Amendment No. 23,
filed August 1, 2000 (Accession Number 0000950144-00-009321).
Table of Contents
(4).
Sub-Transfer Agent Agreement with Howard Johnson & Company;
incorporated by reference from Post Effective Amendment No. 21,
filed February 26, 1999 (Accession Number 0000950144-99-002256).
(5).
Form of Shareholder Servicing Agent Agreement with National
Financial Services Corp; incorporated by reference from Post
Effective Amendment No. 21, filed February 26, 1999 (Accession
Number 0000950144-99-002256).
(6).
IRA Disclosure Statement and Adoption Agreement; incorporated by
reference from Post Effective Amendment No. 23 filed August 1,
2000. (Accession Number 0000950144-00-009321).
(i).
Legal Opinion. Filed herewith.
(j).
Other Opinions or Consents. Opinion and Consent of PriceWaterhouse
Coopers LLP; filed herewith.
(k).
Omitted Financial Statements. None.
(1).
Initial Capital Agreements. None.
(m).
Rule 12b-1 Plan. None.
(n).
Financial Data Schedule; not applicable.
(o)
Rule 18f-3 Plan. Not applicable; none.
(p).
Code of Ethics; incorporated by reference from Post-Effective Amendment
No. 24, filed February 28, 2001 (Accession Number 0000950144-01-003202).
(q).
Resolution Regarding Authorized
Signature of Andrew R. McCarroll.
Table of Contents
Longleaf Partners Funds Trust, a Massachusetts business trust
registered under the Investment Company Act of 1940 as an open-end
management investment company, now has three series — Longleaf Partners
Fund, Longleaf Partners Small-Cap Fund, and Longleaf Partners
International Fund, all of which are non-diversified open-end management
investment companies. Each series has a separate Board of Trustees
composed of the same individuals. Five of the eight Trustees are
classified as Trustees who are not “interested” as defined by Sec. 2
(a)(19) of the Investment Company Act of 1940. Each series is controlled
by its particular Board of Trustees, and each series has entered into an
Investment Counsel Agreement and a Fund Administration Agreement with
Southeastern Asset Management, Inc., an investment adviser registered
under the Investment Advisers Act of 1940. Each series is treated for
accounting purposes as a separate entity, and each series has separate
financial statements.
Table of Contents
(2)
The determination shall be made:
(i)
By the Trustees, by a majority vote of a quorum which
consists of Trustees who were not parties to the action,
suit or proceeding; or
(ii)
If the required quorum is not obtainable, or if a quorum
of disinterested Trustees so directs, by independent legal
counsel in a written opinion; or
(iii)
By the Shareholders.
(3)
Notwithstanding any provision of this Section 4.8, no person
shall be entitled to indemnification for any liability, whether
or not there is an adjudication of liability, arising by reason
of willful misfeasance, bad faith, gross negligence, or reckless
disregard of duties as described in Section 17(h) and (i) of the
Investment Company Act of 1940 (“disabling Conduct”). A person
shall be deemed not liable by reason by disabling conduct if,
either:
(i)
A final decision on the merits is made by a court or other
body before whom the proceeding
Table of Contents
was brought that the person to be indemnified
(“indemnitee”) was not liable by reason of disabling
conduct; or
(ii)
In the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the
indemnitee was not liable by reason of disabling conduct,
is made by either-
(A)
A majority of a quorum of Trustees who are neither
“interested persons” of the Trust, as defined in
Section 2(a)(19) of the Investment Company Act of
1940, nor parties to the action, suit or proceeding,
or
(B)
an independent legal counsel in a written opinion.
(1)
Authorized in the specific case by the Trustees; and
(2)
The Trust receives an undertaking by or on behalf of the
Trustee, officer, employee or agent of the Trust to repay the
advance if it is not ultimately determined that such person is
entitled to be indemnified by the Trust; and
(3)
either,
(i)
such person provides a security for his undertaking, or
(ii)
the Trust is insured against losses by reason of any
lawful advances, or
(iii)
a determination, based on a review of readily available
facts, that there is reason to believe that such person
ultimately will be found entitled to indemnification, is
made by either-
(A)
a majority of a quorum which consists of Trustees who
are neither “interested persons” of the Trust, as
defined in Section 2(a)(19) of the Investment Company
Act of 1940, nor parties to the action, suit or
proceeding, or
(B)
an independent legal counsel in a written opinion.
Table of Contents
Table of Contents
Name of Company,
Name and position
Principal Business
With Registrant
and Address
O. Mason Hawkins, CFA
1975-Present;
Chairman of the Board
Southeastern Asset
and Co-Portfolio Manager
Management, Inc.;
Chairman of the Board and CEO
G. Staley Cates
1985 — Present;
Trustee and Co-Portfolio Manager
Southeastern Asset Management, Inc.;
President, (1994)-present;
Vice President 1985-94
Capacity with
Investment Counsel
John B. Buford, CPA
1990 — Present
Co-Portfolio Manager of
Southeastern Asset
Partners and Small-Cap Funds
Management, Inc.;
Vice President-Investments
Table of Contents
Name of Company,
Capacity with
Principal Business
Investment Counsel
and Address
C.T. Fitzpatrick, III, CFA;
1990 — Present;
Vice President-Investments
Southeastern Asset Management, Inc.
E. Andrew McDermott, III
1998 — Present;
Assistant Portfolio Manager
Southeastern Asset
of International Fund,
Management, Inc.;
Vice President-Investments
J.P. Morgan & Co.,
1994-98; NEC Logistics, 1992-94
Frank N. Stanley, CFA
1985 — Present;
Vice President — Investments
Southeastern Asset Management, Inc.;
Julie M. Douglas, CPA
Vice President; Chief
Financial Officer-Mutual Funds
1989 — Present;
Southeastern Asset Management, Inc.
Lee B. Harper
1993 — Present
Vice President-Marketing
Southeastern Asset Management, Inc.
Andrew R. McCarroll,
2003 — Present; Vice President and Assistant
Vice President and
General Counsel
(1998-2002)
General Counsel
Southeastern Asset Management, Inc.;
1996-98; Farris Warfield & Kanady (law firm)
Randy D. Holt
1985 — Present
Vice President and Secretary
Southeastern Asset Management, Inc.
Michael J. Wittke
Vice
President and Assistant General Counsel
2003 — Present; Associate Legal Counsel (2002)
Southeastern Asset Management, Inc.; 1996-2002;
PricewaterhouseCoopers, LLP
Table of Contents
(a)
None. Each series is a no-load, open-end management investment
company selling shares directly to the public.
(b)
Not Applicable.
(c)
Not Applicable.
Table of Contents
LONGLEAF PARTNERS FUNDS TRUST (THE MASTER TRUST)
LONGLEAF PARTNERS FUND
LONGLEAF PARTNERS SMALL-CAP FUND
LONGLEAF PARTNERS INTERNATIONAL FUND
By
/s/ Andrew R. McCarroll
Andrew R. McCarroll
VP and General Counsel
Southeastern Asset Management, Inc.
Functioning as principal legal officer under agreements with Longleaf
Partners Funds Trust and its separate series
Table of Contents
Signature
Title
Date
INTERESTED TRUSTEES
/s/ O. Mason Hawkins
O. Mason Hawkins
Trustee; Chairman of the
Board
February 28, 2003
/s/ G. Staley Cates
G. Staley Cates
Trustee
February 28, 2003
/s/ Margaret H. Child
Margaret H. Child
Trustee
February 28, 2003
NON-INTERESTED TRUSTEES
/s/ Chadwick H. Carpenter, Jr.
Chadwick H. Carpenter, Jr.
Trustee
February 28, 2003
/s/ Daniel W. Connell, Jr.
Daniel W. Connell, Jr.
Trustee
February 28, 2003
/s/ Steven N. Melnyk
Steven N. Melnyk
Trustee
February 28, 2003
/s/ C. Barham Ray
C. Barham Ray
Trustee
February 28, 2003
/s/ Perry C. Steger
Perry C. Steger
Trustee
February 28, 2003