<PAGE> 1
As filed with the Securities and Exchange Commission on July 3, 1997
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. 18 (X)
----- -----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 18 (X)
----- -----
(Check appropriate box or boxes)
LONGLEAF PARTNERS FUNDS TRUST
LONGLEAF PARTNERS FUND (SERIES ONE)
LONGLEAF PARTNERS SMALL CAP FUND (SERIES TWO)
LONGLEAF PARTNERS REALTY FUND (SERIES THREE)
(Exact name of registrant as specified in charter)
--------------------------------------------------
c/o Southeastern Asset Management, Inc.
6075 Poplar Avenue; Suite 900
Memphis, TN 38119
(Address of principal executive offices)
----------------------------------------
Registrant's Telephone Number, Including Area Code - (901) 761-2474
<TABLE>
<S> <C>
CHARLES D. REAVES, ESQ. Copy to:
Executive Vice President ALAN ROSENBLAT, ESQ.
Longleaf Partners Funds Trust Dechert Price & Rhoads
c/o Southeastern Asset Mgmt., Inc. 1500 K Street, N.W.
6075 Poplar Ave., Ste. 900 Washington, D.C. 20005
Memphis, TN 38119
</TABLE>
(Name and address of agent for service)
---------------------------------------
Approximate Date of Proposed Public Offering
-----------------------------
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] 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, 1996, was filed with the Securities & Exchange
Commission on February 7, 1997, together with a registration fee for net sales
for the period.
<PAGE> 2
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 18
__________
LONGLEAF PARTNERS FUND
LONGLEAF PARTNERS REALTY FUND
LONGLEAF PARTNERS SMALL-CAP FUND
FORM N-1A CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
PART A - ITEM NUMBER PROSPECTUS CAPTION
<S> <C> <C>
1. Cover Page Front Cover Page
2. Synopsis The Funds at a Glance
3. Condensed Financial "Condensed
Information Financial Information"
4. General Description of Front Cover Page;
Registrant The Funds in Detail
Information on Investment
Management
5. Management of the Fund Types of Investments
Investment Techniques
Investment Risk Factors
Diversification and
Portfolio Turnover
Information on Management
and Administration
6. Capital Stock and Other State of Organization
Securities Distributions and Taxes
7. Purchase of Securities How to Open an Account
Being Offered How to Purchase Shares
8. Redemption or Repurchase How to Redeem Shares
9. Legal Proceedings Not Applicable
</TABLE>
<PAGE> 3
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 18
<TABLE>
<CAPTION>
STATEMENT OF ADDITIONAL
PART B - ITEM NUMBER INFORMATION CAPTION
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents; Page 1
12. General Information Contained in Prospectus on
and History Face Page and under
Significance of Fund Names;
State of Organization
Provisions; In SAI under
Management of the Fund.
13. Investment Objectives and Additional Information About
Policies Investment Restrictions and
Policies; Additional
Information About Investment
Techniques
14. Management of the Fund Management of the Fund
15. Control Persons and Control Persons and Principal
Principal Holders of Holders of Securities
Securities
16. Investment Advisory and Investment Advisory Services;
Other Services Other Management Related Services
17. Brokerage Allocation and Brokerage Allocation
Other Practices
18. Capital Stock and Other Contained in Prospectus under
Securities caption "State of Organization"
19. Purchase, Redemption and Contained in Prospectus
Pricing of Securities under caption "How to
Purchase Shares"; "How to
Redeem Shares", and
"Computation of Net Asset
Value".
20. Tax Status Contained in Prospectus
under captions "Dividends
and Taxes"; In SAI under
caption "Additional Tax
Information"
21. Underwriters None; not applicable
22. Calculation of Performance Investment Performance and
Data Total Return
23. Financial Statements Financial Statements
</TABLE>
<PAGE> 4
LONGLEAF PARTNERS FUNDS TRUST
=============================
LONGLEAF PARTNERS FUND
LONGLEAF PARTNERS REALTY FUND
LONGLEAF PARTNERS SMALL-CAP FUND
PART A
INFORMATION REQUIRED IN THE PROSPECTUS
<PAGE> 5
================================================================================
[LONGLEAF PARTNERS LOGO (SM)]
LONGLEAF PARTNERS FUND
LONGLEAF PARTNERS REALTY FUND
LONGLEAF PARTNERS SMALL-CAP FUND
Series of
Longleaf Partners Funds Trust
PROSPECTUS
September 1, 1997
================================================================================
LONGLEAF PARTNERS FUNDS
MANAGED BY
SOUTHEASTERN ASSET MANAGEMENT, INC.
6075 Poplar Avenue
Suite 900 Memphis, TN 38119
(800) 445-9469
(901) 761-2474
<PAGE> 6
CONTENTS
<TABLE>
<CAPTION>
<S><C>
The Funds at a Glance......................................
Fund Expenses..............................................
Financial Highlights.......................................
The Funds in Detail........................................
Longleaf Partners Fund...................................
Longleaf Partners Realty Fund............................
Longleaf Partners Small-Cap Fund.........................
Investment Management
Investment Counsel.......................................
Portfolio Managers.......................................
Investment Counsel Fees..................................
Investment Philosophy....................................
Types of Investments.......................................
Restricted and Illiquid Securities.......................
Foreign Securities.......................................
Fixed Income Securities..................................
Cash Reserves............................................
Investment Techniques......................................
Borrowing................................................
Options on Securities and Stock Indicies.................
Forward Foreign Currency Contracts.......................
Loans of Portfolio Securities............................
Short Sales..............................................
Other Risk Factors.........................................
Diversification............................................
Portfolio Turnover.........................................
Fund Administration and Operations.........................
Board of Trustees........................................
Other Executive Officers.................................
How to Open an Account.....................................
How to Redeem Shares.......................................
Shareholder Servicing......................................
How Shares Are Priced......................................
Distributions and Taxes....................................
Other Information
Significance of Fund Names...............................
Code of Ethics...........................................
Portfolio Brokerage......................................
Investment Performance Information.......................
State of Organization....................................
Exceptions to Investment Minimum.........................
</TABLE>
2
<PAGE> 7
================================================================================
LONGLEAF PARTNERS FUNDS
MANAGED BY
SOUTHEASTERN ASSET
MANAGEMENT, INC.
6075 Poplar Avenue
Suite 900 Memphis, TN 38119
(800) 445-9469
(901) 761-2474
LONGLEAF PARTNERS FUND
Seeks long-term capital growth through investment primarily in securities of
companies having a market capitalization greater than $1 billion, most of which
are listed on the major stock exchanges.
LONGLEAF PARTNERS REALTY FUND
Seeks maximum total return over the long-term through investment primarily in
real estate oriented companies.
LONGLEAF PARTNERS SMALL-CAP FUND
Seeks long-term capital growth primarily through investment in securities of
companies having a market capitalization of $1 billion or less, some of which
may be traded in the "over the counter" market.
Series of
Longleaf Partners Funds Trust
No-Load, Open-End,
Non-Diversified
Management Investment Companies
PROSPECTUS
September 1, 1997
Please read this prospectus before investing, and keep it on file for future
reference. It contains important information, including how the Funds invest and
the services available to shareholders.
To learn more about the Funds, you can obtain a copy of the most recent
financial reports and portfolio listings, or a copy of the Statement of
Additional Information (SAI) dated July , 1997. The SAI has been filed with
the Securities and Exchange Commission (SEC) and is incorporated herein by
reference (legally forms a part of the prospectus). For a free copy of either
document, call 1-800-445-9469.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, the Federal Reserve
Board, or any other agency, and are subject to investment risk, including the
possible loss of principal.
- --------------------------------------------------------------------------------
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE> 8
FUND EXPENSES
Expenses are one of several factors to consider when investing in a mutual fund.
The purpose of the following fee table is to provide an understanding of the
various costs and expenses that shareholders of the Fund will bear directly or
indirectly.
<TABLE>
<CAPTION>
PARTNERS REALTY SMALL-CAP
FUND FUND FUND
-------- ------ ---------
<S> <C> <C> <C>
Shareholder Transaction Expenses
Sales Load Imposed on Purchases............... None None None
Sales Load Imposed on Reinvested.............. None None None
Deferred Sales Load........................... None None None
Redemption Fee................................ None None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees............................. .797% 1.000% 1.000%
Fee Waiver.................................. 0 (.107%) 0
----- ----- -----
Net Management Fees......................... .797% .893% 1.000%
12b-1 Fees.................................. None None None
Other Expenses
Administration............................ 0.100% 0.100% 0.100%
Shareholder Services - Transfer Agent..... .018% .018% .018%
All Other Operating Expenses.............. .039% .489% .114%
----- ----- -----
Total Fund Operating Expenses*.............. .954% 1.500% 1.232%
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
EXAMPLE*
You would pay the following expenses on a 1 Year $ 10 $ 15 $ 13
$1,000 investment, assuming a 5% annual
return 3 Years $ 30 $ 47 $ 39
and either redemption or no redemption at
the 5 Years $ 53 $ 82 $ 68
end of each time period. 10 Years $117 $179 $149
</TABLE>
* The Example is based on the "Total Fund Operating Expenses" described above.
PLEASE REMEMBER THAT THE EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF
PAST OR FUTURE EXPENSES AND THAT ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN
THOSE SHOWN. The assumption in the Example of a 5% annual return is required by
regulations of the SEC applicable to all mutual funds. The assumed 5% annual
return is not a prediction of, and does not represent, the projected or actual
performance of a Fund's shares.
5
<PAGE> 9
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
FINANCIAL HIGHLIGHTS
The following condensed financial information, including total returns, has been
The audit report on the 1996 financial statements issued by Coopers & Lybrand
conjunction with this condensed financial information. The presentation is for
<TABLE>
<CAPTION>
NET GAINS
OR
(LOSSES)
NET ON DISTRI-
ASSET SECURITIES TOTAL DIVIDENDS BUTIONS
VALUE NET REALIZED FROM FROM NET FROM TOTAL
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT CAPITAL DISTRI-
OF PERIOD INCOME UNREALIZED OPERATIONS INCOME GAINS BUTIONS
LONGLEAF PARTNERS FUND --------- ---------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1996........................... $21.15 $.37 $ 4.09 $ 4.46 $ (.38) $(2.38) $(2.76)
1995........................... 17.13 .30 4.40 4.70 (.24) (.44) (.68)
1994........................... 16.92 .21 1.30 1.51 (.16) (1.14) (1.30)
1993........................... 14.70 .10 3.16 3.26 (.09) (.95) (1.04)
1992........................... 13.34 .07 2.65 2.72 (.07) (1.29) (1.36)
1991........................... 10.21 .05 3.93 3.98 (.06) (.79) (.85)
1990........................... 12.62 .13 (2.16) (2.03) (.15) (.23) (.38)
Two months ended December 31,
1989........................... 14.30 .03 (.10) (.07) (.08) (1.53) (1.61)
Year ended October 31,
1989........................... 11.25 .18 3.00 3.18 (.13) - (.13)
1988........................... 8.69 .14 2.50 2.64 (.08) - (.08)
March 24, 1987
(Date of Initial Capitalization)
through October 31, 1987......... 10.00 .11 (1.42) (1.31) - - -
</TABLE>
LONGLEAF PARTNERS REALTY FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
January 2, 1996
(Date of Initial Capitalization)
through December 31, 1996...... $10.00 .16 3.91 4.07 (.04) (.05) (.01)
</TABLE>
- ---------------
* Annualized
(1) Aggregate; not annualized.
(2) Before expense limitation fee waiver, this ratio was 1.64% and 1.83% for the
1988 and 1987 periods, respectively.
(3) Not applicable for prior periods.
(4) Before expense limitation fee waiver, this ratio was 1.60%.
(5) Before expense limitation fee waiver, this ratio was .82%.
6
<PAGE> 10
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
FINANCIAL HIGHLIGHTS
audited by Coopers & Lybrand L.L.P., independent certified public accountants.
L.L.P. appears in the Statement of Additional Information and should be read in
a share outstanding throughout each period.
<TABLE>
<CAPTION>
RATIO OF
NET EXPENSES RATIO OF
ASSET NET ASSETS TO NET
VALUE END OF AVERAGE INCOME TO PORTFOLIO AVERAGE
END OF TOTAL PERIOD NET AVERAGE TURNOVER COMMISSION
PERIOD RETURN (THOUSANDS) ASSETS NET ASSETS RATE RATE PAID
------ ------ ----------- -------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$22.85 21.02% $2,300,079 0.95% 1.61% 33.18% $0.0750(3)
21.15 27.50% 1,876,467 1.01% 1.45% 12.60%
17.13 8.96% 753,527 1.17% 1.18% 27.39%
16.92 22.20% 397,282 1.26% .63% 19.12%
14.70 20.47% 243,678 1.29% .50% 29.12%
13.34 39.19% 177,878 1.30% .42% 45.11%
10.21 (16.35)% 129,643 1.32% 1.13% 52.45%
12.62 (0.47)%(1) 148,680 1.31%* 1.73%* 6.67%
14.30 28.38% 139,608 1.35% 1.37% 57.72%
11.25 30.69% 50,676 1.50%(2) 1.40% 92.68%
8.69 (13.14)%(1) 25,787 1.50%*(2) 1.61%* 70.00%
13.97 40.69%(1) $156,009 1.50%(4) .92%(5) 4.28% $0.0613(3)
</TABLE>
7
<PAGE> 11
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
FINANCIAL HIGHLIGHTS
The following condensed financial information, including total returns, has been
The audit report on the 1996 financial statements issued by Coopers & Lybrand
conjunction with this condensed financial information. The presentation is for a
<TABLE>
<CAPTION>
NET GAINS
OR
(LOSS)
NET ON DISTRI-
ASSET NET SECURITIES TOTAL DIVIDENDS BUTIONS
VALUE INVESTMENT REALIZED FROM FROM NET FROM TOTAL
BEGINNING INCOME AND INVESTMENT INVESTMENT CAPITAL DISTRI-
OF PERIOD (LOSS) UNREALIZED OPERATIONS INCOME GAINS BUTIONS
--------- ---------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
LONGLEAF PARTNERS SMALL-CAP FUND
Year ended December 31,
1996........................... $14.46 $.03 $ 4.40 $ 4.43 $ (.02) $(1.01) $(1.03)
1995........................... 13.28 .12 2.35 2.47 (.12) (1.17) (1.29)
1994........................... 13.49 (.03) .52 .49 - (.70) (.70)
1993........................... 11.40 (.06) 2.32 2.26 - (.17) (.17)
1992........................... 10.67 (.01) .74 .73 - - -
1991........................... 8.50 .06 2.17 2.23 (.06) - (.06)
1990........................... 12.87 .40 (4.18) (3.78) (.36) (.23) (.59)
Two months ended December 31,
1989........................... 13.02 .04 .22 .26 (.05) (.36) (.41)
December 28, 1987
(Date of Initial Capitalization)
through October 31, 1987......... 10.00 .17 2.94 3.11 (.09) - (.09)
</TABLE>
* Annualized
(1) Aggregate; not annualized.
(2) Before expense limitation fee waiver, this ratio was 1.59%.
(3) Not applicable for prior periods.
8
<PAGE> 12
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
FINANCIAL HIGHLIGHTS
audited by Coopers & Lybrand L.L.P., independent certified public accountants.
L.L.P. appears in the Statement of Additional Information and should be read in
share outstanding throughout each period.
<TABLE>
<CAPTION>
RATIO OF
NET EXPENSES RATIO OF
ASSET NET ASSETS TO NET
VALUE END OF AVERAGE INCOME TO PORTFOLIO AVERAGE
END OF TOTAL PERIOD NET AVERAGE TURNOVER COMMISSION
PERIOD RETURN (THOUSANDS) ASSETS NET ASSETS RATE RATE PAID
------ ------ ----------- -------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$17.86 30.64% $ 252,157 1.23% .18% 27.97% $0.0605(3)
14.46 18.61% 135,977 1.30% .84% 32.95%
13.28 3.64% 99,609 1.38% (.22)% 19.79%
13.49 19.83% 85,087 1.45% (.45)% 14.37%
11.40 6.87% 62,181 1.45% (.03)% 25.80%
10.67 26.31% 60,354 1.43% .60% 65.18%
8.50 (30.05)% 47,894 1.43% 3.48% 14.93%
12.87 2.10%(1) 52,176 1.47%* 1.60%* 3.96%
13.02 31.13%(1) 43,860 1.50%*(2) 1.63%* 20.47%
</TABLE>
9
<PAGE> 13
THE FUNDS IN DETAIL
LONGLEAF PARTNERS FUND ("PARTNERS FUND"). Under normal circumstances, the
Partners Fund invests at least 75% of its equity portfolio (but not less than
65% of total assets) in companies having a market capitalization over $1
billion. Most of these securities are listed on the major securities exchanges.
The Partners Fund may invest the remainder of its portfolio in a wide variety of
securities, including equity securities of smaller companies that generally have
an established market, although the depth and liquidity of the market may vary,
in debt securities, in options, warrants, and other similar investments, and in
money market instruments. Current income is not an objective. The Partners Fund
will not invest as much as 25% of its net assets in companies in any one
industry.
LONGLEAF PARTNERS REALTY FUND ("REALTY FUND"). The Realty Fund seeks maximum
total return over the long-term through investment primarily in real estate
oriented companies. Investments are selected based upon the potential for
long-term capital growth or the realization of high current income, consistent
with the overall objective of maximizing total return.
Under normal circumstances, at least 65% of the Realty Fund's total assets will
be invested in the equity securities of a limited number of companies in the
real estate industry or related industries or in companies which own significant
real estate assets.
The Realty Fund may invest the remainder of its portfolio in a wide variety of
securities, including securities of non-real estate companies, debt securities,
options, warrants, and other similar investments, and money market instruments.
Definition of Companies in the Real Estate Industry. A company is considered in
the real estate industry (residential, commercial or industrial) or a related
industry if it satisfies one or more of the following tests:
1. Revenues and Net Profits. At least 50% of the company's gross revenues or
net profits are derived from:
- Construction, ownership, management, operation, financing, sales, or
development of real estate,
- Extraction of timber or minerals from real estate owned or leased by the
company either as a lessor or as a lessee under a lease granting the
designated development or extraction rights, or
- Other businesses which have a clear relationship to the ownership,
management, use, operation, or development of real estate or appurtenances
to real estate.
10
<PAGE> 14
2. Valuation of Assets. At least 50% of the company's appraised value, as
determined by the Investment Counsel using its established appraisal
procedures for determining intrinsic value, is attributable to one or more of
the following:
- The current appraised value of real estate owned or leased by the company
either as lessor or as lessee
- The current appraised value of timber or minerals on such real estate
- The current appraised value of the stream of fees or revenues to be derived
from the management or operation of real estate or the rights to extract
timber or minerals from real estate
Under the above definitions, at least 65% of the Realty Fund's assets will be
invested in companies such as the following:
- Real estate investment trusts
- Manufacturers and distributors of construction materials, equipment and
building supplies
- Financial institutions which make or service mortgages on real estate
- Hotel and hotel management companies, retail chains, and railroad
- Lumber, paper, forest product, timber, mining and oil companies
- Other similar types of companies with a clear relationship to real estate
or the real estate industry
A company engaged in one or more businesses outside the real estate industry
will be considered to be in the real estate industry for purposes of compliance
with the Fund's investment objective if it satisfies either the Revenues and Net
Profits test or the Valuation of Assets test.
Policy on Industry Concentration. With the exception of companies in the real
estate or related industries, the Realty Fund will not invest as much as 25% of
its net assets in companies in any one industry. As described in the prior
section, the Fund's investment in companies engaged in businesses outside the
real estate industry which possess significant real estate holdings will be
deemed in the real estate industry for purposes of the Realty Fund's investment
objective and its policy on industry concentration. This concentration policy
will not limit the Fund's purchase of obligations issued by the U.S. Government
and its agencies or instrumentalities, or cash equivalents (which will not be
used to concentrate investments in a single industry other than real estate).
LONGLEAF PARTNERS SMALL-CAP FUND ("SMALL-CAP FUND"). Under normal
circumstances, the Small-Cap Fund invests at least 75% of its equity portfolio
(but not less than 65% of total assets) in companies with a market
capitalization of $1 billion or less. Some of these securities may be traded in
the "over the counter" market, the market for securities which are not listed
for trading on the New York or American Stock Exchanges.
11
<PAGE> 15
The Small-Cap Fund may invest the remainder of its portfolio in a wide variety
of securities, including equity securities of smaller companies that generally
have an established market although the depth and liquidity of the market may
vary, debt securities, options, warrants, and other similar investments, and
money market instruments. Current income is not an objective. The Small-Cap Fund
will not invest as much as 25% of its net assets in companies in any one
industry.
INVESTMENT MANAGEMENT
INVESTMENT COUNSEL. Southeastern Asset Management, Inc., ("Southeastern"),
located in Memphis, Tennessee, is the Funds' Investment Counsel. Since 1975, the
firm has been managing securities portfolios for ERISA and government retirement
plans, charitable and educational endowments, and individuals. The firm is owned
and controlled by its principal officers, with Mr. O. Mason Hawkins, Chairman of
the Board and Chief Executive Officer, owning a majority of the outstanding
shares. The firm presently manages more than $9.7 billion in client assets.
PORTFOLIO MANAGERS. Mr. O. Mason Hawkins, Chairman of the Board of Southeastern
and the Funds, and Mr. G. Staley Cates, President of Southeastern, are
co-portfolio managers of all three Funds. Mr. C. T. Fitzpatrick is the lead co-
portfolio manager of the Realty Fund. Collectively, they have primary
responsibility for investment management of the specified Funds' portfolios.
INVESTMENT COUNSEL FEES. Each Fund pays Southeastern an investment counsel fee
which is accrued daily and paid monthly. The fee is based on the average daily
net asset value of the Fund. For the Partners Fund and the Small-Cap Fund, this
fee is equal to 1% per annum of the first $400 million in average daily net
assets and 0.75% per annum of all additional average daily net assets. For the
Realty Fund, the fee is 1% of average daily net assets per annum. Southeastern
has agreed to reduce its fees to the extent operating expenses of any Fund
(excluding brokerage, interest, taxes, and extraordinary expenses) exceed 1.5%
of average annual net assets.
INVESTMENT PHILOSOPHY. Southeastern believes that 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,
Southeastern views stocks as ownership units in business enterprises. Corporate
intrinsic value is determined 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 prices substantially discounted from
their intrinsic worth not only protect investment capital from significant loss
but also facilitate major rewards when the true business value is ultimately
recognized. Seeking the largest margin of safety possible, Southeastern requires
at least a 40% market
12
<PAGE> 16
value discount from its appraisal of a company's intrinsic value before
purchasing a security.
Southeastern's investment analysts determine the appraised per share corporate
worth of potential investments using current, publicly available financial
statements. These are carefully scrutinized, using two primary methods of
appraisal. The first assesses what Southeastern believes to be the real economic
value of the company's net assets. The second examines the enterprise's ability
to generate free cash flow after required or maintenance capital expenditures
and working capital needs. Once free cash flow is determined, conservative
projections about its rate of future growth are made. The present value of that
stream of free cash flow plus its terminal value is then calculated using a
conservative discount rate. If Southeastern's projections are accurate, that
present value would be the price which buyers and sellers negotiating at arms
length would accept for the whole company. In a concluding analysis, the asset
value determination and/or the discounted free cash flow value are compared to
Southeastern's data bank of sales of comparable corporations.
Southeastern also considers the following in selecting potential investments:
- INDICATIONS OF SHAREHOLDER ORIENTED MANAGEMENT.
In selecting portfolio investments, Southeastern seeks companies with properly
incented, ownership vested managements. They must be honest, shareholder
oriented, operationally competent individuals capable of allocating corporate
resources intelligently. Southeastern is seeking exemplary long-term business
partners.
- EVIDENCE OF FINANCIAL STRENGTH. Southeastern requires companies in the
portfolio to have sound financial statements and the potential to generate
excess free cash flow from operations.
- POTENTIAL EARNINGS IMPROVEMENT. The company should be capable of producing
both a meaningful improvement in earnings within three to five years and an
adequate return on its invested capital.
A particular investment may not include all of the above factors, but
Southeastern must be convinced that significant unrealized intrinsic value is
present.
TYPES OF INVESTMENTS
Each Fund will generally maintain a fully invested position in common stocks
with the characteristics discussed above. The Funds may also invest in other
equity securities such as preferred stocks, and in equity securities of Real
Estate Investment Trusts or "REIT"s.
The Funds may also purchase warrants, options, financial futures, foreign
currency contracts, fixed income securities, and other similar investments, as
more fully described in the following sections.
13
<PAGE> 17
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest a maximum of 15% of
its net assets in restricted securities (securities which are not registered or
which are not deemed to be readily marketable) and all other illiquid
securities, including repurchase agreements with maturities of more than seven
days. Securities that may be resold without registration under Rule 144A may be
treated as liquid for these purposes, in accordance with guidelines established
by the Board of Trustees.
Restricted or non-registered securities may be sold only in privately negotiated
transactions or in a public offering under an effective registration statement
or under Rule 144A. If registration is required, the particular Fund may be
obligated to pay all or part of the registration expense, and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If during such a period adverse market conditions develop, the Fund might obtain
a less favorable price. Restricted securities will be valued as the Board of
Trustees determines, in good faith to reflect the fair market value.
FOREIGN SECURITIES. The Funds may invest up to 30% of total assets in foreign
companies which meet the same criteria for investment as domestic companies, or
in sponsored and unsponsored depositary receipts for such securities. The Funds
may be subject to additional investment risks for these securities. Such risks
include currency risks, future political and economic developments, imposition
of foreign withholding taxes on interest income payable on the securities,
establishment of exchange controls, seizure or nationalization of foreign
deposits, or other foreign governmental restrictions which might adversely
affect the payment of principal and interest on such securities. In addition,
there may be less publicly available information about a foreign company, and
foreign companies may not be subject to the same accounting, auditing and
financial recordkeeping standards and requirements as domestic companies.
FIXED INCOME SECURITIES. The Funds may invest a maximum of 25% of net assets in
investment grade and non-investment grade debt securities of companies and
preferred stock. Securities rated non-investment grade (lower than Baa by
Moody's Investor Services Inc. or lower than BBB by Standard and Poors
Corporation) are sometimes referred to as "high yield" or "junk" bonds. The
Statement of Additional Information contains a table summarizing these ratings.
The prices of high yield securities may be less sensitive to interest-rate
changes than more highly rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. Yields on high yield
securities will fluctuate. If the issuer of high yield securities defaults, the
Funds may incur additional expenses to seek recovery.
CASH RESERVES. Cash reserves, held to provide flexibility to take advantage of
new investment opportunities and for other cash needs, will be invested in money
market instruments and generally will not exceed 15% of total assets. If
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<PAGE> 18
Southeastern has difficulty finding an adequate number of undervalued equity
securities, all or any portion of assets may also be invested temporarily in
money market instruments. Cash reserves in excess of 35% of total assets will be
held for defensive purposes only.
Money market instruments will generally consist of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and
obligations subject to repurchase agreements for these instruments. A repurchase
agreement permits an investor to purchase a U.S. Government security from a
vendor, with an agreement by the vendor to repurchase the security at the same
price, plus interest.
Other acceptable money market instruments include commercial paper rated by any
nationally recognized rating agency, such as Moody's or Standard & Poor's,
certificates of deposit, bankers' acceptances issued by domestic banks having
total assets in excess of $1 billion, and money market investment companies
(each limited to a maximum of 5% of total assets).
INVESTMENT TECHNIQUES
All of the Funds may use the following investment techniques or investment
tools, subject to the accompanying restrictions. These investment tools provide
investment flexibility and enable Southeastern to reduce investment risk through
hedging the portfolio when appropriate, managing foreign currency exposure when
investing in foreign securities, and managing potential income tax liabilities.
Southeastern intends to use these investment flexibilities primarily when, in
its opinion, they would be effective to manage or reduce risk.
BORROWING. The Funds may borrow up to 30% of total assets for temporary or
emergency purposes such as clearing trades or processing redemptions, and for
increasing portfolio holdings. Each Fund must maintain continuous asset coverage
of 300% with respect to borrowings and sell within three days sufficient
portfolio holdings to restore such coverage if it should decline to less than
300%, even if such liquidations are disadvantageous from an investment
standpoint. Leveraging may exaggerate the effect of any increase or decrease in
the value of portfolio securities on the Funds' net asset value. Money borrowed
also will be subject to interest and other costs which may include commitment
fees and/or the cost of maintaining minimum average balances. These expenses may
exceed the income received from the securities purchased with borrowed funds.
OPTIONS ON SECURITIES AND STOCK INDICES. The Funds may write (i.e., sell) put
and call options and purchase put and call options on securities or stock
indices. An option on a security is a contract that gives the purchaser, in
return for the premium paid, the right to buy a specified security if it is a
call option, or to sell a specified security if it is a put option, from or to
the writer of the option at a designated price during the term of the option. An
option on a stock index gives the purchaser, in return for the premium paid, the
right to receive from the seller
15
<PAGE> 19
cash equal to the difference between the closing price of the index and the
exercise price of the option.
The Funds may write a call or put option only if the option is "covered." While
the Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the call, or hold a call at the same or lower exercise
price, for the same exercise period, and on the same securities as the written
call. A put is covered if the Fund maintains collateral consisting of cash,
liquid money market instruments, or U.S. government securities with a value
equal to the exercise price in a segregated account, or holds a put on the same
underlying security at an equal or greater exercise price. The value of the
underlying securities on which options may be written at any one time will not
exceed 25% of the total assets of the Fund.
FUTURES CONTRACTS. The Funds may buy and sell financial futures contracts,
stock and bond index futures contracts, foreign currency futures contacts and
options on any of these. A financial futures contract is an agreement between
two parties to buy or sell a specified debt security at a set price on a future
date. An index futures contract is an agreement to take or make delivery of an
amount of cash based on the difference between the value of the index at the
beginning and at the end of the contract period. A futures contract on a foreign
currency is an agreement to buy or sell a specified amount of a currency for a
set price on a future date.
FORWARD FOREIGN CURRENCY CONTRACTS. The Funds may enter into forward foreign
currency exchange contracts ("forward contracts") to attempt to minimize the
risk from adverse changes 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. The contract is
individually negotiated and privately traded by currency traders and their
customers.
Each Fund may enter into forward contracts under the following circumstances.
When the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security in relation to another currency by entering into a forward
contract to buy the amount of the foreign currency needed to settle the
transaction. Second, when Southeastern believes that the currency of a
particular foreign country may sustain substantial movement against another
currency, it may "cross hedge." Cross hedging entails entering into a forward
contract to sell or buy the amount of the foreign currency (or another currency
which acts as a proxy for that currency) approximating the value of some or all
of the portfolio securities denominated in that foreign currency. Forward
transactions may call for the delivery of one foreign currency in exchange for
another foreign currency and may at times involve currencies other than those in
which its portfolio securities are denominated.
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<PAGE> 20
RISK OF OPTIONS, FUTURES AND FOREIGN CURRENCY CONTRACTS. When used separately,
options and futures have risks. For example, the price movements of the
securities underlying the options and futures may not follow the price movements
of the portfolio securities subject to the hedge. Gains on investments in
options and futures depend on the ability to predict correctly the direction of
stock prices, interest rates, and other economic factors. Where a liquid
secondary market for options or futures does not exist, the Funds may not be
able to close their positions and in such an event, the loss is theoretically
unlimited. However, using puts and calls in conjunction with each other for
hedging purposes can reduce market risks.
LOANS OF PORTFOLIO SECURITIES. The Funds may lend to broker-dealers portfolio
securities with an aggregate market value of up to one-third of total assets.
Such loans must be secured by liquid collateral in an amount at least equal to
the current market value of the securities loaned, marked-to-market daily. The
Funds may terminate the loans at any time and obtain the return of the
securities loaned within three business days. The Funds will continue to receive
any interest or dividends paid on the loaned securities.
SHORT SALES. The Funds may enter into short sales, provided the dollar amount
of short sales at any one time would not exceed 25% of net assets, and the value
of securities of any one issuer in which the Funds are short would not exceed 5%
of net assets. The Funds must maintain liquid collateral in a segregated account
equal to the current market value of the shorted securities, marked to market
daily. These restrictions do not apply to short sales against the box, where the
Funds own an equal amount of the securities sold short or securities convertible
into or exchangeable into an equal amount of securities of the same issuer sold
short, without additional payment.
OTHER RISK FACTORS
There is no assurance that any of the Funds will achieve their investment
objectives. Market values of all types of securities fluctuate and the value of
the Funds' portfolios and the prices per share will vary, based on general stock
market conditions. Liquidity risks can limit the ability of the Funds to sell
portfolio securities at current market valuations. Fixed income securities have
interest rate risks, which cause a decline in their principal values when
interest rates rise. For these and other reasons, the value of your investment
as a shareholder at redemption may be more or less than the purchase price.
Because the Realty Fund generally invests at least 65% of its assets in real
estate oriented companies, it may be subject to risks normally associated with
the direct ownership of real estate. Thus, the value of its shares may change at
different rates than shares of a mutual fund with investments in many
industries.
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<PAGE> 21
DIVERSIFICATION
The Funds are classified as non-diversified under the Investment Company Act of
1940 and have no diversification requirements under the federal securities laws.
The Funds comply with the diversification standards of SubChapter M of the
Internal Revenue Code of 1986. With respect to 50% of total assets, not more
than 5% of total assets may be invested in the securities of any one issuer and
the Funds may not acquire more than 10% of all outstanding voting securities of
any one issuer; with respect to the other 50% of total assets, not more than 25%
of total assets may be invested in the securities of any one issuer or related
issuers.
Under these diversification requirements, the Funds must, when fully invested
own at least twelve securities positions. Ten of the positions may not exceed 5%
of total assets each at the time of purchase; the remaining two positions could
each comprise 25% of total assets at the time of purchase. Generally,
Southeastern anticipates that the portfolios will consist of more than twelve
positions. To the extent that the Funds are less diversified, they may be more
susceptible to adverse economic, political, or regulatory developments affecting
a single investment than if they were more broadly diversified.
PORTFOLIO TURNOVER
The Funds may engage in short-term trading, but this strategy will not be used
as a primary means of achieving their investment objectives. The Funds cannot
accurately predict portfolio turnover. In past years, portfolio turnover has
generally been less than 50%. There are no limits on the rate of portfolio
turnover, and investments will be sold without regard to the length of time held
when investment considerations support such action. Higher turnover rates, such
as rates over 100%, involve greater commissions and transaction costs.
FUND ADMINISTRATION AND OPERATIONS.
BOARD OF TRUSTEES. Each Fund has a separate Board of Trustees which oversees
all operations of the Funds. The same six Trustees serve all Funds. Four of the
six Trustees are independent and not affiliated with Southeastern. Each Fund
Board elects officers who are also officers or employees of Southeastern. The
business operations of each Fund are performed by the officers and employees of
Southeastern under its operating agreements with the Funds.
FUND ADMINISTRATOR. As Fund Administrator, Southeastern provides all business,
administrative and compliance services for the Funds. For these services, the
firm receives an Administration Fee of 0.10% of average net assets per annum,
accrued daily and paid monthly. The Funds pay all direct expenses of their
operations, such as professional association fees, insurance premiums,
registration fees, and costs of supplies, and reimburse Southeastern for
computer licensing fees for mutual fund software programs and the salary of the
Funds' Treasurer.
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<PAGE> 22
BOARD OF TRUSTEES
O. MASON HAWKINS*, CFA, Chairman of the Board and Chief Executive Officer; Co-
Portfolio Manager.
Founder and Director, Southeastern Asset Management, Inc. (since 1975); Director
of Research, First Tennessee Investment Management Company, Memphis, TN (1974-
1975); Director of Research, Atlantic National Bank, Jacksonville, FL
(1972-1974); Director, Mid-America Apartment Communities, Inc. (since 1993).
Education: B.S.B.A., Finance, University of Florida, 1970; M.B.A., University of
Georgia, 1971.
W. REID SANDERS*, Trustee and President.
Founder and Director, Southeastern Asset Management, Inc. (since 1975);
Investment Officer, First Tennessee Investment Management Company, Memphis, TN
(1973-1975); Credit Analyst and Commercial Lending Official, Union Planters
National Bank, Memphis, TN (1972-1973).
Education: B.A., Economics, University of Virginia, 1971.
CHADWICK H. CARPENTER, JR., Trustee.
Senior Executive Officer in charge of corporate development, Progress Software
Corporation, Bedford, MA (a corporation engaged in the development and marketing
of software products used by developers to build and deploy commercial
applications) (since 1993); Senior Vice President, Sales and Services
(1986-1993); Vice President, Product Services (1983-1986); prior to 1983,
Manager of MIMS Systems Operation, General Electric Information Services
Company; Senior Consultant, Touche Ross & Company.
Education: B.S., Electrical Engineering, Massachusetts Institute of Technology,
1971; M.S., Electrical Engineering, Massachusetts Institute of Technology, 1972.
DANIEL W. CONNELL, JR., Trustee.
Senior Vice President -- Marketing, Jacksonville Jaguars, Ltd., Jacksonville, FL
(since 1994) (National Football League franchise); Executive Vice
President -- Corporate Banking Group and other officer positions, First Union
National Bank of Florida, Jacksonville, FL (1970-94); 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.
Chairman of the Executive Committee and President, Riverside Golf Group, Inc.,
Jacksonville, FL (since 1987) (a corporation engaged in the design, construction
and operation through ownership of golf courses throughout the southeastern US);
Golf commentator and sports marketing executive, ABC Sports (since 1991) and CBS
Sports (1982-1991); Founding director and former Chairman, First Coast Community
Bank, Fernandina Beach, FL; Winner of U.S. Amateur Championship, 1969, and
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, Memphis, TN (since 1974)
(a corporation serving as a financial advisor in the evaluation of private
businesses, in the negotiation and structuring of purchase and sale transactions
of private businesses and as a venture capital investor); Director, Financial
Federal Savings Bank, Memphis, TN.
Education: B.A., Vanderbilt University, 1968; M.B.A., University of Virginia,
1973.
- ---------------
* Mr. Hawkins and Mr. Sanders are employed by the Investment Counsel and each is
deemed to be a Trustee who is an "interested person", as that term is defined
in Section 2(a)(19) of the Investment Company Act of 1940. Mr. Carpenter
serves as Chairman of the Audit Committee, which is composed of all Trustees
who are not affiliated with the Investment Counsel.
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<PAGE> 23
OTHER EXECUTIVE OFFICERS
INVESTMENT MANAGEMENT
G. STALEY CATES, CFA, Co-Portfolio Manager, Vice President -- Investments.
Professional Experience: President, Southeastern Asset Management, Inc. (since
1994); Vice President, Southeastern Asset Management, Inc. (1986-1994).
Education: B.B.A., Finance, University of Texas, 1986.
C. T. FITZPATRICK, III, CFA, Co-Portfolio Manager of Longleaf Partners Realty
Fund; Vice President -- Investments.
Professional Experience: Vice President, Southeastern Asset Management, Inc.
(since 1990); Financial Analyst, Merrill Lynch Capital Markets (1986-88).
Education: B.A., Corporate Finance, University of Alabama, 1986; MBA, Finance,
Vanderbilt University (1990).
JOHN B. BUFORD, CFA, Vice President -- Investments.
Professional Experience: Southeastern Asset Management, Inc. (since 1990); Vice
President, First Tennessee Bank (1989-90); Commercial Lending Officer/Credit
Analyst, Metropolitan National Bank (1985-88).
Education: B.B.A., Finance, University of Texas, 1985.
FRANK N. STANLEY, III, CFA, Vice President -- Investment.
Professional Experience: Vice President, Southeastern Asset Management, Inc.
(since 1984); Portfolio Manager and Analyst, Montag & Caldwell, Atlanta, GA
(1974-1984); Investment Officer, Atlantic National Bank, Jacksonville, FL
(1972-1974).
Education: B.S., Management, Georgia Institute of Technology, 1964; Graduate
study, Emory University, 1965; M.B.A., Marketing, University of Florida, 1970.
FUND OPERATIONS
CHARLES D. REAVES, Executive Vice President.
Professional Experience: General Counsel, Southeastern Asset Management, Inc.
(since 1988); Vice President in corporate finance, Porter, White & Yardley,
Inc., Birmingham, AL (1986-1988); Senior Vice President -- Finance and Secretary
(1981-1986) and Vice President and General Counsel (1974-1981), Saunders System
Inc., Birmingham, AL.
Education: J.D., University of Alabama, 1961; L.L.M. (Taxation), Georgetown
University Law Center, 1966; M.B.A., Emory University, 1981.
JULIE M. DOUGLAS, CPA, Executive Vice President -- Operations & Treasurer.
Professional Experience: Southeastern Asset Management, Inc. (since 1989);
Audit Supervisor and Audit Senior, Coopers & Lybrand, Birmingham, AL and
Pittsburgh, PA (1984-1989).
Education: B.S., Accounting, Pennsylvania State University, 1984.
MARKETING AND ADMINISTRATION
LEE B. HARPER, Executive Vice President -- Marketing.
Professional Experience: Southeastern Asset Management, Inc. (since 1993);
Consultant, IBM Corporation, Memphis, TN (1989-1993); Business Analyst, McKinsey
& Company, Atlanta, GA (1985-1987).
Education: B.A., University of Virginia, 1985; M.B.A., Harvard University,
1989.
RANDY D. HOLT, CPA, Vice President -- Secretary.
Professional Experience: Vice President and Secretary, Southeastern Asset
Management, Inc. (since 1994); Secretary/Treasurer (1985-1994); Ott, Baxter,
Holt (1983-1985); A.M. Pullen & Co. (1982-1983); Harry M. Jay & Associates
(1978-1982).
Education: B.S., Accounting, University of Tennessee, 1976.
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<PAGE> 24
FUNDS CLOSED TO NEW SHAREHOLDERS
Longleaf Partners Realty Fund is open to new investors. Longleaf Partners Fund
and Longleaf Partners Small-Cap Fund are closed to new shareholders until
further notice, but remain open to the following investors:
(1) Shareholders of the particular Fund on the date of its closing and their
immediate family members.
(2) Shareholders who had an account balance of at least $250,000 in one of the
Longleaf Partners Funds on July 31, 1997.
(3) Financial Advisors or Consultants having clients invested in the particular
Fund on the date of its closing.
(4) Institutions or affiliates having an investment advisory relationship with
Southeastern Asset Management, Inc. of at least $2,000,000.
(5) Employees and affiliates of Southeastern Asset Management, Inc. and their
relatives.
(6) Prospective investors of the Small-Cap Fund who received marketing
presentations from an officer of the Funds or Southeastern Asset Management,
Inc. after January 1, 1997.
A current shareholder of Longleaf Partners Fund or Longleaf Partners Small-Cap
Fund who redeems an account below the minimum initial investment minimum of
$10,000 will not be allowed to make further investments until these Funds have
re-opened to new investors.
HOW TO OPEN AN ACCOUNT
REGULAR ACCOUNTS. To invest in Longleaf Partners Funds, complete, sign and mail
the account application to the address below. THE MINIMUM INVESTMENT FOR EACH
FUND IS $10,000.
Longleaf Partners Funds
P.O. Box 419929
Kansas City, MO 64141-6929
INDIVIDUAL RETIREMENT ACCOUNTS. You can open an IRA by requesting the IRA
Application kit. The kit contains an explanation of tax considerations and
information on the trustee, State Street Bank. After reading the information,
fill in the IRA application and the IRA transfer form and mail to the above
address. THE MINIMUM INITIAL INVESTMENT IS $10,000, WHICH MUST BE SATISFIED
PRIMARILY BY TRANSFERRING FUNDS FROM AN EXISTING IRA OR A QUALIFIED RETIREMENT
PLAN. YOU WILL BE CHARGED AN INITIAL SET-UP FEE OF $15 AND A $10 ANNUAL
MAINTENANCE FEE.
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HOW TO PURCHASE SHARES
You may obtain shares of the Funds by two different methods. (1) You may invest
directly with the Funds using the following instructions, and you will not be
charged a transaction fee. (2) You may purchase shares through an authorized
broker of your choice and the broker may charge an additional transaction fee
for its services.
For all types of accounts, the minimum initial investment for a direct purchase
from the Funds is $10,000 for each Fund. There are no minimum requirements on
subsequent purchases. Authorized brokers may have different minimum investments.
BY MAIL. To purchase shares into existing accounts by mail, send a check
payable to Longleaf Partners Funds along with the remittance stub from the
bottom of your most recent transaction statement to:
Longleaf Partners Funds
P.O. Box 419733
Kansas City, MO 64141-6733
INCLUDE THE NAME OF THE FUND AND YOUR ACCOUNT NUMBER ON THE CHECK.
If your check is returned because of insufficient funds or because you have
stopped payment, you will be responsible for any losses sustained by the Fund
from custodian or transfer agent fees or a decline in the net asset value when
the shares issued are cancelled. If you are an existing shareholder, the Fund
may collect losses by redeeming the appropriate amount from your account.
BY WIRE. You may purchase shares by wire. To do so:
- - Call the transfer agent at (800) 488-4191 to establish an account. Be prepared
to provide all information requested on the application. Your account number
will be assigned.
- - Instruct your bank to wire funds as follows:
<TABLE>
<S> <C>
- State Street Bank, Boston, MA
- ABA routing number 011000028
- A/C# 9905-023-9
- Specify Longleaf Partners Funds # ___
#133 Longleaf Partners Fund
#134 Longleaf Partners Small-Cap Fund
#135 Longleaf Partners Realty Fund
- your account number and your name
</TABLE>
Wired funds are considered received on the same day they are deposited in the
Fund account if received before the close of the New York Stock Exchange,
usually at 4:00 p.m. Eastern time. If received later, shares will be purchased
at the following business day's closing price. A completed application must be
sent to
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<PAGE> 26
the Fund as soon as possible. No redemptions can occur until the Fund receives a
completed application.
BY AUTOMATIC MONTHLY INVESTMENT. Once you have opened an account and met the
$10,000 minimum, you can arrange for automatic investments of $100 or more by
filling in the Automatic Monthly Investment Plan section of the application and
sending a voided check from your bank account. There is no charge for the
Automatic Monthly Investment Plan, but your bank or credit union may charge a
service fee. Transfers will occur on the business day on or about the 21st day
of each month, as affected by weekends and bank holidays. Cancellation of the
plan or a change in the amount of the withdrawal must be made in writing.
CERTIFICATES. To receive a stock certificate with your purchases, you must send
written instructions. Unless shares are purchased with wired funds, your
certificate will not be issued until 15 days after your purchase. Please note
that if you request certificates, you cannot redeem those shares without
returning the certificates. If you lose your certificates, you may incur a cost
to replace them.
PURCHASES AND REDEMPTIONS OF FUND SHARES THROUGH BROKERAGE FIRMS. You may
purchase and redeem shares through securities brokerage firms having agreements
with the Longleaf Funds. The brokerage firm may charge transaction fees.
Investors using brokerage firms to purchase and redeem Fund shares will follow
the brokerage firm's procedures. Those procedures take precedence over any
instructions for opening accounts directly with the Fund. The brokerage firm is
responsible for supplying its clients who are Fund shareholders with periodic
account statements, Prospectus and financial reports.
BROKER/DEALER AND INSTITUTIONAL INVESTMENTS. Upon execution of formal trading
agreements, the Funds will accept telephone trade orders under $50,000 from NASD
members or other institutional investors. Larger phone orders require special
approval by the Funds. The Funds also offer automated trading through their
transfer agent, NFDS. In addition, institutional investors may establish
pre-authorized fax redemption privileges. Please contact the Funds directly to
obtain more information regarding these special processing options.
For ALL trading, full payment must be received within one day of the trade date.
The entity placing the order will be responsible for any loss resulting from
non-settlement. All purchase minimums and other requirements specified in
trading agreements must be followed to remain in good standing. The Funds may
withdraw trading privileges if it is in their best interests.
HOW TO REDEEM SHARES
PROCEDURES. At any time, you may withdraw any portion of your account in a
share or dollar amount. Redemption proceeds are mailed within one week of
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<PAGE> 27
receipt of the redemption request in Good Order. Good Order means that you have
a completed application on file and that the redemption request includes:
- Account number and fund name -- Longleaf Partners Fund (#133), Longleaf
Partners Small-Cap Fund (#134), Longleaf Partners Realty Fund (# 135)
- Amount of the transaction (specified in dollars or shares)
- Signatures of all owners exactly as they are registered on the account
- Signature guarantees if required and applicable (see below)
- Fund certificates if applicable
- Other supporting legal documents that may be required in cases of estates,
corporations, trusts and certain other accounts
If you have questions about these requirements, please call the transfer agent
at (800) 488-4191.
A Fund must have received payment for the shares being redeemed, and may delay
redemption payment (for up to 15 days from the date of purchase) until collected
payment for the initial share purchase has been received.
REDEMPTION PRICE AND FEES. The redemption price is the net asset value per
share at the next market close after receipt of a redemption request in good
order. The redemption price may be more or less than the shares' original cost.
The Funds charge no redemption fees. IRA accounts will remain subject to the
full $10 annual maintenance fee in the year of redemption.
BY MAIL. Mail your redemption requests and required documentation to:
Longleaf Partners Funds
P.O. Box 419929
Kansas City, MO 64141-6929
The Funds suggest that you send redemption requests by registered or certified
mail to the above address or by overnight courier to:
Longleaf Partners Funds
c/o NFDS, Transfer Agent;
1004 Baltimore, 5th Floor;
Kansas City, MO 64105;
telephone (800) 488-4191.
BY TELEPHONE. You may redeem up to $25,000 by telephone from your regular
account unless you elect otherwise on the application. Telephone redemptions may
not be used for IRA's. Proceeds of telephone redemptions will be sent only to
the address of record or will be wired only to the pre-determined commercial
bank account. If you call before 4:00 p.m. Eastern Time, you will receive that
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<PAGE> 28
day's closing price; redemption requests made after 4:00 p.m. Eastern Time will
receive the next day's closing price. Once initiated, a telephone redemption
request cannot be changed or cancelled. Any changes in the instructions for your
account must be made in writing, with a signature guarantee. The transfer agent
may verify these changes before a redemption.
The transfer agent employs reasonable procedures to confirm that instructions
communicated by telephone are genuine. When these procedures are followed, the
Funds and the transfer agent are not liable for losses caused by following
telephone instructions which are reasonably believed to be genuine. The Funds
reserve the right to revise or terminate the telephone redemption privilege at
any time.
SIGNATURE GUARANTEE. Redemptions over $25,000 must be made in writing and
require a signature guarantee. The signatures must correspond to all names in
which the account is registered and all registered owners must sign the request
and have their signatures guaranteed. To obtain a signature guarantee, a member
firm of a domestic stock exchange, a U.S. commercial bank or other financial
institution that is an eligible guarantor institution, must witness the
signature and stamp the document with the appropriate certification. A notary
public is NOT an eligible guarantor.
OTHER INFORMATION. Longleaf Partners Funds may suspend redemption rights or
postpone payments at times when the New York Stock Exchange is closed for other
than weekends or holidays under emergency circumstances permitted by the U.S.
Securities and Exchange Commission.
SHAREHOLDER SERVICING
TRANSFER AGENT. National Financial Data Services ("NFDS"), an affiliate of
State Street Bank, serves as transfer agent and dividend disbursing agent. NFDS
maintains all shareholder accounts and records, processes all transactions
including purchases, redemptions, transfers and exchanges, prepares and mails
account confirmations and correspondence, issues stock certificates, and handles
all account inquiries. PLEASE DIRECT ALL QUESTIONS REGARDING YOUR ACCOUNT TO
NFDS AT (800) 488-4191. Your Funds' advisor, Southeastern Asset Management, does
not process account transactions and will forward any correspondence received to
NFDS in Kansas City, which will delay action on your account.
CONFIRMATION AND REPORTS. You will receive a confirmation statement after each
transaction and a statement of your account status after the end of each
calendar quarter. You will also receive all tax documentation as required by the
IRS. In addition, you will receive quarterly, semi-annual and audited annual
reports which provide information on the Funds' portfolio of investments.
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<PAGE> 29
HOW SHARES ARE PRICED
OFFERING PRICE. For both new accounts and subsequent purchases, the public
offering price is the net asset value per share next determined after receipt of
your check or wire transfer of funds, or after a telephone order from an
authorized broker/dealer. All applications to establish an account are subject
to acceptance by the Funds.
COMPUTATION OF NET ASSET VALUE. The net asset value per share is determined as
of the close of trading on each day that the New York Stock Exchange is open for
business. Net asset value per share is computed by taking the value of all
assets of the portfolio, subtracting its liabilities as accrued daily, and
dividing by the number of shares outstanding. Presently, the New York Stock
Exchange closes at 4:00 p.m. Eastern Standard or Eastern Daylight time. In the
calculation of net asset value:
(1) Portfolio securities listed or traded on a securities exchange and
over-the-counter securities traded on the NASDAQ national market are
valued at the last sale price; if there were no sales that day, securities
listed on major exchanges are valued at the midpoint between the latest
available and representative bid and ask prices;
(2) All other portfolio securities for which over-the-counter market
quotations are readily available are valued at the midpoint between the
latest available and representative bid and ask prices;
(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) Valuation of debt securities for which market quotations are not readily
available may be based upon current market prices of securities which are
comparable in coupon, rating and maturity or an appropriate matrix
utilizing similar factors;
(5) The fair value of short term United States Government obligations and
other debt securities will be determined on an amortized cost basis; and
(6) 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.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS. Each Fund pays dividends from net investment income and
distributes realized capital gains annually, at the end of December. All
dividends and distributions are reinvested automatically in additional shares of
the Fund, unless you notify the transfer agent that you desire to receive cash
distributions. The reinvestment price is the net asset value on the ex-dividend
date.
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<PAGE> 30
A distribution reduces the net asset value per share on the record date by the
amount of the distribution. Any distribution paid shortly after a purchase of
shares will be fully taxable. You may request information during early December
on projected dividend amounts and the record and payment dates by calling (800)
488-4191.
TAXES. Each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Federal Internal Revenue Code of 1986, and will distribute
substantially all net investment income and net realized capital gains as
dividends. Management expects that the Funds will not incur any significant
Federal income tax liability. Should a Fund fail to distribute the required
minimum amounts, it would be subject to a non-deductible 4% excise tax on
certain undistributed taxable income and realized capital gains.
Promptly after the close of each taxable year, the Funds will provide
information on the proper classification of any net investment income and
capital gains distributions, and the amounts of any returns of capital or other
special reclassifications.
Shareholders subject to Federal income taxation must report all distributions as
income, even if reinvested, and states may also tax Fund distributions.
A portion of these distributions may qualify for the corporate
dividends-received deduction. Distributions from a REIT, and dividends
attributable to such distributions, will not constitute "dividends" for purposes
of the dividends-received deduction applicable to corporate shareholders. In
addition, rental income or income from the disposition of real property acquired
as a result of a default on securities could adversely affect the Funds' ability
to retain the tax status as a regulated investment company.
This discussion about taxes is an abbreviated summary of the provisions of the
Federal Internal Revenue Code and Regulations. For more information, see the
section entitled "Additional Tax Information" in the Statement of Additional
Information. These provisions are subject to change by legislative or
administrative action. Shareholders should consult their own tax advisors for
more detailed information concerning federal, state and local income taxation of
investment company distributions in their particular circumstances.
OTHER INFORMATION
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 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 corpo-
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<PAGE> 31
rate resources intelligently. The Funds endeavor to be supportive long-term
"partners" with management of the companies in the portfolios. Correspondingly,
the manager'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.
CODE OF ETHICS. The Funds and Southeastern Asset Management, Inc. have adopted
a Code of Ethics which requires all employees to limit their investments in
publicly offered equity securities to shares of the Longleaf Partners Funds
unless prior clearance is received for any other personal securities
transactions. All employees must report their personal securities transactions
at the end of each quarter. Any material violation of the Code of Ethics is
reported to the Board of the Funds. The Board also reviews the administration of
the Code of Ethics on an annual basis.
The independent Trustees of the Funds must also obtain clearance before making
personal securities investments to avoid conflicts of interest with purchases
and sales by the Funds. They have also adopted a policy requiring each
independent Trustee to invest in the Funds an amount at least equal to their
Trustees' fees.
PORTFOLIO BROKERAGE. Southeastern makes decisions to buy or sell investment
securities for the Funds, under the supervision of the Board of Trustees.
Southeastern has authority to place the orders for the Funds' investment
portfolio transactions. Southeastern uses its best efforts to obtain the most
favorable price and execution, as more fully described in the Statement of
Additional Information. The Funds may pay higher commissions to certain brokers
for particular transactions than might be charged by a different broker if
Southeastern believes that the most favorable price and execution may be
obtained by doing so.
The Board of Trustees has authorized Southeastern to consider research and other
investment information provided by a broker/dealer, its sales of shares of the
Funds, and the supplying of other economic benefits which reduce the Funds'
expenses as factors in selecting broker/dealers qualified to execute portfolio
transactions for the Funds. The Funds may pay higher commissions to secure
research and investment services and other specific benefits, subject to review
by the Board of Trustees. Sales of Fund shares by a broker are one factor among
others that Southeastern considers in allocating portfolio transactions, but
higher commissions will not be paid solely for sales of Fund shares. The Funds
are not committed to execute portfolio transactions through any particular
broker/dealers which provide investment research information, or which sell
shares of the Funds or provide other benefits. The Board of Trustees monitors
executions of portfolio transactions at least quarterly.
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<PAGE> 32
INVESTMENT PERFORMANCE INFORMATION. The Funds may publish their total returns
from time to time in advertisements and in communications to shareholders.
Performance is calculated using an industry standardized formula, as more fully
described in the Statement of Additional Information. Total return information
will include the average annual compounded rate of return for the one, five, and
ten year periods 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. Total return includes changes in net assets
value per share and reinvestment in additional shares of any dividends from net
investment income or other distributions.
Investment results will fluctuate over time, and an investment may be worth more
or less than the purchase price, depending on the timing of the investment and
stock market performance. Any presentation of total return for any prior periods
is not intended to represent future total returns.
Each Fund may compare its performance to that of widely recognized unmanaged
stock market indices, such as the Standard & Poor's 500 Stock Index 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.
STATE OF ORGANIZATION. Longleaf Partners Funds Trust was organized as a
Massachusetts business trust on November 26, 1986. It now has three series or
portfolios -- Longleaf Partners Fund, Longleaf Partners Realty Fund and
Longleaf Partners Small-Cap Fund. Each series may issue an unlimited number of
shares of beneficial interest, all of which are of one class and have equal
rights as to voting, redemption, dividends and liquidation. Upon receipt of
payment for shares, all shares issued and outstanding are fully paid and
nonassessable and are redeemable at the net asset value per share at the option
of shareholders as more fully described in the section entitled "How to Redeem
Shares". Shares have no preemptive or concession rights. For information on
limitation of liability and indemnification of Shareholders, Trustees and other
affiliated parties, see the section in the Statement of Additional Information
entitled "Limitation of Liability of Shareholders, Trustees and Others". The
registered address in the Commonwealth of Massachusetts is Two Oliver Street,
Boston, Massachusetts 02109.
A mutual fund which is a Massachusetts business trust is not required by state
law to hold annual meetings of shareholders. Accordingly, shareholders' meetings
29
<PAGE> 33
must be held only when required by the Investment Company Act of 1940. The Board
of Trustees will determine whether annual meetings will be held in the future
when not specifically required.
EXCEPTIONS TO INVESTMENT MINIMUM. The minimum initial purchase requirement is
not applicable to Trustees or officers of the Funds or to directors, officers or
employees of the Investment Counsel. These persons and their relatives may open
an account with a minimum initial investment of $1,000. Members of the immediate
families of shareholders having invested at least $250,000 in one Fund may open
an account with a minimum initial investment of $5,000 in the same Fund.
Personnel of clients having private accounts of at least $2,000,000 may also
open Fund accounts with a minimum initial investment of $5,000. Any investor
seeking one of the above exceptions must obtain prior approval of Fund
management.
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<PAGE> 34
LONGLEAF PARTNERS FUND
LONGLEAF PARTNERS REALTY FUND
LONGLEAF PARTNERS SMALL-CAP FUND
PART B
INFORMATION REQUIRED IN THE
STATEMENT OF ADDITIONAL INFORMATION
<PAGE> 35
STATEMENT OF ADDITIONAL INFORMATION
---------------------
LONGLEAF PARTNERS FUND
LONGLEAF PARTNERS REALTY FUND
LONGLEAF PARTNERS SMALL-CAP FUND
Series of
LONGLEAF PARTNERS FUNDS TRUST
TABLE OF CONTENTS
[LONGLEAF PARTNERS LOGO (SM)]
<TABLE>
<S> <C>
- - Additional Information About Investment Objectives and
Policies
Fundamental Investment Objectives......................
General Investment Policies............................
- - Investment Restrictions
Fundamental Investment Restrictions....................
Non-Fundamental Investment Restrictions................
- - Additional Information About Types of Investments and
Investment Techniques
Repurchase Agreements..................................
Warrants...............................................
Real Estate Investment Trusts..........................
Futures Contracts......................................
Options on Securities and Stock Indices................
Foreign Currency Contracts.............................
Lending of Portfolio Securities........................
- - Management of the Funds...................................
- - Control Persons and Principal Holders of Securities.......
- - Investment Advisory Services..............................
- - Investment Performance and Total Return...................
- - Other Management Related Services.........................
- - Terms of Agreements.......................................
- - Additional Tax Information................................
- - Allocation of Brokerage Commissions.......................
- - Distribution of Fund Shares...............................
- - Redemption of Fund Shares.................................
- - Custodian of Fund Assets..................................
- - Independent Certified Public Accountants..................
- - Legal Counsel.............................................
- - Limitation of Liability...................................
- - Table of Bond and Preferred Stock Ratings.................
- - Financial Statements......................................
</TABLE>
MANAGED BY
SOUTHEASTERN ASSET MANAGEMENT, INC.
6075 POPLAR AVENUE; SUITE 900
MEMPHIS, TN 38119
---------------------
THIS STATEMENT OF ADDITIONAL INFORMATION, DATED JULY , 1997, IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF LONGLEAF
PARTNERS REALTY FUND, ALSO DATED JULY , 1997, WHICH MAY BE OBTAINED WITHOUT
CHARGE UPON REQUEST MADE TO THE FUND ADMINISTRATOR, SOUTHEASTERN ASSET
MANAGEMENT, INC.
TELEPHONE (800) 445-9469; (901) 761-2474.
<PAGE> 36
STATEMENT OF ADDITIONAL INFORMATION
---------------------
LONGLEAF PARTNERS FUND
LONGLEAF PARTNERS REALTY FUND
LONGLEAF PARTNERS SMALL-CAP FUND
---------------------
ADDITIONAL INFORMATION ABOUT INVESTMENT
OBJECTIVES AND POLICIES
Longleaf Partners Fund (the "Partners Fund"), Longleaf Partners Realty Fund (the
"Realty Fund"), and Longleaf Partners Small-Cap Fund (the "Small-Cap Fund") are
series of Longleaf Partners Funds Trust, a Massachusetts business trust. Prior
to 1994, the Partners Fund was known as Southeastern Asset Management Value
Trust and the Small-Cap Fund was known as Southeastern Asset Management Small-
Cap Fund.
Each of the three Funds is operated as a separate mutual fund and each has its
own particular investment objective. The investment philosophy, policies and
restrictions of all Funds are similar.
Those investment objectives and restrictions classified as fundamental cannot be
changed without approval of the holders of a majority of the outstanding voting
securities. Under the Investment Company Act of 1940, a "vote 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 portfolio 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. To
the extent not designated as fundamental, other investment policies and
restrictions, the Funds' investment philosophy, the discussion of types of
securities in which the Funds may invest and the investment techniques used by
each Fund may be changed by approval of the Board of Trustees.
Fundamental Investment Objectives. The fundamental investment objective of both
the Partners Fund and the Small-Cap Fund is to seek long-term capital growth.
The fundamental investment objective of the Realty Fund is to obtain maximum
total return over the long-term through investment primarily in real estate
oriented companies.
General Investment Policies. The Partners Fund and the Small-Cap Fund invest
primarily in the common stocks of a limited number of companies believed by
Southeastern Asset Management, Inc. ("Southeastern"), the Investment Counsel, to
have unrecognized intrinsic value and the potential to grow their economic
worth. The Partners Fund invests primarily in companies with a market
capitalization of more than $500 million, while the Small-Cap Fund invests at
least 65% of its assets in companies with a market capitalization of less than
$1 billion. Neither Fund seeks current income and the realization of current
income is incidental.
The Realty Fund normally invests at least 65% of its total assets in the equity
securities of a limited number of companies in the real estate industry or
related industries or in companies which own significant real estate assets, and
which are believed by Southeastern to have unrecognized intrinsic value.
Investments are selected based upon the potential for long-term capital growth
or the realization of current income, consistent with the overall objective of
maximizing total return.
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<PAGE> 37
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions. The following investment restrictions have
been adopted as fundamental. Except for the restriction limiting industry
concentration, all restrictions are identical for all Funds. The Funds may not
engage in these transactions except to the extent authorized by the particular
restriction.
Diversification Requirements. The diversification requirements of the Internal
Revenue Code, adopted by each of the Funds as fundamental policy, are as
follows:
With respect to 50% of its total assets, the Fund will 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 securities issued by the U.S. Government, its
agencies or instrumentalities; with respect to the remaining 50% of its
assets, the Fund will not invest more than 25% of the value of its total
assets in the securities of any one issuer (other than U.S. Government
securities), or invest 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.
Restrictions on Industry Concentration. Neither the Partners Fund nor the
Small-Cap Fund may invest 25% or more of the value of its 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 or its agencies
or instrumentalities or to cash equivalents. Cash equivalents will not be used
to concentrate investments in a single industry.
For purposes of defining what constitutes a single industry for purposes of this
restriction, each portfolio will use the SIC Industry Code definitions for
industries, as set forth in the latest edition of the Securities & Exchange
Commission publication entitled "Directory of Companies Required to File Annual
Reports with the Securities & Exchange Commission" or as otherwise publicly
available. Industry category groupings shown in the printed reports sent
quarterly to shareholders may contain more than one SIC Industry Code, and these
broader industry groupings are intended to be functionally descriptive
presentations rather than being limited to a single SIC industry category.
The Realty Fund may not invest as much as 25% of its assets in any one industry
other than the real estate industry or related industries. More information on
the definitions which apply to this restriction appear in the Prospectus on page
9.
Other Fundamental Investment Restrictions. Except as specifically authorized,
each Fund 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;
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<PAGE> 38
- - 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;
- - 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.
Non-Fundamental Investment Restrictions. The following investment restrictions
are non-fundamental, and may be changed in the discretion of the Board of
Trustees. Except as specifically authorized, each Fund may not:
- - Purchase restricted 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, provided such
acquisitions are 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)
acquire securities of any investment company as part of a merger,
consolidation or similar transaction;
- - Make short sales 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 the lessor of 5% of the
value of the Fund's net assets or 5% of the securities of any class of any
issuer; provided the Fund maintains collateral in a segregated account
consisting of cash, liquid money market instruments or U.S. government
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 permitted
borrowings;
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<PAGE> 39
- - 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.
Prior to enactment of the National Securities Markets Improvements Act of 1996,
several states imposed investment restrictions or limitations on the Funds'
investment transactions in addition to those of the Securities and Exchange
Commission. These special state restrictions no longer apply and those which had
been adopted by the Funds have been deleted.
ADDITIONAL INFORMATION ABOUT TYPES OF INVESTMENTS
AND INVESTMENT TECHNIQUES
Repurchase Agreements. A repurchase agreement is an instrument under which an
investor such as the Fund purchases U.S. Government security from a vendor, with
an agreement by the vendor to repurchase the security at the same price, plus
interest at a specified rate. In such a case, the security is held by the Fund,
in effect, as collateral for the repurchase obligation. Repurchase agreements
may be entered into with member banks of the Federal Reserve System or "primary
dealers" (as designated by the Federal Reserve Bank of New York) in United
States Government securities. Repurchase agreements usually have a short
duration, often less than one week. In entering into the repurchase agreement
for the Fund, the Investment Counsel will evaluate and monitor the credit
worthiness of the vendor. In the event that a vendor should default on its
repurchase obligation, the Fund might suffer a loss to the extent that the
proceeds from the sale of the collateral were less than the repurchase price. If
the vendor becomes bankrupt, the Fund might be delayed, or may incur costs or
possible losses of principal and income, in selling the collateral.
Warrants. Each of the Funds may invest in warrants for the purchase of equity
securities at a specific price for a limited period of time. Warrants may be
considered more speculative than other types of investments in that they do not
entitle a holder to dividends or voting rights for the securities which may be
purchased nor do they represent any rights in the assets of the issuing company.
The value of a warrant does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not exercised
prior to the expiration date.
Real Estate Investment Trusts. REITs are sometimes described as equity REITs,
mortgage REITs and hybrid REITs. An equity REIT invests primarily in the fee
ownership or leasehold ownership of land and buildings and derives its income
primarily from rental income. An equity REIT may also realize capital gains (or
losses) by selling real estate properties in its portfolio that have appreciated
(or depreciated) in value. A mortgage REIT invests primarily in mortgages on
real estate, which may secure construction, development or long-term loans. A
mortgage REIT generally derives its income primarily from interest payments on
the credit it has extended. A hybrid REIT combines the characteristics of equity
REITs and mortgage REITs, generally by holding both ownership interests and
mortgage interests in real estate.
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.
5
<PAGE> 40
Futures Contracts. For hedging purposes, the Funds may purchase and sell
financial futures contracts. Although some financial futures contracts call for
making or taking delivery of the underlying securities, in most cases these
obligations are closed out before the settlement date. The closing of a
contractual obligation is accomplished by purchasing or selling an identical
offsetting futures contract. Other financial futures contracts by their terms
call for cash settlements.
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 purchase a futures contract, an amount of cash,
U.S. Government securities, or other liquid money market instruments 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).
Options on Securities and Stock Indices. The Funds may write covered put and
call options and purchase put and call options on securities or stock indices.
An option on a security is a contract that gives the purchaser of the option, in
return for the premium paid, the right to buy a specified security (in the case
of a call option) or to sell a specified security (in the case of a put option)
from or to the writer of the option at a designated price during the term of the
option. An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
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 covered by the call or 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. 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 money market
instruments, or U.S. Government securities 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 else 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 a stock indices by owning securities whose
price changes, in the opinion of the Investment Counsel, are expected to be
similar to those of the index, or in such other manner as may be
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<PAGE> 41
in accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, where the 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. The Fund will 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.
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.
Foreign Currency Contracts. In order to hedge against foreign currency exchange
rate risks, the Funds may enter into forward foreign currency exchange contracts
and foreign currency futures contracts, as well as purchase put or call options
on foreign currencies, as described below. The Funds may also conduct foreign
currency exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market.
7
<PAGE> 42
One of the Funds may enter into forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk from adverse changes 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. The 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. In addition, for example, when Southeastern
believes that a foreign currency may suffer or enjoy a substantial movement
against another currency, a Fund may enter into a forward contract to sell an
amount of the former foreign currency approximating the value of some or all of
its portfolio securities denominated in such foreign currency. This second
investment practice is generally referred to as "cross-hedging." Because an
amount of the Fund's assets equal to the amount of the purchase will be held
aside or segregated to be used to pay for the commitment, the Fund will always
have cash, cash equivalents or high quality liquid securities available
sufficient to cover any commitments under these contracts or to limit any
potential risk. The segregated account will be marked-to-market on a daily
basis. In addition, the fund will not enter into such forward contracts if, as a
result, it will have more than 30% of the value of its total assets committed to
such contracts. While these contracts are not presently regulated by the
Commodity Future Trading Commission ("CFTC"), the CFTC may in the future assert
authority to regulate forward contracts. In such event, the Fund's ability to
utilize forward contracts in the manner set forth above may be restricted.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for the Fund
than if it had not engaged in such contracts.
One 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.
The 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 unexpected manner, the Fund may not achieve the anticipated benefits of
foreign currency futures or may realize losses.
Lending of Portfolio Securities. The Funds may from time to time lend portfolio
securities to brokers or dealers, banks and other institutional investors and
receive collateral in the form of United States Government obligations or money
market funds. Under current practices, the loan collateral must be maintained at
all times in an amount equal to at least 100% of the current market value of the
loaned securities, and will not be used to leverage the portfolio. In
determining whether to lend securities to a particular broker/dealer or
financial institution, Southeastern will consider all relevant facts and
circumstances, including the credit-worthiness of the broker or financial
institution. If the borrower should fail to
8
<PAGE> 43
return the loaned securities, the particular Fund could use the collateral to
acquire replacement securities, but could be deprived of immediate access to
such assets for the period prior to such replacement. The Funds may pay
reasonable finders, administrative and custodial fees in connection with such a
loan of securities. The Funds will not lend portfolio securities in excess of
one-third of the value of total assets, nor will the Funds lend portfolio
securities to any officer, director, trustee, employee of affiliate of the Funds
or Southeastern.
MANAGEMENT OF THE FUNDS
Each of the Funds is supervised by its Board of Trustees, which implements
policies through the particular Fund's principal executive officers. Day to day
portfolio management and fund administration is provided by Southeastern Asset
Management, Inc. in its capacity as Investment Counsel and as Fund Administrator
under contracts which must be renewed at periodic intervals, as required by the
Investment Company Act of 1940.
The names, principal occupations during at least the past five years and other
information about members of the Board of Trustees and the Funds' executive
officers are set forth in the Prospectus. The following table provides
information on the current schedule of Trustees' fees to be paid by all of the
Funds for the fiscal year ending December 31, 1997:
1997 COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
FROM EACH FUND TOTAL
NAME OF PERSON; ----------------------------- COMPENSATION
POSITION (AGE) PARTNERS REALTY SMALL-CAP FROM ALL
ADDRESS FUND FUND FUND FUNDS**
--------------- -------- ------ --------- ------------
<S> <C> <C> <C> <C>
O. Mason Hawkins*............................... None None None None
Chairman of the Board and CEO (49)
Chadwick H. Carpenter, Jr. ..................... $15,000 $7,500 $7,500 $30,000
Trustee (47)
Progress Software Corp.
14 Oak Park
Bedford, MA 01730
Daniel W. Connell, Jr. ......................... $15,000 $7,500 $7,500 $30,000
Trustee (48)
One Stadium Place
Jacksonville, FL 32202
Steven N. Melnyk................................ $15,000 $7,500 $7,500 $30,000
Trustee (50)
111 Riverside Ave.
Ste. 330
Jacksonville, FL 32202
</TABLE>
9
<PAGE> 44
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION
FROM EACH FUND TOTAL
NAME OF PERSON; ----------------------------- COMPENSATION
POSITION (AGE) PARTNERS REALTY SMALL-CAP FROM ALL
ADDRESS FUND FUND FUND FUNDS**
--------------- -------- ------ --------- ------------
<S> <C> <C> <C> <C>
C. Barham Ray................................... $15,000 $7,500 $7,500 $30,000
Trustee (50)
845 Crossover Lane
Ste. 140
Memphis, TN 38117
W. Reid Sanders*................................ None None None None
Trustee and President (47)
</TABLE>
- ---------------
* Trustee is an "interested" person because of employment by Southeastern Asset
Management, Inc., the Investment Counsel. The "interested" Trustees and all
executive officers of the Fund are officers or employees of the Investment
Counsel, which pays their salaries and other employee benefits. Its address
is 6075 Popular Ave., Ste. 900, Memphis, TN 38119.
** The Funds have no pension or retirement plan for Trustees who are classified
as non-"interested" or non-affiliated.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Each Fund is controlled by its respective Board of Trustees. Each Board of
Trustees consists of six members, four of whom are independent of Southeastern
and are not "interested persons" as that term is defined in the Investment
Company Act of 1940. The percentages of outstanding shares of each of the Funds
beneficially owned by members of the Board of Trustees affiliated with
Southeastern and other persons owning beneficially 5% or more of the outstanding
shares at March 14, 1997, are as follows:
<TABLE>
<CAPTION>
PARTNERS REALTY SMALL-CAP
FUND FUND FUND
-------- ------ ---------
<S> <C> <C> <C>
O. Mason Hawkins....................................... 0.5% 4.5% 5.2%
W. Reid Sanders........................................ 0.4% 0.9% 2.3%
Other Trustees, officers, and affiliates of
Southeastern Asset Management........................ 0.1% 8.6% 17.5%
Clients of Charles Schwab & Co., a brokerage firm...... 15.4% 29.6% 16.1%
Clients of National Financial Service Corp., a
brokerage firm....................................... -- 11.9% 9.4%
</TABLE>
INVESTMENT ADVISORY SERVICES
Southeastern Asset Management, Inc., an investment advisor registered with the
Securities and Exchange Commission under the Investment Advisers Act of 1940, is
the Fund's Investment Counsel. The firm is owned and controlled by its principal
officers, who are listed in the Prospectus as affiliated Trustees and Executive
Officers of each Fund. Mr. O. Mason Hawkins, Chairman of the Board and Chief
Executive Officer of Southeastern, owns a majority of its outstanding voting
stock.
10
<PAGE> 45
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 $9.7 billion in client assets. It has served as investment
adviser to each of the Funds since their respective inception dates. Additional
information with respect to the investment advisory function is contained in the
Prospectus under the caption "Investment Management."
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 Realty Fund is 1% of average daily net
assets. The Investment Counsel Agreement limits the normal operating expenses of
each series, taken separately, including all fees but excluding interest, taxes,
brokerage commissions, and certain extraordinary charges, to a maximum of 1.5%
of each Fund's average net assets in any fiscal year through a reduction of the
Investment Counsel fees. No reduction was required in the Investment Counsel
fees paid by the Partners Fund and the Small-Cap Fund for the fiscal year ended
December 31, 1966. The Investment Counsel fee for the Realty Fund was reduced by
$47,201 during 1996, its first year of operations. Investment Counsel fees paid
by each Fund for the last three fiscal years are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Partners Fund................................... $17,004,356 $11,548,213 $5,234,469
Small-Cap Fund.................................. $ 1,735,200 $ 1,217,369 $ 913,327
Realty Fund..................................... $ 391,283 -- --
</TABLE>
INVESTMENT PERFORMANCE AND TOTAL RETURN
Total Return Calculation. The average annual total return on an investment in
shares of the Fund 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 by the Fund 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
<TABLE>
<S> <C> <C> <C>
Where 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).
</TABLE>
11
<PAGE> 46
The average annual total returns for the Funds for each full year since
inception are as follows:
<TABLE>
<CAPTION>
PARTNERS SMALL-CAP REALTY
FUND FUND FUND
-------- --------- ------
<S> <C> <C> <C>
1996............................................. 21.02% 30.64% 40.69%
1995............................................. 27.50% 18.61% --
1994............................................. 8.96% 3.64% --
1993............................................. 22.20% 19.83% --
1992............................................. 20.47% 6.87% --
1991............................................. 39.19% 26.31% --
1990............................................. (16.35)% (30.05)% --
1989............................................. 23.27% 32.78% --
1988............................................. 35.27% -- --
</TABLE>
The average annual total returns for the Partners Fund and the Small-Cap Fund
for the five years ended December 31, 1996, and from inception through December
31, 1996 are as follows:
<TABLE>
<S> <C>
PARTNERS FUND
5 years ended 12/31/96.................................... 19.87%
Inception on 4/8/87 through 12/31/96...................... 15.82%
SMALL-CAP FUND
5 years ended 12/31/96.................................... 15.52%
Inception on 2/21/88 through 12/31/96..................... 10.60%
</TABLE>
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 contain different
and generally more numerous securities than the Fund's portfolios. Some market
indices are not adjusted for reinvested dividends. Further, no adjustment is
made in the Funds' total returns or the total returns of any market indices for
taxes payable on distributions.
An investment in the Funds is an equity investment. As a result, total returns
will fluctuate over time, and 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.
OTHER MANAGEMENT RELATED SERVICES
Southeastern, as the Fund Administrator, manages and performs all business and
administrative operations of each Fund, including the following:
- - Preparation and maintenance of all accounting records
- - Preparation and filing of all required financial reports, tax returns,
Registrations and reports of sales of shares
12
<PAGE> 47
- - Calculation of the daily net asset value per share
- - Preparation and mailing of prospectuses, proxy statements, and other required
reports to shareholders
- - General coordination and liaison among the Investment Counsel, authorized
dealers, the custodian bank, the transfer agent, and regulatory authorities
- - Supplying office space and administrative support for the above functions.
Each Fund pays an Administration Fee equal to 0.10% per annum of the average
daily net assets, which is accrued daily and paid monthly in arrears.
Administration fees paid by each Fund for the last three fiscal years are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
Partners Fund...................................... $2,133,914 $1,406,428 $564,619
Small-Cap Fund..................................... $ 173,520 $ 121,737 $ 91,333
Realty Fund........................................ $ 43,848 -- --
</TABLE>
The Funds also reimburse the Administrator for the charges for computer programs
and hardware solely used to process Fund transactions and for the salary of the
Funds' Treasurer. These reimbursable expenses are allocated among the portfolios
taking into account their respective assets and number of shareholders. The
Administrator has not been leasing computer hardware equipment for dedicated use
by the Fund and has not requested reimbursement for costs or charges related to
computer hardware. Reimbursable expenses paid by each Fund for the last three
fiscal years are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Partners Fund......................................... $168,016 $133,072 $159,720
Small-Cap Fund........................................ $ 15,838 $ 56,425 $ 64,139
Realty Fund........................................... $ 30,397 -- --
</TABLE>
All other direct Fund operating expenses are paid by that particular Fund. Such
expenses include but are not limited to the following: (i) the fees of the
Custodian and Transfer Agent; (ii) compensation of the independent certified
public accountants, outside legal counsel, and fees and travel expenses of the
Trustees who are not officers or employees of Southeastern; (iii) all 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 regulatory agency in the several states; (v) insurance premiums and
trade association dues; (vi) the costs of typesetting, printing and mailing to
shareholders such documents as prospectuses, proxy statements, dividend notices
and all other communications; (vii) expenses of meetings of shareholders and 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 also pay the expenses of stationery, appropriate forms,
envelopes, checks, postage, overnight air courier charges, telephone charges,
and printing and mailing charges for shareholder communications and similar
items.
TERMS OF AGREEMENTS
Each Fund has entered into agreements with Southeastern Asset Management, Inc.,
as the Investment Counsel and separately as the Fund Administrator, effective
for a period of two years. Each agreement must be renewed annually by the
affirmative vote of a majority of the outstanding voting securities of the Fund
or
13
<PAGE> 48
by a majority of members of the Board of Trustees, including a majority of the
Trustees who are not "interested" Trustees, as required by the Investment
Company Act of 1940. 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.
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 future and forward
foreign currency contracts) derived with respect to its business of investing in
such securities; and derive less than 30% of its gross income from the sale or
other disposition of securities or any of following: options, futures or forward
contracts (other than those on foreign currencies), or foreign currencies (or
options, futures or forward contracts thereon) that are not directly related to
the Fund's principal business of investing in securities (or options and futures
with respect thereto) held for less than three months.
In order to achieve favorable tax treatment, 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). Further, a regulated investment company may not invest
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. By so qualifying,
a Fund is not subject to Federal income tax if it timely distributes its
investment company taxable income and any net realized capital gains.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax. To
prevent application of the tax, a Fund must distribute or be deemed to have
distributed with respect to each calendar year an amount equal to the sum of:
(1) at least 98% of its ordinary income (not taking into account any capital
gains or losses) for the calendar year, (2) at least 98% of its capital gains in
excess of its capital losses (adjusted for certain ordinary losses) for the 12-
month period ending on October 31 or the calendar year; and (3) all taxable
ordinary income and capital gains for previous years that were not distributed
during such years. A distribution will be treated as paid on December 31 of the
calendar year if it is declared by the Fund in October, November, or December of
that year to shareholders of record on a date in such a month and paid by the
Fund during January of the following calendar year. Such distributions will be
treated as received by shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received.
Certain of the debt securities which may be acquired by one of the Funds may be
secured in whole or in part by interests in real estate. If each Fund were to
acquire real estate (by foreclosure, for example), income, if any, generated by
that real estate (including rental income and gain on its disposition) may not
be regarded as qualifying income. If the Fund's non-qualifying income for a
taxable year exceeded 10% of its gross
14
<PAGE> 49
income, it would fail to qualify as a regulated investment company and it would
be taxed in the same manner as an ordinary corporation. In that case, the Fund
would be ineligible to deduct its distributions to its Shareholders and those
distributions, to the extent derived from the Fund's current and accumulated
earnings and profits, would constitute dividends (which may be eligible for the
corporate dividends-received deduction) which are taxable to Shareholders as
ordinary income, even though those distributions might otherwise, at least in
part, have been treated in the Shareholder's hands as long-term capital gain. If
the Fund fails to qualify as a regulated investment company in a given taxable
year, it must distribute its earnings and profits accumulated in that year in
order to qualify again as a regulated investment company.
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 through selected
brokers of purchase and sale orders. 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 brokers for portfolio transactions and in selecting
such brokers. Southeastern takes into account its past experience with
brokers 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
15
<PAGE> 50
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.
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 the 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 of the Funds are made independently from those of
the other Funds or accounts of other clients advised by Southeastern, but the
same security may be held in the portfolios of more than one Fund or one
account. When several accounts and the Fund's 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 independent brokerage firms. As an investment, the
Partners Fund owned 2,363,300 shares of PaineWebber Group, Inc. at December 31,
1996, which constituted 2.9% of the Fund's assets and had a value at year-end of
$66,467,813. PaineWebber Group, Inc. is the parent of one of the Partners Fund's
regular brokers, PaineWebber Incorporated, which received brokerage commissions
from the Fund of $282,000 during 1996.
Total brokerage Commissions paid by each Fund for the last three fiscal years
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Partners Fund..................................... $2,172,895 $1,681,102 $1,272,094
Small-Cap Fund.................................... $ 576,550 $ 236,927 $ 97,842
Realty Fund....................................... $ 427,047 -- --
</TABLE>
16
<PAGE> 51
DISTRIBUTION OF FUND SHARES
Shareholders are referred to the Prospectus for information on the methods of
purchasing shares and computation of net asset value per share. Shares are
available directly from the Funds at net asset value without payment of any
sales charge. Shares are also available through authorized broker/dealers upon
payment of transaction fees, all of which are retained by the particular broker
or dealer.
Shares of the Funds are continuously issued and redeemed. The transfer agent and
shareholder servicing agent functions are performed by National Financial Data
Services ("NFDS") of Kansas City, Missouri, an affiliate of State Street Bank
and Trust Company, the custodian bank.
REDEMPTION OF FUND SHARES
The Funds have filed an election with the Securities & Exchange Commission in
the manner authorized by Rule 18f-1 under the Investment Company Act of 1940, in
which each Fund has committed to pay in cash all requests for redemption by any
shareholder of record, limited in amount with respect to each shareholder during
any ninety-day period to the lesser of $250,000 or 1% of the net asset value of
the Fund at the beginning of the period. This election is irrevocable while Rule
18f-1 is in effect, unless the Securities & Exchange Commission by order upon
application permits the withdrawal of such notification of election as being
appropriate in the public interest and consistent with the protection of
investors. In connection with omnibus accounts, this election applies separately
to each beneficial owner rather than to the omnibus account in the aggregate.
The purpose of this election is to assure that at least $250,000 of a redemption
will be paid in cash.
The Funds have followed the practice since inception of paying all redemptions
in cash, and have never distributed securities in lieu of cash. Should a Fund
elect to limit its cash payments on redemption to $250,000, the balance of a
redemption request in excess of that amount would be paid through a distribution
of portfolio securities. A shareholder liquidating portfolio securities received
in such a distribution would incur brokerage commissions and be subject to
prevailing market prices.
CUSTODIAN OF FUND ASSETS
State Street Bank and Trust Company, Boston, Massachusetts, 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 also has the responsibility of collection of the
proceeds of securities sold and disbursement of the cost of securities purchased
by the Funds.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Coopers & Lybrand, L.L.P., an international public accounting firm, serves as
the independent certified public accountants.
17
<PAGE> 52
LEGAL COUNSEL
Dechert Price & Rhoads, a law firm with offices in several major cities,
including Washington, D.C., Philadelphia, and Boston, serves as special legal
counsel to the Funds. Charles D. Reaves, Esq., Executive Vice President of the
Fund and Vice President & General Counsel of Southeastern Asset Management,
Inc., serves as general counsel to the Funds.
LIMITATION OF LIABILITY
Longleaf Partners Funds Trust is a Massachusetts business trust organized on
November 26, 1986. It now has three series of Funds. The Declaration of Trust
and By-Laws provide that no Trustee, officer, employee, 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 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. Information on
the contractual term and rights of cancellation of each such agreement is
contained in the section entitled "Terms of Agreements."
Under Massachusetts law, shareholders of a Fund which is a series of a
Massachusetts business trust could, in theory, be held personally liable for
certain obligations of the particular series. The Declaration of Trust contains
an express disclaimer of shareholder liability for such acts or 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 any shareholder liability for applicable acts or
obligations should any shareholder be held liable under these provisions for
having been a shareholder.
18
<PAGE> 53
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.
19
<PAGE> 54
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
20
<PAGE> 55
capacity or willingness to pay interest and repay principal. The B rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or BB rating.
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.
FINANCIAL STATEMENTS
The financial statements for the fiscal year ended December 31, 1996, audited by
Coopers & Lybrand, L.L.P., the Fund's independent certified public accountants,
are included in the printed Annual Report to Shareholders of each Fund, and such
Financial Statements are incorporated herein. Copies of the Financial Statements
included in such printed Annual Reports, together with the Report of Independent
Accountants dated January 10, 1997 for Longleaf Partners Fund and Longleaf
Partners Small-Cap Fund, and January 24, 1997 for Longleaf Partners Realty Fund,
are included in this Statement of Additional Information.
21
<PAGE> 56
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
LONGLEAF PARTNERS FUND
We have audited the accompanying statement of assets and liabilities of Longleaf
Partners Fund (a series of Longleaf Partners Funds Trust), including the
schedule of portfolio investments, as of December 31, 1996, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for the years ended December 31, 1996, 1995, 1994, 1993, 1992, 1991
and 1990, October 31, 1989 and 1988, the two months ended December 31, 1989, and
the period from March 24, 1987 (Date of Initial Capitalization) through October
31, 1987. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures include confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Longleaf Partners Fund as of December 31, 1996 and the results of its
operations, changes in its net assets, and the financial highlights each of the
respective periods stated in the first paragraph, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 10, 1997
<PAGE> 57
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- COMMON STOCK (83.9%) ------------
<S> <C> <C> <C> <C> <C>
BEVERAGES (4.3%)
2,550,000 The Seagram Company Ltd. ................................ $ 98,812,500
------------
BUSINESS SERVICES (1.3%)
595,700 Ecolab, Inc. ............................................ 22,413,213
279,200 * The Union Corporation.................................... 6,386,700
------------
28,799,913
------------
ENTERTAINMENT (0.3%)
171,277 * Chris-Craft Industries, Inc.............................. 7,172,224
------------
ENVIRONMENTAL SERVICES (2.7%)
346,900 Safety-Kleen Corp........................................ 5,680,487
1,709,800 WMX Technologies, Inc.................................... 55,782,225
------------
61,462,712
------------
FINANCIAL SERVICES (2.9%)
2,363,300 PaineWebber Group, Inc................................... 66,467,813
------------
FOOD (12.9%)
2,298,900 Nabisco Holdings Corp.................................... 89,369,737
3,818,000 The Quaker Oats Company.................................. 145,561,250
846,500 Ralston Purina Group Common Stock........................ 62,111,938
------------
297,042,925
------------
HEALTH CARE (2.7%)
1,361,700 * United HealthCare Corporation............................ 61,276,500
------------
INSURANCE BROKERAGE (2.8%)
3,770,142 Alexander & Alexander Services Inc....................... 65,506,217
------------
MANUFACTURING (2.1%)
1,407,000 Louisiana-Pacific Corporation............................ 29,722,875
574,000 * USG Corporation.......................................... 19,444,250
------------
49,167,125
------------
MULTI-INDUSTRY (8.5%)
1,565,000 Alexander & Baldwin, Inc................................. 39,125,000
3,075,000 * Phillips Electronics N.V................................. 123,000,000
1,488,300 Whitman Corporation...................................... 34,044,863
------------
196,169,863
------------
</TABLE>
See Notes to Financial Statements.
<PAGE> 58
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- --------------
<S> <C> <C> <C> <C> <C>
NATURAL RESOURCES (6.1%)
1,237,700 The Pioneer Group, Inc. ................................. $ 29,395,375
2,900,000 Rayonier Inc............................................. 111,287,500
--------------
140,682,875
--------------
PROPERTY & CASUALTY INSURANCE (1.0%)
110,616 * Alleghany Corp........................................... 23,450,592
--------------
PUBLISHING (12.9%)
6,341,200 Knight-Ridder, Inc....................................... 242,550,900
158,300 The Washington Post Company - Class B.................... 53,050,287
--------------
295,601,187
--------------
REAL ESTATE (7.5%)
788,000 Cousins Properties Incorporated.......................... 22,162,500
6,847,791 * TrizecHahn Corporation................................... 150,651,402
--------------
172,813,902
--------------
RETAIL (0.9%)
520,000 American Stores Company.................................. 21,255,000
--------------
TELECOMMUNICATIONS (5.0%)
4,966,837 * 360 degrees Communications Company....................... 114,858,106
--------------
TRANSPORTATION (10.0%)
3,234,800 * Federal Express Corporation.............................. 143,948,600
1,934,100 Kansas City Southern Industries, Inc..................... 87,034,500
--------------
230,983,100
--------------
TOTAL COMMON STOCKS (COST $1,479,371,024)................................. 1,931,522,554
--------------
SHORT TERM OBLIGATIONS (16.0%)
Certificate of Deposit - due 8-19-97 at 5.25%............................. 45,000
Repurchase Agreement with State Street Bank and Trust Company, dated
12-31-96, due 1-2-97 at 4.75%, collateralized by $20,847,153 U.S.
Treasury Bond due 2-15-20 (Repurchase proceeds - $20,442,393) (Cost
$20,437,000)............................................................. 20,437,000
U.S. Treasury Bill, due 2-27-97, yield at date of purchase 4.94%.......... 347,323,375
--------------
367,805,375
--------------
TOTAL INVESTMENTS (COST $1,847,176,399)* *................................... 99.9% 2,299,327,929
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................... 0.1 751,247
----- --------------
NET ASSETS................................................................... 100.0% $2,300,079,176
===== ==============
NET ASSET VALUE PER SHARE (OFFERING AND REDEMPTION PRICE PER SHARE) BASED ON
100,652,843 SHARES OUTSTANDING AT DECEMBER 31, 1996............................... $22.85
==============
</TABLE>
* Non-income producing security
* * Also represents aggregate cost for Federal income tax purposes
See Notes to Financial Statements.
<PAGE> 59
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUND
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments:
Securities, at market value (cost $1,479,371,024) (Note 1
and Note 7)............................................... $1,931,522,554
U.S. Treasury Bills....................................... 347,323,375
Repurchase agreement (Note 6)............................. 20,437,000
Certificate of deposit.................................... 45,000
--------------
TOTAL INVESTMENTS 2,299,327,929
Cash........................................................ 263
Dividends and interest receivable........................... 2,530,519
Prepaid assets.............................................. 123,498
Insurance reserve premium................................... 52,272
--------------
TOTAL ASSETS 2,302,034,481
--------------
LIABILITIES:
Payable for:
Investment Counsel fee (Note 2)........................... 1,549,488
Administration fee (Note 3)............................... 195,305
Other accrued expenses...................................... 210,512
--------------
TOTAL LIABILITIES 1,955,305
--------------
NET ASSETS $2,300,079,176
==============
Composition of net assets:
Paid-in capital (unlimited number of shares authorized,
100,652,843 shares outstanding)........................ $1,847,529,846
Undistributed net investment income....................... 129,189
Accumulated net realized gain............................. 268,611
Unrealized appreciation of investments (Note 7)........... 452,151,530
--------------
NET ASSETS $2,300,079,176
==============
NET ASSET VALUE (OFFERING AND REDEMPTION PRICE) PER SHARE
($2,300,079,176 DIVIDED BY 100,652,843 SHARES)............ $22.85
==============
</TABLE>
See Notes to Financial Statements.
<PAGE> 60
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME:
INCOME:
Dividends................................................. $ 32,116,678
Interest.................................................. 22,612,971
------------
54,729,649
------------
EXPENSES:
Investment Counsel fee (Note 2)........................... 17,004,356
Administration fee (Note 3)............................... 2,133,914
Transfer Agent fee........................................ 388,284
Reimbursable administration expenses (Note 3)............. 168,016
Supplies and postage...................................... 154,407
Registration and filing fees.............................. 127,615
Printing.................................................. 77,912
Trustees' fees............................................ 54,946
Insurance expense......................................... 50,815
Professional fees......................................... 35,600
Custodian fee............................................. 34,716
Miscellaneous............................................. 125,371
------------
20,355,952
------------
Net investment income............................. 34,373,697
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain from securities transactions, net:
Proceeds from sales.................................... 817,198,461
Cost of securities sold................................ 603,525,053
------------
Net realized gain................................. 213,673,408
Increase in unrealized appreciation for the year, net..... 158,628,871
------------
Net realized and unrealized gain on investments... 372,302,279
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $406,675,976
============
</TABLE>
See Notes to Financial Statements.
<PAGE> 61
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income..................................... $ 34,373,697 $ 20,371,114
Net realized gain on investments.......................... 213,673,408 37,694,798
Net unrealized appreciation for the period................ 158,628,871 239,294,987
-------------- --------------
Net increase in net assets resulting from operations... 406,675,976 297,360,899
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ($0.383 and $0.24 per share,
respectively).......................................... (34,349,264) (20,363,752)
From net realized gain on investments ($2.381 and $0.444
per share, respectively)............................... (213,539,413) (37,672,942)
-------------- --------------
Net decrease in net assets resulting from
distributions........................................ (247,888,677) (58,036,694)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares.......................... 415,870,054 1,109,962,005
Net asset value of shares issued to shareholders for
reinvestment of shareholder distributions.............. 234,252,018 54,537,285
Cost of shares redeemed................................... (385,297,441) (280,883,298)
-------------- --------------
Net increase in net assets from fund share
transactions......................................... 264,824,631 883,615,992
-------------- --------------
Total increase in net assets........................... 423,611,930 1,122,940,197
NET ASSETS:
Beginning of year......................................... 1,876,467,246 753,527,049
-------------- --------------
End of year (including undistributed net investment income
of $129,189 and $104,756, respectively)................ $2,300,079,176 $1,876,467,246
============== ==============
</TABLE>
See Notes to Financial Statements.
<PAGE> 62
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUND
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Longleaf Partners Fund (the "Fund") is a series of Longleaf Partners Funds
Trust, a Massachusetts business trust which is registered under the Investment
Company Act of 1940, as amended, as a diversified open-end management investment
company. The Fund was organized on November 26, 1986 and on March 24, 1987 the
initial capitalization of $100,000 was provided by two principals of
Southeastern Asset Management, Inc., the Investment Counsel, who received 10,000
shares of beneficial interest in return. The Fund commenced its public offering
of shares on April 8, 1987.
The following is a summary of significant accounting policies:
(a) Valuation of Securities and Repurchase Agreements:
(1) Portfolio securities listed or traded on a securities exchange and
over-the-counter securities traded on the NASDAQ national market are
valued at the last sales price. If there are no transactions in the
security that day, securities are valued at the midpoint between the
closing bid and ask prices.
(2) All other portfolio securities for which over-the-counter market
quotations are readily available are valued at the midpoint between the
closing bid and ask prices. 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.
(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
Fund's Trustees.
(b) Accounting for Investments:
The Fund follows industry practice and records security transactions on
the day following the trade date (date the order to buy or sell is
executed). Realized gains and losses on security transactions are
determined using the specific identification method. Dividend income is
recognized on the ex-dividend date and interest income is recognized on an
accrual basis.
(c) Federal Income Taxes:
The Fund's policy is to comply with the requirements of the Internal
Revenue Code that are applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Accordingly, no
federal income tax provision is required. In addition, the Fund intends to
make any required distributions to avoid the application of a 4%
nondeductible excise tax.
(d) Distributions to Shareholders:
Dividends and distributions to shareholders are recorded on the
ex-dividend date.
<PAGE> 63
NOTE 2. INVESTMENT COUNSEL AGREEMENT
Southeastern Asset Management, Inc. ("Southeastern") serves as Investment
Counsel to the Fund and receives annual compensation from the Fund, computed
daily and paid monthly, in accordance with the following schedule:
<TABLE>
<S> <C>
First $400 million of average daily net assets.............. 1.00%
In excess of $400 million................................... .75%
</TABLE>
The Investment Counsel has agreed to reduce its fees on a pro rata basis for
services rendered to the extent that the Fund's normal annual operating expenses
(excluding taxes, interest, brokerage fees, and extraordinary expenses) exceed
1.5% of average annual net assets. No such reduction was necessary for the
current year.
NOTE 3. 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 Fund, including, among other things, the preparation
of all registration statements, prospectuses, tax returns and proxy statements,
daily valuation of the Fund's portfolio and calculation of daily net asset value
per share. The Fund pays a fee as compensation for these services, accrued daily
and paid monthly, of 0.10% per annum of average daily net assets.
Reimbursable administration expenses paid by the Fund to Southeastern consist of
a portion of both the computer support charges for computer programs used in
processing transactions for the Fund and its shareholders and of the salary of
the Fund's Treasurer calculated in accordance with Trustee review and approval.
NOTE 4. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Shares sold...................... 18,238,896 $415,870,054 56,015,693 $1,109,962,005
Reinvestment of shareholder
distribution................... 10,180,444 234,252,018 2,589,615 54,537,285
Shares redeemed.................. (16,493,540) (385,297,441) (13,874,948) (280,883,298)
----------- ------------ ----------- --------------
11,925,800 $264,824,631 44,730,360 $ 883,615,992
=========== ============ =========== ==============
</TABLE>
NOTE 5. INVESTMENT TRANSACTIONS
Purchases and sales of securities for the period (excluding short-term
obligations) aggregated $561,624,924 and $565,682,438, respectively. Total
brokerage commissions paid by the Fund during the period were $2,172,895.
<PAGE> 64
NOTE 6. INVESTMENTS IN SHORT-TERM OBLIGATIONS
As excess funds are available, the Fund makes certain short-term investments in
cash equivalents, including repurchase agreements. The Fund's custodian bank
sells U.S. government securities to the Fund under an agreement to repurchase
these securities from the Fund at a stated repurchase price including interest
for the term of the agreement, which is usually overnight or over a week-end.
The Fund, through its custodian, receives delivery of the underlying U.S.
government securities as collateral, the market value of which is required to be
at least equal to the repurchase price. If the custodian becomes bankrupt, the
Fund might be delayed, or may incur costs or possible losses of principal and
income, in selling the collateral. A repurchase agreement of $20,437,000 is
included in the statement of assets and liabilities at December 31, 1996.
NOTE 7. UNREALIZED APPRECIATION
Net unrealized appreciation consists of the following:
<TABLE>
<S> <C>
Unrealized appreciation.................................... $469,426,282
Unrealized depreciation.................................... (17,274,752)
------------
$452,151,530
============
</TABLE>
NOTE 8. RELATED PARTY SHAREHOLDERS
At December 31, 1996, officers and employees of Southeastern and their families,
Fund trustees and the Southeastern retirement plan and other affiliates owned
1,543,076 shares of the Fund, constituting 1.53% of the outstanding shares.
NOTE 9. OTHER PORTFOLIO INFORMATION
At December 31, 1996, the Fund's holdings consisted of at least five percent of
the outstanding voting stock of the following companies: 8.4% of Alexander &
Alexander Services, Inc., 5.2% of Kansas City Southern Industries, Inc., 6.8% of
Knight-Ridder, Inc., and 9.9% of Rayonier Inc.
<PAGE> 65
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUND
FINANCIAL HIGHLIGHTS
The following condensed financial information, including total returns, has been
audited by Coopers & Lybrand L.L.P., independent certified public accountants.
The audit report on the 1996 financial statements issued by Coopers & Lybrand
L.L.P. appears in this report and should be read in conjunction with this
condensed financial information. The presentation is for a share outstanding
throughout each period.
<TABLE>
<CAPTION>
NET GAINS
OR
(LOSSES)
NET ON DISTRI- NET
ASSET SECURITIES TOTAL DIVIDENDS BUTIONS ASSET
VALUE NET REALIZED FROM FROM NET FROM TOTAL VALUE
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT CAPITAL DISTRI- END OF TOTAL
OF PERIOD INCOME UNREALIZED OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN
--------- ---------- ----------- ---------- ---------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December
31,
1996.............. $21.15 $.37 $ 4.09 $ 4.46 $ (.38) $(2.38) $(2.76) $22.85 21.02%
1995.............. 17.13 .30 4.40 4.70 (.24) (.44) (.68) 21.15 27.50%
1994.............. 16.92 .21 1.30 1.51 (.16) (1.14) (1.30) 17.13 8.96%
1993.............. 14.70 .10 3.16 3.26 (.09) (.95) (1.04) 16.92 22.20%
1992.............. 13.34 .07 2.65 2.72 (.07) (1.29) (1.36) 14.70 20.47%
1991.............. 10.21 .05 3.93 3.98 (.06) (.79) (.85) 13.34 39.19%
1990.............. 12.62 .13 (2.16) (2.03) (.15) (.23) (.38) 10.21 (16.35)%
Two months ended
December 31,
1989................ 14.30 .03 (.10) (.07) (.08) (1.53) (1.61) 12.62 (0.47)%(1)
Year ended
October 31,
1989.............. 11.25 .18 3.00 3.18 (.13) - (.13) 14.30 28.38%
1988.............. 8.69 .14 2.50 2.64 (.08) - (.08) 11.25 30.69%
March 24, 1987
(Date of Initial
Capitalization)
through October 31,
1987................ 10.00 .11 (1.42) (1.31) - - - 8.69 (13.14)%(1)
<CAPTION>
RATIO OF
EXPENSES RATIO OF
NET ASSETS TO NET
END OF AVERAGE INCOME TO PORTFOLIO AVERAGE
PERIOD NET AVERAGE TURNOVER COMMISSION
(THOUSANDS) ASSETS NET ASSETS RATE RATE PAID
----------- -------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December
31,
1996.............. $2,300,079 0.95% 1.61% 33.18% $0.0750(3)
1995.............. 1,876,467 1.01% 1.45% 12.60%
1994.............. 753,527 1.17% 1.18% 27.39%
1993.............. 397,282 1.26% .63% 19.12%
1992.............. 243,678 1.29% .50% 29.12%
1991.............. 177,878 1.30% .42% 45.11%
1990.............. 129,643 1.32% 1.13% 52.45%
Two months ended
December 31,
1989................ 148,680 1.31%* 1.73%* 6.67%
Year ended
October 31,
1989.............. 139,608 1.35% 1.37% 57.72%
1988.............. 50,676 1.50%(2) 1.40% 92.68%
March 24, 1987
(Date of Initial
Capitalization)
through October 31,
1987................ 25,787 1.50%*(2) 1.61%* 70.00%
</TABLE>
* Annualized
(1) Aggregate; not annualized.
(2) Before expense limitation fee waiver, this ratio was 1.64% and 1.83% for the
1988 and 1987 periods, respectively.
(3) Not applicable for prior periods.
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
LONGLEAF PARTNERS REALTY FUND
We have audited the accompanying statement of assets and liabilities of Longleaf
Partners Realty Fund (a series of Longleaf Partners Funds Trust), including the
schedule of portfolio investments, as of December 31, 1996, and the related
statement of operations, the statement of changes in net assets, and the
financial highlights for the year ended December 31, 1996. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures include confirmation of securities owned as of December 31, 1996 by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Longleaf Partners Realty Fund as of December 31, 1996 and the results of its
operations, changes in its net assets, and the financial highlights for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 24, 1997
<PAGE> 67
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- COMMON STOCK (84.9%) ------------
<S> <C> <C> <C> <C> <C>
FINANCIAL SERVICES (0.5%)
14,500 * White River Corporation.................................. $ 790,250
-----------
FURNITURE (1.2%)
236,600 * Rhodes, Inc.............................................. 1,833,650
-----------
INSURANCE AND BROKERAGE (3.7%)
130,000 Alexander & Alexander Services Inc....................... 2,258,750
264,400 Hilb, Rogal and Hamilton Company......................... 3,503,300
-----------
5,762,050
-----------
PUBLISHING (4.3%)
178,000 Knight-Ridder, Inc....................................... 6,808,500
-----------
REAL ESTATE INDUSTRY (75.2%)
19,200 Alexander & Baldwin, Inc................................. 480,000
365,000 Arden Realty, Inc........................................ 10,128,750
102,000 Bradley Real Estate, Inc................................. 1,836,000
34,000 Burnham Pacific Properties............................... 510,000
100,000 Bay View Capital Corp.................................... 4,237,500
359,200 * Castle & Cooke, Inc...................................... 5,702,300
1,390,400 * Catellus Development Corporation......................... 15,815,800
256,900 Cousins Properties Incorporated.......................... 7,225,313
44,000 Essex Property Trust..................................... 1,292,500
80,000 * First Fed Financial Corp................................. 1,760,000
87,900 Forest City Enterprises, Inc. - Class A.................. 5,317,950
40,800 Forest City Enterprises, Inc. - Class B.................. 2,468,400
672,300 * IHOP Corp................................................ 15,883,087
28,000 Louisiana-Pacific Corporation............................ 591,500
293,700 The Pioneer Group, Inc................................... 6,975,375
35,000 * Quaker City Bancorp, Inc................................. 665,000
261,000 Rayonier Inc............................................. 10,015,875
12,500 Reckson Associates Realty Corp........................... 528,125
295,000 * Red Roof Inns, Inc....................................... 4,572,500
282,400 Sizeler Property Investors, Inc.......................... 2,718,100
213,500 * Supertel Hospitality, Inc................................ 1,921,500
469,160 * TrizecHahn Corporation................................... 10,321,520
28,000 * USG Corporation.......................................... 948,500
190,200 Wolohan Lumber Co........................................ 2,377,500
113,400 Zurn Industries, Inc..................................... 2,962,575
-----------
117,255,670
-----------
TOTAL COMMON STOCKS (COST $116,169,380)................................... 132,450,120
-----------
</TABLE>
See Notes to Financial Statements.
<PAGE> 68
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
MARKET VALUE
------------
<S> <C> <C> <C> <C> <C>
SHORT TERM OBLIGATIONS (15.2%)
Certificates of Deposit in Thrift Institutions............................ $ 9,000
Repurchase Agreement with State Street Bank and Trust Company, dated
12-31-96 due 1-2-97 at 4.75%, collateralized by $716,504 U.S. Treasury
Bond due 2-15-20 (Repurchase proceeds-$700,185) (Cost $700,000).......... 700,000
U.S. Treasury Bill, due 1-2-97, yield at date of purchase 4.82%........... 16,997,757
U.S. Treasury Bill, due 1-9-97, yield at date of purchase 4.11%........... 2,997,300
U.S. Treasury Bill, due 1-16-97, yield at date of purchase 4.57%.......... 2,994,375
------------
23,698,432
------------
TOTAL INVESTMENTS (COST $139,867,812)*....................................... 100.1% 156,148,552
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS............................... (0.1) (139,328)
----- ------------
NET ASSETS................................................................... 100.0% $156,009,224
===== ============
NET ASSET VALUE PER SHARE (OFFERING AND REDEMPTION PRICE PER SHARE) BASED ON
11,165,607 SHARES OUTSTANDING AT DECEMBER 31, 1996................................ $13.97
========
</TABLE>
* Non-income producing security
* * Also represents aggregate cost for Federal income tax purposes
See Notes to Financial Statements.
<PAGE> 69
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments:
Securities, at market value (cost $116,169,380) (Note 1
and Note 7)............................................ $132,450,120
U.S. Treasury Bills....................................... 22,989,432
Repurchase agreement (Note 6)............................. 700,000
Deposits in thrift institutions........................... 9,000
------------
TOTAL INVESTMENTS 156,148,552
Cash........................................................ 5,382
Dividends and interest receivable........................... 183,179
Prepaid assets.............................................. 3,456
------------
TOTAL ASSETS 156,340,569
------------
LIABILITIES:
Payable for:
Securities purchased...................................... 92,500
Investment Counsel fee (Note 2)........................... 142,316
Administration fees (Note 3).............................. 11,829
Other accrued expenses...................................... 84,700
------------
TOTAL LIABILITIES 331,345
------------
NET ASSETS $156,009,224
============
Composition of net assets:
Paid-in capital (unlimited number of shares authorized,
11,165,607 shares outstanding)......................... $139,719,202
Undistributed net investment income....................... 5,919
Accumulated net realized gain............................. 3,363
Unrealized appreciation of investments (Note 7)........... 16,280,740
------------
NET ASSETS $156,009,224
============
NET ASSET VALUE (OFFERING AND REDEMPTION PRICE) PER SHARE
($156,009,224 DIVIDED BY 11,165,607 SHARES)............... $13.97
=======
</TABLE>
See Notes to Financial Statements.
<PAGE> 70
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME:
INCOME:
Dividends................................................. $ 672,709
Interest.................................................. 390,751
-----------
1,063,460
-----------
EXPENSES:
Investment Counsel fee (Note 2)........................... 438,484
Registration and filing fees.............................. 78,446
Administration fee (Note 3)............................... 43,848
Reimbursable administration expenses (Note 3)............. 30,397
Printing.................................................. 24,885
Custodian fee............................................. 24,356
Professional fees......................................... 21,210
Trustees' fees............................................ 18,315
Transfer agent fee........................................ 7,871
Supplies and postage...................................... 7,523
Insurance expense......................................... 3,167
Miscellaneous............................................. 6,424
Less: Fee reduction (Note 2).............................. (47,201)
-----------
657,725
-----------
Net investment income............................. 405,735
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain from securities transactions, net:
Proceeds from sales.................................... 1,637,737
Cost of securities sold................................ 1,147,205
-----------
Net realized gain................................. 490,532
Increase in unrealized appreciation for the year, net..... 16,280,740
-----------
Net realized and unrealized gain on investments... 16,771,272
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $17,177,007
===========
</TABLE>
See Notes to Financial Statements.
<PAGE> 71
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
OPERATIONS:
Net investment income..................................... $ 405,735
Net realized gain on investments.......................... 490,532
Net unrealized appreciation for the period................ 16,280,740
------------
Net increase in net assets resulting from operations... 17,177,007
------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net realized gain on investments ($0.04589 per
share)................................................. (487,169)
From net investment income ($0.03766 per share)........... (399,816)
From return of capital ($0.01502 per share)............... (159,496)
------------
Net decrease in net assets resulting from
distributions......................................... (1,046,481)
------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares.......................... 150,091,326
Net asset value of shares issued to shareholders for
reinvestment of shareholder distributions.............. 999,870
Cost of shares redeemed................................... (11,212,498)
------------
Net increase in net assets from fund share
transactions.......................................... 139,878,698
------------
Total increase in net assets........................... 156,009,224
NET ASSETS:
Beginning of year......................................... 0
------------
End of year (including undistributed net investment income
of $5,919)............................................. $156,009,224
============
</TABLE>
See Notes to Financial Statements.
<PAGE> 72
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Longleaf Partners Realty Fund (the "Fund") is a series of Longleaf Partners
Funds Trust, a Massachusetts business trust which is registered under the
Investment Company Act of 1940, as amended. The Fund is a non-diversified
open-end management investment company. The Fund was funded and commenced its
public offering of shares on January 2, 1996. Initial capitalization of $100,000
was provided by a principal of Southeastern Asset Management, Inc., the
Investment Counsel, who received 10,000 shares of beneficial interest in return.
The following is a summary of significant accounting policies:
(a) Valuation of Securities and Repurchase Agreements:
(1) Portfolio securities listed or traded on a securities exchange and
over-the-counter securities traded on the NASDAQ national market are
valued at the last sales price. If there are no transactions in the
security that day, securities are valued at the midpoint between the
closing bid and ask prices.
(2) All other portfolio securities for which over-the-counter market
quotations are readily available are valued at the midpoint between the
closing bid and ask prices. Repurchase agreements are valued at cost
which, combined with accrued interest, approximates market.
(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
Fund's Trustees.
(b) Accounting for Investments:
The Fund follows industry practice and records security transactions on
the day following the trade date (date the order to buy or sell is
executed). Realized gains and losses on security transactions are
determined using the specific identification method. Dividend income is
recognized on the ex-dividend date and interest income is recognized on an
accrual basis.
(c) Federal Income Taxes:
The Fund's policy is to comply with the requirements of the Internal
Revenue Code that are applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Accordingly, no
federal income tax provision is required. In addition, the Fund intends to
make any required distributions to avoid the application of a 4%
nondeductible excise tax.
(d) Distributions to Shareholders:
Dividends and distributions to shareholders are recorded on the
ex-dividend date.
<PAGE> 73
NOTE 2. INVESTMENT COUNSEL AGREEMENT
Southeastern Asset Management, Inc. ("Southeastern") serves as Investment
Counsel to the Fund and receives annual compensation from the Fund, computed
daily and paid monthly, of 1.0% per annum of average daily net assets.
The Investment Counsel has agreed to reduce its fees on a pro rata basis for
services rendered to the extent that the Fund's normal annual operating expenses
(excluding taxes, interest, brokerage fees, and extraordinary expenses) exceed
1.5% of average annual net assets. A reduction of $47,201 was required for the
year ended December 31, 1996.
NOTE 3. 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 Fund, including, among other things, the preparation
of all registration statements, prospectuses, tax returns and proxy statements,
daily valuation of the Fund's portfolio and calculation of daily net asset value
per share. The Fund pays a fee as compensation for these services, accrued daily
and paid monthly, of 0.10% per annum of average daily net assets.
Reimbursable administration expenses paid by the Fund to Southeastern consist of
a portion of both the computer support charges for computer programs used in
processing transactions for the Fund and its shareholders and of the salary of
the Fund's Treasurer calculated in accordance with Trustee review and approval.
NOTE 4. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
---------- ------------
<S> <C> <C>
Shares sold.................................... 11,949,427 $150,091,326
Reinvestment of shareholder distributions...... 71,778 999,870
Shares redeemed................................ (855,598) (11,212,498)
---------- ------------
11,165,607 $139,878,698
========== ============
</TABLE>
NOTE 5. INVESTMENT TRANSACTIONS
Purchases and sales of securities for the period (excluding short term
obligations) aggregated $117,476,081 and $1,637,737, respectively. Total
brokerage commissions paid by the Fund during the period were $427,047.
NOTE 6. INVESTMENTS IN SHORT-TERM OBLIGATIONS
As excess funds are available, the Fund makes certain short term investments in
cash equivalents, including repurchase agreements. The Fund's custodian bank
sells U.S. government securities to the Fund under an agreement to repurchase
these securities from the Fund at a stated repurchase price including interest
for the term of the agreement, which is usually overnight or over a weekend. The
Fund, through its custodian, receives delivery of the underlying U.S. government
securities as collateral, the market value of which is required to be at least
equal to the repurchase price. If the custodian becomes bankrupt, the Fund might
be
<PAGE> 74
delayed, or may incur costs or possible losses of principal and income, in
selling the collateral. A repurchase agreement of $700,000 is included in the
statement of assets and liabilities at December 31, 1996.
NOTE 7. UNREALIZED APPRECIATION
Net unrealized appreciation consists of the following:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $17,288,185
Unrealized depreciation..................................... (1,007,445)
-----------
$16,280,740
===========
</TABLE>
NOTE 8. RELATED PARTY SHAREHOLDERS
At December 31, 1996, Mr. O. Mason Hawkins, Chairman of the Board and Chief
Executive Officer of Southeastern and of the Fund, owned 960,873 shares of the
Fund, constituting 8.6% of the outstanding shares; Mr. W. Reid Sanders, a
director and Executive Vice President of Southeastern and a member of the Board
of Trustees and President of the Fund, owned 190,114 shares of the Fund,
constituting 1.7% of the outstanding shares. Officers and employees of
Southeastern and their families, Fund trustees and the Southeastern retirement
plan and other affiliates owned an additional 368,580 shares, constituting 3.3%
of the outstanding shares.
NOTE 9. OTHER PORTFOLIO INFORMATION
At December 31, 1996, the Fund held 5% or more of the outstanding voting stock
of the following company: 7.1% of IHOP Corp.
<PAGE> 75
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS REALTY FUND
FINANCIAL HIGHLIGHTS
The Fund was initially capitalized January 2, 1996. The following condensed
financial information, including total returns, has been audited by Coopers &
Lybrand L.L.P., independent certified public accountants. The audit report on
the 1996 financial statements issued by Coopers & Lybrand L.L.P. appears in this
report and should be read in conjunction with this condensed financial
information. The presentation is for a share outstanding throughout the year.
<TABLE>
<CAPTION>
<S> <C>
Net Asset Value, Beginning of Year.......................... $ 10.00
Income from Investment Operations:
Net Investment Income..................................... .16
Net Gains or Losses on Securities (both realized and
unrealized)............................................ 3.91
--------
Total From Investment Operations.......................... 4.07
--------
Less Distributions:
Dividends from net investment income...................... (.04)
Distributions from capital gains.......................... (.05)
Return of capital......................................... (.01)
--------
(.10)
--------
Net Asset Value, End of Year................................ $ 13.97
========
Total Return................................................ 40.69%(1)
Ratios/Supplemental Data:
Net Assets, End of Year (000's)........................... $156,009
Ratio of Expenses to Average Net Assets................... 1.50%(2)
Ratio of Net Income to Average Net Assets................. .92%(3)
Portfolio Turnover Rate................................... 4.28%
Average commission rate paid.............................. $ 0.0613
</TABLE>
- ---------------
(1) Aggregate; not annualized.
(2) Before expense limitation fee waiver, this ratio was 1.60%.
(3) Before expense limitation fee waiver, this ratio was .82%.
<PAGE> 76
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
LONGLEAF PARTNERS SMALL-CAP FUND
We have audited the accompanying statement of assets and liabilities of Longleaf
Partners Small-Cap Fund (a series of Longleaf Partners Funds Trust), including
the schedule of portfolio investments, as of December 31, 1996, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for the years ended December 31, 1996, 1995, 1994, 1993, 1992, 1991
and 1990, the two months ended December 31, 1989, and the period from December
28, 1988 (Date of Initial Capitalization) through October 31, 1989. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures include confirmation of securities owned and
securities purchased but not received as of December 31, 1996 by correspondence
with the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Longleaf Partners Small-Cap Fund as of December 31, 1996 and the results of its
operations, changes in its net assets, and the financial highlights each of the
respective periods stated in the first paragraph, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 10, 1997
<PAGE> 77
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHARES MARKET VALUE
------- COMMON STOCK (96.6%) ------------
<S> <C> <C> <C> <C> <C>
ADVERTISING (2.1%)
21,020 Grey Advertising Inc. - Class A............................ $ 5,318,060
------------
BANKING (3.8%)
225,000 Bay View Capital Corp...................................... 9,534,375
------------
BEVERAGES (1.5%)
195,000 * Celestial Seasonings, Inc.................................. 3,851,250
------------
BUSINESS SERVICES (6.4%)
370,000 * Pinkerton's, Inc........................................... 9,296,250
300,000 * The Union Corporation ..................................... 6,862,500
------------
16,158,750
------------
COMMERCIAL LIGHTING (1.2%)
148,900 Thomas Industries, Inc..................................... 3,108,288
------------
FINANCIAL SERVICES (9.5%)
200,400 Duff & Phelps Credit Rating Co............................. 4,834,650
351,200 * White River Corporation.................................... 19,140,400
------------
23,975,050
------------
FOOD (0.7%)
100,000 GoodMark Foods, Inc........................................ 1,650,000
------------
FURNITURE (2.2%)
723,000 * Rhodes, Inc. .............................................. 5,603,250
------------
HEALTH CARE (5.3%)
1,025,000 * Healthsource, Inc. ........................................ 13,453,125
------------
INDUSTRIAL EQUIPMENT (0.2%)
231,400 * Baldwin Technology Company, Inc. - Class A................. 578,500
------------
INVESTMENT MANAGEMENT COMPANIES (4.8%)
164,000 * Lexington Global Asset Managers, Inc. ..................... 1,028,125
416,000 United Asset Management Corporation........................ 11,076,000
------------
12,104,125
------------
MANUFACTURING (15.5%)
850,000 * American Safety Razor Company.............................. 11,900,000
392,400 AMETEK, Inc................................................ 8,730,900
173,200 Franklin Electric Co., Inc................................. 8,097,100
393,000 Zurn Industries, Inc....................................... 10,267,125
------------
38,995,125
------------
</TABLE>
See Notes to Financial Statements.
<PAGE> 78
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- ------------
<S> <C> <C> <C> <C> <C>
MISCELLANEOUS (1.6%)
104,152 Seafield Capital Corporation............................. $ 4,035,890
------------
NATURAL RESOURCES (3.5%)
374,000 The Pioneer Group, Inc................................... 8,882,500
------------
PROPERTY & CASUALTY INSURANCE (11.3%)
34,680 * Alleghany Corporation.................................... 7,352,160
642,500 Hilb, Rogal and Hamilton Company......................... 8,513,125
28,200 * Markel Corporation....................................... 2,538,000
165,000 Orion Capital Corporation................................ 10,085,625
------------
28,488,910
------------
PUBLISHING (1.5%)
110,000 Plenum Publishing Corporation............................ 3,850,000
------------
REAL ESTATE (19.2%)
1,050,000 * Catellus Development Corporation......................... 11,943,750
385,000 Cousins Properties Incorporated.......................... 10,828,125
478,000 * IHOP Corp................................................ 11,292,750
649,600 * TrizecHahn Corporation................................... 14,291,200
------------
48,355,825
------------
RESTAURANTS (1.5%)
290,000 * VICORP Restaurants, Inc.................................. 3,842,500
------------
RETAIL (0.9%)
120,000 Delchamps, Inc........................................... 2,325,000
------------
TELECOMMUNICATIONS (3.8%)
610,459 * Vanguard Cellular Systems, Inc. -- Class A............... 9,614,729
------------
TOTAL COMMON STOCKS (COST $192,789,051)................................... 243,725,252
------------
SHORT TERM OBLIGATIONS (3.3%)
Repurchase Agreement with State Street Bank and Trust Company, dated
12-31-96, due 1-2-97 at 4.75%, collateralized by $8,361,291 U.S.
Treasury Bond due 2-15-20 (Repurchase proceeds-$8,195,162) (Cost
$8,193,000).............................................................. 8,193,000
------------
TOTAL INVESTMENTS (COST $200,982,051)* *..................................... 99.9% 251,918,252
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................... 0.1 238,705
----- ------------
NET ASSETS................................................................... 100.0% $252,156,957
===== ============
NET ASSET VALUE PER SHARE (OFFERING AND REDEMPTION PRICE PER SHARE) BASED ON
14,121,918 SHARES OUTSTANDING AT DECEMBER 31, 1996................................ $17.86
========
</TABLE>
* Non-income producing security
* * Also represents aggregate cost for Federal income tax purposes
See Notes to Financial Statements.
<PAGE> 79
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments:
Securities, at market value (cost $192,789,051) (Note 1
and Note 7)............................................ $243,725,252
Repurchase agreement (Note 6)............................. 8,193,000
------------
TOTAL INVESTMENTS 251,918,252
Cash........................................................ 568
Receivables:
Securities sold........................................... 395,163
Dividends and interest.................................... 267,754
Prepaid assets.............................................. 20,621
Insurance reserve premium................................... 7,274
------------
TOTAL ASSETS 252,609,632
------------
LIABILITIES:
Payable for:
Securities purchased...................................... 164,320
Investment Counsel fee (Note 2)........................... 203,354
Administration fee (Note 3)............................... 20,335
Other accrued expenses...................................... 64,666
------------
TOTAL LIABILITIES 452,675
------------
NET ASSETS $252,156,957
============
Composition of net assets:
Paid-in capital (unlimited number of shares authorized,
14,121,918 shares outstanding)......................... $201,119,380
Undistributed net investment income....................... 4,598
Accumulated net realized gain............................. 96,778
Unrealized appreciation of investments (Note 7)........... 50,936,201
------------
NET ASSETS $252,156,957
============
NET ASSET VALUE (OFFERING AND REDEMPTION PRICE) PER SHARE
($252,156,957 DIVIDED BY 14,121,918 SHARES)............... $17.86
=======
</TABLE>
See Notes to Financial Statements.
<PAGE> 80
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME:
INCOME:
Dividends................................................. $2,115,108
Interest.................................................. 328,269
-----------
2,443,377
-----------
EXPENSES:
Investment counsel fee (Note 2)........................... 1,735,200
Administration fee (Note 3)............................... 173,520
Registration and filing fees.............................. 59,945
Transfer agent fee........................................ 31,520
Trustees' fees............................................ 27,473
Printing.................................................. 22,553
Custodian fee............................................. 20,558
Reimbursable administration expenses (Note 3)............. 15,838
Supplies and postage...................................... 13,061
Professional fees......................................... 12,588
Insurance expense......................................... 6,374
Miscellaneous............................................. 18,984
-----------
2,137,614
-----------
Net investment income............................. 305,763
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain from securities transactions, net:
Proceeds from sales.................................... 47,196,026
Cost of securities sold................................ 33,779,854
-----------
Net realized gain................................. 13,416,172
Increase in unrealized appreciation for the year, net..... 33,330,915
-----------
Net realized and unrealized gain on investments... 46,747,087
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $47,052,850
===========
</TABLE>
See Notes to Financial Statements.
<PAGE> 81
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income..................................... $ 305,763 $ 1,025,608
Net realized gain on investments.......................... 13,416,172 10,013,505
Net unrealized appreciation for the period................ 33,330,915 10,269,885
------------ ------------
Net increase in net assets resulting from operations... 47,052,850 21,308,998
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net realized gain on investments ($1.005 and $1.166
per share, respectively)............................... (13,335,532) (10,015,944)
From net investment income ($0.0236 and $0.118 per share,
respectively).......................................... (313,153) (1,013,621)
------------ ------------
Net decrease in net assets resulting from
distributions........................................ (13,648,685) (11,029,565)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares.......................... 108,358,068 54,528,065
Net asset value of shares issued to shareholders for
reinvestment of shareholder distributions.............. 12,582,527 10,605,812
Cost of shares redeemed................................... (38,164,599) (39,045,822)
------------ ------------
Net increase in net assets from fund share
transactions......................................... 82,775,996 26,088,055
------------ ------------
Total increase in net assets........................... 116,180,161 36,367,488
NET ASSETS:
Beginning of year......................................... 135,976,796 99,609,308
------------ ------------
End of year (including undistributed net investment income
of $4,598 and $11,988, respectively)................... $252,156,957 $135,976,796
============ ============
</TABLE>
See Notes to Financial Statements.
<PAGE> 82
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Longleaf Partners Small-Cap Fund (the "Fund") is a series of Longleaf Partners
Funds Trust, a Massachusetts business trust which is registered under the
Investment Company Act of 1940, as amended, as a diversified open-end management
investment company. The Fund was formed on December 21, 1988, and on December
28, 1988 the initial capitalization of $1,500,000 was provided by two principals
of Southeastern Asset Management, Inc., the Investment Counsel, who received
150,000 shares of beneficial interest in return. The Fund commenced its public
offering of shares on February 21, 1989.
The following is a summary of significant accounting policies:
(a) Valuation of Securities and Repurchase Agreements:
(1) Portfolio securities listed or traded on a securities exchange and
over-the-counter securities traded on the NASDAQ national market are
valued at the last sales price. If there are no transactions in the
security that day, securities are valued at the midpoint between the
closing bid and ask prices.
(2) All other portfolio securities for which over-the-counter market
quotations are readily available are valued at the midpoint between the
closing bid and ask prices. Repurchase agreements are valued at cost
which, combined with accrued interest, approximates market.
(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
Fund's Trustees.
(b) Accounting for Investments:
The Fund follows industry practice and records security transactions on
the day following the trade date (date the order to buy or sell is
executed). Realized gains and losses on security transactions are
determined using the specific identification method. Dividend income is
recognized on the ex-dividend date and interest income is recognized on an
accrual basis.
(c) Federal Income Taxes:
The Fund's policy is to comply with the requirements of the Internal
Revenue Code that are applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Accordingly, no
federal income tax provision is required. In addition, the Fund intends to
make any required distributions to avoid the application of a 4%
nondeductible excise tax.
(d) Distributions to Shareholders:
Dividends and distributions to shareholders are recorded on the
ex-dividend date.
<PAGE> 83
NOTE 2. INVESTMENT COUNSEL AGREEMENT
Southeastern Asset Management, Inc. ("Southeastern") serves as Investment
Counsel to the Fund and receives annual compensation from the Fund, computed
daily and paid monthly, in accordance with the following schedule:
<TABLE>
<S> <C>
First $400 million of average daily net assets.............. 1.00%
In excess of $400 million................................... .75%
</TABLE>
The Investment Counsel has agreed to reduce its fees on a pro rata basis for
services rendered to the extent that the Fund's normal annual operating expenses
(excluding taxes, interest, brokerage fees, and extraordinary expenses) exceed
1.5% of average annual net assets. No such reduction was necessary for the
current period.
NOTE 3. 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 Fund, including, among other things, the preparation
of all registration statements, prospectuses, tax returns and proxy statements,
daily valuation of the Fund's portfolio and calculation of daily net asset value
per share. The Fund pays a fee as compensation for these services, accrued daily
and paid monthly, of 0.10% per annum of average daily net assets.
Reimbursable administration expenses paid by the Fund to Southeastern consist of
a portion of both the computer support charges for computer programs used in
processing transactions for the Fund and its shareholders and of the salary of
the Fund's Treasurer calculated in accordance with Trustee review and approval.
NOTE 4. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Shares sold........................... 6,357,663 $108,358,068 3,818,992 $54,528,065
Shares redeemed....................... (2,348,601) (38,164,599) 734,983 10,605,812
Reinvestment of shareholder
distribution........................ 706,090 12,582,527 (2,650,508) (39,045,822)
---------- ------------ ---------- -----------
4,715,152 $ 82,775,996 1,903,467 $26,088,055
========== ============ ========== ===========
</TABLE>
NOTE 5. INVESTMENT TRANSACTIONS
Purchases and sales of securities for the period (excluding short term
obligations) aggregated $112,741,793 and $47,196,026, respectively. Total
brokerage commissions paid by the Fund during the period were $576,550.
NOTE 6. INVESTMENTS IN SHORT-TERM OBLIGATIONS
As excess funds are available, the Fund makes certain short term investments in
cash equivalents, including repurchase agreements. The Fund's custodian bank
sells U.S. government securities to the Fund under an
<PAGE> 84
agreement to repurchase these securities from the Fund at a stated repurchase
price including interest for the term of the agreement, which is usually
overnight or over a week-end. The Fund, through its custodian, receives delivery
of the underlying U.S. government securities as collateral, the market value of
which is required to be at least equal to the repurchase price. If the custodian
becomes bankrupt, the Fund might be delayed, or may incur costs or possible
losses of principal and income, in selling the collateral. A repurchase
agreement of $8,193,000 is included in the statement of assets and liabilities
at December 31, 1996.
NOTE 7. UNREALIZED APPRECIATION
Net unrealized appreciation consists of the following:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $56,813,222
Unrealized depreciation..................................... (5,877,021)
-----------
$50,936,201
===========
</TABLE>
NOTE 8. RELATED PARTY SHAREHOLDERS
At December 31, 1996, Mr. O. Mason Hawkins, Chairman of the Board and Chief
Executive Officer of Southeastern and of the Fund, owned 903,082 shares of the
Fund, constituting 6.4% of the outstanding shares; Mr. W. Reid Sanders, a
director and Executive Vice President of Southeastern and a member of the Board
of Trustees and President of the Fund, owned 451,171 shares of the Fund,
constituting 3.2% of the outstanding shares. Officers and employees of
Southeastern and their families, Fund trustees and the Southeastern retirement
plan and other affiliates owned an additional 892,535 shares, constituting 6.3%
of the outstanding shares.
NOTE 9. OTHER PORTFOLIO INFORMATION
At December 31, 1996, the Fund's holdings consisted of at least five percent of
the outstanding class of common stock of the following companies: 7.0% of
American Safety Razor Company, 5.0% of IHOP Corp., 7.9% of Rhodes, Inc., 5.2% of
The Union Corporation, and 7.2% of White River Corporation.
<PAGE> 85
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
FINANCIAL HIGHLIGHTS
The following condensed financial information, including total returns, has been
audited by Coopers & Lybrand L.L.P., independent certified public accountants.
The audit report on the 1996 financial statements issued by Coopers & Lybrand
L.L.P. appears in this report and should be read in conjunction with this
condensed financial information. The presentation is for a share outstanding
throughout each period.
<TABLE>
<CAPTION>
NET GAINS
OR
NET (LOSS) ON DISTRI- NET
ASSET NET SECURITIES TOTAL DIVIDENDS BUTIONS ASSET
VALUE INVESTMENT REALIZED FROM FROM NET FROM TOTAL VALUE
BEGINNING INCOME AND INVESTMENT INVESTMENT CAPITAL DISTRI- END OF TOTAL
OF PERIOD (LOSS) UNREALIZED OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN
--------- ---------- ---------- ---------- ---------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended
December 31,
1996.............. $ 14.46 $ .03 $ 4.40 $ 4.43 $ (.02) $(1.01) $ (1.03) $17.86 30.64%
1995.............. 13.28 .12 2.35 2.47 (.12) (1.17) (1.29) 14.46 18.61%
1994.............. 13.49 (.03) .52 .49 - (.70) (.70) 13.28 3.64%
1993.............. 11.40 (.06) 2.32 2.26 - (.17) (.17) 13.49 19.83%
1992.............. 10.67 (.01) .74 .73 - - - 11.40 6.87%
1991.............. 8.50 .06 2.17 2.23 (.06) - (.06) 10.67 26.31%
1990.............. 12.87 .40 (4.18) (3.78) (.36) (.23) (.59) 8.50 (30.05)%
Two months ended
December 31, 1989... 13.02 .04 .22 .26 (.05) (.36) (.41) 12.87 2.10%(1)
December 28, 1988
(Date of Initial
Capitalization)
through October 31,
1989................ 10.00 .17 2.94 3.11 (.09) - (.09) 13.02 31.13%(1)
<CAPTION>
RATIO OF
EXPENSES RATIO OF
NET ASSETS TO NET INCOME
END OF AVERAGE (LOSS) TO PORTFOLIO AVERAGE
PERIOD NET AVERAGE TURNOVER COMMISSION
(THOUSANDS) ASSETS NET ASSETS RATE RATE PAID
----------- -------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Year ended
December 31,
1996.............. $252,157 1.23% .18% 27.97% $0.0605(3)
1995.............. 135,977 1.30% .84% 32.95%
1994.............. 99,609 1.38% (.22)% 19.79%
1993.............. 85,087 1.45% (.45)% 14.37%
1992.............. 62,181 1.45% (.03)% 25.80%
1991.............. 60,354 1.43% .60% 65.18%
1990.............. 47,894 1.43% 3.48% 14.93%
Two months ended
December 31, 1989... 52,176 1.47%* 1.60%* 3.96%
December 28, 1988
(Date of Initial
Capitalization)
through October 31,
1989................ 43,860 1.50%*(2) 1.63%* 20.47%
</TABLE>
* Annualized
(1) Aggregate; not annualized.
(2) Before expense limitation fee waiver, this ratio was 1.59%.
(3) Not applicable for prior periods.
<PAGE> 86
INVESTMENT COUNSEL
Southeastern Asset Management, Inc.
6075 Poplar Avenue, Suite 900
Memphis, TN 38119
(901) 761-2474
TRANSFER AND DIVIDEND AGENT
National Financial Data Services ("NFDS")
P.O. Box 419733
Kansas City, MO 64141-6733
For Information about your account,
call (800) 488-4191
CUSTODIAN
State Street Bank & Trust
Company, Boston, MA
SPECIAL LEGAL COUNSEL
Dechert Price & Rhoads,
Washington, DC
INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS
Coopers & Lybrand, L.L.P.,
Boston, MA
No person has been authorized to
give any further information or
make any representations other
than those contained in this
Prospectus. If given or made,
such other information or
representations must not be
relied upon as having been
authorized by the Fund,
Investment Counsel, or
Administrator. This Prospectus
does not constitute an offering
in any state where such an
offering may not be lawfully
made.
LONGLEAF
PARTNERS
FUNDS TRUST
LOGO (SM)
Longleaf Partners Realty Fund
MANAGED BY:
SOUTHEASTERN ASSET
MANAGEMENT, INC.
6075 POPLAR AVE.
SUITE 900
MEMPHIS, TN 38119
(901) 761-2474
(800) 445-9469
LONGLEAF
PARTNERS
(LOGO SM) FUNDS
STATEMENT OF
ADDITIONAL INFORMATION
--------------------------------------------------------------
LONGLEAF PARTNERS FUND
LONGLEAF PARTNERS
REALTY FUND
LONGLEAF PARTNERS
SMALL-CAP FUND
--------------------------------------------------------------
MANAGED BY
SOUTHEASTERN ASSET MANAGEMENT, INC.
6075 POPLAR AVENUE; SUITE 900
MEMPHIS, TN 38119
--------------------------------------------------------------
TELEPHONE (800) 445-9469;
(901) 761-2474.
<PAGE> 87
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 18
PART C. OTHER INFORMATION
Item 24 Financial Statement and Exhibits
(a) Financial Statements. Included in Part B of Post-Effective Amendment No.
18.
(b) Exhibits:
(1) Declaration of Trust and Amendments; (previously
filed) (1), (3), (5)
(2) By-laws - previously filed. (1)
(3) Voting Trust Agreement - none
(4) Specimen Security - previously filed (1)
(5) Form of Investment Counsel Agreement with Southeastern
Asset Management, Inc. (4), (5)
(6)(a) Form of Agreement with Principal Underwriter - None
(6)(b) Sample Dealer Agreement - none
(7) Bonus, profit sharing or pension plans - none
(8)(a) Custodian Agreement with State Street Bank and Trust
Company; previously filed (4), (5)
(b) Transfer Agent Agreement with National Financial Data
Services; previously filed (4), (5)
(9) Administration Agreement - Agreement with Southeastern
Asset Management, Inc. Previously filed (4), (5)
(10) Opinion and consent of counsel; filed herewith
(11) Other opinions, appraisals, rulings and consents:
Accountants' Consent; filed herewith
(12) Financial Statements omitted from Prospectus - See Item 24(a)
(13) Letters of investment intent - None
(14) Prototype Retirement Plan - Individual Retirement Account ("IRA")
filed herewith
(15) Plan pursuant to Rule 12b-1 - None
(16) Schedule of Performance Calculations. See pages 11 and 12 of the
Statement of Additional Information.
(17) Financial Data Schedule - filed herewith
(18) Rule 18f-3 Plan - Not applicable
____________________________________________________________
(1) Incorporated by reference from the Initial Registration
Statement and Pre-Effective Amendments Numbers 1 and 2.
(2) Incorporated by reference from Post-Effective Amendment 1
(3) Incorporated by reference from Post-Effective Amendment 3
(4) Incorporated by reference from Post-Effective Amendment 10.
(5) Incorporated by reference from Post-Effective Amendment 12
<PAGE> 88
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 18
Item 25 Persons Under Common Control With Registrant
Longleaf Partners Funds Trust, a Massachusetts business
trust registered under the Investment Company Act of 1940 as an
open-end management investment company has three series. The first
series is Longleaf Partners Fund, the second series is Longleaf
Partners Small-Cap Fund, and the third is Longleaf Partners Realty Fund.
Each series has a separate Board of Trustees composed of the same six
individuals. Four of the six 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 with Southeastern Asset Management, an 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.
Item 26 Number of Holders of Securities
As of May 31, 1997, there were 16,519 shareholders of the
single class of shares outstanding of Longleaf Partners Fund, 3,231
shareholders of the single class of shares outstanding of Longleaf
Partners Small-Cap Fund, and 3,614 shareholders of the single class of
shares outstanding of Longleaf Partners Realty Fund. The above accounts
are separate accounts maintained by the transfer agent, NFDS, and do not
include sub-accounts of various omnibus accounts maintained by brokerage
firms or retirement plan administrators.
Item 27 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 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 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
<PAGE> 89
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 18
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 adjudicate 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).
(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
<PAGE> 90
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 18
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.
(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:
(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.
(f) The indemnification provided by this Section shall not
<PAGE> 91
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 18
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 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
<PAGE> 92
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 18
against such liabilities (other than the payment by the Registrant 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 28 Business and Other Connections of Investment Counsel
Southeastern Asset Management, Inc., a Tennessee corporation, offers
investment management services to corporations, retirement and pension plans
and individual investors. The primary occupations for at least the past five
years of its directors, officers or employees who are also either Trustees or
officers of the two series included in Post-Effective Amendment No. 18 are as
follows:
<TABLE>
<CAPTION>
Name of Company,
Name and position Principal Business Capacity With
With Registrant and Address Investment Counsel
---------------------- ------------------ ------------------
<S> <C> <C>
O. Mason Hawkins, CFA 1975-Present; Chairman of the
Chairman of the Board Southeastern Asset Board and CEO
and Co-Portfolio Management, Inc.
Manager
W. Reid Sanders 1975-Present; Executive
Trustee and President Southeastern Asset Vice President
Chief Operating Management, Inc.
Officer
G. Staley Cates, CFA 1985 - Present; President (1994)
Co-Portfolio Manger Southeastern Asset Vice President
and Vice President- Management, Inc. 1985-94
Investments
</TABLE>
<PAGE> 93
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 18
<TABLE>
<S> <C> <C>
John B. Buford, CPA 1990 - Present Vice President
Vice President - Investments Southeastern Asset
Management, Inc.;
1989-90 - First
Tennessee Bank,
Memphis, TN,
Vice President;
1985-1988,
Metropolitan
National Bank
Commercial Lending
Officer/Credit
Analyst.
C.T. Fitzpatrick, III, 1990 - Present; Vice President
CFA; Co-Portfolio Southeastern Asset (1994); Prior to
Manager and Vice Management, Inc. 1994 - Securities
President - Investments Analyst
Frank N. Stanley, CFA 1985 - Present; Vice President
Vice President - Southeastern Asset
Investments Management, Inc.;
1984-1985; Montag &
Caldwell, Inc.
Atlanta, Georgia
Charles D. Reaves 1988 - Present; Vice President &
Executive Vice President Southeastern Asset General Counsel
General Counsel Management, Inc.
1986-1988; Porter
White & Yardley, Inc.
Birmingham, AL
(Vice Prescient and
Principal); Prior to
1986; Saunders System,
Inc., Birmingham, AL.
(Senior Vice President
and Chief Financial
Officer)
Julie M. Douglas, CPA 1989 - Present; Fund Accountant
Executive Vice Southeastern Asset
President- Operations Management, Inc.
and Treasurer 1984-1989; Coopers &
Lybrand, Certified
Public Accountants,
Pittsburgh, PA &
Birmingham, AL
Lee B. Harper 1993 - Present Marketing
Executive Vice Southeastern Asset Analyst
President - Marketing Management, Inc.
1989-1993 - IBM Corp.,
Memphis, TN, Consultant;
McKinsey & Company, Atlanta,
GA, Business Analyst
Randy D. Holt, CPA 1985 - Present; Vice President
Vice President Southeastern Asset & Secretary
and Secretary Management, Inc.
</TABLE>
The address of Southeastern Asset Management, Inc. is Suite 900, The Crescent
Center; 6075 Poplar Avenue; Memphis, TN 38119.
<PAGE> 94
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 18
Item 29 Principal Underwriters
(a) The Fund is a no-load fund selling its shares directly to the
public and serves as its own distributor.
(b) Not Applicable.
(c) Not Applicable.
ITEM 30 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, which is Southeastern Asset Management, Inc.,
Suite 900, 6075 Poplar Avenue; Memphis, TN 38119. Transfer Agent records are
maintained in the possession of National Financial Data Services, Inc., 1004
Baltimore, 5th Floor, Kansas City, MO 64105.
ITEM 31 Management Services
Not applicable. (See section in the Prospectus entitled "Fund
Administrator").
ITEM 32 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 5A of Form N-1A is set forth
in the audited annual reports to shareholders 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.
<PAGE> 95
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 18
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) having three series or
portfolios, Longleaf Partners Fund (Series One), and Longleaf Partners Small-Cap
Fund (Series Two), have duly caused this Post-Effective Amendment No. 18 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 2nd day of July, 1997.
Longleaf Partners Fund Trust (the Master Trust)
Longleaf Partners Fund (Series One)
Longleaf Partners Small-Cap Fund (Series Two)
Longleaf Partners Realty Fund (Series Three)
By /s/ Charles D. Reaves
------------------------
Charles D. Reaves
Executive Vice President
The Financial Data Schedule meeting the requirements of Rule 483 under the
Securities Exchange Act of 1933 is filed herewith as Exhibit 17.
<PAGE> 96
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 18
SIGNATURES (Continued)*
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 18 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:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ O. Mason Hawkins
- --------------------------
O. Mason Hawkins Trustee; Chairman of the July 2, 1997
Board and Chief Executive
Officer
/s/ W. Reid Sanders
- --------------------------
W. Reid Sanders Trustee and President July 2, 1997
(Chief Operating Officer)
/s/ Chadwick H. Carpenter, Jr.
- ------------------------------
Chadwick H. Carpenter, Jr. Trustee July 2, 1997
/s/ Daniel W. Connell, Jr.
- --------------------------
Daniel W. Connell, Jr. Trustee July 2, 1997
/s/ Steven N. Melnyk
- --------------------------
Steven N. Melnyk Trustee July 2, 1997
/s/ C. Barham Ray
- --------------------------
C. Barham Ray Trustee July 2, 1997
</TABLE>
(*) As of the date of this Post-Effective Amendment No. 18, the Board of
Trustees of each Series consists of six individuals, as shown above. Each
Trustee and each officer is a Trustee and/or officer 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 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.
<PAGE> 1
LONGLEAF PARTNERS FUNDS TRUST
Post-Effective Amendment No. 18
EXHIBIT 10
LONGLEAF PARTNERS FUNDS TRUST
c/o Southeastern Asset Management, Inc.
6075 Poplar Avenue; Suite 900
Memphis, TN 38119
July 2, 1997
Securities and Exchange Commission and
Board of Trustees
Longleaf Partners Funds Trust (the master trust)
Longleaf Partners Fund (Series One)
Longleaf Partners Small-Cap Fund (Series Two)
Longleaf Partners Realty Fund (Series Three)
Gentlemen:
This letter is written with respect to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 33-10472), (the "Registration
Statement") of Longleaf Partners Funds Trust, a Massachusetts business trust
("the Trust"), with the Securities and Exchange Commission for the purpose of
registering under the Securities Act of 1933, as amended, an indefinite number
of shares of beneficial interest of no par value (the "Shares") of the three
series of Longleaf Partners Funds Trust.
As General Counsel of the Master Trust and its three series, I am familiar with
and have examined such records, certificates and other documents and reviewed
such questions of law as deemed necessary or appropriate for the purposes of
this opinion. On the basis of such examination and review, you are advised
that, in my opinion, proper trust proceedings have been taken by the Trust so
that the shares have been validly authorized and, when the shares have been
issued and sold in accordance with the terms of the Prospectus included in the
Registration Statement, (with the Trust receiving consideration for the net
asset value per share prior to issuance of the shares), the Shares will be
validly issued, fully paid and non-assessable when issued.
I hereby consent to the filing of this opinion as an exhibit to the said Post
Effective Amendment No. 18 to the Registration Statement and the reference to
my name as General Counsel in the Statement of Additional Information under the
heading "The Fund's Legal Counsel".
Very truly yours,
/s/ Charles D. Reaves
- ---------------------
Charles D. Reaves
General Counsel
Longleaf Partners Funds Trust
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in Part B of the Statement of Additional
Information, constituting part of Post-Effective Amendment No. 18 to this
Registration Statement on Form N-1A (File No. 33-10472), of our reports dated
January 10, 1997, on the audits of the following:
Longleaf Partners Fund
Statement of Assets and Liabilities, including the schedule of
portfolio investments, as of December 31, 1996 and the related statement of
operations for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial
highlights for the years ended December 31, 1996, 1995, 1994, 1993, 1992,
1991, and 1990, October 31, 1989 and 1988, the two months ended December 31,
1989, and the period from March 24, 1987 (Date of Initial Capitalization)
through October 31, 1987.
Longleaf Partners Small-Cap Fund
Statement of Asset and Liabilities including the schedule of portfolio
investments, as of December 31, 1996 and the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the two years in the period then ended, and the financial highlights for the
years ended December 31, 1996, 1995, 1994, 1993, 1992, 1991, and 1990, the
two months ended December 31, 1989, and the period from December 28, 1988
(Date of Initial Capitalization) through October 31, 1989.
We consent to the inclusion in Part B of the Statement of Additional
Informaiton, constituting part of Post-Effective Amendment NO. 18 to this
Registration Statement on Form N-1A (File No. 33-10472), of our report dated
January 24, 1997 on the audit of the following:
Longleaf Partners Realty Fund
Statement of Asset and Liabilities including the schedule of portfolio
investments, as of December 31, 1996 and the related statement of
operations, the statement of changes in net assets, and the financial
highlights for the year ended December 31, 1996.
We also consent to the reference to our firm under the headings, "Independent
Certified Public Accountants" and "Financial Statements" in Part B of the
Registration Statement, and in the Financial Highlights Tables contained in
Part A of the Registration Statement.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
July 2, 1997
<PAGE> 1
EXHIBIT 14
INDIVIDUAL RETIREMENT ACCOUNT ("IRA") APPLICATION KIT
- ------------------------- --------------------------
---------------------------------------------------------------
[LONGLEAF PARTNERS LOGO]
IRA
APPLICATION
KIT
LONGLEAF
PARTNERS FUNDS
===============================================================
INVESTMENT ADVISOR:
SOUTHEASTERN ASSET MANAGEMENT, INC.
MEMPHIS, TN
PLAN ADMINISTRATIVE AGENT:
NATIONAL FINANCIAL DATA SERVICES
KANSAS CITY, MO
TRUSTEE:
STATE STREET BANK AND TRUST CO.
BOSTON, MA
<PAGE> 2
TABLE OF CONTENTS
GENERAL INFORMATION ABOUT THE IRA
Types of Accounts..............................................................i
Types of Contributions.........................................................i
GENERAL RULES AND INFORMATION
Tax Benefits..................................................................ii
When Can an Account be Opened?................................................ii
Do I Pay Tax on Dividends and Distributions?.................................iii
When May I Make Withdrawals?.................................................iii
What If I Make A Withdrawal Before Age 59 1/2?...............................iii
Automatic Investment Plan....................................................iii
Custodian Fees...............................................................iii
DISCLOSURE STATEMENT
Fees and Expenses..............................................................1
Eligibility....................................................................1
Contributions..................................................................2
For Active Participants........................................................2
Transfers/Rollovers............................................................4
Investments....................................................................5
Withdrawals....................................................................6
Tax Matters....................................................................7
INDIVIDUAL RETIREMENT TRUST ACCOUNT
(Form 5305)....................................................................9
FORMS
Transfer Forms........................................................Back Cover
Application and Beneficiary Forms.....................................Back Cover
HOW TO OPEN A LONGLEAF PARTNERS IRA ACCOUNT
Complete the Application, Beneficiary Form and the Asset Transfer Form at the
back of this booklet and mail to National Financial Data Services (NFDS) at the
address shown on the application. Call NFDS at (800) 488-4191 if you have any
questions.
This booklet is authorized for distribution only when preceded or accompanied by
a current prospectus of Longleaf Partners Funds.
<PAGE> 3
GENERAL INFORMATION ABOUT
THE INDIVIDUAL RETIREMENT
ACCOUNT
TYPES OF IRA ACCOUNTS
- --------------------
REGULAR IRA
Who qualifies? You qualify in any year when you have earnings from employment or
self-employment. You qualify even if you are also covered by a retirement
program of your employer or a Keogh plan. However, if you and/or your spouse are
active participants in such a plan, your deduction for your IRA contribution may
be reduced or eliminated depending on your income. See the Disclosure Statement,
pages 2 and 3.
You may contribute up to $2,000 or 100% of your earned income, whichever is
less. Alimony and separate maintenance payments are treated as earned income for
this purpose.
You may not contribute to your regular IRA for any year if you are over age
70 1/2 before the end of the year.
SPOUSAL IRA
Before 12/31/96. If your spouse has no earned income (or elects to be treated
as having no earned income) and you file a joint return, you may contribute up
to the lesser of $2,250 or 100% of your earned income. The contribution may be
divided between your IRA and your spouse's IRA in any way you decide, so long as
the portion allocated to any one account does not exceed $2,000.
After 1/1/1997. The Small Business Job Protection Act of 1996 increased from
$2,250 to $4,000 the maximum annual contribution by a couple with a non-working
spouse, so long as the portion allocated to any one account does not exceed
$2,000. Consult your tax adviser or call NFDS for more details.
SEP-IRA
Your employer may set up a simplified employee pension plan (SEP) and contribute
to your IRA and the IRA of each other eligible employee up to $30,000 or 15% of
compensation, whichever is less. The employer contribution must be based on a
written formula, which cannot discriminate in favor of officers, shareholders or
self-employed or highly compensated individuals.
If your employer chooses and certain conditions are satisfied, you can elect to
have your salary reduced by no more than an amount specified by law and to have
the reduction contributed to your SEP-IRA, but your deduction may be limited
depending on your income.
Although you may have a SEP-IRA, you can still have a Regular IRA, but your
deduction may be limited depending on your income.
Additional information on SEP-IRA's can be found in IRS Publication 590. Because
of the complexities of this type of IRA, you should consult your tax advisor.
ROLLOVER IRA
If you receive a distribution from the qualified retirement plan of a former
employer, you may be eligible to roll over the distribution to an IRA free of
tax. You may under certain circumstances make a rollover again to the profit
sharing or pension plan of a new employer. If you want to have that right,
however, your rollover IRA derived from an employer's qualified plan must be
kept separate from any other IRA you may have. Qualified retirement plans are
required to withhold 20% of most distributions to you for payment of income
taxes unless your plan balance is transferred directly to an IRA or another
qualified plan. THIS MEANS THAT A DIRECT TRANSFER MAY BE THE PREFERABLE WAY TO
MOVE YOUR QUALIFIED PLAN BALANCE TO A LONGLEAF PARTNERS IRA. See "Direct
Transfer From a Qualified
Retirement Plan" below.
TYPES OF CONTRIBUTIONS
- --------------------
The minimum initial investment for the
Longleaf Partners Funds IRA is $10,000, which must be satisfied primarily by
transferring assets from another IRA or qualified retirement plan.
There are four ways to put money into your Longleaf Partners IRA.
- Direct transfer from another IRA
- Rollover from another IRA
- Direct transfer from a Qualified
Retirement Plan
I
<PAGE> 4
- Annual personal contributions
(regular IRA) or employer contributions (SEP-IRA)
DIRECT TRANSFER FROM ANOTHER IRA
You may make a direct transfer of funds from another IRA to a Longleaf Partners
IRA. The limit of one rollover in any 12-month period does not apply to direct
transfers. The transfer must be directly from your existing IRA to a Longleaf
Partners IRA without having the funds transferred to your possession. To make a
transfer:
1) Follow the procedure for opening an account.
2) Complete the attached Transfer Form to instruct your present custodian or
trustee to transfer the assets of your present account to State Street Bank
and Trust Company as successor trustee. Have your signature guaranteed if
required by your present trustee or custodian.
3) Send the completed Transfer Form, along with the Longleaf Partners IRA
application and beneficiary form, to NFDS at the address on the
application.
4) NFDS and your present custodian or trustee will complete the details of
transferring your funds to your
Longleaf Partners IRA.
ROLLOVER FROM ANOTHER IRA
You may also make a rollover of funds you received from another IRA. However,
a rollover of the same funds you received from one IRA to another may be made no
more than once during a 12-month period. A rollover differs from a direct
transfer in that you take physical possession of the funds being transferred.
Any rollover must be made within 60 days after receipt of the funds from your
previous IRA. Otherwise, the distribution will be subject to tax for the year
you receive it.
DIRECT TRANSFER FROM A QUALIFIED RETIREMENT PLAN
You may make a direct transfer of funds from your employer's qualified
retirement plan to a Longleaf Partners IRA if you are terminating your
employment or the plan is being terminated. Retirement plans are required to
transfer distributions directly to an IRA if the employee directs, and are also
required to withhold 20% of the distribution for taxes if a distribution is not
transferred directly to an IRA or another qualified plan.
To make a direct transfer from a retirement plan into an IRA, follow the same
steps for a direct transfer from another IRA, discussed above. Your employer may
require special forms, and you should consult your plan administrator for
information on those requirements.
ANNUAL CONTRIBUTIONS
See page 2 of the attached Disclosure Statement under "Contributions".
GENERAL RULES AND
INFORMATION
TAX BENEFITS
You may be able to deduct part or all of the yearly contributions to your IRA
from your gross income, depending on whether you and/or your spouse are active
participants in a retirement program of your employer or a Keogh plan, and
depending on your income. See the Disclosure Statement, page 2. You may claim
such a deduction even if you do not itemize your deductions.
The Longleaf Partners IRA is in the form of IRA Form 5305, which is
automatically deemed acceptable by the Internal Revenue Service. The approval by
the IRS relates only to the provisions of the account and not to the merits of
using the account as a retirement plan.
WHEN CAN AN ACCOUNT BE OPENED?
You can open your account and make a contribution for any year at any time up to
the due date of your federal income tax return for that year (excluding
extensions). Rollovers and direct transfers from other IRAs or retirement plans
can be made at any time during the year, so long as a rollover contribution is
made within 60 days after the distribution from the other IRA or retirement plan
is received by you. A distribution from a qualified plan may be subject to
income tax withholding unless the distribu-
II
<PAGE> 5
tion is transferred directly to an IRA. See "Rollover IRA" and "Direct Transfer
From a Qualified Plan" above.
DO I PAY TAX ON DIVIDENDS AND DISTRIBUTIONS?
No, all dividends and distributions accumulate tax-free. Tax is paid when you
(or your spouse, if a spousal account is elected) withdraw your retirement
benefits. See the Disclosure Statement, page 8, "Are the Earnings on my IRA
Funds Taxed?"
WHEN MAY I MAKE WITHDRAWALS?
Withdrawals can start after age 59 1/2 and MUST start by April 1 after the end
of the year in which you (or your spouse, in the case of a spousal account)
reach age 70 1/2. Withdrawals can be made in a lump sum or in installments. The
Internal Revenue Code imposes complex limits on the length of time over which
withdrawals from an IRA can be made. See the Disclosure Statement, page 6.
Withdrawals are subject to tax as ordinary income, except for any portion rolled
over to another IRA or considered to be a return of nondeductible contributions.
See Disclosure Statement, page 6.
WHAT IF I MAKE A WITHDRAWAL BEFORE AGE 59 1/2?
A withdrawal can be made without penalty before age 59 1/2 only in case of death
or permanent disability, or in the case of certain periodic payments. Otherwise,
a withdrawal before age 59 1/2 is a premature withdrawal and is subject to a
penalty tax of 10% of the portion that is included in your income, in addition
to the regular income tax. But neither the regular income tax nor the 10%
penalty tax applies to any portion rolled over to another IRA within 60 days or
transferred directly to another IRA.
AUTOMATIC INVESTMENT PLAN
The Longleaf Partners, Longleaf Partners Small-Cap and Longleaf Partners Realty
have an "Automatic Investment Plan" that permits you to buy shares of either
Fund automatically on a monthly basis through electronic funds transfer. Under
such a plan the initial contribution to an IRA must be at least $10,000 which
must be primarily satisfied by a rollover or direct transfer from another IRA or
a qualified retirement plan. There is no minimum on subsequent contributions.
Total contributions per year are limited as discussed in Disclosure Statement,
page 2. The form for establishing such a plan may be obtained from NFDS by
calling (800) 488-4191.
CUSTODIAN FEES
Set-up fee (one-time).....................................................$15.00
Annual maintenance fee....................................................$10.00
Note: Each IRA account is subject to the above fee, including Spousal IRAs and
multiple accounts for the same participant.
If you do not add the $10.00 maintenance fee and $15.00 set-up fee to your
initial contribution, it will be deducted from your account. The $10.00 annual
maintenance fee will be deducted yearly in the third or fourth quarter, unless
paid separately, as billed.
The Longleaf Partners, Longleaf Partners Small-Cap and Longleaf Partners Realty
are series of Longleaf Partners Funds Trust, which sponsors the Longleaf
Partners Funds IRA Plan. The above brief outline of the Plan is not intended as
a full explanation of the Individual Retirement Plan, but we hope that we have
answered some of the questions that may occur to you.
WE URGE YOU TO READ THE ENCLOSED MATERIAL THOROUGHLY, AS WELL AS THE FUND
PROSPECTUS.
III
<PAGE> 6
LONGLEAF PARTNERS FUNDS
INDIVIDUAL RETIREMENT
ACCOUNT
DISCLOSURE STATEMENT
ESTABLISHING YOUR IRA
This disclosure statement contains information about your Individual Retirement
Account with State Street Bank and Trust Company as Trustee. Your IRA gives you
several tax benefits. Earnings on the assets held in your IRA are not subject to
federal income tax until withdrawn by you. You may be able to deduct all or part
of your IRA contribution on your federal income tax return. State income tax
treatment of your IRA may differ from federal treatment; ask your state tax
department or your personal tax advisor for details.
All IRAs must meet certain requirements. Contributions generally must be made in
cash. The IRA trustee or custodian must be a bank or other person who has been
approved by the Secretary of the Treasury. Your contributions may not be
invested in life insurance or be commingled with other property except in a
common trust or investment fund. Your interest in the account must be
nonforfeitable at all times. You may obtain further information on IRAs from any
district office of the Internal Revenue Service.
You may revoke a newly established IRA at any time within seven days after the
date on which you receive this Disclosure Statement. An IRA established more
than seven days after the date of your receipt of this Disclosure Statement may
not be revoked.
To revoke your IRA, mail or deliver a written notice of revocation to the
Trustee at the address which appears at the end of this Disclosure Statement.
Mailed notice will be deemed given on the date that it is postmarked (or, if
sent by certified or registered mail, on the date of certification or
registration). If you revoke your IRA within the seven-day period, you are
entitled to a return of the entire amount you contributed into your IRA, without
adjustment for such items as sales charges, administrative expenses or
fluctuations in market value.
- ----------------------------------------
FEES AND EXPENSES
TRUSTEE'S FEES
The following is a list of the fees charged by the Trustee for maintaining your
IRA.
Set-up fee per new account
per fund: $15
Annual Maintenance Fee
per account per fund: $10
In event of Termination, Rollover, or Transfer of Account to Successor Trustee
the $10 maintenance fee will be deducted from the account if the fee has not
already been paid.
GENERAL FEE POLICIES
- Fees may be paid by you directly or the Trustee may deduct them from your
IRA.
- Fees may be changed upon 30 days written notice to you.
- The full annual maintenance fee will be charged for any calendar year during
which you have an IRA with us. This fee is not prorated for periods of less
than one full year.
OTHER CHARGES
- Be sure to read carefully the current prospectus of any Fund you are
considering as an investment for your IRA for a description of any other
applicable charges.
- ----------------------------------------
ELIGIBILITY
WHAT ARE THE ELIGIBILITY REQUIREMENTS FOR AN IRA?
You are eligible to establish and contribute to an IRA for a year if:
- You received compensation (or earned income if you are self-employed) during
the year for personal services you rendered. If you received taxable alimony,
this is treated like compensation for IRA purposes.
- You did not reach age 70 1/2 during the year.
1
<PAGE> 7
ADJUSTED GROSS INCOME
CAN I CONTRIBUTE TO AN IRA FOR MY SPOUSE?
For each year before the year when your spouse attains age 70 1/2, you can
contribute to a separate IRA for your spouse, regardless of whether your spouse
had any compensation or earned income in that year. This is called a "spousal
IRA." To make a contribution to a spousal IRA for your spouse, you must file a
joint tax return and your spouse must either have no compensation or earned
income or must elect to be treated as having no compensation or earned income
for that year. For a spousal IRA, your spouse must set up a different IRA,
separate from yours, to which you contribute.
- ----------------------------------------
CONTRIBUTIONS
WHEN CAN I MAKE CONTRIBUTIONS TO AN IRA?
You may make a contribution to your existing IRA or establish a new IRA for a
taxable year by the due date (NOT including any extensions) for your federal
income tax return for the year. Usually this is April 15 of the following year.
HOW MUCH CAN I CONTRIBUTE TO MY IRA?
For each year when you are eligible (see above), you can contribute up to the
lesser of $2,000 or 100% of your compensation (or earned income, if you are
self-employed). However, under the tax laws, all or a portion of your
contribution may not be deductible.
Before 12/31/96. If you and your spouse have spousal IRAs, you may contribute
each year up to $2,250 from your compensation (or earned income) between both
spousal IRAs. You may divide the contribution between the spousal IRAs as you
wish, as long as you do not contribute more than $2,000 to either of the spousal
IRAs.
After 1/1/1997. The Small Business Job Protection Act of 1996 increased from
$2,250 to $4,000 the maximum annual contribution by a couple with a non-working
spouse, so long as the portion allocated to any one account does not exceed
$2,000. Consult your tax adviser or call NFDS for more details.
HOW DO I KNOW IF MY CONTRIBUTION IS TAX DEDUCTIBLE?
The deductibility of your contribution depends upon whether you are (or your
spouse is) an active participant in any employer-sponsored retirement plan. If
neither you nor your spouse is an active participant, the entire IRA
contribution is deductible.
If either you or your spouse is an active participant, your IRA contribution may
still be completely or partly deductible on your tax return. This depends on the
amount of your income.
HOW DO I DETERMINE MY OR MY SPOUSE'S "ACTIVE PARTICIPANT" STATUS?
Your Form W-2 (or your spouse's W-2) should indicate if you were an active
participant in an employer-sponsored retirement plan for a year. If you have a
question, you should ask your employer or the plan administrator.
In one situation, your spouse's "active participant" status will not affect the
deductibility of your contributions to your IRA. This rule applies only if you
and your spouse file separate tax returns for the taxable year and you lived
apart at all times during the taxable year.
WHAT ARE THE DEDUCTION RESTRICTIONS?
The portion of your contribution that is deductible depends upon your filing
status and the amount of your adjusted gross income ("AGI"). The following table
shows the deduction rules.
- ----------------------------------------
FOR ACTIVE PARTICIPANTS
<TABLE>
<CAPTION>
<C> <C> <C> <C>
- -----------------------------------
IF
YOU
ARE IF YOU ARE THEN YOUR
SINGLE MARRIED IRA
FILING CONTRIBUTION
JOINTLY IS
-------------------------------
Up
to Up to Fully
$25,000 $40,000 Deductible
-------------------------------
Over Over Partly
$25,000 $40,000 Deductible
but
less but less
than than
$35,000 $50,000
-------------------------------
$35,000 $50,000 Not
and
up and up Deductible
- -----------------------------------
</TABLE>
2
<PAGE> 8
HOW DO I CALCULATE MY DEDUCTION IF I FALL IN THE "PARTLY DEDUCTIBLE" RANGE?
If your AGI falls in the partly deductible range, you must calculate the portion
of your contribution that is deductible. To do this, multiply your contribution
by a fraction. The numerator is the amount by which your AGI exceeds the lower
limit of the partly deductible range ($25,000 if single, or $40,000 if married
filing jointly). The denominator is $10,000. Subtract this from your
contribution and then round up to the nearest $10. The deductible amount is the
greater of the amount calculated or $200 (provided you contributed at least
$200). If your contribution was less than $200, then the entire contribution is
deductible.
For example, assume that you make a $2,000 contribution to your IRA in a year in
which you are an active participant in your employer's retirement plan. Also
assume that your AGI for the year is $47,555 and you are married, filing
jointly. You would calculate the deductible portion of your contribution this
way:
1. The amount by which your AGI exceeds the lower limit of the partly
deductible range: (47,555-40,000) = 7,555
2. Divide this by 10,000: 7,555 =
10,000
3. Multiply this by your contribution:
0.7555 x $2,000 = $1,511
4. Subtract this from your contributions:
($2,000 - $1,511) = $489
5. Round this up to the nearest $10: = $490
6. Your deductible contribution is the greater of this amount or $200.
Even though part or all of your contribution is not deductible, you may still
contribute to your IRA up to the limit on contributions ($2,000 or $2,250 for
spousal IRAs). When you file your tax return for the year, you must designate
the amount of non-deductible IRA contributions for the year. See IRS Form 8606.
HOW DO I DETERMINE MY AGI?
AGI is your gross income minus those deductions which are available to all
taxpayers even if they do not itemize. Instructions to calculate your AGI are
provided with your income tax Form 1040 or 1040A.
WHAT HAPPENS IF I CONTRIBUTE MORE THAN ALLOWED TO MY IRA?
The maximum contribution you can make to an IRA is $2,000 ($2,250 including a
spousal IRA) or 100% of compensation or earned income, whichever is less. Any
amount contributed to the IRA above the maximum is considered an "excess
contribution." The excess is calculated using your CONTRIBUTION limit, not the
DEDUCTIBLE limit. An excess contribution is subject to excise tax of 6% for each
year it remains in the IRA.
HOW CAN I CORRECT AN EXCESS CONTRIBUTION?
Excess contributions may be corrected without paying a 6% penalty. To do so, you
must withdraw the excess and any earnings on the excess before the due date
(including extensions) for filing your federal income tax return for the year
for which you made the excess contribution. A deduction should not be taken for
any excess contribution. Earnings on the amount withdrawn must also be
withdrawn. The earnings must be included in your income for the tax year for
which the contribution was made.
WHAT HAPPENS IF I DON'T CORRECT THE EXCESS CONTRIBUTION BY THE TAX RETURN DUE
DATE?
Any excess contribution withdrawn after the tax return due date (including any
extensions) for the year for which the contribution was made will be subject to
the 6% excise tax. There will be an additional 6% excise tax for each year the
excess remains in your account.
Under limited circumstances, you may correct an excess contribution after tax
filing time by withdrawing the excess contribution (leaving the earnings in the
account). This withdrawal will not be included in income nor will it be subject
to any premature withdrawal penalty if (1) your contributions to all IRAs do not
exceed $2,250 and (2) you did not take a deduction for the excess amount (or you
file an amended return (Form 1040X) which removes the excess deduction).
3
<PAGE> 9
HOW ARE EXCESS CONTRIBUTIONS TREATED IF NONE OF THE PRECEDING RULES APPLY?
Unless an excess contribution qualifies for the special treatment outlined
above, the excess contribution and any earnings on it withdrawn after tax filing
time will be included in taxable income and will be subject to a 10% premature
withdrawal penalty if you deducted the excess contribution and are not age
59 1/2 at the time of the withdrawal. No deduction will be allowed for the
excess contribution for the year in which it is made.
Excess contributions may be corrected in a subsequent year to the extent that
you contribute less than your maximum amount. As the prior excess contribution
is reduced or eliminated, the 6% excise tax will become correspondingly reduced
or eliminated for subsequent tax years. Also, you may be able to take an income
tax deduction for the amount of excess that was reduced or eliminated, depending
on whether you would be able to take a deduction if you had instead contributed
the same amount.
- ----------------------------------------
TRANSFERS/ROLLOVERS
CAN I TRANSFER OR ROLL OVER A DISTRIBUTION I RECEIVE FROM MY EMPLOYER'S
RETIREMENT PLAN INTO AN IRA?
Almost all distributions from employer plans or 403(b) arrangements (for
employees of tax-exempt employers) are eligible for roll-
over to an IRA. The main exceptions are:
- payments over the lifetime or life expectancy of the participant (or
participant and a designated beneficiary),
- installment payments for a period of 10 years or more,
- required distributions starting at age 70 1/2, and
- payments of employee after-tax contributions.
If you are eligible to receive a distribution from a tax qualified retirement
plan as a result of, for example, termination of employment, plan
discontinuance, or retirement, all or part of the distribution may be
transferred directly into your IRA. This is called a "direct rollover." Or, you
may receive the distribution and make a regular rollover to your IRA within 60
days. By making a direct rollover or a regular rollover, you can defer income
taxes on the amount rolled over until you subsequently make withdrawals from
your IRA.
The maximum amount you may roll over is the amount of employer contributions and
earnings distributed. You may not roll over any after-tax employee contributions
you made to the employer retirement plan. If you are over age 70 1/2 and are
required to take minimum distributions under the tax laws, you may not roll over
any amount required to be distributed to you under the minimum distribution
rules. Also, if you are receiving periodic payments over your or your designated
beneficiary's life expectancy or for a period of at least 10 years, you may not
roll over these payments. A regular rollover to an IRA must be completed within
60 days after the distribution from the employer retirement plan to be valid.
NOTE: A qualified plan administrator MUST WITHHOLD 20% OF YOUR
DISTRIBUTION for federal income taxes UNLESS you elect a direct rollover. Your
plan is required to provide you with information about direct and regular
rollovers and withholding taxes before you receive your distribution and must
comply with your directions to make a direct rollover.
The rules governing rollovers are complicated. Be sure to consult your tax
advisor or the IRS if you have a question about rollovers.
ONCE I HAVE ROLLED OVER A PLAN DISTRIBUTION INTO AN IRA, CAN I SUBSEQUENTLY ROLL
OVER INTO ANOTHER EMPLOYER'S QUALIFIED RETIREMENT PLAN?
Yes. Part or all of an eligible distribution received from a qualified plan may
be transferred to another qualified plan through the medium of an IRA. However,
the IRA must have no assets other than those which were previously distributed
to you from the qualified plan. Specifically, the IRA cannot contain any regular
IRA contributions. Also, the new qualified plan must accept rollovers.
4
<PAGE> 10
HOW OFTEN CAN I MAKE A REGULAR ROLLOVER FROM MY IRA TO ANOTHER IRA?
You may make a regular rollover from one IRA to another only once in any 365-day
period. This rule applies to each individual IRA.
WHAT HAPPENS IF I COMBINE ROLLOVER CONTRIBUTIONS WITH MY REGULAR CONTRIBUTIONS
IN ONE IRA?
If you wish to make both a regular annual contribution and a rollover
contribution, you may wish to open two separate IRAs by completing two adoption
agreements and two sets of forms. You should consult a tax advisor before making
your regular contribution to the IRA you established with
rollover contributions (or make a rollover contribution to the IRA to which you
make your regular contributions). This is because combining your regular annual
contributions and rollover contributions originating from an employer plan
distribution would prohibit the future rollover of the assets of the IRA into
another qualified plan.
HOW DO ROLLOVERS AFFECT MY CONTRIBUTION OR DEDUCTION LIMITS?
Rollover contributions, if properly made, do not count toward the maximum
contribution. Also, rollovers are not deductible and they do not affect your
deduction limits as described above.
- ----------------------------------------
INVESTMENTS
HOW ARE MY IRA CONTRIBUTIONS INVESTED?
You control the investment of contributions to your IRA. Investments must be in
one or more of the Fund(s) available from time to time as listed in the Adoption
Agreement for your IRA or in an investment selection form included with your IRA
Adoption Agreement. You direct the investment of your IRA by giving your
investment instructions to the Transfer Agent for the Fund(s). Since you control
the investment of your IRA, you are responsible for any losses; neither the
Trustee, nor the Transfer Agent has any responsibility for any loss or
diminution in value occasioned by your exercise of investment control.
Transactions for your IRA will generally be effected at the applicable public
offering price or net asset value for shares of the Fund(s) involved next
established after the Transfer Agent receives proper investment instructions
from you; consult the current prospectus for the Fund(s) involved for additional
information.
Before making any investment, read carefully the current prospectus for any Fund
you are considering as an investment for your IRA. The prospectus will contain
information about the Fund's investment objectives and policies, as well as any
minimum initial investment or minimum balance requirements and any sales,
redemption or other charges.
Because you control the selection of investments for your IRA, the growth in
value of your IRA cannot be guaranteed or projected.
ARE THERE ANY RESTRICTIONS ON THE USE OF MY IRA ASSETS?
The tax-exempt status of your IRA will be revoked if you engage in any of the
prohibited transactions listed in Section 4975 of the tax code. The fair market
value of your IRA will be included in your taxable income in the year in which
such prohibited transaction takes place. The fair market value of your IRA may
also be subject to a 10% penalty tax as a premature withdrawal if you have not
yet reached the age of 59 1/2.
Any investment in a collectible (for example, rare stamps) by your IRA is
treated as a taxable withdrawal; the only exception involves certain types of
government-sponsored coins.
WHAT IS A PROHIBITED TRANSACTION?
Generally, a prohibited transaction is any improper use of the assets in your
IRA. Some examples of prohibited transactions are:
- Direct or indirect sale or exchange of property between you and your IRA.
- Transfer of any property from your IRA to yourself or from yourself to your
IRA.
Your IRA could lose its tax exempt status if you use all or part of your
interest in your IRA as security for a loan or borrow any
5
<PAGE> 11
money from your IRA. Any portion of your IRA used as security for a loan will be
taxed as ordinary income in the year in which the money is borrowed. If you are
under age 59 1/2, this amount will also be subject to a 10% penalty tax as a
premature distribution.
- ----------------------------------------
WITHDRAWALS
WHEN CAN I MAKE WITHDRAWALS FROM MY IRA?
You may withdraw from your IRA at any time. However, withdrawals before age
59 1/2 may be subject to a 10% penalty tax in addition to regular income taxes
(see below).
WHEN MUST I START MAKING WITHDRAWALS?
If you have not withdrawn your entire IRA by the April 1 following the year in
which you reach 70 1/2, you must make minimum withdrawals in order to avoid
penalty taxes. The minimum withdrawal amount is determined by dividing the
balance in your IRA (or IRAs) by your life expectancy or the combined life
expectancy of you and your designated beneficiary. The minimum withdrawal rules
are complex. Consult your tax advisor for assistance.
The penalty tax is 50% of the difference between the minimum withdrawal amount
and your actual withdrawals during a year. The IRS may waive or reduce the
penalty tax if you can show that your failure to make the required minimum
withdrawals was due to reasonable cause and you are taking reasonable steps to
remedy the problem.
HOW ARE WITHDRAWALS FROM MY IRA TAXED?
Except for non-deductible contributions, amounts withdrawn by you are included
in your gross income in the taxable year that you receive them, and are taxable
as ordinary income. Lump sum withdrawals from an IRA are not eligible for
averaging treatment available to certain lump sum distributions from qualified
employer retirement plans.
Since the purpose of the IRA is to accumulate funds for retirement, your receipt
or use of any portion of your IRA before you attain age 59 1/2 generally will be
considered as an early withdrawal and subject to a 10% penalty tax.
The 10% penalty tax for early withdrawal will not apply if the distribution
- was a result of your death or disability, or
- is one of a scheduled series of substantially equal periodic payments for
your life or life expectancy (or the joint lives or life expectancies of you
and your beneficiary).
If there is an adjustment to the scheduled series of payments, the 10% penalty
tax will apply. For example, if you begin receiving payments at age 50 under a
withdrawal program providing for substantially equal payments over your life
expectancy, and at age 58 you elect to receive the remaining amount in your IRA
in a lump-sum, the 10% penalty tax will apply to the lump sum and to the amounts
previously paid to you before age 59 1/2.
HOW ARE NONDEDUCTIBLE CONTRIBUTIONS TAXED WHEN THEY ARE WITHDRAWN?
A withdrawal of nondeductible contributions (not including earnings) will be
tax-free. However, if you made both deductible and nondeductible IRA
contributions, then each distribution will be treated as partly a return of your
nondeductible contributions (not taxable) and partly a distribution of
deductible contributions and earnings (taxable). The nontaxable amount is the
portion of the amount withdrawn which bears the same ratio as your total
nondeductible IRA contributions bear to the total balance of all your IRAs
(including rollover IRAs and SEPs).
For example, assume that you made the following IRA contributions:
<TABLE>
<CAPTION>
Year Deductible Nondeductible
---- ---------- -------------
<C> <C> <C>
1991 $2,000
1992 $2,000
1993 $1,000 $1,000
1994 $1,000
------ ------
$5,000 $2,000
</TABLE>
6
<PAGE> 12
In addition assume that your IRA has total investment earnings through 1995 of
$1,000. During 1995 you withdraw $500. Your total account balance as of 12-31-95
is $7,500 as shown below.
Deductible Contributions $5,000
Nondeductible
Contributions $2,000
Earnings On IRAs $1,000
Less 1995 Withdrawal $ 500
- ----------------------------------------
Total Account Balance
as of 12/31/95 $7,500
To determine the nontaxable portion of your 1995 withdrawal, the total 1995
withdrawal ($500) must be multiplied by a fraction. The numerator of the
fraction is the total of all nondeductible contributions remaining in the
account before the 1995 withdrawal ($2,000). The denominator is the total
account balance as of 12-31-95 ($7,500) plus the 1995 withdrawal ($500) or
$8,000. The calculation is:
Total Remaining
Nondeductible $2,000 X $500
Contributions $8,000
- ----------------------------------------
Total Account Balance = $ 125
Thus, $125 of the $500 withdrawal in 1995 will not be included in your taxable
income. The remaining $375 will be taxable for 1995. In addition, for future
calculations the remaining nondeductible contribution total will be $2,000 minus
$125, or $1,875.
A loss in your IRA investment may be deductible. You should consult your tax
advisor for further details on the appropriate calculation for this deduction if
applicable.
- ----------------------------------------
TAX MATTERS
WHAT IRA REPORTS DOES THE TRUSTEE ISSUE?
The Trustee will report all withdrawals to the IRS and the recipient on the
appropriate form. For reporting purposes, a direct transfer of assets to a
successor trustee or trustee is not considered a withdrawal.
The Trustee will report to the IRS the year-end value of your account and the
amount of any rollover or accumulation contribution made during a calendar year,
as well as the tax year for which a contribution is made. Unless the Trustee
receives an indication from you to the contrary, it will treat any amount as a
contribution for the tax year in which it is received. It is most important that
a contribution between January and April 15th for the prior year be clearly
designated as such.
WHAT TAX INFORMATION MUST I REPORT TO THE IRS?
You must file Form 5329 with the IRS for each taxable year for which you made an
excess contribution, or you take a premature withdrawal, or you withdraw less
than the required minimum amount from your IRA.
You must also report each nondeductible contribution to the IRS by designating
it a nondeductible contribution on your tax return. Use Form 8606. In addition,
for any year in which you make a nondeductible contribution or take a
withdrawal, you must include additional information on your tax return. The
information required includes: (1) the amount of your nondeductible
contributions for that year; (2) the amount of withdrawals from IRAs in that
year; (3) the amount by which your total nondeductible contributions for all the
years exceed the total amount of your distributions previously excluded from
gross income; and (4) the total value of all your IRAs as of the end of the
year. If you fail to report any of this information, the IRS will assume that
all your contributions were deductible. This will result in the taxation of the
portion of your withdrawals that should be treated as a nontaxable return of
your nondeductible contributions.
ARE IRA WITHDRAWALS SUBJECT TO WITHHOLDING?
Federal income tax will be withheld at a flat rate of 10% from any withdrawal
from your IRA, unless you elect not to have tax withheld. Withdrawals from an
IRA are not subject to the mandatory 20% income tax withholding that applies to
most distributions from qualified plans or 403(b) accounts that are not directly
rolled over to another plan or IRA.
7
<PAGE> 13
ARE THE EARNINGS ON MY IRA FUNDS TAXED?
Any earnings on investments held in your IRA are generally exempt from federal
income taxes and will not be taxed until withdrawn by you, unless the tax exempt
status of your IRA is revoked.
ACCOUNT TERMINATION
You may terminate your IRA at any time after its establishment by sending a
complete withdrawal letter, or a transfer authorization form, to:
NFDS
P.O. Box 419929
Kansas City, MO 64141-6929
Your IRA with State Street Bank will terminate upon the first to occur of the
following:
- The date your properly executed withdrawal letter (as described above) is
received and accepted by the Trustee or, if later, the termination date
specified in the withdrawal form.
- The date the IRA ceases to qualify under the tax code. This will be deemed a
termination.
- The transfer of the IRA to another trustee.
Any outstanding fees must be received prior to such a termination of your
account.
The amount you receive from your IRA will be treated as a withdrawal, and thus
the rules relating to IRA withdrawals will apply. For example, if the IRA is
terminated or amounts are withdrawn before you reach age 59 1/2, the 10% early
withdrawal penalty may apply on the amount you receive.
IRA DOCUMENTS
The terms contained in Articles I to VII of the State Street Bank and Trust
Company Individual Retirement Trust Account document have been promulgated by
the IRS in Form 5305 for use in establishing an IRA trust account that meets the
requirements of the tax laws for a valid IRA. This IRS approval relates only to
the form of Articles I to VII and is not an approval of the merits of the IRA or
of any investment permitted by the IRA.
Longleaf Partners Funds
c/o NFDS, Transfer Agent
P.O. Box 419929
Kansas City, MO 64141-6929
8
<PAGE> 14
STATE STREET BANK AND
TRUST COMPANY INDIVIDUAL
RETIREMENT TRUST ACCOUNT
The following provisions of Articles I to VII are in the form promulgated by the
Internal Revenue Service in Form 5305 for use in establishing an individual
retirement trust account.
ARTICLE I.
The Trustee may accept additional cash contributions on behalf of the Grantor
for a tax year of the Grantor. The total cash contributions are limited to
$2,000 for the tax year unless the contribution is a rollover contribution
described in section 402(c) (but only after December 31, 1992), 403(a)(4),
403(b)(8), 408(d)(3), or an employer contribution to a simplified employee
pension plan as described in section 408(k). Rollover contributions before
January 1, 1993 include rollovers described in section 402(a)(5), 402(a)(6),
402(a)(7),
403(a)(4), 403(b)(8) or 408(d)(3) of the
Code or an employer contribution to a simplified employee pension plan as
described in section 408(k).
ARTICLE II.
The Grantor's interest in the balance in the trust account is nonforfeitable.
ARTICLE III.
1. No part of the trust funds may be invested in life insurance contracts, nor
may the assets of the trust account be commingled with other property
except in a common trust fund or common investment fund (within the meaning
of section 408(a)(5) of the Code).
2. No part of the trust funds may be invested in collectibles (within the
meaning of section 408(m)) except as otherwise permitted by section
408(m)(3) which provides an exception for certain gold and silver coins and
coins issued under the laws of any state.
ARTICLE IV.
1. Notwithstanding any provisions of this agreement to the contrary, the
distribution of the Grantor's interest in the trust account shall be made
in accordance with the following requirements and shall otherwise comply
with section 408(a)(6) and Proposed Regulations section 1.408-8, including
the
incidental death benefit provisions of Proposed Regulations section
1.401(a)(9)-2, the provisions of which are incorporated by reference.
2. Unless otherwise elected by the time distributions are required to begin to
the Grantor under paragraph 3, or to the surviving spouse under paragraph
4, other than in the case of a life annuity, life expectancies shall be
recalculated annually. Such election shall be irrevocable as to the Grantor
and the surviving spouse and shall apply to all subsequent years. The life
expectancy of a nonspouse beneficiary may not be recalculated.
3. The Grantor's entire interest in the trust account must be, or begin to be,
distributed by the Grantor's required beginning date, the April 1 following
the calendar year end in which the Grantor reaches age 70 1/2. By that
date, the Grantor may elect, in a manner acceptable to the Trustee, to have
the balance in the custodial account distributed in:
(a) A single-sum payment.
(b) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the life of the Grantor.
(c) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the joint and last survivor lives of the
Grantor and his or her designated beneficiary.
(d) Equal or substantially equal annual payments over a specified period that
may not be longer than the Grantor's life expectancy.
9
<PAGE> 15
(e) Equal or substantially equal annual payments over a specified period that
may not be longer than the joint life and last survivor expectancy of the
Grantor and his or her designated beneficiary.
4. If the Grantor dies before his or her entire interest is distributed to him
or her, the entire remaining interest will be distributed as follows:
(a) If the Grantor dies on or after distribution of his or her interest has
begun, distribution must continue to be made in accordance with paragraph
3.
(b) If the Grantor dies before distribution of his or her interest has begun,
the entire remaining interest will, at the election of the Grantor or, if
the Grantor has not so elected, at the election of the beneficiary or
beneficiaries, either
(i) Be distributed by the December 31 of the year containing the fifth
anniversary of the Grantor's death, or
(ii) Be distributed in equal or substantially equal payments over the life or
life expectancy of the designated beneficiary or beneficiaries starting by
December 31 of the year following the year of the Grantor's death. If,
however, the beneficiary is the Grantor's surviving spouse, then this
distribution is not required to begin before December 31 of the year in
which the Grantor would have turned age 70 1/2.
(c) Except where distribution in the form of an annuity meeting the
requirements of section 408(b)(3) and its related regulations has
irrevocably commenced, distributions are treated as having begun on the
Grantor's required beginning date, even though payments may actually have
been made before that date.
(d) If the Grantor dies before his or her entire interest has been distributed
and if the beneficiary is other than the surviving spouse, no additional
cash contributions or rollover contributions may be accepted in the
account.
5. In the case of distribution over life expectancy in equal or substantially
equal annual payments, to determine the minimum annual payment for each
year, divide the Grantor's entire interest in the Trust account as of the
close of business on December 31 of the preceding year by the life
expectancy of the Grantor (or the joint life and last survivor expectancy
of the Grantor and the Grantor's designated beneficiary, or the life
expectancy of the designated beneficiary, whichever applies.) In the case
of distributions under paragraph 3, determine the initial life expectancy
(or joint life and last survivor expectancy) using the attained ages of the
Grantor and designated beneficiary as of their birthdays in the year the
Grantor reaches age 70 1/2. In the case of a distribution in accordance
with paragraph 4(b)(ii), determine life expectancy using the attained age
of the designated beneficiary as of the beneficiary's birthday in the year
distributions are required to commence.
6. The owner of two or more individual retirement accounts may use the
"alternative method" described in Notice 88-38, 1988-l C.B. 524, to satisfy
the minimum distribution requirements described above. This method permits
an individual to satisfy these requirements by taking from one individual
retirement account the amount required to satisfy the requirement for
another.
ARTICLE V.
1. The Grantor agrees to provide the Trustee with information necessary for
the Trustee to prepare any reports required under section 408(i) and
Regulations sections 1.408-5 and 1.408-6.
2. The Trustee agrees to submit reports to the Internal Revenue Service and
the Grantor as prescribed by the Internal Revenue Service.
ARTICLE VI.
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through III and this sentence will be controlling. Any
additional articles that are not consistent with section 408(a) and the related
regulations will be invalid.
10
<PAGE> 16
ARTICLE VII.
This agreement will be amended from time to time to comply with the provisions
of the Code and related regulations. Other amendments may be made with the
consent of the persons whose signatures appear on the Adoption Agreement.
ARTICLE VIII.
1. As used in this Article VIII the following terms have the following
meanings:
"Trustee" means State Street Bank and Trust Company.
"Fund" means a mutual fund or registered investment company which is
specified in the Adoption Agreement, or which is designated by the
Distributor named in the Adoption Agree
ment, as being available as an
investment for the trust account; provided, however, that such a mutual
fund or registered investment company must be legally offered for sale in
the state of the Grantor's residence in order to be a Fund hereunder.
"Distributor" means the entity which has a contract with the Fund(s) to
serve as distributor of the shares of such Fund(s).
In any case where there is no Distributor, the duties assigned hereunder to
the Distributor may be performed by the Fund(s) or by an entity that has a
contract to perform management or investment advisory services for the
Fund(s).
"Service Company" means any entity employed by the Trustee or the
Distributor, including the transfer agent for the Fund(s), to perform
various administrative duties of either the Trustee or the Distributor.
In any case where there is no Service Company, the duties assigned
hereunder to the Service Company will be performed by the Distributor (if
any) or by an entity specified in the second preceding paragraph.
2. The Grantor may revoke the trust account established hereunder by mailing
or delivering a written notice of revocation to the Trustee within seven
days after the Grantor receives the Disclosure Statement related to the
trust account. Mailed notice is treated as given to the Trustee on date of
the postmark (or on the date of Post Office certification or registration
in the case of notice sent by certified or registered mail). Upon timely
revocation, the Grantor's initial contribution will be returned, without
adjustment for administrative expenses, commissions or sales charges,
fluctuations in market value or other changes.
3. All contributions to the trust account shall be invested and reinvested in
full and fractional shares of one or more Funds. Such investments shall be
made in such proportions and/or in such amounts as Grantor from time to
time in the Adoption Agreement or by other written notice to the Service
Company (in such form as may be acceptable to the Service Company) may
direct.
The Service Company shall be responsible for promptly transmitting all
investment directions by the Grantor for the purchase or sale of shares of
one or more Funds hereunder to the Funds' transfer agent for execution.
However, if investment directions with respect to the investment of any
contribution hereunder are not received from the Grantor as required or,
if received, are unclear or incomplete in the opinion of the Service
Company, the contribution will be returned to the Grantor without
liability for interest or for loss of income or appreciation. If any
directions or other orders by the Grantor with respect to the sale or
purchase of shares of one or more Funds for the custodial account are
unclear or incomplete in the opinion of the Service Company, the Service
Company will refrain from carrying out such investment directions or from
executing any such sale or purchase, without liability for loss of income
or for appreciation or depreciation of any
11
<PAGE> 17
asset, pending receipt of clarification or completion from the Grantor.
All investment directions by Grantor will be subject to any minimum
initial or additional investment or minimum balance rules applicable to a
Fund as described in its prospectus.
All dividends and capital gains or other distributions received on the
shares of any Fund held in the Grantor's account shall be retained in the
account and (unless received in additional shares) shall be reinvested in
full and fractional shares of such Fund.
4. Subject to the minimum initial or additional investment, minimum balance
and other exchange rules applicable to a Fund, the Grantor may at any time
direct the Service Company to exchange all or a specified portion of the
shares of a Fund in the Grantor's account for shares and fractional shares
of one or more other Funds. The Grantor shall give such directions by
written or telephonic notice acceptable to the Service Company, and the
Service Company will process such directions as soon as practicable after
receipt thereof (subject to the second paragraph of Section 3 of this
Article VIII).
5. Any purchase or redemption of shares of a Fund for or from the Grantor's
account will be effected at the public offering price or net asset value
of such Fund (as described in the then effective prospectus for such Fund)
next established after the Service Company has transmitted the Grantor's
investment directions to the transfer agent for the Fund(s).
Any purchase, exchange, transfer or redemption of shares of a Fund for or
from the Grantor's account will be subject to any applicable sales,
redemption or other charge as described in the then effective prospectus
for such Fund.
6. The Service Company shall maintain adequate records of all purchases or
sales of shares of one or more Funds for the Grantor's trust account. Any
account maintained in connection herewith shall be in the name of the
Trustee for the benefit of the Grantor.
All assets of the trust account shall be registered in the name of the
Trustee or of a suitable nominee. The books and records of the Trustee
shall show that all such investments are part of the trust account.
The Trustee shall maintain or cause to be maintained adequate records
reflecting transactions of the trust account. In the discretion of the
Trustee, records maintained by the Service Company with respect to the
account hereunder will be deemed to satisfy the Trustee's recordkeeping
responsibilities therefor. The Service Company agrees to furnish the
Trustee with any information the Trustee requires to carry out the
Trustee's recordkeeping responsibilities.
7. Neither the Trustee nor any other party providing services to the trust
account will have any responsibility for rendering advice with respect to
the investment and reinvestment of Grantor's trust account, nor shall such
parties be liable for any loss or diminution in value which results from
Grantor's exercise of investment control over his trust account. Grantor
shall have and exercise exclusive responsibility for and control over the
investment of the assets of his custodial account, and neither Trustee nor
any other such party shall have any duty to question his directions in
that regard or to advise him regarding the purchase, retention or sale of
shares of one or more Funds for the trust account.
8. The Grantor may appoint an investment advisor with respect to the trust
account on a form acceptable to the Trustee and the Service Company. The
investment advisor's appointment will be in effect until written notice to
the contrary is received by the Trustee and the Service Company. While an
investment advisor's appointment is
12
<PAGE> 18
in effect, the investment advisor may issue investment directions or may
issue orders for the sale or purchase of shares of one or more Funds to
the Service Company, and the Service Company will be fully protected in
carrying out such investment directions or orders to the same extent as if
they had been given by the Grantor.
The Grantor's appointment of any investment advisor will also be deemed to
be instructions to the Trustee and the Service Company to pay such
investment advisor's fees to the investment advisor from the trust account
hereunder without additional authorization by the Grantor or the Trustee.
9. Distribution of the assets of the trust account shall be made at such time
and in such form as Grantor (or the Beneficiary if Grantor is deceased)
shall elect by written order to the Trustee. Grantor acknowledges that any
distribution (except for the distribution on account of Grantor's
disability or death, return of an "excess contribution" referred to in
Code Section 408(d), or a "rollover" from this custodial account) made
earlier than age 59 1/2 may subject Grantor to an "additional tax on early
distributions" under Code Section 72(t). For that purpose, Grantor will be
considered disabled if Grantor can prove, as provided in Code Section
72(m)(7), that Grantor is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or be of
long-continued and indefinite duration. It is the responsibility of the
Grantor (or the Beneficiary) by appropriate distribution instructions to
the Trustee to insure that the distribution requirements of Code Section
401(a)(9) and Article IV above are met. If the Grantor (or Beneficiary)
does not direct the Trustee to make distributions from the trust account
by the time that such distributions are required to commence in accordance
with such distribution requirements, the Trustee (and Service Company)
shall assume that the Grantor (or Beneficiary) is meeting the minimum
distribution requirements from another individual retirement arrangement
maintained by the Grantor (or Beneficiary) and the Trustee and Service
Company shall be fully protected in so doing. The Grantor (or the
Grantor's surviving spouse) may elect to comply with the distribution
requirements in Article IV using the recalculation of life expectancy
method, or may elect that the life expectancy of the Grantor (and/or the
Grantor's surviving spouse) will not be recalculated; any such election
may be in such form as the Grantor (or surviving spouse) provides
(including the calculation of minimum distribution amounts in accordance
with a method that does not provide for recalculation of the life
expectancy of one or both of the Grantor and surviving spouse and
instructions to the Trustee in accordance with such method). Neither
Trustee nor any other party providing services to the trust account
assumes any responsibility for the tax treatment of any distribution from
the trust account; such responsibility rests solely with the person
ordering the distribution.
10. Trustee assumes (and shall have) no responsibility to make any
distribution except upon the written order of Grantor (or Beneficiary if
Grantor is deceased) containing such information as the Trustee may
reasonably request. Also, before making any distribution or honoring any
assignment of the trust account, Trustee shall be furnished with any and
all applications, certificates, tax waivers, signature guarantees and
other documents (including proof of any legal representative's authority)
deemed necessary or advisable by Trustee, but Trustee shall not be
responsible for complying with an order which appears on its face to be
genuine, or for refusing to
13
<PAGE> 19
comply if not satisfied it is genuine, and Trustee has no duty of further
inquiry. Any distributions from the account may be mailed, first-class
postage prepaid, to the last known address of the person who is to receive
such distribution, as shown on the Trustee's records, and such
distribution shall to the extent thereof completely discharge the
Trustee's liability for such payment.
11. (a) The term "Beneficiary" means the person or persons designated as such
by the "designating person" (as defined below) on a form acceptable to the
Trustee for use in connection with the trust account, signed by the
designating person, and filed with the Trustee. The form may name
individuals, trusts, estates, or other entities as either primary or
contingent beneficiaries. However, if the designation does not effectively
dispose of the entire trust account as of the time distribution is to
commence, the term "Beneficiary" shall then mean the designating person's
estate with respect to the assets of the trust account not disposed of by
the designation form. The form last accepted by the Trustee before such
distribution is to commence, provided it was received by the Trustee (or
deposited in the U.S. Mail or with a delivery service) during the
designating person's lifetime, shall be controlling and, whether or not
fully dispositive of the trust account, thereupon shall revoke all such
forms previously filed by that person. The term "designating person" means
Grantor during his/her lifetime; after Grantor's death, it also means
Grantor's spouse if the spouse begins to receive a portion of the trust
account (pursuant to such a designation by Grantor) under a form of
distribution permitted by Article. A designation by Grantor's spouse shall
relate solely to the balance remaining in the spouse's portion of the
trust account after the death of the spouse.
(b) When and after distributions from the trust account to Grantor's
Beneficiary commence, all rights and obligations assigned to Grantor
hereunder shall inure to, and be enjoyed and exercised by, Beneficiary
instead of Grantor.
12. (a) The Grantor agrees to provide information to the Trustee at such time
and in such manner as may be necessary for the Trustee to prepare any
reports required under Section 408(i) of the Code and the regulations
thereunder or otherwise.
(b) The Trustee or the Service Company will submit reports to the Internal
Revenue Service and the Grantor at such time and manner and containing such
information as is prescribed by the Internal Revenue Service.
(c) The Grantor, Trustee and Service Company shall furnish to each other such
information relevant to the trust account as may be required under the Code
and any regulations issued or forms adopted by the Treasury
Department thereunder or as may otherwise be necessary for the
administration of the trust account.
(d) The Grantor shall file any reports to the Internal Revenue service which
are required of him by law (including Form 5329), and neither the Trustee
nor Service Company shall have any duty to advise Grantor concerning or
monitor Grantor's compliance with such requirement.
13. (a) Grantor retains the right to amend this trust account document in any
respect at any time, effective on a stated date which shall be at least 60
days after giving written notice of the amendment (including its exact
terms) to Trustee by registered or certified mail, unless Trustee waives
notice as to such amendment. If the Trustee does not wish to continue
serving as such under this trust account document as so amended, it may
resign in accordance with Section 17 below.
14
<PAGE> 20
(b) Grantor delegates to the Trustee the Grantor's right so to amend, provided
the Trustee amends in the same manner all agreements comparable to this
one, having the same Trustee, permitting comparable investments, and under
which such power has been delegated to it; this includes the power to amend
retroactively if necessary or appropriate in the opinion of the Trustee in
order to conform this trust account to pertinent provisions of the Code and
other laws or successor provisions of law, or to obtain a governmental
ruling that such requirements are met, to adopt a prototype or master form
of agreement in substitution for this Agreement, or as otherwise may be
advisable in the opinion of the Trustee. Such an amendment by the Trustee
shall be communicated in writing to Grantor, and Grantor shall be deemed to
have consented thereto unless, within 30 days after such communication to
Grantor is mailed, Grantor either (i) gives Trustee a written order for a
complete distribution or transfer of the trust account, or (ii) removes the
Trustee and appoints a successor under Section 17 below.
Pending the adoption of any amendment necessary or desirable to conform
this trust account document to the requirements of any amendment to the
Internal Revenue Code or regulations or rulings thereunder, the Trustee and
the Service Company may operate the Grantor's custodial account in
accordance with such requirements to the extent that the Trustee and/or the
Service Company deem necessary to preserve the tax benefits of the account.
(c) Notwithstanding the provisions of
subsections (a) and (b) above, no
amendment shall increase the responsibilities or duties of Trustee without
its prior written consent.
(d) This Section 13 shall not be construed to restrict the Trustee's right to
substitute fee schedules in the manner provided by Section 16 below, and no
such substitution shall be deemed to be an amendment of this Agreement.
14. (a) Trustee shall terminate the trust account if this Agreement is
terminated or if, within 30 days (or such longer time as Trustee may
agree) after resignation or removal of Trustee under Section 17, Grantor
has not appointed a successor which has accepted such appointment.
Termination of the custodial account shall be effected by distributing all
assets thereof in a single payment in cash or in kind to Grantor, subject
to Trustee's right to reserve funds as provided in Section 17.
(b) Upon termination of the trust account, this trust account document shall
have no further force and effect, and Trustee shall be relieved from all
further liability hereunder or with respect to the trust account and all
assets thereof so distributed.
15. (a) In its discretion, the Trustee may appoint one or more contractors or
service providers to carry out any of its functions and may compensate
them from the trust account for expenses attendant to those functions.
(b) The Service Company shall be responsible for receiving all
instructions,notices, forms and remittance from Grantor and for dealing
with or forwarding the same to the transfer agent for the Fund(s).
(c) The parties do not intend to confer any fiduciary duties on Trustee or
Service Company (or any other party providing services to the trust
account), and none shall be implied. Neither shall be liable (or assumes
any responsibility) for the collection of contributions, the proper amount,
time or deductibility of any contribution to the trust account or the
propriety of any contributions under this Agreement, or the purpose, time,
amount (including any minimum distribution amounts) or propriety of any
distribution hereunder, which matters are the respon-
15
<PAGE> 21
sibility of Grantor and Grantor's Beneficiary.
(d) As soon as is practicable after the close of each taxable year, and
whenever required by the Code, or Regulations thereunder, the Trustee and
Service Company shall each file with Grantor a written report or reports
reflecting the transactions effected by it during such period and the
assets of the trust account at its close. Upon the expiration of 60 days
after such a report is sent to Grantor (or Beneficiary), the Trustee and
Service Company shall be forever released and discharged from all liability
and accountability to anyone with respect to transactions shown in or
reflected by such report except with respect to any such acts or
transactions as to which Grantor shall have filed written objections with
the Trustee or Service Company within such 60 day period.
(e) The Service Company shall deliver, or cause to be delivered, to Grantor all
notices, prospectuses, financial statements and other reports to
shareholders, proxies and proxy soliciting materials relating to the shares
of the Funds(s) credited to the trust account. No shares shall be voted,
and no other action shall be taken pursuant to such documents, except upon
receipt of adequate written instructions from Grantor.
(f) Grantor shall always fully indemnify Service Company, Distributor, the
Fund(s) and Trustee and save them harmless from any and all liability
whatsoever which may arise either (i) in connection with this Agreement and
the matters which it contemplates, except that which arises directly out of
the Service Company's, Distributor's or Trustee's negligence or willful
misconduct, or (ii) with respect to making or failing to make any
distribution, other than for failure to make distribution in accordance
with an order therefor which is in full compliance with Section 10. Neither
Service Company nor Trustee shall be obligated or expected to commence or
defend any legal action or proceeding in connection with this Agreement or
such matters unless agreed upon by that party and Grantor, and unless fully
indemnified for so doing to that party's satisfaction.
(g) The Trustee and Service Company shall each be responsible solely for
performance of those duties expressly assigned to it in this Agreement, and
neither assumes any responsibility as to duties assigned to anyone else
hereunder or by operation of law.
(h) Trustee and Service Company may each conclusively rely upon and shall be
protected in acting upon any written order from Grantor or Beneficiary, or
any investment advisor appointed under Section 8, or any other notice,
request, consent, certificate or other instrument or paper believed by it
to be genuine and to have been properly executed, and so long as it acts in
good faith, in taking or omitting to take any other action in reliance
thereon. In addition, Trustee will carry out the requirements of any
apparently valid court order relating to the custodial account and will
incur no liability or responsibility for so doing.
16. (a) The Trustee, in consideration of its services under this Agreement,
shall receive the fees specified on the applicable fee schedule. The fee
schedule originally applicable shall be the one specified in the
Disclosure Statement furnished to the Grantor. The Trustee may substitute
a different fee schedule at any time upon 30 days' written notice to
Grantor. The Trustee shall also receive reasonable fees for any services
not contemplated by any applicable fee schedule and either deemed by it to
be necessary or desirable or requested by Grantor.
(b) Any income, gift, estate and inheritance taxes and other taxes of any kind
whatsoever, including transfer taxes incurred in connection with the
investment or reinvestment of the assets of the trust account, that may be
lev-
16
<PAGE> 22
ied or assessed in respect to such assets, and all other administrative
expenses incurred by the Trustee in the performance of its duties
(including fees for legal services rendered to it in connection with the
trust account) shall be charged to the trust account.
(c) All such fees and taxes and other administrative expenses charged to the
trust account shall be collected either from the amount of any contribution
or distribution to or from the account, or (at the option of the person
entitled to collect such amounts) to the extent possible under the
circumstances by the conversion into cash of sufficient shares of one or
more Funds held in the trust account (without liability for any loss
incurred thereby). Notwithstanding the foregoing, the Trustee or Service
Company may make demand upon the Grantor for payment of the amount of such
fees, taxes and other administrative expenses. Fees which remain
outstanding after 60 days may be subject to a collection charge.
17. (a) Upon 30 days' prior written notice to the Trustee, the Fund may remove
it from its office hereunder. Such notice, to be effective, shall
designate a successor trustee and shall be accompanied by the successor's
written acceptance. The Trustee also may at any time resign upon 30 days'
prior written notice to the Fund, whereupon the Fund shall appoint a
successor to the Trustee.
(b) The successor trustee shall be a bank, insured credit union, or other
person satisfactory to the Secretary of the Treasury under Code Section
408(a)(2). Upon receipt by Trustee of written acceptance by its successor
of such successor's appointment, Trustee shall transfer and pay over to
such successor the assets of the trust account and all records (or copies
thereof) of Trustee pertaining thereto, provided that the successor trustee
agrees not to dispose of any such records without the Trustee's consent.
Trustee is authorized, however, to reserve such sum of money or property as
it may deem advisable for payment of all its fees, compensation, costs, and
expenses, or for payment of any other liabilities constituting a charge on
or against the assets of the trust account or on or against the Trustee,
with any balance of such reserve remaining after the payment of all such
items to be paid over to the successor trustee.
(c) Any Trustee shall not be liable for the acts or omissions of its
predecessor or its successor.
18. References herein to the "Internal Revenue Code" or "Code" and sections
thereof shall mean the same as amended from time to time, including
successors to such sections.
19. Except where otherwise specifically required in this Agreement, any notice
from Trustee to any person provided for in this Agreement shall be
effective if sent by first-class mail to such person as that person's last
address on the Trustee's records.
20. Grantor or Grantor's Beneficiary shall not have the right or power to
anticipate any part of the trust account or to sell, assign, transfer,
pledge or hypothecate any part thereof. The trust account shall not be
liable for the debts of Grantor or Grantor's Beneficiary or subject to any
seizure, attachment, execution or other legal process in respect thereof.
At no time shall it be possible for any part of the assets of the trust
account to be used for or diverted to purposes other than for the
exclusive benefit of the Grantor or his/her Beneficiary.
21. When accepted by the Trustee, this Agreement is accepted in and shall be
construed and administered in accordance with the laws of the Commonwealth
of Massachusetts. Any action involving the Trustee brought by any other
party must be brought in a state or federal court in such Commonwealth.
17
<PAGE> 23
This Agreement is intended to qualify under Code Section 408(a) as an
individual retirement trust account and to entitle Grantor to the
retirement savings deduction under Code Section 219 if available, and if
any provision hereof is subject to more than one interpretation or any
term used herein is subject to more than one construction, such ambiguity
shall be resolved in favor of that interpretation or construction which is
consistent with that intent. However, Trustee shall not be responsible for
whether or not such intentions are achieved through use of this Agreement,
and Grantor is referred to Grantor's attorney for any such assurances.
22. Grantor should seek advice from Grantor's attorney regarding the legal
consequences (including but not limited to federal and state tax matters)
of entering into this Agreement, contributing to the trust account, and
ordering Trustee to make distributions from the account. Grantor
acknowledges that Trustee and Service Company (and any company associated
therewith) are prohibited by law from rendering such advice.
23. Articles I through VII of this Agreement are in the form promulgated by
the Internal Revenue Service. It is anticipated that if and when the
Internal Revenue Service promulgates changes to Form 5305, the Trustee
will amend this Agreement correspondingly.
24. The Grantor acknowledges that he or she has received and read the current
prospectus for each Fund in which his or her account is invested and the
Individual Retirement Account Disclosure Statement related to the Account.
The Grantor represents under penalties of perjury that his or her Social
Security number (or other Taxpayer Identification Number) as stated in the
Adoption Agreement is correct.
GENERAL INSTRUCTIONS
(Section references are to the Internal Revenue Code unless otherwise noted.)
PURPOSE OF FORM
Form 5305 is a model trust account agreement that meets the requirements of
section 408(a) and has been automatically approved by the IRS. An individual
retirement account (IRA) is established after the form is fully executed by both
the individual (Grantor) and the trustee and must be completed no later than the
due date of the individual's income tax return for the tax year (without regard
to extensions). This account must be created in the United States for the
exclusive benefit of the Grantor or his or her beneficiaries.
Individuals may rely on regulations for the Tax Reform Act of 1986 to the extent
specified in those regulations.
Do not file Form 5305 with the IRS. Instead, keep it for your records.
For more information on IRAs, including the required disclosure you can get from
your trustee, get Pub. 590, Individual Retirement Arrangements (IRAs).
DEFINITIONS
Trustee--The trustee must be a bank or savings and loan association, as defined
in section 408(n), or any person who has the approval of the IRS to act as
trustee.
Grantor--The grantor is the person who establishes the trust account.
Identifying Number--The Grantor's social security number will serve as the
identifying number of his or her IRA. An employer identification number is
required only for an IRA for which a return is filed to report unrelated
business taxable income. An employer identification number is required for a
common fund created for IRAs.
IRA for Nonworking Spouse--Form 5305 may be used to establish the IRA trust for
a nonworking spouse.
Contributions to an IRA trust account for a nonworking spouse must be made to a
separate IRA trust account established by the nonworking spouse.
18
<PAGE> 24
SPECIFIC INSTRUCTIONS
Article IV--Distributions made under this article may be made in a single sum,
periodic payment, or a combination of both. The distribution option should be
reviewed in the year the Grantor reaches age 70 1/2 to ensure that the
requirements of section 408(a)(6) have been met.
Article VIII--Article VIII and any that follow it may incorporate additional
provisions that are agreed to by the grantor and trustee to complete the
agreement. They may include, for example, definitions, investment powers, voting
rights, exculpatory provisions, amendment and termination, removal of the
trustee, trustee's fees, state law requirements, beginning date of
distributions, accepting only cash, treatment of excess contributions,
prohibited transactions with the grantor, etc. Use additional pages if necessary
and attach them to this form.
Note: Form 5305 may be reproduced and reduced in size for adoption to passbook
purposes.
19
<PAGE> 25
- ------------------------- --------------------------
---------------------------------------------------------------
[LONGLEAF PARTNERS LOGO]
IRA
APPLICATION
& TRANSFER
FORMS
LONGLEAF
PARTNERS FUNDS
===============================================================
<PAGE> 26
(This page left blank
intentionally)
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LONGLEAF PARTNERS FUND FOR THE YEAR ENDED DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 01
<NAME> LONGLEAF PARTNERS FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 1,847,176,399
<INVESTMENTS-AT-VALUE> 2,299,327,929
<RECEIVABLES> 2,530,519
<ASSETS-OTHER> 176,033
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,302,034,481
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,955,305
<TOTAL-LIABILITIES> 1,955,305
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,847,529,846
<SHARES-COMMON-STOCK> 100,652,843
<SHARES-COMMON-PRIOR> 88,727,043
<ACCUMULATED-NII-CURRENT> 129,189
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 268,611
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 452,151,530
<NET-ASSETS> 2,300,079,176
<DIVIDEND-INCOME> 32,116,678
<INTEREST-INCOME> 22,612,971
<OTHER-INCOME> 0
<EXPENSES-NET> 20,355,952
<NET-INVESTMENT-INCOME> 34,373,697
<REALIZED-GAINS-CURRENT> 213,673,408
<APPREC-INCREASE-CURRENT> 158,628,871
<NET-CHANGE-FROM-OPS> 406,675,976
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 34,349,264
<DISTRIBUTIONS-OF-GAINS> 213,539,413
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18,238,896
<NUMBER-OF-SHARES-REDEEMED> 16,493,540
<SHARES-REINVESTED> 10,180,444
<NET-CHANGE-IN-ASSETS> 423,611,930
<ACCUMULATED-NII-PRIOR> 104,756
<ACCUMULATED-GAINS-PRIOR> 134,616
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 17,004,356
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 20,355,952
<AVERAGE-NET-ASSETS> 2,133,914,494
<PER-SHARE-NAV-BEGIN> 21.15
<PER-SHARE-NII> .37
<PER-SHARE-GAIN-APPREC> 4.09
<PER-SHARE-DIVIDEND> .38
<PER-SHARE-DISTRIBUTIONS> 2.38
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.85
<EXPENSE-RATIO> 0.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SMALL-CAP FUND FOR THE YEAR ENDED DECEMBER 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 02
<NAME> SMALL-CAP FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 200,982,051
<INVESTMENTS-AT-VALUE> 251,918,252
<RECEIVABLES> 662,917
<ASSETS-OTHER> 28,463
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 252,609,632
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 452,675
<TOTAL-LIABILITIES> 452,675
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 201,119,380
<SHARES-COMMON-STOCK> 14,121,918
<SHARES-COMMON-PRIOR> 9,406,766
<ACCUMULATED-NII-CURRENT> 4,598
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 96,778
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 50,936,201
<NET-ASSETS> 252,156,957
<DIVIDEND-INCOME> 2,115,108
<INTEREST-INCOME> 328,269
<OTHER-INCOME> 0
<EXPENSES-NET> 2,137,614
<NET-INVESTMENT-INCOME> 305,763
<REALIZED-GAINS-CURRENT> 13,416,172
<APPREC-INCREASE-CURRENT> 33,330,915
<NET-CHANGE-FROM-OPS> 47,052,850
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 313,153
<DISTRIBUTIONS-OF-GAINS> 13,335,532
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,357,663
<NUMBER-OF-SHARES-REDEEMED> 2,348,601
<SHARES-REINVESTED> 706,090
<NET-CHANGE-IN-ASSETS> 116,180,161
<ACCUMULATED-NII-PRIOR> 11,988
<ACCUMULATED-GAINS-PRIOR> 16,139
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,735,200
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,137,614
<AVERAGE-NET-ASSETS> 173,520,120
<PER-SHARE-NAV-BEGIN> 14.46
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> 4.40
<PER-SHARE-DIVIDEND> .02
<PER-SHARE-DISTRIBUTIONS> 1.01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.86
<EXPENSE-RATIO> 1.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LONGLEAF PARTNERS REALTY FOR THE YEAR ENDED DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 03
<NAME> LONGLEAF PARTNERS REALTY
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 139,867,812
<INVESTMENTS-AT-VALUE> 156,148,552
<RECEIVABLES> 183,179
<ASSETS-OTHER> 8,838
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 156,340,569
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 331,345
<TOTAL-LIABILITIES> 331,345
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 139,719,202
<SHARES-COMMON-STOCK> 11,165,607
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 5,919
<OVERDISTRIBUTION-NII> 159,496
<ACCUMULATED-NET-GAINS> 3,363
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,280,740
<NET-ASSETS> 156,009,224
<DIVIDEND-INCOME> 672,709
<INTEREST-INCOME> 390,751
<OTHER-INCOME> 0
<EXPENSES-NET> 657,725
<NET-INVESTMENT-INCOME> 405,735
<REALIZED-GAINS-CURRENT> 490,532
<APPREC-INCREASE-CURRENT> 16,280,740
<NET-CHANGE-FROM-OPS> 17,177,007
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 399,816
<DISTRIBUTIONS-OF-GAINS> 487,169
<DISTRIBUTIONS-OTHER> 159,496
<NUMBER-OF-SHARES-SOLD> 11,949,427
<NUMBER-OF-SHARES-REDEEMED> 855,598
<SHARES-REINVESTED> 71,778
<NET-CHANGE-IN-ASSETS> 156,009,224
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 438,484
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 657,725
<AVERAGE-NET-ASSETS> 43,968,814
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .16
<PER-SHARE-GAIN-APPREC> 3.91
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> .05
<RETURNS-OF-CAPITAL> .01
<PER-SHARE-NAV-END> 13.97
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
