<PAGE> 1
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LOGO
LONGLEAF PARTNERS FUNDS
SEMI-ANNUAL REPORT
at June 30, 1998
PARTNERS FUND
REALTY FUND
SMALL-CAP FUND
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MANAGED BY:
SOUTHEASTERN ASSET MANAGEMENT, INC.
Memphis, TN
<PAGE> 2
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Letter to Shareholders..................................... 2
Longleaf Partners Fund (Partners Fund)
Management Discussion.................................... 6
Performance History and Portfolio Summary*............... 7
Portfolio Investments.................................... 8
Longleaf Partners Realty Fund (Realty Fund)
Management Discussion.................................... 10
Performance History and Portfolio Summary*............... 11
Portfolio Investments.................................... 12
Longleaf Partners Small-Cap Fund (Small-Cap Fund)
Management Discussion.................................... 14
Performance History and Portfolio Summary*............... 15
Portfolio Investments.................................... 17
Financial Reports and Footnotes............................ 20
Financial Highlights....................................... 34
Service Directory.......................................... 36
Trustees and Officers...................................... 37
</TABLE>
* Average annual returns for all Funds and all indices except the Value-Line
Index are shown with all dividends and distributions reinvested; the
Value-Line Index is not available with reinvested dividends. The indices shown
are unmanaged. Past performance is no guarantee of future performance, and the
value of an investment when redeemed may be more or less than the purchase
price.
<PAGE> 3
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LONGLEAF PARTNERS FUNDS
LETTER TO SHAREHOLDERS
TO OUR SHAREHOLDERS:
Second Quarter and First Half Performance
We are pleased to report that Longleaf Partners Fund and Longleaf Partners
Small-Cap Fund performed admirably in the second quarter and first half of the
year. Their substantial year-to-date absolute returns exceeded our expectations
for ALL of 1998. The Partners and Small-Cap Funds' returns also surpassed their
benchmark indices in both the second quarter and for the first six months. The
Partners Fund was up 18.1% and Small-Cap grew 13.7% in the first half of 1998,
while the average common stock fund increased 11.7%.
Longleaf Partners Realty Fund's results were not as good. The Realty Fund
outperformed its benchmark and most of its peers in the first six months, but
real estate funds were down through June, some severely. Longleaf Partners
Realty Fund was negative 3.7%.
The Longleaf fund with the weakest short-term results ironically, but not
surprisingly, offers the most compelling values. We are finding numerous
qualifying investments for the Realty Fund. Our charge for the Partners and
Small-Cap Funds is much more challenging.
Great Partners at Longleaf
In a recent session with Bill Gates, before 350 students at the University of
Washington, Warren Buffett talked about the importance of having the right kind
of owners at Berkshire Hathaway.
What you want to do is attract shareholders that are very much like
you, with the same time horizons and expectations. . . . we don't want
people who are focusing on what's going to happen next quarter or next
year. We want people to join us because they want to be with us until
they die.
As many people say, "You get the shareholders you deserve." Mr. Buffett has
wonderful long-term supporters and no one is more deserving of their backing
than he and Charlie Munger.
The right kind of shareholder is more important to a mutual fund than to an
individual corporation. We think Longleaf has a nonpareil group of owners. Our
partners are unequaled in their average size, ownership duration, and moral
support. Longleaf shareholders understand buying undervalued and qualifying
businesses one at a time, minimizing taxes, and having a long-term time horizon.
2
<PAGE> 4
We will remain substantial partners with you until we give our shares to
charitable causes or our estates are settled. We prefer the former. We thank you
for being the kind of owners we envisioned when we opened the Funds in 1987.
Active asset allocators and market timers need not apply; we do all we can to
discourage their involvement.
We're Keeping Our Shares
We have told you our views in numerous letters regarding the futility of market
timing. If forced to make market calls, we would have been wrong in each of the
past four years. We spend all our energy on what we can do successfully -
analyze individual businesses and their managements to uncover investments with
a wide margin of safety for long-term compounding.
This unprecedented bull market has raised questions from some of our partners
about the risks of remaining invested. Some pundits recommend exiting the market
now and reinvesting when it bottoms. While we agree that the S&P 500 is, at
least, fully valued, there are three reasons we are NOT exiting Longleaf to wait
for a correction.
1. WE ASSESS THE PROBABILITY OF CORRECTLY TIMING THE MARKET
TO BE LESS THAN 1 IN 6.
Successfully timing the market requires three sequential events - picking the
market top, having a significant (i.e. 25%) decline, and picking the market
bottom to reinvest. In our experience, the chance of correctly predicting ANY of
these three occurrences is less than 50%.
To illustrate the extreme difficulty of market timing, we use an example of two
mutual fund owners with an original investment of $300,000 and a balance of
$1,000,000 at the market peak. We assume that the hypothetical market timer is
better than average at anticipating events. A 55% chance of a) picking the
market high, b) seeing a 25% decline, and c) reinvesting at the low, makes the
probability of his calling all three correctly 1 in 6, or 16.6% (55% X 55% X 55%
= 16.6%). Each investor's results are below.
<TABLE>
<CAPTION>
SUCCESSFUL
LONG-TERM MARKET
SHAREHOLDER TIMER
----------- ----------
<S> <C> <C>
Investment at market peak $1,000,000 $1,000,000
Cost basis 300,000 300,000
Gain on investment 700,000 700,000
Tax liability (20% federal, 6% state) 0 182,000
Investment at market low $ 750,000 $ 830,000*
Difference at market low: $80,000
</TABLE>
* Assumes $182,000 capital gains tax paid and 1.5% after-tax interest
earned on cash balance for 6 months.
Is it worth risking a $1,000,000 partnership and its future profitability for a
1 in 6 chance of making $80,000? We think not, given the difficulty of correctly
forecasting AND ACTING UPON three turning points. Anecdotal evidence suggests
that the chances of combining analysis and action on any one of these decisions
is
3
<PAGE> 5
considerably less than 55%, given the emotional nature of the decision and the
intestinal fortitude required to move directly on each. The odds for timers look
even worse when the certainty of federal and state tax liabilities is weighed
against the avoidance of these taxes by investors who hold shares until death or
donation to charity.
The above is our conservative attempt to quantify the case for a timing
advocate; the case is poor. In the real versus theoretical world, we think the
odds of success are much, much lower than 1 in 6. The market could modestly
appreciate for many more years; it could remain stable over a couple of years;
it could decline modestly; the timer might not pick the absolute top and bottom
even with a 25% decline. We believe the ability to correctly time the market is,
realistically, at best a 1 in 100 shot. We have never known anyone who has
successfully liquidated their equities, paid the required taxes, and reinvested
at a large enough discount to justify the risks and come out ahead over the
long-run.
2. LONG-TERM EQUITY OWNERSHIP HAS CREATED MOST OF THE WEALTH IN THE U.S.
A quick glance at the Forbes 400 reveals that holding significant ownership
stakes in businesses over long periods without the participation of federal or
state tax authorities has created most of the wealth in the United States. Bill
Gates, Sam Walton, and the Rockefellers did not amass their fortunes through
trading or by market timing.
3. THE LONGLEAF FUNDS' PORTFOLIOS ARE UNDERVALUED RELATIVE TO MAJOR MARKET
INDICES.
Longleaf's holdings remain at a significant discount to appraised value, and the
composite price-to-value ratio of each portfolio is still very attractive.
Staying invested in the Funds is the best way to continue compounding the value
of our own money. Our margin of safety provides great comfort against the risk
of losing capital. We can easily tolerate volatility in our net asset values
given the low probability of succeeding with a more activist approach founded on
very tenuous assumptions.
Longleaf Partners International Fund
We are pursuing Longleaf Partners International Fund with great alacrity. We
have added an analyst to our team to lead the international effort. Andrew
McDermott joined us from the investment banking group at J.P. Morgan. During the
last several years, Andrew has lived in Hong Kong, Tokyo, and Singapore. He will
spend most of his time living in Asia and analyzing foreign companies and their
managements.
Our research team has been hard at work spreading out numerous companies and
visiting with managements throughout Asia. We now have the requisite number of
undervalued and qualified investment opportunities to justify the Fund's
formation. We are moving forward with the required SEC filings and expect to
4
<PAGE> 6
open the Fund by year end. We will notify all our shareholders when Longleaf
Partners International Fund is available. Consistent with our partnership
approach we will seed the portfolio with a substantial investment from the
principals at Southeastern.
We enjoyed being with many of you at our annual meeting and appreciate all your
questions and support. We hope you have a good summer with family and friends.
Sincerely,
<TABLE>
<S> <C> <C>
/s/ O. Mason Hawkins, CFA /s/ G. Staley Cates, CFA /s/ C.T. Fitzpatrick, CFA
O. Mason Hawkins, CFA G. Staley Cates, CFA C.T. Fitzpatrick, CFA
Co-Portfolio Manager Co-Portfolio Manager Co-Portfolio Manager
</TABLE>
See pages 7, 11 and 15 for historical performance information on each fund.
5
<PAGE> 7
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PARTNERS FUND - MANAGEMENT DISCUSSION
by Mason Hawkins and Staley Cates
Over the last quarter and throughout 1998 Longleaf Partners Fund has delivered
strong absolute and relative performance in spite of our large cash component.
The Fund grew 4.0% during the second quarter versus 3.3% for the S&P 500.
Year-to-date the Partners Fund is up 18.1% compared to the S&P's 17.6%.
The equity market appears fully valued and homogenous to many, yet we have
always contended that good analysts can uncover wonderful long-term opportunity.
The power of identifying and buying significant stakes in a few very compelling
and undervalued companies cannot be overemphasized. The flexibility our
shareholders approved last year to allow more concentration enabled us to make
large commitments to MediaOne, News Corp., and Waste Management in the second
half of 1997. These three companies illustrate our beliefs and have driven the
Partners Fund's 1998 performance. Each of these businesses has competitive
economics, was disdained by Wall Street when purchased, and continues to sell at
a discount to intrinsic value.
MediaOne, formerly U S West Media Group, has become the only publicly traded
broadband cable company that offers one class of shares, has little debt, and is
managed equally well for all owners. Our investment in MediaOne has more than
doubled. News Corp.'s portfolio market value is almost twice our cost as the
company has gone from Wall Street dog to darling with Rupert Murdoch's sale of
TV Guide and proposed public sale of 20% of Fox's assets. Waste Management will
soon merge with USA Waste, and our stake has materially appreciated. The
strength of John Drury and his management team at USA Waste combined with the
assets of Waste Management will create the strongest company in the solid waste
industry.
During the quarter the portfolio had a number of transactions, but few were
sizeable. Several companies split into their component parts. When Chicago Title
was spun off by Alleghany, Chicago Title quickly reached full value and we sold
it. The same was true when Sodexho Marriott Services split from Marriott.
Ralston Purina and Agribrands separated, and we liquidated our long-term Ralston
holding at appraisal. With great reluctance we sever our ten year partnership
with Bill Stiritz and his team. Few have been better stewards of corporate
assets for us. He is at the top of the class in our hall of fame. We all owe a
great debt of thanks to Bill and his very capable management team.
Since quarter end Alltel closed its purchase of 360 degrees Communications. We
look forward to our new association with Joe Ford, Dennis Foster, and their
team.
6
<PAGE> 8
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PARTNERS FUND - PERFORMANCE HISTORY AND
PORTFOLIO SUMMARY
AVERAGE ANNUAL RETURNS
FOR THE PERIODS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Value-Line
Partners S&P 500 Geometric
Fund Index Index
-------- ------- ----------
<S> <C> <C> <C>
Year-to-Date 18.09% 17.64% 4.92%
One Year 31.93 30.09 13.53
Three Years 25.83 30.21 15.29
Five Years 23.29 23.05 11.37
Ten Years 19.58 18.53 7.10
</TABLE>
FIVE LARGEST HOLDINGS
(REPRESENT 39.2% OF NET ASSETS)
MEDIAONE GROUP, INC. (formerly U S West Media Group) (UMG) 12.9%
Cable and communications company whose focus is providing a single line to the
home for multiple services including video, Internet access, and voice.
FDX CORPORATION (FDX) 6.8%
Integrated air-ground transportation company providing time-definite delivery of
packages and documents worldwide.
PHILIPS ELECTRONICS N.V. (PHG) 6.8%
A leading manufacturer of lighting systems, electronics products including
television and stereo equipment, appliances, and semiconductors.
THE NEWS CORPORATION LIMITED (NWS) 6.4%
International media company which operates satellite television, owns Fox
Broadcasting and 20th Century Fox film operations, and publishes numerous
newspapers and magazines.
WASTE MANAGEMENT, INC. (WMX) 6.3%
The world's largest solid waste collection and disposal company with
residential, commercial, and industrial customers throughout North America.
PORTFOLIO CHANGES
JANUARY 1, 1998 THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Agribrands International, Inc.* Agribrands International, Inc.*
Boston Properties, Inc. Chicago Title Corporation*
Chicago Title Corporation* Kansas City Southern Industries, Inc.
MediaOne Group, Inc.* The Ralston Purina Company
Pioneer Natural Resources Company Sodexho Marriott Services, Inc.*
Sodexho Marriott Services, Inc.* Tricon Global Restaurants, Inc.
Tricon Global Restaurants, Inc. The Union Corporation
UCAR International, Inc. U S West, Inc.*
U S West, Inc.*
</TABLE>
* Acquired through merger/spin-off of existing position.
7
<PAGE> 9
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PARTNERS FUND - PORTFOLIO INVESTMENTS
AT JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
Common Stock 85.4%
Beverages 5.2%
4,604,800 The Seagram Company Ltd. (Foreign) ........... $ 188,509,000
Broadcasting 6.4%
7,284,362 The News Corporation Limited (Foreign)........ 234,010,129
Cable 12.9%
10,686,100 * MediaOne Group, Inc........................... 469,520,519
Environmental Services 6.3%
6,550,000 Waste Management, Inc......................... 229,250,000
Food 1.5%
1,009,400 The Quaker Oats Company....................... 55,453,912
Lodging 6.9%
9,788,700 * Host Marriott Corporation..................... 174,361,219
2,407,600 Marriott International, Inc.--Class A......... 77,946,050
--------------
252,307,269
--------------
Manufacturing 3.5%
4,450,000 * UCAR International, Inc....................... 129,884,375
Multi-Industry 8.2%
1,565,000 Alexander & Baldwin, Inc...................... 45,580,625
2,903,800 Philips Electronics N.V. (Foreign)............ 246,823,000
--------------
292,403,625
--------------
Natural Resources 7.8%
1,237,700 The Pioneer Group, Inc........................ 32,566,981
5,071,200 Pioneer Natural Resources Company............. 121,074,900
2,900,000 Rayonier Inc.................................. 133,400,000
--------------
287,041,881
--------------
Pharmaceuticals 1.4%
1,770,350 Mallinckrodt Inc. ............................ 52,557,266
Property & Casualty Insurance 5.3%
112,828 * Alleghany Corp................................ 26,317,131
25,046,000 Mitsui Marine and Fire Insurance Company, Ltd.
(Foreign)................................... 125,784,933
6,603,000 The Nippon Fire & Marine Insurance Company,
Ltd. (Foreign).............................. 26,976,265
3,706,000 The Yasuda Fire and Marine Insurance Company,
Ltd. (Foreign).............................. 15,754,873
--------------
194,833,202
--------------
Publishing 4.7%
3,150,000 Knight Ridder, Inc............................ 173,446,875
</TABLE>
See Notes to Financial Statements.
8
<PAGE> 10
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PARTNERS FUND - PORTFOLIO INVESTMENTS
AT JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
Real Estate 3.7%
176,100 Boston Properties Inc......................... $ 6,075,450
6,038,591 TrizecHahn Corporation (Foreign).............. 129,452,295
--------------
135,527,745
--------------
Telecommunications 4.8%
5,450,000 * 360 degrees Communications Company............ 174,400,000
Transportation 6.8%
3,954,300 * FDX Corporation............................... 248,132,325
--------------
TOTAL COMMON STOCKS (COST $2,159,076,627)..... 3,117,278,123
Short-Term Obligations 15.1%
Commercial Paper -- Clipper Receivables Corp., 5.6% due 7-29-98.... 99,569,889
Federal Home Loan Mortgage Corporation, 5.5% due 7-7-98............ 49,955,167
Federal Home Loan Mortgage Corporation, 5.5% due 7-14-98........... 49,902,500
Federal Home Loan Mortgage Corporation, 5.5% due 8-6-98............ 149,188,500
Federal National Mortgage Association Discount Note, 5.5% due
7-13-98.......................................................... 99,820,000
Repurchase Agreement with State Street Bank, 5.0% due 7-1-98....... 103,128,000
--------------
551,564,056
--------------
TOTAL INVESTMENTS (COST $2,710,640,683)(a).................. 100.5% 3,668,842,179
OTHER ASSETS AND LIABILITIES, NET........................... (0.5) (16,837,013)
----- --------------
NET ASSETS.................................................. 100.0% $3,652,005,166
===== ==============
NET ASSET VALUE PER SHARE.......................................... $30.68
==============
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for Federal income tax purposes.
Note: Companies designated as "Foreign" are headquartered outside the U.S. and
represent 26% of Net Assets.
Open Forward Currency Contracts
<TABLE>
<CAPTION>
Currency
Currency Currency Sold and Market Unrealized
Units Sold Settlement Date Value Gain
- - -------------- ---------------------------------- ------------ -----------
<C> <S> <C> <C>
14,552,730,000 Japanese Yen 1-28-99.............. $108,156,558 $15,208,101
5,933,189,584 Japanese Yen 2-26-99.............. 44,257,286 3,909,027
------------ -----------
Total Forward Contracts........... $152,413,844 $19,117,128
============ ===========
</TABLE>
See Notes to Financial Statements.
9
<PAGE> 11
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REALTY FUND - MANAGEMENT DISCUSSION
by C.T. Fitzpatrick, Mason Hawkins and Staley Cates
During 1998, Longleaf Partners Realty Fund's short-term absolute returns have
weakened. The Fund's relative performance, however, has been strong since
inception and has remained so this year. For the first six months of 1998, the
Fund is down 3.7% versus the Wilshire Real Estate Securities Index's 5.3%
decrease. The Realty Fund's net asset value decreased by 5.0% in the second
quarter compared to a decline of 4.9% for the Index.
We have seized upon this year's short-term volatility in publicly traded real
estate to lay a strong foundation for long-term compounding. The composite
price-to-value ratio for Longleaf Partners Realty Fund is near its most
attractive level since the Fund began operations. During the second quarter we
added to several of our best holdings which are temporarily depressed. A number
of real estate companies whose values are rising have become more attractive as
their prices have fallen. The Fund remains fully invested and our qualifying
investments exceed our cash resources.
This year's disparity between the returns of real estate and common stocks has
caused some to worry. We give no thought to broad markets or the differences
between them. Some real estate businesses that we do not own are suffering from
increased supply, slowed growth, harmful legislation, or poor management. Those
companies do not concern us. Instead, we carefully analyze the managements, cash
flows, and local markets for each of the companies we do own and their
respective properties. The fundamentals for our portfolio holdings remain
robust. Even for good companies in weaker sectors, the prices we paid are so low
that we are being more than compensated for their slower growth. We will invest
our money and yours only in those real estate businesses with good managers,
competitive properties, and greatly discounted prices.
As owners and managers of Longleaf Partners Realty Fund, we expect the
following. First, long-term investors should be amply rewarded for bearing
short-term risk. Second, short-term investors could be disappointed. Volatility
may persist or even increase. Third, regardless of "the market" each of the
companies in the Realty Fund continues to build per share value and sell below
intrinsic worth. These dynamics imply above average long-term returns with below
average risk. The principals of Southeastern Asset Management consequently have
increased our commitment to the Realty Fund to $46 million. This capital is
permanently invested.
We have communicated Longleaf Partners Realty Fund's unique approach. You might
be interested to know about our unique partners. While most real estate funds
have had net redemptions this year, Longleaf Partners Realty Fund has had very
stable net inflows which are especially beneficial since we have businesses to
buy. All shareholders should be grateful for the wonderful investment partners
we have, their support of our philosophy and process, and the positive impact
that has on our results.
10
<PAGE> 12
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REALTY FUND - PERFORMANCE HISTORY AND
PORTFOLIO SUMMARY
AVERAGE ANNUAL RETURNS
FOR THE PERIODS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Wilshire NAREIT
Realty Real Estate Equity
Fund Securities Index Index
------ ---------------- ------
<S> <C> <C> <C>
Year-to-Date (3.69)% (5.30)% (5.03)%
One Year 7.28 6.55 8.05
Since inception 1/2/96 25.39 19.38 19.06
</TABLE>
FIVE LARGEST HOLDINGS
(REPRESENT 39.1% OF NET ASSETS)
HOST MARRIOTT CORPORATION (HMT) 10.1%
Owner of 101 upscale and luxury full-service Marriott and Ritz Carlton hotels
and 31 assisted living centers, which are operated by Marriott International.
EXCEL LEGACY CORPORATION (XELC) 9.6%
A C-Corp spun out of Excel Realty Trust and focused on development and re-
development of unique real estate projects throughout the U.S.
CATELLUS DEVELOPMENT CORPORATION (CDX) 8.1%
A diversified real estate company that owns, manages and develops industrial
warehouses, offices, apartments and residential communities. CDX has substantial
land holdings throughout the U.S.
FOREST CITY ENTERPRISES, INC. (FCE) 5.9%
A vertically integrated real estate company which develops, constructs, owns,
and manages commercial (primarily urban infill, mixed-use projects) and
residential real estate throughout the U.S.
BOSTON PROPERTIES INC. (BXP) 5.4%
A fully integrated, development oriented company which owns premier, Class A
office properties primarily in New York, Washington, D.C., Boston, and San
Francisco.
PORTFOLIO CHANGES
JANUARY 1, 1998 THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Beacon Capital Partners, Inc. Arden Realty, Inc.
Excel Legacy Corporation Common Sodexho Marriott Services, Inc.*
Excel Legacy Corporation - Series A Sunburst Hospitality Corporation
Liquidating Preference Convertible Wellsford Real Properties, Inc.
Horizon Group Properties, Inc.* White River Corporation
Sodexho Marriott Services, Inc.*
</TABLE>
* Acquired through merger/spin-off of existing position.
11
<PAGE> 13
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REALTY FUND - PORTFOLIO INVESTMENTS
AT JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C> <C> <C> <C>
Common Stock - 83.8%
Diversified Realty 17.2%
3,979,800 * Catellus Development Corporation................ $ 70,392,712
2,280,000 * Excel Legacy Corporation........................ 9,975,000
802,800 Forest City Enterprises, Inc. - Class A......... 47,515,725
67,600 Forest City Enterprises, Inc. - Class B......... 3,988,400
783,000 Sizeler Property Investors, Inc. (REIT)......... 7,878,938
440,600 TrizecHahn Corporation (Foreign)................ 9,445,362
------------
149,196,137
------------
Lodging 16.4%
4,929,600 * Host Marriott Corporation....................... 87,808,500
204,600 Marriott International, Inc. - Class A.......... 6,623,925
2,490,000 * Red Roof Inns, Inc.............................. 42,174,375
518,646 * Supertel Hospitality, Inc....................... 6,483,075
------------
143,089,875
------------
Mortgage Financing 3.3%
913,200 Bay View Capital Corp........................... 28,994,100
Natural Resources/Land 13.6%
1,683,000 * Castle & Cooke, Inc............................. 31,977,000
650,000 Deltic Timber Corporation....................... 16,290,625
650,000 The Pioneer Group, Inc.......................... 17,103,125
261,000 Rayonier Inc.................................... 12,006,000
6,950,000 TimberWest Timber Trust (Foreign)............... 41,118,667
------------
118,495,417
------------
Office 21.3%
892,400 Alexandria Real Estate Equities, Inc. (REIT).... 26,716,225
2,075,000 * Beacon Capital Partners, Inc.(b) (REIT)......... 41,500,000
1,350,000 Boston Properties Inc. (REIT)................... 46,575,000
1,090,900 Cousins Properties Incorporated (REIT).......... 32,590,638
2,197,300 Prime Group Realty Trust (REIT)................. 37,628,763
------------
185,010,626
------------
Retail 12.0%
1,223,800 Getty Realty Corp............................... 23,711,125
142,880 * Horizon Group Properties, Inc................... 942,122
993,800 * IHOP Corp....................................... 41,118,475
3,195,800 Prime Retail, Inc. (REIT)....................... 38,149,862
------------
103,921,584
------------
TOTAL COMMON STOCKS (COST $696,903,984)......... 728,707,739
------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE> 14
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REALTY FUND - PORTFOLIO INVESTMENTS
AT JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C> <C> <C> <C>
Preferred Stock - 8.4%
Diversified Realty 8.4%
14,600,000 * Excel Legacy Corporation - Series A Liquidating
Preference Convertible(b)....................... $ 73,000,000
------------
TOTAL PREFERRED STOCK (COST $73,000,000)........ 73,000,000
------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Options - 0.8%
CONTRACTS
----------
Put Options Written
5,494 Newhall Land and Farming Company, expiring
April '99 @ $20 (Premiums received
$1,076,268)..................................... (32,964)
2,967 Newhall Land and Farming Company, expiring
October '99 @ $25 (Premiums received
$709,919)....................................... (293,733)
Call Options Purchased
5,494 Newhall Land and Farming Company, expiring
April '99 @ $20 (Cost $1,761,493)............... 5,323,686
2,967 Newhall Land and Farming Company, expiring
October '99 @ $25 (Cost $1,225,243)............. 1,887,012
------------
6,884,001
------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Corporate Bonds - 2.6%
PRINCIPAL
AMOUNT
----------
34,000,000 Marriott International, Inc. Liquid Yield
Option Notes (LYONs), zero coupon conv. sub.
notes due 2011 (COST $19,806,185)............... 22,185,000
------------
Short-Term Obligations 4.3%
Repurchase Agreement with State Street Bank, 5.0% due 7-1-98..... 37,299,000
------------
TOTAL INVESTMENTS (COST $828,209,718)(a)...................... 99.9% 868,075,740
OTHER ASSETS AND LIABILITIES, NET............................. 0.1 1,095,211
----- ------------
NET ASSETS.................................................... 100.0% $869,170,951
===== ============
NET ASSET VALUE PER SHARE............................................ $16.71
======
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for Federal income tax purposes.
(b) Illiquid/restricted security.
Note: Companies designated as "Foreign" are headquartered outside the U.S. and
represent 6% of Net Assets.
See Notes to Financial Statements.
13
<PAGE> 15
- - --------------------------------------------------------------------------------
SMALL-CAP FUND - MANAGEMENT DISCUSSION
by Mason Hawkins and Staley Cates
Over the last quarter and throughout 1998, Longleaf Partners Small-Cap Fund has
delivered strong absolute and relative performance. The Fund grew 1.2% during
the second quarter versus a decline of 4.7% in the Russell 2000. Year-to-date
the Small-Cap Fund is up 13.7% compared to the Russell 2000's 4.9%. The Fund's
performance is more impressive given our high cash levels. At the end of June,
Small-Cap had 27% of its portfolio in cash reserves.
Our investments in cable have propelled much of the year's performance. Shaw
Communications and MediaOne have dramatically impacted the Fund since we
acquired these holdings less than a year ago. Each remains below our appraisal,
and our confidence in their cash flows and managements continues to grow.
While we have found a few qualifying domestic stocks in 1998, the largest
opportunity to buy significantly undervalued small cap businesses has been
outside the U.S. We currently own four companies headquartered in Canada which
represent 18% of Small-Cap's assets. Another 9% of the portfolio is in fourteen
Japanese positions. Our bottom-up process to find the best companies selling at
the steepest discounts has led to our foreign holdings. We hedge the currency of
businesses whose revenues or assets are tied to a single country. Small-Cap is
limited to 30% foreign purchases; below that, we will continue to own the best
investments we can find for our money and yours, wherever they are located.
We sold several companies which reached full value during the quarter including
Dart Group, Corecomm, Grey Advertising, and Chicago Title (spun off from
Alleghany). We have been unable to acquire significant stakes in our new
holdings, and consequently the cash in the Fund rose from 20% in March to 27%.
While the effort to find new investment opportunities has been painstaking, the
attempt to purchase meaningful amounts of our qualifiers has been more so.
Southeastern remains committed to our belief in concentrated portfolios -- 43%
of the portfolio is in our top ten holdings. We are not, however, rigidly wed to
any formal portfolio construction. As long as each marginal investment is amply
qualified, we would rather be owners than lenders. If we adhered to a dogmatic
rule that required investing 4-5% of our assets in a company or none at all, we
would miss a number of outstanding investments in companies we have found. We
will take even the small stakes we are dealt if we are convinced that the
business, people, and price stack up.
On a more optimistic note, we have identified three small cap U.S. companies
that meet our criteria since quarter end. We hope the prices will remain stable
so we can acquire meaningful stakes.
14
<PAGE> 16
- - --------------------------------------------------------------------------------
SMALL-CAP FUND - PERFORMANCE HISTORY AND
PORTFOLIO SUMMARY
AVERAGE ANNUAL RETURNS
FOR THE PERIODS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Small-Cap Russell 2000 Value-Line
Fund Index Index
--------- ------------ ----------
<S> <C> <C> <C>
Year-to-Date 13.71% 4.93% 4.92%
One Year 25.08 16.51 13.53
Three Years 28.64 18.86 15.29
Five Years 20.61 16.04 11.37
</TABLE>
* The average annual returns for the Longleaf Partners Small-Cap Fund and the
Russell 2000 Index, from initial public offering on 2/21/89 through 6/30/98
were 13.38% and 13.99%, respectively. From inception through 3/31/91, the
Fund was managed by a different portfolio manager.
FIVE LARGEST HOLDINGS
(REPRESENT 28.3% OF NET ASSETS)
SHAW COMMUNICATIONS INC. (SCL) 10.2%
A Canadian cable television company which also provides high-speed Internet
access and digital audio services.
MEDIAONE GROUP, INC. (formerly U S West Media Group) (UMG) 6.9%
Cable and communications company whose focus is providing a single line to the
home for multiple services including video, Internet access, and voice.
BAY VIEW CAPITAL CORP. (BVCC) 3.8%
The holding company for Bay View Federal Bank which uses deposits and other
funds to originate and purchase real estate loans and consumer loans, and serves
the nine counties contiguous with San Francisco Bay through 27 branch offices
and one loan production office.
MIDAS INC. (MDS) 3.7%
One of the world's largest automotive service providers with over 1900
franchises in the U.S. and 800 locations overseas.
FDX CORPORATION (FDX) 3.7%
Integrated air-ground transportation company providing time-definite delivery of
packages and documents worldwide.
15
<PAGE> 17
- - --------------------------------------------------------------------------------
SMALL-CAP FUND - PORTFOLIO SUMMARY
PORTFOLIO CHANGES
JANUARY 1, 1998 THROUGH JUNE 30, 1998
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Carmike Cinemas, Inc. Baker Fentress & Company
Chicago Title Corporation* Celestial Seasonings, Inc.
Fuji Fire and Marine Insurance Chicago Title Corporation*
Company, Limited Corecomm, Inc.
Genlyte Group Incorporated Dart Group Corporation
Kentucky Fried Chicken Japan Grey Advertising Inc. -
Kinseki, Ltd. Class A
Kuraya Corporation Showboat, Inc.
MediaOne Group, Inc.* The Union Corporation
Midas Inc. U S West, Inc.*
Nippon Broadcasting System White River Corporation
Nippon Shinyaku Co., Ltd. Zurn Industries, Inc.
Nippon Shoji Kaisha Ltd.
Ryoyo Electro Corp.
Sangetsu Co., Ltd.
Shaw Communications Inc. - Class A
Showa Pharmaceutical Co. Ltd.
U S West, Inc*
</TABLE>
* Acquired through merger/spin-off of existing position.
16
<PAGE> 18
- - --------------------------------------------------------------------------------
SMALL-CAP FUND - PORTFOLIO INVESTMENTS
AT JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C> <C> <C> <C>
Common Stock 71.8%
Broadcasting 1.2%
355,000 Nippon Broadcasting System (Foreign).................... $ 14,963,793
Building Materials 0.4%
405,000 Sangetsu Co., Ltd (Foreign)............................. 5,223,547
Business Services 1.8%
1,104,400 * Pinkerton's, Inc........................................ 22,916,300
Cable 17.1%
1,980,000 * MediaOne Group Inc...................................... 86,996,250
100,000 Shaw Communications Inc. - Class A (Foreign)............ 1,849,711
6,479,800 Shaw Communications Inc. - Class B (Foreign)............ 126,026,712
------------
214,872,673
------------
Commercial Lighting 0.6%
83,700 * Genlyte Group Incorporated.............................. 2,218,050
223,350 Thomas Industries, Inc.................................. 5,458,116
------------
7,676,166
------------
Electronics 1.1%
205,000 Kinseki, Ltd.(Foreign).................................. 1,048,744
1,109,000 Ryoyo Electro Corp. (Foreign)........................... 13,040,948
------------
14,089,692
------------
Entertainment 1.0%
461,100 * Carmike Cinemas, Inc. -- Class A........................ 12,420,881
Financial Services 0.1%
21,500 Duff & Phelps Credit Rating Co.......................... 1,198,625
Investment Management Companies 1.8%
836,000 United Asset Management Corporation..................... 21,788,250
------------
Manufacturing 0.8%
164,700 * American Safety Razor Company........................... 2,408,738
264,000 AMETEK, Inc............................................. 7,738,500
------------
10,147,238
------------
Mortgage Financing 3.9%
1,518,600 Bay View Capital Corp................................... 48,215,550
Natural Resources 8.6%
845,000 Deltic Timber Corporation............................... 21,177,812
2,748,496 Gendis Inc. - Class A (Foreign)......................... 22,802,891
865,000 The Pioneer Group, Inc.................................. 22,760,313
6,950,000 TimberWest Timber Trust (Foreign)....................... 41,118,667
------------
107,859,683
------------
Pharmaceuticals 0.4%
199,700 Kuraya Corporation (Foreign)............................ 1,142,500
516,000 Nippon Shinyaku Co., Ltd. (Foreign)..................... 2,241,943
278,400 Nippon Shoji Kaisha Ltd. (Foreign)...................... 824,458
105,000 Showa Pharmaceutical Co. Ltd (Foreign).................. 518,248
------------
4,727,149
------------
</TABLE>
See Notes to Financial Statements.
17
<PAGE> 19
- - --------------------------------------------------------------------------------
SMALL-CAP FUND - PORTFOLIO INVESTMENTS
AT JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
Property & Casualty Insurance 13.2%
126,273 * Alleghany Corporation.......................... $ 29,453,177
5,717,000 The Chiyoda Fire and Marine Insurance Company,
Ltd. (Foreign)............................... 21,132,118
3,840,000 The Dai-Tokyo Fire and Marine Insurance
Company, Ltd. (Foreign)...................... 13,363,980
2,873,000 Fuji Fire and Marine Insurance Company, Limited
(Foreign).................................... 6,500,141
1,777,400 Hilb, Rogal and Hamilton Company............... 27,771,875
1,702,000 The Koa Fire and Marine Insurance Company, Ltd.
(Foreign).................................... 6,548,748
7,160,000 The Nissan Fire & Marine Insurance Company,
Ltd. (Foreign)............................... 24,608,711
640,800 Orion Capital Corporation...................... 35,804,700
--------------
165,183,450
--------------
Real Estate 9.2%
1,500,700 * Catellus Development Corporation............... 26,543,631
1,135,400 Cousins Properties Incorporated................ 33,920,075
552,900 * IHOP Corp...................................... 22,876,237
1,520,000 TrizecHahn Corporation (Foreign)............... 32,585,000
--------------
115,924,943
--------------
Restaurants 1.2%
36,000 Kentucky Fried Chicken Japan (Foreign)......... 360,558
982,400 * VICORP Restaurants, Inc........................ 15,104,400
--------------
15,464,958
--------------
Retail 3.7%
2,333,400 Midas Inc...................................... 46,959,675
Telecommunications 2.0%
1,349,109 * Vanguard Cellular Systems, Inc. -- Class A..... 25,464,432
Transportation 3.7%
740,000 * FDX Corporation................................ 46,435,000
--------------
TOTAL COMMON STOCKS (COST $717,352,643).................... 901,532,005
--------------
Notional Principal Contract 0.1% (Note 9)
728,900 Contract on Vanguard Cellular Systems Inc...... 692,105
--------------
</TABLE>
See Notes to Financial Statements.
18
<PAGE> 20
- - --------------------------------------------------------------------------------
SMALL-CAP FUND - PORTFOLIO INVESTMENTS
AT JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
MARKET VALUE
--------------
<S> <C> <C> <C> <C> <C>
Short-Term Obligations 27.2%
Commercial Paper - Clipper Receivables Corp., 5.5% due 7-7-98....... $ 49,954,000
Federal Home Loan Mortgage Corporation, 5.5% due 7-14-98............ 99,805,000
Federal Home Loan Mortgage Corporation, 5.6% due 7-24-98............ 99,651,805
Repurchase Agreement with State Street Bank, 5.0% due 7-1-98........ 67,317,000
U.S. Treasury Bill, 4.9% due 8-6-98................................. 24,878,750
--------------
341,606,555
--------------
TOTAL INVESTMENTS (COST $1,058,959,198)(a)................... 99.1% 1,243,830,665
OTHER ASSETS AND LIABILITIES, NET............................ 0.9 11,410,859
----- --------------
NET ASSETS................................................... 100.0% $1,255,241,524
===== ==============
NET ASSET VALUE PER SHARE........................................... $25.22
======
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for Federal income tax purposes.
Note: Companies designated as "Foreign" are headquartered outside the U.S. and
represent 27% of Net Assets.
Open Forward Currency Contracts
<TABLE>
<CAPTION>
Currency Currency Sold and Currency Unrealized
Units Sold Settlement Date Market Value Gain
- - ------------- ---------------------------------- ------------ -----------
<C> <S> <C> <C>
150,608,700 Canadian Dollars 10-28-98......... $102,734,482 $ 4,640,348
3,122,676,537 Japanese Yen 2-26-99.............. 23,292,900 2,021,633
186,235,782 Japanese Yen 3-15-99.............. 1,392,156 114,172
23,644,623 Japanese Yen 3-30-99.............. 177,082 10,158
641,866,185 Japanese Yen 3-31-99.............. 4,807,743 336,476
3,830,551,260 Japanese Yen 4-2-99............... 28,699,009 1,800,279
6,940,169,777 Japanese Yen 5-13-99.............. 52,263,852 1,722,702
------------ -----------
Total Forward Contracts........... $213,367,224 $10,645,768
============ ===========
</TABLE>
See Notes to Financial Statements.
19
<PAGE> 21
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
AT JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments:
Securities, at market value (cost $2,159,076,627,
$772,890,720, and $717,352,643, respectively) (Note
2)......................................................
Short-term cash equivalents...............................
Repurchase agreement (Note 2).............................
Corporate bonds (cost $19,806,185)........................
Notional Principal Contract (Note 9)......................
TOTAL INVESTMENTS
Cash........................................................
Receivable for:
Forward currency contracts (Note 2).......................
Dividends and interest....................................
Securities sold...........................................
Prepaid assets..............................................
Insurance reserve premium...................................
TOTAL ASSETS
LIABILITIES:
Payable for:
Investment Counsel fee (Note 3)...........................
Administration fee (Note 4)...............................
Securities purchased......................................
Options written, at market value (premiums received
$1,786,187)...............................................
Other accrued expenses......................................
TOTAL LIABILITIES
NET ASSETS:
Net assets consist of:
Paid-in capital...........................................
Undistributed net investment income.......................
Accumulated net realized gain.............................
Unrealized appreciation of investments....................
Unrealized foreign exchange loss..........................
Net Assets
NET ASSET VALUE PER SHARE...................................
FUND SHARES ISSUED AND OUTSTANDING..........................
</TABLE>
See Notes to Financial Statements.
20
<PAGE> 22
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
AT JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PARTNERS FUND REALTY FUND SMALL-CAP FUND
- - -------------- ------------ --------------
<S> <C> <C>
$3,117,278,123 $808,918,437 $ 901,532,005
448,436,056 - 274,289,555
103,128,000 37,299,000 67,317,000
- 22,185,000 -
692,105
- - -------------- ------------ --------------
3,668,842,179 868,402,437 1,243,830,665
102 610 852
19,117,128 - 10,645,768
1,886,703 1,958,881 2,083,464
20,971 62,873 51,492
115,903 57,744 62,193
65,451 3,937 12,203
- - -------------- ------------ --------------
3,690,048,437 870,486,482 1,256,686,637
- - -------------- ------------ --------------
2,261,271 722,642 831,979
290,544 72,264 99,972
34,995,739 - 293,761
- 326,697 -
495,717 193,928 219,401
- - -------------- ------------ --------------
38,043,271 1,315,531 1,445,113
- - -------------- ------------ --------------
$3,652,005,166 $869,170,951 $1,255,241,524
- - -------------- ------------ --------------
2,336,419,815 805,894,119 951,237,650
7,748,430 7,116,454 7,724,822
330,627,539 16,295,611 100,806,252
977,318,624 39,866,022 195,517,235
(109,242) (1,255) (44,435)
- - -------------- ------------ --------------
$3,652,005,166 $869,170,951 $1,255,241,524
============== ============ ==============
$30.68 $16.71 $25.22
======= ======= =======
119,051,352 52,027,037 49,762,069
</TABLE>
See Notes to Financial Statements.
21
<PAGE> 23
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
INCOME:
Dividends (net of foreign tax withheld of $1,202,211,
$397,594, and $604,751, respectively) (Note 7).........
Interest..................................................
Net realized foreign exchange gain(loss)..................
Total income......................................
EXPENSES:
Investment Counsel fee (Note 3)...........................
Administration fee (Note 4)...............................
Transfer Agent fee........................................
Registration and filing fees..............................
Supplies and postage......................................
Reimbursable administration expenses (Note 4).............
Printing..................................................
Trustees' fees............................................
Custodian fee.............................................
Insurance expense.........................................
Professional fees.........................................
Miscellaneous.............................................
Total expenses....................................
Net investment income.............................
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on securities...........................
Net unrealized appreciation(depreciation) on securities...
Net unrealized depreciation on options....................
Net unrealized foreign exchange loss......................
Net realized and unrealized gain(loss) on
investments.....................................
NET INCREASE(DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS................................................
</TABLE>
See Notes to Financial Statements.
22
<PAGE> 24
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PARTNERS SMALL-CAP
FUND REALTY FUND FUND
- - ------------- ------------ --------------
<S> <C> <C>
$ 13,813,764 $ 10,383,832 $ 5,972,540
9,380,547 2,031,841 6,017,568
74,725 (25,852) 1,722,748
- - ------------ ------------ ------------
23,269,036 12,389,821 13,712,856
- - ------------ ------------ ------------
13,024,570 4,190,207 4,700,528
1,670,493 419,021 560,619
274,009 68,744 91,953
181,455 85,010 96,464
96,047 45,789 44,905
83,135 27,091 32,269
110,153 52,515 58,203
29,753 14,876 14,876
39,927 19,866 48,206
21,846 5,505 6,642
10,909 9,917 9,917
67,683 19,674 21,670
- - ------------ ------------ ------------
15,609,980 4,958,215 5,686,252
- - ------------ ------------ ------------
7,659,056 7,431,606 8,026,604
- - ------------ ------------ ------------
335,471,394 16,248,817 102,828,341
202,597,749 (56,637,899) 29,786,000
- (1,815,821) -
(109,242) (5,729) (48,904)
- - ------------ ------------ ------------
537,959,901 (42,210,632) 132,565,437
- - ------------ ------------ ------------
$545,618,957 $(34,779,026) $140,592,041
============ ============ ============
</TABLE>
See Notes to Financial Statements.
23
<PAGE> 25
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PARTNERS FUND
--------------------------------
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1998 1997
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income............. $ 7,659,056 $ 21,420,547
Net realized gain on securities... 335,471,394 306,865,056
Net unrealized appreciation
(depreciation) on securities... 202,597,749 322,569,345
Net unrealized appreciation
(depreciation) on options...... - -
Net unrealized foreign exchange
gain (loss).................... (109,242) -
-------------- --------------
Net increase in net assets
resulting from operations.... 545,618,957 650,854,948
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income........ - (21,460,363)
From net realized gain on
investments.................... - (311,977,522)
From return of capital............ - -
-------------- --------------
Net decrease in net assets
resulting from
distributions................ - (333,437,885)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of
shares......................... 371,079,519 477,572,262
Net asset value of shares issued
to shareholders for
reinvestment of shareholder
distributions.................. 315,544,005 -
Cost of shares redeemed........... (185,307,490) (489,998,326)
-------------- --------------
Net increase(decrease) in net
assets from fund share
transactions................. 501,316,034 (12,426,064)
-------------- --------------
Total increase in net assets... 1,046,934,991 304,990,999
NET ASSETS:
Beginning of period............... 2,605,070,175 2,300,079,176
-------------- --------------
End of period..................... $3,652,005,166 $2,605,070,175
============== ==============
Undistributed net investment
income included in net assets
at end of period............... $ 7,748,430 $ 89,373
============== ==============
</TABLE>
See Notes to Financial Statements.
24
<PAGE> 26
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
REALTY FUND SMALL-CAP FUND
---------------------------------- ----------------------------------
SIX MONTHS YEAR ENDED SIX MONTHS YEAR ENDED
ENDED DECEMBER 31, ENDED DECEMBER 31,
JUNE 30, 1998 1997 JUNE 30, 1998 1997
---------------- -------------- ---------------- --------------
<S> <C> <C> <C>
$ 7,431,606 $ 3,776,009 $ 8,026,604 $ 7,445,302
16,248,817 27,323,623 102,828,341 26,187,400
(56,637,899) 74,200,344 29,786,000 114,470,656
(1,815,821) 7,499,273 - -
(5,729) 4,474 (48,904) 4,468
-------------- -------------- -------------- --------------
(34,779,026) 112,803,723 140,592,041 148,107,826
-------------- -------------- -------------- --------------
- (3,757,696) - (7,427,301)
- (27,280,191) - (28,306,270)
- (1,813,127) - -
-------------- -------------- -------------- --------------
- (32,851,014) - (35,733,571)
-------------- -------------- -------------- --------------
300,740,153 685,515,315 255,004,962 770,142,361
30,650,461 - 33,095,199 -
(164,742,841) (184,175,044) (88,709,813) (219,414,438)
-------------- -------------- -------------- --------------
166,647,773 501,340,271 199,390,348 550,727,923
-------------- -------------- -------------- --------------
131,868,747 581,292,980 339,982,389 663,102,178
737,302,204 156,009,224 915,259,135 252,156,957
-------------- -------------- -------------- --------------
$ 869,170,951 $ 737,302,204 $1,255,241,524 $ 915,259,135
============== ============== ============== ==============
$7,116,454 $24,233 $7,724,822 $22,599
============ ======== ============ ========
</TABLE>
See Notes to Financial Statements.
25
<PAGE> 27
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
The Funds are each a series of Longleaf Partners Funds Trust, a Massachusetts
business trust which is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. Capitalization for each
fund was provided by principals of Southeastern Asset Management, Inc., the
Investment Counsel, as follows:
<TABLE>
<CAPTION>
PARTNERS FUND REALTY FUND SMALL-CAP FUND
----------------- ------------------ -----------------
<S> <C> <C> <C>
Organization date.... November 26, 1986 September 12, 1995 December 21, 1988
Initial
capitalization
date............... March 24, 1987 January 2, 1996 December 28, 1988
Amount of initial
capitalization..... $100,000 $100,000 $1,500,000
Shares issued at
capitalization..... 10,000 10,000 150,000
Shares authorized.... Unlimited Unlimited Unlimited
Public offering
date............... April 8, 1987 January 2, 1996 February 21, 1989
</TABLE>
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
(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) Option contracts are marked-to-market daily. Listed options are valued at
the latest closing price. If there are no transactions that day, the
options are valued at the midpoint between the closing bid and ask prices.
Over-the-counter options are valued as determined in good faith under
procedures established by the Funds' trustees.
(4) When market quotations are not readily available, portfolio securities are
valued at their fair value as determined in good faith under procedures
26
<PAGE> 28
established by and under the general supervision of the Funds' Trustees.
In determining fair value, the Board considers all relevant qualitative
and quantitative information available. These factors are subject to
change over time and are reviewed periodically. Estimated values may
differ from the values that would have been used had a ready market of the
investment existed.
Accounting for Investments
The Funds follow industry practice and record security transactions on trade
date plus one. 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.
Distributions to Shareholders
Dividends and distributions to shareholders are recorded on the ex-dividend
date.
Federal Income Taxes
The Funds' policy is to comply with the requirements of the Internal Revenue
Code that are applicable to regulated investment companies and to distribute all
taxable income to shareholders. Accordingly, no federal income tax provision is
required. In addition, the Funds intend to make any required distributions to
avoid the application of a 4% nondeductible excise tax.
Foreign Currency Translations
The books and records of the Funds are maintained in U.S. dollars. Securities
denominated in currencies other than U.S. dollars are subject to changes in
value due to fluctuations in exchange rates. Purchases and sales of securities
and income and expenses are translated into U.S. dollars at the prevailing
exchange rate on the respective date of each transaction. The market value of
investment securities, assets and liabilities are translated into U.S. dollars
daily.
The Funds do not isolate the portion of net realized and unrealized gains or
losses in equity security investments which are attributable to changes in
foreign exchange rates. Accordingly, the impact of foreign currency conversions
is included in the realized and unrealized gains or losses on the underlying
equity securities.
Forward Currency Contracts
The Funds may execute forward currency contracts to reduce their exposure to
currency risk on portfolio investments denominated in foreign currency. Forward
currency contracts are commitments to purchase or sell a foreign currency at a
future maturity date. The resulting obligation is marked-to-market daily using
foreign currency exchange rates supplied by an independent pricing service. An
unrealized gain or loss is recorded for the difference between the contract
opening value and its current value. When a contract is closed or delivery is
taken, this gain or loss is realized. For federal tax purposes, open forward
contracts are treated as realized and subject to distribution at our excise tax
year-end date.
27
<PAGE> 29
Options
Upon the purchase of a put or call option, the premium paid is recorded as an
investment. When the Funds write a put or a call option, the premium received by
the Funds is recorded as a liability. When a purchased option expires, a loss is
recognized for the cost of the option. When a written option expires, a gain is
realized for the premium received. When the Funds enter into a closing sale
transaction, a gain or loss is recognized based on the difference between the
proceeds of the closing transaction and the cost of the option.
Risk of Foreign Currency Contracts and Options
Using foreign currency contracts and options for hedging purposes can reduce
market risks. However, when used separately, foreign currency contracts and
options have risks. For example, the price movements of the securities
underlying the options and forwards may not follow the price movements of the
portfolio securities subject to the hedge. Gains on investments in options and
forwards 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 forwards does not exist, the Funds may not be able to
close their positions and in such an event, the loss is theoretically unlimited.
Swaps
An equity swap is an agreement to exchange streams of payments computed by
reference to a notional amount based on the performance of a basket of stocks or
a single stock. The Funds may enter these transactions to protect against any
increase in the price of securities the Funds anticipate purchasing at a later
date or to obtain the price performance of a security without actually
purchasing the security. For example, a swap may be executed when the underlying
security is illiquid, unavailable for direct investment, or available only at
less attractive terms. Swaps have associated risks including possible default of
the counterparty and illiquidity. Use of a swap to hedge could result in a
greater loss than if the swap had not been employed.
The Funds will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment or closing date with
the Funds paying or receiving only the net amount of the two payments. The Funds
record the net value of their swap obligations daily and segregate cash or
liquid assets at least equal to the notional principal balance.
Repurchase Agreements
The Funds may engage in repurchase agreement transactions. The Funds' custodian
bank sells U.S. government securities to each Fund under agreements to
repurchase these securities from each Fund at a stated repurchase price
including interest for the term of the agreement, which is usually overnight or
over a weekend. Each Fund, through its custodian, receives delivery of the
underlying U.S. government securities as collateral, whose market value 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.
28
<PAGE> 30
NOTE 3. INVESTMENT COUNSEL AGREEMENT
Southeastern Asset Management, Inc. ("Southeastern") serves as Investment
Counsel to the Funds and receives annual compensation, computed daily and paid
monthly, in accordance with the following schedule for the Partners Fund and
Small-Cap Fund:
<TABLE>
<S> <C>
First $400 million of average daily net
assets.................................... 1.00%
In excess of $400 million................... .75%
</TABLE>
The Realty Fund fee is calculated on the same basis at 1.00% per annum on all
asset levels.
Southeastern has agreed to reduce its fees on a pro rata basis to the extent
that the Funds' normal annual operating expenses (excluding taxes, interest,
brokerage fees, and extraordinary expenses) exceed 1.5% of average annual net
assets. No such reductions were necessary for the current year.
NOTE 4. FUND ADMINISTRATOR
Southeastern also serves as the Fund Administrator and in this capacity is
responsible for managing, performing or supervising the administrative and
business operations of the Funds. Functions include the preparation of all
registration statements, prospectuses, tax returns and proxy statements, daily
valuation of the portfolios and calculation of daily net asset values per share.
The Funds pay a fee as compensation for these services, accrued daily and paid
monthly, of 0.10% per annum of average daily net assets.
Reimbursable administration expenses paid by the Funds to Southeastern consist
of the cost of computer software dedicated to valuation calculations and a
portion of the Funds' Treasurer's salary allocated in accordance with Trustee
review and approval.
NOTE 5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------------
PARTNERS FUND REALTY FUND SMALL-CAP FUND
------------- ----------- --------------
<S> <C> <C> <C>
Shares sold................... 13,l27,698 17,232,947 10,681,980
Reinvestment of shareholder
distribution................ 12,145,651 1,766,597 1,492,119
Shares redeemed............... (6,504,068) (9,470,587) (3,674,816)
---------- ---------- ----------
18,769,281 9,528,957 8,499,283
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------
PARTNERS FUND REALTY FUND SMALL-CAP FUND
------------- ----------- --------------
<S> <C> <C> <C>
Shares sold.................. 18,272,322 42,365,845 37,816,017
Shares redeemed.............. (18,643,094) (11,033,373) (10,675,148)
----------- ----------- -----------
(370,772) 31,332,472 27,140,869
=========== =========== ===========
</TABLE>
29
<PAGE> 31
NOTE 6. INVESTMENT TRANSACTIONS
Purchases and sales of equity securities and related brokerage commissions for
the period (excluding short-term obligations) are summarized below:
<TABLE>
<CAPTION>
PARTNERS FUND REALTY FUND SMALL-CAP FUND
------------- ------------ --------------
<S> <C> <C> <C>
Purchases................. $379,675,425 $263,329,715 $189,538,950
Sales..................... 646,942,810 109,225,022 200,549,447
Brokerage commissions..... 2,134,067 831,701 913,290
</TABLE>
NOTE 7. AFFILIATED COMPANIES
Under Section 2(a)(3) of the Investment Company Act of 1940, a portfolio company
is defined as "affiliated" if a Fund owns five percent or more of its voting
stock. At June 30, 1998, each Fund held at least five percent of the outstanding
voting stock of the following companies:
<TABLE>
<CAPTION>
% DIVIDEND INCOME
OUTSTANDING MARKET IN THE
SHARES OF VALUE AT SIX MONTHS
THE JUNE 30, ENDED
COMPANY 1998 JUNE 30, 1998
----------- ------------ ----------------
<S> <C> <C> <C>
PARTNERS FUND
Pioneer Natural Resources Company 5.1% $121,074,900 $ 165,690
Rayonier Inc. 10.3 133,400,000 1,798,000
UCAR International, Inc. 9.9 129,884,375 -
------------ ----------
$384,359,275 $1,963,690
============ ==========
REALTY FUND
Alexandria Real Estate Equities,
Inc. 7.8% $ 26,716,225 $ 713,920
Beacon Capital Partners,
Inc.(Note 8) 9.9 41,500,000 -
Castle & Cooke, Inc. 9.9 31,977,000 -
Deltic Timber Corporation 5.1 16,290,625 81,250
Forest City Enterprises, Inc. --
Class A 8.4 47,515,725 102,522
Excel Legacy Corporation* --
Common 6.8 9,975,000 -
Series A Liquidating Preference
Convertible (Note 8) 68.6 73,000,000 -
Getty Realty Corp. 9.0 23,711,125 244,760
Horizon Group Properties, Inc. 5.2 942,122 -
IHOP Corp. 10.1 41,118,475 -
Prime Group Realty Trust 14.1 37,628,763 1,396,339
Prime Retail, Inc. 7.7 38,149,862 3,713,379
Red Roof Inns, Inc. 9.0 42,174,375 -
Sizeler Property Investors, Inc. 9.3 7,878,938 344,520
Supertel Hospitality, Inc. 10.7 6,483,075 -
TimberWest Timber Trust 10.0 41,118,667 2,236,990
------------ ----------
$486,179,977 $8,833,680
============ ==========
</TABLE>
* Combined voting power is 30.8%
30
<PAGE> 32
<TABLE>
<CAPTION>
% DIVIDEND INCOME
OUTSTANDING MARKET IN THE
SHARES OF VALUE AT SIX MONTHS
THE JUNE 30, ENDED
COMPANY 1998 JUNE 30, 1998
----------- ------------ ----------------
<S> <C> <C> <C>
SMALL-CAP FUND
Bay View Capital Corp. 7.5 $ 48,215,550 $ 151,500
Deltic Timber Corporation 6.6 21,177,812 105,625
Gendis, Inc. - Class A(Note 8) 16.4 22,802,891 97,253
Hilb, Rogal and Hamilton Company 14.0 27,771,875 559,881
IHOP Corp. 5.6 22,876,237 -
Shaw Communications Inc. -- Class
B 10.6 126,026,712 153,176
TimberWest Timber Trust 10.0 41,118,667 2,231,491
VICORP Restaurants, Inc. 10.7 15,104,400 -
Midas Inc. 13.8 46,959,675 46,668
Pinkerton's, Inc. 8.8 22,916,300 -
Vanguard Cellular Systems,
Inc. -- Class A 5.6 25,464,432 -
------------ ----------
$420,434,551 $3,345,594
============ ==========
</TABLE>
Realized net gains on the sales of affiliated companies were:
<TABLE>
<CAPTION>
Gain
----------
<S> <C> <C>
Partners Fund............... UCAR International, Inc. $ 47,571
Realty Fund................. Castle & Cooke, Inc. 955,497
Supertel Hospitality, Inc. 149,402
Small-Cap Fund.............. None
</TABLE>
NOTE 8. ILLIQUID OR RESTRICTED SECURITIES
The Realty Fund holds 2,075,000 shares of Beacon Capital Partners, Inc. (Beacon)
carried at cost of $41,500,000 or $20.00 per share. The Beacon shares were
acquired in a private placement which closed March 17, 1998. The Realty Fund
also owns 14,600,000 shares of Excel Legacy Corp. Series A Liquidating
Preference Convertible Stock (Excel Preferred) carried at cost of $73,000,000 or
$5.00 per share. The Excel Preferred shares were acquired in a private placement
which closed on March 31, 1998 and will be converted by the company into common
shares on August 18, 1998. Both Beacon and Excel Preferred are unregistered and
are presently valued in good faith under guidelines established by the Fund
Trustees. Registration statements for both securities have been filed with the
Securities and Exchange Commission and are presently pending. These investments
represent 13% of the Realty Fund at June 30, 1998.
The Small-Cap Fund owns 2,748,496 shares of Gendis, Inc. Class A common stock,
representing 16.4% of the total outstanding shares of the company. Due to the
Fund's large ownership stake, a portion of this position may be relatively
illiquid. Gendis represents 1.8% of the Small-Cap Fund at June 30, 1998.
31
<PAGE> 33
NOTE 9. NOTIONAL PRINCIPAL CONTRACT (SWAP)
The Small-Cap Fund has entered into a notional principal contract with Merrill
Lynch. In exchange for interest on the principal balance, the contract entitles
the Fund to the appreciation or depreciation related to 728,900 shares of
Vanguard Cellular Systems, Inc.-- Class A common stock. The contract is valued
daily at current unrealized appreciation/depreciation net of accrued interest
expense. This investment represents 0.1% of the Small-Cap Fund at June 30, 1998.
On July 6, 1998, the contract was closed for a net realized gain of $1,138,489.
The Fund subsequently purchased the underlying shares of Vanguard Cellular
Systems, Inc.
NOTE 10. COLLATERAL
Securities with the following aggregate market value were segregated to
collateralize portfolio obligations at June 30, 1998:
<TABLE>
<CAPTION>
Market
Value of
Segregated
Obligation Assets
--------------------------- ------------
<S> <C> <C>
Partners Fund.............. Forward Currency Contracts $263,625,000
Realty Fund................ Newhall-Land and Farming
Company Put Options
Written 32,062,500
Small-Cap Fund............. Forward Currency Contracts 253,352,204
Notional Principal Contract 25,464,432
</TABLE>
32
<PAGE> 34
(Intentionally Left Blank)
33
<PAGE> 35
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
FINANCIAL HIGHLIGHTS
The following condensed financial information, including total returns, has been
financial statements appears in the Statement of Additional Information and The
presentation is for a share outstanding throughout each period.
<TABLE>
<CAPTION>
NET
GAINS
NET ON DISTRI-
ASSET SECURITIES TOTAL DIVIDENDS BUTIONS
VALUE NET REALIZED FROM FROM NET FROM RETURN
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT CAPITAL OF
OF PERIOD INCOME(E) UNREALIZED OPERATIONS INCOME GAINS CAPITAL
----------- ---------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PARTNERS FUND
Six months ended June 30,
1998 (unaudited)........ $25.98 $.06 $ 4.64 $ 4.70 $ -- $ -- $ --
Year ended December 31,
1997.................. 22.85 .21 6.24 6.45 (.21) (3.11) -
1996.................. 21.15 .37 4.09 4.46 (.38) (2.38) -
1995.................. 17.13 .30 4.40 4.70 (.24) (.44) -
1994.................. 16.92 .21 1.30 1.51 (.16) (1.14) -
1993.................. 14.70 .10 3.16 3.26 (.09) (.95) -
REALTY FUND
Six months ended June 30,
1998 (unaudited)........ 17.35 .14 (.78) (.64) -- -- --
Year ended December 31,
1997.................... 13.97 .19 3.96 4.15 (.09) (.64) (.04)
January 2, 1996 (Initial
Capitalization)
through December 31,
1996.................. 10.00 .16 3.91 4.07 (.04) (.05) (.01)
SMALL-CAP FUND
Six months ended June 30,
1998 (unaudited)........ 22.18 .16 2.88 3.04 -- -- --
Year ended December 31,
1997.................. 17.86 .25 4.94 5.19 (.18) (.69) -
1996.................. 14.46 .03 4.40 4.43 (.02) (1.01) -
1995.................. 13.28 .12 2.35 2.47 (.12) (1.17) -
1994.................. 13.49 (.03) .52 .49 - (.70) -
1993.................. 11.40 (.06) 2.32 2.26 - (.17) -
</TABLE>
* Annualized
(a) Aggregate, not annualized.
(b) Not applicable for prior periods prior to 1996.
(c) Before expense limitation fee waiver, this ratio was 1.60%.
(d) Before expense limitation fee waiver, this ratio was .82%.
(e) Calculated based on weighted average shares outstanding for the period.
34
<PAGE> 36
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
FINANCIAL HIGHLIGHTS
audited by PricewaterhouseCoopers LLP. The audit report on the 1997
should be read in conjunction with this condensed financial information.
<TABLE>
<CAPTION>
RATIO OF
NET EXPENSES RATIO OF
ASSET NET ASSETS TO NET
TOTAL VALUE END OF AVERAGE INCOME TO PORTFOLIO AVERAGE
DISTRI- END OF TOTAL PERIOD NET AVERAGE TURNOVER COMMISSION
BUTIONS PERIOD RETURN (THOUSANDS) ASSETS NET ASSETS RATE RATE PAID(B)
------- ------ ------ ----------- -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ -- $30.68 18.09%(a) $3,652,005 .93%* 0.45*% 12.58% $0.0779
(3.32) 25.98 28.25 2,605,070 .94 0.81 38.07 0.0514
(2.76) 22.85 21.02 2,300,079 .95 1.61 33.18 0.0750
(.68) 21.15 27.50 1,876,467 1.01 1.45 12.60
(1.30) 17.13 8.96 753,527 1.17 1.18 27.39
(1.04) 16.92 22.20 397,282 1.26 .63 19.12
-- 16.71 (3.69)(a) 869,171 1.17* 1.76* 14.41 0.0789
(.77) 17.35 29.73 737,302 1.20 0.75 28.66 0.0739
(.10) 13.97 40.69 156,009 1.50(c) .92(d) 4.28 0.0613
-- 25.22 13.71(a) 1,255,242 1.01* 1.42* 20.95 0.0403
(.87) 22.18 29.04 915,259 1.09 1.18 16.95 0.0514
(1.03) 17.86 30.64 252,157 1.23 .18 27.97 0.0605
(1.29) 14.46 18.61 135,977 1.30 .84 32.95
(.70) 13.28 3.64 99,609 1.38 (.22) 19.79
(.17) 13.49 19.83 85,087 1.45 (.45) 14.37
</TABLE>
35
<PAGE> 37
- - --------------------------------------------------------------------------------
SERVICE DIRECTORY
FUND INFORMATION (800) 445-9469
To request a prospectus, financial report, application or other Fund information
call (800) 445-9469 from 8:00 a.m. to 8:00 p.m. Eastern time, seven days a week.
EXISTING SHAREHOLDER INQUIRIES (800) 488-4191
To request action on your existing account contact the transfer agent, NFDS, at
(800) 488-4191 from 9:00 a.m. to 6:00 p.m. Eastern time, Monday through Friday.
<TABLE>
<CAPTION>
<S> <C>
Mail correspondence to: Overnight address:
Longleaf Partners Funds Longleaf Partners Funds
c/o NFDS c/o NFDS
P.O. Box 419929 1004 Baltimore, 5th Floor
Kansas City, MO 64141-6929 Kansas City, MO 64105
(816) 435-5241
</TABLE>
24-HOUR AUTOMATED INFORMATION (800) 378-3788
For automated reporting of daily prices, account balances and transaction
activity call (800) 378-3788, 24-hours a day, seven days a week. Please have
your Fund number (see below) and account number ready to access your investment
information.
SERVICES FOR FINANCIAL ADVISORS (800) 761-2509
Please contact Lee Harper or Mary Williamson for additional information.
PUBLISHED DAILY PRICE QUOTATIONS
Daily net asset value per share of each Fund is reported in mutual fund
quotations tables of major newspapers in alphabetical order under the bold
heading LONGLEAF PARTNERS as follows:
<TABLE>
<CAPTION>
TRANSFER AGENT
ABBREVIATION SYMBOL CUSIP FUND NUMBER
- - ------------ ------ --------- --------------
<C> <S> <C> <C>
Partners LLPFX 543069108 133
Realty LLREX 543069306 135
Sm-Cap LLSCX 543069207 134
</TABLE>
36
<PAGE> 38
- - --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
Trustees
O. Mason Hawkins, Chairman
Chadwick H. Carpenter, Jr.
Daniel W. Connell, Jr.
Steven N. Melnyk
C. Barham Ray
W. Reid Sanders
Officers
O. Mason Hawkins, Co-Portfolio Manager and Chief Executive Officer
W. Reid Sanders, President
G. Staley Cates, Co-Portfolio Manager and Vice President - Investments
C. T. Fitzpatrick, Co-Portfolio Manager of the Realty Fund
and Vice-President - Investments
Charles D. Reaves, Executive Vice President and General Counsel
Julie M. Douglas, Executive Vice President - Operations and Treasurer
Lee B. Harper, Executive Vice President - Marketing
Frank N. Stanley III, Vice President - Investments
John B. Buford, Vice President - Investments
Randy D. Holt, Vice President and Secretary
Transfer Agent
National Financial Data Services
Kansas City, Missouri
Custodian
State Street Bank & Trust Company
Boston, Massachusetts
Special Legal Counsel
Dechert Price & Rhodes
Washington D.C.
Independent Public Accountants
PricewaterhouseCoopers LLP
Boston, Massachusetts
37
<PAGE> 39
Longleaf Partners Funds
c/o NFDS
P.O. Box 419929
Kansas City, MO 64141-6929
Fund Information Requests
(800) 445-9469
Shareholder Account Inquiries
(800) 488-4191
