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[LOGO]
LONGLEAF PARTNERS FUNDS
QUARTERLY REPORT
at March 31, 1998
PARTNERS FUND
REALTY FUND
SMALL-CAP FUND
================================================================================
MANAGED BY:
SOUTHEASTERN ASSET MANAGEMENT, INC.
Memphis, TN
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CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Letter to Shareholders..................................... 2
Longleaf Partners Fund (Partners Fund)
Management Discussion.................................... 4
Performance History and Portfolio Summary................ 5
Portfolio Investments.................................... 6
Longleaf Partners Realty Fund (Realty Fund)
Management Discussion.................................... 8
Performance History and Portfolio Summary................ 9
Portfolio Investments.................................... 10
Longleaf Partners Small-Cap Fund (Small-Cap Fund)
Management Discussion.................................... 12
Performance History and Portfolio Summary................ 13
Portfolio Investments.................................... 14
Service Directory.......................................... 19
Trustees and Officers...................................... 21
</TABLE>
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LONGLEAF PARTNERS FUNDS
LETTER TO SHAREHOLDERS
TO OUR SHAREHOLDERS:
First Quarter Performance
We are pleased to report that first quarter results greatly exceeded our
expectations. In fact, the Partners and Small-Cap Funds' returns for the last
three months surpassed what we recently thought might be tough bogeys for all of
1998. The equity markets have proceeded to soundly repeal the platitude, "If it
can't get better, it won't." After a record seven consecutive up years for the
S&P 500 we believed stock performance could not get better. It did.
The increases in the three Funds' net asset values for the quarter were:
Partners Fund up 13.6%; Realty Fund up 1.4%; and Small-Cap Fund up 12.4%. The
Small-Cap and Realty Funds outperformed their benchmark indices while the
Partners Fund approximately matched the S&P 500.
Margin of Safety
We have begun selling some of our most successful long-term holdings in the
Partners and Small-Cap Funds as prices have risen to our appraisals. Without
exception, these businesses' share prices have compounded faster than the growth
of their underlying corporate values, completing the very profitable evolution
that our research team had hoped for when we decided to buy these stocks.
Parting company with beloved investments presents adverse consequences. We must
pay capital gains taxes (albeit the lowest in recent history) for these winners;
moreover, we will be very pressed to find businesses their equal at our required
discounts.
You might logically ask, "Why not continue holding these excellent compounders
even though they have reached full value?" The reason is no margin of safety
remains of value over price. Having a significant discount from intrinsic value
is paramount for two reasons. It protects one's capital against risk of
permanent loss. Second, the closing of the discount between price and economic
worth is one of two components in the compounding process. Without this "closing
the gap phenomenon," our stocks' performance depends entirely on the growth of
the underlying companies. We want both the shrinking of the discount and the
building of the enterprise value to be at work compounding for our Funds'
owners. Additionally, we want all the insurance we can build into our portfolios
at today's rarefied market levels.
2
<PAGE> 4
Short-Term Lending
In quarterly letters over the past three years we have often lamented how
challenging our mission of finding qualifying equity investments has become,
first in the Partners Fund and then in Small-Cap. Somehow, through an insightful
analytical anomaly or because of an evanescent market downdraft, we have
uncovered enough opportunity to succeed. This may not be the case in the months
to come. Today's market ebullience has priced many stocks of interest to these
two Funds through our evaluations. Hard work and numerous management visits are
producing no qualifiers -- companies priced at less than 60% of our conservative
estimate of their worth. By contrast, qualifying businesses for the Realty Fund
remain available.
While the Realty Fund is fully invested, cash levels have increased in the
Partners and Small-Cap Funds. Through the purchase of government-backed cash
equivalents, we are now doing our share of financing our profligate friends in
Washington. Like you, we are not enamored with the long-term returns accorded
lenders compared to those of owners. In the short run, however, if the price of
ownership increases sufficiently, the implied returns diminish to a level where
the temporary ownership of government obligations becomes the only intelligent
option. We hope this residual commitment will be short-lived, but it may not be.
We will remain extremely vigilant for long-term equity opportunity. Increased
market volatility comparable to that experienced in the second half of 1997, a
traditional cyclical market decline, or additional foreign opportunities
stemming from the financial crisis in Asia could each yield the chance to buy
undervalued stocks. We will not, however, change our long-held disciplines for
your capital nor for ours.
Annual Meeting
Our Annual Meeting will be Wednesday, May 13, at 5:30 p.m. at the Memphis
Botanic Garden. After ten years of presentations and minimal time for questions,
we have decided to reverse the time allocated to each. We will limit our
prepared remarks, so bring any questions that are of interest and we will
attempt to answer them. We look forward to seeing many of you there.
Sincerely,
/s/ G. Staley Cates /s/ C.T. Fitzpatrick
-------------------- ---------------------
G. Staley Cates, CFA C.T. Fitzpatrick, CFA
Co-Portfolio Manager Co-Portfolio Manager
/s/ O. Mason Hawkins
- ---------------------
O. Mason Hawkins, CFA
Co-Portfolio Manager
3
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PARTNERS FUND - MANAGEMENT DISCUSSION
by Mason Hawkins and Staley Cates
Over the past year we have explicitly discussed the market's high levels and our
corresponding difficulty finding undervalued and qualifying investments. The
corollary to this should be that our partners decrease their return
expectations. Below is a brief recap.
Over the past 25 years we have faced three other periods (1972, 1980,
and 1987) where it has been extremely difficult to find qualifying
investment ideas. -- March 31, 1997
Investors are paying peak multiples for peak levels of profitability.
-- June 30, 1997
The composite price-to-value ratio of these two Funds [Partners and
Small-Cap] are at their highest levels . . . We would welcome a market
correction. -- September 30, 1997
The United States equity markets, in closing out 1997, have just
completed the longest uninterrupted period of compounding in the
twentieth century . . . You should clearly remember our recent 1990's
experience. We firmly believe it is unlikely to be repeated soon, if
ever again in our lifetimes. -- December 31, 1997
In spite of our naysaying, Partners Fund performance for the last twelve months,
up 42.6%, exceeds any calendar year return in the Fund's history. As owners we
are pleased. As portfolio mangers looking for discounted prices, we are stymied.
Our warning stands -- this pace of compounding will end. The historical norm for
cyclical market declines has been approximately 25%. We would gladly suffer the
short-term consequences to uncover the underlying opportunities that would
arise.
The first quarter was newsworthy for several of our companies. Alltel announced
its acquisition of 360 degrees Communications. USA Waste and its very capable
management team are bidding for Waste Management. U S West Media Group will soon
be an independent company renamed MediaOne.
Our three holdings, Philips, FDX Corp. and Seagram, whose prices were hurt the
most by the Asian turmoil in 1997, have recovered nicely. Their collective gain
added almost $100 million to the Partners Fund in the quarter.
We sold Kansas City Southern as it reached our appraisal. We thank Landon
Rowland and his team for their many capital allocation and management decisions
that increased corporate value. It is bittersweet to part with such wonderful
corporate partners who have been instrumental to our prosperity. We currently
have several long-time holdings which are approaching full value. We have
redeployed some of our cash proceeds into two very interesting new positions,
UCAR International, Inc. and Pioneer Natural Resources.
4
<PAGE> 6
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PARTNERS FUND - PERFORMANCE HISTORY AND
PORTFOLIO SUMMARY
AVERAGE ANNUAL RETURNS*
FOR THE PERIODS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Partners S&P 500 Value-Line
Fund Index Index
-------- ------- ----------
<S> <C> <C> <C>
Year-to-Date 13.59% 13.95% 10.03%
One Year 42.62 48.01 34.83
Three Years 26.33 32.80 19.63
Five Years 22.56 22.39 12.29
Ten Years 19.70 18.92 8.16
</TABLE>
* The average annual returns for the Longleaf Partners Fund and the S&P 500 are
shown with all dividends and distributions reinvested; the Value-Line
Geometric 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.
FIVE LARGEST HOLDINGS
(REPRESENT 36.3% OF NET ASSETS)
U S WEST MEDIA GROUP (UMG) 10.7%
Cable and communications company whose focus is providing a single line to the
home for multiple services including video, Internet access, and voice.
KNIGHT RIDDER, INC. (KRI) 7.0%
One of the largest newspaper publishers in the U.S.
FDX CORPORATION (FDX) 6.6%
Integrated air-ground transportation company providing time-definite delivery of
packages and documents worldwide.
PHILIPS ELECTRONICS N.V. (PHG) 6.2%
Owner of 75% of recording company Polygram. Also a leading manufacturer of
lighting systems, electronics products including television and stereo
equipment, appliances and semiconductors.
WASTE MANAGEMENT, INC. (WMX) 5.8%
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 MARCH 31, 1998
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Marriott International, Inc. - Class Kansas City Southern Industries, Inc.
A*
Pioneer Natural Resources Company Tricon Global Restaurants, Inc.
Sodexho Marriott Services, Inc.* The Union Corporation
Tricon Global Restaurants, Inc.
UCAR International, Inc.
</TABLE>
* Independent companies spun out of Marriott International on March 27, 1998.
5
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PARTNERS FUND - PORTFOLIO INVESTMENTS
AT MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
Common Stock 90.0%
<S> <C> <C>
Beverages 5.1%
4,604,800 The Seagram Company Ltd. (Foreign) ..... $175,845,800
Broadcasting 5.7%
7,284,362 The News Corporation Limited
(Foreign)............................. 196,222,501
Business Services 0.2%
300,950 *Sodexho Marriott Services, Inc.......... 7,993,984
Cable 10.7%
10,686,100 *U S West Media Group.................... 371,341,975
Environmental Services 5.8%
6,550,000 Waste Management, Inc................... 201,821,875
Food 4.4%
1,106,800 The Quaker Oats Company................. 63,364,300
846,500 Ralston Purina Company.................. 89,729,000
------------
153,093,300
------------
Lodging 7.4%
8,888,200 *Host Marriott Corporation............... 168,320,287
1,203,800 Marriott International, Inc............. 44,766,313
1,203,800 Marriott International, Inc. - Class
A..................................... 43,111,088
------------
256,197,688
------------
Manufacturing 4.1%
4,550,000 *UCAR International, Inc................. 142,756,250
Multi-Industry 7.5%
1,565,000 Alexander & Baldwin, Inc................ 47,830,313
2,903,800 Philips Electronics N.V. (Foreign)...... 213,247,812
------------
261,078,125
------------
Natural Resources 7.9%
1,237,700 The Pioneer Group, Inc.................. 38,678,125
4,017,400 Pioneer Natural Resources Company....... 99,932,825
2,900,000 Rayonier Inc............................ 132,493,750
------------
271,104,700
------------
Property & Casualty Insurance 6.1%
112,828 *Alleghany Corp.......................... 38,361,520
25,046,000 Mitsui Marine and Fire Insurance
Company, Ltd. (Foreign)............... 129,407,961
6,603,000 The Nippon Fire & Marine Insurance
Company, Ltd. (Foreign)............... 27,085,198
3,373,000 The Yasuda Fire and Marine Insurance
Company, Ltd. (Foreign)............... 17,225,302
------------
212,079,981
------------
</TABLE>
6
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PARTNERS FUND - PORTFOLIO INVESTMENTS
AT MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C>
Pharmaceuticals 2.0%
1,770,350 Mallinckrodt Inc. ...................... $ 69,928,825
Publishing 7.0%
4,308,900 Knight Ridder, Inc...................... 240,759,788
Real Estate 3.9%
5,674,291 TrizecHahn Corporation (Foreign)........ 133,700,483
Telecommunications 5.6%
6,143,637 *360 degrees Communications Company...... 191,988,656
Transportation 6.6%
3,234,800 *FDX Corporation......................... 230,075,150
--------------
TOTAL COMMON STOCKS (COST
$2,164,409,991)....................... 3,115,989,081
--------------
Short-Term Obligations 9.7%
Federal Home Loan Mortgage Corporation, 5.5% due 4-3-98...... 99,970,000
Repurchase Agreement with State Street Bank,
5.0% due 4-1-98............................................ 87,753,000
U.S. Treasury Bill, 5.4% due 4-16-98......................... 149,667,500
--------------
337,390,500
--------------
TOTAL INVESTMENTS (COST $2,501,800,491)(A)............ 99.7% 3,453,379,581
OTHER ASSETS AND LIABILITIES, NET..................... 0.3 10,867,879
----- --------------
NET ASSETS............................................ 100.0% $3,464,247,460
===== ==============
NET ASSET VALUE PER SHARE.................................... $29.51
==============
</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 Sold and Currency Unrealized
Units Sold Settlement Date Market Value Gain
- -------------- -------------------------- ------------ -----------
<S> <C> <C> <C>
14,552,730,000 Japanese Yen 1-28-99...... $114,400,958 $ 8,963,701
4,493,857,500 Japanese Yen 2-26-99...... 35,477,412 1,372,587
------------ -----------
Total Forward Contracts... $149,878,370 $10,336,288
============ ===========
</TABLE>
7
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REALTY FUND - MANAGEMENT DISCUSSION
by C.T. Fitzpatrick, Mason Hawkins and Staley Cates
Longleaf Partners Realty Fund's net asset value increased by 1.4% in the first
quarter. By comparison, the Wilshire Real Estate Securities Index declined .4%
while the NAREIT Index dropped .5%. The Fund's long-term results also compare
favorably to its benchmarks. (See Average Annual Returns table)
Some have noted the S&P 500's extraordinary returns and asked why real estate
stocks behaved so differently. Over the long-term, returns from real estate have
been similar to common stock results as measured by the S&P 500. Over shorter
periods of time, however (a number of years in some cases), real estate returns
differ significantly from common stocks. This divergence is desirable since
long-term investors in both areas gain diversification benefits without
sacrificing return. We expect the Realty Fund's quarterly and annual results to
differ from the S&P 500's. Sometimes the difference will favor the Realty Fund;
other times common stocks will lead.
We have now exhausted our views about markets and indices. We do not own either.
We focus on the outstanding companies held in the Fund. Each combines quality
real estate assets with superior management teams, and all were purchased at a
substantial discount to our estimate of intrinsic worth. These characteristics
should allow us to maximize long-term returns with minimal risk of permanent
capital loss, a goal common to all three of our Funds.
The Realty Fund's price-to-value ratio is close to its all time low. We do not
know when the general market will recognize these values nor do we worry about
it. We spend a great deal of time, however, making sure that the individual
companies that comprise the Realty Fund are growing their per share value. We
are extremely pleased with the progress being made by our owner-operator
partners. We have recently added $6.5 million to our permanent investment in the
Fund.
During the first quarter we sold two large positions, Wellsford and Arden. Under
our investment policies, our Wellsford Real Properties position limited our
ability to purchase an even more compelling company, Excel Legacy Corp. We were
required to sell Wellsford sooner than we would have otherwise. Wellsford is an
outstanding company run by wonderful partners, and its price did not fully
reflect its value. Excel Legacy's properties are even more attractive, its
management equally impressive, and its price-to-value ratio more tantalizing.
We sold Arden because of our emphasis on PER SHARE value. The company has done
an outstanding job buying, leasing and managing suburban office properties in
Southern California. However, Arden's recent equity offering diluted its per
share value. With a number of more attractively priced alternatives, we
redeployed the proceeds from Arden into companies with a wider margin of safety.
8
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REALTY FUND - PERFORMANCE HISTORY AND
PORTFOLIO SUMMARY
AVERAGE ANNUAL RETURNS*
FOR THE PERIODS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Wilshire NAREIT
Realty Real Estate Equity
Fund Securities Index Index
------ ---------------- ------
<S> <C> <C> <C>
Year-to-Date 1.38% (0.41)% (0.47)%
One Year 23.23 17.18 18.87
Since inception 1/2/96 31.56 24.52 23.96
</TABLE>
* The average annual returns shown are shown with all dividend and distributions
reinvested. 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.
FIVE LARGEST HOLDINGS
(REPRESENT 35.9% OF NET ASSETS)
HOST MARRIOTT CORPORATION (HMT) 10.5%
Owner of 99 upscale and luxury full-service Marriott and Ritz Carlton hotels and
31 assisted living centers, which are operated by Marriott International.
EXCEL LEGACY CORPORATION 8.5%
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.
TIMBERWEST TIMBER TRUST (TBW) 6.0%
The largest private timberland owner in Western Canada with over 800,000 acres
in British Columbia.
CATELLUS DEVELOPMENT CORPORATION (CDX) 5.6%
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) 5.3%
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.
PORTFOLIO CHANGES
JANUARY 1, 1998 THROUGH MARCH 31, 1998
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Beacon Capital Partners, Inc. Arden Realty, Inc.
Excel Legacy Corporation - Series A Sunburst Hospitality Corporation
Liquidating Preference Convertible Wellsford Real Properties, Inc.
Marriott International, Inc. - Class A* White River Corporation
Sodexho Marriott Services, Inc.*
</TABLE>
* Independent companies spun out of Marriott International on March 27, 1998.
9
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REALTY FUND - PORTFOLIO INVESTMENTS
AT MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C>
Common Stock - 82.3%
Diversified Realty 13.3%
2,563,000 *Catellus Development Corporation........ $ 47,575,688
739,300 Forest City Enterprises, Inc. - Class
A....................................... 41,724,244
61,200 Forest City Enterprises, Inc. - Class
B....................................... 3,453,975
783,000 Sizeler Property Investors, Inc.
(REIT).................................. 8,661,937
440,600 TrizecHahn Corporation (Foreign)........ 10,381,637
------------
111,797,481
------------
Lodging 17.0%
4,738,400 *Host Marriott Corporation............... 89,733,450
102,300 Marriott International, Inc............. 3,804,281
102,300 Marriott International, Inc. - Class
A....................................... 3,663,619
2,112,300 *Red Roof Inns, Inc...................... 38,549,475
558,346 *Supertel Hospitality, Inc............... 6,839,738
------------
142,590,563
------------
Mortgage Financing 3.3%
789,500 Bay View Capital Corp................... 27,435,125
Natural Resources/Land 16.2%
1,980,000 *Castle & Cooke, Inc..................... 33,288,750
650,000 Deltic Timber Corporation............... 19,459,375
650,000 The Pioneer Group, Inc.................. 20,312,500
261,000 Rayonier Inc............................ 11,924,438
6,950,000 TimberWest Timber Trust (Foreign)....... 51,314,957
------------
136,300,020
------------
Office 20.2%
892,400 Alexandria Real Estate Equities, Inc.
(REIT).................................. 28,277,925
1,975,000 *Beacon Capital Partners, Inc.(b)
(REIT).................................. 39,500,000
1,200,700 Boston Properties Inc. (REIT)........... 42,249,631
687,200 Cousins Properties Incorporated
(REIT).................................. 21,217,300
1,940,000 Prime Group Realty Trust (REIT)......... 38,800,000
------------
170,044,856
------------
Retail 12.2%
1,223,800 Getty Realty Corp....................... 28,070,912
993,800 *IHOP Corp............................... 38,137,075
2,442,100 Prime Retail, Inc. (REIT)............... 36,478,869
------------
102,686,856
------------
</TABLE>
10
<PAGE> 12
------------------------------------------------------------------------------
REALTY FUND - PORTFOLIO INVESTMENTS
AT MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C>
Non-Realty 0.1%
25,575 *Sodexho Marriott Services, Inc.......... $ 679,336
------------
TOTAL COMMON STOCKS (COST
$611,414,450)........................... 691,534,237
------------
Preferred Stock - 8.7%
Diversified Realty 8.7%
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
------------
Options - 1.2%
CONTRACTS
---------
Put Options Written
5,494 Newhall Land and Farming Company,
expiring
April '99 @ $20 (Premiums received
$1,076,268)............................. (16,482)
2,967 Newhall Land and Farming Company,
expiring October '99 @ $25 (Premiums
received $709,919)...................... (166,152)
Call Options Purchased
5,494 Newhall Land and Farming Company,
expiring
April '99 @ $20 (Cost $1,761,493)....... 7,526,780
2,967 Newhall Land and Farming Company,
expiring October '99 @ $25 (Cost
$1,225,243)............................. 2,978,868
------------
10,323,014
------------
Corporate Bonds - 2.8%
PRINCIPAL
AMOUNT
----------
34,000,000 Marriott International, Inc. Liquid
Yield
Option Notes (LYONs), zero coupon conv.
sub. notes due 2011 (Cost
$19,607,042)............................ 23,247,500
------------
Short-Term Obligations 4.3%
35,898,000
Repurchase Agreement with State Street Bank, 5.0% due
4-1-98...................................................
------------
TOTAL INVESTMENTS (COST $741,120,041)(A).............. 99.3% 834,002,751
OTHER ASSETS AND LIABILITIES, NET..................... 0.7 5,737,780
----- ------------
NET ASSETS............................................ 100.0% $839,740,531
===== ============
NET ASSET VALUE PER SHARE.................................... $17.59
</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 7% of Net Assets.
11
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SMALL-CAP FUND - MANAGEMENT DISCUSSION
by Mason Hawkins and Staley Cates
Small-Cap completed an eventful and successful three months with a number of
companies contributing to the first quarter's 12.4% return. Four of our holdings
were, or are in the process of being acquired: Showboat, Union Corp., White
River, and Zurn. In addition, Vanguard Cellular sold a part of its subscriber
base for a premium price. Alleghany announced the spin-off of its Chicago Title
Insurance business. Corecomm, U S West Media Group, and Midas were also large
contributors.
Our cash level has risen to 20%, and investment opportunities in the U.S.
continue to elude us. We are, however, finding attractively priced businesses
elsewhere. We own four Canadian companies, representing 18% of our assets. Shaw
Communications, our largest holding, contributed a substantial amount to first
quarter performance as cable television companies regained investor interest.
Gendis and Timberwest, two other Canadian firms, remain among the most
undervalued companies in the portfolio.
We have taken relatively small stakes in a number of Japanese companies, each
selling at steeper discounts than U.S. stocks have seen since 1974. Many of
these are available at less than their net cash or net/net working capital
positions, with no recognition of their underlying business values. Even if
these companies never produce another yen of revenue or profit (which they
will), and even with the widely reported structural problems in the Japanese
economy, these businesses could be liquidated or sold for significantly more
than what we have paid. Collectively, our Japanese holdings are 5% of assets,
and our currency exposure is hedged.
On a final note, some of you have asked when or if the Small-Cap Fund will
reopen. It was closed because our cash levels exceeded our investment ideas.
That situation remains the same today, and the Fund has surpassed $1.1 billion
in assets. Even if volatility or a market correction present buying
opportunities again, the Fund will most likely remain closed to new investors to
maintain our small cap focus and our concentration strategy.
12
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SMALL-CAP FUND - PERFORMANCE HISTORY AND
PORTFOLIO SUMMARY
AVERAGE ANNUAL RETURNS*
FOR THE PERIODS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Small-Cap Russell 2000 Value-Line
Fund Index Index
--------- ------------ ----------
<S> <C> <C> <C>
Year-to-Date 12.40% 10.06% 10.03%
One Year 35.69 42.01 34.83
Three Years 29.59 24.42 19.63
Five Years 21.19 17.67 12.29
</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 3/31/98
were 13.63% and 15.00%, respectively. From inception through 3/31/91, the
Fund was managed by a different portfolio manager.
The average annual returns for the Fund and the Russell 2000 are shown with
all dividends and distributions reinvested; the Value-Line Geometric 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.
FIVE LARGEST HOLDINGS
(REPRESENT 27.6% OF NET ASSETS)
SHAW COMMUNICATIONS INC. (SCL) 8.3%
A Canadian cable television company which also provides high-speed Internet
access and digital audio services.
U S WEST MEDIA GROUP (UMG) 5.9%
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) 4.5%
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.
FDX CORPORATION (FDX) 4.5%
Integrated air-ground transportation company providing time-definite delivery of
packages and documents worldwide.
TIMBERWEST TIMBER TRUST (TBW) 4.4%
The largest private timberland owner in Western Canada with over 800,000 acres
in British Columbia.
PORTFOLIO CHANGES
JANUARY 1, 1998 THROUGH MARCH 31, 1998
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Kentucky Fried Chicken Japan Celestial Seasonings, Inc.
Kuraya Corporation Showboat, Inc.
Midas Inc. The Union Corporation
Nippon Broadcasting System White River Corporation
Nippon Shoji Kaisha Ltd. Zurn Industries, Inc.
Shaw Communications Inc. - Class A
Showa Pharmaceutical Co. Ltd.
</TABLE>
13
<PAGE> 15
- --------------------------------------------------------------------------------
SMALL-CAP FUND - PORTFOLIO INVESTMENTS
AT MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
Common Stock 79.5%
<S> <C> <C>
Advertising 0.5%
14,600 Grey Advertising Inc. - Class A......... $ 5,416,600
Broadcasting 0.3%
80,000 Nippon Broadcasting System (Foreign).... 3,215,572
Business Services 2.0%
1,038,700 *Pinkerton's, Inc........................ 23,955,019
Cable 14.2%
100,000 *Shaw Communications Inc. - Class A
(Foreign)............................. 1,487,237
6,479,800 *Shaw Communications Inc. - Class B
(Foreign)............................. 96,369,995
1,980,000 *U S West Media Group.................... 68,805,000
------------
166,662,232
------------
Commercial Lighting 0.4%
223,350 Thomas Industries, Inc.................. 4,969,538
Financial Services 0.9%
209,700 Duff & Phelps Credit Rating Co.......... 10,563,638
Investment Management Companies 2.1%
87,600 Baker, Fentress & Company............... 1,642,500
836,000 United Asset Management Corporation..... 22,781,000
------------
24,423,500
------------
Manufacturing 1.5%
291,800 *American Safety Razor Company........... 5,142,975
407,500 AMETEK, Inc............................. 12,199,531
------------
17,342,506
------------
Mortgage Financing 4.5%
1,515,000 Bay View Capital Corp................... 52,646,250
Natural Resources 11.9%
845,000 Deltic Timber Corporation............... 25,297,187
2,748,496 Gendis Inc. - Class A (Foreign)......... 35,465,088
865,000 The Pioneer Group, Inc.................. 27,031,250
6,950,000 TimberWest Timber Trust (Foreign)....... 51,314,957
------------
139,108,482
------------
Pharmaceuticals 0.1%
184,900 Kuraya Corporation (Foreign)............ 1,178,580
5,000 Nippon Shoji Kaisha Ltd. (Foreign)...... 14,248
5,000 Showa Pharmaceutical Co. Ltd
(Foreign)............................. 25,159
------------
1,217,987
------------
</TABLE>
14
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- --------------------------------------------------------------------------------
SMALL-CAP FUND - PORTFOLIO INVESTMENTS
AT MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C>
Property & Casualty Insurance
13.9%
126,273 *Alleghany Corporation................... $ 42,932,820
2,556,000 The Chiyoda Fire and Marine Insurance
Company, Ltd. (Foreign)............... 9,890,402
2,584,000 The Dai-Tokyo Fire and Marine Insurance
Company, Ltd. (Foreign)............... 10,153,767
1,777,400 Hilb, Rogal and Hamilton Company........ 32,992,988
1,702,000 The Koa Fire and Marine Insurance
Company, Ltd. (Foreign)............... 7,249,554
6,350,000 The Nissan Fire & Marine Insurance
Company, Ltd. (Foreign)............... 24,285,514
660,800 Orion Capital Corporation............... 36,137,500
--------------
163,642,545
--------------
Real Estate 10.2%
1,500,700 *Catellus Development Corporation........ 27,856,744
1,135,400 Cousins Properties Incorporated......... 35,055,475
552,900 *IHOP Corp............................... 21,217,537
1,520,000 TrizecHahn Corporation (Foreign)........ 35,815,000
--------------
119,944,756
--------------
Restaurants 1.5%
9,000 Kentucky Fried Chicken Japan
(Foreign)............................. 77,615
982,400 *VICORP Restaurants, Inc................. 18,051,600
--------------
18,129,215
--------------
Retail 7.9%
328,030 Dart Group Corporation.................. 44,940,110
2,333,400 *Midas Inc............................... 48,126,375
--------------
93,066,485
--------------
Telecommunications 3.1%
745,000 * Corecomm, Inc........................... 12,408,943
1,349,109 * Vanguard Cellular Systems, Inc. -- Class
A..................................... 24,536,920
--------------
36,945,863
--------------
Transportation 4.5%
740,000 * FDX Corporation......................... 52,632,500
--------------
TOTAL COMMON STOCKS (COST $705,797,693)............. 933,882,688
--------------
</TABLE>
15
<PAGE> 17
- --------------------------------------------------------------------------------
SMALL-CAP FUND - PORTFOLIO INVESTMENTS
AT MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C>
Short-Term Obligations 20.0%
Federal Home Loan Mortgage Corporation, 5.5% due 4-3-98...... 49,985,000
Federal Home Loan Mortgage Corporation, 5.4% due 5-1-98...... 49,773,772
Repurchase Agreement with State Street Bank, 5.0% due
4-1-98..................................................... 85,824,000
U.S. Treasury Bill, 5.4% due 4-16-98......................... 49,889,167
--------------
235,471,939
--------------
TOTAL INVESTMENTS (COST $941,269,632)(A).............. 99.5% 1,169,354,627
OTHER ASSETS AND LIABILITIES, NET..................... 0.5 5,724,353
----- --------------
NET ASSETS............................................ 100.0% $1,175,078,980
===== ==============
NET ASSET VALUE PER SHARE.................................... $24.93
</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 24% of Net Assets.
Open Forward Currency Contracts
<TABLE>
<CAPTION>
Currency Currency Sold and Currency Unrealized
Units Sold Settlement Date Market Value Gain
- ------------- ---------------------------------- ------------ ----------
<S> <C> <C> <C>
3,815,184,590 Japanese Yen 5-13-98.............. $28,880,954 $1,623,803
118,938,180 Canadian Dollars 10-28-98......... 83,943,228 1,231,602
2,534,474,657 Japanese Yen 2-26-99.............. 20,008,779 697,624
156,510,903 Japanese Yen 3-15-99.............. 1,238,673 34,741
5,146,806 Japanese Yen 3-30-99.............. 40,799 753
406,183,921 Japanese Yen 3-31-99.............. 3,219,821 71,783
------------ ----------
Total Forward Contracts........... $137,332,254 $3,660,306
============ ==========
</TABLE>
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17
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(Intentionally Left Blank)
18
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- --------------------------------------------------------------------------------
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 values per share of each Fund are 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>
19
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(Intentionally Left Blank)
20
<PAGE> 22
- --------------------------------------------------------------------------------
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
Coopers & Lybrand L.L.P.
Boston, Massachusetts
21
<PAGE> 23
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
