<PAGE> 1
[LONGLEAF PARTNERS FUNDS LOGO]
LONGLEAF PARTNERS FUNDS
ANNUAL REPORT
at December 31, 1998
PARTNERS FUND
INTERNATIONAL FUND
REALTY FUND
SMALL-CAP FUND
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MANAGED BY:
SOUTHEASTERN ASSET MANAGEMENT, INC.
Memphis, TN
<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders..................................... 1
Longleaf Partners Fund (Partners Fund)
Management Discussion.................................... 6
Performance Contributions................................ 9
Performance History*..................................... 10
Portfolio Summary........................................ 11
Portfolio of Investments................................. 12
Longleaf Partners International Fund (International Fund)
Management Discussion.................................... 14
Performance Contributions................................ 17
Performance History*..................................... 18
Portfolio Summary........................................ 19
Portfolio of Investments................................. 20
Longleaf Partners Realty Fund (Realty Fund)
Management Discussion.................................... 23
Performance Contributions................................ 25
Performance History*..................................... 26
Portfolio Summary........................................ 27
Portfolio of Investments................................. 28
Longleaf Partners Small-Cap Fund (Small-Cap Fund)
Management Discussion.................................... 30
Performance Contributions................................ 32
Performance History and Portfolio Summary*............... 33
Portfolio of Investments................................. 35
Financial Statements and Footnotes......................... 38
Financial Highlights....................................... 52
Report of Independent Accountants.......................... 55
Service Directory.......................................... 56
Trustees and Officers...................................... 57
</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:
Our ten guiding principles serve as an outline for commenting on 1998 and our
efforts going forward.
WE WILL TREAT YOUR INVESTMENT IN LONGLEAF AS IF IT WERE OUR OWN.
Year 2000 Readiness
During 1998 attention increasingly focused on "Y2K". Many computer programs use
two digits instead of four to designate a year; two digit systems may read the
start of the next century as 1900 instead of 2000. This simple problem has
widespread consequences if not corrected. A computer system with an inaccurate
date may not operate correctly or could calculate wrong numbers.
At Longleaf we are taking steps to ensure that our fellow shareholders receive
the same level of service on January 1, 2000, that they had the previous day.
According to our vendors, mission critical systems at Southeastern Asset
Management are already Y2K compliant, meaning they will correctly recognize
dates after December 31, 1999. We will run a full test this quarter by setting
the date to 2000 and confirming that systems run smoothly.
Longleaf also relies on outside vendors for functions such as custody, transfer
agency, and trading. We are monitoring our vendors' Y2K readiness. Each has
provided a plan for compliance. All appear on track. Our objective is to
identify those vendors unable to modify their systems prior to 2000, and put
contingency plans in place until those systems are working properly. Throughout
1999 we will track progress and perform tests with our vendors. Our vendors will
also participate in an industry wide test scheduled in the spring.
Our Y2K effort also includes monitoring the companies we own in the Longleaf
portfolios. As part of our research effort we ask corporate management about
their vulnerability, their plan to address any problems, and the cost to be
compliant. We factor their answers into our appraisals of their business.
In spite of the planning, all systems may not be ready. Even if Longleaf, our
vendors, and our portfolio companies are compliant, a problem at the phone or
utility companies could temporarily negate our efforts. Not even the experts
know if and where we will find a problem until the clock actually turns to 2000
and everyone's systems are running in real time.
To protect your investment in Longleaf against the unknown, we will save a copy
of all account records as back up. In the worst scenario, we will rely on paper
and pencil. If any system problems occur, they will be temporary, and we should
1
<PAGE> 4
return to normal operations relatively quickly. We will remain vigilant
concerning any problems and will strive to protect our partners' capital in all
circumstances. We will update you throughout the year.
No Soft Dollars
A second issue given attention by the SEC and the media during 1998 was
investment advisors' use of soft dollars (commissions) to purchase services.
Soft dollar concerns involve whether fund shareholders pay higher commissions
for services and whether those services legitimately qualify as research
expenses. To address both issues Southeastern Asset Management uses no soft
dollars, a practice unique in the industry.
WE WILL REMAIN SIGNIFICANT INVESTORS WITH YOU IN LONGLEAF.
Our Commitment
The employees and affiliates of Southeastern represent one of the largest
shareholder groups in each of our four funds. Our commitment increased during
1998. Many inquire about our allocation strategy. Over time we expect to own
equal amounts of our four funds for both diversification and opportunistic
reasons. At the time of investment, we generally add to the portfolio selling at
the steepest discount. During 1998 most of our personal inflows went into the
Realty and International Funds.
WE WILL INVEST FOR THE LONG-TERM, WHILE ALWAYS STRIVING TO MAXIMIZE AFTER-TAX
RETURNS AND TO MINIMIZE BUSINESS, FINANCIAL, PURCHASING POWER, REGULATORY, AND
MARKET RISKS.
After-tax returns
As owners we tally our compounding success after paying taxes. In 1998 tax
efficiency was lower than historical averages in the Partners and Small-Cap
Funds for two primary reasons. First, a number of companies reached full value
and/or were acquired. To protect our capital, we sell a business when no margin
of safety exists between price and value. We deferred our gains in these
companies over the years we owned them, but ultimately their prices reached full
value. Most of our gains were long-term. Price appreciation is our goal when
buying a business. Unfortunately, we must pay taxes when prices rise to
appraisals and we sell shares.
Having the Funds closed also impacted shareholders' tax liabilities. We closed
our Funds to protect existing owners' ability to compound. In a year with large
distributions, shareholders in closed funds receive a bigger pay-out because
there are no cash inflows creating a wider base for spreading the increased
gains and dividends.
We do not alter our portfolio for tax management purposes. We sell a business
when it reaches full value or if a materially better long-term opportunity
presents itself. When we make the decision to sell, execution focuses on tax
efficiency. We
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<PAGE> 5
will not, however, sell a company which has a paper loss if we are still
confident in the underlying value of the business and its management. First,
offsetting gains with losses is a short-term strategy that only defers, not
eliminates, taxes. Second, and more importantly, being out of a company for 30
days to book a loss has tremendous potential opportunity cost and definitely
incurs added execution costs. If the stock price rises above 60% of value during
that time, we have lost both the tax free appreciation and the appropriate
weighting of an undervalued company in the portfolio. As an example, many of our
peers who booked losses with very depressed stocks in the third quarter paid the
opportunity cost with the market's rapid fourth quarter rise.
WE WILL CHOOSE OUR COMMON STOCK INVESTMENTS BASED ON THEIR DISCOUNT FROM OUR
APPRAISAL OF THEIR CORPORATE INTRINSIC VALUE, THEIR FINANCIAL STRENGTH, THEIR
MANAGEMENT, THEIR COMPETITIVE POSITION, AND OUR ASSESSMENT OF THEIR FUTURE
EARNINGS POTENTIAL.
Current price-to-value ratios
We choose equities across the four funds using the above criteria. Surprisingly,
given the strength of the S&P 500, each Fund enters 1999 at or near its lowest
price-to-value ratio this decade. The P/V is the best indicator we know for
future performance. We calculate the value of each business in the portfolio and
its current market price. The composite P/V is the weighted average for all the
holdings in a fund. A lower P/V means a larger margin of safety, and
consequently a greater appreciation opportunity.
WE WILL COMPLY WITH THE DIVERSIFICATION STANDARDS OF THE INTERNAL REVENUE CODE,
BUT WILL NOT OVERDIVERSIFY OUR HOLDINGS.
The importance of concentration
When we find a business that passes our stringent investment criteria, we want
to own a lot of it. Taking positions that are 5% or more of a Fund's assets
forces us to choose only our best ideas and ensures those businesses have a
meaningful impact on the portfolio. The largest contributors to performance are
typically among the top five holdings during the year, and 1998 was no
exception. The sections on each Fund will highlight the impact of concentration.
WE WILL NOT IMPOSE LOADS, HOLDING PERIODS, EXIT FEES OR 12B-1 CHARGES ON OUR
INVESTMENT PARTNERS.
Continued low ownership costs
Low expense ratios and no surcharges are in shareholders' best interest. Mutual
fund families that prioritize growing assets over owning large amounts of their
own funds are paying large distribution costs. In 1998 and into 1999 other funds
are exploring adding 12b-1 fees and raising management fees to help cover the
cost of gathering assets. We will not raise or add fees.
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<PAGE> 6
WE WILL CONSIDER CLOSING THE FUNDS TO NEW INVESTORS IF OUR SIZE BEGINS TO
RESTRICT OUR ABILITY TO MANAGE THE PORTFOLIOS, OR IF CLOSING WOULD OTHERWISE
BENEFIT EXISTING SHAREHOLDERS.
Partners Fund
Three years after closing Longleaf Partners Fund, we re-opened it in 1998. The
third quarter's market decline enabled us to fully invest the portfolio and gave
us additional opportunities for putting new cash to work. We have had inflows of
approximately $250 million since mid-October, and have invested most of the
cash. If, however, qualifying investment opportunities again become elusive, we
will re-close the Fund.
Small-Cap Fund
The Small-Cap Fund will remain closed to enable the Fund to continue investing
in small companies.
WE WILL DISCOURAGE SHORT-TERM SPECULATORS AND MARKET TIMERS FROM JOINING US, THE
LONG-TERM INVESTORS IN LONGLEAF.
Short-term investors not welcome
During 1998 we worked closely with third party clearing firms and our transfer
agent to identify market timers. We have compiled a large list of investors and
advisors who are prohibited from trading in any of our funds. Inflows from a
person whose time horizon is less than three years do not benefit our investment
partners.
WE WILL CONTINUE OUR EFFORTS TO ENHANCE SHAREHOLDER SERVICES.
Phone purchases
At the suggestion of a shareholder, we will allow purchasing shares over the
phone and having the amount debited directly from your bank account. We plan to
add this capability in May and will notify you when it is available. We welcome
other suggestions for better service.
Web Site
We are exploring whether the cost of creating and maintaining a web site would
be justified. We are interested to know whether and how our investment partners
would use a site. Would you use a Longleaf site for accessing portfolio
information and account information, for buying and redeeming shares, for
receiving your statements and financial reports or other functions? What
information and capabilities would a site need to make it worthwhile? Please
write Lee Harper with any comments or suggestions you have at 6410 Poplar Ave.,
Suite 900 Memphis, TN 38119, or e-mail her at [email protected].
4
<PAGE> 7
WE WILL COMMUNICATE WITH OUR INVESTMENT PARTNERS AS CANDIDLY AS POSSIBLE.
Simplified Prospectus
We are rewriting our prospectus to refocus and simplify it. You should expect to
see our new version which will include all four funds in May. We welcome your
feedback and suggestions.
Reprints from Outstanding Investor Digest
We hope you find our reports and reprints useful. The Outstanding Investor
Digest in its December 29, 1998, issue summarized notes from several meetings
that Longleaf sponsored in the fall. The article is sixteen pages of Q&A with
Longleaf's portfolio managers and gives greater detail on our philosophy and
investments. To save mailing and printing costs, we have not sent a copy with
this report. If you have not seen the article and are interested in reading it,
please call our service desk at (800) 445-9469, press 1 and request a copy.
Annual Meeting - May 4, 1999
We are always delighted to see our fellow shareholders at Longleaf's Annual
Meeting. We appreciate the effort many of you make to travel from across the
country. This year's meeting will be Tuesday, May 4, 1999, at the Memphis
Botanic Garden. What is on your mind always proves more interesting than our
prepared remarks. Bring your questions and we will look forward to a lively
meeting.
ONE FINAL NOTE
To recognize John Buford's decade of contribution to our research effort, we
have added John as a co-portfolio manager for both the Partners and Small-Cap
Funds. Many of you have met or spoken with John over the years and know the
critical role he has played in our Funds' success. While John's new title in no
way diminishes the commitment and responsibility of Mason and Staley to the
Funds, as co-portfolio manager John's accountability and focus will increase.
We wish you a very happy New Year and trust each of you will have a healthy and
prosperous 1999. As always, we are very appreciative of your long-term support.
Sincerely,
<TABLE>
<S> <C>
/s/ O. Mason Hawkins, CFA /s/ G. Staley Cates, CFA
O. Mason Hawkins, CFA G. Staley Cates, CFA
Chairman & CEO President
Southeastern Asset Management Southeastern Asset Management
</TABLE>
5
<PAGE> 8
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PARTNERS FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and John Buford
Longleaf Partners Fund completed another successful year with a 14.3% return in
1998. The Fund gained 18.5% during the fourth quarter. Our investment partners
have compounded their capital at high rates. The average annual return for the
last five years was 19.8%, and for the last three years was 21.1%.
We strive to preserve our capital and earn a 10% premium over inflation over
long holding periods. We are not driven by performance relative to any index. We
recognize, however, that some are concerned that the Fund has not matched the
unprecedented gains in the S&P 500. As owner operators with a large stake in the
Fund, we are aware of this divergence, but it does not concern us. Equities as
measured by this index have NEVER performed this well for this long. The S&P has
NEVER sold at today's elevated valuation levels. The market-weighted S&P Index
is selling at over 27x current normalized earnings, and several of the large
companies that dominate the index sell at 60x - 80x earnings. Owners of this
index have NO margin of safety between the price they are paying and the value
of the businesses they own. The Partners Fund's portfolio, by contrast, is well
positioned to generate high returns because we own good businesses run by
capable managements at large discounts to their appraised value.
Several holdings drove the Partners Fund's successful results in 1998. MediaOne
Group, which was our second largest holding at the year's outset, added $228
million to the Fund's return. We purchased this cable company in late 1997 when
Wall Street disdained both the industry and the company structure (it was a
target stock of US West). The business subsequently was spun out, and cash flows
have increased as the company leverages its infrastructure by selling more
services. During the year this position rose to 15% of the portfolio. We
realized a portion of the gains when they became long-term to properly re-weight
the portfolio and to redeploy cash into lower priced opportunities. MediaOne
still has unrecognized value which is growing. We are happy to remain partners
with Chuck Lillis and his team. The company is our fifth largest holding.
We purchased significantly more FDX both in 1997 when it suffered under the
Asian crisis, and in August of 1998 when the stock fell dramatically with the
threat of a pilot strike and the market decline. Federal Express has spent over
twenty-five years building its worldwide infrastructure to deliver
time-sensitive packages. As their capital expenditures flatten and volumes
increase, FDX should experience large operating profit leverage. The company's
cash flows are growing steadily, and Fred Smith is a shrewd partner. Our
position in FDX contributed $183 million to the Partners Fund as the investment
world began to understand that few companies will benefit as much from the
growth of electronic commerce.
6
<PAGE> 9
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PARTNERS FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and John Buford
The company remains significantly undervalued, and enters 1999 as the largest
holding in the Fund.
ALLTEL became a holding in 1998 when the company bought 3607 Communications,
which we began purchasing in April 1996. As wireless communications have rapidly
grown, Wall Street has begun to appreciate the growing cash flows at these
businesses, highlighted by several large mergers. The price reached our value in
the Fall, and we sold it, realizing a long-term gain in 1998 of $90 million.
Not all the Fund's holdings were successful in 1998, and several negatively
impacted our return. We began buying Pioneer Natural Resources in January after
the stock had fallen by half. The market's third quarter decline coupled with
additional oil price decreases caused the stock to fall further. Scott Sheffield
has his entire worth in the company, and his track record for rewarding
shareholders is outstanding. He is cutting costs and has several alternatives
for increasing cash flows. At the current price, Pioneer Natural Resources sells
for less than 40% of our appraisal which does not depend on oil prices
rebounding.
The Fund also has a temporary loss in our new position in UCAR International.
UCAR is the world's largest producer of graphite electrodes which steel mini-
mills consume in melting scrap. The business has very strong competitive
attributes with dominant market share, low new supply, long-term pricing
opportunity with customers, and prospects for growth. The company's stock
declined amid concerns over a Justice Department investigation which led to $300
million in fines for price fixing ten years ago. Although the settlements were
completed, the stock continued to fall as overseas steel makers harmed UCAR's
customers by dumping steel in the U.S. and Europe. Cutbacks in U.S. steel
production have hurt UCAR's sales. We have confidence in the new management
team's ability to manage through this short-term contraction, and expect the
company to recover well once mini-mills restore their growth.
Host Marriott owns full service and resort hotels with Marriott and Ritz-Carlton
brands in some of the best locations in the U.S. The company suffered as the
lodging sector's prices declined over 50% in 1998 amid fears of recession,
oversupply, and changes to laws that govern a few paired-share REITs. Even if
these fears become reality, Host Marriott's supply-constrained locations and
overbooked, premium properties should protect the company's cash flows.
In 1998 the Partners Fund turnover was higher than our historic average. We sold
Kansas City Southern, Quaker Oats, and Ralston Purina when they reached our
appraisals. These long-term holdings returned 214%, 76%, and 188%, respectively,
over the time we owned them. We also scaled back Knight Ridder
7
<PAGE> 10
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PARTNERS FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and John Buford
when its price appreciation overweighted it in the portfolio. We sold several
fully valued businesses that were spun off from existing holdings. We liquidated
some very small positions which we could not increase, and bought more
attractive businesses where we could own a meaningful stake.
We used proceeds from these sales as well as our cash reserves to buy several
new holdings and add to existing positions at compelling prices, especially in
the third quarter. We added major stakes in Marriott International, United
Healthcare, Hilton Hotels, and Canadian Pacific.
At the outset of 1999 our investment partners own a concentrated portfolio
selling at a very low price-to-value ratio with minimal cash reserves. The
strength of the businesses we own and the capabilities of their management teams
make us very optimistic about the Partners Fund's long-term prospects.
8
<PAGE> 11
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PARTNERS FUND - PERFORMANCE CONTRIBUTIONS
The following table delineates the specific dollar contributions of individual
holdings to the 14.28% total return for 1998.
<TABLE>
<CAPTION>
PERCENTAGE
CONTRIBUTION OF TOTAL
IN 1998 CONTRIBUTION
------------- ------------
<S> <C> <C>
FROM PORTFOLIO HOLDINGS:
MediaOne Group, Inc. .................... $ 231,812,530 54.1%
FDX Corporation.......................... 183,232,050 42.8
ALLTEL Corp. (formerly 360 DEGREES
Communications)....................... 91,378,592 21.3
United Healthcare Corporation............ 48,642,193 11.4
Waste Management, Inc.................... 44,063,524 10.3
The Seagram Company Ltd.................. 31,752,307 7.4
The News Corporation Limited............. 30,505,514 7.1
Philips Electronics N.V.................. 30,007,055 7.0
Host Marriott Corporation................ (29,673,762) (6.9)
Hilton Hotels Corporation................ (34,414,333) (8.0)
UCAR International, Inc.................. (77,349,077) (18.1)
Pioneer Natural Resources Company........ (116,200,430) (27.1)
All others, net.......................... 11,498,721 2.7
------------- -----
445,254,884 104.0
Interest income............................ 14,673,389 3.4
Realized foreign exchange loss............. (159,306) (0.1)
Expenses................................... (31,576,358) (7.3)
------------- -----
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS............................ $ 428,192,609 100.0%
============= =====
</TABLE>
9
<PAGE> 12
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PARTNERS FUND - PERFORMANCE HISTORY
LONGLEAF PARTNERS FUND
(Graph)
Comparison of Change in Value of $10,000 Investment
Over Ten Years
The graph is a line graph showing total returns of the Partners Fund over ten
years in comparison with the S&P 500 Index, the primary broad based securities
index used, and the Value-Line Index, a secondary index, each beginning
12/31/88 and ending 12/31/98.
The line graph begins with an assumed investment of $10,000 as of 12/31/88. The
ending value for each at 12/31/88 is as follows:
Partners Fund - $52,059
S&P 500 Stock Index - $57,882
Value-Line Index - $18,788
AVERAGE ANNUAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Partners S&P 500 Value-Line
Fund Index Index
-------- ------- ----------
<S> <C> <C> <C>
One Year 14.28% 28.59% (3.79)%
Three Years 21.05 28.23 9.71
Five Years 19.77 24.05 8.16
Ten Years 17.94 19.19 6.51
Since Public Offering 4/8/87 16.69 16.05 4.15
</TABLE>
10
<PAGE> 13
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PARTNERS FUND - PORTFOLIO SUMMARY
FIVE LARGEST HOLDINGS
(REPRESENT 40.3% OF NET ASSETS)
FDX CORPORATION (FDX) 14.7%
Integrated air-ground transportation company providing time-definite delivery of
packages and documents worldwide.
MARRIOTT INTERNATIONAL, INC. (MAR) 8.0%
Owner of many of the strongest brand names in the lodging industry. Operates and
franchises over 300,000 rooms in hotels and resorts under the Marriott,
Courtyard, Residence Inn, Ritz-Carlton, and Renaissance names.
WASTE MANAGEMENT, INC. (WMI) 6.0%
The world's largest solid waste collection and disposal company with
residential, commercial, and industrial customers throughout North America.
PHILIPS ELECTRONICS N.V. (PHG) 5.9%
A leading manufacturer of lighting systems and electronics products, including
television and stereo equipment, appliances, and semiconductors.
MEDIAONE GROUP, INC. (UMG) 5.7%
Cable and communications company whose focus is providing a single line to the
home for multiple services including video, Internet access, and voice.
PORTFOLIO CHANGES
JANUARY 1, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Agribrands International, Inc.* (RAL) Agribrands International, Inc.*
ALLTEL Corp.* (XO) Alleghany Corp.
Boston Properties, Inc. ALLTEL Corp.*
Canadian Pacific Limited Chicago Title Corporation*
Chicago Title Corporation* (Y) Kansas City Southern Industries,
Inc.
Crestline Capital Corporation* (HMT) Mallinckrodt Inc.
Hilton Hotels Corporation The Quaker Oats Company
MediaOne Group, Inc.* (UMG) The Ralston Purina Company
Pioneer Natural Resources Company Sodexho Marriott Services, Inc.*
Sodexho Marriott Services, Inc.* (HMT) Tricon Global Restaurants, Inc.
Tricon Global Restaurants, Inc. U S West, Inc.*
UCAR International, Inc. The Union Corporation
United Healthcare Corporation
</TABLE>
* Acquired through merger/spin-off of existing position (ticker of original
holding).
11
<PAGE> 14
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PARTNERS FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
Common Stock 93.6%
Beverages 5.2%
5,067,200 The Seagram Company Ltd. (Foreign) ........... $ 192,553,600
Broadcasting 5.1%
7,146,362 The News Corporation Limited (Foreign)........ 188,931,945
Cable 5.7%
4,450,000 * MediaOne Group, Inc........................... 209,150,000
Environmental Services 6.0%
4,748,750 Waste Management, Inc......................... 221,410,469
Health Care 5.7%
4,840,000 United Healthcare Corporation................. 208,422,500
Investment Management 0.7%
1,237,700 The Pioneer Group, Inc........................ 24,444,575
Lodging 16.8%
1,076,380 * Crestline Capital Corporation(b).............. 15,742,057
8,500,000 Hilton Hotels Corporation..................... 162,562,500
10,763,800 Host Marriott Corporation(b).................. 148,674,987
10,103,600 Marriott International, Inc................... 293,004,400
--------------
619,983,944
--------------
Manufacturing 2.1%
4,450,000 * UCAR International, Inc.(b)................... 79,265,625
Multi-Industry 6.9%
1,565,000 Alexander & Baldwin, Inc...................... 36,386,250
3,213,000 Philips Electronics N.V. (Foreign)............ 217,479,937
--------------
253,866,187
--------------
Natural Resources 5.9%
9,772,100 Pioneer Natural Resources Company(b).......... 85,505,875
2,900,000 Rayonier Inc.(b).............................. 133,218,750
--------------
218,724,625
--------------
Property & Casualty Insurance 5.8%
20,167,000 Mitsui Marine and Fire Insurance Company, Ltd.
(Foreign)................................... 104,598,465
8,673,000 The Nippon Fire & Marine Insurance Company,
Ltd. (Foreign).............................. 31,450,657
16,245,000 The Yasuda Fire and Marine Insurance Company,
Ltd. (Foreign).............................. 77,034,570
--------------
213,083,692
--------------
Publishing 4.4%
3,150,000 Knight Ridder, Inc............................ 161,043,750
</TABLE>
See Notes to Financial Statements.
12
<PAGE> 15
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PARTNERS FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
Real Estate 5.0%
1,998,400 Boston Properties Inc......................... $ 60,951,200
6,038,591 TrizecHahn Corporation (Foreign).............. 123,791,116
--------------
184,742,316
--------------
Transportation 18.3%
7,003,000 Canadian Pacific Limited (Foreign)............ 132,181,625
6,085,000 * FDX Corporation(c)............................ 541,565,000
--------------
673,746,625
--------------
TOTAL COMMON STOCKS (COST $2,909,987,145)..... 3,449,369,853
Short-Term Obligations 6.4%
Federal Home Loan Bank Discount Note, 5.14% due 1-4-99............. 99,957,917
Repurchase Agreement with State Street Bank, 4.0% due 1-4-99....... 136,060,000
--------------
236,017,917
--------------
TOTAL INVESTMENTS (COST $3,146,005,062)(a).................. 100.0% 3,685,387,770
OTHER ASSETS AND LIABILITIES, NET........................... -- (87,847)
----- --------------
NET ASSETS.................................................. 100.0% $3,685,299,923
===== ==============
NET ASSET VALUE PER SHARE.......................................... $24.39
==============
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for federal income tax purposes. Aggregate
unrealized appreciation and depreciation are $875,271,943 and
($335,889,235), respectively.
(b) Affiliated company. See Note 7.
(c) A portion designated as collateral for forward currency contracts. See Note
10.
Note: Companies designated as "Foreign" are headquartered outside the U.S. and
represent 29% of Net Assets.
OPEN FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Currency
Currency Currency Sold and Market Unrealized
Units Sold Settlement Date Value Loss
- -------------- --------------------------------- ------------ ------------
<C> <S> <C> <C>
14,552,730,000 Japanese Yen 1-28-99............. $129,355,336 $ (5,990,678)
6,265,172,522 Japanese Yen 2-26-99............. 55,969,292 (5,373,509)
823,095,843 Japanese Yen 7-21-99............. 7,495,659 (1,304,967)
------------ ------------
Total Forward Contracts.......... $192,820,287 $(12,669,154)
============ ============
</TABLE>
See Notes to Financial Statements.
13
<PAGE> 16
- --------------------------------------------------------------------------------
INTERNATIONAL FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and Andrew McDermott
In 1998 Longleaf Partners International Fund laid an excellent foundation for
future appreciation in addition to showing a strong initial performance. From
its October 26th public offering, the Fund returned 9.0% versus an unhedged
return of 10.9% for the EAFE index. The International Fund's underlying equity
performance was even stronger because we carried 10-20% cash balances during
this period of rapid asset growth. Thanks to your support, the Fund grew from
our initial $27 million investment to $76 million at year-end, and at January
31, 1999 has $135 million in assets. We expect continued growth because
international markets offer an abundance of sound companies with good partners
at tremendous discounts to intrinsic value. These deep discounts include the
cost of hedging non-US$ currency risk. Over the past several months our hedging
policy dampened returns as the US$ weakened against currencies such as the
Japanese yen. As owner-operators we believe this is a small price for reduced
currency risk across our portfolio. We want our long-term return to hinge on the
performance of the undervalued businesses we own, not on the vagaries of the
foreign exchange markets.
The International Fund benefited from corporate activity in the U.K. and from
the rapid advance of Asian markets after their summer decline. BTR, a U.K. based
industrial conglomerate, added $357 thousand to the Fund's return. We bought BTR
after extreme market pessimism had driven its price down over 50% in six months,
despite management's work to streamline the company and return capital to
shareholders via a buyback of 20% of shares outstanding. We sold our stake when
Siebe announced a takeover.
Swire Pacific added $611 thousand to the Fund. Swire's exceptional assets
include a controlling stake in Cathay Pacific (one of Asia's leading airlines)
one of two Coca-Cola bottlers in China, and prime Hong Kong commercial real
estate. Macroeconomic concerns drove Swire's shares to a steep discount to our
conservative appraisal. The Fund acquired a position at the point of maximum
market pessimism and subsequently benefited from Swire's rapid rise when the
Hong Kong market stabilized.
Singapore based Haw Par Brothers added $359 thousand to the Fund's return for
similar reasons. Haw Par owns a highly profitable sports medicine business
called Tiger Balm, a number of leisure businesses, and approximately 60 million
shares of UOB, one of Singapore's best capitalized banks. Haw Par declined far
below its value on overblown concerns about Singapore during the Southeast Asian
currency crisis.
14
<PAGE> 17
- --------------------------------------------------------------------------------
INTERNATIONAL FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and Andrew McDermott
While the Fund benefited from many overseas holdings, its strongest contributor
was Federal Express's $1.5 million appreciation. Although Federal Express has
been described recently as an Internet beneficiary, many ignore the company's
important growth story as the dominant player in the rapidly expanding
international express market, particularly in Asia. Offshore turmoil often
allows us to purchase U.S. headquartered companies like FDX which have material
value overseas.
In many ways our companies that have not yet added to the Fund's return excite
us more than those that rapidly approached fair value. These undervalued
businesses are managed by capable partners and offer the portfolio's best
opportunities for significant appreciation. Three Canadian natural resource
companies, Canadian Pacific, Gulf Canada, and Anderson Exploration, declined
considerably over the past quarter, driven by depressed oil prices. These
companies are significantly undervalued, even if oil and gas prices remain near
historic lows.
Brierley Investments also declined over the quarter. Brierley, a New Zealand
based holding company, suffered from management turmoil, excessive debt related
to its 1996 acquisition of a U.K. hotel chain, and the general downturn in Asian
markets. Under the company's new management led by Selwyn Cushing we believe
these concerns will be short lived.
Our positions in Japan, on the whole, also negatively impacted our returns.
Despite this short-term decline, the values in Japan, particularly in the
non-life insurance sector, continue to have appeal. Our increased presence in
Japan has helped us better identify those management partners most focused on
shareholder return.
As we enter 1999, the combination of the Fund's record low price-to-value ratio,
our current management partners, and select opportunities in markets around the
world encourage us. The companies in our portfolio have the margins of safety
that Ben Graham sought because simply liquidating today's assets would generate
exceptional returns. At prices of less than half current net asset values, our
performance does not depend on the businesses growing, though we believe they
will.
We welcome those shareholders who have joined us. We anticipate a long and
rewarding relationship.
15
<PAGE> 18
(INTENTIONALLY LEFT BLANK)
16
<PAGE> 19
- --------------------------------------------------------------------------------
INTERNATIONAL FUND - PERFORMANCE CONTRIBUTIONS
The following table delineates the specific dollar contributions of individual
holdings to the 9.02% total return for 1998.
<TABLE>
<CAPTION>
PERCENTAGE
CONTRIBUTION OF TOTAL
IN 1998 CONTRIBUTION
FROM PORTFOLIO HOLDINGS BY COUNTRY: ------------ ------------
<S> <C> <C>
CANADA
Shaw Communications, Inc. -- Class B................... $ 485,136 52.6%
The Seagram Company Ltd................................ 215,857 23.4
Gulf Canada Resources Limited.......................... (207,010) (22.4)
Anderson Exploration Limited........................... (289,273) (31.4)
Canadian Pacific Limited............................... (647,648) (70.2)
Unrealized foreign exchange loss....................... (34,419) (3.7)
----------- ------
(477,357) (51.7)
----------- ------
HONG KONG
Swire Pacific Limited.................................. 535,806 58.1
Unrealized foreign exchange loss....................... (177,749) (19.3)
----------- ------
358,057 38.8
----------- ------
JAPAN
Dai-Tokyo Fire and Marine Insurance Co................. (208,474) (22.6)
Kentucky Fried Chicken Japan........................... (296,350) (32.1)
Nippon Fire & Marine Insurance Co...................... (312,730) (33.9)
Yasuda Fire & Marine Insurance Co...................... (324,759) (35.2)
Nissan Fire & Marine Insurance Co...................... (394,308) (42.7)
All others, net........................................ (117,602) (12.7)
Unrealized foreign exchange loss....................... (168,862) (18.3)
----------- ------
(1,823,085) (197.5)
----------- ------
THE NETHERLANDS
Philips Electronics N.V................................ 263,590 28.6
NEW ZEALAND
Brierley Investments Limited........................... (514,357) (55.7)
Unrealized foreign exchange gain....................... 24,106 2.6
----------- ------
(490,251) (53.1)
----------- ------
SINGAPORE
Haw Par Corporation Limited............................ 289,426 31.3
Unrealized foreign exchange loss....................... (41,009) (4.4)
----------- ------
248,417 26.9
----------- ------
UNITED KINGDOM
BTR PLC................................................ 356,594 38.6
The Highland Distilleries PLC.......................... 217,705 23.6
Wassall PLC............................................ (58,812) (6.4)
Unrealized foreign exchange loss....................... (22,126) (2.4)
----------- ------
493,361 53.4
----------- ------
UNITED STATES
FDX Corporation........................................ 1,520,833 164.8
The MONY Group Inc..................................... 787,408 85.3
Agribrands International, Inc.......................... 114,417 12.4
Wisconsin Central Transportation Corporation........... 42,079 4.5
----------- ------
2,464,737 267.0
----------- ------
1,037,469 112.4
----------- ------
Interest income.......................................... 131,976 14.3
Net realized and unrealized foreign exchange gain........ 1,392 0.1
Expenses................................................. (247,667) (26.8)
----------- ------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS... $ 923,170 100.0%
=========== ======
</TABLE>
17
<PAGE> 20
- --------------------------------------------------------------------------------
INTERNATIONAL FUND - PERFORMANCE HISTORY
LONGLEAF PARTNERS INTERNATIONAL FUND
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
SINCE PUBLIC OFFERING 10/26/98
(Graph)
Comparison of Change in Value of $10,000 Investment
Since Public Offering 10/26/98
The graph is a line graph showing total returns of the International Fund since
its initial public offering on 10/26/98 with the Morgan Stanley Capital
International Europe, Australasia, Far East Index, the primary broad based
securities index used.
The line graph begins with an assumed investment of $10,000 as of 10/26/98. The
end value for each at 12/31/98 is as follows:
International Fund - $10,902
EAFE Index - $11,805
RETURN
FOR THE PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
International EAFE
Fund Index
------------- ------
<S> <C> <C>
Since Public Offering 10/26/98 9.02% 10.85%
</TABLE>
18
<PAGE> 21
- --------------------------------------------------------------------------------
INTERNATIONAL FUND - PORTFOLIO SUMMARY
FIVE LARGEST HOLDINGS
(REPRESENT 25.4% OF NET ASSETS)
ANDERSON EXPLORATION LIMITED (AXL) 5.3%
Calgary based senior oil and gas producer operating exclusively in western
Canada. AXL also owns a 50% stake in a pipeline system for delivery of natural
gas.
FDX CORPORATION (FDX) 5.2%
Integrated air-ground transportation company providing time-definite delivery of
packages and documents worldwide.
GULF CANADA RESOURCES LIMITED (GOU) 5.0%
Canadian based exploration and production company with oil and natural gas
assets across the world.
PHILIPS ELECTRONICS N.V. (PHG) 5.0%
A leading manufacturer of lighting systems and electronics products, including
television and stereo equipment, appliances, and semiconductors.
THE YASUDA FIRE & MARINE INSURANCE COMPANY, LTD. 4.9%
Japanese non-life insurance company with the best (lowest) combined ratio in the
country. Over half of its business is focused in the profitable individual
voluntary automobile line of business. Japanese equities constitute a
significant portion of Yasuda's investment portfolio.
PORTFOLIO CHANGES
AUGUST 12, 1998 (CAPITALIZATION) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
All positions new in 1998. BTR PLC
The Chiyoda Fire and Marine
Insurance Company, Ltd.
The MONY Group Inc.
</TABLE>
19
<PAGE> 22
- --------------------------------------------------------------------------------
INTERNATIONAL FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
Common Stock 82.3%
Agriculture 4.8%
121,000 * Agribrands International, Inc. (United
States)(b)................................... $ 3,630,000
Beverages 5.7%
645,000 The Highland Distilleries PLC (United
Kingdom)..................................... 2,866,592
37,000 The Seagram Company Ltd. (Canada).............. 1,406,000
--------------
4,272,592
--------------
Broadcasting 5.1%
97,000 Nippon Broadcasting System(Japan)(b)........... 3,821,881
Cable 2.2%
69,000 Shaw Communications, Inc. - Class B (Canada)... 1,668,937
Healthcare 2.3%
1,513,000 Haw Par Corporation Limited (Singapore)(b)..... 1,689,479
Multi-Industry 16.1%
14,970,000 Brierley Investments Limited (New
Zealand)(b).................................. 3,383,597
55,000 Philips Electronics N.V. (Netherlands)(b)...... 3,722,813
2,350,000 Swire Pacific Limited (Hong Kong)(b)........... 1,562,070
937,000 Wassall PLC (United Kingdom)(b)................ 3,498,981
--------------
12,167,461
--------------
Natural Resources 10.2%
442,000 * Anderson Exploration Limited (Canada).......... 3,960,896
1,280,000 * Gulf Canada Resources Limited (Canada)......... 3,760,000
--------------
7,720,896
--------------
Property & Casualty Insurance 17.5%
760,000 The Dai-Tokyo Fire and Marine Insurance
Company, Ltd. (Japan)(b)..................... 2,649,968
324,000 The Dowa Fire and Marine Insurance Company,
Ltd. (Japan)................................. 1,186,209
788,000 The Nippon Fire & Marine Insurance Company,
Ltd. (Japan)(b).............................. 2,857,502
965,000 The Nissan Fire & Marine Insurance Company,
Ltd. (Japan)(b).............................. 2,860,048
777,000 The Yasuda Fire & Marine Insurance Company,
Ltd. (Japan)(b).............................. 3,684,571
--------------
13,238,298
--------------
Restaurants 4.1%
334,000 Kentucky Fried Chicken Japan (Japan)(b)........ 3,115,281
Transportation 14.3%
175,000 Canadian Pacific Limited (Canada).............. 3,303,125
44,000 * FDX Corporation (United States)(b)............. 3,916,000
210,000 * Wisconsin Central Transportation Corporation
(United States).............................. 3,609,375
--------------
10,828,500
--------------
TOTAL COMMON STOCKS (COST $59,515,891)..................... 62,153,325
--------------
</TABLE>
See Notes to Financial Statements.
20
<PAGE> 23
- --------------------------------------------------------------------------------
INTERNATIONAL FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARKET VALUE
--------------
<S> <C> <C> <C> <C> <C>
Short-Term Obligations 23.5%
Repurchase Agreement with State Street Bank, 4.00% due 1-4-99....... $ 17,789,000
--------------
TOTAL INVESTMENTS (COST $77,304,891)(a)...................... 105.8% 79,942,325
OTHER ASSETS AND LIABILITIES, NET............................ (5.8) (4,369,962)
----- --------------
NET ASSETS................................................... 100.0% $ 75,572,363
===== ==============
NET ASSET VALUE PER SHARE........................................... $9.97
==============
</TABLE>
* Non-income producing security
(a) Aggregate cost for federal income tax purposes. Aggregate unrealized
appreciation and depreciation are $4,396,327 and ($1,758,893), respectively
(b) All or a portion designated as collateral on forward currency contracts. See
Note 10.
OPEN FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Currency Currency Sold and Currency Unrealized
Units Sold Settlement Date Market Value Gain (Loss)
- ------------- --------------------------------- ------------ -----------
<C> <S> <C> <C>
3,178,628 British Pound 9-8-99............. $ 5,269,384 $ (42,320)
106,000 British Pound 12-30-99........... 175,674 1,855
1,802,146 Canadian Dollars 3-30-99......... 1,173,574 (11,813)
7,212,383 Hong Kong Dollars 8-20-01........ 895,958 (154,709)
5,019,162 Hong Kong Dollars 8-18-99........ 643,485 (23,075)
2,003,546,192 Japanese Yen 8-18-99............. 18,311,077 (2,341,567)
349,428,694 Japanese Yen 12-30-99............ 3,246,542 (87,649)
6,650,710 New Zealand Dollars 9-3-99....... 3,514,392 (69,558)
2,362,725 Singapore Dollars 8-18-99........ 1,453,851 (123,787)
----------- -----------
$34,683,937 $(2,852,623)
=========== ===========
</TABLE>
COUNTRY ALLOCATION
<TABLE>
<S> <C>
Japan..................................... 29.9%
Canada.................................... 23.8
United States............................. 18.8
United Kingdom............................ 10.7
Netherlands............................... 6.3
New Zealand............................... 5.6
Singapore................................. 2.6
Hong Kong................................. 2.3
-----
100.0%
=====
</TABLE>
See Notes to Financial Statements.
21
<PAGE> 24
(INTENTIONALLY LEFT BLANK)
22
<PAGE> 25
- --------------------------------------------------------------------------------
REALTY FUND - MANAGEMENT DISCUSSION
by C.T. Fitzpatrick, Mason Hawkins, and Staley Cates
We are pleased to report Longleaf Partners Realty Fund's net asset value
increased 9.7% in the fourth quarter compared to -1.0% for the Wilshire Real
Estate Securities Index and -3.9% for the NAREIT Index. For all of 1998, the
Realty Fund was down 13% while the Wilshire declined 17.4%, and the NAREIT was
down 18.8%. LONGLEAF PARTNERS REALTY FUND IS THE SECOND BEST PERFORMING REAL
ESTATE FUND SINCE ITS PUBLIC OFFERING ON JANUARY 2, 1996.* The Fund's three year
average annual return of 16.7% is 6 percentage points greater than the Wilshire
Index. The Realty Fund has outperformed the Index in EACH of the three years.
1998 was challenging for publicly traded real estate to say the least. Absolute
returns were the worst since 1974. Performance relative to common stocks was
even more dramatic. Publicly traded real estate prices lagged the S&P 500 by
over 50 percentage points -- the largest disparity ever recorded and twice the
previous record in 1989.
In 1990, publicly traded real estate businesses and other common equities traded
at the same earnings multiple. Today common equities sell for three times the
multiple of their real estate counterparts. This pricing schizophrenia is even
more puzzling when real estate FFO has grown faster than common stock earnings
since 1995 and should continue to do so in 1999.
Real estate's dismal absolute and relative returns contrast sharply to industry
fundamentals. The companies we own are reporting strong same property growth.
Most markets are in equilibrium with rising rents and stable or rising occupancy
levels. Most importantly, new supply remains in check because of the much
publicized credit crunch.
As long-term investors these dichotomies delight us. Our appraisals grew
throughout 1998, and yet we paid less for the same companies. High quality
companies previously selling at premium prices now have fallen within our
required price-to-value ratio. Our performance in 1998 reflects purchases of
some of these wonderful businesses as their prices declined.
Our positive contributors to 1998 performance were IHOP, Cousins, Red Roof Inns,
Rayonier, and Promus. These companies generated positive returns during a year
when the average real estate company's price was down over 20%. More
importantly, each business built shareholder value during the year through
improved operating results and/or beneficial capital allocation. Both Red Roof
and Rayonier performed well against challenging fundamentals, and both used
excess cash flow to repurchase shares. IHOP, Cousins, and Promus posted very
- ---------------
* From January 4, 1996, through December 31, 1998, Longleaf Partners Realty Fund
was the second best performing real estate fund out of 45 funds tracked
according to Lipper Analytical Services.
23
<PAGE> 26
- --------------------------------------------------------------------------------
REALTY FUND - MANAGEMENT DISCUSSION
by C.T. Fitzpatrick, Mason Hawkins, and Staley Cates
strong operating results and reinvested cash flow into their businesses. In
addition, Promus aggressively repurchased shares during the second half of 1998.
Five businesses generated the poorest returns in 1998 -- Catellus, Host
Marriott, Bayview Capital, Prime Group, and Getty Real Estate. Catellus' price
decline was particularly ironic given strong property results, a generally
improving California real estate market, and the success at Mission Bay where
the University of California San Francisco will begin construction of its new
biotech campus in 1999. We expect several additional developments to break
ground over the next 12 months at this 313 acre site on the waterfront in
downtown San Francisco. Although Host Marriott's outstanding full service hotels
outperformed the hotel industry with double digit same property cash flow
growth, lodging was real estate's worst performing sector. Bayview made
excellent progress building its deposit franchise in Silicon Valley, but
substantial mortgage prepayments caused flat earnings. Prime Group should win
the "Did Everything Right and Got No Credit" award. The company purchased assets
cheaply in the rebounding Chicago office market, reported double digit same
property growth, grew earnings at a solid mid-teens rate, and repurchased shares
in 1998. The stock, nevertheless, ended lower. Lastly, Getty Realty built value
by investing its retained cash flow in difficult to replace gas station
locations in the supply constrained Northeast. We added to most of these
positions throughout 1998.
Longleaf Partners Realty Fund experienced net inflows in 1998 while most real
estate funds had net redemptions. Your decision to invest in the Realty Fund
enabled us to acquire larger stakes in existing businesses at more discounted
prices. We also added four outstanding new companies -- Beacon, Excel Legacy,
Hilton Hotels, and Promus -- at most compelling valuation levels. Despite net
cash inflows in 1998 we faced some difficult decisions. We reluctantly sold
Marriott LYON's, Sizeler, Wellsford, and Arden to concentrate finite capital
resources into our best and most discounted companies.
The Realty Fund's composite price-to-value ratio suggests the best positioning
we have had at the start of any year. We continue to increase our personal stake
in the Fund and encourage our partners to do the same.
24
<PAGE> 27
- --------------------------------------------------------------------------------
REALTY FUND - PERFORMANCE CONTRIBUTIONS
The following table delineates the specific dollar contributions of individual
holdings to the (12.98)% total return for 1998. The companies listed impacted
performance by at least 5%.
<TABLE>
<CAPTION>
PERCENTAGE
CONTRIBUTION OF TOTAL
IN 1998 CONTRIBUTION
------------- ------------
<S> <C> <C>
FROM PORTFOLIO HOLDINGS:
IHOP Corp............................... $ 7,385,063 6.0%
TimberWest Forest Corp.................. (6,221,695) (5.0)
Wellsford Real Properties, Inc.......... (7,076,701) (5.7)
Excel Legacy Corporation -- Common and
Preferred............................ (8,104,029) (6.6)
Prime Retail, Inc....................... (8,150,363) (6.6)
Getty Realty Corp....................... (8,688,980) (7.0)
Prime Group Realty Trust................ (8,861,029) (7.2)
Bay View Capital Corp................... (12,780,159) (10.3)
Host Marriott Corporation............... (15,056,393) (12.2)
Catellus Development Corporation........ (20,600,697) (16.7)
All others, net......................... (28,525,296) (23.1)
------------- -------
(116,680,279) (94.4)
Interest income........................... 2,657,736 2.2
Net unrealized foreign exchange loss...... (126,311) (0.1)
Expenses.................................. (9,576,940) (7.7)
------------- -------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS...................... $(123,725,794) (100.0)%
============= =======
</TABLE>
25
<PAGE> 28
- --------------------------------------------------------------------------------
REALTY FUND - PERFORMANCE HISTORY
LONGLEAF PARTNERS REALTY FUND
(Graph)
Comparison of Change in Value of $10,000 Investment
Since Public Offering 1/2/96
The graph is a line graph showing total returns of the Realty Fund since its
public offering on 1/2/96, in comparison with the Wilshire Real Estate
Securities Index, the primary broad based securities index used, and the NAREIT
Index, a secondary index, each beginning 1/2/96 and ending 12/31/98.
The line graph begins with an assumed investment of $10,000 as of 1/2/96. The
ending value for each at 12/31/98 is as follows:
Realty Fund - $15,882
Wilshire Real Estate Securities Index - $13,527
NAREIT Index - $13,098
AVERAGE ANNUAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Wilshire
Realty Real Estate NAREIT
Fund Securities Index Index
------ ---------------- ------
<S> <C> <C> <C>
One Year (12.98)% (17.42)% (18.82)%
Two Years 6.25 (0.51) (1.77)
Since Public Offering 1/2/96 16.69 10.70 9.42
</TABLE>
26
<PAGE> 29
- --------------------------------------------------------------------------------
REALTY FUND - PORTFOLIO SUMMARY
FIVE LARGEST HOLDINGS
(REPRESENT 38.6% OF NET ASSETS)
EXCEL LEGACY CORPORATION (XELC) 9.9%
A C-corp. focused on development, re-development, and ownership of unique real
estate projects throughout North America. Excel Legacy has numerous urban, mixed
use retail/ entertainment developments in the western U.S. including San Diego,
Palm Springs, Salt Lake City, Scottsdale, and Denver.
HOST MARRIOTT CORPORATION (HMT) 9.7%
Owner of 126 upscale and luxury full-service Marriott and Ritz Carlton hotels
which are operated by Marriott International.
CATELLUS DEVELOPMENT CORPORATION (CDX) 7.8%
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. with a concentration of high profile projects
in California. Catellus' most significant project is a 313 acre development at
Mission Bay on the waterfront in downtown San Francisco.
FOREST CITY ENTERPRISES, INC. (FCE) 6.0%
A diversified, national real estate business that owns and operates retail and
office properties, as well as residential units. Also owns over 5000 acres of
land for current and future development.
BEACON CAPITAL PARTNERS, INC. (NOT LISTED) 5.2%
A private REIT that develops and owns office buildings and mixed use properties
throughout the country. Beacon is the largest landlord in the supply constrained
office market of Cambridge, MA, with sites that combine retail, research,
office, and entertainment space.
PORTFOLIO CHANGES
JANUARY 1, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Beacon Capital Partners, Inc. Arden Realty, Inc.
Crestline Capital Corporation* (HMT) Horizon Group Properties, Inc.*
Excel Legacy Corporation Common Marriott International, Inc.
Excel Legacy Corporation - Series A Liquid Option Notes
Liquidating Preference Convertible Sizeler Property Investors, Inc.
Hilton Hotels Corporation Sodexho Marriott Services, Inc.*
Horizon Group Properties, Inc.* (PRT) Sunburst Hospitality Corporation
Promus Hotel Corporation Wellsford Real Properties, Inc.
Sodexho Marriott Services, Inc.* (HMT) White River Corporation
</TABLE>
* Acquired through merger/spin-off of existing position (ticker of original
holding).
27
<PAGE> 30
- --------------------------------------------------------------------------------
REALTY FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C> <C> <C> <C>
Common Stock - 88.2%
Diversified Realty 16.1%
4,209,800 * Catellus Development Corporation................ $ 60,252,762
2,280,000 * Excel Legacy Corporation(b)..................... 9,120,000
1,651,900 Forest City Enterprises, Inc. - Class A(b)...... 43,362,375
135,200 Forest City Enterprises, Inc. - Class B......... 3,481,400
440,600 TrizecHahn Corporation (Foreign)................ 9,032,300
------------
125,248,837
------------
Lodging 26.2%
547,020 * Crestline Capital Corporation................... 8,000,168
1,895,000 Hilton Hotels Corporation....................... 36,241,875
5,470,200 Host Marriott Corporation(d).................... 75,557,137
286,200 Marriott International, Inc. - Class A.......... 8,299,800
1,060,000 * Promus Hotel Corporation........................ 34,317,500
2,153,400 * Red Roof Inns, Inc.(b).......................... 36,338,625
481,846 * Supertel Hospitality, Inc.(b)................... 4,396,845
------------
203,151,950
------------
Mortgage Financing 3.0%
1,088,000 Bay View Capital Corp.(b)....................... 23,596,000
Natural Resources/Land 8.9%
304,200 * Castle & Cooke, Inc............................. 4,486,950
650,000 Deltic Timber Corporation....................... 13,243,750
261,000 Rayonier Inc.................................... 11,989,688
6,950,000 TimberWest Forest Corp.(b) (Foreign)............ 40,101,827
------------
69,822,215
------------
Office 21.0%
447,300 Alexandria Real Estate Equities, Inc. (REIT).... 13,838,344
2,075,000 Beacon Capital Partners, Inc.(b)(c)(REIT)....... 40,504,000
1,187,800 Boston Properties Inc. (REIT)................... 36,227,900
1,090,900 Cousins Properties Incorporated (REIT).......... 35,181,525
2,443,300 Prime Group Realty Trust(b) (REIT).............. 36,954,912
------------
162,706,681
------------
Retail 11.3%
1,223,800 Getty Realty Corp.(b)........................... 17,898,075
915,000 * IHOP Corp.(b)................................... 36,542,813
3,371,400 Prime Retail, Inc.(b) (REIT).................... 33,081,862
------------
87,522,750
------------
</TABLE>
See Notes to Financial Statements.
28
<PAGE> 31
- --------------------------------------------------------------------------------
REALTY FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C> <C> <C> <C>
Non-realty 1.7%
650,000 The Pioneer Group, Inc.......................... $ 12,837,500
------------
TOTAL COMMON STOCKS (COST $713,420,651)......... 684,885,933
------------
Preferred Stock - 8.8%
Diversified Realty 8.8%
14,600,000 * Excel Legacy Corporation - Series A Liquidating
Preference Convertible(b)(c).................. $ 68,031,620
------------
TOTAL PREFERRED STOCK (COST $73,000,000)........ 68,031,620
------------
Options - 0.6%
CONTRACTS
----------
Natural Resources/Land 0.6%
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)....................................... (480,654)
Call Options Purchased
5,494 Newhall Land and Farming Company, expiring
April '99 @ $20 (Cost $1,761,493)............... 3,851,294
2,967 Newhall Land and Farming Company, expiring
October '99 @ $25 (Cost $1,225,243)............. 1,222,404
------------
4,576,562
------------
Short-Term Obligations 1.4%
10,494,000
Repurchase Agreement with State Street Bank, 4.00% due 1-4-99....
------------
TOTAL INVESTMENTS (COST $798,115,200)(a)...................... 99.0% 767,988,115
OTHER ASSETS AND LIABILITIES, NET............................. 1.0 7,707,489
----- ------------
NET ASSETS.................................................... 100.0% $775,695,604
===== ============
NET ASSET VALUE PER SHARE............................................ $14.55
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for federal income tax purposes. Aggregate
unrealized appreciation and depreciation are $51,167,842 and ($81,294,927),
respectively.
(b) Affiliated company. See Note 7.
(c) Illiquid, board valued security. See Note 8.
(d) A portion designated as collateral on Newhall options. See Note 10.
Note: Companies designated as "Foreign" are headquartered outside the U.S. and
represent 6% of Net Assets. REITs comprise 25% of Net Assets.
See Notes to Financial Statements.
29
<PAGE> 32
- --------------------------------------------------------------------------------
SMALL-CAP FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and John Buford
Longleaf Partners Small-Cap Fund completed another successful year with a 12.7%
return in 1998 versus a decline in the Russell 2000 Index of 2.5%. Small-Cap
gained 14.5% during the fourth quarter. The Fund's return has consistently
outpaced the index, but more importantly, our investment partners have
compounded their capital at high rates. The average annual return for the last
five years was 18.5%, and for the last three years was 23.9%. While we are
optimistic about the Fund's opportunity, we are skeptical that 20+% returns will
be the norm.
Success at several of our large holdings drove the year's results. Shaw
Communications, the Canadian cable operator, added $84 million to the Fund's
return. MediaOne Group, a U.S. based cable company provided another $40 million.
The cable industry benefitted from growing cash flows and the recognition that
their broadband capacity will experience increasing demand from telephony and
Internet users.
Our new holding, Midas, also added significantly to our results. We purchased
Midas in January after it was spun out from Whitman (a former Partners Fund
holding). In a short period the management team has effectively paid down debt,
improved relationships with franchisees, and cut costs.
After U.S. Industries used stock to purchase Zurn, the commercial plumbing
products manufacturer we owned, we sold USI in the high $20's based on our
appraisal. When USI subsequently declined below $15 with the market's recession
fears, we took a new position.
Not all the Fund's holdings were successful in 1998, and several negatively
impacted our return. Gendis, the Canadian based holding company whose assets are
largely related to the oil and gas industry, has suffered the most. The decline
in oil prices has hurt Gendis' assets including its interest in Pioneer Natural
Resources (which the Partners Fund owns), the Alliance gas pipeline, and the oil
company, Tundra. In addition, Wall Street has expressed concern over Gendis'
debt relative to cash flow. As a holding company, Gendis is rich in assets and
poor in cash flow. The value of Gendis' net assets, even at today's depressed
prices in oil and gas, are dramatically greater than its stock price. We have
confidence in the management team's ability to grow value and get it recognized.
Bay View also declined considerably in 1998. This San Francisco based savings
and loan has one of the most impressive management teams in the industry. They
have been challenged to replace their prepaying mortgages with higher earning
assets. This short-term problem presents a long-term opportunity for Bay View to
replace lower yielding mortgages with more profitable loans.
30
<PAGE> 33
- --------------------------------------------------------------------------------
SMALL-CAP FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and John Buford
The Fund also has a temporary loss in our new position in The Carbide/Graphite
Group which supplies graphite electrodes to the domestic electric arc steel
industry for melting scrap. The recent steel dumping in the U.S. by overseas
manufacturers desperate to lower inventories in the face of no Asian demand has
hurt Carbide/Graphite's customers. Once overseas manufacturers deplete their
inventories, the company should see sales rise.
Gulf Canada Resources is an important new holding that also has been volatile
since we began purchasing the stock. Gulf Canada is the Canadian oil and gas
exploration and production business that remained after Gulf Oil sold the retail
service station business to British Petroleum several years ago. The value of
the company's net oil and gas reserve, leasehold, and mineral acreage is
multiples greater than the stock price, even in today's depressed energy price
environment.
The Small-Cap portfolio looks significantly different than it did a year ago.
Turnover was higher than our historic average. We sold several businesses that
were spun off from existing holdings. In addition, we sold Dart, Showboat, Zurn,
and White River when they were bought out. We sold Vanguard Cellular and
Corecomm as they approached our appraisals. We also liquidated some very small
positions which we could not increase, and bought more attractive businesses
where we could own a meaningful stake. Our level of concentration is now higher
than it was a year ago--the top five holdings represent 36% of assets (they were
27% at 12/31/97). Because a number of attractive small cap companies became
underpriced, we replaced the two large cap companies (MediaOne and FDX) we had
bought in 1997 when small cap opportunities were elusive.
We used these proceeds as well as our cash reserves to buy several new holdings
at compelling prices, especially in the third quarter. In addition to the new
positions mentioned above, we added Promus Hotels to the Fund. As the lodging
industry suffered terribly on Wall Street, those with premier brands and/or
superior properties continued to grow earnings and cash flow. Promus offers the
strength of several dominant brands that produce valuable management and
franchise fees. The company has been an opportunistic repurchaser of shares.
As significant owners in the Small-Cap Fund we begin 1999 with one of the Fund's
most attractively priced portfolios since we began tracking the price-to-value
ratio. Our businesses are strong and our management partners are excellent.
31
<PAGE> 34
- --------------------------------------------------------------------------------
SMALL-CAP FUND - PERFORMANCE CONTRIBUTIONS
The following table delineates the specific dollar contributions of individual
holdings to the 12.71% total return for 1998.
<TABLE>
<CAPTION>
PERCENTAGE
CONTRIBUTION OF TOTAL
IN 1998 CONTRIBUTION
------------ ------------
<S> <C> <C>
FROM PORTFOLIO HOLDINGS:
Shaw Communications Inc. -- Class A and B...... $ 84,215,654 63.9%
MediaOne Group Inc............................. 40,780,687 31.0
Midas Inc...................................... 36,047,073 27.4
U.S. Industries, Inc........................... 17,812,794 13.5
Dart Group Corporation......................... 14,466,996 11.0
Vanguard Cellular Systems, Inc................. 14,332,451 10.9
Orion Capital Corporation...................... 13,789,353 10.4
Corecomm, Inc.................................. 10,602,503 8.1
Canadian forward currency contracts............ 9,452,559 7.2
Promus Hotel Corporation....................... 6,651,162 5.1
The Pioneer Group, Inc......................... (7,071,375) (5.4)
Carmike Cinemas, Inc........................... (8,250,304) (6.3)
Catellus Development Corporation............... (8,971,315) (6.8)
Japanese forward currency contracts............ (10,100,799) (7.7)
Gulf Canada Resources Limited.................. (11,048,328) (8.4)
The Carbide/Graphite Group, Inc................ (14,057,106) (10.7)
Bay View Capital Corp.......................... (14,405,609) (10.9)
Gendis Inc. -- Class A......................... (35,131,964) (26.7)
All others, net................................ (6,153,278) (4.7)
------------ -----
132,961,154 100.9
Interest income.................................. 10,807,724 8.2
Net realized and unrealized foreign exchange
loss........................................... (160,968) (0.1)
Expenses......................................... (11,887,321) (9.0)
------------ -----
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................... $131,720,589 100.0%
============ =====
</TABLE>
32
<PAGE> 35
- --------------------------------------------------------------------------------
SMALL-CAP FUND - PERFORMANCE HISTORY AND
PORTFOLIO SUMMARY
LONGLEAF PARTNERS SMALL-CAP FUND
(Graph)
Comparison of Change in Value of $10,000 Investment
Since Public Offering 2/21/89
The graph is a line graph showing total returns of the Small-Cap Fund since its
public offering on 2/21/89 in comparison with the Russell 2000 Index, the
primary broad based securities index used, and the Value-Line Index, a
secondary index, each beginning 2/21/89 and ending 12/31/98.
The line graph begins with an assumed investment of $10,000 as of 2/21/89. The
ending value for each at 12/31/98 is as follows:
Small-Cap Fund - $32,113
Russell 2000 Stock Index - $31,628
Value-Line Index - $17,720
AVERAGE ANNUAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Small-Cap Russell 2000 Value-Line
Fund Index Index
--------- ------------ ----------
<S> <C> <C> <C>
One Year 12.71% (2.55)% (3.79)%
Three Years 23.86 11.58 9.71
Five Years 18.49 11.87 8.16
Since Public Offering 2/21/89* 12.56 12.38 5.97
</TABLE>
* From public offering through 3/31/91, the Fund was managed by a different
portfolio manager.
FIVE LARGEST HOLDINGS
(REPRESENT 35.5% OF NET ASSETS)
SHAW COMMUNICATIONS INC. (SJR) 11.6%
A Canadian cable television company which also provides high-speed Internet
access and digital audio services.
PROMUS HOTEL CORPORATION (PRH) 6.7%
Franchisor and/or manager of over 1100 hotels under the Doubletree, Embassy
Suites, Hampton Inn, and Homewood Suites brand names.
ORION CAPITAL CORPORATION (OC) 6.7%
A property/casualty insurer with business lines focusing on workers'
compensation, nonstandard auto, professional liability, and unique or highly
specialized situations.
MIDAS INC. (MDS) 5.4%
One of the world's largest automotive service providers with over 1900
franchises in the U.S. and 800 locations overseas.
U.S. INDUSTRIES, INC. (USI) 5.1%
Manufacturer of bath and plumbing products such as the Jacuzzi and Zurn brands,
as well as indoor lighting, and miscellaneous industrial products.
33
<PAGE> 36
- --------------------------------------------------------------------------------
SMALL-CAP FUND - PORTFOLIO SUMMARY
PORTFOLIO CHANGES
JANUARY 1, 1998 THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Agribrands International, Inc. American Safety Razor Company
Azwell Inc.* (Showa Azwell Inc.*
Pharmaceutical) Baker Fentress & Company
The Carbide/Graphite Group, Inc. Celestial Seasonings, Inc.
Carmike Cinemas, Inc. Chicago Title Corporation*
Chicago Title Corporation* Corecomm, Inc.
Fuji Fire and Marine Insurance Dart Group Corporation
Company, Limited Duff & Phelps Credit Rating Co.
Genlyte Group Incorporated FDX Corporation
Gulf Canada Resources Limited Grey Advertising Inc. -
Kentucky Fried Chicken Japan Class A
Kerr-McGee Corporation Kentucky Fried Chicken Japan
Kinseki, Ltd. Kerr-McGee Corporation
Kuraya Corporation Kinseki, Ltd.
Lincoln Electric Holdings, Inc. The Koa Fire and Marine Insurance
MediaOne Group, Inc.* (UMG) Company, Ltd.
Midas Inc. Kuraya Corporation
Nippon Broadcasting System Lincoln Electric Holdings, Inc.
Nippon Shinyaku Co., Ltd. MediaOne Group Inc.*
Nippon Shoji Kaisha Ltd. Nippon Shinyaku Co., Ltd.
Perrigo Company Nippon Shoji Kaisha Ltd.
Promus Hotel Corporation Ryoyo Electro Corp.
Robbins & Myers, Inc. Showa Pharmaceutical Co., Ltd.
Ryoyo Electro Corp. Showboat, Inc.
Sangetsu Co., Ltd. The Union Corporation
Scott Technologies, Inc. United Asset Management
Shaw Communications Inc. - Class A Corporation
Showa Pharmaceutical Co. Ltd. U S West, Inc.*
U.S. Industries, Inc. Vanguard Cellular Systems, Inc.
U S West, Inc* (UMG) White River Corporation
Wisconsin Central Transportation Zurn Industries, Inc.
Corporation
</TABLE>
* Acquired through merger/spin-off of existing position (ticker or original
holding).
34
<PAGE> 37
- --------------------------------------------------------------------------------
SMALL-CAP FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
Common Stock 94.7%
Agriculture 2.3%
1,015,400 * Agribrands International, Inc.(b).............. $ 30,462,000
Broadcasting 1.1%
367,000 Nippon Broadcasting System (Foreign)(d)........ 14,460,108
Building Materials 0.4%
405,000 Sangetsu Co., Ltd (Foreign)(d)................. 5,966,351
Business Services 1.7%
1,104,400 * Pinkerton's, Inc.(b)........................... 23,537,525
Cable 11.6%
100,000 Shaw Communications Inc. - Class A (Foreign)... 2,391,830
6,479,800 Shaw Communications Inc. - Class B
(Foreign)(b)(d).............................. 154,985,773
--------------
157,377,603
--------------
Commercial Lighting 2.1%
1,397,700 * Genlyte Group Incorporated(b).................. 26,206,875
115,050 Thomas Industries, Inc......................... 2,257,856
--------------
28,464,731
--------------
Entertainment 2.2%
1,470,000 * Carmike Cinemas, Inc. -- Class A(b)............ 29,859,375
Investment Management 1.3%
865,000 The Pioneer Group, Inc......................... 17,083,750
Lodging 6.7%
2,816,100 * Promus Hotel Corporation....................... 91,171,238
Manufacturing 12.0%
2,064,740 AMETEK, Inc.(b)................................ 46,069,511
1,740,000 * The Carbide/Graphite Group, Inc.(b)............ 25,665,000
640,700 Robbins & Myers, Inc.(b)....................... 14,175,487
433,200 * Scott Technologies, Inc........................ 7,161,359
3,729,600 U.S. Industries, Inc........................... 69,463,800
--------------
162,535,157
--------------
Mortgage Financing 3.2%
2,006,100 Bay View Capital Corp.(b)(d)................... 43,507,294
Natural Resources 9.6%
845,000 Deltic Timber Corporation(b)................... 17,216,875
3,349,996 Gendis Inc. - Class A(b)(c)(Foreign)........... 10,366,732
21,584,400 * Gulf Canada Resources Limited(b)(Foreign)...... 63,404,175
6,950,000 TimberWest Forest Corp.(b)(Foreign)............ 40,101,827
--------------
131,089,609
--------------
Pharmaceuticals 3.7%
5,686,100 * Perrigo Company(b)............................. 50,108,756
</TABLE>
See Notes to Financial Statements.
35
<PAGE> 38
- --------------------------------------------------------------------------------
SMALL-CAP FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
Property & Casualty Insurance 15.9%
239,101 * Alleghany Corporation.......................... $ 44,921,100
96,000 The Chiyoda Fire and Marine Insurance Company,
Ltd. (Foreign)............................... 317,159
3,840,000 The Dai-Tokyo Fire and Marine Insurance
Company, Ltd. (Foreign)(d)................... 13,389,312
3,910,000 Fuji Fire and Marine Insurance Company, Limited
(Foreign)(d)................................. 7,498,363
1,777,400 Hilb, Rogal and Hamilton Company(b)............ 35,325,825
7,670,000 The Nissan Fire & Marine Insurance Company,
Ltd. (Foreign)(d)............................ 22,732,193
2,276,800 Orion Capital Corporation(b)................... 90,645,100
--------------
214,829,052
--------------
Real Estate 11.3%
4,203,400 * Catellus Development Corporation............... 60,161,163
1,135,400 Cousins Properties Incorporated(d)............. 36,616,650
631,700 * IHOP Corp.(b).................................. 25,228,519
1,520,000 TrizecHahn Corporation (Foreign)............... 31,160,000
--------------
153,166,332
--------------
Restaurants 1.1%
982,400 * VICORP Restaurants, Inc.(b).................... 15,227,200
Retail 5.4%
2,333,400 Midas Inc.(b).................................. 72,627,075
Transportation 3.1%
2,460,800 * Wisconsin Central Transportation Corporation... 42,295,000
--------------
TOTAL COMMON STOCKS (COST $1,139,085,503).................. 1,283,768,156
--------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Short-Term Obligations 5.5%
Federal Home Loan Bank Discount Note, 5.14% due 1-4-99.............. 49,978,958
Repurchase Agreement with State Street Bank, 4.00% due 1-4-99....... 25,171,000
--------------
75,149,958
--------------
TOTAL INVESTMENTS (COST $1,214,235,461)(a)................... 100.2% 1,358,918,114
OTHER ASSETS AND LIABILITIES, NET............................ (0.2) (3,554,495)
----- --------------
NET ASSETS................................................... 100.0% $1,355,363,619
===== ==============
NET ASSET VALUE PER SHARE........................................... $21.95
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for federal income tax purposes. Aggregate
unrealized appreciation and depreciation are $234,503,217 and ($89,820,564),
respectively.
(b) Affiliated company. See Note 7.
(c) Illiquid security. See Note 8.
(d) All or a portion designated as collateral on forward currency contracts. See
Note 10.
Note: Companies designated as "Foreign" are headquartered outside the U.S. and
represent 27% of Net Assets.
See Notes to Financial Statements.
36
<PAGE> 39
- --------------------------------------------------------------------------------
SMALL-CAP FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1998
OPEN FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Currency Currency Sold and Currency Unrealized
Units Sold Settlement Date Market Value Gain
- ------------- ---------------------------------- ------------ -----------
<C> <S> <C> <C>
206,963,700 Canadian Dollars 4-1-99........... $134,778,061 $ 1,295,338
8,312,155,852 Japanese Yen 5-13-99.............. 75,013,882 (9,167,897)
------------ -----------
Total Forward Contracts........... $209,791,943 $(7,872,559)
============ ===========
</TABLE>
See Notes to Financial Statements.
37
<PAGE> 40
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1998
PARTNERS FUND
ASSETS:
Investments:
Affiliated securities, at market value (cost $713,543,660,
$0, $413,692,921 and $711,713,782, respectively) (Note 2
and 7)..................................................
Other securities, at market value (cost $2,196,443,485,
$59,515,891, $381,044,367 and $427,371,721,
respectively)...........................................
Short-term cash equivalents...............................
Repurchase agreement (Note 2).............................
TOTAL INVESTMENTS
Cash........................................................
Receivable for:
Dividends and interest....................................
Fund shares sold..........................................
Securities sold...........................................
Foreign tax reclaim.......................................
Prepaid assets..............................................
Insurance reserve premium...................................
TOTAL ASSETS
LIABILITIES:
Payable for:
Forward currency contracts (Note 2).......................
Fund shares redeemed......................................
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(loss) on investments and
foreign currency........................................
Unrealized gain(loss) on investments and foreign
currency................................................
Net Assets
NET ASSET VALUE PER SHARE...................................
FUND SHARES ISSUED AND OUTSTANDING..........................
See Notes to Financial Statements.
38
<PAGE> 41
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
PARTNERS FUND INTERNATIONAL FUND REALTY FUND SMALL-CAP FUND
- -------------- ------------------ ------------ --------------
<S> <C> <C> <C>
$ 462,407,295 $ - $403,172,705 $ 814,720,924
2,986,962,558 62,153,325 354,818,546 469,047,232
99,957,917 - - 49,978,958
136,060,000 17,789,000 10,494,000 25,171,000
- -------------- -------------- ------------ --------------
3,685,387,770 79,942,325 768,485,251 1,358,918,114
429 120 866 677
12,702,775 89,681 9,135,740 1,841,186
3,900,353 467,449 1,103,251 5,691,921
5,579,162 - - 10,276
- 4,816 - -
95,048 26,710 39,571 42,168
65,451 - 3,937 12,203
- -------------- -------------- ------------ --------------
3,707,730,988 80,531,101 778,768,616 1,366,516,545
- -------------- -------------- ------------ --------------
12,669,154 2,852,623 - 7,872,559
6,574,924 - 1,728,482 1,317,385
2,340,913 84,434 651,327 908,759
300,798 14,152 65,133 109,844
- 1,950,956 - 722,241
- - 497,136 -
545,276 56,406 130,934 222,138
- -------------- -------------- ------------ --------------
22,431,065 4,958,571 3,073,012 11,152,926
- -------------- -------------- ------------ --------------
$3,685,299,923 $ 75,572,530 $775,695,604 $1,355,363,619
============== ============== ============ ==============
$3,110,650,576 $ 74,687,080 $823,098,728 $1,215,486,666
872,615 244 627,922 43,744
47,063,178 1,099,320 (17,904,507) 3,023,536
526,713,554 (214,114) (30,126,539) 136,809,673
- -------------- -------------- ------------ --------------
$3,685,299,923 $ 75,572,530 $775,695,604 $1,355,363,619
============== ============== ============ ==============
$24.39 $9.97 $14.55 $21.95
============== ============== ============ ==============
151,097,394 7,583,796 53,308,405 61,740,958
</TABLE>
See Notes to Financial Statements.
39
<PAGE> 42
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED DECEMBER 31, 1998
INVESTMENT INCOME:
INCOME:
Dividends from affiliates (net of foreign tax withheld of
$0, $0, $755,956 and $845,151 respectively) (Note 7)....
Dividends from non-affiliates (net of foreign tax withheld
of $1,716,137, $24,527, $19,827, and $200,014,
respectively)...........................................
Interest..................................................
Total income.......................................
EXPENSES:
Investment Counsel fee (Note 3)...........................
Administration fee (Note 4)...............................
Transfer Agent fee........................................
Registration and filing fees..............................
Supplies and postage......................................
Printing..................................................
Reimbursable administration expenses (Note 4).............
Custodian fee.............................................
Professional fees.........................................
Trustees' fees............................................
Insurance expense.........................................
Interest..................................................
Miscellaneous.............................................
Investment counsel fee waived.............................
Total expenses.....................................
Net investment income..............................
REALIZED AND UNREALIZED GAIN(LOSS):
Net realized gain(loss):
Non-affiliated securities.................................
Affiliated securities.....................................
Forward currency contracts................................
Foreign currency transactions.............................
Net gain(loss)........................................
Change in unrealized gain(loss):
Securities................................................
Other assets, liabilities, forwards and options...........
Change in net unrealized gain(loss)...................
Net realized and unrealized gain(loss)................
NET INCREASE(DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS................................................
See Notes to Financial Statements.
40
<PAGE> 43
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PARTNERS FUND INTERNATIONAL FUND REALTY FUND SMALL-CAP FUND
- ------------- ------------------ ------------- --------------
<S> <C> <C> <C>
$ 35,534,587 $ - $ 17,737,888 $ 7,391,619
19,277,888 153,336 17,285,962 3,907,131
14,673,389 131,976 2,657,736 10,807,724
- ------------ ---------- ------------- ------------
69,485,864 285,312 37,681,586 22,106,474
- ------------ ---------- ------------- ------------
26,393,753 212,286 8,173,553 9,831,536
3,385,838 14,152 817,356 1,177,540
554,932 2,319 133,985 192,991
423,608 39,848 126,038 201,515
161,502 9,000 74,202 80,999
137,000 33,600 63,501 67,000
159,255 9,704 48,319 59,371
81,500 20,000 28,999 82,500
43,999 22,500 30,998 39,998
60,000 7,740 30,000 30,000
48,203 670 13,908 16,866
- - - 61,572
126,768 3,700 36,081 45,433
- (127,852) - -
- ------------ ---------- ------------- ------------
31,576,358 247,667 9,576,940 11,887,321
- ------------ ---------- ------------- ------------
37,909,506 37,645 28,104,646 10,219,153
- ------------ ---------- ------------- ------------
466,251,933 1,075,021 4,784,490 87,373,574
172,273,375 - (22,688,997) 57,831,869
(75,578) 24,299 -- 5,053,725
(159,306) 319 (122,383) (156,080)
- ------------ ---------- ------------- ------------
638,290,424 1,099,639 (18,026,890) 150,103,088
- ------------ ---------- ------------- ------------
(235,338,167) 2,637,436 (129,676,362) (20,724,205)
(12,669,154) (2,851,550) (4,127,188) (7,877,447)
- ------------ ---------- ------------- ------------
(248,007,321) (214,114) (133,803,550) (28,601,652)
- ------------ ---------- ------------- ------------
390,283,103 885,525 (151,830,440) 121,501,436
- ------------ ---------- ------------- ------------
$428,192,609 $ 923,170 $(123,725,794) $131,720,589
============ ========== ============= ============
</TABLE>
See Notes to Financial Statements.
41
<PAGE> 44
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PARTNERS FUND
---------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income............................... $ 37,909,506 $ 21,420,547
Net realized gain(loss)............................. 638,290,424 306,865,056
Change in net unrealized gain(loss)................. (248,007,321) 322,569,345
-------------- --------------
Net increase(decrease) in net assets resulting
from operations................................. 428,192,609 650,854,948
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income.......................... (36,966,961) (21,460,363)
From net realized gain on investments............... (586,542,694) (311,977,522)
From return of capital.............................. - -
-------------- --------------
Net decrease in net assets resulting from
distributions................................... (623,509,655) (333,437,885)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares.................... 890,978,876 477,572,262
Net asset value of shares issued to shareholders for
reinvestment of shareholder distributions......... 907,344,282 -
Cost of shares redeemed............................. (522,776,364) (489,998,326)
-------------- --------------
Net increase(decrease) in net assets from fund
share transactions.............................. 1,275,546,794 (12,426,064)
-------------- --------------
Total increase in net assets...................... 1,080,229,748 304,990,999
NET ASSETS:
Beginning of period................................. 2,605,070,175 2,300,079,176
-------------- --------------
End of period....................................... $3,685,299,923 $2,605,070,175
============== ==============
Undistributed net investment income included in net
assets at end of period........................... $872,615 $89,373
------- ------
------- ------
</TABLE>
See Notes to Financial Statements.
42
<PAGE> 45
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INTERNATIONAL FUND
------------------ REALTY FUND SMALL-CAP FUND
CAPITALIZATION ----------------------------- ------------------------------
AUGUST 12, 1998 YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
TO DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1997 1998 1997
------------------ ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
$ 37,645 $ 28,104,646 $ 3,776,009 $ 10,219,153 $ 7,445,302
1,099,639 (18,026,890) 27,323,623 150,103,088 26,187,400
(214,114) (133,803,550) 81,704,091 (28,601,652) 114,475,124
----------- ------------ ------------ -------------- -------------
923,170 (123,725,794) 112,803,723 131,720,589 148,107,826
----------- ------------ ------------ -------------- -------------
(37,720) (22,154,503) (3,757,696) (10,041,928) (7,427,301)
- (18,724) (27,280,191) (145,213,540) (28,306,270)
- (5,557,418) (1,813,127) - -
----------- ------------ ------------ -------------- -------------
(37,720) (27,730,645) (32,851,014) (155,255,468) (35,733,571)
----------- ------------ ------------ -------------- -------------
75,071,603 524,495,785 685,515,315 565,247,944 770,142,361
32,236 56,610,939 - 178,562,305 -
(516,759) (391,256,885) (184,175,044) (280,170,886) (219,414,438)
----------- ------------ ------------ -------------- -------------
74,587,080 189,849,839 501,340,271 463,639,363 550,727,923
----------- ------------ ------------ -------------- -------------
75,472,530 38,393,400 581,292,980 440,104,484 663,102,178
100,000 737,302,204 156,009,224 915,259,135 252,156,957
----------- ------------ ------------ -------------- -------------
$75,572,530 $775,695,604 $737,302,204 $1,355,363,619 $ 915,259,135
=========== ============ ============ ============== =============
$244 $627,922 $24,233 $43,744 $22,599
-------- -------- ------- ------ -------
-------- -------- ------- ------ -------
</TABLE>
See Notes to Financial Statements.
43
<PAGE> 46
- --------------------------------------------------------------------------------
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 non-diversified investment company. Capitalization for
each fund was provided by principals of Southeastern Asset Management, Inc., the
Investment Counsel.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Management Estimates
The accompanying financial statements are prepared in accordance with Generally
Accepted Accounting Principles for the investment company industry; these
principles may require the use of estimates by Fund management.
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
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.
44
<PAGE> 47
Accounting for Investments
The Funds record security transactions on trade date. 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. Fund expenses are also recorded 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. The Funds intend to make any required distributions to avoid the
application of a 4% nondeductible excise tax. Distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. Reclassifications are made within the Fund's capital
accounts to reflect income and gains available for distribution under income tax
regulations.
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 such changes 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, gain or loss on
open forward contracts are treated as realized and subject to distribution at
our excise tax year-end date.
45
<PAGE> 48
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 Forward Currency Contracts and Options
The Funds generally use forward currency contracts and options for hedging
purposes to reduce market risks. However, when used separately, forward currency
contracts and options have risks. For example, the price movements of 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.
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.
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.
For the Partners, Small-Cap and Realty Funds, Southeastern has agreed to reduce
its fees on a pro rata basis to the extent that each Fund's normal annual
operating
46
<PAGE> 49
expenses (excluding taxes, interest, brokerage fees, and extraordinary expenses)
exceed 1.5% of average annual net assets. No such reductions were necessary for
the current year.
The International Fund fee is calculated at 1.5% per annum on all asset levels.
For this Fund, Southeastern has agreed to reduce its fees on a pro rata basis to
the extent that the Fund's normal annual operating expenses (excluding taxes,
interest, brokerage fees and extraordinary expenses) exceed 1.75% of average
annual net assets. Southeastern reduced its fees by $127,852 in 1998 for
expenses exceeding 1.75%.
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>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------
PARTNERS INTERNATIONAL REALTY SMALL-CAP
FUND FUND FUND FUND
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Shares sold......... 33,032,388 7,632,832 32,103,302 24,333,088
Reinvestment of
shareholder
distribution...... 37,325,423 3,246 3,576,951 8,326,574
Shares redeemed..... (19,542,488) (52,282) (24,869,928) (12,181,491)
----------- --------- ----------- -----------
50,815,323 7,583,796 10,810,325 20,478,171
=========== ========= =========== ===========
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------
PARTNERS INTERNATIONAL SMALL-CAP
FUND FUND REALTY FUND FUND
----------- ------------- ----------- -----------
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>
47
<PAGE> 50
NOTE 6. INVESTMENT TRANSACTIONS
Purchases and sales of equity securities for the periods (excluding short-term
obligations) are summarized below:
<TABLE>
<CAPTION>
PARTNERS FUND INTERNATIONAL FUND REALTY FUND SMALL-CAP FUND
-------------- ------------------ ------------ --------------
<S> <C> <C> <C> <C>
Purchases $1,529,160,118 $64,413,279 $365,529,493 $875,404,049
Sales 1,365,027,274 7,024,788 162,962,921 515,634,661
</TABLE>
There were no written option transactions for any Fund in 1998.
NOTE 7. AFFILIATED COMPANIES
Under Section 2(a)(3) of the Investment Company Act of 1940, a portfolio company
is defined as "affiliated" if a Fund owns five percent or more of its voting
stock. At December 31, 1998, each Fund held at least five percent of the
outstanding voting stock of the following companies:
<TABLE>
<CAPTION>
%
OUTSTANDING
SHARES OF
THE
COMPANY
-----------
<S> <C>
PARTNERS FUND
Crestline Capital Corporation 5.3%
Host Marriott Corporation 5.3
Pioneer Natural Resources Company 9.8
Rayonier Inc. 10.4
UCAR International, Inc. 9.9
REALTY FUND
Bayview Capital Corporation 5.6
Beacon Capital Partners, Inc.(Note 8) 9.9
Deltic Timber Corporation 5.1
Forest City Enterprises, Inc. -- Class A 8.6
Excel Legacy Corporation* --
Common 6.8
Series A Liquidating Preference Convertible (Note 8) 68.6
Getty Realty Corp. 9.0
IHOP Corp. 9.3
Prime Group Realty Trust 16.2
Prime Retail, Inc. 7.9
Red Roof Inns, Inc. 7.9
Supertel Hospitality, Inc. 10.0
TimberWest Forest Corp. 10.0
* Combined voting power is 30.8%
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
%
OUTSTANDING
SHARES OF
THE
COMPANY
-----------
<S> <C>
SMALL-CAP FUND
Agribrands International, Inc. 9.5
AMETEK, Inc. 6.4
Bay View Capital Corp. 10.4
Carbide/Graphite Group, Inc. 20.8
Carmike Cinemas, Inc. 14.8
Deltic Timber Corporation 6.6
Gendis, Inc. - Class A(Note 8) 20.0
Genlyte Group Incorporated 10.3
Gulf Canada Resources Limited 6.2
Hilb, Rogal and Hamilton Company 14.6
IHOP Corp. 6.4
Midas Inc. 13.8
Orion Capital Corporation 8.4
Perrigo Company 7.8
Pinkerton's, Inc. 9.0
Robbins & Meyers, Inc. 5.9
Shaw Communications Inc. -- Class B 8.9
TimberWest Forest Corp. 10.0
VICORP Restaurants, Inc. 10.6
</TABLE>
NOTE 8. ILLIQUID OR RESTRICTED SECURITIES
The Realty Fund holds 2,075,000 shares of Beacon Capital Partners, Inc. (Beacon)
carried at cost less accrued dividends of $40,504,000 or $19.52 per share. The
Beacon shares were acquired in a private placement which closed March 17, 1998.
The registration statement for the Beacon shares became effective on November
13, 1998, but no regular trading market in the shares had developed by December
31, 1998.
The Realty Fund also owns 14,600,000 shares of Excel Legacy Corp. Series A
Liquidating Preference Convertible Stock (Excel Preferred) valued at $68,031,620
or $4.66 per share. The Excel Preferred shares were acquired in a private
placement which closed on March 31, 1998 and may be converted by the company
into common shares on May 17, 1999. The $5.00 per share cost is being amortized
to the market price of the common shares less 10% over the period remaining
until May 17, 1999, when the company has the right to require conversion. The
Excel Preferred shares are not registered and there is no regular trading market
in these shares.
Both Beacon and Excel Preferred are valued in good faith under guidelines
established by the Board of Trustees. These investments represent 14% of the
Realty Fund's net assets at December 31, 1998.
The Small-Cap Fund owns 3,349,996 shares of Gendis, Inc. Class A common stock,
representing 20.0% of the total outstanding shares of the company. Due to
49
<PAGE> 52
the Fund's large ownership stake, a portion of this position may be relatively
illiquid. Gendis represents 0.8% of the Small-Cap Fund's net assets at December
31, 1998.
NOTE 9. RELATED OWNERSHIP
At December 31, 1998, officers, employees of Southeastern and their families,
Fund trustees, the Southeastern retirement plan and other affiliates owned more
than 5% of the following Funds:
<TABLE>
<CAPTION>
Shares Owned Percent of Fund
------------ ---------------
<S> <C> <C>
International Fund................... 2,361,908 41.2%
Realty Fund.......................... 3,023,575 5.7%
</TABLE>
NOTE 10. COLLATERAL
Securities with the following aggregate market value were segregated to
collateralize portfolio obligations at December 31, 1998:
<TABLE>
<CAPTION>
Market
Value of
Segregated
Obligation Assets
------------------------- ---------------
<S> <C> <C>
Partners Fund............ Forward Currency
Contracts $453,188,000
International Fund....... Forward Currency
Contracts 36,080,111
Realty Fund.............. Newhall-Land and Farming
Company Put Options
Written 24,862,500
Small-Cap Fund........... Forward Currency
Contracts 288,581,970
</TABLE>
NOTE 11. CAPITAL LOSS CARRYOVERS
At December 31, 1998, the Funds had capital loss carryovers for federal income
tax purposes which may be applied against future net taxable realized gains of
each succeeding year until the earlier of their utilization or expiration on
December 31, 2006 as follows:
<TABLE>
<S> <C>
Partners Fund..................... None
International Fund................ $ 867,951
Realty Fund....................... 17,735,542
Small-Cap Fund.................... None
</TABLE>
50
<PAGE> 53
NOTE 12. POST OCTOBER LOSSES
Under current tax laws, certain capital losses realized after October 31 may be
deferred and treated as occurring on the first day of the following fiscal year.
The Funds elected to defer losses between November 1, 1998 and December 31, 1998
as follows:
<TABLE>
<CAPTION>
CAPITAL CURRENCY
---------- --------
<S> <C> <C>
Partners Fund.................................. None None
International Fund............................. $ 583,780 $ 182
Realty Fund.................................... 168,966 96,531
Small-Cap Fund................................. 5,500,942 79,329
</TABLE>
UNAUDITED TAX INFORMATION
Distributions from long-term capital gains for the fiscal year ended December
31, 1998 were as follows:
<TABLE>
<S> <C>
Partners Fund..................... $581,299,173
International Fund................ None
Realty Fund....................... 18,724
Small-Cap Fund.................... 142,277,813
</TABLE>
51
<PAGE> 54
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
FINANCIAL HIGHLIGHTS
The presentation is for a share outstanding throughout each period.
<TABLE>
<CAPTION>
NET
GAINS
(LOSS)
NET ON DISTRI-
ASSET SECURITIES TOTAL DIVIDENDS BUTIONS
VALUE NET REALIZED FROM FROM NET FROM
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT CAPITAL
OF PERIOD INCOME(A) UNREALIZED OPERATIONS INCOME GAINS
----------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
PARTNERS FUND
Year ended December 31,
1998.......................... $25.98 $.31 $ 3.16 $ 3.47 $ (.25) $(4.81)
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)
INTERNATIONAL FUND
August 12, 1998 (Capitalization)
through December 31, 1998..... $10.00 .01 (.03) (.02) (.01) -
REALTY FUND
Year ended December 31,
1998.......................... 17.35 .56 (2.82) (2.26) (.43) -
1997.......................... 13.97 .19 3.96 4.15 (.09) (.64)
1996.......................... 10.00 .16 3.91 4.07 (.04) (.05)
SMALL-CAP FUND
Year ended December 31,
1998.......................... 22.18 .20 2.51 2.71 (.17) (2.77)
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)
</TABLE>
(a) Calculated based on weighted average shares outstanding for the period.
(b) Total return reflects the rate that an investor would have earned on
investment in the Fund during each period, assuming reinvestment of all
distributions.
(c) Aggregate, not annualized. Calculated based on initial public offering price
of $9.15 on October 26, 1998.
(d) Expenses presented net of fee waiver.
52
<PAGE> 55
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
RATIO OF
NET EXPENSES RATIO OF
ASSET NET ASSETS TO NET
RETURN TOTAL VALUE END OF AVERAGE INCOME TO PORTFOLIO
OF DISTRI- END OF TOTAL PERIOD NET AVERAGE TURNOVER
CAPITAL BUTIONS PERIOD RETURN(B) (THOUSANDS) ASSETS NET ASSETS RATE
- ------- ------- ------ --------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$ - $(5.06) $24.39 14.28% $3,685,300 .93% 1.12% 43.78%
- (3.32) 25.98 28.25 2,605,070 .94 0.81 38.07
- (2.76) 22.85 21.02 2,300,079 .95 1.61 33.18
- (.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
- (.01) 9.97 9.02(c) 75,572 1.75(d) 0.10 24.05
(.11) (.54) 14.55 (12.98) 775,696 1.17 3.44 21.55
(.04) (.77) 17.35 29.73 737,302 1.20 0.75 28.66
(.01) (.10) 13.97 40.69 156,009 1.50(d) .92 4.28
(2.94) 21.95 12.71 1,355,364 1.01 0.87 52.51
- (.87) 22.18 29.04 915,259 1.09 1.18 16.95
- (1.03) 17.86 30.64 252,157 1.23 .18 27.97
- (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
</TABLE>
53
<PAGE> 56
[Intentionally Left Blank]
54
<PAGE> 57
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Longleaf Partners Funds:
In our opinion, the accompanying statements of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Longleaf Partners Fund, Longleaf
Partners International Fund, Longleaf Partners Realty Fund, and Longleaf
Partners Small-Cap Fund, each a series of Longleaf Partners Funds Trust,
(hereafter referred to as the "Funds"), at December 31, 1998, and the results of
each of their operations, the changes in each of their net assets, and the
financial highlights for each of the fiscal periods presented, in conformity
with generally accepted accounting principles. Theses financial statements and
the financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with custodian and brokers provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 5, 1999
55
<PAGE> 58
- --------------------------------------------------------------------------------
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>
<S> <C>
Mail correspondence to: Overnight address:
Longleaf Partners Funds Longleaf Partners Funds
c/o NFDS c/o NFDS
P.O. Box 419929 330 W. 9th Street
Kansas City, MO 64141-6929 Kansas City, MO 64105
(816) 843-8468
</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
International LLINX 543069405 136
Realty LLREX 543069306 135
Sm-Cap LLSCX 543069207 134
</TABLE>
56
<PAGE> 59
- --------------------------------------------------------------------------------
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
John B. Buford, Co-Portfolio Manager of the Partners and Small-Cap Funds
and Vice President - Investments
G. Staley Cates, Co-Portfolio Manager and Vice President - Investments
C. T. Fitzpatrick, Co-Portfolio Manager of the Realty Fund
and Vice-President - Investments
E. Andrew McDermott, Assistant Portfolio Manager of the International 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
Randy D. Holt, Vice President and Secretary
Andrew R. McCarroll, Vice President and Assistant General Counsel
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
Baltimore, Maryland
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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
