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PROSPECTUS
May 1, 1999
LONGLEAF PARTNERS FUNDS SM
MANAGED BY
SOUTHEASTERN ASSET
MANAGEMENT, INC.
6410 POPLAR AVENUE, SUITE 900
MEMPHIS, TN 38119
(800) 445-9469
[LONGLEAF LOGO(SM)] (901) 761-2474
LONGLEAF PARTNERS FUND
Invests primarily in mid to large cap companies believed to be significantly
undervalued. (closed to new investors)
LONGLEAF PARTNERS INTERNATIONAL FUND
Invests primarily in foreign companies of all sizes believed to be significantly
undervalued.
LONGLEAF PARTNERS REALTY FUND
Invests primarily in real estate related operating companies and REITs of all
sizes believed to be significantly undervalued.
LONGLEAF PARTNERS SMALL-CAP FUND
Invests primarily in companies of the size included in the Russell 2000 Index
believed to be significantly undervalued. (Closed to new investors)
The Longleaf Partners Funds are registered with the Securities and Exchange
Commission (SEC). That registration does not imply that the SEC endorses the
funds.
The SEC has not approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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TABLE OF CONTENTS
RISK/RETURN SUMMARY
<TABLE>
<S> <C>
PRINCIPAL INVESTMENT STRATEGY
Philosophy................................................ 4
Process................................................... 4
Governing Principles...................................... 4
PRIMARY INVESTMENT RISKS WHICH APPLY TO ALL FUNDS
Market Fluctuation........................................ 5
Permanent Loss of Capital................................. 5
Business Ownership Risks.................................. 5
Non-Diversification....................................... 5
Liquidity Risks........................................... 6
Foreign Investment Risks.................................. 6
Currency Hedging Risks.................................... 6
INVESTMENT OBJECTIVES, PERFORMANCE, FEES, AND EXPENSE
INFORMATION
Longleaf Partners Fund.................................... 8
Longleaf Partners International Fund...................... 10
Longleaf Partners Realty Fund............................. 12
Longleaf Partners Small-Cap Fund.......................... 14
DISCUSSION OF PRINCIPAL INVESTMENT
STRATEGIES AND RELATED RISKS
ADDITIONAL INFORMATION ON TYPES OF INVESTMENTS
International Fund........................................ 16
Realty Fund............................................... 16
HOW WE ACHIEVE OUR INVESTMENT OBJECTIVES
Determining Business or Intrinsic Value................... 17
Other Investment Criteria................................. 17
Allocation of Investment Ideas............................ 17
How Companies Reach Intrinsic Value....................... 18
Portfolio Turnover........................................ 18
Other Investments......................................... 18
Cash Reserves............................................. 18
OTHER RISKS OF INVESTING WHICH APPLY TO ALL FUNDS
Risks of Puts, Calls, Options, and Financial Futures...... 19
Investments in Restricted or Illiquid Securities.......... 19
Fixed Income Securities................................... 19
Year 2000 Computer Readiness.............................. 19
</TABLE>
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<TABLE>
<S> <C>
PORTFOLIO MANAGEMENT AND FUND OPERATIONS
Investment Adviser.......................................... 20
Code of Ethics.............................................. 20
Management Services......................................... 20
Advisory and Administration Fees............................ 21
Portfolio Managers.......................................... 22
Fund Operations............................................. 22
Board of Trustees........................................... 23
Other Executive Officers.................................... 24
SHAREHOLDER MANUAL
General Information......................................... 25
How To Open a New Account................................... 25
Additional Investments...................................... 26
Exceptions to Investment Minimum and Closed Funds........... 27
How To Redeem Shares........................................ 28
How Fund Shares Are Priced.................................. 31
Dividends and Distributions................................. 31
Taxes....................................................... 32
Financial Highlights........................................ 34
</TABLE>
This Prospectus contains important information about the investment strategies
and risks of the Longleaf Partners Funds that you should know before making an
investment. Please read it carefully and keep it on hand for future reference.
Please be aware that the Funds:
- - Are not bank deposits;
- - Are not guaranteed, endorsed, or insured by any financial institution or
governmental entity such as the Federal Deposit Insurance Corporation (FDIC);
- - May not achieve their stated goals.
3
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RISK/RETURN SUMMARY
PRINCIPAL INVESTMENT STRATEGY
PHILOSOPHY. We believe in what is commonly called value investing. The Funds
seek to achieve superior long-term performance by acquiring equity securities of
financially strong, well-managed companies run by capable managements at market
prices significantly below our assessment of their business value, and selling
these stocks when they approach that value. We view equity investments as
ownership in a business enterprise. We determine business or intrinsic value
through financial analysis and established disciplines which we have
consistently applied over 24 years. Equities purchased at prices substantially
less than their intrinsic worth should protect capital from significant loss and
should also appreciate substantially if the market ultimately recognizes true
value.
PROCESS. All of the Longleaf Partners Funds use the same general investment
strategy. Our portfolio management group, working as a team, identifies those
companies which we believe are selling at 60% or less of their true worth. If
the company satisfies other criteria, including effectiveness of the management
team, we purchase a position for the Fund or Funds whose investment objectives
and policies most closely parallel the company.
GOVERNING PRINCIPLES. The Longleaf Partners Funds represent an investment
partnership between all Fund shareholders and employees and affiliates of
Southeastern Asset Management, Inc. ("Southeastern"), who together are among the
largest shareholders. The following principles govern this investment
partnership:
- We will treat your investment in Longleaf as if it were our own.
- We will remain significant investors with you in Longleaf.
- We will invest for the long term, while always striving to maximize
after-tax returns and to minimize business, financial, purchasing power,
regulatory and market risks.
- We will choose our equity investments based on their discounts from our
appraisals of their corporate intrinsic values, their financial strength,
their management, their competitive position, and our assessment of their
future earnings potential.
- We will comply with the Internal Revenue Code diversification standards
which require that at least 50% of each portfolio be diversified, even
though the Funds are non-diversified under federal securities laws.
- We will not impose loads, holding periods, exit fees or 12b-1 charges on our
investment partners.
- 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.
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- We will discourage short-term speculators and market timers from joining us,
the long-term investors in Longleaf.
- We will continue our efforts to enhance shareholder services.
- We will communicate with our investment partners as candidly as possible.
PRIMARY INVESTMENT RISKS WHICH APPLY TO ALL FUNDS
MARKET FLUCTUATION. The Funds invest primarily in common stocks, which are
equity investments. Investments in equities of any type expose you to risks such
as a sudden decline in a company's share price or an overall decline in the
stock market. The value of your investment in a Fund fluctuates daily in
response to the results of individual companies or with movements in the stock
market. Loss of money is, therefore, a risk of investing in the Funds.
PERMANENT LOSS OF CAPITAL. As significant shareholders in the Funds, management
at Longleaf defines investment risk as the permanent loss of capital. The Funds
are partial owners of companies through holdings of portfolio securities. We
attempt to mitigate the risk of permanent capital loss by buying businesses only
when they are selling at substantially less than our appraised value and by
having long holding periods for these securities. Stock price fluctuations,
however, present a risk to investors who sell shares during market declines,
creating a permanent loss from a paper one. Historically, the ability to hold
shares through periods of volatility has protected long-term investors from
permanent loss.
BUSINESS OWNERSHIP RISKS. As partial owners of the companies in Longleaf's
portfolios, we face four main risks inherent in owning a business. First, the
company's operations must be successful. To minimize the business risk, we look
for companies with competitive advantages in their markets. Advantages could
include dominant market share, lowest cost structure, entrenched brand name, or
other similar qualities.
The second risk of owning a company is financial risk. To help ensure that a
company can weather economic downturns and take advantage of opportunities, a
company's assets and cash flows should amply cover liabilities, annual working
capital needs, and necessary capital replacements.
A company's third risk is whether it can control and mitigate cost increases. We
prefer to own businesses with strong purchasing power and the ability to pass
any cost increases on to customers.
If a regulatory agency can dictate a company's markets and profits, then that
business faces a fourth risk to its long-term success. Longleaf is selective in
its ownership of businesses with regulatory risk.
NON-DIVERSIFICATION. The Funds are non-diversified under federal securities
laws and each Fund invests in a small number of companies. Limiting the number
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of our holdings focuses on our best investments, enables us to know each in
greater detail, and should permit significant gain if the market recognizes a
company's true worth.
Each Fund could own as few as twelve securities, but generally will have 20 to
30 companies in its portfolio. At least 50% of each Fund's portfolio must be
diversified with a maximum of 5% of a Fund's total assets invested in any
security and owning no more than 10% of any company's equity. The remainder of a
Fund's portfolio may contain positions which are over 5% of assets and greater
than 10% of a company's equity.
We believe this approach maximizes the potential for outperforming the market
over the long term. There is a risk, however, that the Funds' share values could
fluctuate more than if the portfolios had wider diversification.
LIQUIDITY RISKS. We take relatively large ownership positions in some companies
that we find are particularly undervalued. We often own more than 5% of a
company's equity securities and may own up to 20% or more of some companies.
Depending on market conditions and trading volume, disposing of such holdings
could be more difficult than if we owned less of the same companies. Because it
may take longer to dispose of a large position once we have decided to sell, we
may be more susceptible to price fluctuations.
FOREIGN INVESTMENT RISKS. The Partners, Realty, and Small-Cap Funds may invest
up to 30% of assets in foreign securities, and the International Fund may invest
all of its assets in foreign securities. Foreign investment risks include
international political and economic changes, currency fluctuations, foreign
withholding taxes, exchange controls, confiscation risks, foreign governmental
restrictions, differences in accounting standards, and more limited availability
of public information.
CURRENCY HEDGING RISKS. As part of the investment decision process, we evaluate
whether currency hedging for foreign securities would reduce the exposure to
foreign currencies. Effectively hedged, a foreign investment should offer the
opportunity for capital appreciation regardless of large fluctuations between
foreign and U.S. currencies. Not all foreign currencies can be effectively
hedged, however, and the costs of hedging may outweigh the benefits. If our
hedging strategy does not correlate well with market forces, price volatility of
the portfolio could increase. Currency hedging, considered separately, can
result in losses but these losses may be offset by gains in the values of the
securities hedged.
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INVESTMENT OBJECTIVES, PERFORMANCE, FEES, AND EXPENSE INFORMATION
The following sections include specific information on the investment objectives
and policies of each Fund, their historical performance, and the expenses of
ownership.
The bar charts illustrate risk by showing the variability of Fund returns from
year to year. The total returns for the best and worst quarters indicate the
short-term risks and rewards of investing in each Fund.
The average annual returns for the cumulative periods ended December 31, 1998
compared with appropriate market indices highlight the benefits of compounding
through longer term investing, and illustrate the effects of averaging negative
returns in some periods with positive returns in others.
Each Fund's particular investment objective and policies, and the corresponding
market conditions, impact performance during the reported periods. Historical
returns illustrate how the Funds met the challenges of changing market
conditions during prior periods. Past investment performance does not predict
future performance and there is no assurance that we will achieve our investment
objectives.
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LONGLEAF PARTNERS FUND
INITIAL PUBLIC OFFERING -- April 8, 1987.
(Closed to new investors, effective June 1, 1999)
INVESTMENT OBJECTIVE -- Long-term capital growth.
INVESTMENT POLICY -- The Partners Fund normally invests at least 65% of total
assets in the equity securities of a limited number of companies having a market
capitalization greater than $1 billion. Most of these securities are listed on
the major securities exchanges. Current income is not an objective.
The Fund may invest up to 30% of illiquid assets in foreign securities and up to
15% of assets in non-registered or illiquid securities.
PAST FUND PERFORMANCE
TOTAL RETURN (%)
(LONGLEAF PARTNERS FUND PAST FUND PERFORMANCE)
BAR GRAPH (TOTAL RETURN-%)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
23.26 (16.35) 39.19 20.47 22.10 8.96 27.50 21.02 28.25 14.28
YEAR 89 90 91 92 93 94 95 96 97 98
</TABLE>
Best Quarter in last ten years. 23.73% -- 1st Quarter of 1991
Worst Quarter in last ten years. (18.35%) -- 3rd Quarter of 1998
8
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LONGLEAF PARTNERS FUND
PAST FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS AT 12/31/98
<TABLE>
<CAPTION>
PARTNERS S&P 500 VALUE LINE
FUND INDEX INDEX
-------- ------- ----------
<S> <C> <C> <C>
One Year.................................. 14.28% 28.59% (3.79)%
Five Years................................ 19.77% 24.05% 8.16%
Ten Years................................. 17.94% 19.19% 6.51%
</TABLE>
FUND FEES AND EXPENSES
The following table shows the fees and expenses you would pay to buy and hold
shares of the Partners Fund. We do not impose any front-end or deferred sales
charges or redemption fees, and the Fund does not have a 12b-1 Plan.
<TABLE>
<S> <C> <C>
Shareholder Transaction Fees and Expenses (fees paid
directly from your investment)................................ None
Annual Fund Operating Expenses --
(expenses that are deducted from Fund assets)
Management Fees......................................... 0.78%
12b-1 Fees.............................................. None
Other Expenses.......................................... 0.15%
Administration...................................... 0.10%
Transfer Agent...................................... 0.02%
Other Operating Expenses............................ 0.03%
-----
Total Fund Operating Expenses............................... 0.93%
-----
</TABLE>
EXAMPLE OF FUND EXPENSES. This example will help you compare the cost of
investing in the Partners Fund with other mutual funds. The table shows what you
would pay in expenses over time, whether or not you sold your shares at the end
of each period. The example assumes a $10,000 investment, a 5% total return each
year, and no changes in expenses. This information is for comparison purposes
only and does not represent the Fund's actual returns or expenses, which may be
higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------- ------- --------
<S> <C> <C> <C>
$98 $305 $529 $1,174
</TABLE>
9
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LONGLEAF PARTNERS INTERNATIONAL FUND
INITIAL PUBLIC OFFERING -- October 26, 1998
INVESTMENT OBJECTIVE -- Long-term capital growth through investment primarily in
the equity securities of international or foreign issuers.
INVESTMENT POLICY -- The International Fund normally invests at least 65% of
total assets in the equity securities of international issuers domiciled or
operating primarily in at least three countries other than the United States.
NO COUNTRY LIMITATIONS. The Fund does not limit the percentage of assets which
may be invested in any particular geographic region or country. The majority of
investments generally are in companies located in Canada, Australia, and in the
developed countries of Europe, the Far East, and Latin America. We may also
invest a significant portion of assets in a single country, such as Japan, and
may invest in other countries, both developed and emerging. The Fund may also
invest up to 15% of assets in non-registered or illiquid securities.
If investments meeting the Fund's criteria are not available, or when market or
economic conditions so indicate, we may invest the Fund's assets temporarily in
obligations of the U.S. government and its instrumentalities, or in other
domestic or foreign money market instruments.
SPECIFIC RISKS OF INVESTING IN THIS FUND
The International Fund is designed for long-term investors who can accept
international investment risk, including currency, political, economic,
regulatory, and international market risks. Although world economies are
increasingly integrated, market valuations vary with each country's economic
conditions. These movements in different securities markets and, to the extent
not hedged, movements in foreign currencies where the Fund has exposure will
affect the Fund's price per share and returns.
10
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LONGLEAF PARTNERS INTERNATIONAL FUND
PAST FUND PERFORMANCE
The International Fund began offering its shares to the public on October 26,
1998. Because it has less than one full year of operations on the effective date
of this Prospectus, there is no bar chart showing annual returns or table
showing average annual returns.
FUND FEES AND EXPENSES
The following table shows the fees and expenses you would pay to buy and hold
shares of the International Fund. We do not impose any front-end or deferred
sales charges or redemption fees, and the Fund does not have a 12b-1 Plan.
<TABLE>
<S> <C> <C>
Shareholder Transaction Fees and Expenses (fees paid
directly from your investment)................................ None
Annual Fund Operating Expenses --
(expenses that are deducted from Fund assets)
Management Fees......................................... 1.50 %
12b-1 Fees.............................................. None
Other Expenses.......................................... 1.15 %
Administration...................................... 0.10%
Transfer Agent...................................... 0.02%
Other Operating Expenses............................ 1.03%
-----
Total Fund Operating Expenses............................... 2.65 %
------
Expense Limitation Reimbursement*....................... (0.90)%
Net Expenses............................................ 1.75 %
------
</TABLE>
* The Fund has a contractual expense limitation of 1.75% of average net assets
per annum, excluding interest, taxes, brokerage commissions and extraordinary
expenses, which cannot be amended without shareholder approval.
EXAMPLE OF FUND EXPENSES. This example will help you compare the cost of
investing in the International Fund with other mutual funds. The table shows
what you would pay in expenses over time, whether or not you sold your shares at
the end of each period. The example assumes a $10,000 investment, a 5% total
return each year, and no changes in expenses. This information is for comparison
purposes only and does not represent the Fund's actual returns or expenses,
which may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
- ------- -------
<S> <C>
$184 $569
</TABLE>
11
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LONGLEAF PARTNERS REALTY FUND
DATE OF INITIAL PUBLIC OFFERING -- January 2, 1996
INVESTMENT OBJECTIVE -- Maximum total return over the long term through
investment primarily in the equity securities of a limited number of real estate
oriented companies.
INVESTMENT POLICY. The Realty Fund normally invests at least 65% of total
assets in the equity securities of companies in the real estate industry or
related industries, or in companies with significant real estate assets. For
example, the Fund may invest in manufacturers and distributors of construction
and building materials and equipment, institutions financing real estate, hotel
management companies, retail chains, railroads, and in lumber, paper, forest
product, timber, oil, mining, and natural resource companies. The Fund also
invests in real estate investment trusts (REIT's) and may invest in a few
non-real estate oriented companies. We may also invest up to 30% of assets in
foreign securities and up to 15% of assets in non-registered or illiquid
securities.
SPECIFIC RISKS OF INVESTING IN THIS FUND
The Realty Fund may face some of the risks normally associated with direct
ownership of real estate through its holdings of companies which own real
estate. These risks include fluctuations in mortgage interest rates, accounting
and tax law changes in depreciation deductions and other financial reporting
requirements affecting real estate, and limited liquidity of undeveloped land.
The Realty Fund's price fluctuations could differ from those of mutual funds
that invest in other industries.
PAST FUND PERFORMANCE
TOTAL RETURN (%)
(LONGLEAF PARTNERS REALTY FUND PAST FUND PERFORMANCE)
BAR GRAPH - Total Return (%)
40.69 29.93 (12.98)
Year 96 97 98
Best Quarter since inception. 14.94% -- 3rd Quarter of 1997
Worst Quarter since inception. (17.65%) -- 3rd Quarter of 1998
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LONGLEAF PARTNERS REALTY FUND
PAST FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS AT 12/31/98
<TABLE>
<CAPTION>
WILSHIRE
REAL ESTATE
REALTY SECURITIES NAREIT
FUND INDEX INDEX
------- ----------- ------
<S> <C> <C> <C>
One Year................................... (12.98)% (17.42)% (18.82)%
Since Initial Public Offering (January 2,
1996).................................... 16.69% 10.70% 9.42%
</TABLE>
FUND FEES AND EXPENSES
The following table shows the fees and expenses you would pay to buy and hold
shares of the Realty Fund. We do not impose any front-end or deferred sales
charges or redemption fees, and the Fund does not have a 12b-1 Plan.
<TABLE>
<S> <C> <C>
Shareholder Transaction Fees and Expenses (fees paid
directly from your investment)................................ None
Annual Fund Operating Expenses --
(expenses that are deducted from Fund assets)
Management Fees......................................... 1.00%
12b-1 Fees.............................................. None
Other Expenses.......................................... 0.17%
Administration...................................... 0.10%
Transfer Agent...................................... 0.02%
Other Operating Expenses............................ 0.05%
-----
Total Fund Operating Expenses............................... 1.17%
------
</TABLE>
EXAMPLE OF FUND EXPENSES. This example will help you compare the cost of
investing in the Realty Fund with other mutual funds. The table shows what you
would pay in expenses over time, whether or not you sold your shares at the end
of each period. The example assumes a $10,000 investment, a 5% total return each
year, and no changes in expenses. This information is for comparison purposes
only and does not represent the Fund's actual returns or expenses, which may be
higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------- ------- --------
<S> <C> <C> <C>
$123 $383 $662 $1,459
</TABLE>
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LONGLEAF PARTNERS SMALL-CAP FUND
INITIAL PUBLIC OFFERING -- February 21, 1989 (Closed to new investors effective
July 31, 1997)
INVESTMENT OBJECTIVE -- Long-term capital growth.
INVESTMENT POLICY -- The Small-Cap Fund normally invests at least 65% of total
assets in the equity securities of a limited number of companies whose market
capitalization is within the range of companies in the Russell 2000 Index. The
capitalization range of this index at March 31, 1999 was as follows:
Largest Market Cap (000) $6,579,999
Average Market Cap (000) $ 424,624
Smallest Market Cap (000) $ 1,077
Some small-cap securities may be traded in the "over-the-counter" market, the
market for securities not listed on a stock exchange. The Fund may also invest
in a limited number of larger companies. Current income is not an objective.
We may also invest up to 30% of assets in foreign securities and up to 15% of
assets in non-registered or illiquid securities.
SPECIFIC RISKS OF INVESTING IN THIS FUND
Smaller companies have more limited product lines, markets, and financial
resources than larger companies. Their securities may trade less frequently and
in more limited volume than those of larger companies. As a result, small-cap
stocks may be more volatile than those of larger companies and, where trading
volume is limited, our ability to dispose of such securities may be more
limited.
PAST FUND PERFORMANCE
TOTAL RETURN (%)
(LONGLEAF PARTNERS SMALL-CAP FUND PAST FUND PERFORMANCE)
BAR GRAPH - Total Return (%)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
21.51* (30.05) 26.31 6.87 19.83 3.64 18.61 30.64 29.04 12.71
YEAR 89 90 91 92 93 94 95 96 97 98
</TABLE>
* Initial public offering on 2/21/89 through 12/31/89
Best Quarter since inception. 19.24% -- 1st Quarter of 1991
Worst Quarter since inception. (20.21%) -- 3rd Quarter of 1990
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LONGLEAF PARTNERS SMALL-CAP FUND
PAST FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS AT 12/31/98
<TABLE>
<CAPTION>
RUSSELL
SMALL-CAP 2000 VALUE LINE
FUND INDEX INDEX
--------- ------- ----------
<S> <C> <C> <C>
One Year................................... 12.71% (2.55)% (3.79)%
Five Years................................. 18.49% 11.87% 8.16%
Since Initial Public Offering (February 21,
1989).................................... 12.56% 12.38% 5.97%
</TABLE>
FUND FEES AND EXPENSES
The following table shows the fees and expenses you would pay to buy and hold
shares of the Small-Cap Fund. We do not impose any front-end or deferred sales
charges or redemption fees, and the Fund does not have a 12b-1 Plan.
<TABLE>
<S> <C> <C>
Shareholder Transaction Fees and Expenses (fees paid
directly from your investment)................................ None
Annual Fund Operating Expenses --
(expenses that are deducted from Fund assets)
Management Fees......................................... 0.84%
12b-1 Fees.............................................. None
Other Expenses.......................................... 0.17%
Administration...................................... 0.10%
Transfer Agent...................................... 0.02%
Other Operating Expenses............................ 0.05%
-----
Total Fund Operating Expenses............................... 1.01%
-----
</TABLE>
EXAMPLE OF FUND EXPENSES. This example will help you compare the cost of
investing in the Small-Cap Fund with other mutual funds. The table shows what
you would pay in expenses over time, whether or not you sold your shares at the
end of each period. The example assumes a $10,000 investment, a 5% total return
each year, and no changes in expenses. This information is for comparison
purposes only and does not represent the Fund's actual returns or expenses,
which may be higher or lower.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- ------- ------- --------
<S> <C> <C> <C>
$106 $331 $574 $1,270
</TABLE>
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<PAGE> 16
DISCUSSION OF PRINCIPAL INVESTMENT STRATEGIES
AND RELATED RISKS
ADDITIONAL INFORMATION ON TYPES OF INVESTMENTS
INTERNATIONAL FUND. In selecting investments for the International Fund, we
define a company as international if it is organized or headquartered outside
the U.S. An issuer organized or headquartered in the U.S. also qualifies as
international if at least 50% of its assets are outside the U.S. or 50% of its
gross income is from non-U.S. sources.
The Fund normally will be substantially invested in equity securities of
international companies. We may also invest in U.S. or foreign closed-end
investment companies which invest internationally when direct investments in the
foreign region would be difficult or less liquid. The Fund may also invest in
foreign governmental and commercial bonds, and in other foreign money market
instruments when appropriate.
REALTY FUND. In selecting investments for the Realty Fund, a company qualifies
as real estate oriented if it meets one of the following tests:
1. Revenues and Net Profits. At least 50% of gross revenues or net profits are
derived from (i) construction, ownership, management, operation, financing,
sales, or development of real estate; (ii) extraction of timber or minerals
from real estate owned or leased as either a lessor or lessee under a lease
granting the designated development or extraction rights; or (iii) other
businesses clearly related to the above functions or to manufacturing
appurtenances to real estate; or
2. Valuation of Assets. At least 50% of the company's appraised value,
determined by our established procedures, is based on one or more of the
following: (i) real estate owned or leased by the company either as lessor or
lessee; (ii) timber or materials on such real estate; or (iii) the value of
the stream of fees or revenues derived from the management or operation of
real estate or rights to extract timber or minerals.
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<PAGE> 17
HOW WE ACHIEVE OUR INVESTMENT OBJECTIVES
DETERMINING BUSINESS OR INTRINSIC VALUE. A company's market price must be 60%
or less of our appraisal to qualify for investment. Our research team appraises
businesses by studying publicly available financial statements and talking with
corporate management.
We use two primary methods of appraisal. The first assesses the company's
current liquidation value based on corporate assets and liabilities. The second
method determines the company's operating value based on its ability to generate
free cash flow after required capital expenditures and working capital needs. We
calculate the present value of the projected cash flows plus a terminal value,
using a conservative discount rate. Our appraisals should represent the price
which buyers and sellers would negotiate in an arms length transaction. We then
check our appraisals against our data bank of comparable business sales.
OTHER INVESTMENT CRITERIA. We also look for the following when selecting
investments:
- EFFECTIVE MANAGEMENT. Management's actions often determine whether a
business's value grows and its stock price reflects that business value. We
meet with corporate managers and research their history to assess both their
operating and capital allocation capabilities. To align our interests with
those of management, we prefer managers who own a significant amount of
their company's stock and whose compensation is tied to building corporate
value.
- FINANCIAL STRENGTH. Financial strength helps protect a company during slow
economic times and enables a business to seize opportunities when they
arise. Strength implies low debt levels, limited liabilities, and the
ability to generate free cash flow from operations.
- EARNINGS IMPROVEMENT. A company should grow cash earnings and earn an
adequate return on its capital over three to five years.
Although a company may not meet all the above criteria, we must be convinced
that significant unrealized value is present before making an investment.
ALLOCATION OF INVESTMENT IDEAS. When a company meets our criteria, we allocate
the stock to the Funds whose investment objectives and policies most closely
parallel the business. More than one Fund may own a single security. For
example, a large-cap real estate company might appear in both the Realty and
Partners Funds. If the same company were based overseas, the International Fund
might also own it. The Small-Cap Fund may purchase a few large-cap companies
also held by one or more of the other Funds. If the Fund most closely aligned
with a security is fully invested or otherwise unable to buy a position, another
of the Funds might purchase that security.
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<PAGE> 18
HOW COMPANIES REACH INTRINSIC VALUE. We generally sell a holding when its
market price reaches our appraisal. Undervalued businesses may reach their
intrinsic worth in several ways.
- - MARKET REALIZATION. Over time the market may recognize the business's true
value. As companies with strong management and true earnings power report
better earnings, the market should bid up the price of the stock;
- - MERGERS AND ACQUISITIONS. Undervalued companies often attract acquirors or
large owners may seek a buyer. In addition, the company's management may take
the company private;
- - LIQUIDATIONS. A company may partially liquidate its assets or operations
through spin-offs of subsidiaries or sales of a portion of the business. On
occasion, a company may elect to liquidate completely.
- - SHARE REPURCHASE PROGRAMS. When a company's stock is undervalued,
repurchasing outstanding shares can enhance shareholder values. If
repurchasing shares is the capital allocation choice with the highest return,
management can grow the value of the business and shrink the number of owners
sharing the returns.
PORTFOLIO TURNOVER. Our time horizon when purchasing a company is five years.
Generally, we will hold the stock as long as
(i) A margin of safety exists between price and value and we remain confident
in management's ability to create additional value; and
(ii) No significantly better investments are available.
The Funds' portfolio turnover is generally less than 50%. There are no limits on
portfolio turnover, however, and we may sell portfolio holdings whenever we
believe that sales would benefit shareholders.
OTHER INVESTMENTS. All Funds may invest a portion of assets in cash equivalents
and a wide variety of securities other than common stock, including preferred
stock, debt securities, warrants, puts, calls, options, financial futures, and
combinations of these instruments.
CASH RESERVES. Generally, cash reserves and money market instruments do not
exceed 15% of net assets. If, however, we have difficulty finding enough
undervalued equity securities or if market conditions are otherwise unfavorable,
we may invest any portion of assets in money market instruments. Holding cash
reserves can penalize short-term performance in rising markets, but during
market declines cash allows us to purchase securities at discounted prices.
Generally, we would hold cash in excess of 15% of total assets only in periods
when equity valuations are high. When cash has previously approached such
levels, we closed the affected funds to new investors. We would not allow cash
reserves to exceed 35% of total assets expect for temporary, defensive
positions.
18
<PAGE> 19
OTHER RISKS OF INVESTING WHICH APPLY TO ALL FUNDS
The primary risks of investing in the Longleaf Partners Funds appear on pages
5-6 of this Prospectus. Those risks include general market conditions, business
ownership, non-diversification, possible limited liquidity, foreign market, and
currency hedging risks. Other risks include the following:
PUTS, CALLS, OPTIONS, AND FINANCIAL FUTURES. The Funds may invest selectively
in a wide variety of put and call options, financial futures, swaps,
combinations of these techniques, and in other similar financial instruments.
Generally, these investments are used for hedging purposes or as an alternative
to owning the underlying security. When used in conjunction with each other,
these techniques can reduce market risks. If used separately as independent
investments, these instruments have risks. Gains on investments in options and
futures depend on correctly predicting the direction of stock prices, interest
rates, and other economic factors. If a Fund were not able to close out its
position, a significant loss could occur.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest up to
15% of its net assets in unregistered and not readily marketable securities.
Restricted or non-registered securities may be sold only in privately negotiated
transactions or in limited amounts under other exemptions. A Fund might have to
pay the registration expenses in order to sell such a position. When the
securities are not saleable, adverse market conditions could lower the eventual
sale price.
FIXED INCOME SECURITIES. The Funds may invest up to 15% of assets in both
investment and non-investment grade bonds. High yield securities or non-
investment grade bonds are more risky than investment grade securities. They may
be less sensitive to interest rate changes, but may be more sensitive to
economic downturns or adverse corporate developments.
YEAR 2000 COMPUTER READINESS. The "Y2K" issue has been receiving increased
public attention. 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 could have widespread consequences if
not corrected. A computer system with an inaccurate date may not operate
properly or could make incorrect calculations.
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. We
are also assessing our portfolio companies to determine whether proper steps are
being taken so that their operations will be Y2K compliant. We factor their
answers into our appraisals of their businesses.
According to our vendors, mission critical systems at Southeastern Asset
Management are already Y2K ready, which means that they will correctly recognize
dates after December 31, 1999. Longleaf also relies on outside vendors for
functions
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<PAGE> 20
such as custody, transfer agency, and trading. We are monitoring our mission
critical 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.
We will be testing during 1999 and forming contingency plans to address other
unexpected service problems. There can be no assurance that these efforts will
be sufficient. It has been reported that foreign institutions have made less
progress in addressing the Y2K issue than major U.S. entities, in part because
of the need to prepare for the earlier conversion to Euro denominated currency.
To the extent that domestic or foreign institutions do not adequately address
the Y2K issue on a timely basis, there could be adverse effects on shareholder
servicing or other operations, pricing, trading of portfolio securities in
domestic and foreign markets, and the operations of companies in which the Funds
are invested.
PORTFOLIO MANAGEMENT AND FUND OPERATIONS
INVESTMENT ADVISER. Southeastern Asset Management, Inc. ("Southeastern") is the
Funds' investment adviser. Formed in 1975, the firm has 24 years of experience
managing private securities portfolios for institutional investors and
individuals. Longleaf Partners Fund, the firm's first investment company, began
operations in 1987. Located at 6410 Poplar Ave., Suite 900, Memphis, Tennessee,
Southeastern now manages more than $15 billion in private account and mutual
fund assets.
CODE OF ETHICS. To align our interests with those of shareholders and prevent
conflicts of interest, we have adopted a Code of Ethics which requires all
employees to limit their investments in publicly offered equity securities to
shares of the Longleaf Partners Funds unless granted prior clearance for other
personal securities transactions. All employees must report their personal
securities transactions at the end of each quarter. Any material violation of
the Code of Ethics is reported to the Board of the Funds. The Board also reviews
the administration of the Code of Ethics on an annual basis.
The independent Trustees of the Funds must also obtain clearance before making
personal securities investments to avoid conflicts of interest. They have
adopted a policy requiring each independent Trustee to invest in the Funds an
amount at least equal to their Trustees' fees.
MANAGEMENT SERVICES. Southeastern manages the securities portfolios of the four
Longleaf Partners Funds under an Investment Counsel Agreement initially
effective in 1987. Southeastern also serves as Fund Administrator and provides
administrative, business, legal and compliance services. The Funds pay all
direct expenses of operations, such as professional fees of outside lawyers and
accounting firms, registration fees, trade association dues, insurance premiums,
and costs
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<PAGE> 21
of outside pricing services. The Funds also reimburse Southeastern for the costs
of computer programs dedicated to Fund operations and a portion of the
compensation of the Funds' treasurer.
ADVISORY AND ADMINISTRATION FEES. The Funds pay Southeastern the following
annual fees as a percentage of average net assets for the services rendered:
<TABLE>
<CAPTION>
INVESTMENT COUNSEL FEE
-----------------------------
ACTUAL ADMINISTRATION
STATED FEE 1998 FEE FEE
----------------- -------- --------------
<S> <C> <C> <C>
Partners Fund 1.00% on first
$400 million in
average net
assets; 0.75% on
balance 0.78% 0.10%
International Fund 1.50% on average
net assets 0.60%* 0.10%
Realty Fund 1.00% on average
net assets 1.00% 0.10%
Small-Cap Fund 1.00% on first
$400 million in
average net
assets; 0.75% on
balance 0.84% 0.10%
</TABLE>
* Annualized; reflects fee reduction of 0.90% as the result of contractual
expense limitation.
All of the Funds have a contractual expense limitation included in their
investment counsel agreements with Southeastern, requiring Southeastern to
reduce its fees to the extent necessary to limit normal annual operating
expenses to a stated percentage of average net assets per annum, excluding
interest, taxes, brokerage commissions, and extraordinary expenses. The
investment counsel and fund administration fees are included in normal operating
expenses in making the calculation. Shareholder approval is required to amend or
remove these expense limitations. The expense limitation for the Partners,
Realty, and Small-Cap Funds is 1.5% of average net assets annually; the expense
limitation for the International Fund is 1.75% of average net assets annually.
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<PAGE> 22
PORTFOLIO MANAGERS. Collectively, the following individuals have shared
responsibility for investment management decisions of the specified Funds'
portfolios. Background information on each appears on pages 23 and 24.
<TABLE>
<CAPTION>
FUND PORTFOLIO
NAME AND TITLE RESPONSIBILITY FUNDS
- -------------------------------- -------------------- ------------
<S> <C> <C>
O. Mason Hawkins
Chairman of the Board and
C.E.O. of Southeastern and the
Funds Co-Portfolio Manager All
G. Staley Cates
President of Southeastern and
the Funds Co-Portfolio Manager All
John B. Buford
Vice President of Southeastern Partners and
and Vice President -- Small-Cap
Investments of the Funds Co-Portfolio Manager Funds
C. T. Fitzpatrick
Vice President of Southeastern
and Vice President --
Investments of the Funds Co-Portfolio Manager Realty Fund
E. Andrew McDermott, III
Vice President of Southeastern
and Vice President -- Assistant Portfolio International
Investments of the Funds Manager Fund
</TABLE>
FUND OPERATIONS. Each Fund has a separate Board of Trustees which oversees all
operations of the particular Fund. The same Trustees serve all of the Funds. A
majority of the Trustees are independent and not affiliated with Southeastern.
Each Board of Trustees elects officers of the Funds who are also officers or
employees of Southeastern. The business and administrative operations of each
Fund are performed by the officers and employees of Southeastern under its
operating agreements with the Funds.
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<PAGE> 23
BOARD OF TRUSTEES
O. MASON HAWKINS*, CFA, Chairman of the Board and Chief Executive Officer; Co-
Portfolio Manager.
Founder and Director, Southeastern Asset Management, Inc. (since 1975); Director
of Research, First Tennessee Investment Management Company, Memphis, TN (1974-
1975); Director of Research, Atlantic National Bank, Jacksonville, FL
(1972-1974); Director, Mid-America Apartment Communities, Inc. (since 1993).
Education: B.S.B.A., Finance, University of Florida, 1970; M.B.A., University of
Georgia, 1971.
G. STALEY CATES, CFA, Trustee and President Co-Portfolio Manager;
Professional Experience: President, Southeastern Asset Management, Inc. (since
1994); Vice President, Southeastern Asset Management, Inc. (1986-1994).
Education: B.B.A., Finance, University of Texas, 1986.
CHADWICK H. CARPENTER, JR., Trustee.
Private investor and consultant to several software startups. Currently a board
member of Indus River Networks and Call Technologies, which are developing
products for virtual private networks and telephony respectively. Previously
spent 14 years in senior executive officer positions at Progress Software
Corporation (a leading provider of software products used by developers to build
and deploy commercial applications worldwide). Prior to 1983, Manager of MIMS
Systems Operation, General Electric Information Services Company; Senior
Consultant, Touche Ross & Company.
Education: B.S., Electrical Engineering, Massachusetts Institute of Technology,
1971; M.S., Electrical Engineering, Massachusetts Institute of Technology, 1972.
DANIEL W. CONNELL, JR., Trustee.
Senior Vice President -- Marketing, Jacksonville Jaguars, Ltd., Jacksonville, FL
(since 1994) (National Football League franchise); Executive Vice
President -- Corporate Banking Group and other officer positions, First Union
National Bank of Florida, Jacksonville, FL (1970-1994); Chairman, Jacksonville
Chamber of Commerce (1997); Commissioner, Jacksonville Economic Development
Commission; Advisory Director, First Union National Bank of Florida.
Education: B.S.B.A., University of Florida, 1970.
STEVEN N. MELNYK, Trustee.
Private investor and consultant. Chairman of the Executive Committee and
President, Riverside Golf Group, Inc., (1987-1997), Jacksonville, FL (a
corporation engaged in the design, construction and operation through ownership
of golf courses throughout the southeastern US); Golf commentator and sports
marketing executive, ABC Sports (since 1991) and CBS Sports (1982-1991);
Founding director and former Chairman, First Coast Community Bank, Fernandina
Beach, FL; Winner of U.S. Amateur Championship, 1969, and British Amateur
Championship, 1971.
Education: B.S.B.A., Industrial Management, University of Florida, 1969.
C. BARHAM RAY, Trustee.
Chairman of the Board and Secretary, SSM Corporation, Memphis, TN (since 1974)
(a venture capital investor); Director, Financial Federal Savings Bank, Memphis,
TN.
Education: B.A., Vanderbilt University, 1968; M.B.A., University of Virginia,
1973.
- ---------------
* Mr. Hawkins and Mr. Cates are employed by the Investment Counsel and each is
deemed to be a Trustee who is an "interested person", as that term is defined
in Section 2(a)(19) of the Investment Company Act of 1940. Mr. Carpenter
serves as Chairman of the Audit Committee, which is composed of all Trustees
who are not affiliated with Southeastern.
23
<PAGE> 24
OTHER EXECUTIVE OFFICERS
INVESTMENT MANAGEMENT
JOHN B. BUFORD, CFA, Co-Portfolio Manager, Longleaf Partners Fund and Longleaf
Partners Small-Cap Fund; Vice President -- Investments.
Professional Experience: Southeastern Asset Management, Inc. (since 1990).
Education: B.B.A., Finance, University of Texas, 1985.
C. T. FITZPATRICK, III, CFA, Co-Portfolio Manager of Longleaf Partners Realty
Fund; Vice President -- Investments.
Professional Experience: Vice President, Southeastern Asset Management, Inc.
(since 1990).
Education: B.A., Corporate Finance, University of Alabama, 1986; MBA, Finance,
Vanderbilt University, 1990.
E. ANDREW MCDERMOTT, III, Assistant Portfolio Manager of Longleaf Partners
International Fund; Vice President -- Investments
Professional Experience: Southeastern Asset Management, Inc. (since 1998); J.P.
Morgan & Co., San Francisco, Hong Kong, and Singapore; Associate and Analyst
(1994-1998); NEC Logistics, Tokyo (1992-1994).
Education: B.A., Princeton University, 1992.
FRANK N. STANLEY, III, CFA, Vice President -- Investments.
Professional Experience: Vice President, Southeastern Asset Management, Inc.
(since 1984).
Education: B.S., Management, Georgia Institute of Technology, 1964; Graduate
study, Emory University, 1965; M.B.A., Marketing, University of Florida, 1970.
FUND OPERATIONS
CHARLES D. REAVES, Executive Vice-President.
Professional Experience: Vice President and General Counsel, Southeastern Asset
Management, Inc. (since 1988). Director, ICI Mutual Insurance Company (since
1998).
Education: B.A. (Magna Cum Laude) Furman University, 1956; J.D., University of
Alabama, 1961; L.L.M. (Taxation), Georgetown University Law Center, 1966;
M.B.A., Emory University, 1981.
JULIE M. DOUGLAS, CPA, Executive Vice President -- Operations & Treasurer.
Professional Experience: Southeastern Asset Management, Inc. (since 1989).
Education: B.S., Accounting, Pennsylvania State University, 1984.
ANDREW R. MCCARROLL, Vice President and Assistant General Counsel.
Professional Experience: Southeastern Asset Management, Inc. (since 1998);
Farris, Warfield & Kanaday (law firm), Nashville, TN (1996-1998).
Education: Vanderbilt University, B.A., 1990; J.D., 1996; The University of
Chicago, M.A., 1993.
MARKETING AND ADMINISTRATION
LEE B. HARPER, Executive Vice President -- Marketing.
Professional Experience: Southeastern Asset Management, Inc. (since 1993).
Education: B.A., University of Virginia, 1985; M.B.A., Harvard University,
1989.
RANDY D. HOLT, CPA, Vice President -- Secretary.
Professional Experience: Vice President and Secretary, Southeastern Asset
Management, Inc. (since 1994).
Education: B.S., Accounting, University of Tennessee, 1976.
24
<PAGE> 25
SHAREHOLDER MANUAL
GENERAL INFORMATION
FUNDS OPEN TO NEW SHAREHOLDERS. The International Fund and Realty Fund are open
to new shareholders. The Partners Fund and Small-Cap Fund are closed to new
shareholders unless you meet one of the exceptions outlined on page 28.
MINIMUM INITIAL INVESTMENT. Our minimum initial investment for each Fund is
$10,000. Exceptions to the investment minimum are outlined on pages 28 and 29.
There is no minimum amount required for subsequent investments. All purchases
are subject to acceptance, and we may reject purchases to protect our other
shareholders.
TRANSFER AGENT. Our transfer agent, National Financial Data Services (NFDS), in
Kansas City, Missouri, handles all shareholder purchases, redemptions and
account changes. Please direct your requests and questions about your account
directly to NFDS at (800) 445-9469. SOUTHEASTERN ASSET MANAGEMENT DOES NOT
PROCESS ACCOUNT ACTIVITY AND WILL FORWARD ANY CORRESPONDENCE RECEIVED IN MEMPHIS
TO NFDS IN KANSAS CITY. NFDS will process your request when it is received in
Kansas City.
HOW TO OPEN A NEW ACCOUNT
BY CHECK. To open a new account, please complete and sign the application and
return it with a check for your initial investment. Your check should be made
payable to "Longleaf Partners Funds". The Funds DO NOT ACCEPT THIRD PARTY CHECKS
that have been endorsed over to them. You must indicate on your account
application the amount of your investment in each Fund. You may return your
application and check in our business reply envelope or mail them to:
Longleaf Partners Funds
P. O. Box 419929
Kansas City, MO 64141-6929
Overnight air courier deliveries should be sent to:
Longleaf Partners Funds
330 West 9th Street, 5th Floor
Kansas City, MO 64105
(800) 445-9469
BY WIRE. Call our transfer agent at (800) 445-9469 to establish a new account.
You should be prepared to provide all of the information that is required on the
account application. You will be assigned an account number by one of our
25
<PAGE> 26
account representatives. Using your new account number, you should instruct your
bank to wire funds as follows:
State Street Bank, Boston, MA
ABA # 011000028
A/C # 9905-023-9
Specify Longleaf Partners Funds # _______
# 133 Longleaf Partners Fund
# 136 Longleaf Partners International Fund
# 135 Longleaf Partners Realty Fund
# 134 Longleaf Partners Small-Cap Fund
Your account number and your name
You will receive the current day's closing price if the Funds receive your wire
transfer prior to the close of the New York Stock Exchange, usually at 4:00 p.m.
Eastern Time. Your investment will be made at the following business day's
closing price if your wire is received after the close of the Exchange. You
should initiate wire transfers as early in the day as possible to assure receipt
before the close of the Exchange. You must send a signed application to the
Fund. No redemptions can be paid until the Funds receive your completed
application.
INDIVIDUAL RETIREMENT ACCOUNTS. Please request an IRA Application Kit to open a
Traditional IRA, Roth IRA or SEP. The kit contains an explanation of tax
considerations, information on the trustee, State Street Bank, and instructions
for opening your retirement account. Your minimum initial investment of $10,000
must be satisfied primarily by transferring funds from an existing IRA or
qualified retirement plan. State Street Bank charges an initial set-up fee of
$15 and a $10 annual maintenance fee.
ADDITIONAL INVESTMENTS
BY MAIL. You may make additional investments into your existing account by
sending a check and the remittance stub from your account statement to our
transfer agent, NFDS. You must designate on your remittance stub the particular
Fund(s) in which you are investing to ensure that your investment is processed
correctly.
BY WIRE TRANSFER. You may send additional investments through a wire transfer
by following the wire instructions shown above. These wire instructions are also
shown on the reverse side of your account statement.
BY TELEPHONE AND ELECTRONIC TRANSFER. You may establish electronic transfer
capability on your account application with your initial investment of $10,000
or by sending instructions to our transfer agent. You must also include a voided
check. You may purchase shares of the Funds by calling the transfer agent at
(800) 445-9469 to initiate an electronic transfer from your bank account. Your
purchase price will be the net asset value computed on the next business day
following your telephone purchase request. Your initial investment cannot be
made by electronic transfer.
26
<PAGE> 27
BY AUTOMATIC MONTHLY INVESTMENT. You may establish an automatic monthly
investment of $100 or more on your account by completing the ACH selection on
your account application or by sending written instructions to our transfer
agent. You must include a voided check with your request for the automatic
monthly investment. The Longleaf Partners Funds do not charge any fees for the
Automatic Monthly Investment Plan. You should consult your banking institution
about any service fees that they may charge. Transfers will occur on the
business day on or about the 21st of each month. You must send written
instructions to our transfer agent if you would like to change or cancel your
automatic monthly investment plan.
CERTIFICATES. If you would like to receive stock certificates for your
investments, you must send a written request to our transfer agent. Your
certificates will not be issued until 15 days after your purchase unless the
shares are purchased with wired funds. You cannot redeem those shares until the
certificates have been returned to our transfer agent. If you lose your
certificates, you may incur a cost to replace them.
RETURNED CHECKS OR REJECTED TRANSFERS. You are responsible for any expenses or
losses incurred by the Funds if your check is returned or your telephone order
is rejected by your bank because of insufficient funds or a stop payment
request. These expenses and losses include additional custodial and transfer
agent fees as well as any loss on the shares purchased for your account upon
their cancellation. If you are an existing shareholder, the Funds may collect
losses by redeeming the necessary amount from your account.
EXCEPTIONS TO INVESTMENT MINIMUM AND CLOSED FUNDS
$10,000 INVESTMENT MINIMUM. The following investors may open a new account with
an initial investment that is less than $10,000.
(1) Family members of shareholders who have at least $250,000 invested in one of
the Longleaf Partners Funds may open an account with $5,000 in the same
Fund.
(2) Persons who are employed by or are participants in institutional accounts of
at least $2,000,000 in one of the Funds or in an account managed by
Southeastern may invest $5,000 in any of the open funds.
(3) Employees of Southeastern Asset Management and their family members may open
new accounts with a $1,000 initial investment.
27
<PAGE> 28
PARTNERS FUND AND SMALL-CAP FUND. The Partners Fund closed to new investors
effective June 1, 1999, and the Small-Cap Fund closed to new investors on July
31, 1997. The following investors may open new accounts in these
Funds:
(1) Immediate family members of shareholders of the particular Fund may open a
new account in the same Fund.
(2) Financial advisors and consultants having clients invested in the Partners
Fund or Small-Cap Fund on their closing dates may add new clients to the
Fund already owned.
(3) Institutions and affiliates of institutions having an investment advisory
relationship with Southeastern Asset Management, Inc. of at least $2,000,000
may open a new account.
(4) Shareholders with an account balance of at least $250,000 in any Longleaf
Partners Fund when the Partners Fund closed may open a new account in the
Partners Fund.
(5) Employees of Southeastern Asset Management and their family members.
Please note that if you redeem your Partners Fund or Small-Cap Fund account
below the minimum initial investment amount of $10,000, you will not be allowed
to make further investments until that Fund reopens.
PRIOR APPROVAL FOR EXCEPTIONS. Approval for one of the above exceptions must be
obtained by calling Southeastern Asset Management at (901) 761-2474 prior to
making your investment.
HOW TO REDEEM SHARES
You may withdraw any portion of your account in a share or dollar amount at any
time. We will send your redemption proceeds within one week of receipt of your
redemption request in good order. We must have received a completed and signed
account application or W-9 form before releasing your redemption.
REDEMPTIONS BY TELEPHONE. Investors who have established telephone redemption
privileges may redeem up to $100,000 over the telephone. Telephone redemptions
may not be used for IRA accounts. Proceeds of telephone redemptions can be sent
only to the address of record on the account or wired in accordance with prior
bank instructions on your account. If you call before the close of the New York
Stock Exchange, usually 4:00 p.m. Eastern Time, you will receive that day's
closing price. Redemption requests made after the close of the Exchange will
receive the next day's closing price. A telephone redemption request cannot be
changed or cancelled by the investor after the transfer agent has begun
processing.
The transfer agent employs reasonable procedures to confirm that instructions
received by telephone are genuine. When these procedures are followed, the Funds
and the transfer agent are not liable for losses caused by such instructions.
The Fund reserves the right to revise or terminate the telephone redemption
privilege at any time.
28
<PAGE> 29
REDEMPTIONS BY LETTER. The following information must be included in a
redemption request made by letter:
- Your account number and Fund name -- Longleaf Partners Fund (#133); Longleaf
Partners International Fund (#136); Longleaf Partners Realty Fund (#135);
Longleaf Partners Small-Cap Fund (#134);
- The amount of the redemption specified in either dollars or shares;
- The signatures of all owners, exactly as they are registered on the account;
- Medallion Signature Guarantees for redemptions over $100,000;
- Fund Certificates, if any have been issued for the shares being redeemed;
- Other supporting legal documents that may be required in cases of estates,
corporations, trusts and certain other accounts.
Please call our transfer agent at (800) 445-9469 if you have questions about
these requirements.
COLLECTED FUNDS. Whether you are redeeming by telephone or by letter, the Funds
must have received payment for the shares you are redeeming and may delay paying
your redemption for up to 15 days to ensure that collected funds have been
received.
REDEMPTION PRICE AND FEES. Your redemption price will be the net asset value
per share at the next market close after the receipt of your redemption request
in good order. The redemption price may be more or less than the shares'
original cost. The Funds do not charge redemption fees. IRA accounts are subject
to the full $10 annual maintenance fee in the year they are redeemed.
The Funds suggest that you send written redemption requests and required
documentation by registered or certified mail to:
Longleaf Partners Funds
P.O. Box 419929
Kansas City, MO 64141-6929
Written redemption requests and required documentation may be sent by overnight
air courier to:
Longleaf Partners Funds
330 West 9th Street, 5th Floor
Kansas City, MO 64105
(800) 445-9469
ACCOUNT CHANGES. Changes to your account registration, mailing address, or
account privileges must be made in writing. Changes that accompany a redemption
request must be Medallion Signature Guaranteed.
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<PAGE> 30
MEDALLION SIGNATURE GUARANTEE. Redemptions over $100,000 must be made in
writing and require a Medallion Signature Guarantee. Each signature must
correspond to all of the names and signatures of the registered owners of the
account. All of the registered owners must sign the request and have their
signatures guaranteed. To obtain a Medallion Signature Guarantee, a member firm
of a domestic stock exchange, a U. S. commercial bank, or another financial
institution that is a participant in a Medallion Program must witness your
signature and stamp the document with the appropriate certification. A NOTARY
PUBLIC IS NOT AN ELIGIBLE GUARANTOR.
CONFIRMATIONS AND REPORTS. If you invest directly with the Funds, you will
receive a confirmation statement after each account transaction and a
consolidated statement at the end of each calendar quarter. You will also
receive tax documentation as required by the IRS. We send quarterly, semi-annual
and audited annual reports containing information on each Fund's portfolio of
investments.
PURCHASES AND REDEMPTIONS THROUGH BROKERAGE FIRMS AND OTHER AUTHORIZED
INSTITUTIONS. You may purchase and redeem shares of the Funds through brokerage
firms and other authorized institutions that have agreements with the Funds. The
firm may charge you a transaction fee for its services. If you invest through an
authorized firm, you must follow that firm's procedures for buying and selling
shares. The firm may designate other organizations to accept purchase and
redemption orders on behalf of their clients. The Funds will use the time of day
when the firm or its designee accepts the order to determine the time of
purchase or redemption, and will process the order at the next closing price
computed after acceptance. The brokerage firm or other authorized institution
has the responsibility of sending prospectuses, financial reports and other Fund
materials.
BROKER/DEALER AND INSTITUTIONAL INVESTMENTS. Upon execution of formal trading
agreements, the Funds will accept trade orders from NASD members or other
institutional investors. The Funds offer telephone and automated trading through
our transfer agent, NFDS. Institutional investors may also establish pre-
authorized fax redemption privileges. Please contact the Funds directly to
obtain more information about these trading options.
Full payment for all trades must be received within one day of the trade date.
The entity that initiates the trade order will be responsible for any loss that
results from non-settlement. All purchase minimums and other requirements
outlined in the trade order agreements must be followed to remain in good
standing. The Funds may withdraw trading privileges at any time if it is in
their best interest.
PAYMENT OF REDEMPTIONS IN CASH. Although all redemptions in prior years have
been paid in cash, we have made a Rule 18f-1 election. Under this election, the
Longleaf Partners Funds at their present sizes are obligated to pay during any
90 day period only the first $250,000 of each redemption in cash. For omnibus
30
<PAGE> 31
accounts of brokers this commitment applies to each separate shareholder rather
than to the single omnibus account. We have reserved the right to pay the
balance of any redemptions in excess of $250,000 by distributing portfolio
securities rather than cash. If that should happen, you may incur brokerage
commissions when selling the securities that were distributed to you. The
securities would also be subject to prevailing market prices at the time of the
sale.
HOW FUND SHARES ARE PRICED
The price at which you buy or sell your Fund shares is referred to as their net
asset value or "NAV". We calculate NAV by dividing the total value of a Fund's
assets less its liabilities by the number of shares outstanding. We determine
the NAV once a day, at the close of regular trading on the New York Stock
Exchange (usually at 4:00 p.m.) on days the Exchange is open for business. The
Exchange is closed for specified national holidays and on week-ends.
The values of the Funds' investments are based on their market values, usually
the last price reported before the close of the primary stock exchange where the
security trades. If there are no stock exchange trades or the security is traded
over-the-counter, the price we use for valuation is the midpoint between the
last representative bid and ask prices or, if there are no such prices, the
prior day's price. Non-registered securities and securities with limited trading
markets are valued in good faith by the Board of Trustees.
We usually price foreign securities at the latest market close in the foreign
market, which may be at different times or days than the close of the New York
Stock Exchange. If events occur which could materially affect the NAV between
the close of the foreign market and normal pricing at the close of the New York
Stock Exchange, we reserve the right to price the foreign securities at fair
value as determined by the Board of Trustees, consistent with any regulatory
guidelines.
More detailed information on how we price portfolio securities appears in the
Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
We intend to qualify for favorable tax treatment under the federal Internal
Revenue Code by distributing to shareholders essentially all income and capital
gains. The Funds' dividends, comprised primarily of dividends on portfolio
securities and interest from money market investments, are usually distributed
at the end of the year. Any capital gains realized from sales of portfolio
securities during the year are usually distributed between October 31 and the
end of the year. Your dividends and distributions will be reinvested in
additional shares of the Funds unless you have chosen to receive them by check.
If you make an investment shortly before a dividend is declared, you will be
taxed on the dividend as though you had owned the shares from the beginning of
the year.
31
<PAGE> 32
TAXES
This tax information is general and refers primarily to current federal income
tax provisions. We urge you to consult your own tax adviser about the status of
distributions and redemptions as applied to your personal situation.
TAXES ON INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS. Generally, the Funds
are not taxed on dividends and capital gains distributed to shareholders. Unless
your account is a tax advantaged account such as an Individual Retirement
Account, or you are a tax exempt organization, you are responsible for paying
federal and possibly state income taxes on any dividends and capital gains
distributions you receive, even if you reinvest in additional shares of the
Funds.
Fund dividends from net investment income, and short-term capital gains are
taxed at your ordinary income tax rate. Long-term capital gains from securities
held by the Funds for more than one year are taxed at a maximum rate of 20%. The
Form 1099 mailed to you after December 31 each year explains the federal tax
category of these distributions.
TAXES ON SALES OF FUND SHARES. If you redeem any Fund shares or if you exchange
shares between Funds, the transaction is taxable and you may have a capital gain
or loss. The amount of the gain or loss is the difference between your tax basis
and the amount received. The gain or loss is long-term for shares you have held
for one year or more, and is short-term for shares held less than one year. You
are responsible for reporting and paying any federal or state taxes which may be
due.
WITHHOLDING. Federal law requires the Funds to withhold a portion of
distributions and proceeds from redemptions if you have failed to provide a
correct tax identification number or to certify that you are not subject to
withholding. These certifications must be made on your application or on a
separate form which may be requested from our transfer agent.
More detailed information about tax issues relating to the Funds can be found in
the Statement of Additional Information.
32
<PAGE> 33
(This page intentionally left blank)
33
<PAGE> 34
LONGLEAF PARTNERS FUNDS
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand each Fund's
operations. Certain information reflects financial results for a single Fund
share.
earned [or lost] on an investment in the Fund (assuming reinvestment of
PricewaterhouseCoopers, LLP, whose report, along with the Funds' financial
annual report, which are available upon request.
<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.
34
<PAGE> 35
LONGLEAF PARTNERS FUNDS
FINANCIAL HIGHLIGHTS
financial performance for the past 5 years or, if shorter, the period of the
Fund's
The total returns in the table represent the rate that an investor would have
all dividends and distributions). This information has been audited by
statements, are included in the Statement of Additional Information and
<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>
35
<PAGE> 36
LONGLEAF
PARTNERS
FUNDS SM
[LONGLEAF LOGO (SM)]
MANAGED BY:
SOUTHEASTERN ASSET MANAGEMENT, INC.
6410 POPLAR AVE.
SUITE 900
MEMPHIS, TN 38119
(800) 445-9469
(901) 761-2474
This Prospectus does not constitute an offering in any jurisdiction in which
such offering would not be lawful.
You can find more information about the investment objectives and policies, the
risks of investing in the Longleaf Partners Funds, and more information on Fund
operations in the Statement of Additional Information (SAI). The SAI is
incorporated by reference in this Prospectus, and you may request a copy by
calling (800) 445-9469.
You can also find more information about the Longleaf Partners Funds in our
annual and semi-annual reports to shareholders, which contain financial
statements and which also discuss market conditions and investment strategies
that significantly affected the Funds' performance during the last fiscal year.
To obtain a free copy of the latest annual or semi-annual report, please call
(800) 445-9469.
The Securities and Exchange Commission maintains an Internet website that
contains the Funds' periodic financial reports to shareholders, amendments to
its registration statement which include the Prospectus and Statement of
Additional Information, and other required filings. An investor may review these
materials free of charge by accessing the SEC's website at http://www.sec.gov.
The Securities and Exchange Commission Investment Company Act File Number for
the Longleaf Partners Funds is 811-4923
<PAGE> 37
- --------------------------------------------------------------------------------
LOGO
LONGLEAF PARTNERS FUNDS
Send completed application and check to:
Longleaf Partners Funds, P.O. Box 219929, Kansas City, MO 64121-6929
NEW ACCOUNT APPLICATION
PLEASE PRINT. Remember to complete and sign section 10 on the reverse of this
application and retain a copy.
DO NOT USE THIS FORM TO OPEN AN IRA. For an IRA application or for more
information, call (800) 445-9469.
1. ACCOUNT REGISTRATION (CHECK ONE BOX ONLY)
[ ] INDIVIDUAL
- --------------------------------------------------------------------------------
OWNER'S NAME (FIRST, INITIAL, LAST)
- --------------------------------------------------------------------------------
OWNER'S SOCIAL SECURITY BIRTHDAY (MO/DAY/YR)
[ ] JOINT TENANT WITH RIGHTS OF SURVIVORSHIP (UNLESS OTHERWISE NOTED)
- --------------------------------------------------------------------------------
JOINT OWNER'S NAME (FIRST, INITIAL, LAST)
- --------------------------------------------------------------------------------
JOINT OWNER'S SOCIAL SECURITY BIRTHDAY (MO/DAY/YR)
[ ] GIFT TO MINOR
- --------------------------------------------------------------------------------
ADULT CUSTODIAN'S NAME (ONE NAME ONLY. FIRST, INITIAL, LAST)
- --------------------------------------------------------------------------------
MINOR'S NAME (ONE NAME ONLY. FIRST, INITIAL, LAST)
- --------------------------------------------------------------------------------
MINOR'S STATE OF RESIDENCE
- --------------------------------------------------------------------------------
MINOR'S SOCIAL SECURITY NUMBER MINOR'S BIRTHDAY (MO/DAY/YR)
[ ] TRUST [ ] CORPORATION [ ] 401(K) [ ] OTHER
(check one)
- --------------------------------------------------------------------------------
NAME OF TRUST OR ENTITY
- --------------------------------------------------------------------------------
TRUSTEE NAME
- --------------------------------------------------------------------------------
ADDITIONAL TRUSTEE NAME, IF ANY
- --------------------------------------------------------------------------------
BENEFICIARY'S OR CLIENT'S NAME IF DIFFERENT THAN TRUST OR ENTITY NAME
- --------------------------------------------------------------------------------
TAXPAYER ID NUMBER DATE OF TRUST AGREEMENT (MO/DAY/YR)
2. MAILING ADDRESS
- --------------------------------------------------------------------------------
STREET OR P.O. BOX NUMBER
- --------------------------------------------------------------------------------
OTHER INFORMATION (SUITE, ATTENTION, ETC.)
- --------------------------------------------------------------------------------
CITY, STATE, ZIP
( ) ( )
- --------------------------------------------------------------------------------
DAYTIME PHONE EVENING PHONE
ARE YOU A U.S. CITIZEN? [ ] Yes [ ] No
If not a U.S. citizen, specify country of permanent residence:
- --------------------------------------------------------------------------------
3. INITIAL INVESTMENT ($10,000 MINIMUM PER ACCOUNT)
NOTE: THE FUNDS DO NOT ACCEPT THIRD-PARTY CHECKS.
[ ] Partners Fund (#133) $ Closed 6/1/99
-------------------
[ ] International Fund (#136) $
-------------------
[ ] Realty Fund (#135) $
-------------------
[ ] Small-Cap Fund (#134) $ Closed 7/31/97
-------------------
Total $
===================
[ ] Check Make payable to Longleaf Partners Funds and mail to the address at
the top of this form.
[ ] Wire Prior to wiring funds, call (800) 445-9469 to set up an account. Wire
as follows:
State Street Bank and Trust Company
Boston, Massachusetts
ABA #011000028
Account #9905-023-9
For Fund #
----------------
For credit to: (your name as account is registered)
Shareholder account #: (your account number)
Note: You must send a completed application to the Fund. Redemption cannot be
paid until the completed application has been received.
4. DIVIDENDS AND CAPITAL GAINS PAYMENTS
All distributions will be reinvested in additional shares unless you select one
or both options below:
[ ] Distribute all capital gains by check.
[ ] Distribute all dividends by check.
5. AUTOMATIC MONTHLY INVESTMENT
Please indicate the amount of your monthly investment in each fund. Our minimum
monthly investment is $100 per Fund. Bank transfers will be processed on or
about the 21(st) of each month.
[ ] TRANSFER THE FOLLOWING AMOUNT AROUND THE 21ST OF EACH MONTH:
Partners Fund (#133) $
----------------------
International Fund (#136) $
----------------------
Realty Fund (#135) $
----------------------
Small-Cap Fund (#134) $
----------------------
TOTAL MONTHLY INVESTMENT $
----------------------
[ ] BEGINNING DATE
----------------------
MO/YR
(Automatic Investment Plans normally become active 20 business days after your
application is processed.)
<PAGE> 38
6. TELEPHONE PURCHASES
Purchases made by telephone will be added to your account on the day following
your call, NOT ON the same day your call is placed. Once initiated, a telephone
purchase cannot be canceled. Purchases will be deducted from your checking
account by electronic transfer.
[ ] Add the telephone purchase capability to my account.
Include a voided check to verify your banking instructions.
7. TELEPHONE REDEMPTIONS AND EXCHANGES
I DO NOT want the following telephone capability on my account:
[ ] Telephone Redemption ($100,000 Maximum)
[ ] Telephone Exchange
You can redeem up to $100,000 over the telephone. Larger redemptions must be
made in writing and must have a medallion signature guarantee.
8. WIRE INSTRUCTIONS
Redemptions should be sent by Federal Wire to:
- ------------------------------------------------------------------------
BANK NAME CITY STATE
- ------------------------------------------------------------------------
ABA ROUTING # ACCOUNT #
- ------------------------------------------------------------------------
NAME ON ACCOUNT
Include a voided check to verify your banking instructions.
9. DUPLICATE SHAREHOLDER STATEMENTS
Please send a copy of my account statements to:
- ----------------------------------------------------------------
NAME (FIRST, INITIAL, LAST)
- ----------------------------------------------------------------
COMPANY NAME
- ----------------------------------------------------------------
STREET OR P.O. BOX NUMBER
- ----------------------------------------------------------------
CITY, STATE, ZIP
CLIENT IDENTIFICATION NUMBER (For Internal Use Only)
10. SIGNATURE
EACH OWNER MUST SIGN THIS SECTION.
By signing this application, I certify that:
- - I have received and read the prospectus for the Fund and I agree to its terms.
I have the authority and legal capacity to purchase mutual fund shares, am of
legal age and believe each investment to be suitable for me.
- - I understand that this Fund is not a bank, and Fund shares are not backed or
guaranteed by any bank nor insured by the FDIC.
- - I ratify any instructions, including telephone instructions, given on this
account. I understand that the Fund or National Financial Data Services (NFDS)
will employ reasonable procedures to confirm the genuineness of my
instructions. I agree that neither the Fund nor NFDS will be liable for any
loss, cost, or expense for acting upon any instructions believed to be genuine
and in accordance with reasonable procedures designed to prevent unauthorized
transactions.
- - If I am a non-resident alien, as indicated above, I certify under penalties of
perjury that I am not a U.S. citizen or resident alien and that I am an
"exempt foreign person" as defined under IRS regulations.
- - IF I AM A U.S. CITIZEN OR RESIDENT ALIEN, AS INDICATED ABOVE, I CERTIFY UNDER
PENALTIES OF PERJURY THAT (1) THE SOCIAL SECURITY OR TAXPAYER IDENTIFICATION
NUMBER PROVIDED ABOVE IS CORRECT, AND (2) I AM NOT SUBJECT TO IRS BACKUP
WITHHOLDING BECAUSE (A) I AM EXEMPT FROM BACKUP WITHHOLDING, OR (B) I HAVE NOT
BEEN NOTIFIED BY THE IRS THAT I AM SUBJECT TO BACKUP WITHHOLDING, OR (C)
BECAUSE I HAVE BEEN NOTIFIED BY THE IRS THAT I AM NO LONGER SUBJECT TO BACKUP
WITHHOLDING.
[ ] CHECK HERE IF YOU ARE SUBJECT TO BACKUP WITHHOLDING.
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF
THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO AVOID BACKUP
WITHHOLDING.
[ ]Check if more than one authorized signature is
required to execute a transaction.
------------------------------------------
(number required)
X
- --------------------------------------------------------------------------------
SIGNATURE OF OWNER/AUTHORIZED SIGNER (DATE)
X
- --------------------------------------------------------------------------------
SIGNATURE OF JOINT OWNER/AUTHORIZED SIGNER (DATE)
X
- --------------------------------------------------------------------------------
(ADDITIONAL INSTITUTIONAL SIGNATURE) (DATE)
X
- --------------------------------------------------------------------------------
(ADDITIONAL INSTITUTIONAL SIGNATURE) (DATE)
<PAGE> 39
LONGLEAF PARTNERS FUNDS SM
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
---------------------
LONGLEAF PARTNERS FUND
LONGLEAF PARTNERS INTERNATIONAL FUND
LONGLEAF PARTNERS REALTY FUND
LONGLEAF PARTNERS SMALL-CAP FUND
Series of
LONGLEAF PARTNERS FUNDS TRUST
[LONGLEAF LOGO] TABLE OF CONTENTS
<TABLE>
<S> <C>
- - Fund History.............................................. 2
- - Investment Objectives and Policies........................ 2
- - Fundamental Policies and Restrictions..................... 3
- - Non-Fundamental Investment Restrictions................... 6
- - Additional Information About Types of Investments and
Investment Techniques
Repurchase Agreements................................... 7
Warrants................................................ 8
Real Estate Investment Trusts........................... 8
Futures Contracts....................................... 8
Options on Securities and Stock Indices................. 9
Foreign Currency Contracts.............................. 10
Lending of Portfolio Securities......................... 11
Swaps................................................... 11
Short Sales............................................. 12
- - Portfolio Turnover........................................ 12
- - Management of the Funds................................... 13
- - Compensation Table........................................ 13
- - Control Persons and Principal Holders of Securities....... 14
- - Investment Advisory Services.............................. 14
- - Fund Administration....................................... 15
- - Other Service Providers................................... 16
- - Allocation of Brokerage Commissions....................... 17
- - Capital Stock and Indemnification Rights.................. 19
- - Purchase, Redemption, and Pricing of Shares............... 20
- - Additional Tax Information................................ 21
- - Investment Performance and Total Return................... 23
- - Table of Bond and Preferred Stock Ratings................. 25
- - Financial Statements
Report of Independent Public Accountants................ 28
Longleaf Partners Fund Portfolio of Investments.... 29
Longleaf Partners International Fund Portfolio of
Investments....................................... 31
Longleaf Partners Realty Fund Portfolio of
Investments....................................... 33
Longleaf Partners Small-Cap Fund Portfolio of
Investments....................................... 35
Other Financial Statements.............................. 38
</TABLE>
MANAGED BY
SOUTHEASTERN ASSET MANAGEMENT, INC.
6410 POPLAR AVENUE; SUITE 900
MEMPHIS, TN 38119
---------------------
THIS STATEMENT OF ADDITIONAL INFORMATION, DATED MAY 1, 1999, IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF LONGLEAF
PARTNERS FUNDS TRUST, ALSO DATED MAY 1, 1999, WHICH MAY BE OBTAINED WITHOUT
CHARGE UPON REQUEST MADE TO SOUTHEASTERN ASSET MANAGEMENT, INC.
TELEPHONE (800) 445-9469; (901) 761-2474.
<PAGE> 40
LONGLEAF PARTNERS FUNDS TRUST
STATEMENT OF ADDITIONAL INFORMATION
---------------------
LONGLEAF PARTNERS FUND
LONGLEAF PARTNERS INTERNATIONAL FUND
LONGLEAF PARTNERS REALTY FUND
LONGLEAF PARTNERS SMALL-CAP FUND
---------------------
FUND HISTORY
Organization. Longleaf Partners Funds Trust was organized on November 26, 1986
as a Massachusetts business trust under the name Southeastern Asset Management
Value Trust. Its name was changed to Longleaf Partners Funds Trust on August 2,
1994. Its four separate series or Funds and the dates of their initial public
offerings are as follows:
Longleaf Partners Fund (known as Southeastern Asset Management Value Trust
prior to August 2, 1994) -- Initial public offering -- April 8, 1987;
closed to new investors, effective June 1, 1999.
Longleaf Partners International Fund -- Initial public offering -- October
26, 1998
Longleaf Partners Realty Fund -- Initial public offering -- January 2, 1996
Longleaf Partners Small-Cap Fund (known as Southeastern Asset Management
Small-Cap Fund prior to August 2, 1994) -- Initial public
offering -- February 21, 1989; closed to new investors, effective July 31,
1997.
Significance of Fund Names. The name "Longleaf", derived from the longleaf
pine, a majestic, sturdy tree indigenous to the southeastern United States,
represents the qualities of strength and endurance. A second element of the name
is the word "Partners." In selecting portfolio investments, Southeastern Asset
Management, Inc. ("Southeastern"), the Funds' Investment Counsel, seeks
corporate managers who would make exemplary long-term business partners. They
should be properly incented, ownership vested, honest, shareholder oriented,
operationally competent individuals who are capable of allocating corporate
resources intelligently. The Funds endeavor to be supportive long-term
"partners" with management of the companies in the portfolios. Correspondingly,
Southeastern's own partners, other personnel, and relatives, are major investors
in the Funds. Management considers itself a "partner" with Fund shareholders in
seeking long-term capital growth. The Funds desire loyal, long-term investors as
shareholders who view themselves as "partners" with Fund management.
INVESTMENT OBJECTIVES AND POLICIES
Longleaf Partners Funds Trust is an open-end, management investment company with
four series or Funds. Each series is operated as a separate mutual fund with its
own particular investment objective. The investment objectives and general
investment policies are as follows:
LONGLEAF PARTNERS FUND
Investment Objective -- Long-term capital growth.
Investment Policy -- Invests primarily in equity securities of companies having
a market capitalization greater than $1 billion.
2
<PAGE> 41
LONGLEAF PARTNERS INTERNATIONAL FUND
Investment Objective -- Long-term capital growth through investment primarily in
equity securities of international issuers.
LONGLEAF PARTNERS REALTY FUND
Investment Objective -- Maximum total return over the long-term through
investment primarily in real estate oriented companies.
LONGLEAF PARTNERS SMALL-CAP FUND
Investment Objective -- Long-term capital growth.
Investment Policy -- Invests primarily in equity securities of companies having
a market capitalization in the range of companies included in the Russell 2000
Index.
Certain investment objectives, policies, and restrictions have been adopted as
"fundamental", either because a Fund has elected to do so or because the
Securities and Exchange Commission so requires. Those investment objectives and
restrictions classified as fundamental cannot be changed without approval of a
majority of the outstanding voting securities. Under the Investment Company Act
of 1940, "approval of a majority of the outstanding voting securities" means the
affirmative vote of the lesser of (1) more than 50% of the outstanding shares of
the particular Fund or (2) 67% or more of the shares present at a shareholders'
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy.
The investment objectives of the Partners, Small-Cap, and Realty Funds are
fundamental, and cannot be changed without shareholder approval. The investment
objective of the International Fund is non-fundamental, as are the general
investment policies of all of the Funds. In addition, as described in more
detail in the following sections, certain investment restrictions are not
fundamental. Non-fundamental investment objectives, policies, and restrictions
may be changed by the respective Boards of Trustees without shareholder
approval.
FUNDAMENTAL POLICIES AND RESTRICTIONS
Non-Diversification. The Funds are all classified as "non-diversified" under
the federal securities laws. As a result, there are no diversification
requirements under the Investment Company Act of 1940 or any other securities
laws.
Internal Revenue Code Diversification Standards. The Partners Fund, the
Small-Cap Fund, and the Realty Fund have adopted as fundamental policy the
diversification standards of the Internal Revenue Code which apply to regulated
investment companies. The International Fund expects to apply these
diversification standards but has not adopted them as fundamental policy.
Under the diversification standards of the Internal Revenue Code, a mutual fund
has two "baskets" or groups of holdings -- a diversified basket, which must
comprise at least 50% of its total assets and a non-diversified basket, which
includes the remainder of its assets. With respect to the diversified basket,
consisting of at least 50% of a Fund's total assets, a Fund may not purchase
more than 10% of the outstanding voting securities of any one issuer or invest
more than 5% of the value of its total assets in the securities of any one
issuer, except for securities issued by the U.S. Government, and its agencies or
instrumentalities. With respect to the remainder of its assets, a Fund may not
invest more than 25% of the
3
<PAGE> 42
value of its total assets in the securities of any one issuer (other than U.S.
Government securities), or invest more than 25 percent of the value of its total
assets in the securities of two or more issuers which the Fund controls and
which are engaged in the same or similar trades or businesses or related trades
or businesses.
Industry Concentration. The Partners Fund, International Fund, and Small-Cap
Fund may not invest 25% or more of the value of their total assets in securities
of issuers in any one industry. This restriction does not apply to obligations
issued or guaranteed by the United States Government and its agencies or
instrumentalities or to cash equivalents. Corporate commercial paper will not be
used to concentrate investments in a single industry.
For purposes of defining what constitutes a single industry for purposes of the
restriction applying to these Funds, each Fund will use the definitions for
industries as set forth in the latest edition of the North American Industry
Classification System ("NAICS") or other publicly available information.
Industry category groupings shown in the Funds' printed reports sent quarterly
to shareholders may contain more than one Industry Code, and these broader
industry groupings are intended to be functionally descriptive presentations
rather than being limited to a single NAICS industry category.
The Realty Fund may not invest 25% of more of the value of its total assets in
any industry other than in real estate oriented companies, as discussed in more
detail in the Prospectus on pages 12 and 16. For purposes of this definition, a
company is real estate oriented if at least 50% of its revenues are derived from
real estate related activities, or at least 50% of its appraised value as
determined by Southeastern is comprised of real estate assets. A company which
satisfies this definition is realty oriented even though its technical NAICS
Industry Code may classify it as being in a different industry.
The Funds have adopted certain investment restrictions which are designated as
fundamental, which means that these restrictions cannot be changed without
shareholder approval. The fundamental investment restrictions of the Partners,
Realty, and Small-Cap Funds are identical; the fundamental restrictions of the
International Fund, formed in 1998, are phrased differently, and its fundamental
restrictions are shown separately.
Except as specifically authorized, the Partners Fund, the Realty Fund, and the
Small-Cap Fund each may not:
- - Borrow money, except that it may borrow from banks to increase its holdings of
portfolio securities in an amount not to exceed 30% of the value of its total
assets and may borrow for temporary or emergency purposes from banks and
entities other than banks in an amount not to exceed 5% of the value of its
total assets; provided that aggregate borrowing at any time may not exceed 30%
of the Fund's total assets less all liabilities and indebtedness not
represented by senior securities.
- - Issue any senior securities, except that collateral arrangements with respect
to transactions such as forward contracts, futures contracts, short sales or
options, including deposits of initial and variation margin, shall not be
considered to be the issuance of a senior security for purposes of this
restriction;
- - Act as an underwriter of securities issued by other persons, except insofar as
the Fund may be deemed an underwriter in connection with the disposition of
securities;
- - Purchase or sell real estate, except that the Fund may invest in securities of
companies that deal in real estate or are engaged in the real estate business,
including real estate investment trusts, and securities secured by real estate
or interests therein and the Fund may hold and sell real estate acquired
through default, liquidation, or other distributions of an interest in real
estate as a result of the Fund's ownership of such securities;
4
<PAGE> 43
- - Purchase or sell commodities or commodity futures contracts, except that the
Fund may invest in financial futures contracts, options thereon and similar
instruments;
- - Make loans to other persons except through the lending of securities held by
it (but not to exceed a value of one-third of total assets), through the use
of repurchase agreements, and by the purchase of debt securities, all in
accordance with its investment policies.
The International Fund has adopted the following investment restrictions as
fundamental. The text of the fundamental restriction is set forth in quotation
marks and bold type; any comments following these fundamental restrictions are
explanatory only and are not fundamental.
- -INDUSTRY CONCENTRATION. "THE FUND WILL NOT PURCHASE ANY SECURITY WHICH WOULD
CAUSE THE FUND TO CONCENTRATE ITS INVESTMENTS IN THE SECURITIES OF ISSUERS
PRIMARILY ENGAGED IN ANY ONE INDUSTRY EXCEPT AS PERMITTED BY THE SECURITIES AND
EXCHANGE COMMISSION."
Comment. The present position of the staff of the Division of Investment
Management of the Securities and Exchange Commission is that a mutual fund will
be deemed to have concentrated its investments in a particular industry if it
invests 25% or more of its total assets, exclusive of cash and U.S. Government
securities, in securities of companies in any single industry. The Fund will
comply with this position but will be able to use a different percentage of
assets without seeking shareholder approval if the SEC should subsequently
allow investment of a larger percentage of assets in a single industry. Such a
change will not be made without providing prior notice to shareholders.
- -SENIOR SECURITIES. "THE FUND MAY NOT ISSUE SENIOR SECURITIES, EXCEPT AS
PERMITTED UNDER THE INVESTMENT COMPANY ACT OF 1940 OR ANY RULE, ORDER OR
INTERPRETATION UNDER THE ACT."
Comment. Generally, a senior security is an obligation of a Fund which takes
precedence over the claims of fund shareholders. The Investment Company Act
generally prohibits a fund from issuing senior securities, with limited
exceptions. Under SEC staff interpretations, funds may incur certain
obligations (for example, to deliver a foreign currency at a future date under
a forward foreign currency contract) which otherwise might be deemed to create
a senior security, provided the fund maintains a segregated account containing
liquid securities having a value equal to the future obligations.
- -BORROWING. "THE FUND MAY NOT BORROW MONEY, EXCEPT AS PERMITTED BY APPLICABLE
LAW."
Comment. In general, a fund may not borrow money, except that (i) a fund may
borrow from banks (as defined in the Investment Company Act) in amounts up to
33 1/3% of its total assets (including the amount borrowed) less liabilities
(other than borrowings), (ii) a fund may borrow up to 5% of its total assets
for temporary or emergency purposes, (iii) a fund may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of
portfolio securities, and (iv) a fund may not pledge its assets other than to
secure such borrowings or, to the extent permitted by the Fund's investment
policies as set forth in its current prospectus and statement of additional
information, in connection with hedging transactions, short sales, when-issued
and forward commitment transactions and similar investment strategies.
- -UNDERWRITING. "THE FUND MAY NOT ACT AS AN UNDERWRITER OF SECURITIES ISSUED BY
OTHERS, EXCEPT INSOFAR AS THE FUND MAY BE DEEMED AN UNDERWRITER IN CONNECTION
WITH THE DISPOSITION OF PORTFOLIO SECURITIES."
Comment. Generally, a mutual fund may not be an underwriter of securities
issued by others. However, an exception to this restriction enables the Fund to
sell securities held in its portfolio, usually securities
5
<PAGE> 44
which were acquired in unregistered or "restricted" form, even though it
otherwise might technically be classified as an underwriter under the federal
securities laws in making such sales.
- -COMMODITIES. "THE FUND MAY NOT PURCHASE OR SELL COMMODITIES OR COMMODITY
CONTRACTS UNLESS ACQUIRED AS A RESULT OF OWNERSHIP OF SECURITIES OR OTHER
INSTRUMENTS ISSUED BY PERSONS THAT PURCHASE OR SELL COMMODITIES OR COMMODITIES
CONTRACTS, BUT THIS RESTRICTION SHALL NOT PREVENT THE FUND FROM PURCHASING,
SELLING AND ENTERING INTO FINANCIAL FUTURES CONTRACTS (INCLUDING FUTURES
CONTRACTS ON INDICES OF SECURITIES, INTEREST RATES AND CURRENCIES), OPTIONS ON
FINANCIAL FUTURES CONTRACTS, WARRANTS, SWAPS, FORWARD CONTRACTS, FOREIGN
CURRENCY SPOT AND FORWARD CONTRACTS, OR OTHER DERIVATIVE INSTRUMENTS THAT ARE
NOT RELATED TO PHYSICAL COMMODITIES."
Comment. The Fund has the ability to purchase and sell (write) put and call
options and to enter into futures contracts and options on futures contracts
for hedging and risk management and for other non-hedging purposes. Examples of
non-hedging risk management strategies include increasing a Fund's exposure to
the equity markets of particular countries by purchasing futures contracts on
the stock indices of those countries and effectively increasing the duration of
a bond portfolio by purchasing futures contracts on fixed income securities.
Hedging and risk management techniques, unlike other non-hedging derivative
strategies, are not intended to be speculative but, like all leveraged
transactions, involve the possibility of gains as well as losses that could be
greater than the purchase and sale of the underlying securities.
- -LENDING. "THE FUND MAY NOT MAKE LOANS TO OTHER PERSONS EXCEPT THROUGH THE
LENDING OF SECURITIES HELD BY IT AS PERMITTED BY APPLICABLE LAW, THROUGH THE
USE OF REPURCHASE AGREEMENTS, AND BY THE PURCHASE OF DEBT SECURITIES, ALL IN
ACCORDANCE WITH ITS INVESTMENT POLICIES."
- -REAL ESTATE. "THE FUND MAY NOT PURCHASE OR SELL REAL ESTATE, EXCEPT THAT THE
FUND MAY INVEST IN SECURITIES OF COMPANIES THAT DEAL IN REAL ESTATE OR ARE
ENGAGED IN THE REAL ESTATE BUSINESS, INCLUDING REAL ESTATE INVESTMENT TRUSTS,
AND SECURITIES SECURED BY REAL ESTATE OR INTERESTS THEREIN AND THE FUND MAY
HOLD AND SELL REAL ESTATE ACQUIRED THROUGH DEFAULT, LIQUIDATION, OR OTHER
DISTRIBUTIONS OF AN INTEREST IN REAL ESTATE AS A RESULT OF THE FUND'S OWNERSHIP
OF SUCH SECURITIES."
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
All of the funds have also adopted the following non-fundamental investment
restrictions which may be changed in the discretion of the Board of Trustees,
without prior shareholder approval. Except as specifically authorized, the Funds
may not:
- - Purchase restricted (non-registered) or "illiquid" securities, including
repurchase agreements maturing in more than seven days, if as a result, more
than 15% of the Fund's net assets would then be invested in such securities
(excluding securities which are eligible for resale pursuant to Rule 144A
under the Securities Act of 1933).
- - Acquire or retain securities of any investment company, except that the Fund
may (a) acquire securities of investment companies up to the limits permitted
by Sec. 12(d)(l) of the Investment Company Act of 1940 (for each holding, 5%
of the Fund's total assets, 3% of the company's voting stock, with not more
than 10% of the Fund's total assets invested in all such investment companies)
provided such acquisitions are made in the open market and there is no
commission or profit to a dealer or sponsor other than the customary broker's
commission, and (b) may acquire securities of any investment company as part
of a merger, consolidation or similar transaction.
6
<PAGE> 45
- - Make short sales of equity portfolio securities whereby the dollar amount of
short sales at any one time would exceed 25% of the net assets of the Fund,
and the value of securities of any one issuer in which the Fund is short would
exceed the lessor of 5% of the value of the Fund's net assets or 5% of the
securities of any class of any issuer; provided that the Fund maintains
collateral in a segregated account consisting of cash or liquid securities
with a value equal to the current market value of the shorted securities,
which is marked to market daily. If the Fund owns an equal amount of such
securities or securities convertible into or exchangeable for, without payment
of any further consideration, securities of the same issuer as, and equal in
amount to, the securities sold short (which sales are commonly referred to as
"short sales against the box"), such restrictions shall not apply.
- - Invest in puts, calls, straddles, spreads or any combination thereof, except
that the Fund may (a) purchase and sell put and call options on securities and
securities indexes, and (b) write covered put and call options on securities
and securities indexes and combinations thereof; provided that the securities
underlying such options are within the investment policies of the Fund and the
value of the underlying securities on which options may be written at any one
time does not exceed 25% of total assets.
- - Invest in oil, gas or other mineral exploration programs, development programs
or leases, except that the Fund may purchase securities of companies engaging
in whole or in part in such activities.
- - Pledge, mortgage or hypothecate its assets except in connection with
borrowings which are otherwise permissible.
- - Purchase securities on margin, except short-term credits as are necessary for
the purchase and sale of securities, provided that the deposit or payment of
initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase on margin.
ADDITIONAL INFORMATION ABOUT TYPES OF INVESTMENTS
AND INVESTMENT TECHNIQUES
Repurchase Agreements. An acceptable investment for cash reserves, a repurchase
agreement is an instrument under which an investor such as the Fund purchases
U.S. Government securities or other securities from a vendor, with an agreement
by the vendor to repurchase the security at the same price, plus interest at a
specified rate. In such a case, the security is held by the Fund, in effect, as
collateral for the repurchase obligation. Repurchase agreements may be entered
into with member banks of the Federal Reserve System or "primary dealers" (as
designated by the Federal Reserve Bank of New York) in United States Government
securities. Repurchase agreements usually have a short duration, often less than
one week. In entering into the repurchase agreement for the Fund, the Investment
Counsel will evaluate and monitor the credit worthiness of the vendor. In the
event that a vendor should default on its repurchase obligation, the Fund might
suffer a loss to the extent that the proceeds from the sale of the collateral
were less than the repurchase price. If the vendor becomes bankrupt, the Fund
might be delayed, or may incur costs or possible losses of principal and income,
in selling the collateral.
Warrants. Each of the Funds may invest in warrants for the purchase of equity
securities at a specific price for a stated period of time. Warrants may be
considered more speculative than other types of investments in that they do not
entitle a holder to dividends or voting rights for the securities which may be
purchased nor do they represent any rights in the assets of the issuing company.
The value of a warrant does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not exercised
prior to the expiration date.
7
<PAGE> 46
Real Estate Investment Trusts. REITs are sometimes described as equity REITs,
mortgage REITs and hybrid REITs. An equity REIT invests primarily in the fee
ownership or leasehold ownership of land and buildings and derives its income
primarily from rental income. An equity REIT may also realize capital gains (or
losses) by selling real estate properties in its portfolio that have appreciated
(or depreciated) in value. A mortgage REIT invests primarily in mortgages on
real estate, which may secure construction, development or long-term loans. A
mortgage REIT generally derives its income primarily from interest payments on
the credit it has extended. A hybrid REIT combines the characteristics of equity
REITs and mortgage REITs, generally by holding both ownership interests and
mortgage interests in real estate.
Equity REITs may be further characterized as operating companies or financing
companies. To the extent that an equity REIT provides operational and management
expertise to the properties held in its portfolio, the REIT generally exercises
some degree of control over the number and identity of tenants, the terms of
their tenancies, the acquisition, construction, repair and maintenance of
properties and other operational issues. A mortgage REIT or an equity REIT that
provides financing rather than operational and management expertise to the
properties in its portfolio will generally not have control over the operations
that are conducted on the real estate in which the REIT has an interest.
Futures Contracts. Primarily for hedging purposes, the Funds may purchase and
sell financial futures contracts. Although some financial futures contracts call
for making or taking delivery of the underlying securities, in most cases these
obligations are closed out before the settlement date. The closing of a
contractual obligation is accomplished by purchasing or selling an identical
offsetting futures contract. Other financial futures contracts by their terms
call for cash settlements.
The Funds may also buy and sell index futures contracts with respect to any
stock or bond index traded on a recognized stock exchange or board of trade. An
index futures contract is a contract to buy or sell units of an index at a
specified future date at a price agreed upon when the contract is made. The
stock index futures contract specifies that no delivery of the actual stocks
making up the index will take place. Instead, settlement in cash must occur upon
the termination of the contract, with the settlement being the difference
between the contract price and the actual level of the stock index at the
expiration of the contract.
At the time one of the Funds purchases a futures contract, an amount of cash,
U.S. Government securities, or other liquid securities equal to the market value
of the futures contract will be deposited in a segregated account with the
Fund's Custodian. When writing a futures contract, the Fund will maintain with
the Custodian similar liquid assets that, when added to the amounts deposited
with a futures commission merchant or broker as margin, are equal to the market
value of the instruments underlying the contract. Alternatively, the Fund may
"cover" the position by owning the instruments underlying the contract (or, in
the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Custodian).
Options on Securities and Stock Indices. The Funds may write covered put and
call options and purchase put and call options on securities or stock indices.
An option on a security is a contract that gives the purchaser of the option, in
return for the premium paid, the right to buy a specified security (in the case
of a call option) or to sell a specified security (in the case of a put option)
from or to the writer of the option at a designated price during the term of the
option. An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
8
<PAGE> 47
The Funds may write a call or put option only if the option is "covered." A call
option on a security written by one of the Funds is covered if the Fund owns the
underlying security subject to the call, has an absolute and immediate right to
acquire that security without additional cash consideration (or for additional
cash consideration held in a segregated account by its Custodian) upon
conversion or exchange of other securities held in its portfolio, or the call is
otherwise covered with assets held in a segregated account. A call option on a
security is also covered if the Fund holds a call on the same security and in
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, liquid securities or money market instruments in
a segregated account with its Custodian. A put option on a security written by
the Fund is covered if the Fund maintains similar liquid assets with a value
equal to the exercise price in a segregated account with its Custodian, or holds
a put on the same security and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written.
A Fund may cover call options on stock indices through a segregated account or
by owning securities whose price changes, in the opinion of Southeastern, are
expected to be similar to those of the index, or in such other manner as may be
in accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, where a Fund covers a call option
on a stock index through ownership of securities, such securities may not match
the composition of the index. In that event, the Fund will not be fully covered
and could be subject to risk of loss in the event of adverse changes in the
value of the index. A Fund may cover put options on stock indices by segregating
assets equal to the option's exercise price, or in such other manner as may be
in accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations.
A Fund will receive a premium from writing a put or call option, which increases
its gross income in the event the option expires unexercised or is closed out at
a profit. If the value of a security or an index on which a Fund has written a
call option falls or remains the same, the Fund will realize a profit in the
form of the premium received (less transaction costs) that could offset all or a
portion of any decline in the value of the portfolio securities being hedged. If
the value of the underlying security or index rises, however, the Fund will
realize a loss in its call option position, which will reduce the benefit of any
unrealized appreciation in the Fund's stock investments. By writing a put
option, the Fund assumes the risk of a decline in the underlying security or
index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on securities or indices will increase the Fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
A Fund may also purchase put options to hedge its investments against a decline
in value. By purchasing a put option, the Fund will seek to offset a decline in
the value of the portfolio securities being hedged through appreciation of the
put option. If the value of the Fund's investments does not decline as
anticipated, or if the value of the option does not increase, the Fund's loss
will be limited to the premium paid for the option plus related transaction
costs. The success of this strategy will depend, in part, on the accuracy of the
correlation between the changes in value of the underlying security or index and
the changes in value of the Fund's security holdings being hedged.
A Fund may purchase call options on individual securities to hedge against an
increase in the price of securities that the Fund anticipates purchasing in the
future. Similarly, a Fund may purchase call options to attempt to reduce the
risk of missing a broad market advance, or an advance in an industry or market
segment, at a time when the Fund holds uninvested cash or short-term debt
securities awaiting investment.
9
<PAGE> 48
When purchasing call options, the Fund will bear the risk of losing all or a
portion of the premium paid if the value of the underlying security or index
does not rise.
There can be no assurance that a liquid market will exist when a Fund seeks to
close out an option position. Trading could be interrupted, for example, because
of supply and demand imbalances arising from a lack of either buyers or sellers,
or the options exchange could suspend trading after the price has risen or
fallen more than the maximum specified by the exchange. Although the Fund may be
able to offset to some extent any adverse effects of being unable to liquidate
an option position, it may experience losses in some cases as a result of such
inability.
Foreign Currency Contracts. As a method of hedging against foreign currency
exchange rate risks, the Funds may enter into forward foreign currency exchange
contracts and foreign currency futures contracts, as well as purchase put or
call options on foreign currencies, as described below. The Funds may also
conduct foreign currency exchange transactions on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market.
As part of the investment decision process, a Fund may enter into forward
foreign currency exchange contracts ("forward contracts") to seek to minimize
the exposure from a change in the relationship between the U.S. dollar and
foreign currencies. A forward contract is an obligation to purchase or sell a
specific currency for an agreed price at a future date which is individually
negotiated and privately traded by currency traders and their customers. A Fund
may enter into a forward contract, for example, when it enters into a contract
for the purchase or sale of a security denominated in a foreign currency in
order to "lock in" the U.S. dollar price of the security. The Funds will
segregate cash, cash equivalents or liquid securities sufficient to cover any
commitments under these contracts. The segregated account will be
marked-to-market daily. Each Fund may seek to hedge the foreign currency
exposure risk to the full extent of its investment in foreign securities, but
there is no requirement that all foreign securities be hedged against foreign
currency exposure. Forward contracts may reduce the potential gain from a
positive change in the relationship between the U.S. dollar and foreign
currencies or, considered separately, may produce a loss.
A Fund may purchase and write put and call options on foreign currencies for the
purpose of protecting against declines in the dollar value of foreign portfolio
securities and against increases in the dollar cost of foreign securities to be
acquired. As with other kinds of options, however, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount of the
premium received, and the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against fluctuation in exchange rates although, in the event of rate movements
adverse to the Fund's position, the Fund may forfeit the entire amount of the
premium plus related transaction costs.
A Fund may enter into exchange-traded contracts for the purchase or sale for
future delivery of foreign currencies ("foreign currency futures"). This
investment technique may be used to hedge against anticipated future changes in
exchange rates which otherwise might adversely affect the value of the
particular Fund's portfolio securities or adversely affect the prices of
securities that the Fund intends to purchase at a later date. The successful use
of currency futures will usually depend on the Investment Counsel's ability to
forecast currency exchange rate movements correctly. Should exchange rates move
in an unexpected manner, the Fund may not achieve the anticipated benefits of
foreign currency futures or may realize losses.
Lending of Portfolio Securities. The Funds may from time to time lend portfolio
securities to brokers or dealers, banks and other institutional investors and
receive collateral in the form of United States
10
<PAGE> 49
Government obligations or money market funds. Under current practices, the loan
collateral must be maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities, and will not be used to
leverage the portfolio. In determining whether to lend securities to a
particular broker/dealer or financial institution, Southeastern will consider
all relevant facts and circumstances, including the credit-worthiness of the
broker or financial institution. If the borrower should fail to return the
loaned securities, the particular Fund could use the collateral to acquire
replacement securities, but could be deprived of immediate access to such assets
for the period prior to such replacement. The Funds may pay reasonable fees in
connection with such a loan of securities. The Funds will not lend portfolio
securities in excess of one-third of the value of total assets, nor will the
Funds lend portfolio securities to any officer, director, trustee, employee of
affiliate of the Funds or Southeastern.
Swaps. The Funds may enter into swaps involving equity interests, indexes, and
currencies without limit. An equity swap is an agreement to exchange streams of
payments computed by reference to a notional amount based on the performance of
a single stock or a basket of stocks. Index swaps involve the exchange by a Fund
with another party of the respective amounts payable with respect to a notional
principal amount related to one or more indices. Currency swaps involve the
exchange of cash flows on a notional amount of two or more currencies based on
their relative future values.
The Funds may enter into these transactions to preserve a return or spread on a
particular investment or portion of its assets, to protect against currency
fluctuations, as a duration management technique, or to protect against any
increase in the price of securities a Fund anticipates purchasing at a later
date. These transactions may also be used to obtain the price performance of a
security without actually purchasing the security in circumstances where, for
example, the subject security is illiquid, is unavailable for direct investment
or is available only on less attractive terms.
Swaps have risks associated with them, including possible default by the counter
party to the transaction, illiquidity and, where used for hedges, the risk that
the use of a swap could result in losses greater than if the swap had not been
employed.
Short Sales. The Funds may seek to realize additional gains through short sale
transactions in securities listed on one or more national securities exchanges,
or in unlisted securities. Short selling involves the sale of borrowed
securities. At the time a short sale is effected, a Fund incurs an obligation to
replace the security borrowed at whatever its price may be at the time the Fund
purchases it for delivery to the lender. When a short sale transaction is closed
out by delivery of the securities, any gain or loss on the transaction is
taxable as short term capital gain or loss.
Since short selling can result in profits when stock prices generally decline,
the Funds can, to a certain extent, hedge the market risk to the value of its
other investments and protect its equity in a declining market. However, the
Funds could, at any given time, suffer both a loss on the purchase or retention
of one security, if that security should decline in value, and a loss on a short
sale of another security, if the security sold short should increase in value.
When a short position is closed out, it may result in a short term capital gain
or loss for federal income tax purposes. To the extent that in a generally
rising market a Fund maintains short positions in securities rising with the
market, the net asset value of the Fund would be expected to increase to a
lesser extent than the net asset value of an investment company that does not
engage in short sales.
11
<PAGE> 50
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of a Fund's portfolio securities for the year by the monthly average value
of the portfolio securities. Securities with remaining maturities of one year or
less at the date of acquisition are excluded from the calculation.
Portfolio turnover cannot be accurately predicted. The Funds' investment
philosophy contemplates holding portfolio securities for the long term, and
portfolio turnover usually should be less than 50%. There are no specific limits
on portfolio turnover, and investments will be sold without regard to the length
of time held when investment considerations support such action. Turnover rates
greater than 100% involve greater transaction costs.
The 1998 portfolio turnover rates of the Funds for the past three years are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Partners Fund.......................................... 43.78% 38.07% 33.18%
International Fund (partial year)...................... 24.05% -- --
Realty Fund............................................ 21.55% 28.66% 4.28%
Small-Cap Fund......................................... 52.51% 16.95% 27.97%
</TABLE>
Portfolio turnover rates (the lesser of purchase or sales) for the Partners Fund
and the Small-Cap Fund were higher during 1998 as the result of increased sales
of portfolio securities during the year. A number of portfolio holdings reached
their appraised or intrinsic value and were sold, and several companies spun-off
a subsidiary, which was then sold.
12
<PAGE> 51
MANAGEMENT OF THE FUNDS
Each of the Funds is supervised by its Board of Trustees, which implements
policies through the particular Fund's principal executive officers, all of whom
are officers or employees of Southeastern Asset Management, Inc.
("Southeastern"). Day to day portfolio management and fund administration are
provided by Southeastern in its capacity as Investment Counsel and as Fund
Administrator under contracts which must be renewed annually, as required by the
Investment Company Act of 1940.
The names, principal occupations during at least the past five years and other
information about members of the Boards of Trustees and the Funds' executive
officers are set forth in the Prospectus on pages 23 and 24. The following table
provides information on the schedule of Trustees' fees expected to be paid for
the fiscal year ending December 31, 1999:
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION FROM EACH FUND TOTAL
NAME OF PERSON; --------------------------------------------- COMPENSATION
POSITION (AGE) PARTNERS INTERNATIONAL REALTY SMALL-CAP FROM ALL
ADDRESS FUND FUND FUND FUND FUNDS
--------------- -------- ------------- ------ --------- ------------
<S> <C> <C> <C> <C> <C>
O. Mason Hawkins*
Chairman of the Board and Chief
Executive Officer (51).......... None None None None None
G. Staley Cates*
Trustee and President (34)...... None None None None None
Chadwick H. Carpenter, Jr.
Trustee (48)
14 Oak Park; Bedford, MA 01730
42366 N. 111th Street
Scottsdale, AZ 85262-3251....... $15,000 $5,000 $7,500 $7,500 $35,000
Daniel W. Connell, Jr.
Trustee (50)
One Stadium Place
Jacksonville, FL 32202.......... $15,000 $5,000 $7,500 $7,500 $35,000
Steven N. Melnyk
Trustee (52)
1535 The Greens Way
Jacksonville Beach, FL 32250.... $15,000 $5,000 $7,500 $7,500 $35,000
C. Barham Ray
Trustee (52)
845 Crossover Lane
Ste. 140
Memphis, TN 38117............... $15,000 $5,000 $7,500 $7,500 $35,000
</TABLE>
- ---------------
Trustee is an "interested" person through employment by Southeastern. The
"interested" Trustees and all executive officers of the Fund are officers or
employees of Southeastern, which pays their salaries and other employee
benefits. Its address is 6410 Poplar Ave., Ste. 900, Memphis, TN 38119.
The Funds have no pension or retirement plan for Trustees.
13
<PAGE> 52
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Each Fund is controlled by its respective Board of Trustees. Each Board of
Trustees consists of six members, four of whom are independent of Southeastern
and are not "interested persons" of the particular Fund as that term is defined
in the Investment Company Act of 1940.
The following shareholders owned of record or beneficially 5% or more of the
outstanding shares of the designated Funds at December 31, 1998:
<TABLE>
<CAPTION>
PARTNERS INTERNATIONAL REALTY SMALL-CAP
FUND FUND FUND FUND
-------- ------------- ------ ---------
<S> <C> <C> <C> <C>
Clients of Charles Schwab & Co., a
brokerage firm......................... 16.0% 12.0% 26.7% 32.6%
Clients of National Financial Service
Corp., a brokerage firm................ * * 6.7% 5.6%
Sun Microsystems, Inc. 401(k) Plan....... 5.7% -- -- --
Litton Industries, Inc. (Employee
Plans)................................. 5.2% -- 6.1% --
Mr. O. Mason Hawkins, Chairman of the
Board and CEO of the Funds and
Southeastern........................... * 28.6% * *
All Trustees and officers of the Fund,
all directors and officers of
Southeastern and their relatives,
affiliated retirement plans and
endowments............................. 1.6% 41.2% 5.7% 4.3%
</TABLE>
- ---------------
* Ownership is less than 5%.
INVESTMENT ADVISORY SERVICES
Southeastern Asset Management, Inc. ("Southeastern"), an investment advisor
registered with the Securities and Exchange Commission under the Investment
Advisers Act of 1940, is the Fund's Investment Counsel. Southeastern is owned
and controlled by its principal officers, who are listed in the Prospectus as
affiliated Trustees and Executive Officers of the Fund. Mr. O. Mason Hawkins,
Chairman of the Board and Chief Executive Officer of Southeastern, owns a
majority of its outstanding voting stock and is deemed to control the Company.
Formed in 1975, Southeastern manages institutional and individual assets in
private or separate accounts as well as mutual funds, and is responsible for
managing more than $13 billion in client assets. It has served as investment
adviser to each of the Longleaf Partners Funds since their respective inception
dates. Additional information with respect to the investment advisory function
is contained in the Prospectus on pages 20 and 21.
The annual Investment Counsel fee for the Partners Fund and the Small-Cap Fund,
calculated daily and paid monthly, is 1% of average daily net assets on the
first $400 million and 0.75% of average daily net assets above $400 million. The
annual Investment Counsel fee for the Realty Fund is 1% of average daily net
assets; the annual Investment Counsel fee for the International Fund is 1.5% of
average daily net assets.
14
<PAGE> 53
All of the Funds have a contractual expense limitation, which is included in the
Investment Counsel Agreement and cannot be changed without approval of
shareholders. The expense limitation includes the investment advisory and
administration fees, all reimbursable expenses, and all normal operating
expenses. For the Partners, Realty, and Small-Cap Funds, the Investment Counsel
has agreed to reduce its Investment Counsel fees to the extent that total
operating expenses, excluding interest, taxes, brokerage commissions and
extraordinary expenses, exceed a maximum of 1.5% of each Fund's average net
assets on an annualized basis. The International Fund has an expense limitation
of 1.75% of average net assets per annum, applicable in the same manner to the
same types of expenses. During 1998, the start-up year for the International
Fund, Southeastern reduced its Investment Counsel fees for this Fund by $127,852
to comply with the expense limitation.
Investment Counsel fees paid by each Fund for the last three fiscal years are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Partners Fund................................. $26,393,753 $20,885,285 $17,004,356
International Fund............................ $ 212,286 -- --
Realty Fund................................... $ 8,173,553 $ 5,064,551 $ 391,283
Small-Cap Fund................................ $ 9,831,536 $ 5,697,623 $ 1,735,200
</TABLE>
FUND ADMINISTRATION
Southeastern serves as Fund Administrator and in that capacity manages or
performs all business and administrative operations of each Fund, including the
following:
- - Preparation and maintenance of all accounting records
- - Preparation and filing of required financial reports and tax returns
- - Securities registrations and reports of sales of shares
- - Calculation of daily net asset value per share
- - Preparation and filing of prospectuses, proxy statements, and other reports to
shareholders
- - General coordination and liaison among the Investment Counsel, the custodian
bank, the transfer agent, authorized dealers, other outside service providers,
and regulatory authorities
- - Supplying office space and general administrative support for the above
functions.
Each Fund pays an Administration Fee equal to 0.10% per annum of the average
daily net assets, which is accrued daily and paid monthly in arrears.
Administration fees paid by each Fund for the last three fiscal years are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Partners Fund..................................... $3,385,838 $2,651,375 $2,133,914
International Fund................................ $ 14,152 -- --
Realty Fund....................................... $ 817,356 $ 506,455 $ 43,848
Small-Cap Fund.................................... $1,177,540 $ 632,636 $ 173,520
</TABLE>
The Funds also reimburse the Administrator for the charges for computer programs
and hardware solely used to process Fund transactions and a portion of the
compensation of the Funds' Treasurer. These reimbursable expenses are allocated
among the portfolios taking into account their respective assets and number of
shareholders. The Administrator has not been leasing computer hardware equipment
for
15
<PAGE> 54
dedicated use by the Fund and has not requested reimbursement for costs or
charges related to computer hardware. Reimbursable expenses paid by each Fund
for the last three fiscal years are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Partners Fund......................................... $159,255 $192,492 $168,016
International Fund.................................... $ 9,704 -- --
Realty Fund........................................... $ 48,319 $ 19,076 $ 30,397
Small-Cap Fund........................................ $ 59,371 $ 26,959 $ 15,838
</TABLE>
All other direct operating expenses are paid by that particular Fund. Such
expenses include but are not limited to the following: (i) fees of the Custodian
and Transfer Agent; (ii) compensation of the independent public accountants,
outside legal counsel, and fees and travel expenses of the Trustees who are not
officers or employees of Southeastern; (iii) any franchise, income and other
taxes relating to the Funds or their securities; (iv) all filing fees and legal
expenses incurred in qualifying and continuing the registrations of the shares
for sale with the Securities and Exchange Commission and with any regulatory
agency in the several states; (v) insurance premiums and trade association dues;
(vi) the costs of typesetting, printing and mailing to shareholders such
documents as prospectuses, proxy statements, dividend notices and all other
communications; (vii) expenses of meetings of shareholders and the Boards of
Trustees; (viii) external expenses related to pricing the Funds' portfolio
securities; and (ix) any extraordinary expenses such as expenses of litigation.
The Funds also pay the expenses of stationery, appropriate forms, envelopes,
checks, postage, overnight air courier charges, telephone charges, and printing
and mailing charges for shareholder communications and similar items.
Terms of Operating Agreements. Each Fund has entered into agreements with
Southeastern as Investment Counsel and separately as Fund Administrator,
initially effective for a period of two years. Each agreement must be renewed
prior to August 1 of each year by the affirmative vote of a majority of the
outstanding voting securities of each Fund or by a majority of the members of
the Board of Trustees, including a majority of the Trustees who are not
"interested" Trustees. Such Agreements will automatically terminate in the event
of assignment as defined in the Investment Company Act of 1940. The Funds may
terminate such Agreements, without penalty, upon 60 days' written notice by a
majority vote of the Board of Trustees or by a majority of the outstanding
voting securities of the particular Fund.
OTHER SERVICE PROVIDERS
Custodian of Fund Assets. State Street Bank and Trust Company, located at One
Heritage Drive, North Quincy, MA 02171, serves as Custodian of the assets of
each Fund. Where possible, the Custodian utilizes book entry records with
securities depositories, which in turn may have book entry records with transfer
agents of the issuers of the securities. With respect to U.S. Government issues
the Custodian may utilize the book entry system of the Federal Reserve System.
The Custodian is responsible for collecting the proceeds of securities sold and
disbursement of the cost of securities purchased by the Funds. State Street Bank
also serves as the foreign custody manager for the Funds with respect to foreign
securities, using foreign sub-custodians which participate in its global custody
network.
Transfer Agent. National Financial Data Services ("NFDS"), located at 330 W.
9th Street, Kansas City, MO 64105, an affiliate of State Street Bank and Trust
Company, is the transfer agent and dividend disbursing agent. NFDS maintains all
shareholder accounts and records; processes all transactions including
16
<PAGE> 55
purchases, redemptions, transfers and exchanges; prepares and mails account
confirmations and correspondence; issues stock certificates; and handles all
account inquiries.
Independent Public Accountants. PricewaterhouseCoopers, L.L.P. is the Fund's
independent public accounting firm. The Funds are served by the Baltimore
office, located at 250 West Pratt Street, Suite 2100, Baltimore MD 21201, and by
the Boston office, located at One Post Office Square, Boston, MA 02109.
Legal Counsel. Dechert Price and Rhoads, a law firm with offices in major
cities including Washington, Philadelphia, New York City, and Boston, is the
Funds' special legal counsel. The Funds are served by the Washington office,
located at 1775 Eye Street, NW, Washington, DC 20006-2402, and the Boston
office, located at Ten Post Office Square, South, Boston, MA 02109-4603. Charles
D. Reaves, Executive Vice President of the Funds and Vice President and General
Counsel of Southeastern, is General Counsel of the Funds, and Andrew R.
McCarroll is Vice President and Assistant General Counsel of the Funds and
Southeastern.
ALLOCATION OF BROKERAGE COMMISSIONS
Southeastern, in its capacity as Investment Counsel, is responsible under the
supervision of the Board of Trustees for the selection of members of securities
exchanges, brokers and dealers (referred to as "brokers") for the execution of
portfolio transactions and, when applicable, the negotiation of brokerage
commissions. On behalf of each Fund, Southeastern is also responsible for
investment decisions and for the placement and execution of purchase and sale
orders through selected brokers. All investment decisions and placements of
trades for the purchase and sale of portfolio securities are made in accordance
with the following principles:
1. Purchase and sale orders are usually placed with brokers who are
recommended by Southeastern and/or selected by management of the Fund as
able to achieve "best execution" of such orders. "Best execution" means
prompt and reliable execution at the most favorable security price, taking
into account the following provisions. The determination of what may
constitute best execution and price in the execution of a securities
transaction by a broker involves a number of considerations, including,
among others, the overall direct net economic result to the Fund (involving
both price paid or received and any commissions and other costs paid), the
efficiency with which the transaction is effected, the ability to effect
the transaction in the future, the financial strength and stability of the
broker, and the ability of the broker to commit resources to the execution
of the trade. Such considerations are judgemental and are weighed by
Southeastern and the Board of Trustees in determining the overall
reasonableness of brokerage commissions.
2. In recommending or selecting brokers for portfolio transactions,
Southeastern takes into account its past experience in determining those
qualified to achieve "best execution".
3. Southeastern is authorized to recommend and the Fund is authorized
to allocate brokerage and principal purchase and sales transactions to
brokers who have provided brokerage and research services, as such services
are defined in Section 28(e) of the Securities Exchange Act of 1934 (the
"1934 Act"), and for other services which benefit the Fund directly through
reduction of the Fund's expense obligations, such as a reduction in the
Fund's share of the lease charges for computer expenses. Southeastern could
cause the Fund to pay a commission for effecting a securities transaction
in excess of the amount another broker would have charged for effecting
that transaction, if Southeastern in making the recommendation in question
determines in good faith that the commission is reasonable in relation to
the value of the brokerage and research services or other benefits provided
the Fund by such broker. In reaching such determination, neither
Southeastern nor the officer of the Fund making the decision is
17
<PAGE> 56
required to place a specific dollar value on the research or execution
services of a broker. In demonstrating that such determinations were made
in good faith, Southeastern and the officer of the Fund shall be prepared
to show that all commissions were allocated and paid for purposes
contemplated by the Fund's brokerage policy; that any other benefits or
services provided the Fund were in furtherance of lawful and appropriate
obligations of the Fund; and that the commissions paid were within a
reasonable range. Such determination shall be based on available
information as to the level of commissions known to be charged by other
brokers on comparable transactions, but there shall be taken into account
the Fund's policies (i) that paying the lowest commission is deemed
secondary to obtaining a favorable price and (ii) that the quality,
comprehensiveness and frequency of research studies which are provided for
the Fund and Southeastern may be useful to Southeastern in performing its
services under its Agreement with the Fund but are not subject to precise
evaluation. Research services provided by brokers to the Fund or to
Southeastern are considered to be supplementary to, and not in lieu of
services required to be performed by Southeastern.
4. Purchases and sales of portfolio securities within the United
States other than on a securities exchange are executed with primary market
makers acting as principal, except where, in the judgment of Southeastern,
better prices and execution may be obtained on a commission basis or from
other sources.
5. Sales of a Fund's shares by a broker are one factor among others to
be taken into account in recommending and in deciding to allocate portfolio
transactions (including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender offers) for the
account of the Fund to a broker, provided that the broker shall furnish
"best execution", as defined in paragraph 1 above, and that such allocation
shall be within the scope of the Fund's other policies as stated above; and
provided further that in every allocation made to a broker in which the
sale of Fund shares is taken into account, there shall be no increase in
the amount determined, as set forth in paragraph 3 above, on the basis of
best execution plus research services, without taking account of or placing
any value upon such sales of Fund shares.
Investment decisions for each Fund are made independently from those of the
other Funds or accounts of other clients managed by Southeastern, but the same
security may be held in the portfolios of more than one Fund or one managed
account. When several accounts and the Funds' portfolios simultaneously purchase
or sell the same security, the prices and amounts will be equitably allocated
among all such accounts. In some situations this procedure could adversely
affect the price or quantity of the security available to one or more of the
Funds, but in other situations the ability to participate in larger volume
transactions may enable a Fund to realize better executions, prices, and lower
commissions.
Southeastern does not own an interest in any brokerage firm and places trades
for the Funds through independent brokerage firms. Brokerage commissions paid by
the Funds for the past three years are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Partners Fund..................................... $6,461,416 $4,707,780 $2,172,895
International Fund (partial year)................. $ 282,438 -- --
Realty Fund....................................... $1,362,321 $1,791,258 $ 427,047
Small-Cap Fund.................................... $4,088,165 $1,632,755 $ 576,550
</TABLE>
Brokerage commissions for the Partners Fund and the Small-Cap Fund were higher
during 1998 as the result of several factors. A number of portfolio holdings
reached their appraised or intrinsic value and were sold.
18
<PAGE> 57
Several companies spun-off a subsidiary, which was sold. In addition, the assets
of the Funds have increased substantially during the past three years, and a
substantial portion of the new assets were invested in equities during the
market decline during the summer and fall of 1998.
CAPITAL STOCK AND INDEMNIFICATION RIGHTS
Longleaf Partners Funds Trust (the "Trust") is a Massachusetts business trust
with four separate series or Funds. Each series issues its capital stock in the
form of shares of beneficial interest having no par value. Each Fund may issue
an unlimited number of shares of beneficial interest, all of which are of one
class. Each share of each Fund has equal voting rights with all other shares of
that Fund. Shares do not have cumulative voting rights, which means that holders
of less than 50% of the outstanding shares cannot cumulate their total votes for
all Trustees in order to elect a single Trustee, and the holders of more than
50% of the outstanding shares may elect 100% of the particular Fund's Trustees.
A Massachusetts business trust is not required to hold annual meetings of
shareholders. Annual meetings ordinarily will not be held unless so required by
the provisions of the Investment Company Act of 1940, which would include such
matters as amending the investment advisory agreement or electing new members of
the Board of Trustees. The Board of Trustees may fill vacancies on the Board if
at least two-thirds of the Trustees serving after the new appointment were
elected by shareholders.
Each share of beneficial interest represents an equal proportionate interest in
the assets of the particular Fund with every other share and each share is
entitled to a proportionate share of dividends and distributions of net income
and capital gains belonging to that Fund when declared by the Board of Trustees.
There are no preemptive, subscription, or conversion rights.
When a Fund has received payment of the net asset value per share, each share
issued is fully paid and non-assessable. Under Massachusetts law, shareholders
of a mutual fund which is a series of a Massachusetts business trust could, in
theory, be held personally liable for certain obligations of the particular
series. Our Declaration of Trust contains an express disclaimer of shareholder
liability for obligations of each series, and this disclaimer is included in
contracts between the Funds and third parties. The Declaration of Trust also
provides for indemnification from the assets of each series for shareholder
liability for covered acts or obligations should any shareholder be held
personally liable under these provisions.
The Declaration of Trust and By-Laws provide that no Trustee, officer, employee,
or agent of any Fund shall be subject to any personal liability to the Fund or
its shareholders for any action or failure to act, except for such person's
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
person's duties. The Trust indemnifies each such person against all such losses
other than the excepted losses. The agreements between the Trust and,
respectively, the Investment Counsel and the Fund Administrator provide for
indemnification and relieve each such entity of liability for any act or
omission in the course of its performance under the particular agreement,
including any mistake of judgment, in the absence of willful misfeasance, bad
faith or gross negligence.
19
<PAGE> 58
PURCHASE, REDEMPTION, AND PRICING OF SHARES
The methods of purchasing and redeeming shares through the transfer agent, NFDS,
are described on pages 25 through 31 of the Prospectus. Shares are offered and
redeemed at the net asset value per share next computed after receiving a
purchase order or a redemption request. Such calculations are made once a day,
at the close of regular trading on the New York Stock Exchange, usually at 4:00
p.m. Eastern Time.
To compute net asset value per share, we value all Fund assets daily, including
accruing dividends declared on portfolio securities and other rights to future
income. Liabilities are accrued and subtracted from assets, and the resulting
amount is dividend by the number of shares of beneficial interest then
outstanding. The following formula illustrates this calculation:
<TABLE>
<S> <C> <C>
Net Assets equals Net Asset Value Per Share
- ------------------------
Shares Outstanding
</TABLE>
The net asset value per share for each of the Longleaf Partners Funds as shown
in the Statement of Assets and Liabilities for the year ended December 31, 1998,
shown on pages 38 and 39, was calculated as follows:
<TABLE>
<C> <S> <C> <C>
PARTNERS FUND INTERNATIONAL FUND
$3,685,299,923 $75,572,530
= $24.39 = $9.97
--------------- -------------
151,097,394 7,583,796
REALTY FUND SMALL-CAP FUND
$775,695,604 $1,355,363,619
= $14.55 = $21.95
--------------- -------------
53,308,405 61,740,958
</TABLE>
In valuing Fund assets, we apply the following procedures:
(1) Portfolio securities listed or traded on a securities exchange and
securities traded on the NASDAQ national market are valued at the last sale
price; if there were no sales that day, securities listed on major exchanges
are valued at the midpoint between the latest available and representative
bid and ask prices;
(2) All other portfolio securities for which over-the-counter market quotations
are readily available are valued at the midpoint between the latest
available and representative bid and ask prices;
(3) When market quotations are not readily available, portfolio securities are
valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Funds' Trustees;
(4) Valuation of debt securities for which market quotations are not readily
available may be based upon current market prices of securities which are
comparable in coupon, rating and maturity or an appropriate matrix utilizing
similar factors;
(5) The fair value of short term United States Government obligations and other
debt securities will be determined on an amortized cost basis; and
20
<PAGE> 59
(6) The value of other assets, including restricted and not readily marketable
securities, will be determined in good faith at fair value under procedures
established by and under the general supervision of the Trustees.
(7) Assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars using a method of determining a rate of exchange
consistent with policies established by the Board of Trustees.
The Funds normally calculate net asset value as of the close of business of the
New York Stock Exchange. Trading in securities on European and Far Eastern
securities exchanges or in other foreign markets is normally completed on days
(such as on week-ends) and at times when the New York Stock Exchange is not open
for business. In addition, trading in such international markets may not take
place on days when the New York Stock Exchange is open for business. Because of
the different trading days or hours in the various foreign markets, the
calculation of the Funds' net asset value may not take place contemporaneously
with the determination of the closing prices of some foreign securities on the
particular foreign exchanges or in other foreign markets in which those
securities are traded. The Funds follow the practice of converting closing
market prices denominated in foreign currency to U.S. dollars using the noon
Reuters currency exchange rates. This practice is widely used in the industry
and tends to reduce pricing differences between the close of the foreign markets
and the close of business on the New York Stock Exchange.
The Funds expect to follow their standard procedures in valuing foreign
securities even though there may be interim market developments which could have
an effect on the net asset value. However, should events occur which could
materially or significantly affect the valuation of such securities between the
time when their closing prices are determined in the usual manner and the time
the net asset value is calculated, the Funds may, in the discretion of the Board
of Trustees and in the absence of specific regulatory requirements, elect to
value these securities at fair value as determined in good faith by the Board of
Trustees.
ADDITIONAL TAX INFORMATION
Each Fund intends to qualify for favorable tax treatment applicable to regulated
investment companies under Subchapter M of the Internal Revenue Code of 1986, as
amended. Qualification does not involve supervision of management or investment
practices or policies by the Internal Revenue Service. In order to qualify as a
regulated investment company, a Fund must, among other things, derive at least
90% of its gross income from dividends, interest, payments with respect to
proceeds from securities loans, gains from the sale or other disposition of
securities and other income (including gains from options future and forward
foreign currency contracts) derived with respect to its business of investing in
such securities. Each Fund must also diversify its holdings so that, at the end
of each quarter of its taxable year, (i) at least 50% of the market value of
total assets is represented by cash, U.S. Government securities and other
securities limited in respect of any one issuer, to an amount not greater than
5% of the Fund's total assets and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities). Further, a regulated investment company may invest not more than 25
percent of the value of its total assets in the securities of two or more
issuers which the Fund controls and which are engaged in the same or similar
trades or businesses or related trades or businesses.
If a Fund qualifies under the Internal Revenue Code for favorable tax treatment,
it is not subject to federal income tax or state taxation in the Commonwealth of
Massachusetts on its investment company taxable income and any net realized
capital gains which are distributed to shareholders. Instead, shareholders other
than tax exempt organizations are taxable at their personal income tax rates on
the distributions declared,
21
<PAGE> 60
even if the distributions are reinvested in additional shares of the Funds. If a
Fund should fail to qualify for favorable tax treatment under the Internal
Revenue Code, the Fund itself would be subject to federal income tax and to
taxation by the Commonwealth of Massachusetts on these amounts. To qualify again
for favorable tax treatment under the Internal Revenue Code, the Fund must
distribute all undistributed earnings and profits to shareholders, who then
would be subject to taxation on the amounts distributed.
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>
The Funds may purchase certain debt securities which may be secured in whole or
in part by interests in real estate. If there should be a default and a Fund
were to acquire real estate by foreclosure, income generated by that real estate
(including rental income and gain on its disposition) may not be regarded as
qualifying income. If the Fund's non-qualifying income for a taxable year
exceeds 10% of its gross income, it would fail to qualify for favorable tax
treatment.
Investment income received by the Fund from sources within foreign countries may
be subject to foreign income taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries which entitle the Fund to
a reduced rate of tax or exemption from tax on such income. It is not possible
to determine the effective rate of foreign tax in advance, because the amount of
assets to be invested within various countries is not known.
If a Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" for U.S. federal income tax purposes and the Fund
does not elect or is not able to treat the foreign corporation as a "qualified
electing fund" within the meaning of the Code, the Fund may be subject to U.S.
federal income tax on a portion of any "excess distribution" it receives from
the foreign corporation or any gain it derives from the disposition of such
shares, even if such income is distributed as a taxable dividend by the Fund to
its U.S. shareholders. The Fund may also be subject to additional tax in the
nature of an interest charge with respect to deferred taxes arising from such
distributions or gains. Any tax paid by the Fund as a result of its ownership of
shares in a "passive foreign investment company" will not give rise to any
deduction or credit to the Fund or any shareholder. If the Fund owns shares in a
"passive foreign investment company" and the Fund treats the foreign corporation
as a "qualified electing fund" under the Code, the Fund may be required to
include in its income each year a portion of the ordinary income and net capital
gains of the foreign corporation, even if this income is not distributed to the
Fund. Any such income may be treated as ordinary income and would be subject to
the distribution requirements described above, even if the Fund does not receive
any amounts to distribute.
22
<PAGE> 61
INVESTMENT PERFORMANCE AND TOTAL RETURN
Total Return Calculation. The average annual total return on an investment in
shares of each of the Funds for a particular period is calculated using a
specific formula required by the Securities & Exchange Commission. The formula
takes into account any appreciation or depreciation in the portfolio, assumes
reinvestment of all dividends and capital gains distributions, and then
mathematically averages the return over the length of time covered by the
calculation. The formula used for computing average annual total return, as
specified by regulation, is as follows:
"Average Annual Total Return" shall mean the average annual compounded
rate of return, computed according to the following formula:
p(1+T) to the nth power = ERV
<TABLE>
<S> <C> <C> <C>
Where P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years (or fractional portions thereof)
ERV = ending value of a hypothetical $1,000 investment made at the
beginning of the period (or fractional portion thereof).
</TABLE>
The average annual total returns for each of the Funds since their respective
initial public offering dates are as follows:
<TABLE>
<CAPTION>
PARTNERS REALTY SMALL-CAP
FUND FUND FUND
-------- ------ ---------
<S> <C> <C> <C>
1998............................................... 14.28% (12.98)% 12.71%
1997............................................... 28.25% 29.73% 29.04%
1996............................................... 21.02% 40.69% 30.64%
1995............................................... 27.50% -- 18.61%
1994............................................... 8.96% -- 3.64%
1993............................................... 22.20% -- 19.83%
1992............................................... 20.47% -- 6.87%
1991............................................... 39.19% -- 26.31%
1990............................................... (16.35)% -- (30.05)%
1989............................................... 23.26% -- 21.51%
1988............................................... 35.19% -- --
</TABLE>
The average annual returns for each of the Funds for the cumulative periods
shown, ending on December 31, 1998, are as follows:
<TABLE>
<S> <C>
PARTNERS FUND
5 years ended 12/31/98.................................... 19.77%
10 years ended 12/31/98................................... 17.94%
From Initial Public Offering on 4/8/87 through 12/31/98... 16.69%
INTERNATIONAL FUND
From Initial Public offering on 10/26/98 through
12/31/98............................................... 9.02%
REALTY FUND
From Initial Public Offering on 1/2/96 through 12/31/98... 16.69%
SMALL-CAP FUND
5 years ended 12/31/98.................................... 18.49%
From Initial Public offering on 2/21/89 through
12/31/98............................................... 12.56%
</TABLE>
23
<PAGE> 62
Investment Performance Information. The Funds may publish their total returns
in advertisements and communications to shareholders. Total return information
will include the average annual compounded rate of return for the one, five, and
ten year periods (or since initial public offering) ended at the close of the
most recent calendar quarter. Each Fund may also advertise or provide aggregate
and average total return information for different periods of time, such as the
latest calendar quarter or for the calendar year-to-date.
Each Fund may also compare its performance to that of widely recognized
unmanaged stock market indices as well as other more specialized indices. The
Funds may also compare their performance with that of other mutual funds having
similar investment objectives and with the industry as a whole, as determined by
outside services such as Lipper Analytical Services, Inc., CDA Technologies,
Morningstar, Inc., and The Value Line Mutual Fund Survey. The Funds may also
provide information on their relative rankings as published in such newspapers
and magazines as The Wall Street Journal, Barron's, Forbes, Business Week,
Money, Financial World, and other similar publications.
Use of Total Return Information. Average annual total return information may be
useful to investors in considering each Fund's past investment performance.
However, certain factors should be taken into account before basing an
investment decision on this information. First, in comparing the Fund's total
return with the total return of any market indices for the same period, the
investor should be aware that market indices are unmanaged and contain different
and generally more numerous securities than the Funds' portfolios. Some market
indices are not adjusted for reinvested dividends, and no adjustment is made in
the Funds' total returns or the total returns of any market indices for taxes
payable on distributions.
An investment in the Funds is an equity investment. As a result, total returns
will fluctuate over time, and the total return for any past period is not an
indication or representation as to future rates of total return. When comparing
each Fund's total returns with those of other alternatives such as fixed income
investments, investors should understand that an equity fund may be subject to
greater market risks than are money market or fixed income investments, and that
the Funds are designed for investors who are willing to accept such greater
market risks for the possibility of realizing greater long-term gains. There is
no assurance that the Funds' investment objectives will be achieved.
24
<PAGE> 63
TABLE OF BOND AND PREFERRED STOCK RATINGS
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS:
Aaa -- Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC. PREFERRED STOCK RATINGS:
aaa -- An issue which is rated aaa is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of convertible preferred stocks.
25
<PAGE> 64
aa -- An issue which is rated aa is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
a -- An issue which is rated a is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than the aaa and
aa classifications, earnings and asset protection are, nevertheless, expected to
be maintained at adequate levels.
baa -- An issue which is rated baa is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba -- An issue which is rated ba is considered to have speculative elements, and
its future cannot be considered well assured. Earnings and asset protection may
be very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
b -- An issue which is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa -- An issue which is rated caa is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
DESCRIPTION OF STANDARD & POOR'S CORPORATION CORPORATE BOND AND PREFERRED STOCK
RATINGS:
AAA -- Securities rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA -- Securities rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A -- Securities rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than securities in higher rated
categories.
BBB -- Securities rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
securities in this category than for securities in higher rated categories.
BB, B and CCC -- Securities rated BB, B and CCC are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB represents the
lowest degree of speculation and CCC the highest degree of speculation. While
such securities will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB -- Securities rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Securities rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair
26
<PAGE> 65
capacity or willingness to pay interest and repay principal. The B rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or BB rating.
CCC -- Securities rated CCC have a currently identifiable vulnerability to
default, and are dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, they are not
likely to have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or B- rating.
Plus (+) or Minus (-): The ratings from A to CCC may be modified by the addition
of a plus or minus sign to show relative standing within major rating
categories.
FINANCIAL STATEMENTS
The financial statements for the fiscal year ended December 31, 1998, audited by
PricewaterhouseCoopers, L.L.P., the Fund's independent public accountants, are
included in the printed Annual Report to Shareholders of the Funds, and such
Financial Statements are incorporated by reference herein. The Financial
Statements contained in such printed Annual Reports, together with the Report of
Independent Accountants dated February 5, 1999 are included in this Statement of
Additional Information.
27
<PAGE> 66
- --------------------------------------------------------------------------------
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
28
<PAGE> 67
- --------------------------------------------------------------------------------
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
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
--------------
</TABLE>
See Notes to Financial Statements.
29
<PAGE> 68
- --------------------------------------------------------------------------------
PARTNERS FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
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.
30
<PAGE> 69
- --------------------------------------------------------------------------------
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.
31
<PAGE> 70
- --------------------------------------------------------------------------------
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.
32
<PAGE> 71
- --------------------------------------------------------------------------------
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
------------
Non-realty 1.7%
650,000 The Pioneer Group, Inc............................................. 12,837,500
------------
TOTAL COMMON STOCKS (COST $713,420,651)............................ 684,885,933
------------
</TABLE>
See Notes to Financial Statements.
33
<PAGE> 72
- --------------------------------------------------------------------------------
REALTY FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C> <C> <C> <C>
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%
Repurchase Agreement with State Street Bank, 4.00% due 1-4-99....................... 10,494,000
------------
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.
34
<PAGE> 73
- --------------------------------------------------------------------------------
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
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
</TABLE>
See Notes to Financial Statements.
35
<PAGE> 74
- --------------------------------------------------------------------------------
SMALL-CAP FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
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.
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.
36
<PAGE> 75
(This page intentionally left blank)
37
<PAGE> 76
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1998
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> 77
- --------------------------------------------------------------------------------
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> 78
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
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................................................
</TABLE>
See Notes to Financial Statements.
40
<PAGE> 79
- --------------------------------------------------------------------------------
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> 80
- --------------------------------------------------------------------------------
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> 81
- --------------------------------------------------------------------------------
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> 82
- --------------------------------------------------------------------------------
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.
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.
44
<PAGE> 83
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.
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.
45
<PAGE> 84
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 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.
46
<PAGE> 85
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>
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
</TABLE>
47
<PAGE> 86
<TABLE>
<CAPTION>
%
OUTSTANDING
SHARES OF
THE
COMPANY
-----------
<S> <C>
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%
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
48
<PAGE> 87
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 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>
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<PAGE> 88
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>
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<PAGE> 90
- --------------------------------------------------------------------------------
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> 91
- --------------------------------------------------------------------------------
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
