<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
LOGO
LONGLEAF PARTNERS FUNDS (SM)
QUARTERLY REPORT
at September 30, 2000
PARTNERS FUND
INTERNATIONAL FUND
REALTY FUND
SMALL-CAP FUND
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MANAGED BY:
SOUTHEASTERN ASSET MANAGEMENT, INC.
Memphis, TN
<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders..................................... 1
Longleaf Partners Fund (Partners Fund)
Management Discussion.................................... 7
Performance History* and Portfolio Summary............... 9
Portfolio of Investments................................. 10
Longleaf Partners International Fund (International Fund)
Management Discussion.................................... 12
Performance History* and Portfolio Summary............... 14
Portfolio of Investments................................. 16
Longleaf Partners Realty Fund (Realty Fund)
Management Discussion.................................... 18
Performance History* and Portfolio Summary............... 20
Portfolio of Investments................................. 22
Longleaf Partners Small-Cap Fund (Small-Cap Fund)
Management Discussion.................................... 24
Performance History* and Portfolio Summary............... 26
Portfolio of Investments................................. 28
Service Directory.......................................... 30
Trustees and Officers...................................... 31
</TABLE>
* Average annual returns for all Funds and all indices except the Value-Line
Index are shown with all dividends and distributions reinvested; the
Value-Line Index is not available with reinvested dividends. The indices shown
are unmanaged. Past performance is no guarantee of future performance, and the
value of an investment when redeemed may be more or less than the purchase
price.
<PAGE> 3
LONGLEAF PARTNERS FUNDS
LETTER TO SHAREHOLDERS
TO OUR SHAREHOLDERS:
We have much to celebrate at the end of the third quarter. The Longleaf Partners
Funds posted another three months of solid absolute and relative performance,
with returns ranging from 4.9% to 9.6%. Additionally, all four funds delivered
meaningful results through the first nine months of 2000, a period when a number
of our peers experienced material declines and major stock market indices such
as the DJIA, S&P 500, NASDAQ, and EAFE dropped 6.3%, 1.4%, 9.7%, and 12.6%,
respectively.
<TABLE>
<CAPTION>
PERIOD ENDED 9/30/00
-------------------------
QUARTER YEAR-TO-DATE
------- ------------
<S> <C> <C>
LONGLEAF PARTNERS FUND...................................... 4.9% 7.6%
S&P 500 Index............................................... -1.0% -1.4%
LONGLEAF PARTNERS INTERNATIONAL FUND........................ 9.6% 23.2%
EAFE Index.................................................. -8.4% -12.6%
LONGLEAF PARTNERS REALTY FUND............................... 5.9% 11.2%
Wilshire Real Estate Securities Index....................... 8.5% 25.0%
LONGLEAF PARTNERS SMALL-CAP FUND............................ 4.9% 6.5%
Russell 2000 Index.......................................... 1.1% 4.2%
</TABLE>
August also marked Southeastern Asset Management's 25th anniversary. After a
quarter of a century, the saying that "the more things change, the more they
stay the same" applies to much of what we have learned.
FEAR AND GREED DRIVE MARKET SWINGS, BUT OWNERS WILL GET PAID A BUSINESS' VALUE.
In 1975 we were coming out of one of the worst and longest bear markets in
history. Fear was abundant (especially as measured by the looks of disbelief and
pity we got when we told family and friends that it was an opportune time to
start an investment management firm). The bear market had not only taken much
excess out of the overpriced "Nifty Fifty," which we discussed in our first
quarter letter, but the fear had left many exceptional businesses selling for
less than half their worth. The S&P 500 had fallen from a P/E ratio of 18.4
times trailing earnings at year-end 1972 to 7.7 times two years later.
Benjamin Graham's teachings stood ready -- financially sound, good businesses
run by capable management teams and offered at steep discounts to intrinsic
value present low-risk, high-return opportunities for the intelligent investor.
We took advantage of the market's bargains and built the foundation for a
successful long-term record of compounding.
1
<PAGE> 4
LONGLEAF PARTNERS FUNDS
LETTER TO SHAREHOLDERS
Twenty-five years later we appear to be seeing the end of a ten-year bull run as
measured by the S&P 500 and NASDAQ. Greed lifted the prices of many companies,
especially those driving these two indices, to unprecedented levels. Recently,
however, a dose of reality and some fear have crept into the market. Many stocks
had become so inflated with unrealistic assumptions about growth, that small
adjustments to earnings expectations have caused huge price dislocations. Over
the last six months the S&P 500 has declined 3.6% and the NASDAQ has plunged
19.7%. Because recent excesses in the bull market existed in large-cap
technology and dot.com related companies, the newfound fear has had little
impact on Longleaf's holdings, which already had a large margin of safety
between price and value. Longleaf's net asset values over the last two quarters
have climbed between 12.0% and 20.7%.
The dramatic relative swing between the indices and Longleaf might cause one to
conclude that fear and greed have approached equilibrium. The numbers tell us
otherwise. A significant divergence remains in the market. The NASDAQ still
sells at 146 times trailing earnings. The chart below shows the average P/E of
S&P 500 companies broken into quintiles. The wide dispersion confirms what we
have found -- attractively priced businesses are still available. Our parsimony
highlights Longleaf's opportunity -- the Funds' average price to after-tax free
cash flow is a low 8 to 9 times.
P/E Chart
AVERAGE P/E'S OF S&P 500 COMPANIES BY QUINTILE
9/30/00
The chart shown in the printed report is a bar graph with five parallel vertical
bars along the horizontal axis, and matching coordinates on the vertical axis,
as follows:
Horizontal Axis Vertical Axis
1st Quintile -- 9
2nd Quintile -- 13
3rd Quintile -- 17
4th Quintile -- 26
5th Quintile -- 58
We find ourselves as enthusiastic today as we were 25 years ago about the
opportunity imbedded in our holdings. All four Longleaf Funds are selling at
approximately 55% of our appraisal of their values, implying substantial returns
when these businesses reach intrinsic worth. As contrasted with the mid-1990's
2
<PAGE> 5
LONGLEAF PARTNERS FUNDS
LETTER TO SHAREHOLDERS
when we closed our funds and turned away new shareholders, our message to
clients today echoes that of a quarter century ago -- now is a compelling time
to increase your stake in the Longleaf Funds or to become a new partner.
OUR MANAGEMENT PARTNERS ARE CRITICAL TO OUR OUTCOME.
A second truism that has not changed in 25 years is how much our success depends
on associating with high quality management partners. Assessing CEOs is one of
our most challenging endeavors. Management can mislead us about their intentions
as well as the realities confronting a business, and even honorable executives
can make mistakes. In spite of the challenge, working hard to find top-notch
corporate leaders is more than worth the effort. Good management can magnify
value creation at a dominant, competitively entrenched business; mediocre
leadership can imperil an average company. Corporate stewards greatly determine
how fast business value grows and whether intrinsic worth gets recognized. Our
most successful investments have been largely due to corporate partners who
consistently and constructively acted to build per share value. Conversely, most
of our opportunity costs and frustrations have occurred at the hand of
executives who proved to be misdirected, incapable, or less than honorable.
We prefer not to divulge specifics on how we screen for corporate leadership,
personal character, competence, passion, and the proper set of incentives. We
will tell you we have 100% of our equity capital and careers committed to
selecting good management partners, and half of our research effort is spent on
this endeavor.
THE MARGIN OF SAFETY AND VALUE GROWTH PROTECT US AND REWARD US.
Graham defined an investment as something that offers safety of principle and an
adequate return. For the last 25 years we have increasingly seen the importance
of the margin of safety in providing both our protection and our reward. In our
March 2000 quarterly letter we discussed the substantial return opportunity
presented when we pay half of appraisal for a company and when the value of the
business grows.
The margin of safety that generates the return also creates a cushion if
something unexpected lowers the value. In spite of our tremendous effort to
appraise companies and assess managements, we can misjudge our partners or lower
our appraisals because of unanticipated events such as new competitive threats,
changes in interest rates, legal claims, or regulatory surprises. Paying half of
a company's worth at the outset provides a cushion; even if an unanticipated
occurrence lowers our appraisal by 20% or more, the value remains higher than
the price we paid.
3
<PAGE> 6
LONGLEAF PARTNERS FUNDS
LETTER TO SHAREHOLDERS
Over the last quarter century our focus on the margin of safety has evolved from
simply paying a low entry price to also assessing how the value of a company
will build. If a business is cheap but its value stagnant, we have some
protection and return opportunity. Both are enhanced, however, if the value is
building faster than inflation. The value build means a higher return when we do
get paid, thus lowering the opportunity cost of waiting. Value growth also
benefits taxable investors who defer taxable gains if the value rises faster
than the stock price.
PARTNERSHIP AND ACCOUNTABILITY ARE A THREE-WAY RELATIONSHIP.
A large part of our success over 25 years stems from the common goals we share
in our three-way partnership. Longleaf's shareholders, the employees of
Southeastern, and corporate management at our investees all have a substantial
stake in the underlying companies' shares. Each partner has a responsibility in
our joint outcome. Fund shareholders must take a long-term view and understand
the benefits of investing at times of market despair. Southeastern's employees
must select the portfolio holdings wisely and deliver real, long-term
performance of at least inflation plus 10%. Our corporate partners must make
intelligent operating and capital allocation decisions to grow business values
and have those values recognized.
COMMUNICATING WITH SHAREHOLDERS IS IMPERATIVE.
We endeavor to keep our partners well informed of our progress. Enclosed is a
copy of the "Forbes Honor Roll" of 15 funds selected for their capital
preservation and long-term performance. Other recent articles appearing in AAII
Journal, Outstanding Investor Digest, and the New York Times can be accessed or
ordered on our web site, www.longleafpartners.com.
We encourage you to use our web site. In addition to relevant articles, from
time to time we post conversations with the portfolio managers to answer
shareholder questions. With our successful transfer agent conversion in August,
we also added the capability to look up account information electronically. As
we enhance the site, we welcome your comments and suggestions for content,
presentation, or navigation.
PORTFOLIO CHANGES TO CONFORM WITH TAX CODE DIVERSIFICATION STANDARDS.
To meet the tax code requirements for diversification at each quarter end,
positions of 5% or less combined with holdings where we own no more than 10% of
a company must total at least half of the assets in each fund. Because we run
concentrated portfolios and our holdings do not move in synch with one another,
we sometimes scale back a position which has appreciated to over 5% of the
portfolio.
4
<PAGE> 7
LONGLEAF PARTNERS FUNDS
LETTER TO SHAREHOLDERS
Many shareholders review our portfolio changes from quarter to quarter with
great scrutiny. We mention our diversification-related portfolio management
because we do not want anyone to read too much into a position's slight
reduction.
WE WANT TO KEEP YOU APPRISED OF DISTRIBUTION PLANS.
Our capital gains distribution will be in early November, around the 7th. We
will not know the final amounts until that time, and any activity through
October 31 will be included. We are using our web site to keep shareholders
aware of distribution plans. Through September the Small-Cap and Realty Funds
have little to no gains to pay out. The Partners Fund has some long-term
realized gains from the conclusion of our Philips Electronics sale late last
year. At this point the level of payout is approximately 8% of NAV. Along with
the success of the International Fund have come meaningful gains, 16% of NAV.
Because the Fund is only two years old, a large part of those are short-term.
We will also have a small income distribution in late December. Please use
www.longleafpartners.com to keep abreast of all distribution information.
We appreciate the part you have played in our success over the last 25 years. We
believe the future has never looked brighter for the risk averse, disciplined
value buyer.
Sincerely,
<TABLE>
<S> <C>
/s/ O. Mason Hawkins, CFA /s/ G. Staley Cates, CFA
O. Mason Hawkins, CFA G. Staley Cates, CFA
Chairman & CEO President
</TABLE>
5
<PAGE> 8
(Intentionally Left Blank)
6
<PAGE> 9
PARTNERS FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and John Buford
Longleaf Partners Fund completed a second consecutive quarter of strong absolute
and relative performance. The Fund rose 4.9% over the last three months while
the S&P 500 declined 1.2% and the Value-Line appreciated 2.9%. Year-to-date the
Partners Fund is up 7.6% versus -2.2% for the S&P and -2.6% for the Value Line.
Several holdings contributed to our successful quarter. Nippon Fire and Marine's
stock appreciated 39%. Ken Matsuzawa is transforming Nippon from a well-
capitalized and well-operated Japanese non-life insurance company to one that is
also focused on building shareholder value. To that end, Nippon has repurchased
significant amounts of its undervalued shares, established share ownership
requirements for management, and is reviewing a stock option plan and bringing
outside members to its board. Meanwhile, many competitors have made capital
allocation blunders by investing in undercapitalized banks and life insurance
companies. While the market has partially recognized Matsuzawa's operational and
asset-management efforts, the company continues to trade at a dramatic discount
to its liquidation and ongoing business values.
Our hotel businesses also posted strong returns with Hilton and Host Marriott
both rising over 20% in the quarter. Each company has delivered better than
expected results, benefiting from having top branded hotels in supply
constrained markets. Demand for rooms has been much stronger than plan, and new
supply growth is slowing. In spite of the progress, both Hilton and Host
Marriott sell for extremely low prices.
FedEx had a successful quarter; the stock advanced 17%. Fred Smith and his team
are strengthening the domestic business with the integration of air, ground, and
home delivery capability. Overseas volume growth continues to exceed optimistic
projections. The focus on improving yields and achieving high returns on capital
has benefited shareholders. Additionally, fuel surcharges and hedging are
helping protect margins against rising fuel prices. The price remains well below
our appraisal.
Georgia Pacific Timber Group's stock jumped when Plum Creek, a timber REIT,
announced its intention to purchase the company. The proposed merger awaits
approvals. The new structure offers substantial tax benefits to shareholders as
well as the opportunity to own some of North America's best timberland at well
below its private market value.
Waste Management gave up some of its second quarter gain, retreating 8% in the
quarter on nothing but positive news. Two-thirds of the decline occurred on the
7
<PAGE> 10
PARTNERS FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and John Buford
final trading day of September amid frantic quarter-end portfolio window
dressing. On the first day of the fourth quarter the stock regained almost half
its third quarter loss. Trading frenzy notwithstanding, Maury Myers and his
management team continue to make solid progress. Non-strategic asset sales have
generated in excess of $2.1 billion thus far; the company's unit growth remains
firm, implying pricing opportunity; improved systems are enabling better
tracking and financial management; Waste is canceling unprofitable collection
contracts; and reported results continue to meet expectations. The stock sells
for less than half of our conservative appraisal.
In July Aetna announced the sale of its financial services and international
assets to ING for $7.7 billion. Shareholders will receive $35 per share in the
fourth quarter plus a new share of a well-capitalized healthcare management
business. The board has recently appointed John Rowe as CEO, who is well
qualified to lead the turnaround of the health business. Our appraisal of the
current combined Aetna is in excess of $90 per share; the stock sells for
$58.06.
The Partners Fund portfolio was mostly unchanged in the quarter. We sold our
small stake in Nabisco when the price reached appraisal upon the company's sale.
We own nineteen competitively entrenched businesses run by quality managers. In
aggregate our portfolio sells for 55% of our appraisal; no holding is priced at
more than 80% of value. We are fully invested and have several new ideas ready
for new cash. Our confidence and enthusiasm reflect how well positioned we are
for continued good results. It is a particularly opportune time to add to your
Partners Fund investment.
8
<PAGE> 11
PARTNERS FUND - PERFORMANCE HISTORY
AND PORTFOLIO SUMMARY
AVERAGE ANNUAL RETURNS
FOR THE PERIODS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Value-Line
PARTNERS S&P 500 (Geometric) Inflation
FUND Index Index Plus 10%*
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Year-to-Date 7.56% (1.44)% (2.59)% 10.17%
One Year 7.02 13.28 0.53 12.92
Five Years 14.59 21.67 4.87 12.44
Ten Years 19.35 19.42 8.27 12.68
</TABLE>
* Inflation Source: Monthly Consumer Price Index for All Urban Consumers (CPI-U)
compiled by the U.S. Bureau of Labor Statistics.
FIVE LARGEST HOLDINGS
(REPRESENT 45.7% OF NET ASSETS)
WASTE MANAGEMENT, INC. (WMI) 15.5%
The world's largest solid waste collection and disposal company with
residential, commercial, and industrial customers throughout North America.
MARRIOTT INTERNATIONAL, INC. (MAR) 10.9%
Owner of many of the strongest brand names in the lodging industry. Operates and
franchises over 300,000 rooms in hotels and resorts under the Marriott,
Ritz-Carlton, Renaissance, Courtyard, and Residence Inn names.
FEDEX CORPORATION. (FDX) 7.5%
Integrated air-ground transportation company providing time-definite delivery of
packages and documents worldwide.
GENERAL MOTORS CORPORATION (GM) 6.4%
Conglomerate that owns a controlling stake in Hughes Electronics, GMAC, and the
international truck and car business.
HILTON HOTELS CORPORATION (HLT) 5.4%
Worldwide hotel owner, operator, and franchiser. Owns trophy properties
including the Waldorf Astoria, Palmer House and Hawaiian Village. Manages and/or
franchises the Hilton, Hampton Inn, Embassy Suites, Doubletree, and Homewood
Suites brands.
PORTFOLIO CHANGES
JANUARY 1, 2000 THROUGH SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Diageo plc Alexander & Baldwin, Inc.
Diageo plc (ADR) Boston Properties Inc.
Nabisco Holdings Corp. - Class A Crestline Capital Corporation
Koninklijke Philips Electronics N.V.
Nabisco Holdings Corp. - Class A
The Pioneer Group, Inc.
United Healthcare Corporation
The Yasuda Fire & Marine Insurance
Company, Ltd.
</TABLE>
9
<PAGE> 12
PARTNERS FUND - PORTFOLIO OF INVESTMENTS
AT SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
Common Stock 96.9%
Beverages 4.8%
15,577,000 Diageo plc (Foreign)......................... $ 139,219,944
650,000 Diageo plc ADR (Foreign)..................... 22,953,125
--------------
162,173,069
--------------
Environmental Services 16.3%
2,890,900 * Allied Waste Industries, Inc................. 26,560,144
29,958,789 Waste Management, Inc........................ 522,406,383
--------------
548,966,527
--------------
Health Insurance 3.1%
1,768,400 Aetna Inc.................................... 102,677,725
Lodging 20.2%
15,610,000 Hilton Hotels Corporation.................... 180,490,625
11,700,250 Host Marriott Corporation.................... 131,627,813
10,103,600 Marriott International, Inc.................. 368,149,925
--------------
680,268,363
--------------
Manufacturing 1.7%
4,450,000 * UCAR International, Inc...................... 56,459,375
Multi-Industry 6.4%
3,323,000 General Motors Corporation................... 215,995,000
Natural Resources 12.8%
6,263,200 Georgia-Pacific Corporation - Timber Group... 168,323,500
11,201,032 * Pioneer Natural Resources Company............ 158,914,641
2,900,000 Rayonier Inc................................. 104,218,750
--------------
431,456,891
--------------
Property & Casualty Insurance 4.9%
40,088,000 The Nippon Fire & Marine Insurance Company,
Ltd. (Foreign)............................. 165,085,549
Publishing 4.5%
2,973,300 Knight Ridder, Inc........................... 151,080,806
Real Estate 4.6%
9,122,700 TrizecHahn Corporation (Foreign)............. 153,375,394
</TABLE>
10
<PAGE> 13
PARTNERS FUND - PORTFOLIO OF INVESTMENTS
AT SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C>
Restaurants 5.3%
5,848,300 *Tricon Global Restaurants, Inc............... $ 179,104,187
Transportation 12.3%
6,255,000 Canadian Pacific Limited (Foreign)........... 162,630,000
5,678,000 *FedEx Corporation............................ 251,762,520
--------------
414,392,520
--------------
TOTAL COMMON STOCKS (COST $3,446,040,209).... 3,261,035,406
--------------
</TABLE>
<TABLE>
<CAPTION>
PAR
----------
<S> <C> <C> <C> <C> <C>
Short-Term Obligation 2.2%
73,467,000 Repurchase Agreement with State Street Bank,
5.55% due 10-2-00 (Collateralized by U.S.
government agency securities).............. 73,467,000
--------------
TOTAL INVESTMENTS (COST $3,519,507,209)(a)................ 99.1% 3,334,502,406
OTHER ASSETS AND LIABILITIES, NET......................... 0.9 31,763,422
----- --------------
NET ASSETS................................................ 100.0% $3,366,265,828
===== ==============
NET ASSET VALUE PER SHARE......................................... $22.04
==============
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for federal income tax purposes.
Note: Companies designated as "Foreign" are headquartered outside the U.S. and
represent 19% 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>
5,500,000,000 Japanese Yen 12-28-00............ $ 51,702,475 $5,571,294
5,500,000,000 Japanese Yen 3-29-01............. 52,483,322 37,686
4,500,000,000 Japanese Yen 6-29-01............. 43,607,750 2,017,313
------------ ----------
$147,793,547 $7,626,293
============ ==========
</TABLE>
11
<PAGE> 14
INTERNATIONAL FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and Andrew McDermott
Longleaf Partners International Fund rose 9.6% in the third quarter versus an
8.4% decline in the EAFE Index. Year-to-date, the International Fund is up 23.2%
against a 12.6% decline for EAFE. Broad-based advances from across the portfolio
drove performance. Fifteen of our twenty-three holdings made positive
contributions during the quarter of continued weakness in most international
markets.
Relative performance does not drive us, but when it is this strong, we remind
our partners of our objective. We want to achieve returns of at least inflation
plus 10% while taking little business risk and eliminating foreign currency
exposure. Our foreign currency policy has not and will not impact absolute
returns. Most of our peers do not hedge. As a result, hedging has helped our
relative performance this year. We hope that our partners share our focus on the
absolute performance of our underlying equity picks, because relative factors
will not always swing our way.
The largest contributors to our performance this quarter were our investments in
the non-life insurance industry. Nippon Fire and Marine, the Fund's second
largest holding, appreciated 39%. Ken Matsuzawa is transforming Nippon from a
well-capitalized and well-operated Japanese non-life insurance company to one
that is also focused on building shareholder value. To that end, Nippon has
repurchased significant amounts of its undervalued shares, established share
ownership requirements for management, and is reviewing a stock option plan and
bringing outside members to its board. Meanwhile, many competitors have made
capital allocation blunders by investing in undercapitalized banks and life
insurance companies. While the market has partially recognized Matsuzawa's
operational and asset-management efforts, the company continues to trade at a
dramatic discount to its liquidation and ongoing business values. Nissan Fire
and Marine also advanced strongly during the quarter, helped partly by
management's decision to repurchase 2% of outstanding shares.
Fairfax Financial's rise reflected both operational improvements driven by
higher renewal policy rates and recognition of Fairfax's extreme undervaluation.
We sold our position in Sampo Insurance as it approached our appraisal after
returning nearly 70% over the past year, thanks to the exceptional work of
Sampo's management team.
Several other companies made key contributions to the Fund's performance.
DeBeers continues to generate cash at an unprecedented rate while positioning
itself to become the "supplier of choice" to the diamond market. Although
DeBeers advanced over 10% during the quarter, almost all of this appreciation
12
<PAGE> 15
INTERNATIONAL FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and Andrew McDermott
reflected the price rise of its holding in Anglo-American, a global mining
conglomerate that we believe is fairly valued.
Molson's new management has cut costs and strengthened its beer brand faster
than we had hoped. The stock advanced 18% during the quarter, but because
management has built value at nearly the same pace, the company remains
undervalued. Gendis resolved a key lawsuit that leaves the company with a hard
asset value of nearly $12.00 per share and no financial risk. Even after a 27%
rise during the quarter, the company continues to sell at a large discount to
appraisal.
Two positions hurt our performance this quarter, Brierley Investments and
Wisconsin Central. Public quotes for Brierley's subsidiaries and Brierley itself
declined during the quarter, even though Brierley reported results that
surpassed our expectations. Operations at all three core investments are
proceeding better than hoped, and CEO Greg Terry's smart investments have offset
the company's structural exposure to weak economies and currencies in Southeast
Asia. We remain excited about our opportunity at Brierley. At Wisconsin Central
fuel prices hurt margins and growth in all three locations (North America, U.K.,
and New Zealand) slowed. New management at each rail is working to turn around
results. The company is attractive to larger railroads which are prohibited by
the Surface Transportation Board from executing mergers until June 2001. We have
filed a 13-D to enable us to have open conversations with management and other
large shareholders to chart an optimal outcome. The company remains at 50% of
appraisal.
We used cash inflows and the proceeds from our Sampo sale to add to existing
holdings and fund three new investments. Tricon Global Restaurants' KFC, Pizza
Hut, and Taco Bell brands are well known in the U.S. We bought the position in
the International Fund because over a third of Tricon's current value is in its
international operations. More important, Tricon's incremental investment
dollars are going to international expansion, where the company consistently
generates high margins and double-digit returns on capital. We also purchased
Brascan, a Canadian conglomerate whose most valuable asset is Brookfield, one of
the highest quality office real-estate companies we have encountered in North
America. Finally, we also purchased Tenma, a Japanese manufacturer of household
molded products run by an owner operator and available for less than the net
cash on its balance sheet.
We are pleased with our performance this year and excited by our possibilities
going forward. The Fund's composite price-to-value ratio remains below 60%.
13
<PAGE> 16
INTERNATIONAL FUND - PERFORMANCE HISTORY
AND PORTFOLIO SUMMARY
AVERAGE ANNUAL RETURNS
FOR THE PERIODS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
INTERNATIONAL EAFE Inflation
FUND Index Plus 10%
------------- ------ ---------
<S> <C> <C> <C>
Year-to-Date 23.21% (12.59)% 10.17%
One Year 22.81 1.95 12.92
Since Public Offering 10/26/98 30.43 10.55 13.37
</TABLE>
* Inflation Source: Monthly Consumer Price Index for All Urban Consumers (CPI-U)
compiled by the U.S. Bureau of Labor Statistics.
FIVE LARGEST HOLDINGS
(REPRESENT 44.0% OF NET ASSETS)
DE BEERS CONSOLIDATED MINES LTD. (DBRSY) 11.1%
World's largest diamond miner and marketer.
THE NIPPON FIRE & MARINE INSURANCE COMPANY, LTD. 10.6%
Japanese provider of both non-life (property/casualty) and life insurance
services.
TRIZECHAHN CORPORATION (TZH) 9.0%
A Canadian based real estate development company with commercial and retail
properties across North America and Europe and a 33% stake in Global Switch, a
telecom real estate service company.
FAIRFAX FINANCIAL HOLDINGS LIMITED (FFH) 7.7%
Canadian based property/casualty insurer offering both primary insurance and
reinsurance across North America.
DIAGEO PLC (DGE) 5.6%
Owner of premium spirits brands including Smirnoff, Johnnie Walker, Tanqueray,
Gordons, Hennessy, and Baileys; the world's leading stout, Guinness; and the
Burger King restaurant franchise.
14
<PAGE> 17
INTERNATIONAL FUND - PORTFOLIO SUMMARY
PORTFOLIO CHANGES
JANUARY 1, 2000 THROUGH SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Brascan Corporation Banco Hipotecario
Diageo plc Bemrose Corporation plc
Diageo plc (ADR) The Dai-Tokyo Fire and Marine
Fairfax Financial Holdings Limited Insurance Company Ltd.
Guinness Peat Group plc Ezaki Glico Co., Ltd.
Jarvis Hotels plc Hollinger Inc.
Molson Inc. -- Class A Jarvis Hotels plc
Tenma Corporation Kentucky Fried Chicken Japan
Tricon Global Restaurants, Inc. Nippon Broadcasting System
TrizecHahn Corporation Sampo Insurance Company Ltd.
Wassall PLC
The Yasuda Fire & Marine Insurance
Company, Ltd.
</TABLE>
COUNTRY ALLOCATION OF PORTFOLIO
(STOCKS AND FORWARDS)
<TABLE>
<S> <C>
Canada................................ 42.9%
Japan................................. 20.2
United Kingdom........................ 11.1
South Africa.......................... 10.8
United States......................... 6.6
Singapore............................. 5.2
Bermuda............................... 3.2
-----
100.0%
=====
</TABLE>
15
<PAGE> 18
INTERNATIONAL FUND - PORTFOLIO OF INVESTMENTS
AT SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
----------- ------------
<S> <C> <C> <C> <C> <C>
Common Stock 99.8%
Beverages 10.1%
909,200 Diageo plc (United Kingdom).................... $ 8,126,005
395,300 Diageo plc ADR (United Kingdom)................ 13,959,031
797,000 Molson Inc. -- Class A (Canada)................ 18,142,529
------------
40,227,565
------------
Food 0.4%
47,800 Weetabix Limited (United Kingdom).............. 1,572,459
Multi-Industry 11.8%
753,800 Brascan Corporation (Canada)................... 9,744,390
129,910,000 Brierley Investments Limited (Singapore)....... 18,662,012
8,792,199 Guinness Peat Group plc (United Kingdom)....... 5,557,186
555,000 Sea Containers Limited (Bermuda)............... 12,938,438
------------
46,902,026
------------
Natural Resources 19.6%
1,585,000 De Beers Consolidated Mines Ltd. (South
Africa)...................................... 43,884,688
3,349,996 * Gendis Inc. (Canada)(b)........................ 17,589,371
3,084,000 * Gulf Canada Resources Limited (Canada)......... 16,576,500
------------
78,050,559
------------
Plastics 0.7%
226,000 Tenma Corporation (Japan)...................... 2,591,280
Property & Casualty Insurance 23.4%
245,000 * Fairfax Financial Holdings Limited (Canada).... 30,653,496
10,250,000 The Nippon Fire & Marine Insurance Company,
Ltd. (Japan)................................. 42,210,309
6,620,000 The Nissan Fire & Marine Insurance Company,
Ltd. (Japan)................................. 19,910,218
------------
92,774,023
------------
Publishing 5.3%
1,248,500 Hollinger International Inc. (Canada).......... 20,912,375
Real Estate 13.1%
4,671,600 * O&Y Properties Corporation (Canada)............ 16,300,611
2,118,000 TrizecHahn Corporation (Canada)................ 35,608,875
------------
51,909,486
------------
Restaurants 7.0%
1,212,000 MOS Food Service, Inc. (Japan)................. 12,808,651
490,000 * Tricon Global Restaurants, Inc. (United
States)...................................... 15,006,250
------------
27,814,901
------------
Retail 3.6%
3,390,000 Safeway plc (United Kingdom)................... 14,384,770
</TABLE>
16
<PAGE> 19
INTERNATIONAL FUND - PORTFOLIO OF INVESTMENTS
AT SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
----------- ------------
<S> <C> <C> <C> <C> <C>
Transportation 4.8%
280,000 Canadian Pacific Limited (Canada).............. $ 7,280,000
1,095,200 * Wisconsin Central Transportation Corporation
(United States).............................. 11,568,050
------------
18,848,050
------------
TOTAL COMMON STOCKS (COST $370,364,868)........ 395,987,494
------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
PAR
----------
Short-Term Obligation 0.2%
859,000 Repurchase Agreement with State Street Bank, 5.55% due
10-2-00 (Collateralized by U.S. government agency
securities)......................................... 859,000
-------------
TOTAL INVESTMENTS (COST $371,223,868)(a)........................... 100.0% 396,846,494
SHARES
----------
Securities Sold Short (3.8)%
(285,000) Anglo American plc (United Kingdom) (Proceeds
$16,315,363)................................ (3.8) (15,135,700)
OTHER ASSETS AND LIABILITIES, NET.................................. 3.8 15,216,159
------ -------------
NET ASSETS......................................................... 100.0% $ 396,926,953
====== =============
NET ASSET VALUE PER SHARE.................................................. $14.81
</TABLE>
* Non-income producing security
(a) Aggregate cost for federal income tax purposes.
(b) Illiquid security.
Note: Country listed in parenthesis after each company indicates location of
headquarters.
OPEN FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Currency Currency Sold and Currency Unrealized
Units Sold Settlement Date Market Value Gain
------------- ---------------------------------- ------------ ----------
<C> <S> <C> <C>
2,500,000 Australian Dollar 3-29-01 $ 1,354,811 $ 107,109
9,000,000 British Pound 12-28-00 13,329,755 1,205,245
4,000,000 British Pound 6-29-01 5,937,725 103,475
5,750,000 Canadian Dollar 3-29-01 3,838,240 101,555
35,250,000 Canadian Dollar 6-29-01 23,577,228 414,605
2,500,000,000 Japanese Yen 12-28-00 23,501,125 2,524,276
2,550,000,000 Japanese Yen 3-29-01 24,333,177 1,369,877
3,250,000,000 Japanese Yen 6-29-01 31,494,486 244,749
21,600,000 New Zealand Dollar 12-28-00 8,784,771 1,531,690
18,000,000 New Zealand Dollar 3-29-01 7,320,601 679,679
3,000,000 New Zealand Dollar 6-29-01 1,219,038 60,762
4,000,000 New Zealand Dollar 9-28-01 1,624,000 31,600
------------ ----------
$146,314,957 $8,374,622
============ ==========
</TABLE>
17
<PAGE> 20
REALTY FUND - MANAGEMENT DISCUSSION
by C.T. Fitzpatrick, Mason Hawkins, and Staley Cates
Longleaf Partners Realty Fund gained 5.9% in the third quarter, bringing its
year-to-date return to 11.2%. We are pleased with these absolute returns but
they are below the Realty Fund's benchmarks. As long-term investors in the Fund
this disparity represents a significant opportunity.
We are focused on intrinsic value-per-share and its growth at the companies we
own. The values at most of our core holdings are building at mid-teen rates, and
we will be rewarded for being patient investors. Where the value growth is
lower, we are working with our management partners to realize current value to
enable us to allocate the capital into more rapidly compounding, long-term
investments. The implied returns from both types of companies are high.
We made material progress at several companies during the third quarter:
Hilton Hotels: Operating results at our largest holding are exceeding our
expectations. The Promus hotel brands (Hampton Inns, Embassy Suites, Homewood
Suites, and Doubletree) acquired late last year have benefited from Hilton's
reservation and marketing systems. Demand for rooms has been much stronger than
plan and supply growth is slowing. We expect Hilton's free cash flow and value
to compound at a mid-teen rate. Hilton sells for approximately 5.5X FFO (funds
from operations) and 7.25X free cash flow. These multiples are less than half
those afforded the "Blue Chip REIT's" that have led the publicly traded real
estate rebound so far in 2000. Hilton, a C-Corp., is growing faster than any
other REIT that we know. Some of these attributes received recognition in the
third quarter as the stock rose over 20%. The company remains below half of our
appraisal.
Catellus: The company is also a C-Corp. Market rents in Catellus' core markets
of San Francisco and Silicon Valley have exceeded our wildest expectations. The
company owns large blocks of fully entitled land in severely supply constrained
areas where demand for space is extremely high. As Catellus signs long-term
leases and sells land, the company will deliver outstanding economics over the
next several years. While management's progress was rewarded over the last three
months with a 17% price rise, the stock still sells at a significant discount.
Forest City Enterprises: This C-Corp. has grown its value by approximately 25%
from a year ago through strong same property results and new developments such
as Times Square which are intelligently financed with property specific, non-
recourse debt. Forest City was selected to re-develop the Denver-Stapleton
Airport, the largest urban in-fill, mixed-use development ever undertaken by a
single firm. Forest City's initial capital outlay for this project is very
modest due to astute financing.
18
<PAGE> 21
REALTY FUND - MANAGEMENT DISCUSSION
by C.T. Fitzpatrick, Mason Hawkins, and Staley Cates
Prime Group Realty Trust: The company announced that it has hired three
investment advisors to explore options to maximize shareholder value, including
the possible sale of the business. Meanwhile, Dearborn Center, the 1.5 million
square foot Class A office complex located in the Chicago CBD and anchored by
Bank One, has broken ground. Fundamentals in Prime Group's core Chicago office
markets remain strong.
Bayview Capital: Bayview has also hired an advisor to help assess its strategic
alternatives for maximizing shareholder value. As part of this process, Bayview
has shut down its disastrous FMAC subsidiary investment. The closure should
highlight the earnings power and value of Bayview's core deposit franchise in
the San Francisco Bay area.
Excel Legacy: Excel Legacy hurt our results in the third quarter. In contrast
to the market reaction, we are encouraged that the company made material
progress in its business plan to sell non-core assets, focus on its most
promising developments, and repurchase stock.
Longleaf Partners Realty Fund looks different than other real estate funds
because we, as the largest investors in the Fund, seek to maximize LONG-TERM
returns by buying out of favor, quality real estate companies run by capable,
shareholder-oriented management partners. As these companies return to favor and
their values are properly capitalized in the stock market, we expect to reap
outstanding returns.
19
<PAGE> 22
REALTY FUND - PERFORMANCE HISTORY
AND PORTFOLIO SUMMARY
AVERAGE ANNUAL RETURNS
FOR THE PERIODS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Wilshire
Real Estate
REALTY Securities NAREIT Inflation
FUND Index Index Plus 10%*
------ ----------- ------ ---------
<S> <C> <C> <C> <C>
Year-to-Date 11.19% 24.95% 21.56% 10.17%
One Year 7.39 25.24 19.42 12.92
Three Years (5.65) (0.08) (2.29) 12.34
Since Public Offering 1/2/96 10.13 10.88 8.75 12.56
</TABLE>
* Inflation Source: Monthly Consumer Price Index for All Urban Consumers (CPI-U)
compiled by the U.S. Bureau of Labor Statistics.
FIVE LARGEST HOLDINGS
(REPRESENT 49.3% OF NET ASSETS)
HILTON HOTELS CORPORATION (HLT) 15.6%
Worldwide hotel owner, operator, and franchiser. Owns trophy properties
including the Waldorf Astoria, Palmer House and Hawaiian Village. Manages and/or
franchises the Hilton, Hampton Inn, Embassy Suites, Doubletree, and Homewood
Suites brands.
FOREST CITY ENTERPRISES, INC. (FCE) 11.7%
A diversified, national real estate owner and operator of retail and office
properties, as well as residential units. Forest City is developing several high
profile urban in-fill projects including the Denver Stapleton Airport
redevelopment, and mixed-use projects in both New York's Times Square and San
Francisco.
CATELLUS DEVELOPMENT CORPORATION (CDX) 9.0%
A diversified real estate company that owns, manages and develops industrial
warehouses, offices, and apartments. CDX has substantial land holdings
throughout the U.S. with a concentration of high profile projects in California.
Catellus' most significant project is a 313 acre mixed-use development at
Mission Bay on the waterfront in downtown San Francisco.
PRIME GROUP REALTY TRUST (PGE) 7.2%
A REIT that owns over 9 million square feet of central business district and
suburban office space predominantly in the Chicago area. Also owns over 5
million square feet of industrial properties and has the right to over 9 million
square feet of developable space.
EXCEL LEGACY CORPORATION (XLG) 5.8%
A C-corp. focused on development, redevelopment, and ownership of unique real
estate projects throughout North America. Excel Legacy has numerous urban,
mixed-use retail/entertainment developments primarily located in the western
U.S. including Scottsdale, Anaheim, and Newport, KY across the river from
Cincinnati.
20
<PAGE> 23
REALTY FUND - PERFORMANCE HISTORY
AND PORTFOLIO SUMMARY
PORTFOLIO CHANGES
JANUARY 1, 2000 THROUGH SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
CO Space, Inc. Voting Trust* (Beacon CO Space, Inc. Voting Trust* (Beacon
Capital Partners, Inc.) Capital Partners, Inc.)
Cypress Communications, Inc. Voting Cousins Properties Incorporated
Trust* (Beacon Capital Partners, Cypress Communication, Inc.
Inc.) Voting Trust* (Beacon Capital
Partners, Inc.)
The Pioneer Group, Inc.
Prime Retail, Inc.
Rayonier Inc.
</TABLE>
* Acquired through spin-off of existing position (name of original holding).
21
<PAGE> 24
REALTY FUND - PORTFOLIO OF INVESTMENTS
AT SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C> <C> <C> <C>
Common Stock 87.9%
Diversified Realty 26.0%
3,182,500 * Catellus Development Corporation................ $ 55,693,750
2,040,900 * Excel Legacy Corporation........................ 4,847,137
1,864,050 Forest City Enterprises, Inc. - Class A......... 67,105,800
148,600 Forest City Enterprises, Inc. - Class B......... 5,461,050
1,640,000 TrizecHahn Corporation (Foreign)................ 27,572,500
------------
160,680,237
------------
Lodging 25.1%
8,365,000 Hilton Hotels Corporation....................... 96,720,312
2,709,000 Host Marriott Corporation (REIT)................ 30,476,250
767,300 Marriott International, Inc..................... 27,958,494
------------
155,155,056
------------
Mortgage Financing 3.9%
2,250,647 Bay View Capital Corp........................... 24,194,455
Natural Resources/Land 11.0%
650,000 Deltic Timber Corporation....................... 11,009,375
4,156,000 TimberWest Forest Corp. (Foreign)............... 29,831,716
1,565,000 Waste Management, Inc........................... 27,289,687
------------
68,130,778
------------
Office 14.9%
1,885,000 Beacon Capital Partners, Inc. (REIT)(b)......... 18,451,323
689,000 Boston Properties Inc. (REIT)................... 29,583,938
2,810,700 Prime Group Realty Trust (REIT)................. 44,268,525
------------
92,303,786
------------
Retail 7.0%
1,223,800 Getty Realty Corp............................... 13,997,213
1,534,700 * IHOP Corp....................................... 29,351,137
------------
43,348,350
------------
TOTAL COMMON STOCKS (COST $538,762,636)......... 543,812,662
------------
</TABLE>
22
<PAGE> 25
REALTY FUND - PORTFOLIO OF INVESTMENTS
AT SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C> <C> <C>
Preferred Stock 5.0%
Diversified Realty 5.0%
14,600,000 *Excel Legacy Corporation - Series A Liquidating
Preference Convertible (Cost $73,000,000)(b).... $ 31,207,500
------------
UNITS
----------
Trust Units 1.3%
Lodging 1.3%
98,506 Wyndham International, Inc. Voting Trust (Cost
$9,440,147)(b).................................. 7,880,480
------------
CONTRACTS
----------
Options 0.1%
Natural Resources/Land 0.1%
Put Options Written
8,461 Newhall Land and Farming Company, expiring
April '01 @ $25 (Premiums received
$2,581,033)..................................... (1,624,512)
Call Options Purchased
8,461 Newhall Land and Farming Company, expiring
April '01 @ $25 (Cost $3,711,631)............... 1,903,725
------------
279,213
------------
PAR
----------
Short-Term Obligation 3.9%
23,839,000 Repurchase Agreement with State Street Bank,
5.55% due 10-2-00 (Collateralized by U.S.
government agency securities)................. 23,839,000
------------
TOTAL INVESTMENTS (COST $646,172,381)(a)...................... 98.2% 607,018,855
OTHER ASSETS AND LIABILITIES, NET............................. 1.8 11,390,004
----- ------------
NET ASSETS.................................................... 100.0% $618,408,859
===== ============
NET ASSET VALUE PER SHARE............................................ $14.11
======
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for federal income tax purposes.
(b) Illiquid, board valued security.
Note: REITs comprise 20% of net assets. Companies designated as "Foreign" are
headquartered outside the U.S. and represent 9% of net assets.
23
<PAGE> 26
SMALL-CAP FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and John Buford
Longleaf Partners Small-Cap Fund completed a second consecutive quarter of
strong absolute and relative performance. The Fund rose 4.9% over the last three
months while the Russell 2000 advanced 1.1% and the Value-Line appreciated 2.9%.
Year-to-date the Small-Cap Fund is up 6.5% versus 4.2% for the Russell 2000 and
-2.6% for the Value Line.
Several holdings contributed to our successful quarter. Gulf Canada, our largest
position, continued its upward pace, advancing 12% in the quarter for a total
return of 59% this year. The strength in oil and gas prices combined with an
efficient cost structure have dramatically increased free cash flow at Gulf. The
stock sells for approximately 60% of our conservative appraisal, even after we
have reaped large gains.
Continued pricing strength in the commercial property/ casualty insurance
business increased profitability for Hilb, Rogal & Hamilton. The stock rose 20%
during the quarter. The MONY Group produced substantial free cash flow and,
coupled with renewed market interest in financial services, the stock climbed
18% over the last three months.
Genlyte rose 21% over the last three months. The company began to reap the
benefits of 4-5% pricing increases earlier this year and made substantial
progress assimilating its lighting business with Thomas Industries' lighting
division at Genlyte-Thomas LLC.
A few of our stocks declined in the quarter. At Wisconsin Central fuel prices
hurt margins and growth in all three locations (North America, U.K., and New
Zealand) slowed. New management at each rail is working to turn around results.
The company remains attractive to larger railroads which are prohibited by the
Surface Transportation Board from executing mergers until June 2001. We have
filed a 13-D to enable us to have open conversations with management and other
large shareholders to chart an optimal outcome. The company remains at 50% of
appraisal.
U. S. Industries also dropped during the quarter amid fears of lower demand and
foreign currency weakness. Highly competent owner operators are running USI.
They compete by being the low-cost producer, cutting costs more quickly than
prices. The company is now focused on its core plumbing and hardware businesses
and will be distributing its lighting company to shareholders.
Wyndham did not enjoy the price appreciation that many lodging companies
experienced in the third quarter. Although cash flow from operations increased,
reported numbers were deflated due to asset sales. Management is strengthening
the brand and the balance sheet. The company remains one of the most undervalued
businesses we own at Southeastern.
24
<PAGE> 27
SMALL-CAP FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and John Buford
During the quarter we sold our remaining stake in Perrigo. We used the proceeds
as well as cash inflows to add two new holdings, Ralcorp and USG.
The Small-Cap Fund's portfolio is well positioned with competitively entrenched
businesses and a number of superb corporate partners. In aggregate the Fund
sells for 55% of our appraisal. We are fully invested and have several new ideas
ready for new cash. Our confidence emanates from our holdings. For those with
access to this closed fund, Longleaf Partners Small-Cap Fund is a buy.
25
<PAGE> 28
SMALL-CAP FUND - PERFORMANCE HISTORY
AND PORTFOLIO SUMMARY
AVERAGE ANNUAL RETURNS
FOR THE PERIODS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Value-Line
SMALL-CAP Russell 2000 (Geometric) Inflation
FUND Index Index Plus 10%*
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Year-to-Date 6.49% 4.18% (2.59)% 10.17%
One Year 6.06 23.39 0.53 12.92
Five Years 16.57 12.38 4.87 12.44
Ten Years(a) 14.59 16.93 8.27 12.68
Since Public Offering 2/21/89(a) 11.55 12.67 4.68 13.17
</TABLE>
(a) From public offering through 3/31/91, the Fund was managed by a different
portfolio manager.
* Inflation Source: Monthly Consumer Price Index for All Urban Consumers
(CPI-U) compiled by the U.S. Bureau of Labor Statistics.
FIVE LARGEST HOLDINGS
(REPRESENT 29.5% OF NET ASSETS)
GULF CANADA RESOURCES LIMITED (GOU) 8.3%
Canadian based exploration and production company with oil and natural gas
assets across the world.
FLEMING COMPANIES, INC. (FLM) 6.2%
A leading food wholesaler which also has Food 4 Less retail stores.
HILB, ROGAL AND HAMILTON COMPANY (HRH) 5.2%
An insurance broker with over 65 agencies focused on mid-sized commercial and
industrial accounts across the U.S. and Canada.
FAIRFAX FINANCIAL HOLDINGS LIMITED (FFH) 4.9%
Canadian based property/casualty insurer offering both primary insurance and
reinsurance across North America.
CATELLUS DEVELOPMENT CORPORATION(CDX) 4.9%
A diversified real estate company that owns, manages and develops industrial
warehouses, offices, and apartments. CDX has substantial land holdings
throughout the U.S. with a concentration of high profile projects in California.
Catellus' most significant project is a 313 acre mixed-use development at
Mission Bay on the waterfront in downtown San Francisco.
26
<PAGE> 29
SMALL-CAP FUND - PERFORMANCE HISTORY AND
PORTFOLIO SUMMARY
PORTFOLIO CHANGES
JANUARY 1, 2000 THROUGH SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Fairfax Financial Holdings Limited Carmike Cinemas, Inc. - Class A
Hollinger International Inc. Cousins Properties Incorporated
Ralcorp Holdings, Inc. Midas Inc.
USG Corporation Perrigo Company
The Pioneer Group, Inc.
Romac International, Inc.
Safety-Kleen Corp.
</TABLE>
27
<PAGE> 30
SMALL-CAP FUND - PORTFOLIO OF INVESTMENTS
AT SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C><C> <C> <C>
Common Stock 96.6%
Agriculture 3.2%
1,015,400 *Agribrands International, Inc.................. $ 44,296,825
Beverages 2.6%
3,052,900 Whitman Corporation............................ 35,299,156
Commercial Lighting 7.0%
2,407,500 *Genlyte Group Incorporated..................... 61,541,719
1,692,850 Thomas Industries, Inc......................... 34,280,212
--------------
95,821,931
--------------
Food 1.9%
1,819,800 *Ralcorp Holdings, Inc.......................... 25,704,675
Food -- Wholesale 6.2%
6,444,000 Fleming Companies, Inc......................... 84,174,750
Health Care 1.9%
1,967,600 *Pediatrix Medical Group, Inc................... 25,455,825
Life Insurance 4.9%
1,675,000 The MONY Group Inc............................. 66,790,625
Lodging 4.5%
2,829,653 Hilton Hotels Corporation...................... 32,717,863
15,450,400 *Wyndham International, Inc. - Class A.......... 28,003,850
--------------
60,721,713
--------------
Manufacturing 14.0%
1,788,240 AMETEK, Inc.................................... 37,888,335
1,740,000 *The Carbide/Graphite Group, Inc................ 6,280,356
2,392,200 *Scott Technologies, Inc........................ 42,386,913
2,170,600 USG Corporation................................ 54,400,662
5,093,800 U.S. Industries, Inc........................... 50,619,637
--------------
191,575,903
--------------
Mortgage Financing 2.5%
3,114,700 Bay View Capital Corp.......................... 33,483,025
Natural Resources 13.0%
845,000 Deltic Timber Corporation...................... 14,312,188
20,936,560 *Gulf Canada Resources Limited (Foreign)........ 112,534,010
6,950,000 TimberWest Forest Corp. (Foreign).............. 49,887,013
--------------
176,733,211
--------------
</TABLE>
28
<PAGE> 31
SMALL-CAP FUND - PORTFOLIO OF INVESTMENTS
AT SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
Property & Casualty Insurance 13.7%
248,760 *Alleghany Corporation.......................... $ 48,756,960
537,381 Fairfax Financial Holdings Limited (Foreign)... 67,235,128
1,700,700 Hilb, Rogal and Hamilton Company............... 70,897,931
--------------
186,890,019
--------------
Publishing 4.0%
3,443,600 Hollinger International Inc. (Foreign)......... 57,680,300
Real Estate 7.0%
3,829,600 *Catellus Development Corporation............... 67,018,000
1,443,400 *IHOP Corp.(b).................................. 27,605,025
--------------
94,623,025
--------------
Restaurants 1.4%
982,400 *VICORP Restaurants, Inc........................ 19,156,800
Retail 4.5%
2,115,900 *The Neiman Marcus Group, Inc. -- Class B....... 60,567,638
Transportation 4.3%
5,550,800 *Wisconsin Central Transportation Corporation... 58,630,325
--------------
TOTAL COMMON STOCKS (COST $1,221,222,756).................. 1,317,605,746
--------------
</TABLE>
<TABLE>
<CAPTION>
PAR
----------
<S> <C> <C> <C> <C> <C>
Short-Term Obligation 2.5%
34,614,000 Repurchase Agreement with State Street Bank,
5.55% due 10-2-00 (Collateralized by U.S.
government agency securities)................ 34,614,000
--------------
TOTAL INVESTMENTS (COST $1,255,836,756)(a)................... 99.1% 1,352,219,746
OTHER ASSETS AND LIABILITIES, NET............................ 0.9 11,815,946
----- --------------
NET ASSETS................................................... 100.0% $1,364,035,692
===== ==============
NET ASSET VALUE PER SHARE........................................... $21.51
==============
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for federal income tax purposes.
Note: Companies designated as "Foreign" are headquartered outside the U.S. and
represent 21% of net assets.
29
<PAGE> 32
SERVICE DIRECTORY
CONTACT US AT WWW.LONGLEAFPARTNERS.COM OR
(800) 445-9469
FUND INFORMATION OPTION 1
To request a prospectus, financial report, application or other Fund information
from 7:00 a.m. to 7:00 p.m. Eastern time, Monday through Friday.
DAILY FUND PRICES OPTION 2
For automated reporting 24-hours a day, seven days a week.
ACCOUNT INFORMATION OPTION 3
For account balance and transaction activity, 24-hours a day, seven days a week.
Please have your Fund number (see below) and account number ready to access your
investment information.
SHAREHOLDER INQUIRIES OPTION 0
To request action on your existing account from 9:00 a.m. to 6:00 p.m. Eastern
time, Monday through Friday.
CORRESPONDENCE
By U.S. Mail: By Overnight Courier:
Longleaf Partners Funds Longleaf Partners Funds
P.O. Box 9694 c/o PFPC
Providence, RI 02940-9694 4400 Computer Drive
Westborough, MA 01581
(508) 871-8800
SERVICES FOR FINANCIAL ADVISORS (800) 761-2509
Please contact Mary Williamson or Lee Harper for additional information.
PUBLISHED DAILY PRICE QUOTATIONS
Daily net asset value per share of each Fund is reported in mutual fund
quotations tables of major newspapers in alphabetical order under the bold
heading LONGLEAF PARTNERS as follows:
<TABLE>
<CAPTION>
TRANSFER AGENT
ABBREVIATION SYMBOL CUSIP FUND NUMBER
------------- ------ --------- --------------
<C> <S> <C> <C>
Partners LLPFX 543069108 133
Intl LLINX 543069405 136
Realty LLREX 543069306 135
Sm-Cap LLSCX 543069207 134
</TABLE>
30
<PAGE> 33
TRUSTEES AND OFFICERS
Trustees
O. Mason Hawkins, Chairman
Chadwick H. Carpenter, Jr.
G. Staley Cates
Daniel W. Connell, Jr.
Steven N. Melnyk
C. Barham Ray
Officers
O. Mason Hawkins, Co-Portfolio Manager and Chief Executive Officer
G. Staley Cates, Co-Portfolio Manager and President
John B. Buford, Co-Portfolio Manager of the Partners and Small-Cap Funds
and Vice President - Investments
C. T. Fitzpatrick, Co-Portfolio Manager of the Realty Fund
and Vice-President - Investments
E. Andrew McDermott, Assistant Portfolio Manager of the International Fund
and Vice President - Investments
Charles D. Reaves, Executive Vice President and General Counsel
Julie M. Douglas, Executive Vice President - Operations, Chief Financial
Officer and Treasurer
Lee B. Harper, Executive Vice President - Marketing
Frank N. Stanley III, Vice President - Investments
Randy D. Holt, Vice President
Andrew R. McCarroll, Vice President, Secretary and Assistant General Counsel
Transfer Agent
PFPC, Inc.
Westborough, Massachusetts
Custodian
State Street Bank & Trust Company
Boston, Massachusetts
Special Legal Counsel
Dechert Price & Rhodes
Washington D.C.
Independent Public Accountants
PricewaterhouseCoopers LLP
Baltimore, Maryland
31
<PAGE> 34
Longleaf Partners Funds (SM)
c/o PFPC
P.O. Box 9694
Providence, RI 02940-9694
(800) 445-9469
www.longleafpartners.com
