<PAGE> 1
(LOGO)
LONGLEAF PARTNERS FUNDS (SM)
ANNUAL REPORT
at December 31, 1999
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
Distribution Discussion.................................... 7
Longleaf Partners Fund (Partners Fund)
Management Discussion.................................... 11
Performance Contributions................................ 13
Performance History*..................................... 14
Portfolio Summary........................................ 15
Portfolio of Investments................................. 16
Longleaf Partners International Fund (International Fund)
Management Discussion.................................... 18
Performance Contributions................................ 21
Performance History*..................................... 22
Portfolio Summary........................................ 23
Portfolio of Investments................................. 24
Longleaf Partners Realty Fund (Realty Fund)
Management Discussion.................................... 26
Performance Contributions................................ 29
Performance History*..................................... 30
Portfolio Summary........................................ 31
Portfolio of Investments................................. 32
Longleaf Partners Small-Cap Fund (Small-Cap Fund)
Management Discussion.................................... 35
Performance Contributions................................ 37
Performance History*..................................... 38
Portfolio Summary........................................ 39
Portfolio of Investments................................. 40
Financial Statements and Footnotes......................... 42
Financial Highlights....................................... 56
Report of Independent Accountants.......................... 59
Service Directory.......................................... 60
Trustees and Officers...................................... 61
</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:
Longleaf Partners International Fund reported outstanding results in the first
full year of operation in 1999, yet many of our undervalued assets in the three
domestic funds did not receive their fair weighing by the market. In 2000 we
will be disappointed if we don't achieve our base-line objective of inflation
plus 10% in all four Funds. As we discuss below, our return opportunities have
not been foregone, but have improved as most of our corporate appraisals have
grown.
The lackluster reported results for the three domestic funds should not
overshadow the fact that 1999 was one of our best years from a buying
perspective. The foundation that has been established should produce more than
acceptable future returns. We committed more of our personal capital to the
Longleaf Funds last year than in any prior period.
We have formatted this letter to answer some of the questions shareholders have
raised recently.
Is something wrong at Longleaf?
We don't think so. We are in the same boat with other managers we admire
tremendously. After a year when Berkshire Hathaway's performance did not equal
some of the momentum followers', the December 27, 1999 Barron's headline read,
"Has Warren lost his touch?" We and other disciplined value brethren have been
through previous periods of underperformance. When our returns are hot (as
recently as six months ago) people think we're smarter than we are, and during
periods of weak relative performance we have had to explain our rationale. Like
seasoned sports coaches, we don't get that excited when being carried off the
field and we don't get that upset if the fans are screaming to fire us.
Aren't you exercising disciplines that are no longer valid in this new age?
Mathematically, the value of a business is equal to the net present value of its
future free cash flows. History has proven that over time stock prices, although
volatile in the short-term, will converge with intrinsic business value.
Companies that can grow their free cash flow in the high single digits or low
double digits WITHOUT SPENDING CAPITAL TO GET THAT GROWTH currently are
considered downright frumpy. When we add the wisely reinvested free cash flow
coupon to the organic growth rate, the companies we own are capable of growing
their intrinsic values in the mid-teens for a long time. Buying those businesses
at half their values implies large future returns. For our capital, a quality,
low risk investment has an assured growth of corporate intrinsic worth and has a
large margin of safety with the appraised value significantly greater than the
share price. Remember, as business analysts we look through the stock to the
assets that a
1
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LONGLEAF PARTNERS FUNDS
LETTER TO SHAREHOLDERS
company owns; free cash flows, not newspaper headlines or short-term stock price
action, determine quality. We made a lot of money in Seagram last year;
initially when we invested, many confused the then bad press with the quality of
Seagram's assets. The same applies to Waste Management today.
Some are worried about the opportunity cost of meager returns from quality
businesses while the hot, speculative stocks are rising so dramatically. THE
OPPORTUNITY OF A SIGNIFICANTLY UNDERVALUED INVESTMENT IS NOT FOREGONE. Why?
Assume that high-quality company A was worth $40 in 1998, and it grew its
intrinsic value through retained and reinvested cash flow by 15% to $46. Assume
further that the price of A went from $20 to $17 in 1999. If in the long run
stock prices converge with underlying values, which they have done for the last
couple of centuries, then our target payoff is now $46 for A, not $40. We have
postponed and INCREASED, not given up, our return. As long as the value grows,
when the payoff happens is irrelevant because the prospective return rises.
Furthermore, for taxable investors, long-term capital gains tax liabilities are
deferred.
Stock market recognition of business value has never come in straight lines or
equally measured amounts. If we knew the payoff pattern, we would not need to be
either patient or long-term.
Why are you avoiding the Internet growth stories?
Historically, owning industries that transform the economy and have guaranteed
high UNIT growth rates has almost never equaled investment success. Knowing that
autos, aviation, televisions, and computers would proliferate did not translate
into acceptable returns for investors for two primary reasons. First, the
revolutionary benefits of these incredible breakthroughs accrued to customers
and users, not owners. Second, in our open capitalist markets, competitive
pricing fire rained down from everywhere, eliminating all but a few survivors.
The risks are too high if the business owner might not keep the benefit of
burgeoning demand because of having to discount prices, or if the current high
grower might not have a competitive position in five years. Because a company's
value is derived from the net present value of all future cash flows, what
happens in year five is of massive importance to today's price. Sometimes
investors assign multiples lightly or irrationally to earnings, revenues,
"pageviews," or other relevant measures without any certainty about whether and
when the company will generate cash.
Will Longleaf ever invest in technology?
We have and we will, but only on our terms and conditions. We can benefit from
new, revolutionary, and productivity-enhancing technologies in four intelligent
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LONGLEAF PARTNERS FUNDS
LETTER TO SHAREHOLDERS
ways. Each has varying degrees of risk and probabilities of success, and each
must be analyzed carefully. First, we can invest in unique, strongly competitive
non-tech businesses that will become more profitable through their use of new
technologies (Marriott, Hilton, Waste Management). Second, we can own companies
that will benefit significantly as service providers to rapidly growing
technology enterprises (FedEx). Third, we can purchase above-average companies
that are so undervalued we receive their established and/or nascent high-tech
endeavors for no or negative consideration (Hughes through General Motors,
semiconductors and digital technologies such as DVD through Koninklijke Philips
Electronics, Nokia via Sampo). Fourth, we can own technology companies directly
(MediaOne and 360 degrees Communications). In this last alternative, the
business clearly must fall within our sphere of understandability, be
competitively entrenched, have a definitive cash earnings stream that determines
our value, and be available in the market at less than 60% of our appraisal.
Can't you just admit you missed the mark on Waste Management?
Our long-term investment success depends solely on 1) getting our appraisals
right, and 2) having the values grow. No matter what the stock price does short-
term, if the company's value rises, we will be successful over time. That is
why, after only six months since the price declined, we are not ready to throw
in the towel on Waste Management. The quality of the business and the
competitive strength of the company have not been harmed. WMI's landfills and
ability to generate substantial cash flow through efficient integration of waste
collection and disposal create a large and GROWING value. The company has the
right leadership in place with Maury Myers, and his team is several months into
fixing computer related and operational problems from the merger.
With such large personal stakes in the Funds, we are constantly assessing
whether we are "right" about our appraisals, the managements, and the businesses
we own. We admit and try to learn from our errors. It is instructive to look at
what we consider poor assessments, where 1) the values have dropped or
stagnated, and 2) there is a meaningful measurement period of years, not months.
Our economic assessment of Alexander & Baldwin was too optimistic. The Hawaiian
economy has stayed weak for so long that our appraisal hasn't grown in the past
few years, nor has the price of the stock. We continue to hold A&B because our
appraisal is finally growing as the new CEO, Allen Doane, takes advantage of the
state's distress by buying Hawaiian properties cheaply and repurchasing his
undervalued shares.
We also misjudged Host Marriott's ability to allocate capital. Our value took a
major hit when, instead of rolling up partnerships cheaply for cash, management
3
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LONGLEAF PARTNERS FUNDS
LETTER TO SHAREHOLDERS
issued undervalued equity for partnerships and for a major acquisition. We
remain shareholders because we are convinced that the newly appointed CEO, Chris
Nassetta, will do a better job at capital allocation; performance of the hotel
properties has not missed a beat; and the company has begun to aggressively buy
in shares.
We sold five companies across the four funds last year at close to breakeven
results because our assessments of management turned negative, even though the
stocks remain undervalued. We would rather not name them to protect the guilty.
As your portfolio manager and large investment partner we are responsible for
making sure our businesses grow in value. To do that, it behooves us to judge
ourselves critically and improve our investment and analytical process, rather
than worry about people's perceptions of our judgement. Renowned value investor
Seth Klarman pointed out that "Being very early and being wrong look exactly the
same 99% of the time."
Why aren't you worried about your results?
We reassess our holdings constantly, as any long-term owner should. Today's
evaluations point to one conclusion -- we currently own the best collection of
assets we have ever held, at the best prices.
- - You and we own sited landfills that have almost no risk of duplication, little
serious competition, strong pricing power, and growing long-term demand. These
landfills sell for less than seven times free after-tax cash flow (contrasted
to the S&P's P/E of over 30X).
- - You and we own the highest quality worldwide express delivery network in the
world via FDX for a fraction of replacement cost. While UPS has higher stock
price parameters because of its strength in business-to-consumer Internet
delivery, FDX is stronger in business-to-business commerce. This e-commerce
market will become substantially larger than the consumer side.
- - You and we own the highest quality collection of hotels anywhere at unlevered
cash-on-cash yields in the mid-teens.
- - You and we own vast amounts of timberlands with high cash flow returns at a
few hundred dollars per acre.
This list goes on and on. If we bid today's market equivalent prices for
comparable private assets, sellers would either have a stroke laughing or punch
us for the insult.
In the past we have been unable to own as many assets of this quality. Prices
were too rich to stomach, despite how we salivated at the rapid value growth. To
our
4
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LONGLEAF PARTNERS FUNDS
LETTER TO SHAREHOLDERS
benefit today's stock market is assigning the "quality" label only to those
businesses such as technology and communications with a case for phenomenal UNIT
growth.
The management teams at the companies we own are not only good partners, they
are enhancing our appraisals with share repurchases. With stock prices more
disconnected from their businesses than most can remember, our partners are
making the intelligent capital allocation choice to buy back shares. The current
level of share repurchase activity at our portfolio companies is unprecedented.
Using the Partners Fund as a proxy, only FOUR U.S. companies in the entire
portfolio are not buying back their shares. While this statistic means nothing
short-term, repurchases significantly raise intrinsic values-per-share (as the
denominator shrinks faster than the numerator), and therefore increase our long-
term return.
Our strong optimism about the Longleaf portfolios, despite an overvalued market,
is based on our compelling and undervalued holdings. When we compare the
appraisal of each company we own to its stock price, we have some of the
cheapest, quality businesses that we have ever owned. Collectively, these
positions should produce significant future returns. We have increased our own
investments in all four Longleaf funds for all the above reasons.
How could I have known about the distributions?
Our vehicle for communicating with our partners has always been our quarterly
reports. Every quarter we list positions sold and we discuss significant sales
in each Fund's commentary.
- - Our Third Quarter Report included a paragraph indicating the date and
magnitude of distributions for the funds.
- - With the introduction of our Web site (see below), we will have an additional
way to inform you of distribution plans.
- - Because we have received so many questions and comments about this topic, we
put together a separate discussion on distributions. Although many of you
received a copy in the mail, we have reprinted it in this report on page 7.
Have Fund redemptions been a problem?
Some shareholders redeemed their investments in all four funds in 1999.
Redemptions have not disrupted our portfolio management. In the cases where we
sold securities, we liquidated our highest price-to-value positions and improved
the undervaluation of the remaining portfolio. More importantly, we are grateful
to those of you who continue to believe in our disciplines. Our almost
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LONGLEAF PARTNERS FUNDS
LETTER TO SHAREHOLDERS
30 years of experience convinces us your allegiance will be amply rewarded;
superior returns would be the best "thank you" we know of.
How can I stay more aware of what's going on at Longleaf?
We spend a substantial amount of time trying to make our quarterly reports
thorough and useful, and encourage all our partners to read them. Because the
Annual Report is audited, it requires about six weeks to get a final version. We
try to turn around the other quarterlies within three to four weeks of quarter
end to enable our partners to have the information they want as soon as
possible.
We also encourage you to come to our annual gathering of shareholders. Last year
we had over 400 partners attend. This year the meeting will be Wednesday, May 10
at 5:30 p.m. at the Memphis Botanic Garden.
We enter the new century by announcing a Longleaf Web site,
www.longleafpartners.com. We heard from a number of you with content
suggestions, and have tried to incorporate your comments in our design. The site
should be available around the first of February. We will be adding enhancements
to the site over the next few months, and welcome your suggestions. We will use
the site to post our quarterly reports electronically and to notify shareholders
of any fund news. Background information, historical data and reports, and
articles will be available.
Will the Partners Fund reopen?
The Partners Fund re-opens to new investors on February 1, 2000. The Fund is
extremely well positioned with undervalued, high quality holdings and little
cash. We have found several compelling additional investments which cash inflows
will enable us to own. All our partners will benefit from new assets into the
Fund. Buying our most undervalued investment ideas will decrease the Fund's
already historically low price-to-value ratio, thereby further improving our
substantial return opportunity.
We extend our best wishes to each of you as we head into 2000. We look forward
to visiting with our partners at the annual meeting.
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>
6
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LONGLEAF PARTNERS FUNDS
DISTRIBUTION DISCUSSION
Why do the Funds make distributions?
To avoid federal taxation, all mutual funds must pass through two types of
distributions to shareholders -- net realized gains on stocks profitably sold
from the portfolio, and net income from company dividends and interest received,
less fund operating expenses. In early February you will receive a 1099-DIV tax
form which indicates the amount of long-term gains received (generally taxed at
20%), and the amount of short-term gains and income (taxed at your marginal
rate).
Why does a distribution cause the Fund to go "down"?
The Fund's net asset value (NAV) declines after a distribution by the amount
paid to shareholders, because this amount is no longer included in the Fund's
assets. If you reinvest your dividends, that amount is returned to the Fund to
purchase more shares. Your account balance doesn't change, but the NAV and
number of shares do. Paying dividends does not affect a Fund's performance.
For example, on November 9, 1999, a Partners Fund shareholder received $4.23 in
capital gains per share. If reinvested, the shareholder received 0.19915
additional shares for every share already owned.
<TABLE>
<CAPTION>
BEFORE AFTER
DISTRIBUTION DISTRIBUTION NOTES
------------ ------------ -----
<S> <C> <C> <C>
Shares owned..... 100 119.915 (add 0.19915 new shares per
existing share)
NAV.............. $25.47 $21.24 (previous NAV minus $4.23 per
share in gains)
Account Value.... $2,547 $2,547 (Same ending balance)
</TABLE>
To track the value of your account accurately you must increase the number of
shares you own by the number of shares received in the distribution.
How can distributions be large when there is little year-to-date performance?
Long-term capital gains and one-year performance are not directly related. When
Longleaf sells a stock, the taxable gain is calculated from the original
purchase price. If the Fund has owned a business for four years, the
appreciation or contribution of that stock to performance has come over that
time, with only a portion contributing in the current year. ALL the taxable gain
from the four-year period, however, is realized in the CURRENT year it is sold.
Whether the appreciation has come in the current year or over time, other stocks
in the portfolio could be flat or down, causing Fund performance for the year to
be lower than the return on the sold stocks.
7
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LONGLEAF PARTNERS FUNDS
DISTRIBUTION DISCUSSION
Why doesn't Longleaf sell some stocks that are down to offset the gains so I
won't have to pay taxes?
Tax loss selling defers, not eliminates, taxes. The tax deferral benefit is
reduced by the tax-free compounding we forego when booking a loss. If our cost
is $10 per share, and we sell the shares at $9, we deduct the 10% loss this
year. However, if we buy back the shares at $9, when the stock ultimately
reaches appraisal, our booked gains will be higher based on a $9 cost, not $10.
That differential is significantly higher if it also is a short-term versus
long-term gain as discussed in item #4 below.
We believe that the benefit of delaying taxes for a few years is quite small
relative to the risk or potential costs described below.
1) Selling shares and then buying them back generates trading costs that
decrease performance.
2) We risk raising the price, and thus our cost basis, by the volume created in
buying back shares. If we sell a stock at $10 to take a loss, and the trading
volume to repurchase moves the price to $10.25, shareholders' future returns
will be lower because the base is 2.5% higher than it would have been if we
had held the shares.
3) We also risk raising our cost basis and/or being unable to re-establish our
full position in a company if, in the 30 days we must be out of a stock to
book a tax loss, company announcements or a change in market sentiment raises
the stock price. In October 1998 several stocks in which we could have booked
a loss rallied over 30% within 30 days. Some moved above our buy price (60%
of appraisal). Missing that appreciation or being unable to buy that holding
back would have been much more costly than paying taxes on our mostly
long-term gains.
4) Moving our purchase date forward can be tremendously expensive if the stock
rises to appraisal in less than a year, because of the large tax rate
difference in short-term versus long-term gains. If we bought XYZ in June of
1999, sold it at a loss in October 1999, and bought it back at the same price
in November 1999, and if in August 2000 the price rapidly rises to appraisal
where we sell it, the higher tax rate for short-term gains in 2000 far
offsets the tax "benefit" received in 1999 by selling the shares at a loss.
Doesn't Longleaf care about AFTER-TAX returns?
The employees of Southeastern are the largest shareholder group across our four
funds, and most of our money is taxable. We care deeply about minimizing our tax
bills. We believe our approach maximizes long-term after-tax returns. Giving
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LONGLEAF PARTNERS FUNDS
DISTRIBUTION DISCUSSION
up long-term performance opportunity is generally more costly than paying taxes
on long-term gains.
We do manage tax liabilities in our selling execution. Our time horizon is 4-5
years, which our average holding periods, or turnover, reflect. Almost all of
our realized gains are long-term which cuts the tax liability in half for most
shareholders. Sales execution focuses on tax management. We sell long-term,
higher cost shares first to minimize short-term and total taxable gains.
What does it mean when we say the portfolio is "tax advantageous"?
Purchasing a fund where the NAV reflects a net unrealized loss provides you a
tax benefit. You did not suffer the price declines that created the loss, but
reap the tax-free appreciation when the stocks rise. Currently both Longleaf
Partners Fund and Longleaf Partners Realty Fund are extremely compelling buying
opportunities for two reasons -- they are fully invested and selling at very
cheap prices, and they have some net unrealized losses. While the Partners
Fund's NAV reflects some realized gains, the Realty Fund's NAV includes the tax
benefit of loss carryforwards or realized losses.
9
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(Intentionally Left Blank)
10
<PAGE> 13
PARTNERS FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and John Buford
Longleaf Partners Fund ended 1999 up 2.2% following an almost flat (-0.5%)
fourth quarter. The equally weighted Value Line Index rose 3.2% in the quarter,
but declined 1.4% in 1999. By contrast, the S&P 500 Index, dominated by a few
large, mostly technology related stocks, rose 14.9% in the quarter and ended the
year up a commendable 21.1%. (Please refer to the table on page 12 for specific
contributions to the Fund's 1999 performance.)
The Fund's meager return for the year is attributable primarily to Waste
Management. We reviewed our reasons for owning WMI in the third quarter report,
and the business case remains valid. Subsequent to our last report, the company
has moved aggressively to solve its two main challenges. First, Maury Myers was
appointed Chairman and CEO. Maury has successfully turned around three
struggling companies with financial constraints significantly more severe than
at Waste. He has strong logistics and systems expertise, which are critical to
making the merged Waste Management and USA Waste operate as a single, efficient
company. He has the leadership experience and skill to improve corporate morale
and customer service. His compensation package is heavily tied to the stock's
performance. Second, a new MIS team with vast experience has been assembled and
is several months into a 12 to 18 month systems project that will solve many of
the problems that caused WMI to stumble.
The market's disdain for real estate also negatively impacted performance last
year. Host Marriott, discussed on pages 3 and 26 of this report, and Trizec Hahn
declined during 1999. The stocks' performance contrasted sharply to operating
results and earnings, which increased over the past twelve months at these
companies.
Our investment in Nippon Fire and Marine, the Japanese non-life company,
declined in 1999. Value has grown as the company's equity investments increased
substantially and its underwriting businesses remained profitable. Japanese
banks and life insurance companies' major liquidity-driven sales of non-life
stocks depressed Nippon's price.
The Partners Fund had several successes that helped the year's results. Philips
Electronics, which we bought in 1996 and again after steep declines in 1998,
rose over 115% during 1999 to $135 per share. Over the 27 months we have owned
the business, not only has the price risen well above our original mid-$30's
cost, but management's ability to rapidly build value has enabled us to defer
taxable gains by continuing to own the rising stock without sacrificing our
margin of safety.
11
<PAGE> 14
PARTNERS FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and John Buford
Early in the year we discussed our successful sales of Seagram, News Corp, and
MediaOne where we made 2-3 times our original investments. Several of our
long-time holdings added to performance. Knight Ridder benefited from higher ad
sales and margins. The recovery of oil helped Canadian Pacific. Marriott
continued to report increased fees as new hotels opened under the Marriott
brands, and Bill Marriott used his free cash flow to aggressively repurchase
inexpensive shares. In the first half of 1999 we reduced our 14.7% FDX position
as the price approached our appraisal, and we reinvested the proceeds in more
undervalued businesses. When the price declined in the Fall, we again increased
our stake in FDX. (See page 4 for comments.)
One recent purchase, General Motors, has begun to appreciate, although it
remains well below our appraisal. We also bought a full position in Georgia-
Pacific Timber Group, a collection of valuable timberlands with a proven,
shareholder-oriented management. Our other new full position, Tricon Global
Restaurants, was spun off from Pepsi and owns the KFC, Taco Bell, and Pizza Hut
brands. As a stand-alone company, management has focused on improving restaurant
operations and franchisee relations. We are pleased to be partners with David
Novak who has the right experience and stock ownership incentives to make Tricon
successful.
As stated earlier in this report, the Partners Fund has rarely owned this many
high quality companies and never at prices this discounted. The portfolio's
composite price-to-value ratio began the new year at the lowest level of any
year since the Fund opened in 1987. When the gap begins to close between share
prices and the large and growing corporate values at our companies, we should
see significant returns.
12
<PAGE> 15
PARTNERS FUND - PERFORMANCE CONTRIBUTIONS
The following table delineates the specific dollar contributions of individual
holdings to operations for 1999. The companies listed impacted performance by at
least $20 million.
<TABLE>
<CAPTION>
CONTRIBUTION
------------
<S> <C>
FROM PORTFOLIO HOLDINGS:
Koninklijke Philips Electronics N.V.................. $196,841,022
The Seagram Company Ltd.............................. 95,083,788
United Healthcare Corporation........................ 71,023,106
The News Corporation Limited......................... 41,755,467
MediaOne Group, Inc. ................................ 39,888,191
Knight Ridder, Inc................................... 29,185,739
General Motors Corporation........................... 28,553,084
Marriott International, Inc.......................... 28,062,749
Canadian Pacific Limited............................. 27,537,843
The Nippon Fire & Marine Insurance Company Ltd....... (23,760,517)
TrizecHahn Corporation............................... (25,411,913)
Host Marriott Corporation............................ (53,063,326)
Waste Management, Inc................................ (425,789,411)
All others, net...................................... 8,232,434
------------
38,138,256
Interest income........................................ 33,602,899
Expenses............................................... (39,467,704)
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS........................................ $ 32,273,451
============
</TABLE>
13
<PAGE> 16
PARTNERS FUND - PERFORMANCE HISTORY
LONGLEAF PARTNERS FUND
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
OVER TEN YEARS
(GRAPH)
The graph is a composite line graph showing total returns of Longleaf Partners
Fund over ten years in comparison with the S&P 500 Index, the primary broad
based securities index used, the Value-Line Index, and inflation plus 10%.*
Each line graph begins with an assumed investment of $10,000 at 12/31/89, and
has an ending value for each at 12/31/99. The ending value for each separate
line graph is as follows:
Longleaf Partners Fund -- $43,157
S&P 500 Index -- $53,211
Value-Line Index -- $16,656
Inflation plus 10% -- $33,734
AVERAGE ANNUAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Value-Line
Partners S&P 500 (Geometric) Inflation
Fund Index Index Plus 10%*
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
One Year 2.18% 21.05% (1.40)% 12.68%
Five Years 18.24 28.55 9.21 12.37
Ten Years 15.75 18.20 5.23 12.93
Since Public Offering 4/8/87 15.48 16.43 3.71 13.25
</TABLE>
* Inflation Source: Monthly Consumer Price Index for All Urban Consumers (CPI-U)
compiled by the U.S. Bureau of Labor Statistics.
14
<PAGE> 17
PARTNERS FUND - PORTFOLIO SUMMARY
FIVE LARGEST HOLDINGS
(REPRESENT 46.9% OF NET ASSETS)
WASTE MANAGEMENT, INC. (WMI) 16.4%
The world's largest solid waste collection and disposal company with
residential, commercial, and industrial customers throughout North America.
FDX CORPORATION (FDX) 8.9%
Integrated air-ground transportation company providing time-definite delivery of
packages and documents worldwide.
MARRIOTT INTERNATIONAL, INC. (MAR) 8.8%
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.
GENERAL MOTORS CORPORATION (GM) 6.7%
Conglomerate that owns a controlling stake in Hughes Electronics, GMAC, and the
international truck and car business.
CANADIAN PACIFIC LIMITED (CP) 6.1%
Canadian company with valuable natural resources including oil, gas, and coal, a
significant transportation (rail and shipping) business, and resort hotels.
PORTFOLIO CHANGES
JANUARY 1, 1999 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Aetna, Inc. MediaOne Group, Inc.
Allied Waste Industries, Inc. Mitsui Marine and Fire
General Motors Corporation Insurance Company, Ltd.
Georgia-Pacific Corporation -- Timber Group The News Corporation Limited
Park Place Entertainment Corp.* (HLT) Park Place Entertainment
Tricon Global Restaurants, Inc. Corp.* (HLT)
The Seagram Company Ltd.
</TABLE>
* Acquired through merger/spin-off of existing position (ticker of original
holding).
15
<PAGE> 18
PARTNERS FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
Common Stock 98.4%
Environmental Services 17.1%
2,890,900 * Allied Waste Industries, Inc................. $ 25,476,056
34,557,689 Waste Management, Inc.(b).................... 593,960,280
--------------
619,436,336
--------------
Health Insurance 2.7%
267,700 Aetna Inc.................................... 14,941,006
1,525,300 United Healthcare Corporation................ 81,031,562
--------------
- ---
95,972,568
--------------
- ---
Investment Management 0.5%
1,237,700 * The Pioneer Group, Inc....................... 19,493,775
Lodging 17.3%
1,076,380 * Crestline Capital Corporation(b)............. 22,200,337
19,601,100 Hilton Hotels Corporation(b)................. 188,660,588
11,700,250 Host Marriott Corporation(b)................. 96,527,063
10,103,600 Marriott International, Inc.................. 318,894,875
--------------
626,282,863
--------------
Manufacturing 2.2%
4,450,000 * UCAR International, Inc.(b).................. 79,265,625
Multi-Industry 9.0%
1,565,000 Alexander & Baldwin, Inc..................... 35,701,563
3,323,000 General Motors Corporation................... 241,540,563
360,640 Koninklijke Philips Electronics N.V.
(Foreign).................................. 48,686,400
--------------
325,928,526
--------------
Natural Resources 11.7%
7,459,900 Georgia-Pacific Corporation - Timber
Group(b)................................... 183,700,038
11,201,032 * Pioneer Natural Resources Company(b)......... 100,109,223
2,900,000 Rayonier Inc.(b)............................. 140,106,250
--------------
423,915,511
--------------
Property & Casualty Insurance 6.8%
30,534,000 The Nippon Fire & Marine Insurance Company,
Ltd. (Foreign)(b).......................... 90,985,902
27,460,000 The Yasuda Fire & Marine Insurance Company,
Ltd. (Foreign)............................. 155,066,839
--------------
246,052,741
--------------
Publishing 5.1%
3,134,300 Knight Ridder, Inc........................... 186,490,850
</TABLE>
See Notes to Financial Statements.
16
<PAGE> 19
PARTNERS FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
Real Estate 6.2%
1,998,400 Boston Properties Inc........................ $ 62,200,200
9,681,791 TrizecHahn Corporation (Foreign)(b).......... 163,380,223
--------------
225,580,423
--------------
Restaurants 4.8%
4,465,000 * Tricon Global Restaurants, Inc............... 172,460,625
Transportation 15.0%
10,175,000 Canadian Pacific Limited (Foreign)........... 219,398,437
7,890,000 * FDX Corporation(c)........................... 322,996,875
--------------
542,395,312
--------------
TOTAL COMMON STOCKS (COST $3,940,414,406).... 3,563,275,155
--------------
</TABLE>
<TABLE>
<CAPTION>
PAR
----------
<S> <C> <C> <C> <C> <C>
Short-Term Obligations 1.7%
62,701,000 Repurchase Agreement with State Street Bank,
2.50% due 1-3-00 (Collateralized by U.S.
government securities)..................... 62,701,000
--------------
TOTAL INVESTMENTS (COST $4,003,115,406)(a)................ 100.1% 3,625,976,155
OTHER ASSETS AND LIABILITIES, NET......................... (0.1) (3,866,685)
----- --------------
NET ASSETS................................................ 100.0% $3,622,109,470
===== ==============
NET ASSET VALUE PER SHARE......................................... $20.49
==============
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for federal income tax purposes. Aggregate
unrealized appreciation and depreciation are $435,970,447, and
$(813,109,698), 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 19% of net assets.
OPEN FORWARD CURRENCY CONTRACTS
<TABLE>
<CAPTION>
Currency Currency Sold and Currency Unrealized
Units Sold Settlement Date Market Value Loss
- ------------- --------------------------------- ------------ ------------
<C> <S> <C> <C>
8,759,000,000 Japanese Yen 3-30-00............. $ 86,819,208 $(12,022,002)
5,565,000,000 Japanese Yen 6-30-00............. 56,009,314 (4,841,706)
5,400,000,000 Japanese Yen 9-29-00............. 55,224,990 (882,633)
------------ ------------
$198,053,512 $(17,746,341)
============ ============
</TABLE>
See Notes to Financial Statements.
17
<PAGE> 20
INTERNATIONAL FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and Andrew McDermott
In 1999 Longleaf Partners International Fund gained 24.4% following a flat
(-0.3%) fourth quarter. The EAFE Index gained 25.3% for the year after its
impressive 16.6% gain in the last quarter. We comfortably exceeded our target of
generating a 10% return over inflation, and perhaps more importantly, we
achieved this return with a low-risk portfolio. We bought some of our best
performers below liquidation value, and our foreign currency exposure was
hedged. (Please refer to page 20 for specific contributions to the Fund's 1999
performance.)
Nippon Broadcasting was the single largest contributor to the Fund's
performance. The company's price rose to partly reflect the value of its 34%
stake in Fuji Television, one of Japan's three public broadcasters. Despite a
near tripling from its lows, Nippon Broadcasting continues to sell at a discount
to both its intrinsic value and its liquidation value. De Beers was our
next-largest contributor; it has doubled since our purchase, but the company's
value has grown nearly as fast because management exchanged various minority
ownership interests in commodity businesses for a larger controlling position in
Anglo-American Corporation, and profitably turned large amounts of its diamond
inventory into cash. De Beers' diamond franchise remains undervalued.
We sold two of our large contributors, Highland Distilleries and Philips
Electronics. Highland's management confirmed our assessment of intrinsic value
by taking the company private for cash at a slight premium to our appraisal. We
sold Philips in the fourth quarter when we found other positions at more
compelling discounts.
Several of the Fund's largest positions declined during the year. Meanwhile,
managements built value, and made these holdings even more attractive than when
we first purchased them. At Brierley Investments management successfully shed
non-core assets, reduced debt, and built value through share repurchases. The
company sells at half its liquidation value and at an even wider discount using
recent comparable transactions to appraise its three major assets. Brierley's
stock fell primarily because it was removed from the New Zealand stock indices
pending a move to Singapore. Index membership has nothing to do with intrinsic
value, and we are confident that Brierley's management will build value while
short-term, non-fundamental factors impact the price.
Olympia & York Properties also suffered a significant decline, along with most
of the Canadian real estate industry. Philip Reichmann, O&Y's CEO, is the
consummate owner-operator who is eager to close the nearly 50% gap between
18
<PAGE> 21
INTERNATIONAL FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and Andrew McDermott
the market price and stock's value, which a number of private market
transactions over the past year have confirmed.
We used sale proceeds and new assets to acquire a number of new positions, the
most significant being Safeway, Bemrose, and Sampo Insurance. Safeway, our
largest holding, is the UK's fourth largest food-retailer. Its price declined
after Wal-Mart's decision to enter the UK market via the acquisition of a
competitor. Safeway's management team, led by CEO and Wal-Mart veteran Carlos
Criado-Perez, has successfully improved operations and positioned the company to
build value either independently or via merger in this consolidating industry.
Our fourth largest position, Bemrose, is a UK promotional marketing and
commercial printing company. The stock price suffered because of weakness in the
printing business and problems integrating two small acquisitions. The
promotional marketing side, however, continues to grow in double digits.
Management has demonstrated its shareholder orientation by selling a portion of
the business at a 70% premium to its implied market value and returning the cash
to shareholders. Sampo is Finland's largest non-life insurance company, and is
our sixth largest holding. Analysts' obsession with the company's low reported
return-on-equity gave us the opportunity to acquire a stake. Reported returns
were low because Sampo holds most of its investments in equities, which depress
reported returns, but are the key ingredient in rapidly building book value.
Our new positions became available partly for the same reason that the Fund's
relative performance declined in the second half of the year: a polarization in
international markets that favored technology and telecommunications stocks at
the expense of most others. In Japan, despite the Nikkei's 37% rise, 80% of
stocks actually finished down for the year. In Europe, 70% of returns were
delivered by 12% of the market, mostly telecommunications stocks.
Our portfolio demonstrates the market's current extremes. Our Japanese non-life
insurers hold equities that have appreciated by 10-20% on average over the past
year. This equity appreciation combined with profitable underwriting results has
pushed up asset values faster this year than at any time in the past decade. In
addition, three non-life companies have announced a merger, and four have
initiated stock buybacks. Nevertheless, after a brief rally this summer, most
non-life stocks are down for the year and sell at historic discounts to their
liquidation values. Nippon Fire and Marine fell despite President Ken
Matsuzawa's consistent demonstration that he is one of Japan's most
shareholder-oriented CEOs.
In Europe, Nokia delivered one of the continent's best performances and nearly
doubled in the second half of the year. Sampo is Nokia's third largest share-
19
<PAGE> 22
INTERNATIONAL FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and Andrew McDermott
holder, and Nokia's increase at market value added nearly 33% to Sampo's NAV.
Sampo announced a buyback, a value-neutral merger, and a number of wise
reinvestments of harvested Nokia gains, yet Sampo's discount to NAV deepened.
We are thankful that the dichotomy in international markets has provided us the
opportunity to steal great companies at discounted prices. Earlier in 1999, we
wondered if we had missed the Japanese market. Now, many of the companies we
analyzed last year are available at lower prices in an environment much more
supportive of creating shareholder value. In Europe, some of the best consumer
brands in the world are trading at new lows. Most important, the companies we
already own are building value via share buybacks and other wise capital
allocation decisions. We are excited about the implied long-term returns from
our portfolio. Thank you for your partnership.
20
<PAGE> 23
INTERNATIONAL FUND - PERFORMANCE CONTRIBUTIONS
The following table delineates the specific dollar contributions of individual
holdings to operations for 1999. The companies listed impacted performance by at
least $1.5 million.
<TABLE>
<CAPTION>
CONTRIBUTION
FROM PORTFOLIO HOLDINGS BY COUNTRY: ------------
<S> <C>
ARGENTINA
Banco Hipotecario......................................... $ 1,632,369
Republic of Argentina Bonds............................... 1,512,200
------------
3,144,569
------------
CANADA
Anderson Exploration Limited.............................. 3,494,342
Gulf Canada Resources Limited............................. 1,656,096
O&Y Properties Corporation................................ (3,822,280)
All others, net........................................... 1,344,854
------------
2,673,012
------------
FINLAND
Sampo Insurance Company Ltd............................... 3,178,549
Unrealized foreign exchange gain.......................... 319,316
------------
3,497,865
------------
JAPAN
Nippon Broadcasting System................................ 9,252,948
MOS Food Service, Inc..................................... (1,938,723)
The Nippon Fire & Marine Insurance Company, Ltd........... (3,780,852)
All others, net........................................... (1,630,803)
Realized and unrealized foreign exchange gain............. 2,604,444
------------
4,507,014
------------
THE NETHERLANDS
Koninklijke Philips Electronics N.V....................... 6,107,877
NEW ZEALAND
Brierley Investments Limited.............................. (3,979,916)
Realized and unrealized foreign exchange gain............. 55,942
------------
(3,923,974)
------------
SOUTH AFRICA
De Beers Consolidated Mines, Ltd.......................... 7,585,932
Anglovaal Mining Limited.................................. 1,106,141
------------
8,692,073
------------
UNITED KINGDOM
Wassall PLC............................................... 7,247,429
The Highland Distillers plc............................... 7,064,864
Safeway plc............................................... (1,495,210)
All others, net........................................... 583,048
Realized and unrealized foreign exchange loss............. (80,134)
------------
13,319,997
------------
UNITED STATES
Agribrands International, Inc............................. 2,498,177
Wisconsin Central Transportation Corporation.............. (2,129,578)
All others, net........................................... 1,072,642
------------
1,441,241
------------
All others, net............................................. (50,970)
------------
39,408,704
Interest income............................................. 1,709,757
Expenses.................................................... (4,055,709)
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...... $ 37,062,752
============
</TABLE>
21
<PAGE> 24
INTERNATIONAL FUND - PERFORMANCE HISTORY
LONGLEAF PARTNERS INTERNATIONAL FUND
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
SINCE PUBLIC OFFERING 10/26/98
(GRAPH)
The graph is a composite line graph showing total returns of Longleaf Partners
International Fund since the initial public offering on 10/26/98, in comparison
with the Morgan Stanley Capital International Europe, Australia, Far East Index
(EAFE), the primary broad based securities index used, and inflation plus 10%.*
Each line graph begins with an assumed investment of $10,000 at 10/26/98, and
has an ending value for each at 12/31/99. The ending value for each separate
line graph is as follows:
Longleaf Partners International Fund -- $13,558
EAFE Index -- $13,886
Inflation plus 10% -- $11,567*
RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
International EAFE Inflation
Fund Index Plus 10%
------------- ------ ---------
<S> <C> <C> <C>
One Year 24.37% 25.27% 12.68%
Since Public Offering 10/26/98 29.41 32.05 13.12
</TABLE>
* Inflation Source: Monthly Consumer Price Index for All Urban Consumers (CPI-U)
compiled by the U.S. Bureau of Labor Statistics.
COUNTRY ALLOCATION OF PORTFOLIO
(STOCKS AND FORWARDS)
<TABLE>
<S> <C>
Japan................................. 28.8%
United Kingdom........................ 23.2
Canada................................ 19.4
United States......................... 8.0
New Zealand........................... 6.1
Finland............................... 6.0
South Africa.......................... 3.8
Bermuda............................... 2.8
Argentina............................. 1.9
-----
100.0%
=====
</TABLE>
22
<PAGE> 25
INTERNATIONAL FUND - PORTFOLIO SUMMARY
FIVE LARGEST HOLDINGS
(REPRESENT 34.0% OF NET ASSETS)
SAFEWAY PLC 8.6%
Fourth largest U.K. food retailer with valuable locations.
WASSALL PLC 6.9%
An U.K. based holding company whose largest holding is Thorn Lighting Group.
Other assets include a large cash position and metal closures.
NIPPON BROADCASTING SYSTEM 6.5%
The largest owner of Japan's #2 television broadcaster, Fuji Television, and a
dominant broadcaster in the Tokyo market.
BEMROSE CORPORATION PLC 6.0%
U.K. promotional products and commercial printing company.
BRIERLEY INVESTMENTS LIMITED 6.0%
A New Zealand based holding company which owns controlling stakes in U.K. based
Thistle hotels, Air New Zealand, and Australian building materials maker, James
Hardie.
PORTFOLIO CHANGES
JANUARY 1, 1999 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Anglovaal Mining Limited Agribrands International, Inc.
Banco Hipotecario Anderson Exploration Limited
Bemrose Corporation plc Anglovaal Mining Limited
De Beers Consolidated Mines Ltd. The Dowa Fire and Marine Insurance
Ezaki Glico Co., Ltd Company Ltd.
Gendis Inc. FDX Corporation
Hollinger Inc. Haw Par Corporation Limited
Hollinger International Inc. The Highland Distillers plc
Jarvis Hotels plc Koninklijke Philips Electronics
MOS Food Service, Inc. N.V.
O&Y Properties Corporation Premier Farnell plc
Premier Farnell plc The Seagram Company Ltd.
Safeway plc Shaw Communications, Inc.--Class B
Sampo Insurance Company Ltd. Swire Pacific Limited
Sea Containers Limited Toyoda Automatic Loom Works, Ltd.
Toyoda Automatic Loom Works, Ltd.
Weetabix Limited
</TABLE>
23
<PAGE> 26
INTERNATIONAL FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C> <C> <C> <C>
Common Stock 101.3%
Banks 1.8%
389,672 * Banco Hipotecario (Argentina).................... $ 5,378,011
Broadcasting 6.5%
220,000 Nippon Broadcasting System (Japan)(d)............ 19,129,484
Food 2.1%
601,000 Ezaki Glico Co., Ltd. (Japan)(d)................. 2,794,937
64,000 Weetabix Limited (United Kingdom)................ 3,352,336
------------
6,147,273
------------
Lodging 0.3%
475,000 Jarvis Hotels plc (United Kingdom)............... 899,530
Multi-Industry 15.7%
83,750,000 * Brierley Investments Limited (New Zealand)(d).... 17,470,250
310,100 Sea Containers Limited (Bermuda)................. 8,256,412
3,765,000 Wassall PLC (United Kingdom)(d).................. 20,388,650
------------
46,115,312
------------
Natural Resources 12.8%
380,000 De Beers Consolidated Mines Ltd. (South
Africa)........................................ 10,996,250
3,349,996 Gendis Inc. (Canada)(b)(c)....................... 10,964,295
4,650,000 * Gulf Canada Resources Limited (Canada)........... 15,693,750
------------
37,654,295
------------
Printing 6.0%
3,453,600 Bemrose Corporation plc (United Kingdom)(b)...... 17,477,765
Property & Casualty Insurance 22.8%
2,670,000 The Dai-Tokyo Fire and Marine Insurance Company,
Ltd. (Japan)(d)................................ 10,877,720
4,879,000 The Nippon Fire & Marine Insurance Company, Ltd.
(Japan)(d)..................................... 14,538,554
3,337,000 The Nissan Fire & Marine Insurance Company, Ltd.
(Japan)(d)..................................... 10,302,292
490,000 Sampo Insurance Company Ltd. (Finland)(d)........ 17,043,807
2,503,000 The Yasuda Fire & Marine Insurance Company, Ltd.
(Japan)(d)..................................... 14,134,461
------------
66,896,834
------------
Publishing 4.7%
639,500 Hollinger Inc. (Canada).......................... 5,948,632
598,400 Hollinger International Inc. (United States)..... 7,741,800
------------
13,690,432
------------
Real Estate 4.4%
4,171,600 * O&Y Properties Corporation (Canada)(b)(d)........ 12,934,748
</TABLE>
See Notes to Financial Statements.
24
<PAGE> 27
INTERNATIONAL FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C> <C> <C> <C>
Restaurants 6.5%
448,000 Kentucky Fried Chicken Japan (Japan)(d).......... $ 5,685,619
1,020,000 MOS Food Service, Inc. (Japan)(d)................ 13,542,854
------------
19,228,473
------------
Retail 8.6%
7,380,000 Safeway plc (United Kingdom)(d).................. 25,216,014
Transportation 9.1%
525,000 Canadian Pacific Limited (Canada)................ 11,320,312
1,150,000 * Wisconsin Central Transportation Corporation
(United States)(d)............................. 15,453,125
------------
26,773,437
------------
TOTAL COMMON STOCKS (COST $280,486,997).......... 297,541,608
------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
PAR
----------
Short-Term Obligations 0.9%
2,769,000 Repurchase Agreement with State Street Bank, 2.50% due
1-3-00 (Collateralized by U.S. government
securities)......................................... 2,769,000
-------------
TOTAL INVESTMENTS (COST $283,255,997)(a)............................ 102.2% 300,310,608
OTHER ASSETS AND LIABILITIES, NET................................... (2.2) (6,697,512)
----- -------------
NET ASSETS.......................................................... 100.0% $ 293,613,096
===== =============
NET ASSET VALUE PER SHARE.................................................. $12.02
</TABLE>
* Non-income producing security
(a) Aggregate cost for federal income tax purposes. Aggregate unrealized
appreciation and depreciation are $34,129,773 and $(17,075,162),
respectively.
(b) Affiliated company. See Note 7.
(c) Illiquid security. See Note 8.
(d) Designated as collateral on forward currency contracts. See Note 10.
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 (Loss)
- ------------- ------------------------------------- ------------ -----------
<C> <S> <C> <C>
6,688,166 British Pound 3-30-00................ $ 10,779,852 $ (56,186)
17,765,000 British Pound 6-30-00................ 28,622,721 (12,798)
10,000,000 British Pound 12-28-00............... 15,935,100 214,900
1,500,000 Canadian Dollar 3-30-00.............. 1,035,769 (4,913)
18,500,000 Canadian Dollar 6-30-00.............. 12,801,919 (328,369)
15,400,000 European Currency Unit 6-30-00....... 15,645,529 659,321
4,938,726,087 Japanese Yen 3-30-00................. 48,952,653 (5,941,384)
1,669,000,000 Japanese Yen 6-30-00................. 16,797,762 (1,333,264)
75,000,000 Japanese Yen 9-29-00................. 767,014 (27,813)
2,500,000,000 Japanese Yen 12-28-00................ 25,955,000 70,401
23,650,000 New Zealand Dollar 3-30-00........... 12,346,483 492,683
6,400,000 New Zealand Dollar 9-29-00........... 3,339,677 (44,957)
5,000,000 New Zealand Dollar 12-28-00.......... 2,607,250 (19,750)
------------ -----------
$195,586,729 $(6,332,129)
============ ===========
</TABLE>
See Notes to Financial Statements.
25
<PAGE> 28
REALTY FUND - MANAGEMENT DISCUSSION
by C.T. Fitzpatrick, Mason Hawkins, and Staley Cates
Longleaf Partners Realty Fund suffered along with most of the publicly traded
real estate world in 1999 as the Fund fell 10.5% for the year following a 3.4%
decline in the fourth quarter. The Wilshire Real Estate Securities Index
reported 1999 results of down 3.2% after a flat (+0.2%) fourth quarter. The
NAREIT Index was down 6.5% for the year, and posted a loss of 1.8% in the final
quarter. (Please refer to the table on page 28 for specific contributions to the
Funds' 1999 performance.)
1999 is the first time since 1973-1974 that publicly traded real estate has
experienced back-to-back negative total returns. Despite solid fundamentals,
favorable earnings results, and generally increasing per share values, our
investments delivered negative returns.
We view this environment with a mixture of frustration and optimism. We have
taken advantage of extremely negative market psychology to position our
portfolio for outstanding long-term returns. We have aligned ourselves with good
partners. We own quality assets in high barrier markets and/or own interests in
real estate businesses with superior economics. By any rational measure the
companies we own are selling at a substantial discount to intrinsic worth.
We cannot predict the direction of markets, especially over the short-term.
However, recent activity (going private transactions, mergers, acquisitions, and
aggressive share repurchase announcements) suggests that compelling valuations
of real estate companies are beginning to get recognized. We will continue to
work with our management partners to ensure that they are building value-per-
share. We will continue to explore new investments that are even more compelling
than existing positions. We will continue to make decisions based on long-term
economics.
Five positions, Bay View Financial, Excel Legacy, Host Marriott, Prime Retail,
and Waste Management, Inc., accounted for most of 1999's negative return. Bay
View has transformed itself from an under-performing savings and loan into a
commercial bank with the largest independent deposit market share in the San
Francisco Bay area. Bay View is primarily a real estate lender. The company
reported higher cash earnings in 1999, and we expect higher cash earnings in
2000 as well. We are confident that Bay View's value will ultimately be
reflected in its stock price.
Excel Legacy made excellent progress on several fronts, including its mixed-use
development at the entrance to Disneyland in Anaheim and the Los Arcos
entertainment retail re-development in Scottsdale. The company, however, was
26
<PAGE> 29
REALTY FUND - MANAGEMENT DISCUSSION
by C.T. Fitzpatrick, Mason Hawkins, and Staley Cates
forced to abandon another project in downtown Scottsdale due to political
opposition, and this defeat hurt the stock.
Host Marriott demonstrated the superior quality of its assets by outperforming
the hotel industry again in 1999. Despite its property level performance, the
company and the lodging industry remain very out of favor. In addition, Host
Marriott experienced higher than anticipated costs to convert to a REIT, and
allocated capital poorly. (See page 3.) The newly appointed CEO has responded by
selling assets and using the proceeds to repurchase the very undervalued stock.
From today's prices we should be amply rewarded when Host Marriott's property
values are weighed properly in the stock market.
Prime Retail is the largest owner of outlet centers in the United States
controlling approximately 50% of the Class A outlet space in the industry. This
market share translated into solid rent growth throughout 1999, and led to a
promising European joint venture development opportunity. Unfortunately, the
company did not execute a leasing turnaround plan for its bottom tier outlet
centers which were acquired primarily from Horizon Group in 1998. The company
sells today for just 2 times depressed FFO (funds from operations). We
anticipate Prime Retail's management team will take decisive steps to increase
shareholder value in 2000.
After a 50% price decline we purchased Waste Management based upon the value of
its landfills, which provide the vast majority of the company's strong free cash
flow. While merger-related integration issues have caused problems that will
take longer to fix than we originally anticipated, we are highly confident that
they are fixable. (See pages 3 and 10.) Waste Management has the best assets
within an increasingly supply constrained industry. As the company's new
management team, led by Maury Myers, makes progress with the basic operations of
the business, those asset values should surface through higher earnings
resulting in a higher stock price.
The Fund's best performing four stocks, Red Roof Inns, Timberwest, Forest City
Enterprises and Prime Group, added $31 million to 1999's return. Red Roof was
acquired by Accor in mid-1999.
Timberwest, the largest private landowner in western Canada, produced solid cash
flows from its timber holdings on Vancouver Island. The company's stock trades
at a substantial discount to private acreage values. Timberwest derives a
disproportionate share of its profits from log sales to Japan. The company
should benefit from an improving Japanese economy.
27
<PAGE> 30
REALTY FUND - MANAGEMENT DISCUSSION
by C.T. Fitzpatrick, Mason Hawkins, and Staley Cates
Forest City, one of the largest real estate owners and developers in the
country, made progress across the board in 1999. The company reported strong
property level results and earnings growth, moved forward on several high
profile developments including Times Square, and was selected as the master
developer for the massive Denver-Stapleton re-development project. The company's
value grew much faster than its stock price, which is even more compelling today
than a year ago.
Prime Group also reported strong results in all parts of its business. Property
level results from its Chicago properties were among the strongest reported
anywhere in the U.S. The company also made several attractive acquisitions, sold
assets at prices above our appraisals, and reported solid earnings growth. At
the end of the year the company announced a plan to sell $500 million in assets,
and to use half the proceeds to retire debt and half to buy in shares. At
today's prices this repurchase would equal nearly two-thirds of the company's
publicly traded equity, and Prime Group would still own over $1 billion in real
estate assets.
The Realty Fund has a unique opportunity where even our best performers are
still selling at large discounts to our appraisals, and many holdings are
selling for less than half of their worth. These substantial discounts are based
on current valuations, and most of our businesses are rapidly increasing their
values-per-share. With the stability of the Fund's assets, we have a tremendous
competitive advantage for reaping future returns. We are confident that the
patience of our partners will result in rewarding long-term results for all of
us.
28
<PAGE> 31
REALTY FUND - PERFORMANCE CONTRIBUTIONS
The following table delineates the specific dollar contributions of individual
holdings to operations for 1999. The companies listed impacted performance by at
least $4.5 million.
<TABLE>
<CAPTION>
CONTRIBUTION
------------
<S> <C>
FROM PORTFOLIO HOLDINGS:
Red Roof Inns, Inc................................... $ 11,960,522
TimberWest Forest Corp............................... 9,542,021
Forest City Enterprises, Inc. -- Class A and B....... 4,988,717
Prime Group Realty Trust............................. 4,534,599
IHOP Corp............................................ (5,380,826)
Catellus Development Corporation..................... (6,314,700)
Beacon Capital Partners, Inc......................... (6,366,605)
Bay View Capital Corp................................ (8,906,068)
Prime Retail, Inc.................................... (10,139,486)
Host Marriott Corporation............................ (21,161,738)
Waste Management, Inc................................ (23,968,341)
Excel Legacy Corporation -- Common and Preferred..... (26,025,685)
All others, net...................................... 1,755,177
------------
(75,482,413)
Interest income........................................ 659,372
Expenses............................................... (8,692,504)
------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS........................................ $(83,515,545)
============
</TABLE>
29
<PAGE> 32
REALTY FUND - PERFORMANCE HISTORY
LONGLEAF PARTNERS REALTY FUND
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
SINCE PUBLIC OFFERING 1/2/96
(GRAPH)
The graph is a composite line graph showing total returns of Longleaf Partners
Realty Fund since its initial public offering on January 2, 1996, in comparison
with the Wilshire Real Estate Securities Index, the primary broad based
securities index used, the NAREIT Index, and inflation plus 10%.*
Each line graph begins with an assumed investment of $10,000 at 1/02/96, and has
an ending value for each at 12/31/99. The ending value for each separate line
graph is as follows:
Longleaf Partners International Fund -- $14,223
Wilshire Real Estate Securities Index -- $13,131
NAREIT Index -- $12,250
Inflation plus 10% -- $15,920*
AVERAGE ANNUAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Wilshire
Real Estate
Realty Securities NAREIT Inflation
Fund Index Index Plus 10%*
------ ----------- ------ ---------
<S> <C> <C> <C> <C>
One Year (10.45)% (3.17)% (6.48)% 12.68%
Three Years 0.36 (1.41) (3.37) 12.00
Since Public Offering 1/2/96 9.21 6.92 5.21 12.34
</TABLE>
* Inflation Source: Monthly Consumer Price Index for All Urban Consumers (CPI-U)
compiled by the U.S. Bureau of Labor Statistics.
30
<PAGE> 33
REALTY FUND - PORTFOLIO SUMMARY
FIVE LARGEST HOLDINGS
(REPRESENT 44.3% OF NET ASSETS)
HILTON HOTELS CORPORATION (HLT) 12.6%
Worldwide hotel owner, operator, and franchiser. Owns trophy properties
including the Waldorf Astoria, Palmer House and Hawaiin Village. Manages and/or
franchises hotels under the Hilton, Hampton Inn, Embassy Suites, Doubletree, and
Homewood Suites brands.
FOREST CITY ENTERPRISES, INC. (FCE) 8.8%
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
re-development, and mixed use projects in both New York's Times Square and San
Francisco.
CATELLUS DEVELOPMENT CORPORATION (CDX) 8.4%
A diversified real estate company that owns, manages and develops industrial
warehouses, offices, apartments and residential communities. CDX has substantial
land holdings throughout the U.S. with a concentration of high profile projects
in California. Catellus' most significant project is a 313 acre mixed use
development at Mission Bay on the waterfront in downtown San Francisco.
EXCEL LEGACY CORPORATION (XLG) 7.9%
A C-corp. focused on development, re-development, and ownership of unique real
estate projects throughout North America. Excel Legacy has numerous urban,
mixed-use retail/entertainment developments primarily located in the western
U.S. including Scottsdale, Palm Springs, Salt Lake City, Anaheim, Denver, and
Newport, KY across the river from Cincinnati.
PRIME GROUP REALTY TRUST (PGE) 6.6%
A REIT that owns over 11 million square feet of central business district and
suburban office space predominately 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.
PORTFOLIO CHANGES
JANUARY 1, 1999 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Beacon Voting Trust* (Beacon Capital Alexandria Real Estate Equities,
Partners, Inc.) Inc.
Franchise Mortgage Acceptance Castle & Cooke, Inc.
Company Crestline Capital Corporation*(HMT)
Park Place Entertainment Corp.*(HLT) Franchise Mortgage Acceptance
Waste Management, Inc. Company**(BVC)
Park Place Entertainment Corp.*(HLT)
Promus Hotel Corporation**(HLT)
Red Roof Inns, Inc.
Supertel Hospitality, Inc.
</TABLE>
* Acquired through merger/spin-off of existing position (ticker of original
holding).
** Eliminated through merger/acquisition (ticker of acquiror).
31
<PAGE> 34
REALTY FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C> <C> <C> <C>
Common Stock - 89.6%
Realty 89.2%
Diversified Realty 21.3%
4,209,800 * Catellus Development Corporation................ $ 53,938,062
2,195,000 * Excel Legacy Corporation(b)..................... 7,270,938
1,864,050 Forest City Enterprises, Inc. - Class A(b)...... 52,193,400
148,600 Forest City Enterprises, Inc. - Class B(b)...... 4,615,887
1,123,600 TrizecHahn Corporation (Foreign)................ 18,960,750
------------
136,979,037
------------
Lodging 20.5%
8,424,744 Hilton Hotels Corporation....................... 81,088,161
3,434,408 Host Marriott Corporation (REIT)(c)............. 28,333,866
719,500 Marriott International, Inc..................... 22,709,219
------------
132,131,246
------------
Mortgage Financing 5.3%
2,399,647 Bay View Capital Corp.(b)....................... 34,044,992
------------
Natural Resources/Land 13.5%
650,000 Deltic Timber Corporation(b).................... 14,218,750
200,000 Rayonier Inc.................................... 9,662,500
4,740,200 TimberWest Forest Corp. (Foreign)(b)............ 31,028,664
1,840,000 Waste Management, Inc........................... 31,625,000
------------
86,534,914
------------
Office 19.3%
2,075,000 Beacon Capital Partners, Inc. (REIT)(b)(d)...... 24,900,000
833,000 Boston Properties Inc. (REIT)................... 25,927,125
914,200 Cousins Properties Incorporated (REIT).......... 31,025,663
2,810,700 Prime Group Realty Trust (REIT)(b).............. 42,687,506
------------
124,540,294
------------
Retail 9.3%
1,223,800 Getty Realty Corp.(b)........................... 13,691,262
1,622,100 * IHOP Corp.(b)................................... 27,068,794
3,371,400 Prime Retail, Inc. (REIT)(b).................... 18,964,125
------------
59,724,181
------------
Non-Realty 0.4%
162,800 * The Pioneer Group, Inc.......................... 2,564,100
------------
TOTAL COMMON STOCKS (COST $663,929,088)......... 576,518,764
------------
</TABLE>
See Notes to Financial Statements.
32
<PAGE> 35
REALTY FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C> <C> <C> <C>
Preferred Stock - 6.8%
Diversified Realty 6.8%
14,600,000 * Excel Legacy Corporation - Series A Liquidating
Preference Convertible (Cost
$73,000,000)(b)(d)............................ $ 43,526,980
------------
UNITS
----------
Trust Units - 1.2%
Lodging 1.2%
93,564 Beacon Voting Trust (Cost $8,945,868)(b)(d)..... 7,485,120
------------
CONTRACTS
----------
Options - 0.5%
Natural Resources/Land 0.5%
Put Options Written
8,461 Newhall Land and Farming Company, expiring
April '01 @ $25 (Premiums received
$2,581,033)..................................... (1,396,065)
Call Options Purchased
8,461 Newhall Land and Farming Company, expiring
April '01 @ $25 (Cost $3,711,631)............... 5,000,451
------------
3,604,386
------------
PAR
----------
Short-Term Obligations 0.8%
5,234,000 Repurchase Agreement with State Street Bank,
2.5% due 1-3-00 (Collateralized by U.S.
government securities).......................... 5,234,000
------------
TOTAL INVESTMENTS (COST $752,209,554)(a)...................... 98.9% 636,369,250
OTHER ASSETS AND LIABILITIES, NET............................. 1.1 6,941,277
----- ------------
NET ASSETS.................................................... 100.0% $643,310,527
===== ============
NET ASSET VALUE PER SHARE............................................ $12.69
======
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for federal income tax purposes. Aggregate
unrealized appreciation and depreciation are $46,044,368 and $(173,332,438),
respectively.
(b) Affiliated company. See Note 7.
(c) A portion designated as collateral on Newhall options. See Note 10.
(d) Illiquid, board valued security. See Note 8.
Note: REITs comprise 27% of net assets. Companies designated as "Foreign" are
headquartered outside the U.S. and represent 8% of net assets.
See Notes to Financial Statements.
33
<PAGE> 36
(Intentionally Left Blank)
34
<PAGE> 37
SMALL-CAP FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and John Buford
Longleaf Partners Small-Cap Fund ended 1999 up 4.1% after a flat (-0.4%) fourth
quarter. While the average stock as measured by Value Line declined 1.4% during
the year, the Russell 2000 Index finished the year up 21.3% following an amazing
fourth quarter rally of 18.4% when technology and internet related stocks
soared. (Please refer to the table on page 35 for specific contributions to the
Fund's 1999 performance.)
Each of our three largest positions going into 1999 appreciated substantially
and was sold. Shaw Communications, the Canadian cable operator, reached our
appraisal in the first quarter. Over the eighteen months we owned the company,
the stock almost tripled. Orion Capital, Promus Hotels, and Pinkerton's were
acquired and significantly added to the Fund's performance.
Several smaller holdings also appreciated during the year. Agribrands' results
improved as its overseas feed business rebounded with the recovering Asian
economy. Hilb, Rogal and Hamilton continued to grow free cash flow both
organically and through intelligent acquisitions. Gulf Canada, currently the
Fund's largest holding, rose during the year as oil and gas prices rebounded.
This exploration and production company did not appreciate nearly as much as oil
prices, however. With a strengthened balance sheet and unique energy assets,
Gulf Canada remains at a large discount to its value. Timberwest, the Canadian
timber company, had solid cash flows, and should benefit further from an
improving Japanese economy.
We bought eleven new holdings during the year. Three, Romac International, First
Health Group, and Neiman Marcus Group, quickly added to the Small-Cap Fund's
results. Romac, the largest single contributor to performance, is a job
placement firm with both a traditional business filling full and part-time
positions, and a new Internet placement venture, kforce.com. The stock fell as
the market feared that the end of Y2K work would hurt revenues, and this decline
allowed us to acquire a position. In a fascinating commentary on today's stock
market, Romac almost doubled in a two week period following an announcement that
the company would change its name to kforce.com, inc. First Health rose to our
appraisal, allowing us to sell our stake. We bought Neiman Marcus, the high-end
retailer, in the fourth quarter, and it ended the year as our fourth largest
holding. Although the stock rose shortly after our purchase, the market has not
fully recognized the value in Neiman's superior brands and rapidly growing
customer base.
The good returns at many of our companies were tempered by price declines in
some of our positions. Pediatrix Medical, a national physician practice manage-
35
<PAGE> 38
SMALL-CAP FUND - MANAGEMENT DISCUSSION
by Mason Hawkins, Staley Cates, and John Buford
ment company that specializes in managing critical care units for babies and
children, is under attack from short sellers over its billing rates to state
governments. At Carmike Cinemas we underestimated the increase in new supply for
rural movie theaters, and how that would impact Carmike's revenues. U.S.
Industries, currently our third largest holding, declined during the year to our
cost. Management took advantage of the price weakness by selling assets and
using the proceeds to repurchase shares. Bay View reported higher cash earnings
in 1999, but the market was unsatisfied. Carbide/Graphite operated below
capacity awaiting improved demand and pricing for both its needle coke and
graphite electrode lines of business. Midas reported weak same-store sales, but
the new management team made great progress in improving franchisee relations,
building value through improved operations, and buying in stock. Wisconsin
Central, currently the Fund's second largest holding, took longer to turn around
the U.K. rail it bought very cheaply from the government. The domestic rail
continues as an industry leader, and the prospects for each of its rail
operations remain compelling.
In 1999 we found numerous investment opportunities and used proceeds from sales
to re-position the portfolio. We also sold our Japanese holdings as equally
attractive qualifying domestic opportunities emerged. As we look down the list
of holdings, we see tremendous upside. We own high quality businesses with good
management partners, and our ownership stakes are very discounted. Collectively
the Fund's composite price-to-value ratio approaches 50%. Businesses that
produce substantial free cash flow and have capable managements with the right
incentives invariably reach full value when either the market changes its mind
(Shaw), the business fundamentals improve (Agribrands and Timberwest), corporate
acquirers see an opportunity (Orion, Promus, Pinkerton's), management
restructures the company (Romac), or management aggressively moves to repurchase
shares (most of our holdings).
36
<PAGE> 39
SMALL-CAP FUND - PERFORMANCE CONTRIBUTIONS
The following table delineates the specific dollar contributions of individual
holdings to operations for 1999. The companies listed impacted performance by at
least $10 million.
<TABLE>
<CAPTION>
CONTRIBUTION
------------
<S> <C>
FROM PORTFOLIO HOLDINGS:
Romac International, Inc............................. $ 31,759,190
Shaw Communications - Class A and B.................. 29,103,094
Orion Capital Corporation............................ 20,462,036
Hilton Hotels (formerly Promus Hotel Corporation).... 17,040,545
Agribrands International, Inc........................ 16,246,400
Hilb Rogal and Hamilton Company...................... 16,049,922
Gulf Canada Resources Limited........................ 14,918,198
First Health Group Corp.............................. 12,843,975
TimberWest Forest Corp............................... 10,623,051
The Nieman Marcus Group, Inc. - Class B.............. 10,294,819
Wisconsin Central Transportation Corporation......... (13,669,587)
Midas Inc............................................ (14,019,287)
The Carbide/Graphite Group, Inc...................... (14,355,000)
Bay View Capital Corp................................ (15,574,117)
U.S. Industries, Inc................................. (17,923,220)
Carmike Cinemas, Inc................................. (18,375,000)
Pediatrix Medical Group, Inc......................... (26,539,195)
All others, net...................................... (4,193,512)
------------
54,692,312
Interest income........................................ 6,060,731
Expenses............................................... (14,160,642)
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS........................................ $ 46,592,401
============
</TABLE>
37
<PAGE> 40
SMALL-CAP FUND - PERFORMANCE HISTORY AND
PORTFOLIO SUMMARY
LONGLEAF PARTNERS SMALL-CAP FUND
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
OVER TEN YEARS
(GRAPH)
The graph is a composite line graph showing total returns of Longleaf Partners
Small-Cap Fund over ten years in comparison with the Russell 2000 Index, the
primary broad based securities index used, the Value-Line Index, and inflation
plus 10%.*
Each line graph begins with an assumed investment of $10,000 at 12/31/89, and
has an ending value for each at 12/31/99. The ending value for each separate
line graph is as follows:
Longleaf Partners Small-Cap Fund -- $27,498
Russell 2000 Index -- $35,164
Value-Line Index -- $16,656
Inflation plus 10% -- $33,734
AVERAGE ANNUAL RETURNS
FOR THE PERIODS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Value-Line Inflation
Small-Cap Russell 2000 (Geometric) Plus
Fund Index Index 10%*
--------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
One Year 4.05% 21.26% (1.40)% 12.68%
Five Years 18.58 16.69 9.21 12.37
Ten Years(a) 10.64 13.40 5.23 12.93
Since Public Offering 2/21/89(a) 11.75 13.17 5.27 13.13
</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.
38
<PAGE> 41
SMALL-CAP FUND - PERFORMANCE HISTORY AND
PORTFOLIO SUMMARY
FIVE LARGEST HOLDINGS
(REPRESENT 26.8% OF NET ASSETS)
GULF CANADA RESOURCES LIMITED (GOU) 6.6%
Canadian based exploration and production company with oil and natural gas
assets across the world.
WISCONSIN CENTRAL TRANSPORTATION CORPORATION (WCLX) 5.2%
A railroad holding company that owns lines in the midwest U.S., Ontario, The
United Kingdom, New Zealand, and Australia.
U.S. INDUSTRIES, INC. (USI) 5.0%
Manufacturer of bath and plumbing (Zurn, Jacuzzi, Eljer) products, indoor
lighting (Lighting Corp. of America), and hardware (True Temper, Ames).
THE NEIMAN MARCUS GROUP, INC. - CLASS B (NMG.B) 5.0%
High-end retailer that owns Neiman Marcus stores and Bergdorf Goodman.
SAFETY-KLEEN CORP. (SK) 5.0%
Collects, recycles, and disposes hazardous & non-hazardous waste streams using
its network of collection facilities.
PORTFOLIO CHANGES
JANUARY 1, 1999 THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
First Health Group Corp. The Chiyoda Fire and Marine
Fleming Companies, Inc. Insurance Company, Ltd.
Hilton Hotels Corporation*(PRH) The Dai-Tokyo Fire and Marine
The MONY Group Inc. Insurance Company, Ltd.
The Neiman Marcus Group, Inc. - First Health Group Corp.
Class B Fuji Fire and Marine Insurance
Pediatrix Medical Group, Inc. Company, Limited
Premier Farnell plc Gendis Inc.
Romac International, Inc. Nippon Broadcasting System
Safety-Kleen Corp. The Nissan Fire & Marine Insurance
Vail Resorts, Inc. Company, Ltd.
Whitman Corporation Orion Capital Corporation
Wyndham International, Inc. Pinkerton's Inc.
Premier Farnell plc
Promus Hotel Corporation**(HLT)
Robbins & Myers, Inc.
Sangetsu Co., Ltd.
Shaw Communications Inc. - Class A
Shaw Communications Inc. - Class B
TrizecHahn Corporation
Vail Resorts, Inc.
</TABLE>
* Acquired through merger/spin-off of existing position (ticker of original
holding)
** Eliminated through merger/acquisition (ticker of acquiror).
39
<PAGE> 42
SMALL-CAP FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
Common Stock 99.1%
Agriculture 3.3%
1,015,400 * Agribrands International, Inc.(b).............. $ 46,708,400
Beverages 2.1%
2,195,100 Whitman Corporation............................ 29,496,656
Business Services 4.7%
5,029,900 * Romac International, Inc.(b)................... 67,589,281
Commercial Lighting 6.0%
2,407,500 * Genlyte Group Incorporated(b).................. 51,460,313
1,692,850 Thomas Industries, Inc.(b)..................... 34,597,622
--------------
86,057,935
--------------
Entertainment 0.8%
1,470,000 * Carmike Cinemas, Inc. -- Class A(b)............ 11,484,375
Environmental Services 5.0%
6,297,600 * Safety-Kleen Corp.(b).......................... 71,241,600
Food -- Wholesale 4.6%
6,444,000 Fleming Companies, Inc.(b)..................... 66,051,000
Health Care 1.0%
2,056,500 * Pediatrix Medical Group, Inc.(b)............... 14,395,500
Investment Management 1.5%
1,320,000 * The Pioneer Group, Inc......................... 20,790,000
Life Insurance 4.2%
2,058,500 The MONY Group Inc............................. 60,082,469
Lodging 5.1%
2,829,653 Hilton Hotels Corporation...................... 27,235,410
15,450,400 * Wyndham International, Inc.(b)................. 45,385,550
--------------
72,620,960
--------------
Manufacturing 13.4%
3,323,440 AMETEK, Inc.(b)................................ 63,353,075
1,740,000 * The Carbide/Graphite Group, Inc.(b)............ 11,310,000
2,390,200 * Scott Technologies, Inc.(b).................... 45,115,025
5,115,000 U.S. Industries, Inc.(b)....................... 71,610,000
--------------
191,388,100
--------------
Mortgage Financing 3.1%
3,114,700 Bay View Capital Corp.(b)...................... 44,189,806
Natural Resources 11.1%
845,000 Deltic Timber Corporation(b)................... 18,484,375
27,863,860 * Gulf Canada Resources Limited (Foreign)(b)..... 94,040,527
6,950,000 TimberWest Forest Corp. (Foreign)(b)........... 45,493,695
--------------
158,018,597
--------------
</TABLE>
See Notes to Financial Statements.
40
<PAGE> 43
SMALL-CAP FUND - PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- --------------
<S> <C> <C> <C> <C> <C>
Pharmaceuticals 4.1%
7,268,800 * Perrigo Company(b)............................. $ 58,150,400
Property & Casualty Insurance 6.6%
243,883 * Alleghany Corporation.......................... 45,240,296
1,777,400 Hilb, Rogal and Hamilton Company(b)............ 50,211,550
--------------
95,451,846
--------------
Real Estate 8.5%
4,680,000 * Catellus Development Corporation............... 59,962,500
1,135,400 Cousins Properties Incorporated................ 38,532,638
1,443,400 * IHOP Corp.(b).................................. 24,086,738
--------------
122,581,876
--------------
Restaurants 1.1%
982,400 * VICORP Restaurants, Inc.(b).................... 15,841,200
Retail 7.7%
1,767,600 Midas Inc.(b).................................. 38,666,250
2,654,100 * The Neiman Marcus Group, Inc. -- Class B(b).... 71,494,819
--------------
110,161,069
--------------
Transportation 5.2%
5,550,800 * Wisconsin Central Transportation
Corporation(b)............................... 74,588,875
--------------
TOTAL COMMON STOCKS (COST $1,402,414,683).................. 1,416,889,945
--------------
</TABLE>
<TABLE>
<CAPTION>
PAR
----------
<S> <C> <C> <C> <C> <C>
Short-Term Obligations 0.7%
9,295,000 Repurchase Agreement with State Street Bank,
2.5% due 1-3-00 (Collateralized by U.S.
government securities)....................... 9,295,000
--------------
TOTAL INVESTMENTS (COST $1,411,709,683)(a)................... 99.8% 1,426,184,945
OTHER ASSETS AND LIABILITIES, NET............................ 0.2 3,488,272
----- --------------
NET ASSETS................................................... 100.0% $1,429,673,217
===== ==============
NET ASSET VALUE PER SHARE........................................... $20.20
======
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for federal income tax purposes. Aggregate
unrealized appreciation and depreciation are $158,598,595 and
$(144,123,333), respectively.
(b) Affiliated company. See Note 7.
Note: Companies designated as "Foreign" are headquartered outside the U.S. and
represent 10% of net assets.
See Notes to Financial Statements.
41
<PAGE> 44
LONGLEAF PARTNERS FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
PARTNERS FUND
<S> <C>
ASSETS:
Investments:
Affiliated securities, at market value (cost
$2,401,549,875, $46,220,168, $379,683,544 and
$1,135,148,750, respectively) (Note 2 and 7)............
Other securities, at market value (cost $1,538,864,531,
$234,266,829, $369,903,043 and $267,265,933,
respectively) (Note 2)..................................
Repurchase agreements (Note 2)............................
TOTAL INVESTMENTS
Cash........................................................
Receivable for:
Dividends and interest....................................
Fund shares sold..........................................
Securities sold...........................................
Prepaid assets..............................................
TOTAL ASSETS
LIABILITIES:
Payable for:
Forward currency contracts (Note 2).......................
Fund shares redeemed......................................
Securities purchased......................................
Investment counsel fee (Note 3)...........................
Administration fee (Note 4)...............................
Options written, at market value (premiums received
$2,581,033) (Note 2 and 9)................................
Other accrued expenses......................................
TOTAL LIABILITIES
NET ASSETS:
Net assets consist of:
Paid-in capital...........................................
Undistributed net investment income(loss).................
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..........................
</TABLE>
See Notes to Financial Statements.
42
<PAGE> 45
LONGLEAF PARTNERS FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
PARTNERS FUND INTERNATIONAL FUND REALTY FUND SMALL-CAP FUND
- -------------- ------------------ ------------ --------------
<S> <C> <C> <C>
$1,658,895,528 $ 41,376,808 $317,080,531 $1,135,549,976
1,904,379,627 256,164,800 315,450,784 281,339,969
62,701,000 2,769,000 5,234,000 9,295,000
- -------------- ------------ ------------ --------------
3,625,976,155 300,310,608 637,765,315 1,426,184,945
169 223 590 590
4,730,304 518,618 3,124,127 1,709,506
4,572,816 407,256 2,987,971 1,080,531
22,696,553 107,327 2,523,217 4,502,879
167,054 20,205 31,462 56,883
- -------------- ------------ ------------ --------------
3,658,143,051 301,364,237 646,432,682 1,433,535,334
- -------------- ------------ ------------ --------------
17,746,341 6,332,129 - -
13,164,530 905,778 1,043,156 2,544,589
2,022,779 - - 2,706
2,421,201 371,774 549,577 1,028,441
311,503 25,602 54,957 125,801
- - 1,396,065 -
367,227 115,858 78,400 160,580
- -------------- ------------ ------------ --------------
36,033,581 7,751,141 3,122,155 3,862,117
- -------------- ------------ ------------ --------------
$3,622,109,470 $293,613,096 $643,310,527 $1,429,673,217
============== ============ ============ ==============
$3,738,388,018 $265,239,079 $785,852,455 $1,414,197,988
- (1,144) - 32,283
278,607,044 17,654,042 (26,670,992) 968,573
(394,885,592) 10,721,119 (115,870,936) 14,474,373
- -------------- ------------ ------------ --------------
$3,622,109,470 $293,613,096 $643,310,527 $1,429,673,217
============== ============ ============ ==============
$20.49 $12.02 $12.69 $20.20
============== ============ ============ ==============
176,769,274 24,431,980 50,689,493 70,780,977
</TABLE>
See Notes to Financial Statements.
43
<PAGE> 46
LONGLEAF PARTNERS FUNDS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
INCOME:
Dividends from affiliates (net of foreign tax withheld of
$454,114, $115,747, $18,319 and $28,235, respectively)
(Note 7)................................................
Dividends from non-affiliates (net of foreign tax withheld
of $1,561,433, $261,841, $41,060 and $66,235,
respectively)...........................................
Interest..................................................
Total income.......................................
EXPENSES:
Investment counsel fee (Note 3)...........................
Administration fee (Note 4)...............................
Transfer agent fee........................................
Registration and filing fees..............................
Postage and supplies......................................
Printing..................................................
Reimbursable administration expenses (Note 4).............
Custodian fee.............................................
Professional fees.........................................
Trustees' fees............................................
Insurance expense.........................................
Miscellaneous.............................................
Total expenses.....................................
Investment counsel fee waived.............................
Net expenses.......................................
Net investment income..............................
REALIZED AND UNREALIZED GAIN(LOSS):
Net realized gain(loss):
Non-affiliated securities.................................
Affiliated securities (Note 7)............................
Options...................................................
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.
44
<PAGE> 47
LONGLEAF PARTNERS FUNDS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PARTNERS FUND INTERNATIONAL FUND REALTY FUND SMALL-CAP FUND
- ------------- ------------------ ------------- --------------
<S> <C> <C> <C>
$ 19,573,130 $ 1,068,720 $ 10,926,161 $ 10,808,885
35,819,820 2,670,858 7,651,367 2,844,620
33,602,899 1,709,757 659,372 6,060,731
- ------------- ------------- ------------- -------------
88,995,849 5,449,335 19,236,900 19,714,236
- ------------- ------------- ------------- -------------
33,132,889 3,476,322 7,445,972 11,915,519
4,284,390 231,755 744,598 1,455,404
690,431 37,347 120,019 234,614
248,545 99,355 39,642 104,973
279,306 23,615 73,313 108,262
263,023 24,429 71,594 96,989
184,137 7,033 41,405 69,576
102,186 108,041 19,443 35,120
46,568 45,346 44,108 41,994
60,000 20,000 30,000 30,000
44,240 2,648 12,001 16,444
131,989 22,076 50,409 51,747
- ------------- ------------- ------------- -------------
39,467,704 4,097,967 8,692,504 14,160,642
- (42,258) - -
- ------------- ------------- ------------- -------------
39,467,704 4,055,709 8,692,504 14,160,642
- ------------- ------------- ------------- -------------
49,528,145 1,393,626 10,544,396 5,553,594
- ------------- ------------- ------------- -------------
916,862,616 27,261,297 (26,756,214) 149,184,620
836,664 (243,560) 16,786,733 18,515,858
- - 1,258,956 -
(13,344,304) (2,235,160) - (4,335,671)
(10,524) (48,685) 10,900 9,300
- ------------- ------------- ------------- -------------
904,344,452 24,733,892 (8,699,625) 163,374,107
- ------------- ------------- ------------- -------------
(916,521,959) 14,417,177 (84,456,914) (130,207,391)
(5,077,187) (3,481,944) (903,402) 7,872,091
- ------------- ------------- ------------- -------------
(921,599,146) 10,935,233 (85,360,316) (122,335,300)
- ------------- ------------- ------------- -------------
(17,254,694) 35,669,125 (94,059,941) 41,038,807
- ------------- ------------- ------------- -------------
$ 32,273,451 $ 37,062,751 $ (83,515,545) $ 46,592,401
============= ============= ============= =============
</TABLE>
See Notes to Financial Statements.
45
<PAGE> 48
LONGLEAF PARTNERS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PARTNERS FUND
---------------------------------
YEAR ENDED
DECEMBER 31,
---------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income...................................... $ 49,528,145 $ 37,909,506
Net gain(loss)............................................. 904,344,452 638,290,424
Change in net unrealized gain(loss)........................ (921,599,146) (248,007,321)
------------- --------------
Net increase(decrease) in net assets resulting from
operations............................................. 32,273,451 428,192,609
------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income................................. (50,849,326) (36,966,961)
From net realized gain on investments...................... (672,352,020) (586,542,694)
From return of capital..................................... - -
------------- --------------
Net decrease in net assets resulting from
distributions.......................................... (723,201,346) (623,509,655)
------------- --------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares........................... 1,134,274,945 890,978,876
Net asset value of shares issued to shareholders for
reinvestment of shareholder distributions................ 695,727,239 907,344,282
Cost of shares redeemed.................................... 1,202,264,742) (522,776,364)
------------- --------------
Net increase in net assets from fund share
transactions........................................... 627,737,442 1,275,546,794
------------- --------------
Total increase(decrease) in net assets................... (63,190,453) 1,080,229,748
NET ASSETS:
Beginning of period........................................ 3,685,299,923 2,605,070,175
------------- --------------
End of period.............................................. 3,622,109,470 $3,685,299,923
============= ==============
Undistributed net investment income(loss) included in net
assets at end of period.................................. $ - $ 872,615
============= ==============
</TABLE>
See Notes to Financial Statements.
46
<PAGE> 49
LONGLEAF PARTNERS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INTERNATIONAL FUND REALTY FUND SMALL-CAP FUND
- -------------------------------- ----------------------------- -------------------------------
YEAR CAPITALIZATION YEAR ENDED YEAR ENDED
ENDED AUGUST 12, 1998 DECEMBER 31, DECEMBER 31,
DECEMBER 31, TO DECEMBER 31, ----------------------------- -------------------------------
1999 1998 1999 1998 1999 1998
- -------------- --------------- -------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1,393,626 $ 37,645 $ 10,544,396 $ 22,852,505 $ 5,553,594 $ 10,219,153
24,733,892 1,099,639 (8,699,625) (18,082,849) 163,374,107 150,103,088
10,935,233 (214,114) (85,360,316) (128,495,450) (122,335,300) (28,601,652)
------------ ----------- ------------ ------------ ------------- --------------
37,062,751 923,170 (83,515,545) (123,725,794) 46,592,401 131,720,589
------------ ----------- ------------ ------------ ------------- --------------
(1,346,328) (37,720) (5,142,943) (22,173,227) (5,574,355) (10,041,928)
(8,227,856) - - - (165,419,770) (145,213,540)
- - (11,417,766) (5,557,418) - -
------------ ----------- ------------ ------------ ------------- --------------
(9,574,184) (37,720) (16,560,709) (27,730,645) (170,994,125) (155,255,468)
------------ ----------- ------------ ------------ ------------- --------------
251,155,300 75,071,603 256,227,058 524,495,785 500,525,620 565,247,944
8,647,707 32,236 15,791,432 56,610,939 163,286,523 178,562,305
(69,251,008) (516,759) (304,327,313) (391,256,885) (465,100,821) (280,170,886)
------------ ----------- ------------ ------------ ------------- --------------
190,551,999 74,587,080 (32,308,823) 189,849,839 198,711,322 463,639,363
------------ ----------- ------------ ------------ ------------- --------------
218,040,566 75,472,530 (132,385,077) 38,393,400 74,309,598 440,104,484
75,572,530 100,000 775,695,604 737,302,204 1,355,363,619 915,259,135
------------ ----------- ------------ ------------ ------------- --------------
$293,613,096 $75,572,530 $643,310,527 $775,695,604 1,429,673,217 $1,355,363,619
============ =========== ============ ============ ============= ==============
$ (1,144) $ 244 $ - $ 627,922 $ 32,284 $ 43,744
============ =========== ============ ============ ============= ==============
</TABLE>
See Notes to Financial Statements.
47
<PAGE> 50
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; these principles may require the use of
estimates by Fund management. Actual results could differ from those estimates.
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 values 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.
48
<PAGE> 51
Dividend income is recognized on the ex-dividend date, except that certain
dividends from foreign securities are recorded as soon after the ex-dividend
date as the Fund is informed of the dividend. Interest income and Fund expenses
are recognized on an accrual basis.
Distributions to Shareholders
Dividends and distributions to shareholders are recorded on the ex-dividend
date.
Federal Income Taxes
The Funds' policy is to comply with the requirements of the Internal Revenue
Code that are applicable to regulated investment companies and to distribute
substantially 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
49
<PAGE> 52
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. When an option
is exercised, the cost of securities acquired or the proceeds from securities
sold is adjusted by the premium amount.
Risk of Forward Currency Contracts and Options
The Funds generally use forward currency contracts and options for hedging
purposes to reduce market risks. However, when used separately, forward currency
contracts and options have risks. For example, the price movements of the
options and forwards may not follow the price movements of the portfolio
securities subject to the hedge. Gains on investments in options and forwards
depend on the ability to predict correctly the direction of stock prices,
interest rates, and other economic factors. Where a liquid secondary market for
options or forwards does not exist, the Funds may not be able to close their
positions and in such an event, the loss is theoretically unlimited.
Repurchase Agreements
The Funds may engage in repurchase agreement transactions. The Funds' custodian
bank sells U.S. government securities to each Fund under agreements to
repurchase these securities from each Fund at a stated repurchase price
including interest for the term of the agreement, which is usually overnight or
over a weekend. Each Fund, through its custodian, receives delivery of the
underlying U.S. government securities as collateral, whose market value is
required to be at least equal to the repurchase price. If the custodian becomes
bankrupt, the Fund might be delayed, or may incur costs or possible losses of
principal and income, in selling the collateral.
NOTE 3. INVESTMENT COUNSEL AGREEMENT
Southeastern Asset Management, Inc. ("Southeastern") serves as Investment
Counsel to the Funds and receives annual compensation, computed daily and paid
monthly, in accordance with the following schedule for the Partners Fund and
Small-Cap Fund:
<TABLE>
<S> <C>
First $400 million of average daily net
assets.................................... 1.00%
In excess of $400 million................... .75%
</TABLE>
The Realty Fund fee is calculated on the same basis at 1.00% per annum on all
asset levels.
For the Partners, Small-Cap and Realty Funds, Southeastern has agreed to reduce
its fees on a pro rata basis to the extent that each Fund's normal annual
operating expenses (excluding taxes, interest, brokerage fees, and extraordinary
expenses)
50
<PAGE> 53
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 $42,258 at December 31, 1999
for expenses exceeding 1.75%.
NOTE 4. FUND ADMINISTRATOR
Southeastern also serves as the Fund Administrator and in this capacity is
responsible for managing, performing or supervising the administrative and
business operations of the Funds. Functions include the preparation of all
registration statements, prospectuses, tax returns and proxy statements, daily
valuation of the portfolios and calculation of daily net asset values per share.
The Funds pay a fee as compensation for these services, accrued daily and paid
monthly, of 0.10% per annum of average daily net assets.
Reimbursable administration expenses paid by the Funds to Southeastern consist
of the cost of computer software dedicated to valuation calculations and a
portion of the Funds' Treasurer's salary allocated in accordance with Trustee
review and approval.
NOTE 5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------
PARTNERS INTERNATIONAL REALTY SMALL-CAP
FUND FUND FUND FUND
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Shares sold......... 42,839,976 21,925,549 18,285,180 22,402,360
Reinvestment of
shareholder
distribution...... 32,884,394 706,373 1,261,297 8,115,384
Shares redeemed..... (50,052,490) (5,783,738) (22,165,389) (21,477,725)
----------- ---------- ----------- -----------
25,671,880 16,848,184 (2,618,912) 9,040,019
=========== ========== =========== ===========
</TABLE>
<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
=========== ========== =========== ===========
</TABLE>
51
<PAGE> 54
NOTE 6. INVESTMENT TRANSACTIONS
Purchases and sales of equity securities for the period (excluding short-term
obligations) are summarized below:
<TABLE>
<CAPTION>
PARTNERS FUND INTERNATIONAL FUND REALTY FUND SMALL-CAP FUND
-------------- ------------------ ------------ --------------
<S> <C> <C> <C> <C>
Purchases $1,902,827,363 $298,661,669 $164,287,991 $727,658,632
Sales 1,800,399,787 103,196,294 197,406,000 632,040,381
</TABLE>
NOTE 7. AFFILIATED COMPANIES
Under Section 2(a)(3) of the Investment Company Act of 1940, a portfolio company
is defined as "affiliated" if a Fund owns five percent or more of its voting
stock. At December 31, 1999, 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 5.6
Georgia-Pacific Corporation--Timber Group 9.0
Hilton Hotels Corporation 5.3
Host Marriott Corporation 5.1
The Nippon Fire & Marine Insurance Company, Ltd. 5.3
Pioneer Natural Resources Company 11.2
Rayonier Inc. 10.6
TrizecHahn Corporation 6.3
UCAR International, Inc. 9.9
Waste Management, Inc. 5.6
INTERNATIONAL FUND
Gendis Inc. (Note 8) 20.0
Bemrose Corporation plc 12.3
O&Y Properties Corporation 9.6
REALTY FUND
Bay View Capital Corporation 7.4
Beacon Capital Partners, Inc. (Note 8) 9.9
Beacon Voting Trust (Note 8) 9.9
Deltic Timber Corporation 5.2
Excel Legacy Corporation*--
Common 6.0
Series A Liquidating Preference Convertible (Note 8) 68.6
Forest City Enterprises, Inc. -- Class A and B 10.3
Getty Realty Corp. 9.0
IHOP Corp. 8.1
Prime Group Realty Trust 18.6
Prime Retail, Inc. 7.8
TimberWest Forest Corp. 6.8
* Combined voting power is 30.8%
</TABLE>
52
<PAGE> 55
<TABLE>
<CAPTION>
%
OUTSTANDING
SHARES OF THE
COMPANY
-------------
<S> <C>
SMALL-CAP FUND
Agribrands International, Inc. 9.8
AMETEK, Inc. 10.3
Bay View Capital Corp. 9.6
The Carbide/Graphite Group, Inc. 20.9
Carmike Cinemas, Inc.-- Class A 14.8
Deltic Timber Corporation 6.8
Fleming Companies, Inc. 16.6
Genlyte Group Incorporated 17.6
Gulf Canada Resources Limited 8.0
Hilb, Rogal and Hamilton Company 13.6
IHOP Corp. 7.2
Midas Inc. 10.9
The Neiman Marcus Group, Inc. -- Class B 5.4
Pediatrix Medical Group, Inc. 13.2
Perrigo Company 9.9
Romac International, Inc. 10.8
Safety-Kleen Corp. 6.3
Scott Technologies, Inc. 13.4
Thomas Industries, Inc. 10.7
TimberWest Forest Corp. 10.0
U.S. Industries, Inc. 5.9
VICORP Restaurants, Inc. 11.1
Wisconsin Central Transportation Corporation 10.8
Wyndham International, Inc. -- Class A 9.2
</TABLE>
NOTE 8. ILLIQUID OR RESTRICTED SECURITIES
The Realty Fund holds 2,075,000 shares of Beacon Capital Partners, Inc. (Beacon)
carried at $24,900,000 or $12.00 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, 1999.
On July 1, 1999, Beacon paid a taxable distribution of $9,013,144 in the form of
91,994 units of Beacon Voting Trust. The Voting Trust structure allows Beacon
Capital Partners to retain voting authority with respect to their investment in
Wyndham International without jeopardizing their REIT status. The Voting Trust
shares are not registered and are subject to transfer restrictions. On October
25, 1999, the Voting Trust paid a cash distribution of $67,275 and 1,570
additional trust units. At December 31, 1999 the 93,564 total Voting Trust units
are carried at $7,485,120 or $80.00 per unit.
The Realty Fund also owns 14,600,000 shares of Excel Legacy Corp. Series A
Liquidating Preference Convertible Stock (Excel Preferred) valued at
53
<PAGE> 56
$43,526,980 or $2.9813 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. The Excel Preferred shares are not registered and
there is no regular trading market in these shares.
Both Beacon, Beacon Voting Trust and Excel Preferred are valued in good faith
under guidelines established by the Board of Trustees. These investments
represent 11.8% of the Realty Fund's net assets at December 31, 1999.
The International Fund owns 3,349,996 shares of Gendis, Inc. 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 3.7% of the International Fund's net assets at
December 31, 1999.
NOTE 9. PUT OPTIONS WRITTEN
The Realty Fund had the following written option transactions for the year ended
December 31, 1999:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- ----------
<S> <C> <C>
Options outstanding at December 31, 1998...... 8,461 $1,786,187
Options expired............................... (8,461) (1,786,187)
Options written............................... 8,461 2,581,033
------ ----------
Options outstanding at December 31, 1999...... 8,461 $2,581,033
====== ==========
</TABLE>
NOTE 10. COLLATERAL
Securities with the following aggregate market value were segregated to
collateralize portfolio obligations at December 31, 1999:
<TABLE>
<CAPTION>
Market
Value of
Segregated
Obligation Assets
------------------------- ---------------
<S> <C> <C>
Partners Fund............ Forward Currency
Contracts $307,031,250
International Fund....... Forward Currency
Contracts $199,512,515
Realty Fund.............. Newhall Land and Farming
Company Put Options
Written $ 24,750,000
</TABLE>
54
<PAGE> 57
NOTE 11. RELATED OWNERSHIP
At December 31, 1999, 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................... 3,445,163 14.1%
Realty Fund.......................... 4,667,904 9.2%
</TABLE>
NOTE 12. CAPITAL LOSS CARRYOVERS
At December 31, 1999, the Realty Fund 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 as follows:
<TABLE>
<CAPTION>
Amount Expiration
------ ----------
<S> <C>
$17,735,542 12/31/2006
$ 7,577,501 12/31/2007
</TABLE>
The Partners Fund, International Fund and Small-Cap Fund had no loss carryovers.
NOTE 13. 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, 1999 and December 31, 1999
as follows:
<TABLE>
<CAPTION>
Capital Currency
---------- --------
<S> <C> <C>
Partners Fund.................................. - -
International Fund............................. - $12,152
Realty Fund.................................... $1,357,949 -
Small-Cap Fund................................. $6,089,260 -
</TABLE>
UNAUDITED TAX INFORMATION
Distributions from long-term capital gains for the fiscal year ended December
31, 1999 were as follows:
<TABLE>
<S> <C>
Partners Fund..................... $642,787,605
International Fund................ -
Realty Fund....................... -
Small-Cap Fund.................... 151,417,702
</TABLE>
55
<PAGE> 58
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 UNREALIZED OPERATIONS INCOME GAINS
----------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
PARTNERS FUND
Year ended December 31,
1999.......................... $24.39 $.28 $ .34 $ .62 $ (.29) $(4.23)
1998.......................... 25.98 .25 3.22 3.47 (.25) (4.81)
1997.......................... 22.85 .21 6.24 6.45 (.21) (3.11)
1996.......................... 21.15 .38 4.08 4.46 (.38) (2.38)
1995.......................... 17.13 .24 4.46 4.70 (.24) (.44)
INTERNATIONAL FUND
Year ended December 31, 1999...... 9.97 .06 2.38 2.44 (.06) (.33)
August 12, 1998 (Capitalization)
through December 31, 1998..... 10.00 .01 (.03) (.02) (.01) -
REALTY FUND
Year ended December 31,
1999.......................... 14.55 .36 (1.88) (1.52) (.23) -
1998.......................... 17.35 .44 (2.70) (2.26) (.43) -
1997.......................... 13.97 .09 4.06 4.15 (.09) (.64)
1996.......................... 10.00 .03 4.04 4.07 (.04) (.05)
SMALL-CAP FUND
Year ended December 31,
1999.......................... 21.95 .08 .79 .87 (.08) (2.54)
1998.......................... 22.18 .17 2.54 2.71 (.17) (2.77)
1997.......................... 17.86 .18 5.01 5.19 (.18) (.69)
1996.......................... 14.46 .02 4.41 4.43 (.02) (1.01)
1995.......................... 13.28 .12 2.35 2.47 (.12) (1.17)
</TABLE>
(a) Annualized
(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. For the International Fund, the
expense ratio before the waiver was 1.76% and 2.65% in 1999 and 1998,
respectively. The Realty Fund's expense ratio in 1996 before the waiver was
1.60%.
56
<PAGE> 59
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>
$ - $(4.52) $20.49 2.18% $3,622,109 .92% 1.16% 50.39%
- (5.06) 24.39 14.28 3,685,300 .93 1.12 43.78
- (3.32) 25.98 28.25 2,605,070 .94 .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
- (.39) 12.02 24.37 293,613 1.75(d) .60 50.32
- (.01) 9.97 9.02 (c) 75,572 1.75(a)(d) .10(a) 24.05
(.11) (.34) 12.69 (10.45) 643,311 1.17 1.42 22.64
(.11) (.54) 14.55 (12.98) 775,696 1.17 3.44 21.55
(.04) (.77) 17.35 29.73 737,302 1.20 .75 28.66
(.01) (.10) 13.97 40.69 156,009 1.50(d) .92 4.28
- (2.62) 20.20 4.05 1,429,673 .97 .38 47.48
(2.94) 21.95 12.71 1,355,364 1.01 .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
</TABLE>
57
<PAGE> 60
(Intentionally Left Blank)
58
<PAGE> 61
LONGLEAF PARTNERS FUNDS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees 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, 1999, 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 accounting principles generally accepted in the United States. These
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 auditing standards generally accepted in the United States 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, 1999 by correspondence with the custodian and
brokers provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Baltimore, Maryland
February 5, 2000
59
<PAGE> 62
SERVICE DIRECTORY
CONTACT US AT WWW.LONGLEAFPARTNERS.COM OR
CALL (800) 445-9469
24-HOUR AUTOMATED INFORMATION OPTION 1
For automated reporting of daily prices, account balances 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.
FUND INFORMATION OPTION 2
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.
SHAREHOLDER INQUIRIES OPTION 3
To request action on your existing account contact the transfer agent, NFDS,
from 9:00 a.m. to 6:00 p.m. Eastern time, Monday through Friday.
<TABLE>
<S> <C>
Mail correspondence to: Overnight address:
Longleaf Partners Funds Longleaf Partners Funds
c/o NFDS c/o NFDS
P.O. Box 219929 330 W. 9th Street
Kansas City, MO 64121-9929 Kansas City, MO 64105
</TABLE>
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>
60
<PAGE> 63
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 and Secretary
Andrew R. McCarroll, Vice President and Assistant General Counsel
Transfer Agent
National Financial Data Services
Kansas City, Missouri
Custodian
State Street Bank & Trust Company
Boston, Massachusetts
Special Legal Counsel
Dechert Price & Rhodes
Washington D.C.
Independent Public Accountants
PricewaterhouseCoopers LLP
Baltimore, Maryland
61
<PAGE> 64
Longleaf Partners Funds (SM)
c/o NFDS
P.O. Box 219929
Kansas City, MO 64121-9929
(800) 445-9469
www.longleafpartners.com
