We intend to qualify for favorable tax treatment under the federal Internal Revenue Code by distributing to shareholders essentially all income and capital gains. The Funds' dividends, comprised primarily of dividends on portfolio securities and interest from money market investments, are usually distributed at the end of the year. Any capital gains realized from sales of portfolio securities are usually distributed between October 31 and the end of the year. Your dividends and distributions will be reinvested in additional shares of the Funds unless you have chosen to receive them by check. If you make an investment shortly before a dividend is declared, you will be taxed on the dividend as though you had owned the shares from the beginning of the year.

We discourage redemptions to avoid taxable distributions. This practice can be disruptive to a Fund's investment strategy and places a greater portion of a Fund's tax burden on remaining shareholders. To the extent we identify this type of activity, we will place your account on "sell only" status and will disallow future purchases. The identification of such trading activity involves judgments that are inherently subjective and our efforts to discourage this behavior cannot eliminate the possibility that the trading activity will occur.

What is a distribution?
To receive favorable tax treatment, mutual funds annually 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. Unlike corporate dividends, mutual fund distributions are not discretionary. In late January you will receive a 1099-DIV tax form which indicates the amount of long-term gains received, and the amount of short-term gains and income.

Why is the Fund "down" after a distribution?
The Fund's NAV declines after a distribution by the amount paid to shareholders. Your value is not down because you either receive cash or more shares. If you reinvest your dividends, your account balance and return don't change, but the NAV and number of shares do.

To track your account accurately you must adjust your number of shares to properly calculate your account value.

How can distributions be large when the Fund's performance is low?
Long-term capital gains and one-year performance are somewhat unrelated. 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.