<PAGE> 1
LONGLEAF PARTNERS FUND
October 7, 1996
TO OUR SHAREHOLDERS:
Longleaf Partners Fund's return for the first nine months approximated that of
the market, despite the fact that we were only marginally successful finding
qualifying equity investments for the Fund's substantial cash reserves. The
portfolio's liquidity position declined from 24.6% at the end of June to 18.6%
at this quarter's close. Through the first nine months the Partners Fund
appreciated 13.4%. We were up 2.6% in the third quarter. Comparative gains for
the S&P 500, including dividends, were 13.5% and 3.1%, respectively.
The data below summarizes Longleaf Partners Fund's recent cumulative and average
annual returns for the periods ended September 30, 1996:
CUMULATIVE TOTAL RETURNS*
<TABLE>
<CAPTION>
LONGLEAF
PARTNERS FUND S&P 500 INDEX VALUE-LINE INDEX
------------- ------------- ----------------
<S> <C> <C> <C>
LAST FIVE YEARS 146.88% 102.99% 47.12%
LAST FOUR YEARS 114.29% 82.78% 44.32%
LAST THREE YEARS 67.93% 61.78% 23.80%
LAST TWO YEARS 37.42% 56.06% 23.76%
LAST YEAR 14.89% 20.31% 7.64%
LAST 9 MONTHS 13.38% 13.48% 7.63%
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LONGLEAF
PARTNERS FUND S&P 500 INDEX VALUE-LINE INDEX
------------- ------------- ----------------
<S> <C> <C> <C>
LAST FIVE YEARS 19.81% 15.21% 8.03%
LAST FOUR YEARS 20.99% 16.27% 9.60%
LAST THREE YEARS 18.86% 17.39% 7.38%
LAST TWO YEARS 17.23% 24.92% 11.25%
LAST YEAR 14.89% 20.31% 7.64%
</TABLE>
As you may know, John Maynard Keynes (1883-1946), the renowned Cambridge
University graduate and British author of General Theory of Employment, Interest
and Money, was one of the most influential economists of all time. What you may
not know is that Mr. Keynes also produced one of modern history's best long-term
investment records when he managed several insurance company portfolios and the
Kings College Foundation. In a letter to a friend some 60 years ago he wrote,
"To suppose that safety-first consists in having a small gamble in a large
number of different directions...as compared with a substantial stake in a
company where one's information is adequate, strikes me as a travesty of
investment policy." Additionally, he said "rather than to buy or sell, 'to be
quiet' is sometimes the best policy for an investor." Each of these dictates has
been an integral part of our strategy for over 20 years. Recently, we have been
relatively quiet on the transaction front in the Partners Fund because we
haven't found the two or three qualifying investment positions needed to become
fully invested. The missing ingredient has been price. We've identified a number
of wonderful companies run by capable individuals. However, until their shares
are offered at large discounts from our appraised values we will continue to
remain patient.
In our 1994 third quarter report we outlined what our ongoing commitment would
be to our fellow shareholders. In the event you were not a shareholder at that
point or in case you have forgotten these pledges, we are restating them.
<PAGE> 2
OUR COMMITMENT TO OUR INVESTMENT PARTNERS
- We will treat your investment in Longleaf Partners Fund as if it were our
own.
- We will remain significant investors with you in Longleaf Partners Fund.
- We will invest for the long-term in an attempt to maximize after-tax
returns while always striving to minimize business, financial, purchasing
power, regulatory and market risks.
- We will choose our common stock investments based on their discount from
our appraisal of their corporate intrinsic value, their financial
strength, their management, their competitive position, and our
assessment of their future earnings potential.
- We will meet regulatory diversification requirements without
overdiversifying our holdings.
- We will not impose loads, holding periods, exit fees or 12b-1 charges on
our investment partners.
- We will consider closing the Fund to new investors if our size begins to
restrict our ability to manage the portfolio.
- We will discourage short-term speculators and market timers from joining
us, the long-term investors.
- We will continue our efforts to improve shareholder services.
- We will communicate with our investment partners as candidly as possible.
In a continuing effort to further these commitments and to more properly align
your interests with those of Southeastern's management and your Fund's Trustees,
we have taken two additional steps to improve our corporate governance. First,
we have adopted a personal securities trading policy and Code of Ethics which
requires Southeastern personnel to use the Longleaf Partners Funds as the sole
vehicles for their equity investments. Exceptions must be approved by our
Compliance Committee. Secondly, we have approved a resolution which requires our
Trustees to invest their Board compensation into shares of our three Funds.
On April 25, 1996, The Wall Street Journal printed an article on mutual fund
management and the potential for conflicts, stating "investors should demand
that managers have a significant stake in what they manage. Such a literal
alignment of interests rules out conflicts." The principals of Southeastern
Asset Management, Inc., advisor to Longleaf Partners Fund, continue as one of
the Fund's largest investment groups with a $35 million stake. We plan to add to
our investment position.
Finally, we want to thank John R. McCarroll, Jr. for his many contributions and
wise counsel to the Longleaf Partners Funds over the past nine years. John was
an original Board member and our longest serving outside trustee. On August 23,
1996 The Honorable Don Sundquist, Governor of the State of Tennessee, appointed
John to the position of Circuit Court Judge - Division I for the 30th Judicial
District of the State of Tennessee. While the Judicial Canons of Ethics
necessitate his resignation from our Board, John will remain an important
investment partner in the Longleaf Partners Funds.
We look forward to a long and successful investment partnership.
Sincerely,
/s/ O. Mason Hawkins, CFA /s/ G.Staley Cates, CFA
O. Mason Hawkins, CFA G. Staley Cates, CFA
Co-Portfolio Manager Co-Portfolio Manager
- --------------------------------------------------------------------------------
* The average annual total returns of Longleaf Partners Fund for the one year
and five years ended September 30, 1996 and from its initial public offering
on April 8, 1987 through September 30, 1996 are 14.89%, 19.81% AND 15.47%,
respectively. Fund returns and those of the S&P 500 Index are shown with all
dividends and distributions reinvested; the Value-Line Index is not available
with reinvested dividends. The stock market 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 FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT SEPTEMBER 30, 1996 (UNAUDITED)
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES COMMON STOCK (81.8%) MARKET VALUE
--------- ------------
<S> <C> <C> <C> <C> <C>
BEVERAGES (4.3%)
2,550,000 The Seagram Company Ltd. ................................ $ 95,306,250
------------
BUSINESS SERVICES (1.3%)
600,000 Ecolab, Inc. ............................................ 20,250,000
47,300 Rollins, Inc............................................. 951,912
279,200 * The Union Corporation.................................... 6,351,800
------------
27,553,712
------------
ENTERTAINMENT (0.3%)
171,277 * Chris-Craft Industries, Inc.............................. 7,150,815
------------
ENVIRONMENTAL SERVICES (3.0%)
512,900 Safety-Kleen Corp........................................ 8,462,850
1,709,800 WMX Technologies, Inc.................................... 56,209,675
------------
64,672,525
------------
FINANCIAL SERVICES (5.4%)
1,170,000 Mellon Bank Corporation.................................. 69,322,500
2,363,300 PaineWebber Group, Inc................................... 49,629,300
------------
118,951,800
------------
FOOD (12.7%)
2,298,900 Nabisco Holdings Corp.................................... 72,702,712
3,818,000 The Quaker Oats Company.................................. 139,834,250
478,333 * Ralcorp Holdings, Inc.................................... 9,925,410
846,500 Ralston Purina Group Common Stock........................ 57,985,250
------------
280,447,622
------------
HEALTH CARE (2.6%)
1,361,700 United HealthCare Corporation............................ 56,680,763
------------
INSURANCE BROKERAGE (3.0%)
3,770,142 Alexander & Alexander Services Inc....................... 62,678,611
42,500 Marsh & McLennan Companies, Inc.......................... 4,127,812
------------
66,806,423
------------
INVESTMENT MANAGEMENT COMPANIES (3.6%)
1,200,000 Franklin Resources, Inc. ................................ 79,650,000
------------
MANUFACTURING (2.2%)
1,407,000 Louisiana-Pacific Corporation............................ 32,009,250
574,000 * USG Corporation.......................................... 17,004,750
------------
49,014,000
------------
MULTI-INDUSTRY (3.3%)
1,565,000 Alexander & Baldwin, Inc................................. 38,342,500
1,488,300 Whitman Corporation...................................... 34,416,938
------------
72,759,438
------------
</TABLE>
<PAGE> 4
- ---------------------------------------------------------------------
LONGLEAF PARTNERS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT SEPTEMBER 30, 1996 (UNAUDITED)
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- --------------
<S> <C> <C> <C> <C> <C>
NATURAL RESOURCES (9.1%)
6,228,300 The Horsham Corporation.................................. $ 101,209,875
1,237,700 The Pioneer Group, Inc. ................................. 32,489,625
1,681,200 Rayonier Inc............................................. 66,827,700
--------------
200,527,200
--------------
PROPERTY & CASUALTY INSURANCE (1.0%)
110,616 * Alleghany Corp........................................... 22,676,280
--------------
PUBLISHING (13.2%)
6,341,200 Knight-Ridder, Inc....................................... 234,624,400
158,300 The Washington Post Company - Class B.................... 55,405,000
--------------
290,029,400
--------------
REAL ESTATE (1.3%)
788,000 Cousins Properties Incorporated.......................... 17,336,000
1,068,088 * Trizec Corporation Ltd................................... 10,146,836
--------------
27,482,836
--------------
RETAIL (1.1%)
520,000 American Stores Company.................................. 20,800,000
225,000 * Craig Corporation........................................ 3,318,750
--------------
24,118,750
--------------
TELECOMMUNICATIONS (4.9%)
4,599,937 * 360(DEGREE) Communications Company....................... 108,098,520
--------------
TRANSPORTATION (9.5%)
1,600,400 * Federal Express Corporation.............................. 126,831,700
1,934,100 Kansas City Southern Industries, Inc..................... 82,682,775
--------------
209,514,475
--------------
TOTAL COMMON STOCKS (COST $1,411,200,510)............................... 1,801,440,809
--------------
SHORT TERM OBLIGATIONS (18.6%)
Certificate of Deposit - due 8-19-97 at 5.25%........................... 45,000
Repurchase Agreement with State Street Bank and Trust Company, dated
9-30-96, due 10-1-96 at 4.75%, collateralized by $62,408,043 U.S.
Treasury Bond due 2-15-23 (Repurchase proceeds - $61,190,073) (Cost
$61,182,000)........................................................... 61,182,000
U.S. Treasury Bill, due 10-17-96, yield at date of purchase
4.98%............................................................. 99,782,222
U.S. Treasury Bill, due 11-7-96, yield at date of purchase 5.14%... 99,484,055
U.S. Treasury Bill, due 11-14-96, yield at date of purchase
5.20%............................................................. 149,068,667
--------------
409,561,944
--------------
TOTAL INVESTMENTS (COST $1,820,762,454)* *................................. 100.4% 2,211,002,753
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS............................. (0.4) (9,196,873)
----- --------------
NET ASSETS................................................................. 100.0% $2,201,805,880
===== =============
NET ASSET VALUE PER SHARE (OFFERING AND REDEMPTION PRICE PER SHARE) BASED ON
91,834,662 SHARES OUTSTANDING AT SEPTEMBER 30, 1996............................. $23.98
</TABLE>
* Non-income producing security
* * Also represents aggregate cost for Federal income tax purposes
<PAGE> 5
FIVE LARGEST HOLDINGS
(REPRESENTS 32.4% OF NET ASSETS AT 9/30/96)
KNIGHT-RIDDER, INC. (KRI) 10.7%
One of the largest newspaper publishers in the U.S. and a worldwide provider of
electronic information services.
THE QUAKER OATS COMPANY (OAT) 6.4%
A producer of brand name packaged foods and beverages including numerous hot and
cold cereals, Gatorade, Snapple, and Aunt Jemima.
FEDERAL EXPRESS CORPORATION (FDX) 5.8%
Integrated air-ground transportation company providing overnight and second-day
delivery of packages and documents worldwide.
360 COMMUNICATIONS (XO) 4.9%
The cellular phone service company spun off from Sprint in March of 1996. Serves
over 1.5 million customers.
THE HORSHAM CORPORATION (HSM) 4.6%
A Canadian based company consisting of three primary businesses - refining and
marketing petroleum products in the U.S. through Clark Refining & Marketing,
owning and operating gold mines via American Barrick Resources Corp., and
developing real estate through ownership of Horsham Properties GmbH in Germany
and Trizec Corp. in Canada.
<PAGE> 6
PORTFOLIO CHANGES
(UNAUDITED)
JANUARY 1, 1996 THROUGH SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
- ---------------------------------------- -----------------------------
<S> <C>
Nabisco Holdings Corp. American Express Company
Rayonier Inc. Coca-Cola Enterprises, Inc.
Trizec Corporation Ltd. Hasbro Inc.
United HealthCare Corporation Health Systems International, Inc.
USG Corporation Hilton Hotels Corp.
360() Communications Company McKesson Corporation
Polaroid Corp.
WellPoint Health Networks, Inc.
</TABLE>
PUBLISHED DAILY PRICE QUOTATIONS
The daily net asset values per share of each series of Longleaf Partners Funds
Trust are reported in the Mutual Fund Quotations tables of major newspapers in
alphabetical sequence under the bold heading LONGLEAF PARTNERS as follows:
"Partners" -- Longleaf Partners Fund
"Realty" -- Longleaf Partners Realty Fund
"Sm-Cap" -- Longleaf Partners Small-Cap Fund
<PAGE> 7
- ---------------------------------------------
TRUSTEES
O. MASON HAWKINS, CFA --
Chairman, Southeastern Asset
Management, Inc.
Memphis, Tennessee
CHADWICK H. CARPENTER, JR. --
Senior Executive Officer, Progress
Software Corporation
Bedford, Massachusetts
STEVEN N. MELNYK --
Chairman of the Executive
Committee and President,
Riverside Golf Group, Inc.
Jacksonville, Florida
C. BARHAM RAY -- Chairman of the
Board and Secretary, SSM Corp.
Memphis, Tennessee
W. REID SANDERS -- Executive
Vice President, Southeastern
Asset Management, Inc.
Memphis, Tennessee
- ---------------------------------------------
This report is submitted for the general informa-
tion of shareholders of the Fund. For more detailed
information about the Fund, its management, fees,
expenses and other pertinent information, please
see the prospectus.
This report is not authorized for distribution to
prospective investors in the Fund unless preceded
or accompanied by an effective prospectus.
LONGLEAF
[LOGO(SM)] PARTNERS
FUNDS
MANAGED BY:
SOUTHEASTERN ASSET
MANAGEMENT, INC.
6075 POPLAR AVE.
SUITE 900
MEMPHIS, TN 38119
(901) 761-2474
Fund Information Requests
(800) 445-9469
Shareholder Account Inquiries
(800) 488-4191
----------------------------------------------------
----------------------------------------------------
[LOGO(SM)]
QUARTERLY
REPORT
September 30, 1996
LONGLEAF
PARTNERS FUND
----------------------------------------------------
----------------------------------------------------
MANAGED BY:
SOUTHEASTERN ASSET
MANAGEMENT, INC.
