<PAGE> 1
==============================LONGLEAF LOGO(SM)================================
LONGLEAF PARTNERS FUNDS
QUARTERLY REPORTS
at September 30, 1997
PARTNERS FUND
REALTY FUND
SMALL-CAP FUND
================================================================================
MANAGED BY:
SOUTHEASTERN ASSET MANAGEMENT, INC.
Memphis, TN
<PAGE> 2
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Letter from the Portfolio Managers......................... 2
Longleaf Partners Fund (Partners Fund)
Fund Summary............................................. 4
Portfolio................................................ 6
Longleaf Partners Realty Fund (Realty Fund)
Fund Summary............................................. 8
Portfolio................................................ 10
Longleaf Partners Small-Cap Fund (Small-Cap Fund)
Fund Summary............................................. 12
Portfolio................................................ 14
Service Directory.......................................... 16
Trustees and Officers...................................... 17
</TABLE>
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LONGLEAF PARTNERS FUNDS
LETTER TO SHAREHOLDERS
TO OUR SHAREHOLDERS: October 7, 1997
The compounding process worked extremely well for all of our Longleaf partners
during the third quarter. Additionally, each of our three Funds is ahead of its
respective benchmark for the twelve months ended September 30. Outperforming the
various averages over the past year has been a rewarding yet surprising
achievement given the strength of the markets, the substantial cash position in
the Partners Fund at the start of the year, the large cash flows into the
Small-Cap and Realty Funds throughout 1997, and our disciplined parsimony which
always applies to buying new positions.
Corporate Partners
Finding a significantly underpriced company is part of our challenge. We must
also believe in the quality of the business and in the skills and character of
the people at the helm, our corporate partners. The partners we have chosen have
been big contributors to the Funds' outstanding long and short term returns, and
we all are indebted to these individuals for the work they have done. We have
been blessed to be associated with managers such as Landon Rowland at Kansas
City Southern, Cor Boonstra at Philips Electronics, Tony Ridder at Knight-
Ridder, Fred Smith at FedEx, Bill Stiritz at Ralston Purina, John Burns at
Alleghany, and Peter Munk and Greg Wilkins at TrizecHahn. This group has managed
and invested for the long term interest of all shareholders. They have applied
discipline and intelligence to the operation of their businesses as well as to
the allocation of OUR capital. Without their sagacious corporate stewardship and
unwavering shareholder orientation, the Longleaf Funds' net asset values would
be substantially lower. We will be challenged to find such qualified partners in
the future.
Southeastern Partners
The undersigned portfolio managers get much more of the credit for the success
of our three Funds than is warranted. John Buford and Jim Thompson are an
indispensable part of your analytical team and carry more than their share of
the water. Deborah Sullivan, who has headed our trading department for the past
10 years, continues to do a nonpareil job of getting our research conclusions
implemented.
2
<PAGE> 4
Investment Partners
The employees of Southeastern, our families and affiliates remain the largest
shareholder group across the three Funds. We and all our investment partners
benefit from maintaining a long term perspective, especially in periods of
volatility. Market downturns present the opportune time to buy great businesses
at low cost and provide the foundation for significant capital growth. For
example, Longleaf Partners Fund shareholders who stayed the course through the
market's downturn in 1990 have subsequently fared exceedingly well. An account
balance of $100,000 at the outset of 1991 had grown to $455,518 by September 30,
1997, compounding at a 25.2% average annual return.
Concentration
Adopting the IRS standards for diversification for all three of the Longleaf
Funds has immediately given us greater flexibility to manage our assets, and
complements our commitment to concentrate portfolio resources in the best
possible investment alternatives. In the following quarterly update of each Fund
we highlight the significant impact of the five largest contributors to
performance. We thank you again for your overwhelming approval of the critical
diversification improvement for the Partners and Small-Cap Funds. Your support
of this and the other items in our recent proxy statement has provided the
Longleaf Funds the maximum discretion to pursue a prudent investment future.
Investment Opportunities
Increased market volatility in the third quarter helped misprice selected
companies that we have been interested in at Southeastern, and aided us in
establishing a few core stakes that we are excited to own. However, the general
level of equity prices continues to make our mission in the Partners and
Small-Cap Funds challenging. Furthermore, the composite price-to-value ratio of
these two Funds are at their highest historical levels, a clear indication your
advisor needs to work hard to find new holdings with larger margins of safety.
To that end, we would welcome a market correction and the concomitant assistance
it would provide. Conversely, Longleaf Partners Realty Fund has not struggled to
find qualifying investments.
As Thanksgiving approaches, we are thankful for the commitment of our investment
partners to the Longleaf Partners Funds.
Sincerely,
<TABLE>
<S> <C> <C>
/s/ O. Mason Hawkins, CFA /s/ G. Staley Cates, CFA /s/ C.T. Fitzpatrick, CFA
- ------------------------- ------------------------ -------------------------
O. Mason Hawkins, CFA G. Staley Cates, CFA C.T. Fitzpatrick, CFA
Co-Portfolio Manager Co-Portfolio Manager Co-Portfolio Manager
</TABLE>
3
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LONGLEAF PARTNERS FUND
MANAGED BY MASON HAWKINS
AND STALEY CATES
The Partners Fund had a particularly rewarding quarter, posting returns twice
the S&P 500. The Fund reversed its 1997 relative performance from 600 basis
points under the index at June 30, to 213 basis points ahead three months later.
The top five contributors to this quarter's return combined to create over 61%
of our performance. Kansas City Southern's management helped Wall Street realize
the true value of the company by announcing the separation of its transportation
business from its money management operations. Federal Express reported not only
the short term benefits it reaped from the UPS strike, but the significant
longer term impact of retaining a substantial portion of those customers at very
attractive margins. Knight-Ridder has moved aggressively with an open market 17
million share repurchase program to offset the shares issued in the Disney
papers acquisition. In addition, operating cash flow continues to exceed
expectations because of stable newsprint prices, growing advertising linage, and
a return to profitability at the Detroit papers following last year's strike.
TrizecHahn's $500 million acquisition of JBG Companies will add a leading
development firm with 4 million square feet of prime office space and 2 million
square feet of development potential in the Washington, D.C. area. The purchase
was made significantly below replacement value at a healthy initial cash-on-cash
return with excellent growth potential. Finally, the market continues to applaud
the aggressive rationalization, new management incentive programs and corporate
governance renaissance Cor Boonstra is installing at Philips Electronics.
Our cash level of 7% is at its lowest point in over two years. Our team's hard
work paid off with two new holdings, U S West Media Group and News Corp.
However, at the close of the quarter several large positions were approaching
full value and we have since begun to liquidate them.
PERFORMANCE*
FOR THE PERIODS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Partners S&P 500 Value-Line
Fund Index Index
-------- ------- ----------
<S> <C> <C> <C>
Most Recent Quarter 14.75% 7.47% 11.29%
Year-to-date 31.73 29.60 24.50
One Year 40.60 40.41 31.15
Three Years 24.55 29.89 17.52
Five Years 24.68 20.75 13.61
Ten Years 17.56 14.72 5.28
</TABLE>
* The average annual returns for the Fund and the S&P 500 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.
4
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LONGLEAF PARTNERS FUND
FUND SUMMARY
AT SEPTEMBER 30, 1997 (UNAUDITED)
FIVE LARGEST HOLDINGS
(REPRESENTS 43.9% OF NET ASSETS)
KNIGHT-RIDDER, INC. (KRI) 11.7%
One of the largest newspaper publishers in the U.S. and a worldwide provider of
electronic information services.
U S WEST MEDIA GROUP (UMG) 8.6%
Cable and communications company whose focus is providing a single line to the
home for multiple services including voice, video and Internet access.
FEDERAL EXPRESS CORPORATION (FDX) 8.5%
Integrated air-ground transportation company providing overnight and second-day
delivery of packages and documents worldwide.
PHILIPS ELECTRONICS N.V. (PHG) 8.5%
Owner of 75% of recording company Polygram. Also a leading manufacturer of
lighting systems, electronics products including television and stereo
equipment, appliances and semiconductors.
KANSAS CITY SOUTHERN INDUSTRIES, INC. (KSU) 6.6%
Large railroad operator throughout nine southern and midwestern states. Also
owns all or significant portions of companies in the mutual fund business
including Janus, Berger and DST.
PORTFOLIO CHANGES
JANUARY 1, 1997 THROUGH SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
ITT Corporation Alexander & Alexander Services Inc.
Mallinckrodt Inc. American Stores Company
Marriott International, Inc. Chris-Craft Industries, Inc.
The News Corporation Limited Ecolab, Inc.
U S West Media Group ITT Corporation
Louisiana-Pacific Corporation
PaineWebber Group Inc.
Safety-Kleen Corp.
United HealthCare Corporation
</TABLE>
5
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LONGLEAF PARTNERS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- ------------
<S> <C> <C> <C> <C> <C>
Common Stock 92.8%
Beverages 3.0%
2,550,000 The Seagram Company Ltd. ............ $ 89,887,500
Broadcasting 4.2%
6,305,400 * The News Corporation Limited......... 128,866,613
Building Materials 0.9%
574,000 * USG Corporation...................... 27,516,125
Business Services 0.2%
279,200 * The Union Corporation................ 6,700,800
Cable 8.6%
11,686,100 * U S West Media Group................. 260,746,106
Environmental Services 2.0%
1,709,800 Waste Management Inc................. 59,736,138
Food 12.0%
2,298,900 Nabisco Holdings Corp................ 97,846,931
3,818,000 The Quaker Oats Company.............. 192,331,750
846,500 Ralston Purina Company............... 74,915,250
------------
365,093,931
------------
Lodging 2.8%
1,203,800 Marriott International, Inc.......... 85,545,038
Multi-Industry 11.1%
1,565,000 Alexander & Baldwin, Inc............. 40,494,375
3,075,000 Philips Electronics N.V.............. 258,300,000
1,488,300 Whitman Corporation.................. 40,556,175
------------
339,350,550
------------
Natural Resources 5.9%
1,237,700 The Pioneer Group, Inc............... 39,606,400
2,900,000 Rayonier Inc......................... 140,287,500
------------
179,893,900
------------
Property & Casualty Insurance 0.9%
112,828 * Alleghany Corp....................... 28,601,898
Pharmaceuticals 1.8%
1,530,350 Mallinckrodt Inc. ................... 55,092,600
</TABLE>
6
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LONGLEAF PARTNERS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- --------------
<S> <C> <C> <C> <C> <C>
Publishing 14.1%
6,549,200 Knight-Ridder, Inc.................. $ 357,750,050
The Washington Post Company - Class
158,300 B................................... 70,938,188
--------------
428,688,238
--------------
Real Estate 6.0%
788,000 Cousins Properties Incorporated..... 23,590,750
6,224,291 TrizecHahn Corporation.............. 160,664,511
--------------
184,255,261
--------------
Telecommunications 4.2%
* 360 degrees Communications
6,143,637 Company............................. 128,248,422
Transportation 15.1%
3,234,800 * Federal Express Corporation......... 258,784,000
Kansas City Southern Industries,
5,802,300 Inc................................. 199,816,706
--------------
458,600,706
--------------
TOTAL COMMON STOCKS (COST
$1,772,036,023)................... 2,826,823,826
--------------
Short-Term Obligations 7.4%
Repurchase Agreement with State Street Bank,
5.00% due 10-1-97......................................... 25,491,000
Federal Home Loan Mortgage Corporation,
5.45% due 10-14-97........................................ 99,806,805
Federal National Mortgage Association Discount Note, 5.47%
due 10-14-97.............................................. 49,903,042
Federal National Mortgage Association Discount Note, 5.47%
due 10-16-97.............................................. 49,888,125
--------------
225,088,972
--------------
TOTAL INVESTMENTS (COST $1,997,124,995)(A)........... 100.2% 3,051,912,798
OTHER ASSETS AND LIABILITIES, NET.................... (0.2) (7,026,905)
----- --------------
NET ASSETS........................................... 100.0% $3,044,885,893
===== ==============
NET ASSET VALUE PER SHARE................................... $30.10
==============
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for Federal income tax purposes.
7
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LONGLEAF PARTNERS REALTY FUND
MANAGED BY C.T. FITZPATRICK,
MASON HAWKINS AND STALEY CATES
We are pleased to report that the Longleaf Partners Realty Fund remains the #1
performing real estate fund in the country since its inception and continues to
outperform its benchmarks. The five largest contributors -- Arden, Wellsford,
Catellus, TrizecHahn and Forest City Enterprises -- provided 42% of this
quarter's 14.9% return.
Two industry changes have contributed to the availability of companies that meet
our criteria. First, real estate is experiencing cyclical recovery in most
property types and across most regions of the United States. Second, and much
more important, real estate is dramatically transitioning from private to public
ownership. This structural change creates numerous new investment opportunities
for us to consider.
The public markets are, in our opinion, somewhat unsophisticated in the
evaluation of real estate. They emphasize short term growth over long term
fundamentals, and ignore important differences in management talent. The
resulting price inefficiencies have enabled us to put the Fund's substantial
cash inflows to work. During the quarter we added three companies to the
portfolio including the Fund's largest holding, Host Marriott. We sold three
companies that approached appraised value or were acquired -- Essex Property
Trust, First Fed Financial and Pacific Forest Products. At quarter end the Fund
had grown to $750 million in assets with a 7% cash position.
Since September further opportunity has come our way. We have added to several
existing holdings which remain significantly undervalued and have begun
purchasing several new ideas. As a result we are fully invested and our "buy
list" exceeds our current resources.
At the risk of being redundant and for the benefit of our new shareholders, the
Realty Fund is driven by a simple philosophy: make long term investments in
companies managed by superior owner/operators which possess quality real estate
assets that can be purchased at substantial discounts to their intrinsic worth.
This last criteria -- undervaluation -- is where we start and finish because it
provides a margin of safety. Paying fair value is of no interest, even if the
company meets our other criteria. This margin of safety will not completely
insulate us from short term market fluctuations, but will protect us from the
permanent loss of capital and provide superior long term results.
PERFORMANCE*
FOR THE PERIODS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Wilshire
Real Estate NAREIT
Realty Securities Equity
Fund Index Index
------ ----------- ------
<S> <C> <C> <C>
Most Recent Quarter 14.94% 12.61% 11.82%
Year-to-date 33.86 19.96 18.20
One Year 48.40 42.02 40.47
Since inception 1/2/96 43.72 32.94 30.85
</TABLE>
* The average annual returns shown are calculated with dividend and
distributions reinvested. 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. Lipper Analytical
Services ranked the Realty Fund #1 out of 42 real estate funds covered from
12/31/95 - 9/30/97.
8
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LONGLEAF PARTNERS REALTY FUND
FUND SUMMARY
AT SEPTEMBER 30, 1997 (UNAUDITED)
FIVE LARGEST HOLDINGS
(REPRESENTS 36.2% OF NET ASSETS)
HOST MARRIOTT CORPORATION (HMT) 10.6%
Owner of over 80 full service Marriott and Ritz Carlton hotels and 30 assisted
living centers, most of which are operated by Marriott International.
ARDEN REALTY, INC. (ARI) 7.7%
An office REIT with over 6 million square feet of class A space in southern
California.
CATELLUS DEVELOPMENT CORPORATION (CDX) 7.1%
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.
WELLSFORD REAL PROPERTIES, INC. (WRP) 5.8%
A manager, owner and developer whose properties, which are primarily in New
Jersey, were spun out from Wellsford Residential Properties, an apartment REIT.
TRIZECHAHN CORPORATION (TZH) 5.0%
One of the world's largest commercial real estate companies which owns, manages
and develops primarily retail (regional and super regional malls) and office
space in the U.S., Canada and Eastern Europe.
PORTFOLIO CHANGES
JANUARY 1, 1997 THROUGH SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Alexandria Real Estate Alexander & Alexander Services Inc.
Equities, Inc. Alexander & Baldwin, Inc.
Boston Properties Inc. Burnham Pacific Properties
CB Commercial Real Estate Essex Property Trust
Services Group, Inc. First Fed Financial Corp.
Deltic Timber Corporation Heilig Meyers Company
Getty Petroleum Marketing Inc. (formerly Rhodes, Inc.)
Getty Realty Corp. Hilb, Rogal and Hamilton Company
Host Marriott Corporation ITT Corporation
ITT Corporation Louisiana-Pacific Corporation
Marriott International, Inc. Pacific Forest Products Limited
Marriott LYONs Quaker City Bancorp, Inc.
Pacific Forest Products Reckson Associates Realty Corp.
Limited Trizec Warrants
Prime Retail, Inc.
Trizec Warrants
Wellsford Real Properties,
Inc.
</TABLE>
9
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LONGLEAF PARTNERS REALTY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- ------------
<S> <C> <C> <C> <C> <C>
Common Stock 89.2%
Real Estate Industry 85.4%
Building Materials 0.7%
28,000 * USG Corporation..................................... $ 1,342,250
113,400 Zurn Industries, Inc................................ 3,926,475
------------
5,268,725
------------
Diversified Realty 19.6%
2,558,700 * Catellus Development Corporation.................... 53,093,025
307,900 * CB Commercial Real Estate Services Group............ 9,852,800
584,100 Forest City Enterprises, Inc. - Class A............. 33,585,750
61,200 Forest City Enterprises, Inc. - Class B............. 3,503,700
783,000 Sizeler Property Investors, Inc. (REIT)............. 9,053,437
1,455,500 TrizecHahn Corporation.............................. 37,570,094
------------
146,658,806
------------
Mortgage Financing 2.5%
674,500 Bay View Capital Corp............................... 18,464,437
Natural Resources/Land 11.0%
1,427,600 * Castle & Cooke, Inc................................. 28,016,650
650,000 Deltic Timber Corporation........................... 21,246,875
650,000 The Pioneer Group, Inc.............................. 20,800,000
261,000 Rayonier Inc........................................ 12,625,875
------------
82,689,400
------------
Lodging 15.9%
3,500,000 * Host Marriott Corporation........................... 79,625,000
102,300 Marriott International, Inc......................... 7,269,694
1,352,600 * Red Roof Inns, Inc.................................. 25,699,400
558,346 * Supertel Hospitality, Inc........................... 6,351,186
------------
118,945,280
------------
Retail 12.6%
79,400 Bradley Real Estate, Inc. (REIT).................... 1,667,400
1,223,800 Getty Realty Corp................................... 21,492,987
993,800 * IHOP Corp........................................... 35,528,350
2,156,700 Prime Retail, Inc. (REIT)........................... 33,698,438
182,800 Wolohan Lumber Co................................... 2,422,100
------------
94,809,275
------------
Office 23.1%
788,800 Alexandria Real Estate Equities, Inc. (REIT)........ 22,530,100
1,829,800 Arden Realty, Inc. (REIT)........................... 57,409,975
1,047,900 * Boston Properties Inc. (REIT)....................... 34,384,219
504,900 Cousins Properties Incorporated (REIT).............. 15,115,444
3,398,000 * Wellsford Real Properties, Inc.(b).................. 43,494,400
------------
172,934,138
------------
</TABLE>
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LONGLEAF PARTNERS REALTY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C> <C> <C> <C>
Non-Realty 3.8%
611,900 Getty Petroleum Marketing Inc...................... $ 3,327,206
448,000 Knight-Ridder, Inc................................. 24,472,000
14,500 * White River Corporation............................ 957,000
------------
28,756,206
------------
TOTAL COMMON STOCKS (COST $527,206,519)............ 668,526,267
------------
<CAPTION>
CONTRACTS
----------
<S> <C> <C> <C> <C> <C>
Options 0.4%
Put Options Written
5,494 Newhall Land and Farming Company, expiring
April '99 @ $20 (Premiums received $1,076,268)..... (335,134)
Call Options Purchased
5,494 Newhall Land and Farming Company, expiring
April '99 @ $20 (Cost $1,761,493).................. 3,664,498
------------
3,329,364
------------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C> <C> <C> <C>
Corporate Bonds 3.0%
34,000,000 Marriott International, Inc. Liquid Yield
Option Notes (LYONs), zero coupon conv. sub. notes
due 2011 (Cost $19,208,755)........................ 22,397,500
------------
Short-Term Obligations 7.4%
Repurchase Agreement with State Street Bank, 5.00% due 10-1-97.... 30,813,000
Commercial Paper -- Clipper Receivables Corporation, 5.55% due 10-
27-97............................................................... 24,900,333
------------
55,713,333
------------
TOTAL INVESTMENTS (COST $602,813,852)(A)............................. 100.0% 749,966,464
OTHER ASSETS AND LIABILITIES, NET.................................... -- (81,280)
----- ------------
NET ASSETS........................................................... 100.0% $749,885,184
===== ============
NET ASSET VALUE PER SHARE................................................... $18.70
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for Federal income tax purposes.
(b) Illiquid/restricted security.
11
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LONGLEAF PARTNERS SMALL-CAP FUND
MANAGED BY MASON HAWKINS
AND STALEY CATES
The Small-Cap Fund grew 7.8% during the quarter and year-to-date is up 26.5%.
Our five largest contributors to this quarter's performance -- Pioneer Group,
TrizecHahn, Orion Capital, Alleghany Corp, and Catellus -- provided 44% of our
return.
The Small-Cap Fund kept us busy during the third quarter. We closed the Fund to
new investors and have consequently stabilized cash inflows, which had grown to
$20 million per week. We added four new companies to the portfolio including
significant stakes in U S West Media Group and Dart Group. We also increased
ownership in several companies whose prices declined due to market volatility.
We liquidated six holdings that reached or approached appraised value or were
acquired. All were relatively small positions -- Delchamps, GoodMark Foods,
Markel, Plenum Publishing, Ralcorp Holdings, and Response Oncology. At quarter
end Small-Cap had $883 million in assets and a 33% cash position.
Since the end of the quarter we have made further progress on the trading desk.
Our new Gendis position is now 5% of assets (Gendis is a Canadian holding
company), and we have added to several other holdings. In nine short months,
Wall Street has "discovered" the small cap universe, driving up the prices of
many companies we would like to own. We remain ready to take advantage of
opportunity when it occurs, but feel no pressure to pay above 60% of intrinsic
value. With the cash flow spigot now turned off we have every confidence our
research team will find attractive long term investments for our substantial
liquidity.
PERFORMANCE*
FOR THE PERIODS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Small-Cap Russell 2000 Value-Line Wilshire 5000
Fund Index Index Index
--------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Most Recent Quarter 7.83% 14.88% 11.29% 9.76%
Year-to-date 26.48 26.60 24.50 29.12
One Year 37.32 33.19 31.15 38.03
Three Years 24.21 22.97 17.52 28.45
Five Years 22.62 20.51 13.61 20.57
</TABLE>
* The average annual returns for the Fund and its benchmark, the Russell 2000
Index, from its initial public offering on 2/21/89 through 9/30/97 were
12.67% and 15.10%, respectively. From inception through 3/31/91, the Fund was
managed by a different portfolio manager. The average annual returns for the
Fund, the Russell 2000 and the Wilshire 5000 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.
12
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LONGLEAF PARTNERS SMALL-CAP FUND
FUND SUMMARY
AT SEPTEMBER 30, 1997 (UNAUDITED)
FIVE LARGEST HOLDINGS
(REPRESENTS 20.6% OF NET ASSETS)
U S WEST MEDIA GROUP (UMG) 5.0%
Cable and communications company whose focus is providing a single line to the
home for multiple services including voice, video and Internet access.
TRIZECHAHN CORPORATION (TZH) 4.4%
One of the world's largest commercial real estate companies which owns, manages
and develops primarily retail (regional and super regional malls) and office
space in the U.S., Canada and Eastern Europe.
DART GROUP CORPORATION (DARTA) 3.9%
A retailer in various markets including do-it-yourself auto parts stores (Super
Trak), discount book stores (Crown and Super Crown), discount grocery
superstores (Shoppers Food Warehouse), and discount beverage superstores (Total
Beverage).
HILB, ROGAL AND HAMILTON COMPANY (HRH) 3.7%
A company that owns insurance agencies in 16 states and Canada. Serves small and
middle markets by placing primarily property and casualty insurance through
various carriers and underwriters.
ALLEGHANY CORPORATION (Y) 3.6%
The dominant title insurer in the U.S. through Chicago Title Insurance Company.
PORTFOLIO CHANGES
JANUARY 1, 1997 THROUGH SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Baker, Fentress & Company Baldwin Technology Company, Inc.
Corecomm, Inc. - Class A
Dart Group Corporation -- Class Delchamps, Inc.
A GoodMark Foods, Inc.
Deltic Timber Corporation Healthsource, Inc.
Gendis, Inc. -- Class A Heilig Meyers Company
Kaydon Corp. (formerly Rhodes, Inc.)
Ralcorp Holdings Lexington Global Asset Managers, Inc.
Showboat, Inc. Markel Corporation
SLH Corporation Plenum Publishing Corporation
U S West Media Group Ralcorp Holdings
SLH Corporation
</TABLE>
13
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LONGLEAF PARTNERS SMALL-CAP FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- ------------
<S> <C> <C> <C> <C> <C>
Common Stock 66.9%
Advertising 0.8%
21,020 Grey Advertising Inc. - Class A............. $ 7,230,880
Beverages 0.8%
237,100 * Celestial Seasonings, Inc................... 7,350,100
Building Materials 1.5%
393,000 Zurn Industries, Inc........................ 13,607,625
Business Services 2.3%
555,000 * Pinkerton's, Inc............................ 12,765,000
300,000 * The Union Corporation....................... 7,200,000
------------
19,965,000
------------
Cable 5.0%
1,980,000 * U S West Media Group........................ 44,178,750
Commercial Lighting 0.5%
148,900 Thomas Industries, Inc...................... 4,467,000
Financial Services 3.4%
209,700 Duff & Phelps Credit Rating Co.............. 6,710,400
351,200 * White River Corporation..................... 23,179,200
------------
29,889,600
------------
Gaming 1.3%
548,900 Showboat, Inc. ............................. 11,183,838
Investment Management Companies 2.9%
836,000 United Asset Management Corporation......... 23,982,750
87,600 Baker, Fentress & Company................... 1,834,125
------------
25,816,875
------------
Manufacturing 4.8%
850,000 * American Safety Razor Company............... 15,618,750
407,500 AMETEK, Inc................................. 9,576,250
173,200 Franklin Electric Co., Inc.................. 9,699,200
115,100 Kaydon Corp................................. 6,906,000
------------
41,800,200
------------
Miscellaneous 0.2%
104,152 Seafield Capital Corporation................ 2,603,800
Mortgage Financing 2.9%
930,000 Bay View Capital Corp....................... 25,458,750
Natural Resources 6.8%
845,000 Deltic Timber Corporation................... 27,620,938
307,500 Gendis Inc -- Class A....................... 5,059,174
865,000 The Pioneer Group, Inc...................... 27,680,000
------------
60,360,112
------------
</TABLE>
14
<PAGE> 16
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- ------------
<S> <C> <C> <C> <C> <C>
Insurance 10.7%
126,273 * Alleghany Corporation........................ $ 32,010,205
1,777,400 Hilb, Rogal and Hamilton Company............. 32,659,725
660,800 Orion Capital Corporation.................... 29,942,500
------------
94,612,430
------------
Real Estate 11.5%
1,500,700 * Catellus Development Corporation............. 31,139,525
385,000 Cousins Properties Incorporated.............. 11,525,937
552,900 * IHOP Corp.................................... 19,766,175
1,520,000 TrizecHahn Corporation....................... 39,235,000
------------
101,666,637
------------
Restaurants 1.8%
982,400 * VICORP Restaurants, Inc...................... 15,718,400
Retail 3.9%
325,730 Dart Group Corporation -- Class A............ 34,283,083
Telecommunications 5.8%
1,828,000 * Corecomm, Inc................................ 30,162,000
1,349,109 * Vanguard Cellular Systems, Inc. -- Class A... 21,248,467
------------
51,410,467
------------
TOTAL COMMON STOCKS (COST $432,238,817)..................... 591,603,547
------------
Short-Term Obligations (33.2%)
Repurchase Agreement with State Street Bank, 5.00% due 10-1-97....... 43,300,000
Federal National Mortgage Association Discount Note, 5.48% due 10-
2-97............................................................... 99,985,056
Federal National Mortgage Association Discount Note, 5.48% due 10-
17-97.............................................................. 99,760,889
Commercial Paper -- Clipper Receivables Corporation, 5.54% due 10-
20-97.............................................................. 49,854,597
------------
292,900,542
------------
TOTAL INVESTMENTS (COST $725,139,359)(A)...................... 100.1% 884,504,089
OTHER ASSETS AND LIABILITIES, NET............................. (0.1) (1,028,640)
----- ------------
NET ASSETS.................................................... 100.0% $883,475,449
===== ============
NET ASSET VALUE PER SHARE............................................ $22.59
======
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for Federal income tax purposes. Aggregate
unrealized appreciation and depreciation of investments are $159,451,619 and
($86,889), respectively.
15
<PAGE> 17
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
SERVICE DIRECTORY
FUND INFORMATION (800) 445-9469
To request a prospectus, financial report, application or other Fund information
call (800) 445-9469 from 8:00 a.m. to 8:00 p.m. Eastern time, seven days a week.
EXISTING SHAREHOLDER INQUIRIES (800) 488-4191
To request action on your existing account contact the transfer agent, NFDS, at
(800) 488-4191 from 9:00 a.m. to 6:00 p.m. Eastern time, Monday through Friday.
<TABLE>
<CAPTION>
<C> <C>
Mail correspondence to: Overnight address:
Longleaf Partners Funds Longleaf Partners Funds
c/o NFDS c/o NFDS
P.O. Box 419929 1004 Baltimore, 5th Floor
Kansas City, MO 64141-6929 Kansas City, MO 64105
(816) 435-5241
</TABLE>
24-HOUR AUTOMATED INFORMATION (800) 378-3788
For automated reporting of daily prices, account balances and transaction
activity call (800) 378-3788, 24-hours a day, seven days a week. Please have
your Fund number (see below) and account number ready to access your investment
information.
SERVICES FOR FINANCIAL ADVISORS (800) 761-2509
Please contact Lee Harper or Mary Williamson for additional information.
PUBLISHED DAILY PRICE QUOTATIONS
Daily net asset values per share of each Fund are reported in mutual fund
quotations tables of major newspapers in alphabetical order under the bold
heading LONGLEAF PARTNERS as follows:
<TABLE>
<CAPTION>
ABBREVIATION SYMBOL CUSIP FUND NUMBER
- ------------ ------ --------- -----------
<C> <S> <C> <C>
Partners LLPFX 543069108 133
Realty LLREX 543069306 135
Sm-Cap LLSCX 543069207 134
</TABLE>
16
<PAGE> 18
- --------------------------------------------------------------------------------
THE LONGLEAF PARTNERS FUNDS
TRUSTEES AND OFFICERS
Trustees
O. Mason Hawkins, Chairman
Chadwick H. Carpenter, Jr.
Daniel W. Connell, Jr.
Steven N. Melnyk
C. Barham Ray
W. Reid Sanders
Officers
O. Mason Hawkins, Co-Portfolio Manager and Chief Executive Officer
W. Reid Sanders, President
G. Staley Cates, Co-Portfolio Manager and Vice President - Investments
C. T. Fitzpatrick, Co-Portfolio Manager of the Realty Fund
and Vice-President - Investments
Charles D. Reaves, Executive Vice President and General Counsel
Julie M. Douglas, Executive Vice President - Operations and Treasurer
Lee B. Harper, Executive Vice President - Marketing
Frank N. Stanley III, Vice President - Investments
John B. Buford, Vice President - Investments
Randy D. Holt, Vice President and Secretary
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
Coopers & Lybrand L.L.P.
Boston, Massachusetts
17
<PAGE> 19
Longleaf Partners Funds
c/o NFDS
P.O. Box 419929
Kansas City, MO 64141-6929
Fund Information Requests
(800) 445-9469
Shareholder Account Inquiries
(800) 488-4191
