<PAGE> 1
LONGLEAF PARTNERS SMALL-CAP FUND
January 10, 1997
TO OUR SHAREHOLDERS:
We are pleased to report that Longleaf Partners Small-Cap Fund grew its net
asset value 30.6% in 1996. By comparison, the Wilshire 5000 and Value-Line
Indices increased 21.2% and 13.4%, respectively. The data below summarizes
Small-Cap's average annual and cumulative returns for the five full years ended
December 31, 1996 that your two current managers have had responsibility for the
Fund:
AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LONGLEAF PARTNERS
SMALL-CAP FUND VALUE-LINE INDEX WILSHIRE 5000 INDEX
----------------- ---------------- -------------------
<S> <C> <C> <C>
ONE YEAR 30.64% 13.38% 21.21%
THREE YEARS 17.11% 8.32% 18.23%
FIVE YEARS 15.52% 8.52% 14.92%
</TABLE>
CUMULATIVE TOTAL RETURNS*
<TABLE>
<CAPTION>
LONGLEAF PARTNERS
SMALL-CAP FUND VALUE-LINE INDEX WILSHIRE 5000 INDEX
----------------- ---------------- -------------------
<S> <C> <C> <C>
LAST QUARTER 8.57% 5.34% 6.90%
LAST YEAR 30.64% 13.38% 21.21%
LAST THREE YEARS 60.61% 27.11% 65.28%
LAST FIVE YEARS 105.69% 50.53% 100.42%
</TABLE>
While several companies reached our appraisal of full value and were sold in
1996, we were able to redeploy the proceeds into businesses that we feel offer
excellent compounding potential. It has been an environment where we have
struggled to find large cap buying opportunities, yet we have had little
difficulty finding qualifying investments for the Small-Cap Fund. As a result,
the Fund remains fully invested with a portfolio which we believe provides a
strong foundation for excellent future returns.
With the Dow Jones Industrial Average and the S&P 500 at record levels, many of
you have quite warrantably asked our opinion of the market. For lack of a better
reply, we have said that more than anytime since the early 1970's we have been
operating in a "market of stocks" while attempting not to be overly influenced
by the "stock market" as represented by the 100+ largest U.S. companies. There
is huge disparity in the price-to-value ratios of these most favored
institutional behemoths and many other publicly traded businesses. Regardless of
what the indices tell the crowds, we will be driven by capable business partners
managing good companies when their security prices are adequately discounted. If
these opportunities cannot be found, we will be reluctant short-term lenders
until attractive long-term ownership stakes become available.
It's important for every shareholder to understand the commitment that your
managers have to Small-Cap's long-term success and our level of confidence in
the Fund as a vehicle for compounding our own assets. We continue to increase
our investment in Longleaf Partners Small-Cap Fund, and invite you to do the
same. When considering Small-Cap you should know:
- The employees of Southeastern, advisor to the Fund, are required to use
Longleaf Partners Funds exclusively for equity investing (unless an
exception is given by our Compliance Committee for an overriding
circumstance).
- Longleaf Partners Funds' Trustees must direct their total board
compensation into the three funds.
- With $40 million of our own capital invested in Small-Cap, not only are
the employees and affiliates of Southeastern the Fund's largest
shareholder, but our stake in Small-Cap is currently larger than in our
other two funds.
- The Fund continues to operate more efficiently, and the overall expense
ratio declined from 1.30% in 1995 to 1.23% in 1996.
- Small-Cap's turnover in 1996 was 28%, and 98% of our distributed realized
capital gains were long-term. We are very mindful of how long holding
periods and tax deferral benefit the compounding process and our ultimate
after tax return.
<PAGE> 2
In closing we would like to welcome Daniel W. Connell, Jr. as a new Trustee.
After spending 25 years as a leading commercial banker with First Union in
Florida, Dan resigned in 1994 to help Jacksonville and Wayne Weaver secure an
NFL franchise. He currently serves as Senior Vice President of Marketing for the
Jaguars and Chairman of the Jacksonville Chamber of Commerce. We hope you will
meet Dan and join the rest of us at our annual meeting scheduled for Tuesday,
May 13 at 5:30 p.m. at the Memphis Botanic Gardens. We wish you and your family
a happy and prosperous new year.
Sincerely,
<TABLE>
<S> <C>
/s/ O. Mason Hawkins, CFA /s/ G. Staley Cates, CFA
- - ------------------------------ -------------------------------
O. Mason Hawkins, CFA G. Staley Cates, CFA
Co-Portfolio Manager Co-Portfolio Manager
</TABLE>
- - --------------------------------------------------------------------------------
* The average annual total returns of Longleaf Partners Small-Cap Fund for the
one year and five years ended December 31, 1996 and from its initial public
offering on February 21, 1989 through December 31, 1996 are 30.64%, 15.52% AND
10.60%, respectively. Fund returns and those of the Wilshire 5000 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 investment performance is no guarantee of future investment
performance, and the value of an investment when redeemed may be more or less
than the purchase price.
- - --------------------------------------------------------------------------------
Comparison of Change in Value of $10,000 Investment in
Longleaf Partners Small-Cap Fund, the Wilshire 5000 Index,
and the Value-Line Index
CHART HERE
The chart is a line graph with a beginning investment of $10,000 at 2/89, the
date of the Fund's first public offering, and continuing annually to an ending
value at 12/96 of $22,080, compared with an ending value of $30,517 for the
Wilshire 5000 Index and an ending value of $15,214 for the Value Line Index.
The chart includes an insert showing the Fund's average annual returns for
1 year (30.6%), 3 years (17.1%), 5 years (15.5%) and since inception at 2/89
(10.6%) compared with the returns for the same periods of the Wilshire 555 and
Value Line Indices.
Small-Cap Fund Yearly Returns
(under current portfolio managers)
(GRAPH)
The graph is a bar graph showing the total annual returns of the Fund for each
full year of its operations under its present co-portfolio managers from 1992
through 1996, as follows: 6.9%, 19.8%, 3.6%, 18.6%, and 30.6%, respectively.
<PAGE> 3
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
MANAGEMENT'S DISCUSSION OF LLSC
FOR THE YEAR ENDED DECEMBER 31, 1996
Longleaf Partners Small-Cap Fund (LLSC) produced a 30.6% total return in 1996.
The Fund remained fully invested. As several holdings reached full value and
were sold, we found a number of attractively priced investment opportunities in
which to redeploy the cash.
Eight companies were sold during the year, contributing to the Fund's
performance. Helene Curtis provided 11.9% of the gain for the Fund as the
company was sold to Unilever early in the year.
Several of our long-time holdings contributed substantially to 1996 performance.
The market began to realize White River's value as the company took public its
operating business, CCC Information Services, and the holdings of White River
thus became easier to evaluate. White River contributed over $5.6 million to
Small-Cap's performance. American Safety Razor provided 11.1% of the Fund's
return as improved earnings got rewarded. Cousins Properties appreciated as it
moved its asset base to more income producing properties yielding higher FFO
(funds from operations), a measure which greatly interests Wall Street. As a
result, the company added over $3 million to Small-Cap's performance. Rhodes
diminished portfolio return by $1.4 million when a 30% shareholder forced the
company's sale to Heilig-Meyers at a point when Rhodes' profits were temporarily
depressed. The transaction closed in January of 1997.
During the year the Fund added twelve new companies to the portfolio, and
several contributed to LLSC's returns. Our position in Trizec benefitted greatly
when Horsham announced, it was buying the remaining half of Trizec that it did
not already own. The new company, TrizecHahn, become one of the world's largest
and most strongly capitalized real estate companies, which was applauded by Wall
Street and added $6.2 million of profit to Small-Cap's performance.
The table on the following page provides a more detailed accounting of
contributions to performance in 1996.
<PAGE> 4
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
The following table delineates the specific dollar contributions of individual
holdings to the 30.64% total return for 1996.
<TABLE>
<CAPTION>
PERCENTAGE
CONTRIBUTION OF TOTAL
IN 1996 CONTRIBUTION
------------ ------------
<S> <C> <C>
REALIZED GAINS:
Helene Curtis Industries, Inc............................. $ 5,594,782 11.9%
Craig Corporation......................................... 939,218 2.0
All others, net........................................... 80,919 0.2
----------- -----
6,614,919 14.1
----------- -----
INCREASE IN UNREALIZED APPRECIATION:
FROM SECURITIES HELD AT DECEMBER 31, 1995:
White River Corporation................................ 5,679,948 12.1
American Safety Razor Company.......................... 5,206,875 11.1
Cousins Properties Incorporated........................ 3,031,875 6.4
United Asset Management Corporation.................... 2,536,420 5.4
Franklin Electric Co., Inc............................. 2,382,355 5.1
Pinkerton's, Inc....................................... 2,093,325 4.4
Duff & Phelps Credit Rating Co......................... 1,953,900 4.1
The Union Corporation.................................. 1,312,500 2.8
Grey Advertising Inc................................... 1,114,060 2.4
VICORP Restaurants, Inc................................ 1,015,000 2.2
Rhodes, Inc............................................ (1,416,633) (3.0)
All others, net........................................ 337,640 0.7
----------- -----
25,247,265 53.7
----------- -----
FROM NEW HOLDINGS IN 1996:
TrizecHahn Corporation................................. 6,247,743 13.3
Bay View Capital Corporation........................... 2,606,462 5.5
Zurn Industries, Inc................................... 2,131,482 4.5
Orion Capital Corporation.............................. 1,996,022 4.2
AMETEK, Inc............................................ 1,755,802 3.7
Healthsource, Inc...................................... 1,021,702 2.2
Vanguard Cellular Systems, Inc. - Class A.............. (957,025) (2.0)
The Pioneer Group, Inc................................. (1,075,626) (2.3)
All others, net........................................ 1,158,341 2.5
----------- -----
14,884,903 31.6
----------- -----
Net realized and unrealized gain on investments............. 46,747,087 99.4
Net investment income....................................... 305,763 0.6
----------- -----
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...... $47,052,850 100.0%
=========== =====
</TABLE>
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
LONGLEAF PARTNERS SMALL-CAP FUND
We have audited the accompanying statement of assets and liabilities of Longleaf
Partners Small-Cap Fund (a series of Longleaf Partners Funds Trust), including
the schedule of portfolio investments, as of December 31, 1996, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for the years ended December 31, 1996, 1995, 1994, 1993, 1992, 1991
and 1990, the two months ended December 31, 1989, and the period from December
28, 1988 (Date of Initial Capitalization) through October 31, 1989. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures include confirmation of securities owned and
securities purchased but not received as of December 31, 1996 by correspondence
with the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Longleaf Partners Small-Cap Fund as of December 31, 1996 and the results of its
operations, changes in its net assets, and the financial highlights each of the
respective periods stated in the first paragraph, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 10, 1997
<PAGE> 6
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHARES MARKET VALUE
------- COMMON STOCK (96.6%) ------------
<S> <C> <C> <C> <C> <C>
ADVERTISING (2.1%)
21,020 Grey Advertising Inc. - Class A............................ $ 5,318,060
------------
BANKING (3.8%)
225,000 Bay View Capital Corp...................................... 9,534,375
------------
BEVERAGES (1.5%)
195,000 * Celestial Seasonings, Inc.................................. 3,851,250
------------
BUSINESS SERVICES (6.4%)
370,000 * Pinkerton's, Inc........................................... 9,296,250
300,000 * The Union Corporation ..................................... 6,862,500
------------
16,158,750
------------
COMMERCIAL LIGHTING (1.2%)
148,900 Thomas Industries, Inc..................................... 3,108,288
------------
FINANCIAL SERVICES (9.5%)
200,400 Duff & Phelps Credit Rating Co............................. 4,834,650
351,200 * White River Corporation.................................... 19,140,400
------------
23,975,050
------------
FOOD (0.7%)
100,000 GoodMark Foods, Inc........................................ 1,650,000
------------
FURNITURE (2.2%)
723,000 * Rhodes, Inc. .............................................. 5,603,250
------------
HEALTH CARE (5.3%)
1,025,000 * Healthsource, Inc. ........................................ 13,453,125
------------
INDUSTRIAL EQUIPMENT (0.2%)
231,400 * Baldwin Technology Company, Inc. - Class A................. 578,500
------------
INVESTMENT MANAGEMENT COMPANIES (4.8%)
164,000 * Lexington Global Asset Managers, Inc. ..................... 1,028,125
416,000 United Asset Management Corporation........................ 11,076,000
------------
12,104,125
------------
MANUFACTURING (15.5%)
850,000 * American Safety Razor Company.............................. 11,900,000
392,400 AMETEK, Inc................................................ 8,730,900
173,200 Franklin Electric Co., Inc................................. 8,097,100
393,000 Zurn Industries, Inc....................................... 10,267,125
------------
38,995,125
------------
</TABLE>
See Notes to Financial Statements.
<PAGE> 7
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- ------------
<S> <C> <C> <C> <C> <C>
MISCELLANEOUS (1.6%)
104,152 Seafield Capital Corporation............................. $ 4,035,890
------------
NATURAL RESOURCES (3.5%)
374,000 The Pioneer Group, Inc................................... 8,882,500
------------
PROPERTY & CASUALTY INSURANCE (11.3%)
34,680 * Alleghany Corporation.................................... 7,352,160
642,500 Hilb, Rogal and Hamilton Company......................... 8,513,125
28,200 * Markel Corporation....................................... 2,538,000
165,000 Orion Capital Corporation................................ 10,085,625
------------
28,488,910
------------
PUBLISHING (1.5%)
110,000 Plenum Publishing Corporation............................ 3,850,000
------------
REAL ESTATE (19.2%)
1,050,000 * Catellus Development Corporation......................... 11,943,750
385,000 Cousins Properties Incorporated.......................... 10,828,125
478,000 * IHOP Corp................................................ 11,292,750
649,600 * TrizecHahn Corporation................................... 14,291,200
------------
48,355,825
------------
RESTAURANTS (1.5%)
290,000 * VICORP Restaurants, Inc.................................. 3,842,500
------------
RETAIL (0.9%)
120,000 Delchamps, Inc........................................... 2,325,000
------------
TELECOMMUNICATIONS (3.8%)
610,459 * Vanguard Cellular Systems, Inc. -- Class A............... 9,614,729
------------
TOTAL COMMON STOCKS (COST $192,789,051)................................... 243,725,252
------------
SHORT TERM OBLIGATIONS (3.3%)
Repurchase Agreement with State Street Bank and Trust Company, dated
12-31-96, due 1-2-97 at 4.75%, collateralized by $8,361,291 U.S.
Treasury Bond due 2-15-20 (Repurchase proceeds-$8,195,162) (Cost
$8,193,000).............................................................. 8,193,000
------------
TOTAL INVESTMENTS (COST $200,982,051)* *..................................... 99.9% 251,918,252
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................... 0.1 238,705
----- ------------
NET ASSETS................................................................... 100.0% $252,156,957
===== ============
NET ASSET VALUE PER SHARE (OFFERING AND REDEMPTION PRICE PER SHARE) BASED ON
14,121,918 SHARES OUTSTANDING AT DECEMBER 31, 1996................................ $17.86
============
</TABLE>
* Non-income producing security
* * Also represents aggregate cost for Federal income tax purposes
See Notes to Financial Statements.
<PAGE> 8
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments:
Securities, at market value (cost $192,789,051) (Note 1
and Note 7)............................................ $243,725,252
Repurchase agreement (Note 6)............................. 8,193,000
------------
TOTAL INVESTMENTS 251,918,252
Cash........................................................ 568
Receivables:
Securities sold........................................... 395,163
Dividends and interest.................................... 267,754
Prepaid assets.............................................. 20,621
Insurance reserve premium................................... 7,274
------------
TOTAL ASSETS 252,609,632
------------
LIABILITIES:
Payable for:
Securities purchased...................................... 164,320
Investment Counsel fee (Note 2)........................... 203,354
Administration fee (Note 3)............................... 20,335
Other accrued expenses...................................... 64,666
------------
TOTAL LIABILITIES 452,675
------------
NET ASSETS $252,156,957
============
Composition of net assets:
Paid-in capital (unlimited number of shares authorized,
14,121,918 shares outstanding)......................... $201,119,380
Undistributed net investment income....................... 4,598
Accumulated net realized gain............................. 96,778
Unrealized appreciation of investments (Note 7)........... 50,936,201
------------
NET ASSETS $252,156,957
============
NET ASSET VALUE (OFFERING AND REDEMPTION PRICE) PER SHARE
($252,156,957 DIVIDED BY 14,121,918 SHARES)............... $17.86
============
</TABLE>
See Notes to Financial Statements.
<PAGE> 9
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME:
INCOME:
Dividends................................................. $2,115,108
Interest.................................................. 328,269
-----------
2,443,377
-----------
EXPENSES:
Investment counsel fee (Note 2)........................... 1,735,200
Administration fee (Note 3)............................... 173,520
Registration and filing fees.............................. 59,945
Transfer agent fee........................................ 31,520
Trustees' fees............................................ 27,473
Printing.................................................. 22,553
Custodian fee............................................. 20,558
Reimbursable administration expenses (Note 3)............. 15,838
Supplies and postage...................................... 13,061
Professional fees......................................... 12,588
Insurance expense......................................... 6,374
Miscellaneous............................................. 18,984
-----------
2,137,614
-----------
Net investment income............................. 305,763
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain from securities transactions, net:
Proceeds from sales.................................... 47,196,026
Cost of securities sold................................ 33,779,854
-----------
Net realized gain................................. 13,416,172
Increase in unrealized appreciation for the year, net..... 33,330,915
-----------
Net realized and unrealized gain on investments... 46,747,087
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $47,052,850
===========
</TABLE>
See Notes to Financial Statements.
<PAGE> 10
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income..................................... $ 305,763 $ 1,025,608
Net realized gain on investments.......................... 13,416,172 10,013,505
Net unrealized appreciation for the period................ 33,330,915 10,269,885
------------ ------------
Net increase in net assets resulting from operations... 47,052,850 21,308,998
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net realized gain on investments ($1.005 and $1.166
per share, respectively)............................... (13,335,532) (10,015,944)
From net investment income ($0.0236 and $0.118 per share,
respectively).......................................... (313,153) (1,013,621)
------------ ------------
Net decrease in net assets resulting from
distributions........................................ (13,648,685) (11,029,565)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares.......................... 108,358,068 54,528,065
Net asset value of shares issued to shareholders for
reinvestment of shareholder distributions.............. 12,582,527 10,605,812
Cost of shares redeemed................................... (38,164,599) (39,045,822)
------------ ------------
Net increase in net assets from fund share
transactions......................................... 82,775,996 26,088,055
------------ ------------
Total increase in net assets........................... 116,180,161 36,367,488
NET ASSETS:
Beginning of year......................................... 135,976,796 99,609,308
------------ ------------
End of year (including undistributed net investment income
of $4,598 and $11,988, respectively)................... $252,156,957 $135,976,796
============ ============
</TABLE>
See Notes to Financial Statements.
<PAGE> 11
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Longleaf Partners Small-Cap Fund (the "Fund") is a series of Longleaf Partners
Funds Trust, a Massachusetts business trust which is registered under the
Investment Company Act of 1940, as amended, as a diversified open-end management
investment company. The Fund was formed on December 21, 1988, and on December
28, 1988 the initial capitalization of $1,500,000 was provided by two principals
of Southeastern Asset Management, Inc., the Investment Counsel, who received
150,000 shares of beneficial interest in return. The Fund commenced its public
offering of shares on February 21, 1989.
The following is a summary of significant accounting policies:
(a) Valuation of Securities and Repurchase Agreements:
(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.
(3) When market quotations are not readily available, portfolio securities
are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of the
Fund's Trustees.
(b) Accounting for Investments:
The Fund follows industry practice and records security transactions on
the day following the trade date (date the order to buy or sell is
executed). Realized gains and losses on security transactions are
determined using the specific identification method. Dividend income is
recognized on the ex-dividend date and interest income is recognized on an
accrual basis.
(c) Federal Income Taxes:
The Fund's policy is to comply with the requirements of the Internal
Revenue Code that are applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Accordingly, no
federal income tax provision is required. In addition, the Fund intends to
make any required distributions to avoid the application of a 4%
nondeductible excise tax.
(d) Distributions to Shareholders:
Dividends and distributions to shareholders are recorded on the
ex-dividend date.
<PAGE> 12
NOTE 2. INVESTMENT COUNSEL AGREEMENT
Southeastern Asset Management, Inc. ("Southeastern") serves as Investment
Counsel to the Fund and receives annual compensation from the Fund, computed
daily and paid monthly, in accordance with the following schedule:
<TABLE>
<S> <C>
First $400 million of average daily net assets.............. 1.00%
In excess of $400 million................................... .75%
</TABLE>
The Investment Counsel has agreed to reduce its fees on a pro rata basis for
services rendered to the extent that the Fund's normal annual operating expenses
(excluding taxes, interest, brokerage fees, and extraordinary expenses) exceed
1.5% of average annual net assets. No such reduction was necessary for the
current period.
NOTE 3. 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 Fund, including, among other things, the preparation
of all registration statements, prospectuses, tax returns and proxy statements,
daily valuation of the Fund's portfolio and calculation of daily net asset value
per share. The Fund pays 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 Fund to Southeastern consist of
a portion of both the computer support charges for computer programs used in
processing transactions for the Fund and its shareholders and of the salary of
the Fund's Treasurer calculated in accordance with Trustee review and approval.
NOTE 4. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Shares sold........................... 6,357,663 $108,358,068 3,818,992 $54,528,065
Shares redeemed....................... (2,348,601) (38,164,599) 734,983 10,605,812
Reinvestment of shareholder
distribution........................ 706,090 12,582,527 (2,650,508) (39,045,822)
---------- ------------ ---------- -----------
4,715,152 $ 82,775,996 1,903,467 $26,088,055
========== ============ ========== ===========
</TABLE>
NOTE 5. INVESTMENT TRANSACTIONS
Purchases and sales of securities for the period (excluding short term
obligations) aggregated $112,741,793 and $47,196,026, respectively. Total
brokerage commissions paid by the Fund during the period were $576,550.
NOTE 6. INVESTMENTS IN SHORT-TERM OBLIGATIONS
As excess funds are available, the Fund makes certain short term investments in
cash equivalents, including repurchase agreements. The Fund's custodian bank
sells U.S. government securities to the Fund under an
<PAGE> 13
agreement to repurchase these securities from the Fund at a stated repurchase
price including interest for the term of the agreement, which is usually
overnight or over a week-end. The Fund, through its custodian, receives delivery
of the underlying U.S. government securities as collateral, the market value of
which 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. A repurchase
agreement of $8,193,000 is included in the statement of assets and liabilities
at December 31, 1996.
NOTE 7. UNREALIZED APPRECIATION
Net unrealized appreciation consists of the following:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $56,813,222
Unrealized depreciation..................................... (5,877,021)
-----------
$50,936,201
===========
</TABLE>
NOTE 8. RELATED PARTY SHAREHOLDERS
At December 31, 1996, Mr. O. Mason Hawkins, Chairman of the Board and Chief
Executive Officer of Southeastern and of the Fund, owned 903,082 shares of the
Fund, constituting 6.4% of the outstanding shares; Mr. W. Reid Sanders, a
director and Executive Vice President of Southeastern and a member of the Board
of Trustees and President of the Fund, owned 451,171 shares of the Fund,
constituting 3.2% of the outstanding shares. Officers and employees of
Southeastern and their families, Fund trustees and the Southeastern retirement
plan and other affiliates owned an additional 892,535 shares, constituting 6.3%
of the outstanding shares.
NOTE 9. OTHER PORTFOLIO INFORMATION
At December 31, 1996, the Fund's holdings consisted of at least five percent of
the outstanding class of common stock of the following companies: 7.0% of
American Safety Razor Company, 5.0% of IHOP Corp., 7.9% of Rhodes, Inc., 5.2% of
The Union Corporation, and 7.2% of White River Corporation.
<PAGE> 14
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
FINANCIAL HIGHLIGHTS
The following condensed financial information, including total returns, has been
audited by Coopers & Lybrand L.L.P., independent certified public accountants.
The audit report on the 1996 financial statements issued by Coopers & Lybrand
L.L.P. appears in this report and should be read in conjunction with this
condensed financial information. The presentation is for a share outstanding
throughout each period.
<TABLE>
<CAPTION>
NET GAINS
OR
NET (LOSS) ON DISTRI- NET
ASSET NET SECURITIES TOTAL DIVIDENDS BUTIONS ASSET
VALUE INVESTMENT REALIZED FROM FROM NET FROM TOTAL VALUE
BEGINNING INCOME AND INVESTMENT INVESTMENT CAPITAL DISTRI- END OF TOTAL
OF PERIOD (LOSS) UNREALIZED OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN
--------- ---------- ---------- ---------- ---------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended
December 31,
1996.............. $ 14.46 $ .03 $ 4.40 $ 4.43 $ (.02) $(1.01) $ (1.03) $17.86 30.64%
1995.............. 13.28 .12 2.35 2.47 (.12) (1.17) (1.29) 14.46 18.61%
1994.............. 13.49 (.03) .52 .49 - (.70) (.70) 13.28 3.64%
1993.............. 11.40 (.06) 2.32 2.26 - (.17) (.17) 13.49 19.83%
1992.............. 10.67 (.01) .74 .73 - - - 11.40 6.87%
1991.............. 8.50 .06 2.17 2.23 (.06) - (.06) 10.67 26.31%
1990.............. 12.87 .40 (4.18) (3.78) (.36) (.23) (.59) 8.50 (30.05)%
Two months ended
December 31, 1989... 13.02 .04 .22 .26 (.05) (.36) (.41) 12.87 2.10%(1)
December 28, 1988
(Date of Initial
Capitalization)
through October 31,
1989................ 10.00 .17 2.94 3.11 (.09) - (.09) 13.02 31.13%(1)
<CAPTION>
RATIO OF
EXPENSES RATIO OF
NET ASSETS TO NET INCOME
END OF AVERAGE (LOSS) TO PORTFOLIO AVERAGE
PERIOD NET AVERAGE TURNOVER COMMISSION
(THOUSANDS) ASSETS NET ASSETS RATE RATE PAID
----------- -------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Year ended
December 31,
1996.............. $252,157 1.23% .18% 27.97% $0.0605(3)
1995.............. 135,977 1.30% .84% 32.95%
1994.............. 99,609 1.38% (.22)% 19.79%
1993.............. 85,087 1.45% (.45)% 14.37%
1992.............. 62,181 1.45% (.03)% 25.80%
1991.............. 60,354 1.43% .60% 65.18%
1990.............. 47,894 1.43% 3.48% 14.93%
Two months ended
December 31, 1989... 52,176 1.47%* 1.60%* 3.96%
December 28, 1988
(Date of Initial
Capitalization)
through October 31,
1989................ 43,860 1.50%*(2) 1.63%* 20.47%
</TABLE>
* Annualized
(1) Aggregate; not annualized.
(2) Before expense limitation fee waiver, this ratio was 1.59%.
(3) Not applicable for prior periods.
<PAGE> 15
FIVE LARGEST HOLDINGS
(REPRESENTS 28.0% OF NET ASSETS AT 12/31/96)
WHITE RIVER CORPORATION (WHRC) 7.6%
A holding company with significant ownership in CCC Information Services Group,
Inc. which provides vehicle valuation and collision estimating services and
software for insurance and auto repair firms. Also owns other equity securities.
TRIZECHAHN CORPORATION (TZH) 5.7%
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.
HEALTHSOURCE, INC. (HS) 5.3%
A large provider of managed health care services with operations primarily in
the Northeast, Midwest, and Southeast.
CATELLUS DEVELOPMENT CORPORATION (CDX) 4.7%
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.
AMERICAN SAFETY RAZOR COMPANY (RAZR) 4.7%
The largest U.S. maker of private label and value-brand shaving blades and
razors; the largest manufacturer of both premium and value-priced bladed hand
tools and blades; the second largest maker of skin care, bath, pharmaceutical
and specialty custom bar soaps. Also makes cotton swabs, balls and puffs, as
well as specialty industrial and medical blades.
PORTFOLIO CHANGES
JANUARY 1, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
AMETEK, Inc Armor All Products Corporation
Bay View Capital Corporation Chartwell Reinsurance Company
Catellus Development Corporation Craig Corporation
FirstFed Financial Corp. FirstFed Financial Corp.
Healthsource, Inc. Helene Curtis Industries, Inc.
Hilb, Rogal and Hamilton Company Meredith Corporation
IHOP Corp. Phoenix Duff & Phelps Corporation
Orion Capital Corporation Ralcorp Holdings, Inc.
The Pioneer Group, Inc.
TrizecHahn Corporation
Vanguard Cellular Systems,
Inc. -- Class A
Zurn Industries, 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> 16
- - ---------------------------------------------
TRUSTEES
O. MASON HAWKINS, CFA --
Chairman, Southeastern Asset
Management, Inc.
Memphis, Tennessee
CHADWICK H. CARPENTER, JR. --
Senior Executive Officer, Progress
Software Corporation
Bedford, Massachusetts
DANIEL W. CONNELL, JR. --
Senior Vice President Marketing,
Jacksonville Jaguars, Ltd.
Jacksonville, Florida
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
PARTNERS
FUNDS
LOGO
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
ANNUAL
REPORT
December 31, 1996
LONGLEAF PARTNERS
SMALL-CAP FUND
----------------------------------------------------
----------------------------------------------------
MANAGED BY:
SOUTHEASTERN ASSET
MANAGEMENT, INC.
