<PAGE> 1
LONGLEAF PARTNERS FUND
January 10, 1997
TO OUR SHAREHOLDERS:
We are pleased to report Longleaf Partners Fund grew its net asset value 21.0%
in 1996 and completed its sixth consecutive year of above average compounding.
To our surprise, the Partners Fund approximately matched the S&P 500 in 1996.
These results are especially gratifying and noteworthy given that we were not
participants in the ebullient IPO, technology or growth stock momentum sectors
and that our portfolio cash position has been material.
The long-term record of Longleaf Partners Fund continues to outperform the S&P
500 Index and the average annual five year return of the Fund bested the index
by 4.7 percentage points. The data below summarizes the Fund's average annual
and cumulative returns for the periods ended December 31, 1996.
AVERAGE ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
LONGLEAF PARTNERS FUND S&P 500 INDEX VALUE-LINE INDEX
---------------------- ------------- ----------------
<S> <C> <C> <C>
FIVE YEARS 19.87% 15.21% 8.52%
THREE YEARS 18.91% 19.66% 8.32%
ONE YEAR 21.02% 22.98% 13.38%
</TABLE>
CUMULATIVE TOTAL RETURNS*
<TABLE>
<CAPTION>
LONGLEAF PARTNERS FUND S&P 500 INDEX VALUE-LINE INDEX
---------------------- ------------- ----------------
<S> <C> <C> <C>
LAST FIVE YEARS 147.49% 102.97% 50.53%
LAST THREE YEARS 68.13% 71.35% 27.11%
LAST YEAR 21.02% 22.98% 13.38%
LAST QUARTER 6.73% 8.36% 5.34%
</TABLE>
A number of portfolio holdings reached our appraisal of full value and were
sold. Although we added six new companies to the Fund, the market's ongoing
momentum made investing our cash a challenge. As long as our cash position stays
relatively high and finding large cap investment opportunities remains a
struggle, Longleaf Partners Fund will be closed to new investors.
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 Longleaf Partners Fund's long-term success and our level of
confidence in the Fund as a vehicle for compounding our own assets. As a
shareholder 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 $35 million of our own capital invested in the Fund, the employees
and affiliates of Southeastern are one of the Fund's largest shareholders.
- The Fund continues to operate more efficiently, and the overall expense
ratio declined from 1.01% in 1995 to 0.95% in 1996.
- Longleaf Partners Fund's turnover in 1996 was 33%, and 70% 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 /s/ G. Staley Cates
- - ----------------------------- -------------------------------
O. Mason Hawkins, CFA G. Staley Cates, CFA
Co-Portfolio Manager Co-Portfolio Manager
</TABLE>
- - --------------------------------------------------------------------------------
* The average annual total returns of Longleaf Partners Fund for the one year
and five years ended December 31, 1996 and from its initial public offering on
April 8, 1987 through December 31, 1996 are 21.02%, 19.87% AND 15.82%,
respectively. Fund returns and those of the S&P 500 Stock 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 Fund, the S&P 500 Index,
and the Value-Line Index
CHART HERE
The chart is a line graph with a beginning investment of $10,000 at 4/87, the
Fund's inception date, and continuing annually to an ending value at 12/96 of
$41,796, compared with an ending value of $33,464 for the S&P 500 Stock Index
and an ending value of $13,842 for the Value Line Index. The chart includes an
insert showing the Fund's average annual returns for 1 year (21.1%), 3 years
(18.9%), 5 years (19.9%) and since inception at 4/87 (15.8%) compared with the
returns for the same periods of the S&P 500 and Value Line Indices.
Longleaf Partners Fund Yearly Returns
(GRAPH)
The graph is a bar graph showing the total annual returns of the Fund for each
full year of its operations from 1988 through 1996, as follows: 35.3%, 23.3%,
- - -16.3%, 39.2%, 20.5%, 22.2%, 8.9%, 27.5%, and 21.0%, respectively.
<PAGE> 3
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
FOR THE YEAR ENDED DECEMBER 31, 1996
Longleaf Partners Fund (LLPF) produced a 21.02% total return in 1996. The Fund's
cash position ranged from 14% to 26% during the year as several holdings reached
full value and were sold, and we were challenged by the reinvestment process
given our disciplines. LLPF remained closed to new investors because of the
relatively high cash position.
Fourteen companies were sold during the year, contributing to the Fund's
performance. Hilton Hotels provided 15.8% of LLPF's gain. Hilton is a company
which Southeastern has followed for many years and has previously owned. In
January the company was selling at approximately 60% of our appraisal, largely
due to the cancellation of plans to separate the gaming and lodging businesses
into separate companies. Wall Street's view of Hilton dramatically changed when
the company announced that Steve Bollenbach, then CFO of Disney and previously
with Trump, Marriott and Holiday Inns, was becoming CEO of Hilton. The company
reached our appraisal of full value quickly and was sold.
In addition, we sold two of our investment management companies as they became
fully valued in the generally bullish market. Franklin Resources and Mellon Bank
contributed a combined $37.8 million to LLPF performance in 1996. Hasbro was
sold early in 1996 when the price appreciated during Mattel's attempt to buy the
company. This contributed 3.1% of the Fund's performance. Coca-Cola Enterprises,
the large bottling company, significantly grew its business through major
acquisitions during the year, and the market rewarded these moves. LLPF's profit
increased $11.5 million in 1996 from the sale of this holding. The only
meaningful realized loss in 1996 resulted from the sale of WellPoint which we
liquidated shortly after cancellation of the proposed merger with Health
Systems.
Several of our long-time holdings contributed substantially to 1996 performance.
TrizecHahn which was formerly Horsham added $57.7 million to the year's return.
Horsham announced it was buying the remaining half of Trizec that it did not
already own. This began the transformation of the company from a holding
corporation owning companies in three different industries to one of the world's
largest and most strongly capitalized real estate companies. The strength and
focus of the newly named TrizecHahn was applauded by Wall Street and provided a
strong gain to LLPF. The market rewarded Knight-Ridder's improved earnings from
increased advertising revenues and decreased newsprint costs, and the company
provided 10.9% of LLPF's return.
During the year the Fund added six new companies to the portfolio, and several
contributed to LLPF's returns. Nabisco Holdings, spun off and majority owned by
RJR, was saddled with concerns about the potential effects of tobacco litigation
against RJR. During the year, the market became more comfortable with the
separation of the two companies and the limited liability. The price
appreciation provided almost $19 million to the Fund's unrealized return. United
Healthcare added $15.5 million to performance when Wall Street calmed from its
overreaction to the "demise of the HMO industry."
The table on the following page provides a more detailed accounting of
contributions to performance in 1996.
<PAGE> 4
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
The following table delineates the specific dollar contributions of individual
holdings to the 21.02% total return for 1996.
<TABLE>
<CAPTION>
PERCENTAGE
CONTRIBUTION OF TOTAL
IN 1996 CONTRIBUTION
------------ ------------
<S> <C> <C>
REALIZED GAINS:
Hilton Hotels Corp........................................ $ 64,044,730 15.8%
Franklin Resources, Inc................................... 25,306,098 6.2
Hasbro Inc................................................ 12,690,210 3.1
Mellon Bank Corporation................................... 12,484,309 3.1
Coca-Cola Enterprises, Inc................................ 11,528,992 2.8
WellPoint Health Networks, Inc............................ (8,909,519) (2.2)
All others, net........................................... 1,719,063 0.4
------------ -----
118,863,883 29.2
------------ -----
INCREASE IN UNREALIZED APPRECIATION:
FROM SECURITIES HELD AT DECEMBER 31, 1995:
TrizecHahn Corporation (formerly The Horsham
Corporation)......................................... 57,690,931 14.2
Knight-Ridder, Inc..................................... 44,388,400 10.9
Federal Express Corporation............................ 23,131,610 5.7
PaineWebber Group, Inc................................. 19,201,813 4.7
The Quaker Oats Company................................ 14,673,165 3.6
The Seagram Company Ltd................................ 10,518,750 2.6
Ralston Purina Group Common Stock...................... 9,311,500 2.3
The Washington Post Company............................ 8,409,688 2.1
All others, net........................................ 13,345,948 3.3
------------ -----
200,671,805 49.4
------------ -----
FROM NEW HOLDINGS IN 1996:
Nabisco Holdings Corp.................................. 18,898,686 4.7
United HealthCare Corporation.......................... 15,514,298 3.8
Phillips Electronics NV................................ 9,374,864 2.3
All others, net........................................ 8,978,743 2.2
------------ -----
52,766,591 13.0
------------ -----
Net realized and unrealized gain on investments............. 372,302,279 91.6
Net investment income....................................... 34,373,697 8.4
------------ -----
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...... $406,675,976 100.0%
============ =====
</TABLE>
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
LONGLEAF PARTNERS FUND
We have audited the accompanying statement of assets and liabilities of Longleaf
Partners 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, October 31, 1989 and 1988, the two months ended December 31, 1989, and
the period from March 24, 1987 (Date of Initial Capitalization) through October
31, 1987. 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 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 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 FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- COMMON STOCK (83.9%) ------------
<S> <C> <C> <C> <C> <C>
BEVERAGES (4.3%)
2,550,000 The Seagram Company Ltd. ................................ $ 98,812,500
------------
BUSINESS SERVICES (1.3%)
595,700 Ecolab, Inc. ............................................ 22,413,213
279,200 * The Union Corporation.................................... 6,386,700
------------
28,799,913
------------
ENTERTAINMENT (0.3%)
171,277 * Chris-Craft Industries, Inc.............................. 7,172,224
------------
ENVIRONMENTAL SERVICES (2.7%)
346,900 Safety-Kleen Corp........................................ 5,680,487
1,709,800 WMX Technologies, Inc.................................... 55,782,225
------------
61,462,712
------------
FINANCIAL SERVICES (2.9%)
2,363,300 PaineWebber Group, Inc................................... 66,467,813
------------
FOOD (12.9%)
2,298,900 Nabisco Holdings Corp.................................... 89,369,737
3,818,000 The Quaker Oats Company.................................. 145,561,250
846,500 Ralston Purina Group Common Stock........................ 62,111,938
------------
297,042,925
------------
HEALTH CARE (2.7%)
1,361,700 * United HealthCare Corporation............................ 61,276,500
------------
INSURANCE BROKERAGE (2.8%)
3,770,142 Alexander & Alexander Services Inc....................... 65,506,217
------------
MANUFACTURING (2.1%)
1,407,000 Louisiana-Pacific Corporation............................ 29,722,875
574,000 * USG Corporation.......................................... 19,444,250
------------
49,167,125
------------
MULTI-INDUSTRY (8.5%)
1,565,000 Alexander & Baldwin, Inc................................. 39,125,000
3,075,000 * Phillips Electronics N.V................................. 123,000,000
1,488,300 Whitman Corporation...................................... 34,044,863
------------
196,169,863
------------
</TABLE>
See Notes to Financial Statements.
<PAGE> 7
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- --------------
<S> <C> <C> <C> <C> <C>
NATURAL RESOURCES (6.1%)
1,237,700 The Pioneer Group, Inc. ................................. $ 29,395,375
2,900,000 Rayonier Inc............................................. 111,287,500
--------------
140,682,875
--------------
PROPERTY & CASUALTY INSURANCE (1.0%)
110,616 * Alleghany Corp........................................... 23,450,592
--------------
PUBLISHING (12.9%)
6,341,200 Knight-Ridder, Inc....................................... 242,550,900
158,300 The Washington Post Company - Class B.................... 53,050,287
--------------
295,601,187
--------------
REAL ESTATE (7.5%)
788,000 Cousins Properties Incorporated.......................... 22,162,500
6,847,791 * TrizecHahn Corporation................................... 150,651,402
--------------
172,813,902
--------------
RETAIL (0.9%)
520,000 American Stores Company.................................. 21,255,000
--------------
TELECOMMUNICATIONS (5.0%)
4,966,837 * 360 degrees Communications Company....................... 114,858,106
--------------
TRANSPORTATION (10.0%)
3,234,800 * Federal Express Corporation.............................. 143,948,600
1,934,100 Kansas City Southern Industries, Inc..................... 87,034,500
--------------
230,983,100
--------------
TOTAL COMMON STOCKS (COST $1,479,371,024)................................. 1,931,522,554
--------------
SHORT TERM OBLIGATIONS (16.0%)
Certificate of Deposit - due 8-19-97 at 5.25%............................. 45,000
Repurchase Agreement with State Street Bank and Trust Company, dated
12-31-96, due 1-2-97 at 4.75%, collateralized by $20,847,153 U.S.
Treasury Bond due 2-15-20 (Repurchase proceeds - $20,442,393) (Cost
$20,437,000)............................................................. 20,437,000
U.S. Treasury Bill, due 2-27-97, yield at date of purchase 4.94%.......... 347,323,375
--------------
367,805,375
--------------
TOTAL INVESTMENTS (COST $1,847,176,399)* *................................... 99.9% 2,299,327,929
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................... 0.1 751,247
----- --------------
NET ASSETS................................................................... 100.0% $2,300,079,176
===== ==============
NET ASSET VALUE PER SHARE (OFFERING AND REDEMPTION PRICE PER SHARE) BASED ON
100,652,843 SHARES OUTSTANDING AT DECEMBER 31, 1996............................... $ 22.85
==============
</TABLE>
* Non-income producing security
* * Also represents aggregate cost for Federal income tax purposes
See Notes to Financial Statements.
<PAGE> 8
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUND
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments:
Securities, at market value (cost $1,479,371,024) (Note 1
and Note 7)............................................ $1,931,522,554
U.S. Treasury Bills....................................... 347,323,375
Repurchase agreement (Note 6)............................. 20,437,000
Certificate of deposit.................................... 45,000
--------------
TOTAL INVESTMENTS 2,299,327,929
Cash........................................................ 263
Dividends and interest receivable........................... 2,530,519
Prepaid assets.............................................. 123,498
Insurance reserve premium................................... 52,272
--------------
TOTAL ASSETS 2,302,034,481
--------------
LIABILITIES:
Payable for:
Investment Counsel fee (Note 2)........................... 1,549,488
Administration fee (Note 3)............................... 195,305
Other accrued expenses...................................... 210,512
--------------
TOTAL LIABILITIES 1,955,305
--------------
NET ASSETS $2,300,079,176
==============
Composition of net assets:
Paid-in capital (unlimited number of shares authorized,
100,652,843 shares outstanding)........................ $1,847,529,846
Undistributed net investment income....................... 129,189
Accumulated net realized gain............................. 268,611
Unrealized appreciation of investments (Note 7)........... 452,151,530
--------------
NET ASSETS $2,300,079,176
==============
NET ASSET VALUE (OFFERING AND REDEMPTION PRICE) PER SHARE
($2,300,079,176 DIVIDED BY 100,652,843 SHARES)............ $22.85
==============
</TABLE>
See Notes to Financial Statements.
<PAGE> 9
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME:
INCOME:
Dividends................................................. $ 32,116,678
Interest.................................................. 22,612,971
------------
54,729,649
------------
EXPENSES:
Investment Counsel fee (Note 2)........................... 17,004,356
Administration fee (Note 3)............................... 2,133,914
Transfer Agent fee........................................ 388,284
Reimbursable administration expenses (Note 3)............. 168,016
Supplies and postage...................................... 154,407
Registration and filing fees.............................. 127,615
Printing.................................................. 77,912
Trustees' fees............................................ 54,946
Insurance expense......................................... 50,815
Professional fees......................................... 35,600
Custodian fee............................................. 34,716
Miscellaneous............................................. 125,371
------------
20,355,952
------------
Net investment income............................. 34,373,697
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain from securities transactions, net:
Proceeds from sales.................................... 817,198,461
Cost of securities sold................................ 603,525,053
------------
Net realized gain................................. 213,673,408
Increase in unrealized appreciation for the year, net..... 158,628,871
------------
Net realized and unrealized gain on investments... 372,302,279
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $406,675,976
============
</TABLE>
See Notes to Financial Statements.
<PAGE> 10
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income..................................... $ 34,373,697 $ 20,371,114
Net realized gain on investments.......................... 213,673,408 37,694,798
Net unrealized appreciation for the period................ 158,628,871 239,294,987
-------------- --------------
Net increase in net assets resulting from operations... 406,675,976 297,360,899
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ($0.383 and $0.24 per share,
respectively).......................................... (34,349,264) (20,363,752)
From net realized gain on investments ($2.381 and $0.444
per share, respectively)............................... (213,539,413) (37,672,942)
-------------- --------------
Net decrease in net assets resulting from
distributions........................................ (247,888,677) (58,036,694)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares.......................... 415,870,054 1,109,962,005
Net asset value of shares issued to shareholders for
reinvestment of shareholder distributions.............. 234,252,018 54,537,285
Cost of shares redeemed................................... (385,297,441) (280,883,298)
-------------- --------------
Net increase in net assets from fund share
transactions......................................... 264,824,631 883,615,992
-------------- --------------
Total increase in net assets........................... 423,611,930 1,122,940,197
NET ASSETS:
Beginning of year......................................... 1,876,467,246 753,527,049
-------------- --------------
End of year (including undistributed net investment income
of $129,189 and $104,756, respectively)................ $2,300,079,176 $1,876,467,246
============== ==============
</TABLE>
See Notes to Financial Statements.
<PAGE> 11
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUND
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Longleaf Partners 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 organized on November 26, 1986 and on March 24, 1987 the
initial capitalization of $100,000 was provided by two principals of
Southeastern Asset Management, Inc., the Investment Counsel, who received 10,000
shares of beneficial interest in return. The Fund commenced its public offering
of shares on April 8, 1987.
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. Short-term
U.S. Government obligations are valued at amortized cost which
approximates current market value.
(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 year.
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...................... 18,238,896 $415,870,054 56,015,693 $1,109,962,005
Reinvestment of shareholder
distribution................... 10,180,444 234,252,018 2,589,615 54,537,285
Shares redeemed.................. (16,493,540) (385,297,441) (13,874,948) (280,883,298)
----------- ------------ ----------- --------------
11,925,800 $264,824,631 44,730,360 $ 883,615,992
=========== ============ =========== ==============
</TABLE>
NOTE 5. INVESTMENT TRANSACTIONS
Purchases and sales of securities for the period (excluding short-term
obligations) aggregated $561,624,924 and $565,682,438, respectively. Total
brokerage commissions paid by the Fund during the period were $2,172,895.
<PAGE> 13
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 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 $20,437,000 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.................................... $469,426,282
Unrealized depreciation.................................... (17,274,752)
------------
$452,151,530
============
</TABLE>
NOTE 8. RELATED PARTY SHAREHOLDERS
At December 31, 1996, officers and employees of Southeastern and their families,
Fund trustees and the Southeastern retirement plan and other affiliates owned
1,543,076 shares of the Fund, constituting 1.53% 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 voting stock of the following companies: 8.4% of Alexander &
Alexander Services, Inc., 5.2% of Kansas City Southern Industries, Inc., 6.8% of
Knight-Ridder, Inc., and 9.9% of Rayonier Inc.
<PAGE> 14
- - --------------------------------------------------------------------------------
LONGLEAF PARTNERS 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
(LOSSES)
NET ON DISTRI- NET
ASSET SECURITIES TOTAL DIVIDENDS BUTIONS ASSET
VALUE NET REALIZED FROM FROM NET FROM TOTAL VALUE
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT CAPITAL DISTRI- END OF TOTAL
OF PERIOD INCOME UNREALIZED OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN
--------- ---------- ----------- ---------- ---------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December
31,
1996.............. $21.15 $.37 $ 4.09 $ 4.46 $ (.38) $(2.38) $(2.76) $22.85 21.02%
1995.............. 17.13 .30 4.40 4.70 (.24) (.44) (.68) 21.15 27.50%
1994.............. 16.92 .21 1.30 1.51 (.16) (1.14) (1.30) 17.13 8.96%
1993.............. 14.70 .10 3.16 3.26 (.09) (.95) (1.04) 16.92 22.20%
1992.............. 13.34 .07 2.65 2.72 (.07) (1.29) (1.36) 14.70 20.47%
1991.............. 10.21 .05 3.93 3.98 (.06) (.79) (.85) 13.34 39.19%
1990.............. 12.62 .13 (2.16) (2.03) (.15) (.23) (.38) 10.21 (16.35)%
Two months ended
December 31,
1989................ 14.30 .03 (.10) (.07) (.08) (1.53) (1.61) 12.62 (0.47)%(1)
Year ended
October 31,
1989.............. 11.25 .18 3.00 3.18 (.13) - (.13) 14.30 28.38%
1988.............. 8.69 .14 2.50 2.64 (.08) - (.08) 11.25 30.69%
March 24, 1987
(Date of Initial
Capitalization)
through October 31,
1987................ 10.00 .11 (1.42) (1.31) - - - 8.69 (13.14)%(1)
<CAPTION>
RATIO OF
EXPENSES RATIO OF
NET ASSETS TO NET
END OF AVERAGE INCOME 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.............. $2,300,079 0.95% 1.61% 33.18% $0.0750(3)
1995.............. 1,876,467 1.01% 1.45% 12.60%
1994.............. 753,527 1.17% 1.18% 27.39%
1993.............. 397,282 1.26% .63% 19.12%
1992.............. 243,678 1.29% .50% 29.12%
1991.............. 177,878 1.30% .42% 45.11%
1990.............. 129,643 1.32% 1.13% 52.45%
Two months ended
December 31,
1989................ 148,680 1.31%* 1.73%* 6.67%
Year ended
October 31,
1989.............. 139,608 1.35% 1.37% 57.72%
1988.............. 50,676 1.50%(2) 1.40% 92.68%
March 24, 1987
(Date of Initial
Capitalization)
through October 31,
1987................ 25,787 1.50%*(2) 1.61%* 70.00%
</TABLE>
* Annualized
(1) Aggregate; not annualized.
(2) Before expense limitation fee waiver, this ratio was 1.64% and 1.83% for the
1988 and 1987 periods, respectively.
(3) Not applicable for prior periods.
<PAGE> 15
FIVE LARGEST HOLDINGS
(REPRESENTS 34.9% OF NET ASSETS AT 12/31/96)
KNIGHT-RIDDER, INC. (KRI) 10.5%
One of the largest newspaper publishers in the U.S. and a worldwide provider of
electronic information services.
TRIZECHAHN CORPORATION (TZH) 6.5%
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.
THE QUAKER OATS COMPANY (OAT) 6.3%
A producer of brand name packaged foods and beverages including numerous hot and
cold cereals, Gatorade, Snapple, and Aunt Jemima products.
FEDERAL EXPRESS CORPORATION (FDX) 6.3%
Integrated air-ground transportation company providing overnight and second-day
delivery of packages and documents worldwide.
PHILLIPS ELECTRONICS N.V. (PHG) 5.3%
Owner of 75% of recording company Polygram. Also a leading manufacturer of
lighting systems, electronics products including television and stereo
equipment, appliances and semiconductors.
PORTFOLIO CHANGES
JANUARY 1, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Nabisco Holdings Corp. American Express Company
Phillips Electronics N.V. Coca-Cola Enterprises, Inc.
Rayonier Inc. Craig Corporation
TrizecHahn Corporation Franklin Resources, Inc.
United HealthCare Corporation Hasbro Inc.
USG Corporation Health Systems International,
360 degrees Communications Company Inc.
Hilton Hotels Corp.
Marsh & McLennan Companies,
Inc.
McKesson Corporation
Mellon Bank Corporation
Polaroid Corp.
Ralcorp Holdings, Inc.
Rollins, Inc.
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> 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 FUND
----------------------------------------------------
----------------------------------------------------
MANAGED BY:
SOUTHEASTERN ASSET
MANAGEMENT, INC.
