<PAGE> 1
[LONG LEAF LOGO]
SEMI-ANNUAL REPORT
at June 30, 1997
LONGLEAF PARTNERS FUND
LONGLEAF PARTNERS REALTY FUND
LONGLEAF PARTNERS SMALL-CAP FUND
================================================================================
MANAGED BY:
SOUTHEASTERN ASSET MANAGEMENT, INC.
Memphis, TN
<PAGE> 2
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Letter from the Portfolio Managers......................... 1
Longleaf Partners Fund (Partners Fund)
Fund Summary............................................. 4
Portfolio................................................ 6
Financial Reports and Footnotes.......................... 16
Financial Highlights..................................... 28
Results of Shareholder Balloting......................... 30
Longleaf Partners Realty Fund (Realty Fund)
Fund Summary............................................. 8
Portfolio................................................ 10
Financial Reports and Footnotes.......................... 16
Financial Highlights..................................... 28
Results of Shareholder Balloting......................... 32
Longleaf Partners Small-Cap Fund (Small-Cap Fund)
Fund Summary............................................. 12
Portfolio................................................ 14
Financial Reports and Footnotes.......................... 16
Financial Highlights..................................... 28
Results of Shareholder Balloting......................... 34
Service Directory.......................................... 36
Trustees and Officers...................................... 37
</TABLE>
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LONGLEAF PARTNERS FUNDS
LETTER TO SHAREHOLDERS
TO OUR SHAREHOLDERS: July 3, 1997
Fabulous Yet Fatuous Times
In the 26 years we have worked in the investment counseling business we have
never experienced economic times this good nor, ironically, a market environment
more difficult for the disciplined value buyer. Inflation is quiescent with the
consensus belief it will remain so, a view supported by the Producer Price Index
dropping the past 5 months; unemployment is at a three decade low of 4.8%;
consumer confidence is at a 28 year high as real incomes increase; the dollar
stands tall against our primary trading partners' currencies; corporate profits
are rising for the seventh consecutive year, to record levels; and, the return
on invested equity capital is the highest in the history of modern capitalism at
more than twice the long-term average of 12.1%. To the great surprise of the
many cynical pundits of the early 1980's, the U.S. economy has become a paragon
of economic strength and competitiveness.
This fabulous economic progress and record profitability have not gone
unnoticed. Institutional, individual and foreign investors have bid the DJIA up
some 230% from a low of 2365 in 1990 to the recent high of 7834. This bull
market is now the U.S.'s longest and one of its largest. Currently the Dow
trades at slightly over 18 times the 1997 expected earnings estimate of $426.
Interestingly, only one other period in U.S. history has sustained this kind of
P/E - from 1958 to 1965.
The fundamentals of that period, however, dramatically differed from today's. In
1950, the Dow's EPS were $31. Eight years later EPS were $28. In 1958, 18 P/E's
were paid for extremely downtrodden earnings and returns on capital that had
fallen to 9%. Bonds yielding 4.3% were not a competitive threat at an 80 basis
point premium to dividend yields. Today, high grade corporate bonds yield over
500 basis points more than what investors receive from owning the Dow's
dividends. Earnings have risen dramatically for seven years and the ROE of the
Dow is the best ever. Investors are paying peak multiples for peak levels of
profitability.
Arithmetically, shareholders' return on invested equity must decline as
corporations reinvest their cash flows at returns below today's unprecedented
levels. Thus, there's no room at today's market levels for P/E contraction nor
for any slowdown in economic demand. Can anyone even imagine the thought that we
could ever have another recession?
Our analyst team is working harder than at any time in memory yet finding fewer
investment opportunities with the margin of safety we require. Additionally,
1
<PAGE> 4
many of our very successful holdings have been sold as they have risen to what
we think is full corporate value. Cash reserves in the Small-Cap and Partners
Funds have built as a result. Longleaf Partners Realty Fund has not faced the
same pressure and remains fully invested.
Our cash position will act as a shock absorber should the market drop and will
provide the liquidity for new long-term core positions when we find them.
Patience most likely will be required because we will not force the investment
process with our own capital nor with yours.
Why is Longleaf in Business?
At quarter end we announced the closing of Longleaf Partners Small-Cap Fund to
new investors effective August 1, 1997. Stemming the deluge of cash flow coming
into the Fund will prevent further dilution of Small-Cap's existing positions.
Substantial cash inflows and selling several fully valued holdings have
increased cash levels. Simultaneously the rising stock market has made finding
significantly undervalued small cap investment opportunities much more
difficult.
Longleaf Partners Realty Fund is now our only fund open to new investors. Most
fund families make money by gathering assets which earn management fees. Funds
don't often close and when they do, the fund family usually offers new products
to ensure an ongoing revenue stream. By contrast Longleaf has virtually shut off
a significant revenue opportunity by closing both the Partners and Small-Cap
Funds, and many would question our skill as business operators.
The explanation for our actions is that we are OWNER operators. The employees
and affiliates of Southeastern are the largest shareholders across our three
funds with substantial personal capital invested alongside other shareholders.
Earning above average returns on our invested capital is more rewarding than
generating management fees.
A Decade Of Commitments
In the second quarter Longleaf completed its first decade of operations. We
thank all our investment partners for ten years of successful growth. Your Funds
have received outstanding industry recognition. Both the Partners and Small-Cap
Funds have Morningstar's highest "5 Star" rating. The Realty Fund, too young to
receive outside ratings, is the #1 real estate fund since its inception.* This
decade of success has been guided by the following principles:
- We will treat your investment in Longleaf as if it were our own.
- We will remain significant investors with you in Longleaf.
- We will invest for the long-term in an attempt to maximize after-tax returns
while always striving to minimize business, financial, purchasing power,
regulatory and market risks.
- We will choose our common stock investments based on their discount from our
appraisal of their corporate intrinsic value, their financial strength,
their management, their competitive position, and our assessment of their
future earnings potential.
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<PAGE> 5
- We will comply with the I.R.S. diversification standard but will not
overdiversify our holdings.
- We will not impose loads, holding periods, exit fees or 12b-1 charges on our
investment partners.
- We will consider closing the Funds to new investors if our size begins to
restrict our ability to manage the portfolios or if closing would otherwise
benefit existing shareholders.
- We will discourage short-term speculators and market timers from joining us,
the long-term investors in Longleaf.
- We will continue our efforts to improve shareholder services.
- We will communicate with our investment partners as candidly as possible.
What's New?
This report contains the results of our recent shareholder proxy vote. Each of
the resolutions passed and we thank shareholders for your overwhelming support.
All three Longleaf Partners Funds now share the same diversification standards
and investment capabilities. We have more flexibility to concentrate assets in
our best investment ideas and more latitude to manage the risks and tax
liabilities of the Funds.
This Semi-Annual report introduces a new format. All three Funds appear in one
document to help streamline our operations and reduce Fund printing and mailing
costs. Shareholders will receive fewer pieces of paper, and the combined report
should clarify Longleaf's overall philosophy and operations.
We welcome your comments and feedback as you review the new report. Thank you
for your support of Longleaf Partners Funds.
Sincerely,
/s/ O. Mason Hawkins /s/ G. Staley Cates /s/ C. T. Fitxpatrick
O. Mason Hawkins, CFA G. Staley Cates, CFA C.T. Fitzpatrick, CFA
Co-Portfolio Manager Co-Portfolio Manager Co-Portfolio Manager
- --------------------------------------------------------------------------------
* Morningstar ratings, updated monthly, reflect historical risk-adjusted
performance at 6/30/97, and are calculated from a fund's 3, 5 & 10 year
average annual returns in excess of 90-day T-Bill returns with appropriate fee
adjustments and a risk factor reflecting performance below 90-day T-Bills.
Both Funds received 5 stars overall and for five years, Partners Fund received
5 stars for ten years and 3 stars for three years. Small-Cap Fund received 4
stars for three years. 618, 1134 and 1997 equity funds were rated for ten,
five & three years, respectively. The top 10% of funds in a category receive 5
stars. Lipper Analytical Services ranked the Realty Fund #1 out of 44 real
estate funds covered from 12/31/95 to 6/30/97.
3
<PAGE> 6
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LONGLEAF PARTNERS FUND
CO-MANAGED BY MASON HAWKINS AND STALEY CATES
FUND SUMMARY
QUARTERLY RECAP
The Partners Fund NAV grew 12.4% in the second quarter and is up 14.8% in 1997.
The Fund has trailed the market. However, we are delighted with our absolute
return especially after holding cash reserves of 19% which penalized our
short-term results. As long-term investors we are committed to owning companies
only when we can buy them at substantial discounts. Finding and acquiring
qualifying investments at today's rarefied market levels remains extremely
challenging. The prices of this quarter's two new holdings both moved higher
before we could establish full positions. On an optimistic note, since quarter
end we have begun purchasing a new holding and anticipate obtaining a meaningful
stake.
Where we have been successful in establishing significant core positions, the
results have been outstanding. Our top three holdings contributed over 55% of
the second quarter's performance. We cherish owning material stakes in companies
such as Knight-Ridder, Philips and FedEx where we have extremely capable
partners managing the business and allocating capital to benefit shareholders.
We will continue to search for these kind of opportunities and will warmly
embrace a return of market volatility.
PERFORMANCE*
for the periods ended June 30, 1997
<TABLE>
<CAPTION>
Partners Value-Line S&P 500
Fund Index Index
-------- ---------- -------
<S> <C> <C> <C>
Most Recent Quarter 12.4% 13.2% 17.4%
Year-to-date 14.8 11.9 20.6
One Year 25.7 18.5 34.7
Five Years 21.9 11.3 19.8
Ten Years 16.5 4.6 14.6
</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 JUNE 30, 1997 (UNAUDITED)
FIVE LARGEST HOLDINGS
(REPRESENTS 39.3% OF NET ASSETS)
KNIGHT-RIDDER, INC. (KRI) 12.2%
One of the largest newspaper publishers in the U.S. and a worldwide provider of
electronic information services.
PHILIPS ELECTRONICS N.V. (PHG) 8.4%
Owner of 75% of recording company Polygram. Also a leading manufacturer of
lighting systems, electronics products including television and stereo
equipment, appliances and semiconductors.
FEDERAL EXPRESS CORPORATION (FDX) 7.1%
Integrated air-ground transportation company providing overnight and second-day
delivery of packages and documents worldwide.
THE QUAKER OATS COMPANY (OAT) 6.5%
The producer of Gatorade and numerous brand name packaged foods including hot
and cold cereals and Aunt Jemima products.
TRIZECHAHN CORPORATION (TZH) 5.1%
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 JUNE 30, 1997
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
ITT Corporation Alexander & Alexander Services Inc.
Marriott International, Inc. American Stores Company
The News Corporation Limited Ecolab, Inc.
ITT Corporation
Safety-Kleen Corp.
United HealthCare Corporation
</TABLE>
5
<PAGE> 8
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LONGLEAF PARTNERS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- ------------
<S> <C> <C> <C> <C> <C>
Common Stock 80.5%
Beverages 3.9%
2,550,000 The Seagram Company Ltd. ............ $102,637,500
Building Materials 0.8%
574,000 * USG Corporation...................... 20,951,000
Business Services 0.3%
279,200 * The Union Corporation................ 7,329,000
Entertainment 0.3%
176,415 * Chris-Craft Industries, Inc.......... 8,512,024
Environmental Services 2.1%
1,709,800 Waste Management Inc. (formerly WMX
Technologies, Inc.).................. 54,927,325
Financial Services 1.9%
1,407,000 PaineWebber Group, Inc............... 49,245,000
Food 12.6%
2,298,900 Nabisco Holdings Corp................ 91,668,637
3,818,000 The Quaker Oats Company.............. 171,332,750
846,500 Ralston Purina....................... 69,571,719
------------
332,573,106
------------
Lodging 2.8%
1,203,800 Marriott International, Inc.......... 73,883,225
Manufacturing 1.1%
1,407,000 Louisiana-Pacific Corporation........ 29,722,875
Multi-Industry 11.3%
1,565,000 Alexander & Baldwin, Inc............. 40,885,625
3,075,000 Philips Electronics N.V.............. 221,015,625
1,488,300 Whitman Corporation.................. 35,719,200
------------
297,620,450
------------
Natural Resources 5.7%
1,237,700 The Pioneer Group, Inc.(b)........... 28,467,100
2,900,000 Rayonier Inc......................... 121,981,250
------------
150,448,350
------------
Property & Casualty Insurance 0.9%
112,828 * Alleghany Corp....................... 24,540,090
See Notes to Financial Statements.
</TABLE>
6
<PAGE> 9
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LONGLEAF PARTNERS FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- --------------
<S> <C> <C> <C> <C> <C>
Publishing 15.1%
6,549,200 Knight-Ridder, Inc.(b).............. $ 321,320,125
675,100 * The News Corporation Limited........ 12,995,675
The Washington Post Company - Class
158,300 B................................... 63,003,400
--------------
397,319,200
--------------
Real Estate 5.9%
788,000 Cousins Properties Incorporated..... 21,867,000
6,224,291 TrizecHahn Corporation.............. 133,044,220
--------------
154,911,220
--------------
Telecommunications 4.0%
* 360 degrees Communications
6,143,637 Company............................. 105,209,784
Transportation 11.8%
3,234,800 * Federal Express Corporation......... 186,809,700
Kansas City Southern Industries,
1,934,100 Inc.(b)............................. 124,749,450
--------------
311,559,150
--------------
TOTAL COMMON STOCKS (COST
$1,417,104,811)................... 2,121,389,299
--------------
Short-Term Obligations 19.4%
U.S. Treasury Bill, 4.99% due 7-3-97........................ 99,972,667
U.S. Treasury Bill, 4.87% due 7-24-97....................... 99,695,569
U.S. Treasury Bill, 4.81% due 7-31-97....................... 99,606,667
U.S. Treasury Bill, 5.21% due 8-21-97....................... 99,281,750
U.S. Treasury Bill, 5.15% due 8-28-97....................... 49,596,416
Repurchase Agreement with State Street Bank, 5.00% due
7-1-97.................................................... 63,389,000
Certificate of Deposit, 5.25% due 8-19-97................... 45,000
--------------
511,587,069
--------------
TOTAL INVESTMENTS (COST $1,928,691,880)(A)........... 99.9% 2,632,976,368
OTHER ASSETS AND LIABILITIES, NET.................... 0.1 1,067,751
----- --------------
NET ASSETS........................................... 100.0% $2,634,044,119
===== ==============
NET ASSET VALUE PER SHARE................................... $26.23
==============
* Non-income producing security
(a) Also represents aggregate cost for Federal income tax purposes. Aggregate
unrealized appreciation and depreciation of investments are $736,769,085 and
($32,484,597), respectively.
(b) Affiliated company. See Note 8.
See Notes to Financial Statements.
</TABLE>
7
<PAGE> 10
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LONGLEAF PARTNERS REALTY FUND
CO-MANAGED BY: C.T. FITZPATRICK, MASON HAWKINS AND STALEY CATES
FUND SUMMARY
QUARTERLY RECAP
The Realty Fund grew by 9.1% in the second quarter and is up 16.5% so far in
1997. The Fund far exceeded its Wilshire benchmark, which increased by 4.6% and
6.5% over the same periods. LONGLEAF PARTNERS REALTY FUND IS THE #1 REAL ESTATE
FUND SINCE IT BEGAN OPERATIONS.*
The Fund entered the second quarter with cash reserves of 15%. Market volatility
allowed us to become fully invested. We added to existing positions at very
attractive prices which appreciated during the quarter. In addition, we made
several new investments in companies that met our three key criteria: quality
real estate companies that will appreciate over time, are managed by competent,
vested shareholder-oriented management, and are available at a substantial
discount to our estimate of intrinsic worth.
For example, we bought a 7.2% position in Wellsford Real Properties (WRP), a
spin-off created when Equity Residential acquired Wellsford Residential
Properties, an apartment REIT. WRP's assets primarily consist of suburban office
properties in the Northeast. Because it is a C-Corp, WRP has great flexibility
to allocate capital and can grow without issuing additional shares. WRP's
outstanding management team is committed to increasing value per share over the
long-term. For instance, WRP recently acquired a large, vacant, class A office
park with 200 acres of land in suburban New Jersey near New York City for
approximately $27/square foot. This price is not much more than annual market
rents for similar space. Consequently, these properties should be worth
substantially more than the low price paid by WRP and the Realty Fund.
Longleaf Partners Realty Fund is solely focussed on finding long-term (our time
horizon is typically five years) investments such as WRP. Investors should
expect cash levels and quarterly investment performance to vary with our ability
to find investments that meet our criteria.
PERFORMANCE*
for the periods ended June 30, 1997
<TABLE>
<CAPTION>
Wilshire
Real Estate
Realty Securities NAREIT
Fund Index Index
------ ----------- ------
<S> <C> <C> <C>
Most Recent Quarter 9.1% 4.6% 5.0%
Year-to-date 16.5 6.5 5.7
One Year 40.2 33.6 33.9
Since inception 1/2/96 39.2 28.8 27.1
</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 44 real estate funds covered from
12/31/95 - 6/30/97.
8
<PAGE> 11
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LONGLEAF PARTNERS REALTY FUND
FUND SUMMARY
AT JUNE 30, 1997 (UNAUDITED)
FIVE LARGEST HOLDINGS
(Represents 34.8% of Net Assets)
CATELLUS DEVELOPMENT CORPORATION (CDX) 9.6%
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) 7.2%
A manager, owner and developer whose properties which are primarily in New
Jersey were spun out from Wellsford Residential Properties, an apartment REIT.
IHOP CORP. (IHOP) 6.4%
A franchisor that develops and leases strategically selected locations to
franchisees for IHOP family restaurants. Earnings from real estate leases are
IHOP's largest contributor to profits.
FOREST CITY ENTERPRISES, INC. (FCE) 6.2%
A vertically integrated real estate company which develops, constructs, owns and
manages commercial and residential real estate throughout the U.S.
TRIZECHAHN CORPORATION (TZH) 5.4%
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.
PORTFOLIO CHANGES
January 1, 1997 through June 30, 1997
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Boston Properties Inc. Alexander & Alexander Services Inc.
CB Commercial Real Estate Alexander & Baldwin, Inc.
Services Group, Inc. Burnham Pacific Properties
Deltic Timber Corporation Heilig Meyers Company
Getty Petroleum Marketing Inc. (formerly Rhodes, Inc.)
Getty Realty Corp. Hilb, Rogal and Hamilton Company
ITT Corporation ITT Corporation
Marriott International, Inc. Louisiana-Pacific Corporation
Marriott LYONs Quaker City Bancorp, Inc.
Pacific Forest Products Reckson Associates Realty Corp.
Limited Trizec Warrants
Trizec Warrants
Wellsford Real Properties,
Inc.
</TABLE>
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<PAGE> 12
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LONGLEAF PARTNERS REALTY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- ------------
<S> <C> <C> <C> <C> <C>
Common Stock 89.7%
Real Estate Industry 84.4%
Building Materials 0.9%
28,000 * USG Corporation............................. $ 1,022,000
113,400 Zurn Industries, Inc........................ 3,260,250
------------
4,282,250
------------
Diversified Realty 30.3%
2,558,700 * Catellus Development Corporation............ 46,376,437
307,900 * CB Commercial Real Estate Services Group.... 9,313,975
565,900 Forest City Enterprises, Inc. - Class A..... 27,021,725
61,200 Forest City Enterprises, Inc. - Class B..... 2,891,700
1,220,860 TrizecHahn Corporation...................... 26,095,883
3,398,000 * Wellsford Real Properties, Inc.(b)(d)....... 34,999,400
------------
146,699,120
------------
Mortgage Financing 3.7%
659,200 Bay View Capital Corp.(b)................... 17,304,000
17,000 * First Fed Financial Corp.................... 528,062
------------
17,832,062
------------
Natural Resources/Land 17.0%
1,427,600 * Castle & Cooke, Inc......................... 23,644,625
650,000 Deltic Timber Corporation(b)................ 19,053,125
733,800 * Pacific Forest Products Limited............. 13,430,668
650,000 The Pioneer Group, Inc...................... 14,950,000
261,000 Rayonier Inc................................ 10,978,313
------------
82,056,731
------------
Lodging 6.9%
102,300 Marriott International, Inc................. 6,278,663
1,249,500 * Red Roof Inns, Inc.......................... 22,491,000
558,346 * Supertel Hospitality, Inc.(b)............... 4,606,354
------------
33,376,017
------------
Retail 10.8%
1,094,200 Getty Realty Corp.(b)....................... 19,285,275
993,800 * IHOP Corp.(b)............................... 30,807,800
190,200 Wolohan Lumber Co........................... 2,318,062
------------
52,411,137
------------
Real Estate Investment Trusts (REITs) 14.8%
885,000 Arden Realty, Inc. (Office)................. 23,010,000
860,000 * Boston Properties Inc. (Office)............. 23,650,000
79,400 Bradley Real Estate, Inc. (Retail).......... 1,528,450
504,900 Cousins Properties Incorporated (Office).... 14,010,975
44,000 Essex Property Trust (Apartment)............ 1,413,500
Sizeler Property Investors, Inc.
783,000 (Diversified)(b)............................ 8,074,688
------------
71,687,613
------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE> 13
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LONGLEAF PARTNERS REALTY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
---------- ------------
<S> <C> <C> <C> <C> <C>
Non-Realty 5.3%
611,900 Getty Petroleum Marketing Inc.............. $ 3,059,500
448,000 Knight-Ridder, Inc......................... 21,980,000
14,500 * White River Corporation.................... 1,056,688
------------
26,096,188
------------
TOTAL COMMON STOCKS (COST
$373,081,871)(C)........................... 434,441,118
------------
</TABLE>
<TABLE>
<CAPTION>
CONTRACTS
----------
<S> <C> <C> <C> <C> <C>
Options 0.4%
Put Options Written -0.1%
4,811 Newhall Land and Farming Company, expiring
April '99 @ $20 (Premiums received
$1,013,897)................................ (543,643)
------------
Call Options Purchased 0.5%
4,811 Newhall Land and Farming Company, expiring
April '99 @ $20 (Cost $1,403,483).......... 2,381,445
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C> <C> <C> <C>
Corporate Bonds 4.2%
34,000,000 Marriott International, Inc. Liquid Yield
Option Notes (LYONs), zero coupon conv.
sub. notes due 2011 (Cost $19,007,424)..... 20,400,000
------------
Short-Term Obligations 7.1%
Repurchase Agreement with State Street Bank,
5.00% due 7-1-97............................................ 24,459,000
U.S. Treasury Bill, 4.93% due 7-17-97....................... 9,978,089
------------
34,437,089
------------
TOTAL INVESTMENTS (COST $426,915,970)(A)..................... 101.4% 491,116,009
OTHER ASSETS AND LIABILITIES, NET............................ (1.4) (7,010,802)
----- ------------
NET ASSETS................................................... 100.0% $484,105,207
===== ============
NET ASSET VALUE PER SHARE........................................... $16.27
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for Federal income tax purposes. Aggregate
unrealized appreciation and depreciation of investments are $66,127,232 and
($1,927,193), respectively.
(b) Affiliated company. See Note 8.
(c) The aggregate market value of securities segregated to collateralize open
put option contracts written was $21,980,000.
(d) Illiquid/restricted security carried at cost. See Note 9.
See Notes to Financial Statements.
11
<PAGE> 14
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LONGLEAF PARTNERS SMALL-CAP FUND
CO-MANAGED BY MASON HAWKINS AND STALEY CATES
FUND SUMMARY
QUARTERLY RECAP
We are pleased to report that NAV grew 9.7% in the second quarter. Coupled with
the top-rated first quarter return of 6.9%, the Small-Cap Fund is up 17.3% in
1997.
Over the past six months the world has changed for Small-Cap. At 12/31/96 the
Fund was fully invested. Today cash reserves are 31% of net assets. Cash rose
after we sold several very successful holdings and struggled to find competent
individuals managing competitive businesses available at prices with our
requisite margin of safety. In addition, Small-Cap has received $311 million in
net new cash inflows since the beginning of the year. Total assets have grown
from $252 million to $633 million in 1997.
The most significant contributors to second quarter performance in order of
magnitude were Hilb, Rogal & Hamilton, Catellus, Orion Capital, Corecomm and
Vanguard Cellular. The last two benefitted from two significant cellular
transactions which occurred at prices between 10.5 and 11 times operating cash
flow. Applying these multiples to both our cellular holdings implies significant
capital appreciation opportunity.
PERFORMANCE*
for the periods ended June 30, 1997
<TABLE>
<CAPTION>
Small-Cap Value-Line Russell 2000 Wilshire 5000
Fund Index Index Index
--------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Most Recent Quarter 9.7% 13.2% 16.2% 16.9%
Year-to-date 17.3 11.9 10.2 17.6
One Year 34.6 18.5 16.3 29.3
Five Years 20.0 11.3 17.9 19.1
Since inception 2/21/89 12.1 6.6 13.7 16.5
</TABLE>
* 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
<PAGE> 15
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
FUND SUMMARY
AT JUNE 30, 1997 (UNAUDITED)
FIVE LARGEST HOLDINGS
(REPRESENTS 21.3% OF NET ASSETS)
HILB, ROGAL AND HAMILTON COMPANY (HRH) 4.8%
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) 4.3%
The dominant title insurance company in the U.S. through Chicago Title.
CATELLUS DEVELOPMENT CORPORATION (CDX) 4.3%
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.
WHITE RIVER CORPORATION (WHRC) 4.0%
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.
DELTIC TIMBER CORPORATION (DEL) 3.9%
A major owner of timberland and other real estate in Arkansas and Northern
Louisiana.
PORTFOLIO CHANGES
January 1, 1997 through June 30, 1997
<TABLE>
<CAPTION>
NEW HOLDINGS ELIMINATIONS
------------ ------------
<S> <C>
Baker, Fentress & Company Baldwin Technology Company, Inc. - Class A
Corecomm, Inc. Healthsource, Inc.
Deltic Timber Corporation Heilig Meyers Company
Kaydon Corp. (formerly Rhodes, Inc.)
Ralcorp Holdings Lexington Global Asset Managers, Inc.
SLH Corporation SLH Corporation
</TABLE>
13
<PAGE> 16
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
------- ------------
<S> <C> <C> <C> <C> <C>
Common Stock 69.4%
Advertising 1.1%
21,020 Grey Advertising Inc. - Class A.............. $ 6,936,600
Beverages 0.9%
237,100 * Celestial Seasonings, Inc.(b)................ 5,927,500
Building Materials 1.8%
393,000 Zurn Industries, Inc......................... 11,298,750
Business Services 3.1%
370,000 * Pinkerton's, Inc............................. 11,377,500
300,000 * The Union Corporation(b)..................... 7,875,000
------------
19,252,500
------------
Commercial Lighting 0.7%
148,900 Thomas Industries, Inc....................... 4,280,875
Financial Services 5.0%
209,700 Duff & Phelps Credit Rating Co............... 6,369,638
351,200 * White River Corporation(b)................... 25,593,700
------------
31,963,338
------------
Food 1.1%
97,500 GoodMark Foods, Inc.......................... 1,828,125
342,500 * Ralcorp Holdings............................. 5,051,875
------------
6,880,000
------------
Investment Management Companies 4.0%
836,000 United Asset Management Corporation.......... 23,669,250
87,600 Baker, Fentress & Company.................... 1,730,100
------------
25,399,350
------------
Manufacturing 6.2%
850,000 * American Safety Razor Company(b)............. 15,406,250
407,500 AMETEK, Inc.................................. 9,576,250
173,200 Franklin Electric Co., Inc................... 8,616,700
115,100 Kaydon Corp.................................. 5,711,838
------------
39,311,038
------------
Miscellaneous 0.6%
104,152 Seafield Capital Corporation................. 3,723,434
Mortgage Financing 2.2%
537,200 Bay View Capital Corp........................ 14,101,500
Natural Resources 7.1%
845,000 Deltic Timber Corporation(b)................. 24,769,062
865,000 The Pioneer Group, Inc....................... 19,895,000
------------
44,664,062
------------
</TABLE>
See Notes to Financial Statements.
14
<PAGE> 17
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS SMALL-CAP FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
AT JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES MARKET VALUE
--------- ------------
<S> <C> <C> <C> <C> <C>
Insurance 13.5%
126,273 * Alleghany Corporation................. $ 27,464,377
1,777,400 Hilb, Rogal and Hamilton Company(b)... 30,215,800
28,200 * Markel Corporation.................... 3,609,600
330,400 Orion Capital Corporation............. 24,367,000
------------
85,656,777
------------
Publishing 0.7%
110,000 Plenum Publishing Corporation......... 4,235,000
Real Estate 12.2%
1,500,700 * Catellus Development Corporation...... 27,200,188
385,000 Cousins Properties Incorporated....... 10,683,750
552,900 * IHOP Corp.(b)......................... 17,139,900
1,049,600 TrizecHahn Corporation................ 22,435,200
------------
77,459,038
------------
Restaurants 1.8%
929,200 * VICORP Restaurants, Inc.(b)........... 11,150,400
Retail 0.6%
120,000 Delchamps, Inc........................ 3,840,000
Telecommunications 6.8%
1,430,000 * Corecomm, Inc.(b)..................... 24,667,500
* Vanguard Cellular Systems,
1,349,109 Inc. -- Class A....................... 18,381,610
------------
43,049,110
------------
TOTAL COMMON STOCKS (COST $327,714,824)............. 439,129,272
------------
Short-Term Obligations (30.7%)
U.S. Treasury Bill, 4.99% due 7-3-97.......................... 99,972,667
U.S. Treasury Bill, 5.21% due 8-21-97......................... 49,640,875
Repurchase Agreement with State Street Bank, 5.0% due
7-1-97...................................................... 44,712,000
------------
194,325,542
------------
TOTAL INVESTMENTS (COST $522,040,366)(A)............... 100.1% 633,454,814
OTHER ASSETS AND LIABILITIES, NET...................... (0.1) (386,944)
----- ------------
NET ASSETS............................................. 100.0% $633,067,870
===== ============
NET ASSET VALUE PER SHARE..................................... $20.95
</TABLE>
* Non-income producing security
(a) Also represents aggregate cost for Federal income tax purposes. Aggregate
unrealized appreciation and depreciation of investments are $118,138,735 and
($6,724,287), respectively.
(b) Affiliated company. See Note 8.
See Notes to Financial Statements.
15
<PAGE> 18
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
AT JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Investments:
Securities, at market value (cost $1,417,104,811,
$374,485,354, and $327,714,824, respectively) (Note
2).....................................................
U.S. Treasury Bills.......................................
Repurchase agreement (Note 2).............................
Corporate bonds (cost $19,007,424)........................
Certificate of deposit....................................
TOTAL INVESTMENTS
Cash........................................................
Receivable for:
Dividends and interest....................................
Securities sold...........................................
Prepaid assets..............................................
Insurance reserve premium...................................
TOTAL ASSETS
LIABILITIES:
Payable for:
Investment Counsel fee (Note 3)...........................
Administration fee (Note 4)...............................
Securities purchased......................................
Options written, at value (premiums received $1,013,897)....
Other accrued expenses......................................
TOTAL LIABILITIES
NET ASSETS:
Net assets consist of:
Paid-in capital...........................................
Undistributed net investment income.......................
Accumulated net realized gain.............................
Unrealized appreciation of investments....................
Net Assets
Fund shares issued and outstanding..........................
NET ASSET VALUE PER SHARE...................................
</TABLE>
See Notes to Financial Statements.
16
<PAGE> 19
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
AT JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PARTNERS FUND REALTY FUND SMALL-CAP FUND
- -------------- ------------ --------------
<C> <C> <C>
$2,121,389,299 $436,822,563 $439,129,272
448,153,069 9,978,089 149,613,542
63,389,000 24,459,000 44,712,000
-- 20,400,000 --
45,000 -- --
- -------------- ------------ ------------
2,632,976,368 491,659,652 633,454,814
44 193 635
2,336,241 53,001 314,578
553,782 228,652 47,473
104,309 40,579 33,482
52,272 -- 7,274
- -------------- ------------ ------------
2,636,023,016 491,982,077 633,858,256
- -------------- ------------ ------------
1,677,209 366,397 442,345
212,669 36,640 48,020
-- 6,821,589 183,750
-- 543,643 --
89,019 108,601 116,271
- -------------- ------------ ------------
1,978,897 7,876,870 790,386
- -------------- ------------ ------------
$2,634,044,119 $484,105,207 $633,067,870
============== ============ ============
$1,841,746,108 $417,351,078 $512,071,778
15,071,581 820,765 1,739,405
72,941,942 1,733,325 7,842,239
704,284,488 64,200,039 111,414,448
- -------------- ------------ ------------
$2,634,044,119 $484,105,207 $633,067,870
============== ============ ============
100,415,871 29,758,817 30,224,290
$26.23 $16.27 $20.95
======= ======= ========
</TABLE>
17
<PAGE> 20
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
INCOME:
Dividends.................................................
Interest..................................................
Total income......................................
EXPENSES:
Investment Counsel fee (Note 3)...........................
Administration fee (Note 4)...............................
Transfer Agent fee........................................
Registration and filing fees..............................
Supplies and postage......................................
Reimbursable administration expenses (Note 4).............
Annual meeting expenses...................................
Printing..................................................
Trustees' fees............................................
Custodian fee.............................................
Insurance expense.........................................
Professional fees.........................................
Miscellaneous.............................................
Total expenses....................................
Net investment income.............................
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on securities...........................
Net unrealized appreciation on securities.................
Net unrealized appreciation on options....................
Net realized and unrealized gain on investments...
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........
</TABLE>
See Notes to Financial Statements.
18
<PAGE> 21
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PARTNERS FUND REALTY FUND SMALL-CAP FUND
- ------------- ----------- --------------
<C> <C> <C>
$ 15,636,310 $ 1,539,930 $ 1,879,485
10,666,425 1,294,662 2,292,360
- ------------ ----------- -----------
26,302,735 2,834,592 4,171,845
- ------------ ----------- -----------
9,486,490 1,620,339 1,974,694
1,198,748 162,034 203,459
208,443 28,098 35,287
34,201 101,469 114,689
81,967 20,527 18,227
95,134 8,764 12,637
64,000 18,000 14,500
38,580 12,547 10,165
29,753 12,410 14,876
15,452 14,013 12,013
24,423 2,458 3,517
11,157 9,173 7,191
71,995 9,915 15,783
- ------------ ----------- -----------
11,360,343 2,019,747 2,437,038
- ------------ ----------- -----------
14,942,392 814,845 1,734,807
- ------------ ----------- -----------
72,673,331 1,729,962 7,745,460
252,132,957 46,471,083 60,478,246
1,448,216
- ------------ ----------- -----------
324,806,288 49,649,261 68,223,706
- ------------ ----------- -----------
$339,748,680 $50,464,106 $69,958,513
============ =========== ===========
</TABLE>
19
<PAGE> 22
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PARTNERS FUND
---------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996
---------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income................ $ 14,942,392 $ 34,373,697
Net realized gain on securities...... 72,673,331 213,673,408
Net unrealized appreciation on
securities........................ 252,132,957 158,628,871
Net unrealized appreciation on
options...........................
-------------- --------------
Net increase in net assets
resulting from operations....... 339,748,680 406,675,976
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income........... -- (34,349,264)
From net realized gain on
investments....................... -- (213,539,413)
From return of capital............... -- --
-------------- --------------
Net decrease in net assets
resulting from distributions.... -- (247,888,677)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares..... 217,742,729 415,870,054
Net asset value of shares issued to
shareholders for reinvestment of
shareholder distributions......... -- 234,252,018
Cost of shares redeemed.............. (223,526,466) (385,297,441)
-------------- --------------
Net increase (decrease) in net
assets from fund share
transactions.................... (5,783,737) 264,824,631
-------------- --------------
Total increase in net assets...... 333,964,943 423,611,930
NET ASSETS:
Beginning of period.................. 2,300,079,176 1,876,467,246
-------------- --------------
End of period........................ $2,634,044,119 $2,300,079,176
============== ==============
Undistributed net investment income
included in net assets at end of
period............................ $15,071,581 $129,189
============== =========
</TABLE>
See Notes to Financial Statements.
20
<PAGE> 23
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
REALTY FUND SMALL-CAP FUND
---------------------------------- ----------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
---------------- -------------- ---------------- --------------
<C> <C> <C> <C>
$ 814,845 $ 405,735 $ 1,734,807 $ 305,763
1,729,962 490,532 7,745,460 13,416,172
46,471,083 16,280,740 60,478,246 33,330,915
1,448,216
-------------- -------------- -------------- --------------
50,464,106 17,177,007 69,958,513 47,052,850
-------------- -------------- -------------- --------------
-- (399,816) -- (313,153)
-- (487,169) -- (13,335,532)
-- (159,496) -- --
-------------- -------------- -------------- --------------
-- (1,046,481) -- (13,648,685)
-------------- -------------- -------------- --------------
341,300,090 150,091,326 413,297,173 108,358,068
-- 999,870 -- 12,582,527
(63,668,213) (11,212,498) (102,344,773) (38,164,599)
-------------- -------------- -------------- --------------
277,631,877 139,878,698 310,952,400 82,775,996
-------------- -------------- -------------- --------------
328,095,983 156,009,224 380,910,913 116,180,161
156,009,224 0 252,156,957 135,976,796
-------------- -------------- -------------- --------------
$ 484,105,207 $ 156,009,224 $ 633,067,870 $ 252,156,957
============== ============== ============== ==============
$820,765 $5,919 $1,739,405 $4,598
========== ======= ============ =======
</TABLE>
21
<PAGE> 24
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
The Funds are each a series of Longleaf Partners Funds Trust, a Massachusetts
business trust which is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. Capitalization for each
fund was provided by principals of Southeastern Asset Management, Inc., the
Investment Counsel, as follows:
<TABLE>
<CAPTION>
PARTNERS FUND REALTY FUND SMALL-CAP FUND
----------------- ------------------ -----------------
<S> <C> <C> <C>
Organization date.... November 26, 1986 September 12, 1995 December 21, 1988
Initial
capitalization
date............... March 24, 1987 January 2, 1996 December 28, 1988
Amount of initial
capitalization..... $100,000 $100,000 $1,500,000
Shares issued at
capitalization..... 10,000 10,000 150,000
Shares authorized.... Unlimited Unlimited Unlimited
Public offering
date............... April 8, 1987 January 2, 1996 February 21, 1989
</TABLE>
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
(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) Option contracts are marked-to-market daily. Listed options are valued at
the latest closing price. If there are no transactions that day, the
options are valued at the midpoint between the closing bid and ask prices.
Over-the-counter options are valued as determined in good faith under
procedures established by the Funds' trustees.
22
<PAGE> 25
(4) 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 Funds' Trustees.
Accounting for Investments
The Funds follow industry practice and record security transactions on trade
date plus one. 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.
Distributions to Shareholders
Dividends and distributions to shareholders are recorded on the ex-dividend
date.
Federal Income Taxes
The Funds' policy is to comply with the requirements of the Internal Revenue
Code that are applicable to regulated investment companies and to distribute all
taxable income to shareholders. Accordingly, no federal income tax provision is
required. In addition, the Funds intend to make any required distributions to
avoid the application of a 4% nondeductible excise tax.
Foreign Currency Translations
The books and records of the Funds are maintained in U.S. dollars. Securities
denominated in currencies other than U.S. dollars are subject to changes in
value due to fluctuations in exchange rates. Purchases and sales of securities
and income and expenses are translated into U.S. dollars at the prevailing
exchange rate on the respective date of each transaction. The market value of
investment securities, assets and liabilities are translated into U.S. dollars
daily.
The Funds do not isolate the portion of net realized and unrealized gains or
losses in equity security investments which is attributable to changes in
foreign exchange rates. Accordingly, the impact of foreign currency conversions
is included in the realized and unrealized gains or losses on the underlying
equity securities.
Options
Upon the purchase of a put or call option, the premium paid is recorded as an
investment. When the Funds write a put or a call option, the premium received by
the Funds is recorded as a liability. When a purchased option expires, a loss is
recognized for the cost of the option. When a written option expires, a gain is
realized for the premium received. When the Funds enter into a closing sale
transaction, a gain or loss is recognized based on the difference between the
proceeds of the closing transaction and the cost of the option. Option activity
was insignificant during the current period.
23
<PAGE> 26
The risk associated with purchasing options is limited to the premium originally
paid. The risk in writing a call option is that the Funds may forego the
opportunity to profit if the market value of the underlying security increases
and the option is exercised. The risk in writing a put option is that the Funds
may incur a loss if the market value of the underlying security decreases and
the option is exercised. In addition, there is the risk that the Funds may not
be able to enter into a closing transaction due to an illiquid secondary market.
Repurchase Agreements
The Funds may engage in repurchase agreement transactions. The Funds' custodian
bank sells U.S. government securities to each Fund under agreements to
repurchase these securities from each Fund at a stated repurchase price
including interest for the term of the agreement, which is usually overnight or
over a weekend. Each Fund, through its custodian, receives delivery of the
underlying U.S. government securities as collateral, whose market value 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.
NOTE 3. INVESTMENT COUNSEL AGREEMENT
Southeastern Asset Management, Inc. ("Southeastern") serves as Investment
Counsel to the Funds and receives annual compensation, computed daily and paid
monthly, in accordance with the following schedule for the Partners Fund and
Small-Cap Fund:
<TABLE>
<S> <C>
First $400 million of average daily net
assets.................................... 1.00%
In excess of $400 million................... .75%
</TABLE>
The Realty Fund fee is calculated on the same basis at 1.0% per annum on all
asset levels.
Southeastern has agreed to reduce its fees on a pro rata basis to the extent
that the Funds' normal annual operating expenses (excluding taxes, interest,
brokerage fees, and extraordinary expenses) exceed 1.5% of average annual net
assets. No such reductions were necessary for the current period.
NOTE 4. 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 Funds. Functions include the preparation of all
registration statements, prospectuses, tax returns and proxy statements, daily
valuation of the portfolios and calculation of daily net asset values per share.
The Funds pay a fee as compensation for these services, accrued daily and paid
monthly, of 0.10% per annum of average daily net assets.
24
<PAGE> 27
Reimbursable administration expenses paid by the Funds to Southeastern consist
of the cost of computer software dedicated to valuation calculations and a
portion of the Funds' Treasurer's salary allocated in accordance with Trustee
review and approval.
NOTE 5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
--------------------------------------------
PARTNERS FUND REALTY FUND SMALL-CAP FUND
------------- ----------- --------------
<S> <C> <C> <C>
Shares sold................... 9,100,079 22,861,701 21,463,879
Shares redeemed............... (9,337,051) (4,268,491) (5,361,507)
------------ ---------- ------------
(236,972) 18,593,210 16,102,372
============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------
PARTNERS FUND REALTY FUND SMALL-CAP FUND
------------- ----------- --------------
<S> <C> <C> <C>
Shares sold................... 18,238,896 11,949,427 6,357,663
Reinvestment of shareholder
distribution................ 10,180,444 71,778 706,090
Shares redeemed............... (16,493,540) (855,598) (2,348,601)
------------ ---------- ------------
11,925,800 11,165,607 4,715,152
============ ========== ============
</TABLE>
NOTE 6. INVESTMENT TRANSACTIONS
Purchases and sales of equity securities and related brokerage commissions for
the period (excluding short-term obligations) are summarized below:
<TABLE>
<CAPTION>
PARTNERS FUND REALTY FUND SMALL-CAP FUND
------------- ------------ --------------
<S> <C> <C> <C>
Purchases................. $222,140,814 $308,388,856 $158,460,806
Sales..................... 357,077,598 34,419,447 31,280,369
Brokerage commissions..... 900,184 836,356 407,157
</TABLE>
NOTE 7. RELATED PARTY SHAREHOLDERS
Significant related ownership of Fund shares at June 30, 1997 is summarized as
follows:
<TABLE>
<CAPTION>
PARTNERS REALTY SMALL-CAP
FUND FUND FUND
-------- --------- ---------
<S> <C> <C> <C>
Officers and employees of Southeastern and
their families, Fund trustees,
Southeastern's retirement plan
and other affiliates % of Fund........... 1.5% 6.2% 8.5%
</TABLE>
25
<PAGE> 28
NOTE 8. AFFILIATED COMPANIES
Under Section 2(a)(3) of the Investment Company Act of 1940, a portfolio company
is defined as "affiliated" if a Fund owns five percent or more of its voting
stock. At June 30, 1997, each Fund held at least five percent of the outstanding
voting stock of the following companies:
<TABLE>
<CAPTION>
% DIVIDEND
OUTSTANDING INCOME
SHARES OF MARKET IN THE
THE VALUE AT PERIOD ENDED
COMPANY JUNE 30, 1997 JUNE 30, 1997
----------- ------------- -------------
<S> <C> <C> <C>
PARTNERS FUND
Kansas City Southern Industries,
Inc. 5.4% $124,749,450 $ 386,820
Knight-Ridder, Inc. 7.2 321,320,125 2,578,080
Rayonier Inc. 10.0 121,981,250 1,740,000
------------ ----------
$568,050,825 $4,704,900
============ ==========
REALTY FUND
Bay View Capital Corp. 5.1% $ 17,304,000 $ 64,576
Deltic Timber Corporation 5.1 19,053,125 71,919
Getty Realty Corp. 8.5 19,285,275 19,368
IHOP Corp. 10.4 30,807,800 --
Sizeler Property Investors, Inc. 9.3 8,074,688 234,124
Supertel Hospitality, Inc. 11.5 4,606,354 --
Wellsford Real Properties, Inc.
(See Note 9) 20.1 34,999,400 --
------------ ----------
$134,130,642 $ 389,987
============ ==========
SMALL-CAP FUND
American Safety Razor Company 7.0% $ 15,406,250 $ --
Corecomm, Inc. 10.9 24,667,500 --
Celestial Seasonings, Inc. 5.8 5,927,500 --
Deltic Timber Corporation 6.6 24,769,062 88,500
Hilb, Rogal and Hamilton Company 13.5 30,215,800 461,497
IHOP Corp. 5.8 17,139,900 --
The Union Corporation 5.2 7,875,000 --
VICORP Restaurants, Inc. 10.2 11,150,400 --
White River Corporation 7.2 25,593,700 --
------------ ----------
$162,745,112 $ 549,997
============ ==========
</TABLE>
There were no realized net gains on the sales of any affiliated company.
NOTE 9. ILLIQUID/RESTRICTED SECURITIES
The Realty Fund holds 3,398,000 shares of Wellsford Real Properties, Inc.
carried at cost of $34,999,400 or $10.30 per share. These shares were acquired
in a private placement which closed June 2, 1997 and are currently restricted
until their registration statement becomes effective (anticipated within 120
days of the closing). These securities are valued in good faith under guidelines
established by the Fund Trustees. This investment represents 7.2% of the Realty
Fund at June 30, 1997.
26
<PAGE> 29
[INTENTIONALLY LEFT BLANK]
27
<PAGE> 30
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
FINANCIAL HIGHLIGHTS
The following condensed financial information, including total returns, has been
financial statements appears in the Statement of Additional Information
information. The presentation is for a share outstanding throughout each
<TABLE>
<CAPTION>
NET
GAINS OR
(LOSSES)
NET ON DISTRI-
ASSET SECURITIES TOTAL DIVIDENDS BUTIONS
VALUE NET REALIZED FROM FROM NET FROM
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT CAPITAL
OF PERIOD INCOME(E) UNREALIZED OPERATIONS INCOME GAINS
--------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
PARTNERS FUND
Six months ended
June 30, 1997 (Unaudited)........ $22.85 $.15 $ 3.23 $ 3.38 $ - $ -
Year ended December 31,
1996............................. 21.15 .37 4.09 4.46 (.38) (2.38)
1995............................. 17.13 .30 4.40 4.70 (.24) (.44)
1994............................. 16.92 .21 1.30 1.51 (.16) (1.14)
1993............................. 14.70 .10 3.16 3.26 (.09) (.95)
1992............................. 13.34 .07 2.65 2.72 (.07) (1.29)
REALTY FUND
Six months ended
June 30, 1997 (Unaudited)........ 13.97 .04 2.26 2.30 - -
January 2, 1996 (Initial
Capitalization) through December
31, 1997......................... 10.00 .16 3.91 4.07 (.04) (.05)
SMALL-CAP FUND
Six months ended
June 30, 1997 (Unaudited)........ 17.86 .08 3.01 3.09 - -
Year ended December 31,
1996............................. 14.46 .03 4.40 4.43 (.02) (1.01)
1995............................. 13.28 .12 2.35 2.47 (.12) (1.17)
1994............................. 13.49 (.03) .52 .49 - (.70)
1993............................. 11.40 (.06) 2.32 2.26 - (.17)
1992............................. 10.67 (.01) .74 .73 - -
</TABLE>
* Annualized
(a) Aggregate, not annualized.
(b) Not applicable for prior periods prior to 1996.
(c) Before expense limitation fee waiver, this ratio was 1.60%.
(d) Before expense limitation fee waiver, this ratio was .82%.
(e) Calculated based on weighted average shares outstanding for the period.
28
<PAGE> 31
- --------------------------------------------------------------------------------
LONGLEAF PARTNERS FUNDS
FINANCIAL HIGHLIGHTS
audited by Coopers & Lybrand L.L.P. The audit report on the 1996
and should be read in conjunction with this condensed financial
period.
<TABLE>
<CAPTION>
RATIO OF
NET EXPENSES RATIO OF
ASSET NET ASSETS TO NET
TOTAL VALUE END OF AVERAGE INCOME TO PORTFOLIO AVERAGE
DISTRI- END OF TOTAL PERIOD NET AVERAGE TURNOVER COMMISSION
BUTIONS PERIOD RETURN (THOUSANDS) ASSETS NET ASSETS RATE RATE PAID(B)
------- ------ ------ ----------- -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ - $26.23 14.79%(a) $2,634,044 .94%* 1.24%* 11.24% $0.0772
(2.76) 22.85 21.02 2,300,079 .95 1.61 33.18 0.0750
(.68) 21.15 27.50 1,876,467 1.01 1.45 12.60
(1.30) 17.13 8.96 753,527 1.17 1.18 27.39
(1.04) 16.92 22.20 397,282 1.26 .63 19.12
(1.36) 14.70 20.47 243,678 1.29 .50 29.12
- 16.27 16.46(a) 484,105 1.24* .50* 12.06 0.0705
(.01) 13.97 40.69 156,009 1.50(c) .92(d) 4.28 0.0613
- 20.95 17.30(a) 633,068 1.19* .85* 9.63 0.0692
(1.03) 17.86 30.64 252,157 1.23 .18 27.97 0.0605
(1.29) 14.46 18.61 135,977 1.30 .84 32.95
(.70) 13.28 3.64 99,609 1.38 (.22) 19.79
(.17) 13.49 19.83 85,087 1.45 (.45) 14.37
- 11.40 6.87 62,181 1.45 (.03) 25.80
</TABLE>
29
<PAGE> 32
- --------------------------------------------------------------------------------
PARTNERS FUND
RESULTS OF SHAREHOLDER BALLOTING
Proxies representing 61.2% of the 100,512,415 shares outstanding on the record
on May 13, 1997, at the Memphis Botanic Garden. All proposals were approved
<TABLE>
<CAPTION>
SHARES VOTING
"FOR" PROPOSAL
----------------
<S> <C> <C>
PROPOSALS SUBMITTED TO SHAREHOLDERS:
1. Re-election of the Board of Trustees:
O. Mason Hawkins 61,036,594
Chadwick H. Carpenter, Jr. 61,033,224
Daniel W. Connell, Jr. 60,958,373
Steven N. Melnyk 61,001,266
C. Barham Ray 61,023,988
W. Reid Sanders 61,028,186
2. To adopt IRS diversification standards and thereby change
the Fund to "non-diversified" 54,387,596
3. To restate certain fundamental investment restrictions to
expand the Fund's investment flexibility:
(a) To approve an increase in the Fund's borrowing
limitations 53,002,996
(b) To amend the Fund's limitation on underwriting
securities of other issuers and purchases of restricted
securities 51,330,652
(c) To amend the Fund's limitation on investments in real
estate 53,819,760
(d) To amend the Fund's limitation on investing in
commodities or commodities futures contracts 49,978,231
(e) To amend the Fund's limitation on loans 52,370,262
(f) To amend the Fund's limitation against issuing senior
securities 52,640,638
4. To restate all remaining fundamental investment
restrictions as non-fundamental investment restrictions, to
eliminate those no longer required and to expand the Fund's
investment flexibility
(a) To allow investing in newly formed companies 52,843,853
(b) To amend the Fund's limitation on pledging 50,629,343
(c) To amend the Fund's limitation on the purchase of
securities of other investment companies 51,811,331
(d) To amend the Fund's limitation against short sales and
writing purchase puts and calls 52,267,135
(e) To amend the Fund's limitation against margin
purchases 51,563,505
5. Ratification of Coopers & Lybrand L.L.P. as independent
certified public accountants 59,923,236
</TABLE>
30
<PAGE> 33
- --------------------------------------------------------------------------------
PARTNERS FUND
RESULTS OF SHAREHOLDER BALLOTING
date of March 14, 1997, were voted at the Annual Meeting of Shareholders held
by shareholders. Results of the balloting follow:
<TABLE>
<CAPTION>
"FOR" SHARES VOTING "AGAINST" "ABSTENTIONS"
AS A PERCENTAGE "AGAINST" AS A PERCENTAGE SHARES AS A PERCENTAGE
OF SHARES VOTED PROPOSAL OF SHARES VOTED "ABSTAINING" OF SHARES VOTED
- --------------- ------------- --------------- -------------- ---------------
<C> <C> <C> <C> <C>
99.2% 515,948 0.8%
99.1% 519,318 0.9%
99.0% 594,169 1.0%
99.1% 551,276 0.9%
99.1% 528,554 0.9%
99.1% 524,356 0.9%
88.4% 6,209,034 10.1% 955,912 1.5%
86.1% 7,505,872 12.2% 1,403,674 1.7%
83.4% 9,092,853 14.8% 1,129,037 1.8%
87.4% 6,597,222 10.7% 1,135,560 1.8%
81.2% 10,444,687 17.0% 1,129,624 1.8%
85.1% 7,992,821 13.0% 1,189,459 1.9%
85.5% 7,643,060 12.4% 1,268,844 2.1%
85.9% 7,531,654 12.2% 1,177,035 1.9%
82.3% 9,557,186 15.5% 1,366,013 2.2%
84.2% 8,704,342 14.1% 1,036,869 1.7%
84.9% 8,118,708 13.2% 1,166,699 1.9%
83.8% 8,802,996 14.3% 1,186,041 1.9%
97.4% 667,176 1.1% 962,130 1.5%
</TABLE>
31
<PAGE> 34
- --------------------------------------------------------------------------------
REALTY FUND
RESULTS OF SHAREHOLDER BALLOTING
Proxies representing 82.1% of the 22,082,925 shares outstanding on the record
date of March 14, 1997, were voted at the Annual Meeting of Shareholders held on
May 13, 1997, at the Memphis Botanic Garden. All proposals were approved by
shareholders. Results of the balloting follow:
<TABLE>
<CAPTION>
AS A AS A
PERCENTAGE SHARES PERCENTAGE
SHARES VOTING OF SHARES "WITHHOLDING OF SHARES
"FOR" TRUSTEE VOTED AUTHORITY" VOTED
--------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
PROPOSALS SUBMITTED TO SHAREHOLDERS:
1. Re-election of the Board of Trustees:
O. Mason Hawkins 17,898,499 98.7% 222,701 1.3%
Chadwick H. Carpenter, Jr. 17,899,265 98.8% 221,935 1.2%
Daniel W. Connell, Jr. 17,885,264 98.7% 235,937 1.3%
Steven N. Melnyk 17,888,091 98.7% 233,109 1.3%
C. Barham Ray 17,892,251 98.7% 228,949 1.3%
W. Reid Sanders 17,899,265 98.8% 221,935 1.2%
2. To ratify the adoption of the
Investment Counsel Agreement and
the Fund Administration Agreement
with Southeastern Asset Management,
Inc., and to extend the term for a As a
one year period beginning August 1, percentage of
1997 and ending July 31, 1998 Shares shares voted
---------- -------------
FOR 17,841,432 98.5%
AGAINST 18,007 0.1%
ABSTAIN 261,761 1.4%
As a
percentage of
3. Ratification of Coopers & Lybrand Shares shares voted
L.L.P. as independent certified public ------------ ---------------
accountants FOR 17,868,312 98.6%
AGAINST 16,674 0.1%
ABSTAIN 236,215 1.3%
</TABLE>
32
<PAGE> 35
[INTENTIONALLY LEFT BLANK]
33
<PAGE> 36
- --------------------------------------------------------------------------------
SMALL-CAP FUND
RESULTS OF SHAREHOLDER BALLOTING
Proxies representing 62.5% of the 19,926,855 shares outstanding on the record
on May 13, 1997, at the Memphis Botanic Garden. All proposals were approved
<TABLE>
<CAPTION>
SHARES VOTING
"FOR" PROPOSAL
----------------
<S> <C> <C>
PROPOSALS SUBMITTED TO SHAREHOLDERS:
1. Re-election of the Board of Trustees:
O. Mason Hawkins 12,410,611
Chadwick H. Carpenter, Jr. 12,410,075
Daniel W. Connell, Jr. 12,404,699
Steven N. Melnyk 12,403,903
C. Barham Ray 12,407,388
W. Reid Sanders 12,410,611
2. To adopt IRS diversification standards and thereby change
the Fund to "non-diversified" 12,243,060
3. To restate certain fundamental investment restrictions to
expand the Fund's investment flexibility:
(a) To approve an increase in the Fund's borrowing
limitations 12,112,494
(b) To amend the Fund's limitation on underwriting
securities of other issuers and purchases of restricted
securities 12,113,339
(c) To amend the Fund's limitation on investments in real
estate 12,140,448
(d) To amend the Fund's limitation on investing in
commodities or commodities futures contracts 12,026,707
(e) To amend the Fund's limitation on loans 12,057,038
(f) To amend the Fund's limitation against issuing senior
securities 12,006,680
4. To restate all remaining fundamental investment
restrictions as non-fundamental investment restrictions, to
eliminate those no longer required and to expand the Fund's
investment flexibility:
(a) To allow investing in newly formed companies 12,140,773
(b) To amend the Fund's limitation on pledging 12,031,327
(c) To amend the Fund's limitation on the purchase of
securities of other investment companies 12,151,655
(d) To amend the Fund's limitation against short sales and
writing purchase puts and calls 12,028,179
(e) To amend the Fund's limitation against margin
purchases 12,035,368
5. Ratification of Coopers & Lybrand L.L.P. as independent
certified public accountants 12,133,855
</TABLE>
34
<PAGE> 37
- --------------------------------------------------------------------------------
SMALL-CAP FUND
RESULTS OF SHAREHOLDER BALLOTING
date of March 14, 1997, were voted at the Annual Meeting of Shareholders held
by shareholders. Results of the balloting follow:
<TABLE>
<CAPTION>
"FOR" SHARES VOTING "AGAINST" "ABSTENTIONS"
AS A PERCENTAGE "AGAINST" AS A PERCENTAGE SHARES AS A PERCENTAGE
OF SHARES VOTED PROPOSAL OF SHARES VOTED "ABSTAINING" OF SHARES VOTED
- --------------- ------------- --------------- -------------- ---------------
<C> <C> <C> <C> <C>
99.6% 52,144 0.4%
99.6% 52,679 0.4%
99.5% 58,055 0.5%
99.5% 58,851 0.5%
99.6% 55,366 0.4%
99.6% 52,144 0.4%
98.2% 78,913 0.6% 140,781 1.2%
97.2% 196,922 1.6% 153,338 1.2%
97.2% 186,613 1.5% 162,803 1.3%
97.4% 169,957 1.4% 152,349 1.2%
96.5% 277,912 2.2% 158,135 1.3%
96.7% 236,838 1.9% 168,877 1.4%
96.3% 285,322 2.3% 170,753 1.4%
97.4% 176,374 1.4% 145,608 1.2%
96.5% 225,073 1.8% 206,355 1.7%
97.5% 160,566 1.3% 150,533 1.2%
96.5% 275,200 2.2% 159,375 1.3%
96.6% 267,637 2.2% 159,749 1.3%
97.4% 42,151 0.3% 286,748 2.3%
</TABLE>
35
<PAGE> 38
- --------------------------------------------------------------------------------
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.
You may mail correspondence to the Longleaf Partners Funds, c/o NFDS, P.O. Box
419929, Kansas City, MO 64141-6929.
You may send overnight mail to Longleaf Partners Funds, c/o NFDS, 1004
Baltimore, 5th Floor, Kansas City, MO 64105, (816) 435-5241.
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 and account number ready to access your investment information.
FINANCIAL ADVISOR SERVICES (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>
FUND ABBREVIATION SYMBOL CUSIP FUND NUMBER
- --------- ------------ ------ --------- -----------
<C> <C> <S> <C> <C>
Partners Partners LLPFX 543069108 133
Realty Realty LLREX 543069306 135
Small-Cap Sm-Cap LLSCX 543069207 134
</TABLE>
36
<PAGE> 39
- --------------------------------------------------------------------------------
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
37
<PAGE> 40
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
