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THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP
VALUE FUND
ANNUAL REPORT
OCTOBER 31, 1997
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THIRD AVENUE VALUE FUND
Dear Fellow Shareholders:
At October 31, 1997, the audited net asset value attributable to the 51,537,358
common shares outstanding of the Third Avenue Value Fund ("TAVF", "Third Avenue"
or the "Fund") was $31.94 per share. This compares with an unaudited net asset
value of $31.69 per share at July 31, 1997 and an audited net asset value,
adjusted for subsequent distributions to shareholders, of $23.54 per share at
October 31, 1996. At December 17, 1997, the unaudited net asset value was $31.59
per share.
QUARTERLY ACTIVITY
During the fourth quarter of fiscal 1997, the Fund established new positions in
six common stock issues and received new common stock issues of Bankers Trust
New York Corp. as well as of Marshall & Ilsley Corp. in connection with mergers
involving two former portfolio companies, Alex. Brown and Security Capital. TAVF
also established new positions, and increased an existing position, in certain
creditor claims against Montgomery Ward, which had sought relief in July under
Chapter 11 of the U.S. Bankruptcy Code. The Fund also took a small position in a
portfolio of real estate first mortgages which a commercial bank had put out for
bid. Further, Third Avenue increased its common stock holdings in eight issues.
The Fund sold one issue of Inverse Floaters during the quarter and there was a
minimal paydown of the Cimarron Secured Note.
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
$15,000,000 American Capital Access Holdings, LLC
("American Capital")
$31,571,364 Montgomery Ward Debt Initially Owned
by Insurance Companies
("Ward Insurance Debt")
$1,649,267 Rossrock, LLC
("Rossrock")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED (CONTINUED)
200,000 shares Alexander & Baldwin, Inc. Common
Stock ("Alexander & Baldwin Common")
223,900 shares CapMAC Holdings Inc. Common Stock
("Capmac Common")
100,000 shares Leucadia National Corp. Common Stock
("Leucadia Common")
100,000 shares Planar Systems, Inc. Common
Stock ("Planar Common")
2,651,000 shares The Chiyoda Fire & Marine Insurance Co.,
Ltd. Common Stock ("Chiyoda Common")
423,000 shares The Yasuda Fire & Marine Insurance Co., Ltd.
Common Stock ("Yasuda Common")
Increases in Existing Positions
$5,873,950 Montgomery Ward Trade Claims
("Ward Trade Claims")
6,000 shares FSI International, Inc. Common Stock
("FSI International Common")
1,744,000 shares Mitsui Marine & Fire Insurance Co., Ltd.
Common Stock ("Mitsui Common")
25,000 shares NCR Corp. Common Stock
("NCR Common")
314,000 shares Risk Capital Holdings, Inc. Common
Stock ("Risk Capital Common")
51,900 shares Silicon Valley Group, Inc. Common
Stock ("Silicon Valley Common")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
58,500 shares Tecumseh Products Co. Class B Common
Stock ("Tecumseh Common")
1,019,000 shares The Nissan Fire & Marine Insurance Co., Ltd.
Common Stock ("Nissan Common")
205,000 shares The Sumitomo Marine & Fire
Insurance Co., Ltd. Common Stock
("Sumitomo Common")
REDUCTIONS IN EXISTING POSITIONS
$4,948,310 U.S. Government Agency Guaranteed
Inverse Floaters ("Inverse Floaters")
The Fund's positions in Ward Insurance Debt and Trade Claims were established at
an average price of less than 40% of the claim amount. In July 1997, Montgomery
Ward sought relief under Chapter 11 of the U.S. Bankruptcy Code. At the prices
paid by Third Avenue, the risk of money loss does not appear very great in large
part because the Ward Debt and Ward Trade Claims represent the most senior pre-
petition obligations of Montgomery Ward. However, it is hard to estimate what
the ultimate returns might be for the Fund, assuming a one to three year
bankruptcy case.
The Rossrock investment is a private placement. It represents a participation in
real estate first mortgages.
Based on a long-term, resource conversion approach to security analysis, I
remain convinced that the Japanese non-life insurance companies are among the
safest and cheapest equities available in the industrial world. Consequently,
during the fourth quarter of fiscal 1997, TAVF either created new positions, or
added to existing positions, in Chiyoda Common, Mitsui Common, Nissan Common,
Sumitomo Common and Yasuda Common.
While there is no difficulty in determining that these companies have very high
quality assets, and that the common stocks are selling at huge discounts from
pre-deferred tax net asset values, it seems almost impossible to predict where
catalysts will come from which will result in the reflection of these large,
underlying asset values in the market prices of the common stocks held by TAVF.
Nonetheless,
3
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I do speculate (perhaps idly) on what some of these catalysts might be in
the years ahead.
The two Japanese non-life issues acquired for the first time during the quarter
were Chiyoda Common and Yasuda Common. 36.8% of the outstanding Chiyoda Common
is owned by Toyota Motor Corp. ("Toyota"), whose Chief Executive Officer,
President and one other executive are represented in the Chiyoda corporate
machinery. Chiyoda is included in Toyota's consolidated financial statements on
an equity basis. If Toyota ever wanted to emulate General Motors or General
Electric, and have wholly-owned insurance subsidiaries, then Chiyoda, whose
common stock sells at an over 50% discount from adjusted net asset value, might
be a logical acquisition candidate for Toyota. We've done a fair amount of
research on the question, but, unfortunately, I have not been able, as yet, to
develop a good sense of what a fair price for Chiyoda Common might be in an
acquisition by Toyota; nor do I have much sense of what Toyota's legal
obligations to pay a fair price might be. This lack of sense about merger and
acquisition considerations in Japan, where the transaction might not be
arms-length, contrasts with the knowledge which we would bring to analyzing a
proposed transaction where the target company is incorporated in Delaware, the
leading U.S. state for the incorporation of companies whose common stocks are
publicly traded. Part of the problem is that, to date, there have been very few
acquisitions of public companies in Japan. With the advent of the "Big Bang",
though, this dearth of merger and acquisition activity seems about to end, at
least for Japanese financial institutions.
Yasuda, the second largest Japanese non-life insurer, seems hell-bent on
diversifying into other financial service areas with strong American partners.
The two areas where Yasuda is expanding with American participants are life
insurance and money management.
Speculating on the possibilities for catalysts for Chiyoda, Yasuda and the other
Japanese non-life insurers would be the height of irresponsibility, given our
state of knowledge, if the prices for these common stocks actually reflected any
sorts of premiums over readily ascertainable net asset values. They do not. TAVF
may be speculating on possible future developments, but the Fund is trying very
hard not to pay for the privilege of indulging in Chiyoda-like flights of fancy.
All of the Japanese non-life insurers whose common stocks are owned by Third
Avenue have huge portfolios of marketable common stocks, mostly Japanese issues.
(In contrast, almost no U.S. property and casualty companies hold in their
port-
4
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folios anything other than investment grade bonds. The U.S. companies lack
excess net worths, i.e., net assets not needed to support insurance operations,
and thus are stopped, by regulation as well as by common sense, from having
common stock portfolios.) In reporting corporate profits for either U.S. or
Japanese accounting purposes, the Japanese non-life insurers include in net
investment income only dividends received on the common stocks held in
portfolios. The reported price:earnings ratios for the Japanese non-life
insurers are now well north of 20 times. However, those P:E ratios likely would
be much more modest if the Japanese non-life insurers were permitted under the
accounting rules, or as a supplement to reported statements, to use
"look-through" accounting. Under "look-through", net investment income reflects
the non-life insurers' equities in the earnings attributable to the common
stocks of portfolio companies rather than merely dividends paid by those
portfolio companies. "Look-through" is the accounting norm, incidentally, when
subsidiaries, even if not wholly-owned, are included in consolidated financial
statements.
At the end of the 1997 fiscal year, the common stocks of Japanese non-life
insurers accounted for almost 12% of TAVF's equity portfolio.
We remain convinced that the long-term growth outlook for the semiconductor
equipment industry is much above-average, even though the industry will remain
highly cyclical and a fair number of individual companies will turn out to have
been unable to compete effectively. Insofar as common stocks of companies in the
industry meet our criteria embodying strong financial positions, reasonable
prices relative to book values, and no apparent deterioration in fundamental
competitive positions, we will continue to accumulate these common stocks.
During the quarter, the Fund expanded its positions in FSI International Common
and Silicon Valley Common. At the end of the fiscal year, the common stocks of
semiconductor equipment manufacturers accounted for about 17% of the Fund's
equity portfolio.
We also expanded our interests in financial insurers, an industry group which at
year-end accounted for about 9% of the Fund's common stock portfolio.
Credit-enhancing ought to continue to be a pretty good growth industry, albeit
not every company in our portfolio will continue to avoid large underwriting
losses. I would not be surprised if a number of companies whose issues we hold
became take overs. The two issues acquired during the quarter were American
Capital, a private placement, and CapMAC Common.
Leucadia National has been a brilliantly managed, resource conversion-type
company, buying businesses and assets, building them up, and then selling them.
Based on expected closings, Leucadia ought to have an extremely liquid balance
sheet and
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a net asset value of approximately $30 per share as of early 1998. The Fund
acquired its toe-hold position at an all-in cost of $35.83 per share. It is
out-of-character for TAVF to pay premiums, but in Leucadia's case it seems worth
it. In any event, maybe the Fund will have opportunities to average-down.
Over the years, TAVF has acquired common stocks which were basically long-term
land development plays at prices that seemed to represent huge discounts from
appraisal values. Such acquisitions included the common stocks of St. Joe Paper
and Consolidated-Tomoka located in Florida; and Tejon Ranch Company located in
California. Alexander & Baldwin, whose common stock was acquired during the
quarter, owns large amounts of agricultural land, principally on the Hawaiian
island of Maui.
NCR and Tecumseh are two very well-financed large companies which are currently
experiencing operating difficulties. Planar is a very well-financed small, high-
tech company which is also experiencing current operating difficulties. All
three companies seem to have reasonably good long-term prospects.
Risk Capital Common was acquired at a small discount from book value. Risk
Capital is an interesting property and casualty reinsurer in that it creates
equity positions in the primary carriers to whom it provides reinsurance
services.
TAVF's investments in Inverse Floaters, which date back to late 1994, have
proven to be a pleasant experience. We acquired the Inverse Floaters, not
because we had a view about the course of interest rates, but rather because we
thought, at the prices being paid, we were locking in a yield-to-maturity from
U.S. Government Agency Guaranteed Obligations of perhaps 7% or 8%, on a
reasonable worst case basis. Actual results, of course, were far better than the
reasonable worst case, and even better than our "base case". At present prices
for Inverse Floaters, an investor is, in effect, making bets on what future
interest rates might be. That is just not the Third Avenue game. The Fund, after
the end of the quarter, was in the process of selling its positions in Inverse
Floaters.
RECENT GENERAL MARKET TURMOIL AND TAVF
The Fund, as a long-term buy and hold investor, is not concerned at all with
fluctuations in general stock market prices. Management was non-plussed by the
554 point drop in the Dow Jones Industrial Average on Monday, October 27. Put
bluntly, TAVF ignores rather completely prospects for unrealized market
depreciation. Rather, the management of Third Avenue focuses its worrying, and
its analyses of possible downsides, on prospects that individual issues held in
the portfolio might be subject
6
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to permanent impairments of capital. Possible permanent impairments of capital
for each of the securities held in the TAVF portfolio seem wholly unrelated to
any day to day general market movements, up or down.
Unrealized market depreciation occurs when the market price of a publicly traded
security declines. Permanent impairment of capital occurs when the fundamental
values of a business are dissipated with consequent long-term adverse
consequences for the securities issued by that business.
While some of the factors that seem relevant to a determination of whether a
permanent impairment of capital might occur are the same as those relevant to
prospects for unrealized market depreciation, most factors involved in the two
approaches are markedly different. Indeed, in the examination of prospects for
unrealized depreciation, analysts concentrate on a wide range of factors that
have nothing whatsoever to do with the possibilities for permanent impairments
of capital for the vast majority of companies. These market-exclusive factors
include forecasts about general stock market levels, interest rate predictions,
inflation predictions, all technical-chartist considerations, short-run earnings
forecasts, and predictions about changes in dividend rates. I remain impressed
with how much easier it is for us, and I suppose everybody else who has had a
modicum of training, to determine what a business is worth, and what the
dynamics of that business might be, compared with estimating the prices at which
a non-arbitrage security will sell in near-term markets.
Our concerns about possible permanent impairments of capital for portfolio
companies are ameliorated to a considerable extent because of the central
characteristics of the TAVF investment style. Any common stock acquired by the
Fund is to be an issue of a company which is extremely well capitalized; any
debt instrument acquired will be a senior instrument, reasonably
well-covenanted, and probably secured. For the Fund's common stock portfolio,
these characteristics result in the underlying businesses having considerable
staying power. The debt instruments TAVF has owned seem to have fared relatively
well, even when the securities became non-performers and the underlying company
had to reorganize. Nonetheless, the future is unpredictable and any of the
securities owned by TAVF could fall prey to permanent impairments of capital.
We'll continue to worry.
Conceptually, the Third Avenue investment strategy on the sell side is simple.
If a permanent impairment of capital seems likely:--SELL. If there is to be
unrealized market depreciation:-- AVERAGE DOWN. So far, TAVF has averaged down
much more frequently than it has sold. For the year ended October 31, 1997, TAVF
portfolio turnover was 10% and for fiscal 1996, TAVF portfolio turnover was 14%.
In contrast, turnover for the average equity mutual fund in 1997 was 85%.
7
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Conceptually, the Third Avenue investment strategy on the buy side is that if we
can find securities that meet our investment criteria BUY, and BUY in quantity
without worrying at all about what prices those securities might sell at in the
periods just ahead. Put otherwise, we buy when fundamental values appear to be
"good enough"; no attempt is made to pick bottoms. When investment opportunities
seem to be sparse, the Fund holds cash. At the end of fiscal 1997, TAVF's cash
equivalent holdings accounted for about 40% of Fund assets, comparable to the
Fund's percentage cash holdings during most of fiscal 1997.
To concentrate on long-term resource conversion, as well as on growth outlooks,
the Fund has to be prepared to live through any number of near-term
difficulties. For example, look at the Fund's four largest investment
categories:- Japanese non-life insurers, semiconductor equipment manufacturers,
money managers and land development companies. The Japanese non-life insurers
function in an economy which seems to be experiencing another severe recession
and whose security markets seem to be in a vicious downtrend. Semiconductor
equipment manufacturers are selling to customers who are suffering from the
existence of too much manufacturing capacity. The common stocks of money
managers now sell at ultra-high price to earnings ratios. Tejon Ranch Common is
TAVF's principal play in land development. At best, it will take many years to
develop even a portion of this huge property, and successful development may not
be a "slam dunk".
There are a number of reasons why we pay no attention to prospects for
unrealized market depreciation. First, we have no skill in predicting near-term
market price movements. After all, our field of expertise is finance, not
abnormal psychology. More importantly, general market considerations almost
always have been unimportant for long-term buy and hold investors approaching
security analysis from a fundamentalist, bottom-up, point of view. In my
lifetime, there have been very few instances where general market considerations
proved to be more important than individual corporate analysis;- say 1929, 1933,
1937 and, maybe, 1974. It seems downright silly to spend a lot of time trying to
predict the unpredictable, especially when that which is unpredictable-- market
crashes-- occur only at random and only infrequently. As long as Third Avenue
invests in countries characterized by political stability, an absence of
violence in the streets, and a relative absence of securities frauds, general
market considerations fade into insignificance compared with the fundamental
analysis of individual portfolio holdings. The Fund has investments in the U.S.
and Japan. Both countries seem politically stable and have relatively well
developed capital markets.
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If the Fund's performance turns out to have been poor over the longer term, or
on average, the great weight of probability is that it will be because our
fundamental analysis was poor, not because we were inadequate market timers.
Assuming our analysis of companies, and the securities they issue is, by and
large, valid, the underlying values attributable to these companies ought to be
increasing over time if there is an absence of permanent impairments of capital.
Further, from time to time, individual situations will work out at premiums over
stock market prices through mergers and acquisitions, takeovers, restructurings
and liquidations. Put otherwise, if we know what we are doing, the Fund's
long-term performance ought to be okay regardless of what happens in the general
market.
For TAVF, bargains are always being created, if only management can recognize
them and have the discipline to act on them. In general, bargains tend to have
been created in three ways, and likely will tend to be created in the same ways
in the future:
1) BEAR MARKETS. The Japanese are in the midst of a really severe bear market,
and since 1990 the Nikkei Average has declined from about 40,000 to 15,800. The
country is capital short and, among financial institutions, commercial banks in
particular seem inadequately capitalized. The common stocks of all publicly
traded Japanese financial institutions have suffered large amounts of unrealized
market depreciation, even the non-life insurance companies which appear to be
the only financial institutions in Japan with tremendous amounts of surplus
capital.
2) PAST CORPORATE PROSPERITY. Because companies have done well, they have
created large amounts of new underlying values for their common stock
constituencies. Leucadia, Tecumseh Products, Raymond James and Legg Mason are
good examples of businesses which today have much more intrinsic value than they
had three or five years ago. This is just another way of stating that value is
dynamic, rather steadily increasing over time for well-managed companies.
3) INDUSTRY-WIDE DEPRESSIONS. During the past twenty years or so, bargains were
created in the securities of companies going through depressions. Indeed, there
hardly exists an American industry that has not, as an industry, been subject to
1930's type depressions at least once during the last 20 years. To cite a few
examples, see the post-1970's experiences of the automobile industry, steel and
aluminum, energy, real estate, banking, row crops, airlines and retail trade.
The essential difference between now and the 1930's seems to be that industry
depressions no longer seem to have a domino effect infecting one industry after
another, not that industry depressions no longer occur. During these industry
depressions, the Fund has been able to acquire a number of securities of
well-financed companies participating in those industries
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at prices which from a long-term point of view appeared to be bargains, even
though the immediate outlooks were quite poor. Such acquisitions included real
estate and depository institution common stocks in the early 1990's;
broker-dealer common stocks in 1993 and 1994; Kmart debt securities in 1995;
semiconductor equipment common stocks in 1996; and Japanese non-life insurance
common stocks in 1997.
For better or worse, most mutual fund managements are going to focus strictly on
trying to avoid unrealized market depreciation without distinguishing between
unrealized market depreciation and permanent impairments of capital for the
following reasons:
1) the managers are untrained in fundamental analysis, and their modus operandi
is to follow the technical-chartist approaches embodied in academic finance.
2) the managers have to try to outperform a market consistently, i.e., over the
very short term, because:
a) they might lose their jobs if they don't;
b) they fear that an underperforming fund will be swamped with redemptions; and
c) the funds operate, at least in part, with borrowed money.
None of the above appears relevant to Third Avenue or its management.
While watching finance programs on television during the week of October 27, I
was struck by how much Third Avenue seemed to be like the man in the street, and
how unlike Wall Street TAVF was. Average investor after average investor kept
stating in TV interviews that they, or their 401(k) plans, were in the market
for the long haul, and that they were not particularly troubled by market
gyrations. My goodness, these average investors were focused on permanent
impairments of capital, or the lack thereof, not on unrealized market
depreciation.
I firmly believe that the Fund's concentration on avoiding permanent impairments
of capital, and our ignoring unrealized market depreciation, will serve the TAVF
shareholder constituency adequately during the uncertain times that seem to lie
just ahead.
10
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1997 DISTRIBUTIONS
On November 12, 1997, TAVF declared a dividend from the Fund's estimated net
investment income through the period ending December 31, 1997. The amount is
estimated to be approximately $0.400 per Fund share. TAVF also declared
distributions of approximately $0.049, representing short-term capital gains
through the period ended October 31, 1997; and approximately $0.111 per share,
representing long-term capital gains through the period ended October 31, 1997.
These distributions are payable January 6, 1998 to Fund shareholders of record
on December 30, 1997. The precise amount of each distribution will be determined
based on the number of total Fund shares outstanding on the close of business on
the record date, December 30, 1997. The distributions are payable in cash or,
for those shareholders who have elected the reinvestment option, in additional
Fund shares at the Fund's net asset value on December 31, 1997, the "ex" date,
or valuation date, for reinvestment.
I will write you again when the quarterly report for the period to end January
31, 1998 is published. Best wishes for a happy and prosperous new year.
Sincerely yours,
/s/Martin J. Whitman
- --------------------
Martin J. Whitman
Chairman of the Board
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------
ASSET BACKED SECURITIES - 1.65%
<S> <C> <C> <C> <C>
5,000,000 Arcadia Automobile Receivables Trust
Series 1997-C A3, Subordinated Bond
6.25% due 11/15/01 $ 5,023,437
1,636,740 Olympic Automobile Receivables Trust
Series 1995-E CTFS, Subordinated Bond,
5.95% due 6/15/02 1,635,048
12,500,000 Standard Credit Card Master Trust
Series 1993-3 A, Subordinated Bond,
5.50% due 2/7/00 12,479,125
3,375,018 The Money Store Home Equity Trust
Series 1992-A A, 6.95% due 1/15/07 3,422,606
4,603,640 The Money Store Home Equity Trust
Series 1995-B A3, 6.65% due 1/15/16 4,667,953
--------------
TOTAL ASSET BACKED SECURITIES
(Cost $27,078,826) 27,228,169 1.65%
--------------
- ---------------------------------------------------------------------------------------------
BANK AND OTHER DEBT - 0.93%
Oil 1,712,015 Cimarron Petroleum Corp. (c) (d) 1,731,241 0.11%
--------------
Retail 295,370 Lechmere, Inc. Trade Claim (c) 23,630
13,000,000 Montgomery Ward Series I
8.37%, 7/15/02 (c) * 4,550,000
8,571,364 Montgomery Ward Series C
9.24%, 3/15/03 (c) * 2,999,977
10,000,000 Montgomery Ward Series F
9.81%, 3/15/03 (c) * 3,500,000
6,889,895 Montgomery Ward Trade Claim (c) 2,411,463
--------------
13,485,070 0.82%
--------------
TOTAL BANK AND OTHER DEBT
(Cost $17,195,973) 15,216,311
--------------
- ---------------------------------------------------------------------------------------------
CORPORATE BONDS - 0.44%
Foreign Issuers- 6,428,575 CGA Special Account Trust (b) (c) 6,428,575 0.39%
Bermuda --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
12
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------
CORPORATE BONDS (CONTINUED)
<S> <C> <C> <C> <C>
Membership 1,004,026 Thousand Trails, Inc.,
Sports & Pay-In-Kind Notes 12%, 7/15/03 $ 893,583 0.05%
Recreation --------------
Clubs
TOTAL CORPORATE BONDS
(Cost $7,461,481) 7,322,158
--------------
- ---------------------------------------------------------------------------------------------
GOVERNMENT AGENCY BONDS (COLLATERALIZED MORTGAGE OBLIGATIONS) - 5.25%
Inverse 2,058,631 Fannie Mae
Floaters Series 1993-129 S,
4.33972% due 8/25/08 (e) 1,619,278
6,600,000 Fannie Mae
Series 1993-229 SB,
5.31562% due 12/25/08 (e) 5,660,754
300,000 Fannie Mae
Series 1993-221 SG,
2.94025% due 12/25/08 (e) 205,218
2,683,270 Fannie Mae
Series 1994-13 SK,
7.08528% due 2/25/09 (e) 2,240,987
3,000,000 Fannie Mae
Series 1994-13 SM,
7.75348% due 2/25/09 (e) 2,796,180
6,191,950 Fannie Mae
Series 1993-210 SA,
0.00% due 11/25/23 (e) 3,483,343
1,696,924 Fannie Mae
Series 1994-72 SB,
2.38125% due 4/25/24 (e) 936,244
2,889,650 Freddie Mac
Series 1635 K,
6.05155% due 12/15/08 (e) 2,593,895
5,000,000 Freddie Mac
Series 1518 G, 3.84% due 5/15/23 (e) 2,786,450
--------------
22,322,349 1.36%
--------------
Planned 5,375,000 Fannie Mae
Amortization Series X-188A E, 5.40% due 7/25/03 5,357,800
Classes
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
13
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------
GOVERNMENT AGENCY BONDS (COLLATERALIZED MORTGAGE OBLIGATIONS) (CONTINUED)
<S> <C> <C> <C> <C>
Planned 10,000,000 Fannie Mae
Amortization Series 1993-174 D, 6.00% due 7/25/06 $ 9,973,500
Classes 6,581,974 Fannie Mae
(continued) Series 1994-41 PD, 5.75% due 4/25/15 6,573,417
20,000,000 Freddie Mac
Series 1978 PA, 6.30% due 8/15/16 20,128,400
12,000,000 Freddie Mac
Series 1547 PE, 6.00% due 3/15/17 12,030,360
10,000,000 Freddie Mac
Series 1610 PE, 6.00% due 4/15/17 9,988,600
--------------
64,052,077 3.89%
--------------
TOTAL GOVERNMENT AGENCY BONDS
(Cost $77,881,290) 86,374,426
--------------
Shares
or Units
- ---------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS - 49.28%
Annuities & 163,300 John Nuveen & Co., Inc. Class A 5,797,150
Mutual Fund 272,000 Liberty Financial Companies, Inc. 14,144,000
Management & 450,000 SunAmerica, Inc. 16,171,875
Sales --------------
36,113,025 2.19%
--------------
Apparel 150,000 Kleinerts, Inc. (a) (c) 2,700,000 0.16%
Manufacturers --------------
Building Products 44,000 Central Sprinkler Corp. (a) 819,500
& Related 125,000 Cummins Engine Co., Inc. 7,617,187
50,000 H.B. Fuller Co. 2,362,500
33,200 Tecumseh Products Co. Class A (b) 1,722,250
358,500 Tecumseh Products Co. Class B (b) 18,731,625
--------------
31,253,062 1.90%
--------------
Business 43,200 Capital Southwest Corp. 3,385,800 0.21%
Development --------------
Companies
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
14
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE % OF
OR UNITS ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS (CONTINUED)
<S> <C> <C> <C> <C>
Computer & 50,000 NCR Corp. (a) $ 1,515,625
Software 100,000 Novell, Inc. (a) 843,750
--------------
2,359,375 0.14%
--------------
Depository 53,000 Astoria Financial Corp. 2,769,250
Institutions 147,034 Bankers Trust New York Corp. 17,350,012
218,500 Carver Bancorp, Inc. (b) 2,785,875
62,500 First Colorado Bancorp, Inc. 1,273,437
149,227 Golden State Bancorp., Inc. (a) 4,961,798
53,480 Golden State Bancorp., Inc.
Warrants, 8/21/00 (a) 1,176,560
10,000 Letchworth Independent Bancshares
Corp. 490,000
10,000 Letchworth Independent Bancshares
Corp. Warrants 12/31/97 (a) 240,000
155,952 Marshall & Ilsley Corp. 8,090,010
34,783 Peoples Heritage Financial Group, Inc. 1,369,581
--------------
40,506,523 2.46%
--------------
Financial 200,000 Ambac Financial Group, Inc. 8,450,000
Insurance 223,900 CapMAC Holdings Inc. 6,717,000
244,100 Enhance Financial Services Group, Inc. 12,891,531
750,000 Financial Security Assurance
Holdings Ltd. 32,625,000
240,000 MBIA Inc. 14,340,000
--------------
75,023,531 4.56%
--------------
Food 328,000 J & J Snack Foods Corp. (a) 5,576,000
Manufacturers 95,000 Premark International, Inc. 2,570,937
& Purveyors 172,200 Sbarro, Inc. 4,552,537
109,100 Weis Markets, Inc. 3,777,587
--------------
16,477,061 1.00%
--------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
15
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE % OF
OR UNITS ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS (CONTINUED)
<S> <C> <C> <C> <C>
Foreign Issuers- 838,710 CGA Group, Ltd. (a) (b) (c) $ 4,193,550
Bermuda 85,917 LaSalle Re Holdings, Ltd. 2,878,219
912,442 St. George Holdings, Ltd.
Class A (a) (b) (c) 91,244
7,549 St. George Holdings, Ltd.
Class B (a) (b) (c) 755
--------------
7,163,768 0.44%
--------------
Foreign 4,244,000 Mitsui Marine & Fire
Issuers- Insurance Co., Ltd. 24,983,383
Japan 2,651,000 The Chiyoda Fire & Marine
Insurance Co., Ltd. 9,632,384
2,532,000 The Nissan Fire & Marine Insurance
Co., Ltd. 10,421,051
1,851,000 The Sumitomo Marine &
Fire Insurance Co., Ltd. (a) 12,343,076
750,000 The Tokio Marine & Fire Insurance
Co., Ltd., Sponsored ADR 38,343,750
423,000 The Yasuda Fire & Marine Insurance
Co., Ltd. 2,345,896
--------------
98,069,540 5.96%
--------------
Forest Products 54,400 St. Joe Corp. 5,181,600 0.31%
--------------
Holding Companies 50,000 Aristotle Corp. (a) 262,500
21,400 White River Corp. (a) 1,562,200
--------------
1,824,700 0.11%
--------------
Insurance Holding 189,978 ACMAT Corp. Class A (a) (b) 3,478,972
Companies 803,669 Danielson Holding Corp. (a) (b) (c) 6,328,893
50,000 Fund American Enterprises
Holdings, Inc. 5,975,000
100,000 Leucadia National Corp. 3,462,500
384,700 Risk Capital Holdings, Inc. (a) 8,751,925
5,490 Sen-Tech International Holdings,
Inc. (a) (c) 2,098,827
--------------
30,096,117 1.83%
--------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
16
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE % OF
OR UNITS ISSUES (NOTE 1)NET ASSETS
- ---------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS (CONTINUED)
<S> <C> <C> <C> <C>
Life Insurance 434,536 ReliaStar Financial Corp. $ 16,240,783 0.99%
--------------
Manufactured 89,000 Liberty Homes, Inc. Class A 928,938
Housing 40,000 Liberty Homes, Inc. Class B 440,000
13,500 Palm Harbor Homes, Inc. (a) 361,125
--------------
1,730,063 0.11%
--------------
Medical Supplies 81,400 Acuson Corp. (a) 1,526,250
& Services 342,300 Datascope Corp. (a) 8,257,988
268,500 Physio-Control International Corp. (a) 4,279,219
90,750 St. Jude Medical, Inc. (a) 2,750,859
--------------
16,814,316 1.02%
--------------
Membership 237,267 Thousand Trails, Inc. (a) (f) 1,156,677 0.07%
Sports & --------------
Recreation Clubs
Mortgage
Insurance 152,800 CMAC Investment Corp. 8,356,250 0.51%
--------------
Motor Vehicles & 50,000 Ford Motor Co. 2,184,375 0.13%
Cars' Bodies --------------
Real Estate 200,000 Alexander & Baldwin, Inc. 5,500,000
31,000 Consolidated-Tomoka Land Co. 639,375
206,400 Forest City Enterprises, Inc. Class A 11,919,600
3,750 Forest City Enterprises, Inc. Class B 221,719
480,336 Koger Equity, Inc. 10,387,266
846 Public Storage, Inc. 23,265
10,000 Royal Palm Beach Colony Limited
Partnership Units (a) 8,125
3,045,508 Tejon Ranch Co. (b) (c) 66,346,970
--------------
95,046,320 5.77%
--------------
Security Brokers, 111,800 Jefferies Group, Inc. 7,406,750
Dealers & 446,666 Legg Mason, Inc. 21,914,551
Flotation 146,300 Piper Jaffray Companies Inc. 3,666,644
Companies
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
17
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE % OF
OR UNITS ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS (CONTINUED)
<S> <C> <C> <C> <C>
Security Brokers, 787,500 Raymond James Financial, Inc. $ 23,625,000
Dealers & 161,941 Ryan, Beck & Co., Inc. 1,143,708
Flotation --------------
Companies 57,756,653 3.51%
(continued) --------------
Semiconductor 25,000 AG Associates, Inc. (a) 143,750
Equipment 400,000 Applied Materials, Inc. (a) 13,350,000
Manufacturers 555,700 Electro Scientific Industries,
Inc. (a) (b) 26,951,450
1,070,000 Electroglas, Inc. (a) (b) 20,330,000
1,534,250 FSI International, Inc. (a) (b) 26,465,813
369,200 KLA-Tencor Corp. (a) 16,221,725
150,000 Photronics, Inc. (a) 6,431,250
551,900 Silicon Valley Group, Inc. (a) 15,867,125
218,700 Veeco Instruments, Inc. (a) 8,665,988
262,500 Zygo Corp. (a) 7,153,125
--------------
141,580,226 8.60%
--------------
Small 108,750 AFC Cable Systems, Inc. (a) 3,085,781
Cap-Technology 200,000 American Physicians Service
Group, Inc. (a) 1,400,000
127,000 Analogic Corp. 4,699,000
375,400 Boston Communications Group, Inc. (a) 5,537,150
163,500 Evans & Sutherland Computer Corp. (a) 4,905,000
81,500 FDP Corp. 855,750
272,500 Glenayre Technologies, Inc. (a) 3,542,500
140,600 H & Q Life Sciences Investors 2,012,337
154,800 Integrated Systems, Inc. (a) 2,728,350
300,000 Interphase Corp. (a) (b) 2,212,500
293,000 Mountbatten, Inc. (a) (b) 3,662,500
100,000 Planar Systems, Inc. (a) 1,112,500
53,600 Sparton Corp. (a) 656,600
612,000 Texas Micro, Inc. (a) 2,027,250
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
18
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE % OF
OR UNITS ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS (CONTINUED)
<S> <C> <C> <C> <C>
Small Cap 306,900 Vertex Communications Corp. (a) (b) $ 7,730,044
- -Technology --------------
(continued)
46,167,262 2.80%
--------------
Title Insurance 814,700 First American Financial Corp. (b) 49,085,675
975,700 Stewart Information Services Corp. (b) 25,063,294
--------------
74,148,969 4.50%
--------------
TOTAL COMMON STOCKS,
LIMITED PARTNERSHIP UNITS AND
WARRANTS (Cost $476,918,696) 811,335,996
--------------
- ---------------------------------------------------------------------------------------------
Preferred Stock - 0.68%
Depository 20,000 Golden State Bancorp Convertible,
Institutions Non-Cumulative, 8.75%, Series A 1,660,000 0.10%
--------------
Foreign 207,969 CGA Group, Ltd., Series A (a) (b) (c) 5,199,227
Issuers- 171,429 CGA Group, Ltd., Series B (a) (b) (c) 4,285,725
Bermuda --------------
9,484,952 0.58%
--------------
TOTAL PREFERRED STOCK
(Cost $9,984,952) 11,144,952
--------------
SHARES OR
INVESTMENT
AMOUNT
- ---------------------------------------------------------------------------------------------
Other Investments - 1.58%
Closed-End 1,000,000 American Government Income
Bond Funds Fund, Inc. 5,562,500 0.34%
--------------
Financial
Insurance $15,000,000 American Capital Access
Holdings, LLC (c) 15,000,000 0.91%
--------------
Foreign $50,000,000 Japanese Yen May 1998
Option Put Options (c) (g) 610,000 0.04%
Contracts --------------
Insurance $3,136,000 Head Insurance Investors LP (c) 3,136,000 0.19%
Holding --------------
Companies
Real Estate $1,649,267 Rossrock, LLC (c) 1,649,267 0.10%
--------------
TOTAL OTHER INVESTMENTS
(Cost $25,362,451) 25,957,767
--------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
19
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bills - 40.24%
46,500,000 U.S. Treasury Bill 5.19%, 11/6/97 $ 46,466,481
80,000,000 U.S. Treasury Bill 5.10%, 11/20/97 79,784,878
13,000,000 U.S. Treasury Bill 5.12%, 12/11/97 12,926,117
27,000,000 U.S. Treasury Bill 5.13%, 1/8/98 26,757,270
12,000,000 U.S. Treasury Bill 5.16%, 1/15/98 11,880,000
16,000,000 U.S. Treasury Bill 5.19%, 2/5/98 15,792,480
1,914,000 U.S. Treasury Bill 5.19%, 2/5/98 (h) 1,889,175
44,000,000 U.S. Treasury Bill 4.96%, 2/12/98 43,388,840
70,000,000 U.S. Treasury Bill 5.15%, 2/26/98 68,897,500
66,000,000 U.S. Treasury Bill 5.16%, 3/5/98 64,885,260
90,000,000 U.S. Treasury Bill 5.13%, 3/12/98 88,398,900
26,000,000 U.S. Treasury Bill 5.00%, 3/19/98 25,511,460
52,915,000 U.S. Treasury Bill 5.64%, 4/2/98 51,816,485
60,000,000 U.S. Treasury Bill 5.06%, 4/9/98 58,696,800
20,000,000 U.S. Treasury Bill 5.11%, 4/16/98 19,549,600
31,000,000 U.S. Treasury Bill 5.08%, 4/30/98 30,228,100
16,000,000 U.S. Treasury Bill 5.09%, 5/28/98 15,540,320
--------------
TOTAL U.S. TREASURY BILLS 662,409,666 40.24%
--------------
(Cost $661,893,224)
TOTAL INVESTMENT PORTFOLIO - 100.05% 1,646,989,445
--------------
(Cost $1,303,776,893)
LIABILITIES NET OF CASH
AND OTHER ASSETS - (0.05%) (749,130)
--------------
NET ASSETS - 100.00% $1,646,240,315
==============
(Applicable to 51,537,358
shares outstanding)
</TABLE>
Notes:
(a)Non-income producing securities.
(b)Affiliated issuers-as defined under the Investment Company Act of 1940
(ownership of 5% or more of the outstanding voting securities of these
issuers).
(c)Restricted/fair valued securities.
(d)Interest accrued at a current rate of prime + 2%.
(e)Inverse floater coupon rate moves inversely to a designated index, such as
LIBOR, typically at a multiple of the changes in the relevant index rate.
(f)130,095 shares restricted/fair valued.
(g)50 million U.S. Dollar notional amount may be exercised on May 27, 1998 to
sell 6.3 billion Japanese Yen at a strike price of 126.
(h)Security segregated for future Fund commitments.
* Issuer in default.
ADR: American Depository Receipt.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
20
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE SMALL-CAP VALUE FUND
Dear Fellow Shareholders:
At October 31, 1997, the end of our first fiscal year, the audited net asset
value attributable to the 8,670,943 common shares outstanding of Third Avenue
Small-Cap Value Fund ("Small-Cap Value" or the "Fund") was $12.37, compared with
the Fund's unaudited net asset value at July 31, 1997 of $12.03. As of December
17, 1997, the unaudited net asset value attributable to the 9,105,490 common
shares outstanding was $11.78.
QUARTERLY ACTIVITY
In its second full quarter of operations, Small-Cap Value established new
positions in the common stocks of 8 companies, and added to 12 of its 18
existing positions. At October 31, Small-Cap Value held positions in 26
companies. None of our positions were reduced or sold during the quarter.
NUMBER OF SHARES NEW POSITIONS ACQUIRED
274,500 ACT Networks, Inc.
Common Stock ("Act Networks
Common")
24,400 Alexander & Baldwin, Inc.
Common Stock ("A&B Common")
200,000 Centigram Communications Corp.
Common Stock ("Centigram Common")
27,000 Electroglas, Inc. Common Stock
("Electroglas Common")
64,900 FBL Financial Group, Inc. Class A Common
Stock ("FBL Common")
312,800 Planar Corp. Common Stock
("Planar Common")
88,800 SpecTran Corp. Common Stock
("Spectran Common")
26,000 Silicon Valley Group, Inc. Common
Stock ("Silicon Valley Group Common")
21
<PAGE>
[GRAPHIC OMITTED]
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
43,000 Alico, Inc. Common Stock
("Alico Common")
184,400 CapMAC Holdings Inc. Common Stock
("CapMAC Common")
108,100 FSI International Common Stock
("FSI International Common")
12,500 Glenayre Technologies, Inc.
Common Stock ("Glenayre
Common")
1,500 PictureTel Corp. Common Stock
("PictureTel Common")
23,000 Shiva Corp. Common Stock
("Shiva Common")
127,700 Skyline Corp. Common Stock
("Skyline Common")
6,000 Summa Four, Inc. Common Stock
("Summa Four Common")
1,429,000 The Nissan Fire & Marine Insurance Co., Ltd.
Common Stock ("Nissan Common")
15,700 Value City Department Stores
Common Stock ("Value City Common")
180,900 ValueVision International, Inc.
Class A Common Stock
("ValueVision Common")
242,900 Xircom, Inc. Common Stock
("Xircom Common")
Small-Cap Value continued to experience very strong flows of new money during
the fourth quarter, finishing with $107.2 million in net assets, up from $48.8
million in net assets at July 31, 1997 and $7.7 million in net assets at April
30, 1997. The flow of new money into the Fund was gratifying, particularly in
light of the Fund's short, seven-month life span, probably beyond my
expectations. At quarter's end, approximately 61% of the Fund's assets were
invested in common stocks, with the balance in cash equivalents. This percentage
compares with the 57% of funds invested as of July 31, 1997, and the more than
70% of net assets invested in common stocks today.
22
<PAGE>
[GRAPHIC OMITTED]
The current composition of Small-Cap Value's portfolio may be thought of as
encompassing three groups, and includes a relatively large investment in a
single Japanese security. These groups include, by percentage of net assets at
October 31, 1997, technology (25%); insurance (20%); and real estate (8%). We
have not consciously selected these groups, nor do we consciously allocate a
certain portion of the Fund to one industry or another. Rather, industries and
businesses tend to select us. It's important to note that even within these
groups, Small-Cap Value is reasonably diversified in its selections. The
technology group, for example, includes companies from several different and
unrelated industries with distinct dynamics, as does the insurance group.
Our investments in SILICON VALLEY GROUP, FSI INTERNATIONAL and ELECTROGLAS
common represent a continuation of Third Avenue Funds' significant investments
within the semiconductor equipment industry. Prices for many of the common
stocks within this group fell precipitously during the quarter and hit
attractive buying levels. Instability in Asia, fears of lower profitability and
over-capacity among semiconductor manufacturers and rich market prices were, as
best I can tell, the central reasons other investors abandoned these stocks in
droves. While I would not underestimate the importance of some of these issues,
I think it is probably fair to say that none of them represents a problem that
translates into a permanent impairment of capital, only into a short-term
disruption. All of these companies remain extremely well financed, and should be
able to withstand even long-term downturns among their respective customers and
markets.
Within the "venture capital" group, Small-Cap Value also made significant
commitments to Centigram Communications, Planar Systems, Xircom and ACT
Networks. CENTIGRAM COMMUNICATIONS, a maker of communications and messaging
systems, operates in a high-growth industry and boasts a cash rich, debt free,
balance sheet. At 1.5 times book value and in view of the consolidation
occurring in the industry, Centigram Common appears cheap at current levels. The
company's new senior management team expects to introduce new products in the
coming months and continues to restructure the company's operations. PLANAR
SYSTEMS manufactures and markets high performance commercial flat panel display
systems and is the largest independent manufacturer of displays in North America
and Europe. The company's systems and components are designed into products
found in a broad range of markets, including medical instruments, industrial
process control, transportation, and military/avionics. Planar possesses a very
strong balance sheet and has shown an appetite for using it to make acquisitions
designed to expand the company's served markets. During the past few years, the
company has suffered
23
<PAGE>
[GRAPHIC OMITTED]
from a number of problems, some competitive and some internal. While it
certainly appears capable of solid growth in the years ahead, and has
demonstrated resilience in the face of competitive pressures, it continues to
suffer from various internal problems -- problems, however, that I view as
fixable. XIRCOM, INC. is a leading manufacturer of PC card communications
products, small credit card-sized adapters designed to let mobile PC users
connect to data networks. Intel owns more than 12% of the company, is a 10%
(OEM) customer and shares a three-year technology sharing and manufacturing
agreement with the company. Xircom Common may be a way to ride the coattails of
the growth in the portable notebook/laptop and handheld PC market "without
paying for the growth." Market research suggests that notebooks and handhelds
seem to be growing faster than desktop models and are, increasingly, the choice
of the corporate customer. Xircom was plagued by excess inventory (i.e., too
much at the distributor level) during the past year and lost money in its
Netaccess subsidiary, a business that the company recently sold. Like many in
the venture capital group, it faces tough competition, most notably from
products made by 3Com. ACT NETWORKS manufactures and markets data networking
products based on frame relay technology and has investments in other related
technologies. Frame Relay, as a technology, has achieved only limited
penetration when compared with alternative data communications technologies and
ACT has experienced problems with assimilating some of its recent acquisitions.
These problems notwithstanding, ACT's financials could not be stronger: $55
million of cash versus total book liabilities of $9 million. At current levels,
the company's shares trade below stated book value and the company's business is
being valued by the stock market at around $25 million -- seemingly cheap for a
high technology company with $50 million in revenues in an industry that
routinely commands merger and acquisition multiples of anywhere from 2x to 8x
revenues. Small-Cap Value added to already significant commitments in other
areas as well. We continued our buying program in Japan, adding approximately $5
million of NISSAN FIRE & MARINE Common. While storm clouds continue to gather
over Japan, as well as the rest of Asia, we are confident that we are purchasing
assets which are "safe and cheap." The emerging dislocations -- currency and
otherwise -- do not, in our view, represent permanent impairments of capital.
Small-Cap Value added to its holdings of CAPMAC Common and SKYLINE Common, two
of our largest positions at quarter's end. Subsequent to quarter's end, CapMAC
agreed to be acquired by MBIA for $35 per share, a roughly 20% premium over
Small-Cap Value's cost basis. The proposed transaction requires shareholder and
regulatory approval and is expected to close early in 1998. Skyline continues to
represent a "safe and cheap" investment within the manufactured housing
industry.
24
<PAGE>
[GRAPHIC OMITTED]
A WORD ABOUT "SMALL-CAP" INVESTING
What exactly is small-cap stock investing? I raise the question because the more
I read and hear about the topic, the more I realize no one can seem to agree on
a satisfactory answer. With Small-Cap Value Fund still in its infancy, I wanted
to explain some of our views about small-cap stock investing, and discuss our
intentions going forward.
Seemingly one of the most debated questions regarding small-cap stocks is that
of market capitalization, the value of a company's outstanding shares in the
public stock market. In this regard, portfolio managers, market researchers, and
the press each serve up something different when it comes to actually defining
small-caps. THE WALL STREET JOURNAL, for example, defines small-caps as
companies with market capitalizations below $750 million (i.e., those companies
whose shares outstanding have a total value of less than $750 million).
Morningstar, the well-respected industry research group, raises the bar a bit,
using $1 billion as an upper limit to market capitalization. Other fund managers
use cut-off points ranging anywhere from $500 million to $1.5 billion.
From our standpoint, arbitrary market capitalization definitions, while
convenient, are neither telling nor helpful for investors. Investors need to
consider why they are buying so-called small-cap stocks. Is it, for example,
because they equate small capitalizations with small size and high growth? If
small-cap investing is really about investing in small companies, as many claim,
why not, as an alternative to market capitalizations, employ a firm's revenues,
or assets? Table I1 following this letter offers some examples (companies not
found in our Fund) that suggest market capitalization is not necessarily
indicative of a company's size, nor does it say much about the growth prospects
of the firm.
For example, at December 31, 1996, Navistar, an old line truck and engine
manufacturer with 14,000 employees and $6 billion in revenues, would have
qualified as a "small-cap" by many definitions, but AtHome, a newly public,
Internet access firm, with little in the way of meaningful revenues, would not
have qualified for many small-cap portfolios simply by virtue of its billion
dollar plus market capitalization. Yet it is clear that AtHome, in contrast to
Navistar, is precisely the type of small, high growth company that many
investors might reasonably expect as part of a "small-cap" portfolio. In other
words, small-cap is not always synonymous with "small company" and small company
may not always mean small-cap.
- ----------
1Table I shows statistics from five companies, including two cyclical/industrial
companies (Cliffs Drilling and Navistar); two high-flying recently public,
technology concerns (AtHome Network and Rambus); and one that fits somewhere in
between (Cognex).
25
<PAGE>
[GRAPHIC OMITTED]
Table I raises another point regarding small-cap stock investing. What happens
when a company's market capitalization exceeds the market cap cut-off point as
defined by the fund manager? At October 31, 1997, for example, all five
companies in Table I showed market capitalizations exceeding the $1 billion
mark, and in two cases the $1.5 billion mark, following significant increases
during 1997.
Should investors expect fund managers to sell a holding when the company's
market capitalization exceeds a pre-defined limit? Industry observers have been
critical of fund managers who let their market capitalizations "creep" northward
and who hold companies with market capitalizations exceeding a certain cut-off
point. As touched on below, I think some of this criticism is misplaced.
First, as pointed out in our prospectus, Small-Cap Value intends to invest at
least 65% of its net assets in companies whose market capitalizations are BELOW
$1 BILLION AT THE TIME OF INVESTMENT. This is not to say we will not invest in
companies with market capitalizations exceeding $1 billion, but the spirit of
our Fund is to identify companies on the smaller end of the capitalization
scale. Secondly, WE WILL NOT AUTOMATICALLY SELL A HOLDING when its
capitalization surpasses our self-imposed $1 billion limit. One case in point:
FSA. FSA's market capitalization has surpassed the $1 billion mark because of
price appreciation, but we have no intention of selling our investment at
current levels. Such a sale could create adverse tax consequences for Fund
shareholders; would certainly increase the Fund's transaction costs; and would
mean throwing out what is a perfectly fine investment. As tax-sensitive,
long-term, buy and hold investors, we prefer to hold investments as long as
value is being created in the business and, of course, defer any tax payments as
far into the future as possible.
Lastly, arbitrary cut-off points, defined around equity-only market values,
ignore a FIRM'S TOTAL CAPITAL STRUCTURE (e.g., the use of debt and equity
financing). For investors who equate small-cap with small company, such
arbitrary definitions are almost certainly misleading.
As a reference point for the statisticians out there, I have provided a second
table, Table II, that outlines Small-Cap Value's holdings and their respective
market capitalizations, which I hope to update on a yearly basis. I hope this
brief summary and the accompanying table provokes some thought about small-cap
stock investing and helps you know more about your investments.
26
<PAGE>
[GRAPHIC OMITTED]
1997 DISTRIBUTION
On November 12, 1997, Small-Cap Value declared a dividend from the Fund's
estimated net investment income through the period ending December 31, 1997 in
the amount of approximately $0.059 per Small-Cap Value share. This distribution
is payable January 6, 1998 to Small-Cap Value shareholders of record on December
30, 1997. The precise amount of the distribution will be determined based on the
number of total Fund shares outstanding on the close of business on the record
date, December 30, 1997. The distribution is payable in cash or, for those
shareholders who have elected the reinvestment option, in additional Fund shares
at the Fund's net asset value on December 31, 1997, the "ex" date, or valuation
date, for reinvestment.
I look forward to writing you again when we publish our First Quarter Report
dated January 31, 1998.
Sincerely,
/s/Curtis R. Jensen
- -------------------
Curtis R. Jensen
Co-Manager, Third Avenue Small-Cap Value Fund
27
<PAGE>
[GRAPHIC OMITTED]
TABLE I
COMPANY MARKET CAPITALIZATION COMPARATIVE
($ MILLIONS)
MARKET MARKET
CAP CAP
AS OF AS OF NO. OF TOTAL
COMPANY 12/31/96 10/31/97 REVENUES EMPLOYEES ASSETS
- -------------------- ------- ------- -------- -------- -----
At Home Corporation $1,230* $2,129 nm 250 $168
Cliffs Drilling $480 $1,124 $210 1,100 $373
Cognex Corp $750 $1,114 $135 500 $243
Navistar $670 $1,750 $5,884 14,000 $4,917
Rambus $350* $1,123 $26 139 $88
- --------------------------------------------------------------------------------
*Market capitalization at time of 1997 IPO.
TABLE II
SMALL-CAP VALUE PORTFOLIO MARKET CAPITALIZATIONS
AS OF OCTOBER 31, 1997
PRICE/SHARE SHARES OUTSTANDING MARKET CAP
COMPANY (10/31/97) (MMS) ($MMS)
- -------------------- ------- -------- --------
Summa Four $11.38 5.75 $ 65
ACT Networks 9.44 9.21 87
Spectran Corp 12.75 6.97 89
Sparton Corp 12.25 7.83 96
Bel Fuse 20.25 5.12 104
Centigram Communications 16.63 7.11 118
ValueVision 4.25 28.04 119
Planar 11.13 10.94 122
Alico, Inc. 24.25 7.03 170
Xircom 10.00 22.74 227
Boston Communications Group 14.75 16.16 238
Value City 7.88 31.89 251
Skyline 29.00 9.43 273
Shiva 10.44 29.17 305
PictureTel 9.25 38.01 352
Tejon Ranch 28.56 12.69 362
Electroglas 19.00 19.44 369
FSI International 17.25 22.62 390
CapMAC Holdings 30.00 17.33 520
FBL Financial 39.63 16.75 664
First American 60.25 11.57 697
Glenayre Technologies 13.00 60.45 786
Silicon Valley Group 28.75 30.94 890
Nissan Fire & Marine 4.12 261.64 1,078
Alexander & Baldwin 27.50 45.01 1,238
Financial Security Assurance 43.50 31.08 1,352
28
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE % OF
OR UNITS ISSUES (NOTE 1) NET ASSETS
- -----------------------------------------------------------------------------------------------
COMMON STOCKS - 61.40 %
<S> <C> <C> <C> <C>
Financial 242,400 CapMAC Holdings Inc. $ 7,272,000
Insurance 40,300 Financial Security Assurance
Holdings Ltd. 1,753,050
--------------
9,025,050 8.41%
--------------
Foreign Issuers 2,132,000 The Nissan Fire & Marine
- -Japan Insurance Co., Ltd. 8,774,755 8.18%
--------------
Life Insurance 64,900 FBL Financial Group, Inc. Class A 2,571,662 2.40%
--------------
Manufactured 160,100 Skyline Corp. 4,642,900 4.33%
Housing --------------
Media 515,000 ValueVision International, Inc.
Class A (a) 2,188,750 2.04%
--------------
Real Estate 24,400 Alexander & Baldwin, Inc. 671,000
137,600 Alico, Inc. 3,336,800
200,000 Tejon Ranch Co. (b) 4,357,038
--------------
8,364,838 7.80%
--------------
Retail 207,000 Value City Department Stores, Inc. (a) 1,630,125 1.52%
--------------
Semiconductor 27,000 Electroglas, Inc. (a) 513,000
Equipment 244,250 FSI International, Inc. (a) 4,213,312
Manufacturers 26,000 Silicon Valley Group, Inc. (a) 747,500
--------------
5,473,812 5.10%
--------------
Technology 274,500 ACT Networks, Inc. (a) 2,590,594
50,000 Bel Fuse Inc. (a) 1,012,500
50,000 Boston Communications Group, Inc. (a) 737,500
200,000 Centigram Communications Corp. (a) 3,325,000
116,500 Glenayre Technologies, Inc. (a) 1,514,500
161,500 PictureTel Corp. (a) 1,493,875
312,800 Planar Systems, Inc. (a) 3,479,900
133,000 Shiva Corp. (a) 1,388,187
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OFTHE FINANCIAL STATEMENTS.
29
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE % OF
OR UNITS ISSUES (NOTE 1) NET ASSETS
- -----------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
<S> <C> <C> <C> <C>
Technology 8,400 Sparton Corp. (a) $ 102,900
(continued) 88,800 SpecTran Corp. (a) 1,132,200
189,900 Summa Four, Inc. (a) 2,160,113
280,200 Xircom, Inc. (a) 2,802,000
------------
21,739,269 20.27%
------------
Title Insurance 24,000 First American Financial Corp. 1,446,000 1.35%
------------
TOTAL COMMON STOCKS
(Cost $62,618,996) 65,857,161
------------
PRINCIPAL
AMOUNT ($)
- ----------------------------------------------------------------------------------
U.S. Treasury Bills - 40.96%
44,000,000 U.S. Treasury Bill 4.55%, 11/13/97 43,933,267
------------
TOTAL U.S. TREASURY BILLS 43,933,267 40.96%
(Cost $43,933,267) ------------
TOTAL INVESTMENT PORTFOLIO - 102.36%
(Cost $106,552,263) 109,790,428
------------
LIABILITIES NET OF CASH
AND OTHER ASSETS - (2.36%) (2,534,582)
------------
NET ASSETS - 100.00% $107,255,846
============
(Applicable to 8,670,943
shares outstanding)
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Restricted/fair valued securities.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
30
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
THIRD AVENUE
THIRD AVENUE SMALL-CAP
VALUE FUND VALUE FUND
--------- ---------
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of
$1,119,089,248 and $106,552,263,
respectively) $1,365,894,508 $109,790,428
Affiliated issuers (identified cost of
$184,687,645 and $0 respectively) 281,094,937 --
-------------- ------------
Total investments (identified cost of
$1,303,776,893 and $106,552,263,
respectively) 1,646,989,445 109,790,428
Cash and cash equivalents (Note 1) 1,116,666 728,537
Receivable for fund shares sold 13,487,622 1,016,718
Dividends and interest receivable 1,062,036 335,862
Deferred organizational costs (Note 1) -- 58,460
Other assets 100,129 12,290
-------------- ------------
Total assets 1,662,755,898 111,942,295
-------------- ------------
LIABILITIES:
Payable for securities purchased 8,687,811 4,086,511
Payable for fund shares redeemed 5,965,490 389,970
Payable to investment adviser 1,274,144 78,745
Accounts payable and accrued expenses 521,924 121,986
Payable to affiliates (Note 3) 5,690 5,690
Payable for service fees (Note 3) 60,524 3,547
Commitments (Note 6) -- --
-------------- ------------
Total liabilities 16,515,583 4,686,449
-------------- ------------
Net assets $1,646,240,315 $107,255,846
============== ============
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized,
no par value, 51,537,358 and
8,670,943 shares outstanding,
respectively $1,281,376,793 $103,774,913
Accumulated undistributed net
investment income 13,807,254 403,045
Accumulated undistributed net
realized gains (losses)
from investment transactions 7,843,716 (160,277)
Net unrealized appreciation of investments 343,212,552 3,238,165
-------------- ------------
Net assets applicable to capital
shares outstanding $1,646,240,315 $107,255,846
============== ============
Net asset value, offering and redemption
price per share $31.94 $12.37
====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
31
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED OCTOBER 31, 1997
THIRD AVENUE
THIRD AVENUE SMALL-CAP
VALUE FUND VALUE FUND*
------------ ---------
Investment Income:
Interest-unaffiliated issuers $ 26,990,018 $ 763,362
Interest-affiliated issuers 115,691 --
Dividends-unaffiliated issuers 4,709,294** 102,857
Dividends-affiliated issuers 1,324,970 --
Other income 289,978 --
------------ ---------
Total investment income 33,429,951 866,219
------------ ---------
Expenses:
Investment advisory fees (Note 3) 9,303,435 252,298
Transfer agent fees 532,609 22,522
Service agent fees (Note 3) 379,786 6,602
Registration and filing fees 335,553 49,543
Reports to shareholders 324,797 14,408
Administration fees (Note 3) 269,859 27,476
Custodian fees (Note 4) 144,215 8,684
Professional fees 128,395 30,300
Accounting services 91,425 18,425
Insurance expenses 84,067 --
Directors' fees and expenses 56,418 24,131
Amortization of organizational expenses (Note 1) -- 7,541
Miscellaneous expenses 70,468 1,244
------------ ---------
Total operating expenses 11,721,027 463,174
------------ ---------
Net investment income 21,708,924 403,045
------------ ---------
Realized and unrealized gains (losses)
on investments:
Net realized gains (losses) on investments
-unaffiliated issuers 7,471,501 (160,277)
Net realized gains on investments -
affiliated issuers 1,892,646 --
Net realized loss on foreign currency
swap contracts
(Note 7) (4,303,734) --
Net change in unrealized appreciation
on investments 236,395,374 3,238,165
------------ ---------
Net realized and unrealized gains on
investments 241,455,787 3,077,888
------------ ---------
Net increase in net assets resulting from
operations $263,164,711 $3,480,933
============ =========
* Third Avenue Small-Cap Value Fund commenced investment operations
April 1, 1997.
** Net of foreign withholding tax of $33,359.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
32
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
STATEMENTS OF CHANGES IN NET ASSETS
THIRD AVENUE
THIRD AVENUE SMALL-CAP
VALUE FUND VALUE FUND*
------------------------- ---------
FOR THE FOR THE FOR THE
YEAR YEAR PERIOD
ENDED ENDED ENDED
10/31/97 10/31/96 10/31/97
------- ------- -------
OPERATIONS:
Net investment income $ 21,708,924 $ 11,780,896 $ 403,045
Net realized gains (losses)
on investments-
unaffiliated issuers 7,471,501 734,777 (160,277)
Net realized gains on
investments-
affiliated issuers 1,892,646 3,347,022 __
Net realized loss on
foreign currency
swap contracts (4,303,734) __ __
Net change in unrealized
appreciation
on investments 236,395,374 45,559,872 3,238,165
------------- ------------ ----------
Net increase in net
assets resulting
from operations 263,164,711 61,422,567 3,480,933
------------- ------------ ----------
DISTRIBUTIONS:
Dividends to shareholders from
net investment income (13,987,128) (6,118,869) __
Distributions to
shareholders from
net realized gains on
investments (3,539,465) (2,245,595) __
------------- ------------ ------------
(17,526,593) (8,364,464) __
------------- ------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 1,019,596,272 273,608,965 117,966,913
Net asset value of shares
issued in reinvestment
of dividends and
distributions 15,120,982 7,089,926 __
Cost of shares redeemed (200,962,398) (79,632,018) (14,192,000)
------------- ------------ ------------
Net increase in net assets
resulting from capital
share transactions 833,754,856 201,066,873 103,774,913
------------- ------------ ------------
Net increase in net assets 1,079,392,974 254,124,976 107,255,846
Net assets at beginning of
period 566,847,341 312,722,365 __
------------- ------------ ------------
Net assets at end of period
(including undistributed net
investment income of
$13,807,254,
$10,389,192 and
$403,045, respectively) $1,646,240,315 $566,847,341 $107,255,846
============== ============ ============
* Third Avenue Small-Cap Value Fund commenced investment operations April 1,
1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
33
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
Third Avenue Trust (the "Trust") is an open-end, non-diversified management
investment company organized as a Delaware business trust pursuant to a Trust
Instrument dated October 31, 1996. The Trust currently consists of two
separate investment series: Third Avenue Value Fund and Third Avenue
Small-Cap Value Fund (each a "Fund" and, collectively, the "Funds"). At the
close of business on March 31, 1997, shareholders of Third Avenue Value Fund,
Inc., a Maryland corporation which was incorporated on November 27, 1989 and
began operations on October 9, 1990, became shareholders of Third Avenue
Value Fund. Third Avenue Small-Cap Value Fund commenced investment operations
on April 1, 1997. Each Fund seeks to achieve its investment objective of
long-term capital appreciation by adhering to a strict value discipline when
selecting securities. While both Funds pursue a capital appreciation
objective, each Fund has a distinct investment approach.
Third Avenue Value Fund seeks to achieve its objective by investing in a
portfolio of equity securities of well-financed companies believed to be
priced below their private market values and debt securities providing
strong, protective covenants and high, effective yields.
Third Avenue Small-Cap Value Fund seeks to achieve its investment objective
by investing at least 65% of its assets in a portfolio of equity securities
of well-financed companies having market capitalizations of below $1 billion
at the time of investment and believed to be priced below their private
market values.
ACCOUNTING POLICIES:
The policies described below are followed consistently by the Funds in the
preparation of their financial statements in conformity with generally
accepted accounting principles.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
34
<PAGE>
[GRAPHIC OMITTED]
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SECURITY VALUATION:
Securities traded on a principal stock exchange or the National Association
of Securities Dealers' Automated Quotation System ("NASDAQ") are valued at
the last quoted sales price or, in the absence of closing sales prices on
that day, securities are valued at the mean between the closing bid and asked
price. Temporary cash investments are valued at cost, plus accrued interest,
which approximates market. Short-term securities with original or remaining
maturities in excess of 60 days are valued at the mean of their quoted bid
and asked prices. Short-term securities with 60 days or less to maturity are
amortized to maturity based on their cost if acquired within 60 days of
maturity, or if already held by the Fund on that day, based on the value
determined on that day.
The Funds may invest up to 15% of their total assets in securities which are
not readily marketable, including those which are restricted as to
disposition under applicable securities laws ("restricted securities").
Restricted securities and other securities and assets for which market
quotations are not readily available are valued at "fair value", as
determined in good faith by the Board of Trustees of the Funds, although
actual evaluations may be made by personnel acting under procedures
established by the Board. At October 31, 1997, such securities had a total
fair value of $133,919,557 or 8.13% of net assets of Third Avenue Value Fund
and $4,357,038 or 4.06% of net assets of Third Avenue Small-Cap Value Fund.
The cost of these securities are $106,566,901 and $2,700,000, respectively,
for the Third Avenue Value Fund and the Third Avenue Small-Cap Value Fund.
Among the factors considered by the Board of Trustees in determining fair
value are the type of security, trading in unrestricted securities of the
same issuer, the financial condition of the issuer, the Fund's cost at the
date of purchase, the percentage of the Fund's beneficial ownership of the
issuer's common stock and debt securities, the operating results of the
issuer, the discount from market value of any similar unrestricted securities
of the issuer at the time of purchase and liquidation values of the issuer.
The fair values determined in accordance with these procedures may differ
significantly from the amounts which would be realized upon disposition of
the securities. Restricted securities often have costs associated with
subsequent registration. The restricted securities currently held by the
Funds are not expected to incur any future registration costs.
35
<PAGE>
[GRAPHIC OMITTED]
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SECURITY TRANSACTIONS AND INVESTMENT INCOME:
Security transactions are accounted for on a trade date basis. Dividend
income is recorded on the ex-dividend date and interest income, including,
where applicable, amortization of premium and accretion of discount on
investments, is accrued daily, except when collection is not expected.
Realized gains and losses from security transactions are reported on an
identified cost basis.
FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS:
The books and records of the Funds are maintained in U.S. dollars. Foreign
currency amounts are translated into U.S. dollars as
follows:
o INVESTMENTS: At the prevailing rates of exchange on the valuation date.
o INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: At the prevailing rates of
exchange on the date of such transactions.
Although the net assets of the Funds are presented at the foreign exchange
rates and market values at the close of the period, the Funds do not isolate
that portion of the results of operations arising as a result of changes in
the foreign exchange rates from the fluctuations arising from changes in the
market prices of the securities held at period end. Similarly, the Funds do
not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of securities sold
during the period. Accordingly, realized and unrealized foreign currency
gains (losses) are included in the reported net realized and unrealized gains
(losses) on investment transactions and balances.
ORGANIZATIONAL COSTS:
Organizational costs of Third Avenue Small-Cap Value Fund amounting to
$66,000 are being amortized on a straight line basis over five years from
commencement of operations.
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income paid to shareholders and distributions
from realized gains on sales of securities are recorded on the ex-dividend
date. The amount of dividends and distributions from net investment income
and net realized capital gains are determined in accordance with Federal
income tax regulations which may differ from generally accepted accounting
principles. These "book/tax" differences are either temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital
36
<PAGE>
[GRAPHIC OMITTED]
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
accounts based on the their tax-basis treatment. Temporary differences do not
require reclassification. For the year ended October 31, 1997,
reclassifications of losses on foreign currency swap contracts resulted in a
decrease to Third Avenue Value Fund's accumulated undistributed net
investment income with an offsetting increase in accumulated net realized
gains of $4,303,734.
FEDERAL INCOME TAXES:
The Funds have complied and intend to continue to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies. Therefore, no Federal income tax provision is required.
CASH AND CASH EQUIVALENTS:
The Funds have defined cash and cash equivalents as cash in interest bearing
and non-interest bearing accounts.
EXPENSE ALLOCATION:
Expenses attributable to a Fund are charged to that Fund. Expenses
attributable to both Funds are allocated using the ratio of each Fund's net
assets relative to the total net assets of the Trust, unless otherwise
specified.
2. SECURITIES TRANSACTIONS
Purchases and sales/conversions:
The aggregate cost of purchases, and aggregate proceeds from sales and
conversions of investments, excluding short-term investments, from
unaffiliated and affiliated issuers (as defined in the Investment Company Act
of 1940, as amended, ownership of 5% or more of the outstanding common stock
of the issuer) for the period ended October 31, 1997 were as follows:
PURCHASES SALES
----------- -----------
Third Avenue Value Fund:
affiliated $ 91,574,042 $ 6,020,911
unaffiliated 303,431,780 66,702,229
Third Avenue Small-Cap Value Fund:
affiliated -- --
unaffiliated 64,443,513 1,664,238
37
<PAGE>
[GRAPHIC OMITTED]
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At October 31, 1997, cost, gross unrealized appreciation and gross unrealized
depreciation, for Federal income tax purposes were as follows:
<TABLE>
<CAPTION>
COST GROSS APPRECIATION GROSS DEPRECIATION NET APPRECIATION
--------------- ------------------- -------------------- ------------------
<S> <C> <C> <C> <C>
Third Avenue Value Fund $1,303,744,443 $349,745,728 ($6,500,726) $343,245,002
Third Avenue Small-Cap
Value Fund 106,712,540 6,400,877 (3,322,989) 3,077,888
</TABLE>
3. INVESTMENT ADVISORY SERVICES AND SERVICE FEE AGREEMENT
The Funds have an Investment Advisory Agreement with EQSF Advisers, Inc. (the
"Adviser") for investment advice and certain management functions. The terms
of the Investment Advisory Agreement provide for a monthly fee of 1/12 of
0.90% (an annual fee of 0.90%) of the total average daily net assets of each
Fund, payable each month. Additionally, under the terms of the Investment
Advisory Agreement, the Adviser pays certain expenses on behalf of the Funds,
which are reimbursable by the Funds, including salaries of non-officer
employees, rent and other miscellaneous expenses. Amounts reimbursed with
respect to non-officer salaries and rent are included under the caption
Administration fees. At October 31, 1997, Third Avenue Value Fund and Third
Avenue Small-Cap Value Fund had payables to affiliates of $5,690 each, for
reimbursement of expenses paid by such affiliates. Whenever, in any fiscal
year, a Fund's normal operating expenses, including the investment advisory
fee, but excluding brokerage commissions and interest and taxes, exceeds
1.90% of the first $100 million of the Funds' average daily net assets, and
1.50% of average daily net assets in excess of $100 million, the Adviser is
obligated to reimburse the Fund in an amount equal to that excess. No expense
reimbursement was required for Third Avenue Value Fund or Third Avenue
Small-Cap Value Fund for the period ended October 31, 1997.
The Trust has entered into shareholder servicing agreements with certain
service agents for which the service agents receive a fee of up to 0.10% of
the average daily net assets invested into the Trust by the agents' customers
in an omnibus account. In exchange for these fees, the service agents render
to such customers, various administrative services, which the Trust would
otherwise be obligated to provide at its own expense.
38
<PAGE>
[GRAPHIC OMITTED]
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS
Brokerage commissions:
Martin J. Whitman, the Chairman and a director of the Funds, is the Chairman
and Chief Executive Officer of M.J. Whitman Holding Corp., which is the
parent of both M.J. Whitman, Inc., a registered broker-dealer and M.J.
Whitman Senior Debt Corp., a dealer in the trading of bank debt and other
private claims. For the period ended October 31, 1997, Third Avenue Value
Fund and Third Avenue Small-Cap Value Fund incurred total brokerage
commissions of $620,345 and $78,938, respectively, of which approximately
$460,641 and $50,977, respectively, was earned by M.J. Whitman, Inc., and
with respect to Third Avenue Value Fund, $18,047 was earned by M.J. Whitman
Senior Debt Corp. At October 31, 1997, Third Avenue Value Fund and Third
Avenue Small-Cap Value Fund's payables for securities purchased included
unsettled trades with M.J. Whitman, Inc. of $6,527,267 and $2,682,032,
respectively.
Investment in affiliates:
A summary of Third Avenue Value Fund's transactions in securities of
affiliated issuers for the year ended October 31, 1997 is set forth below:
<TABLE>
<CAPTION>
DIVIDEND/
SHARES SHARES/ INTEREST
HELD AT SHARES/ PRINCIPAL INCOME
OCT. 31, PRINCIPAL SHARES HELD AT VALUE AT NOV. 1, 1996-
NAME OF ISSUER: 1996 PURCHASED SOLD OCT. 31, 1997 OCT. 31, 1997 OCT. 31, 1997
- --------------- -------- --------- ---- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ACMAT Corp. Class A 189,978 -- -- 189,978 $ 3,478,972 --
Carver Bancorp, Inc. 218,500 -- -- 218,500 2,785,875 $ 10,925
CGA Group, Ltd. 0 838,710 -- 838,710 4,193,550 --
CGA Group, Ltd., Series A 0 207,969 -- 207,969 5,199,227 199,227
CGA Group, Ltd., Series B 0 171,429 -- 171,429 4,285,725 --
CGA Special Account Trust 0 $6,428,575 -- $6,428,575 6,428,575 115,691
Danielson Holding Corp. 803,669 -- -- 803,669 6,328,893 --
Electro Scientific Industries, Inc. 555,700 -- -- 555,700 26,951,450 --
Electroglas, Inc. 1,050,000 20,000 -- 1,070,000 20,330,000 --
First American Financial Corp. 615,000 199,700 -- 814,700 49,085,675 530,986
FSI International, Inc. 561,100 973,150 -- 1,534,250 26,465,813 --
Interphase Corp. 300,000 -- -- 300,000 2,212,500 --
Mountbatten, Inc. 293,000 -- -- 293,000 3,662,500 --
Piper Jaffray Companies Inc. 462,100 -- 315,800 146,300 * 85,980
Progressions Health Systems, Inc. 288,438 -- 288,438 0 * --
Ryan, Beck & Co., Inc.161,941 -- -- 161,941 * 12,955
Stewart Information Services Corp. 445,800 529,900 -- 975,700 25,063,294 180,337
St. George Holdings, Ltd. Class A 0 912,442 -- 912,442 91,244 --
St. George Holdings, Ltd. Class B 0 7,549 -- 7,549 755 --
Tecumseh Products Co. Class A 33,200 -- -- 33,200 1,722,250 59,760
Tecumseh Products Co. Class B 98,600 259,900 -- 358,500 18,731,625 244,800
Tejon Ranch Co. 0 3,045,508 -- 3,045,508 66,346,970 --
Vertex Communications Corp. 301,900 5,000 -- 306,900 7,730,044 --
------------ ----------
TOTAL AFFILIATES $281,094,937 $1,440,661
============ ==========
</TABLE>
*As of October 31, 1997, no longer an affiliate.
39
<PAGE>
[GRAPHIC OMITTED]
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL SHARE TRANSACTIONS
Each Fund is authorized to issue an unlimited number of shares of beneficial
interest with no par value. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
THIRD AVENUE VALUE FUND THIRD AVENUE SMALL-CAP VALUE FUND
------------------------------------ ---------------------------------
FOR THE FOR THE FROM APRIL 1, 1997
YEAR ENDED YEAR ENDED (COMMENCEMENT OF OPERATIONS) TO
OCTOBER 31, 1997 OCTOBER 31, 1996 OCTOBER 31, 1997
----------------- ----------------- --------------------------------
Increase in Fund shares:
<S> <C> <C> <C>
Shares outstanding at beginning
of period 23,364,688 14,524,055 0
Shares sold 34,497,303 12,005,739 9,845,798
Shares reinvested from dividends
and distributions 584,725 325,226 0
Shares redeemed (6,909,358) (3,490,332) (1,174,855)
----------- ----------- -----------
Net increase in Fund shares 28,172,670 8,840,633 8,670,943
----------- ----------- -----------
Shares outstanding at end of period 51,537,358 23,364,688 8,670,943
=========== =========== ===========
</TABLE>
6. COMMITMENTS
Third Avenue Value Fund has committed a $5,000,000 capital investment to Head
Insurance Investors LP of which $3,136,000 has been funded as of October 31,
1997. Securities valued at $1,889,175 have been segregated to meet the
requirements of this commitment. This commitment may be payable upon demand
of Head Insurance Investors LP.
7. FOREIGN CURRENCY SWAP CONTRACTS
Third Avenue Value Fund has entered into foreign currency swaps to exchange
Japanese Yen for U.S. Dollars. A swap is an agreement that obligates two
parties to exchange a series of cash flows at specified intervals based upon
or calculated by reference to changes in specified prices or rates for a
specified amount of an underlying asset. These swaps are used to hedge the
Fund's exposure to Japanese Yen denominated securities and the Japanese
market. The payment flows are usually netted against each other, with the
difference being paid by one party to the other. For the year ended October
31, 1997, the Fund realized losses of $4,303,734 upon the termination of swap
contracts.
40
<PAGE>
[GRAPHIC OMITTED]
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. FOREIGN CURRENCY OPTION CONTRACTS
An option contract gives the buyer the right, but not the obligation to buy
(call) or sell (put) an underlying item at a fixed exercise price on a
certain date or during a specified period. The use of option strategies
provide Third Avenue with protection against a rally in the U.S. dollar
versus the Japanese Yen while retaining the benefits of an appreciation in
Japanese Yen on equity holdings.
9. RISKS RELATING TO CERTAIN INVESTMENTS
FOREIGN SECURITIES:
The Funds intend to limit their investments in foreign securities to
companies issuing U.S. dollar-denominated American Depository Receipts or who
otherwise comply substantially with Securities & Exchange Commission ("SEC")
disclosure requirements. Investments in the securities of foreign issuers may
involve investment risks different from those of U.S. issuers including
possible political or economic instability of the country of the issuer, the
difficulty of predicting international trade patterns, the possibility of
currency exchange controls, the possible imposition of foreign withholding
tax on the dividend income and interest income payable on such instruments,
the possible establishment of foreign controls, the possible seizure or
nationalization of foreign deposits or assets, or the adoption of other
foreign government restrictions that might adversely affect the foreign
securities held by the Fund. Foreign securities may also be subject to
greater fluctuations in price than securities of domestic corporations or the
U.S. Government.
HIGH YIELD DEBT:
Third Avenue Value Fund currently invests in high yield lower grade debt. The
market values of these higher yielding debt securities tend to be more
sensitive to economic conditions and individual corporate developments than
those of higher rated securities. In addition, the secondary market for these
bonds is generally less liquid.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS:
Third Avenue Value Fund invests in loans and other direct debt instruments
issued by corporate borrowers. These loans represent amounts owed to lenders
or lending syndicates (loans and loan participations) or to other parties.
Direct debt instruments may involve a risk of loss in case of default or
insolvency of the borrower and may offer less legal protection to the Fund in
the event of fraud or misrepresentation. In addition, loan participations
involve a risk of insolvency of the lend-
41
<PAGE>
[GRAPHIC OMITTED]
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ing bank or other financial intermediary. The markets in loans are not
regulated by federal securities laws or the SEC.
TRADE CLAIMS:
Third Avenue Value Fund invests in trade claims. Trade claims are interests
in amounts owed to suppliers of goods or services and are purchased from
creditors of companies in financial difficulty. An investment in trade claims
is speculative and carries a high degree of risk. Trade claims are illiquid
securities which generally do not pay interest and there can be no guarantee
that the debtor will ever be able to satisfy the obligation on the trade
claim. The markets in trade claims are not regulated by federal securities
laws or the SEC. Because trade claims are unsecured, holders of trade claims
may have a lower priority in terms of payment than certain other creditors in
a bankruptcy proceeding.
10. LOANS OF PORTFOLIO SECURITIES
Third Avenue Small-Cap Value Fund loaned securities during the period to
certain brokers, with the Fund's custodian acting as lending agent. Upon such
loan, the Fund receives collateral which is maintained by the custodian and
earns income in the form of negotiated lenders' fees, which are included in
interest income in the Statement of Operations. On a daily basis, the Fund
monitors the market value of securities loaned and maintains collateral
against the securities loaned in an amount at least equal to 102% of the
value of the security loaned. The cash collateral received is invested in a
short-term instrument. The Fund had no securities on loan at October 31,
1997. Risks may arise upon entering into securities lending to the extent
that the value of the collateral declines below the value of the securities
loaned.
11. SUBSEQUENT EVENT
On November 12, 1997, the Funds declared dividends from estimated
undistributed net investment income through December 31, 1997. These
dividends will amount to approximately $0.400 and $0.059 per share from Third
Avenue Value Fund and Third Avenue Small-Cap Value Fund, respectively. Third
Avenue Value Fund also declared distributions from long-term and short-term
capital gains through October 31, 1997, which will amount to approximately
$0.111 and $0.049, respectively. These distributions are payable January 6,
1998 to Fund shareholders of record on December 30, 1997. These distributions
are payable in cash or, for those shareholders who have elected the
reinvestment option, in additional Fund shares at the Fund's net asset value
on December 31, 1997, the ex-dividend date.
42
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
FINANCIAL HIGHLIGHTS
SELECTED DATA AND RATIOS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) ARE AS
FOLLOWS:
<TABLE>
<CAPTION>
THIRD AVENUE
THIRD AVENUE SMALL-CAP
VALUE FUND VALUE FUND*
------------------------------------------------------------------- ---------
FOR THE
YEARS ENDED OCTOBER 31, PERIOD
------------------------------------------------------------------- ENDED
1997 1996 1995 1994 1993 10/31/97
---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning
of Period $24.26 $21.53 $18.01 $17.92 $13.57 $10.00
Income from Investment ------ ------ ------ ------ ------ ------
Operations:
Net investment income .48 .53 .38 .29 .18 .05
Net gain on securities
(both realized and
unrealized) 7.92 2.76 3.53 .16 4.77 2.32
------ ------ ------ ------ ------ ------
Total from Investment
Operations 8.40 3.29 3.91 .45 4.95 2.37
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends from net
investment income (.57) (.41) (.25) (.22) (.24) .00
Distributions from
realized gains (.15) (.15) (.14) (.14) (.36) .00
------ ------ ------ ------ ------ ------
Total Distributions (.72) (.56) (.39) (.36) (.60) .00
------ ------ ------ ------ ------ ------
Net Asset Value,
End of Period $31.94 $24.26 $21.53 $18.01 $17.92 $12.37
====== ====== ====== ====== ====== ======
Total Return 35.31% 15.55% 22.31% 2.56% 37.36% 23.70%2
Ratios/Supplemental Data:
Net Assets, End of Period
(in thousands) $1,646,240 $566,847 $312,722 $187,192 $118,958 $107,256
Ratio of Expenses to
Average Net Assets 1.13% 1.21% 1.25% 1.16% 1.42% 1.65%1
Ratio of Net Income to
Average Net Assets 2.10% 2.67% 2.24% 1.85% 1.45% 1.44%1
Portfolio Turnover Rate 10% 14% 15% 5% 17% 7%2
Average Commission
Rate Paid 0.037 0.031 n/a n/a n/a 0.0339
</TABLE>
1 Annualized
2 Not Annualized
* Third Avenue Small-Cap Value Fund commenced investment operations April 1,
1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
43
<PAGE>
[GRAPHIC OMITTED]
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF
THIRD AVENUE TRUST
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Third Avenue Value Fund and Third
Avenue Small-Cap Value Fund, (together the "Funds," two series comprising the
Third Avenue Trust), at October 31, 1997 and the results of their operations,
the changes in their net assets and the financial highlights for each of the
periods presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1997 by correspondence with the custodians and brokers, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
December 19, 1997
44
<PAGE>
FEDERAL TAX STATUS OF DIVIDENDS (UNAUDITED)
The following information represents the tax status of dividends and
distributions paid by the Third Avenue Value Fund during the fiscal year ended
October 31, 1997. This information is presented to meet regulatory requirements
and no current action on your part is required.
Of the $0.718 per share paid to you in cash or reinvested into your account for
the fiscal year ended October 31, 1997, $0.573 was derived from net investment
income, $0.065 from short-term capital gains and $0.08 from long term capital
gains. 26.51% of the income distributed qualifies for the Corporate Dividends
Received Deduction.
45
<PAGE>
BOARD OF TRUSTEES
Phyllis W. Beck
Tibor Fabian
Gerald Hellerman
Marvin Moser
Myron M. Sheinfeld
Martin Shubik
Charles C. Walden
Barbara Whitman
Martin J. Whitman
OFFICERS
Martin J. Whitman
Chairman, Chief Executive Officer, President
David M. Barse
Chief Operating Officer, Executive Vice President
Michael Carney
Chief Financial Officer, Treasurer
Kerri Weltz, Assistant Treasurer
Ian M. Kirschner, General Counsel and Secretary
TRANSFER AGENT
FPS Services, Inc.
P.O. Box 61503
King of Prussia, PA 19406-0903
(610) 239-4600
(800) 443-1021 (toll-free)
INVESTMENT ADVISER
EQSF Advisers, Inc.
767 Third Avenue
New York, NY 10017-2023
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
CUSTODIANS
THIRD AVENUE VALUE FUND THIRD AVENUE SMALL-CAP VALUE FUND
North American Trust Company Custodial Trust Company
225 Broadway 101 Carnegie Center
San Diego, CA 92101-4492 Princeton, NJ 08540-6231
[GRAPHIC OMITTED]
767 THIRD AVENUE
NEW YORK, NY 10017-2023
Phone (212) 888-6685
Toll Free (800) 443-1021
Fax (212) 888-6757
www.mjwhitman.com
