THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP VALUE FUND
THIRD AVENUE HIGH YIELD FUND
PROSPECTUS
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February 1, 1998
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Contents
FUND EXPENSES 3
FINANCIAL HIGHLIGHTS 5
ABOUT THE FUNDS 7
Investment Objectives 7
INVESTMENT PHILOSOPHY AND APPROACH 9
Value Discipline 9
Intensive Research 9
Diversification 9
Buy and Hold 9
Investment in Equity Securities 9
Investment in Debt Securities 10
Convertible Securities 11
Mortgage-Backed Securities 11
Asset-Backed Securities 12
Floating Rate, Inverse Floating Rate and Index Obligations 12
Investment in High Yield Debt Securities 13
Zero-Coupon and Pay-in-Kind Securities 14
Loans and Other Direct Debt Instruments 15
Trade Claims 15
Portfolio Practices 16
Foreign Securities 16
Foreign Currency Transactions 16
Restricted and Illiquid Securities 17
Investment in Relatively New Issues 18
Temporary Defensive Investments 18
Borrowing 18
Investment in Other Investment Companies 18
Simultaneous Investments 19
Restrictions on Investments 19
Securities Lending 19
Portfolio Turnover 20
MANAGEMENT OF THE FUNDS 21
The Investment Adviser 21
Advisory Fees 22
Administrator 22
Distributor 23
Custodian and Transfer Agent 23
Portfolio Trading Practices 23
PERFORMANCE INFORMATION 25
Performance Illustration 25
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES 27
Distribution Options 28
Withholding 29
HOW TO PURCHASE SHARES 30
Business Hours 30
Determining Net Asset Value 30
Share Certificates 31
Through an Authorized Broker-Dealer or Investment Adviser 31
New Accounts 31
Initial Investment 31
By Mail 31
By Wire 32
Additional Investments By Mail 32
Additional Investments Through
the Automatic Investment Plan 33
Individual Retirement Accounts 33
Other Retirement Plans 33
HOW TO REDEEM SHARES 34
By Mail 34
Telephone Redemption Service 34
Fees 34
Redemption Without Notice 35
Account Minimum 35
Payment of Redemption Proceeds 35
Wired Proceeds 35
Signature Guarantees/Other Documents 36
Systematic Withdrawal Plan 36
Early Redemption Fee 36
HOW TO EXCHANGE SHARES 38
Inter-Fund Exchange Privilege 38
Money Market Exchange Privilege 38
Early Redemption Fee 39
SHAREHOLDER SERVICES 40
Telephone Information 40
TRANSFER OF OWNERSHIP 41
DESCRIPTION OF CORPORATE BOND RATINGS 42
Standard & Poor's Ratings Group 42
Moody's Investor's Service, Inc. 44
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Third Avenue Trust (the "Trust") is an open-end, non-diversified, management
investment company organized as a Delaware business trust. The Trust currently
consists of three separate investment series; THIRD AVENUE VALUE FUND, THIRD
AVENUE SMALL-CAP VALUE FUND and THIRD AVENUE HIGH YIELD FUND (each a "Fund" and,
collectively, the "Funds").
Each of THIRD AVENUE VALUE FUND and THIRD AVENUE SMALL-CAP VALUE FUND seeks to
achieve its investment objective of long-term capital appreciation by adhering
to a strict value discipline when selecting securities. While both such Funds
pursue a capital appreciation objective, each Fund has a distinct investment
approach. THIRD AVENUE HIGH YIELD FUND seeks to achieve its objective of
maximizing total return by adhering to a similar value discipline in selecting
securities.
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 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.
THIRD AVENUE HIGH YIELD FUND seeks to achieve its objective by investing at
least 65% of its assets in a portfolio of non-investment grade fixed income or
other debt securities of companies whose capital structures, in the opinion of
EQSF Advisers, Inc., the Fund's investment adviser, have a market value priced
below their private market values.
Some of the securities in which the Funds may invest are regarded as
speculative. As with all mutual funds, there is no assurance the Funds will
achieve their objectives. The Funds are not intended to be a complete investment
program.
THIRD AVENUE HIGH YIELD FUND INTENDS TO INVEST AT LEAST 65% OF ITS TOTAL ASSETS
IN MEDIUM AND LOWER RATED AND COMPARABLE UNRATED FIXED INCOME AND OTHER DEBT
SECURITIES, COMMONLY REFERRED TO AS "JUNK BONDS." THESE SECURITIES ARE
CONSIDERED TO BE SPECULATIVE WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN
OF PRINCIPAL AND INVOLVE GREATER VOLATILITY OF PRICE THAN HIGHER QUALITY FIXED
INCOME SECURITIES. INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH
AN INVESTMENT IN JUNK BONDS BEFORE INVESTING IN THIRD AVENUE HIGH YIELD FUND.
SEE "INVESTMENT IN HIGH YIELD DEBT SECURITIES."
This Prospectus contains important information about the Funds that a
prospective investor should know before investing. It should be read and
retained for future reference. A Statement of Additional Information ("SAI"),
dated February 1, 1998, about the Funds has been filed with the Securities and
Exchange Commission and is incorporated by reference into this Prospectus. You
can obtain the SAI without charge by writing or calling the Funds at 767 Third
Avenue, New York, NY 10017-2023, (800) 443-1021 or (212) 888-6685. The SAI,
material incorporated by reference into this Prospectus, and any other
information regarding the Funds are maintained electronically with the
Securities and Exchange Commission at its Internet Web sight
(http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Each Fund's objective is suitable for investors who are willing to hold their
shares through periods of market fluctuations and the accompanying changes in
prices of the Funds' portfolio securities and, in the case of THIRD AVENUE HIGH
YIELD FUND, for investors seeking current income. The Funds are not intended for
investors seeking short-term price appreciation or for "market timers."
Shares of each Fund are sold and redeemed at net asset value. See "How to
Purchase Shares" and "How to Redeem Shares."
No person is authorized by the Funds to give any information or make any
representation other than those contained herein or in other printed or written
material issued by the Funds, and no person is entitled to rely upon any other
information or representation.
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FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
the Funds will incur.
<TABLE>
<CAPTION>
THIRD AVENUE
THIRD AVENUE SMALL-CAP THIRD AVENUE
VALUE FUND VALUE FUND HIGH YIELD FUND
SHAREHOLDER TRANSACTION EXPENSES:
<S> <C> <C> <C>
Sales Load Imposed on Purchases None None None
Sales Load Imposed on Reinvested Dividends None None None
Deferred Sales Load None None None
Redemption Fee Payable to the Fund None None 1.00%*
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of net assets)
Management Fees .90% .90% .90%
12b-1 Fees None None None
Other Expenses .23% .75% 1.00% (after waivers)
----- ------ -----
Total Fund Operating Expenses 1.13% 1.65% 1.90% (after waivers)
===== ===== =====
</TABLE>
Example
The following example illustrates the expenses that a shareholder would pay on a
$1,000 investment, assuming a 5% annual rate of return and redemption at the end
of each time period.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
THIRD AVENUE VALUE FUND $12 $36 $63 $138
THIRD AVENUE SMALL-CAP
VALUE FUND $17 $52 $90 $197
THIRD AVENUE HIGH YIELD FUND $30 $60
The purpose of this table is to assist investors in understanding the various
costs and expenses that investors will bear directly or indirectly. The expenses
of THIRD AVENUE VALUE FUND are based on actual expenses incurred for the fiscal
year ended October 31, 1997. The other expenses of THIRD AVENUE SMALL-CAP VALUE
FUND are estimated based on actual expenses incurred for the period April 1,
1997, commencement of operations, to October 31, 1997. THIRD AVENUE HIGH YIELD
FUND commenced operations
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on or about February 10, 1998. Because THIRD AVENUE HIGH YIELD FUND has no
operating history, "Other Expenses" is based on estimated amounts for the
current fiscal year. From time to time, the Adviser may voluntarily waive
receipt of its fees and/or assume certain expenses of the Funds which would have
the effect of lowering the expense ratio and increasing the yield to investors.
The expenses noted above for THIRD AVENUE HIGH YIELD FUND, without
reimbursement, would be: "Other Expenses" 1.84% and "Total Fund Operating
Expenses" 2.74%. In addition, shareholders of each Fund pay a $9 charge for
redemptions by wire. For a further description of the various costs and expenses
incurred in the Funds' operations, as well as any reimbursements or waiver
arrangements, see "Management of the Funds."
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
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* There will be a 1% fee retained by THIRD AVENUE HIGH YIELD FUND which is
imposed only on redemptions or exchanges of shares held less than one
year. For additional information, see "How to Redeem Shares - Early
Redemption Fee" and "How to Exchange Shares - Early Redemption Fee."
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FINANCIAL HIGHLIGHTS
THIRD AVENUE TRUST
The following sets forth information for THIRD AVENUE VALUE FUND and THIRD
AVENUE SMALL-CAP VALUE FUND regarding per share income and capital changes from
each of the Fund's commencement of operations to October 31, 1997, the end of
the Funds' most recent fiscal year. These Financial Highlights have been audited
by Price Waterhouse LLP, independent accountants, whose unqualified report on
the October 31, 1997 financial statements appears in the Funds' Annual Report to
Shareholders. This information should be read in conjunction with the financial
statements and accompanying notes appearing in the 1997 Annual Report to
Shareholders which are incorporated by reference into the SAI.
Because the Trust's new Fund, THIRD AVENUE HIGH YIELD FUND, commenced investment
operations on or about February 10, 1998, no financial highlights are available.
THIRD AVENUE VALUE FUND: SELECTED DATA AND RATIOS (Years Ended October 31,)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $24.26 $21.53 $18.01 $17.92 $13.57 $12.80 $10.00
------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .48 .53 .38 .29 .18 .19 .15
Net gain on securities
(both realized and unrealized) 7.92 2.76 3.53 .16 4.77 .64 4.65
----- ----- ----- ---- ----- ---- -----
Total from Investment Operations 8.40 3.29 3.91 .45 4.95 .83 4.80
---- ----- ----- ---- ----- ---- -----
LESS DISTRIBUTIONS:
Dividends from net investment income (.57) (.41) (.25) (.22) (.24) (.02) (.15)
Distributions from net realized gains (.15) (.15) (.14) (.14) (.36) (.04) (1.85)
----- ------ ------ ------ ------ ------ ------
Total Distributions (.72) (.56) (.39) (.36) (.60) (.06) (2.00)
-------- -------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR $31.94 $24.26 $21.53 $18.01 $17.92 $13.57 $12.80
======== ======== ======= ======= ======= ======= =======
TOTAL RETURN 35.31% 15.55% 22.31% 2.56% 37.36% 6.50% 49.16%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Year
(in thousands) $1,646,240 $566,847 $312,722 $187,192 $118,958 $31,387 $17,641
Ratio of Expenses to Average
Net Assets 1.13% 1.21% 1.25% 1.16% 1.42% 2.32% 2.50%
Ratio of Net Income to Average
Net Assets 2.10% 2.67% 2.24% 1.85% 1.45% 1.71% 1.71%
Portfolio Turnover Rate 10% 14% 15% 5% 17% 31% 67%
Average Commission Rate $ 0.0376 $0.0318 ------ ------ ------ ------ ------
</TABLE>
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THIRD AVENUE SMALL-CAP VALUE FUND: SELECTED DATA AND RATIOS
(Period from April 1, 1997* to October 31,)
1997
----
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .05
Net gain on securities
(both realized and unrealized) 2.32
----
Total from Investment Operations 2.37
----
NET ASSET VALUE, END OF PERIOD 12.37
-----
TOTAL RETURN 23.70% 1
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period
(in thousands) $107,256
Ratio of Expenses to Average Net Assets 1.65% 2
Ratio of Net Income to Average Net Assets 1.44% 2
Portfolio Turnover Rate 7% 1
Average Commission Rate $0.0339
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1 Not Annualized
2 Annualized
* Commencement of investment operations
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ABOUT THE FUNDS
Third Avenue Trust (the "Trust") was organized as a business trust under the
laws of the state of Delaware pursuant to a Trust Instrument dated October 31,
1996. At the close of business on March 31, 1997, shareholders of Third Avenue
Value Fund, Inc. ("Third Avenue Maryland"), a Maryland corporation which was
incorporated on November 27, 1989 and began operations on October 9, 1990,
became shareholders of THIRD AVENUE VALUE FUND, a series of the Trust, pursuant
to a merger agreement which was approved by a majority of Third Avenue
Maryland's shareholders on December 13, 1996. Upon this merger, all assets,
privileges, powers, franchises, liabilities and obligations of Third Avenue
Maryland were assumed by the Trust. Except as noted herein, all information
about THIRD AVENUE VALUE FUND includes information about its predecessor, Third
Avenue Maryland. THIRD AVENUE SMALL-CAP VALUE FUND, a series of the Trust,
commenced investment operations on April 1, 1997.
INVESTMENT OBJECTIVES
The investment objective of each of THIRD AVENUE VALUE FUND and THIRD AVENUE
SMALL-CAP VALUE FUND is long-term capital appreciation. The investment objective
of THIRD AVENUE HIGH YIELD FUND is to maximize total return through a
combination of income and capital appreciation. Each investment objective is a
fundamental policy and may not be changed without the affirmative vote of a
majority of that Fund's outstanding voting securities. In pursuit of the Funds'
investment objectives, the research efforts of the Funds' Adviser, EQSF
Advisers, Inc., emphasize analysis of documents, especially stockholder mailings
and Securities and Exchange Commission ("SEC") filings by issuers. The Adviser's
intensive research process, combined with the Adviser's investment philosophy,
may mean that any or all Funds may be constructed using a relatively limited
number of securities.
THIRD AVENUE VALUE FUND seeks to achieve its objective by following a value
investing philosophy to acquire common stocks of well-financed companies at a
substantial discount to the Adviser's estimate of the issuing company's private
market value or takeover value. The Fund also seeks to acquire senior
securities, such as preferred stocks and debt instruments, that have strong
covenant protections and above-average current yields, yields to events, or
yields to maturity. See "Investment in Equity Securities" and "Investment in
Debt Securities."
THIRD AVENUE SMALL-CAP VALUE FUND seeks to achieve its objective by following a
value investing philosophy that seeks to acquire common stocks
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of well-financed companies at a substantial discount to the Adviser's estimate
of the issuing company's private market value or takeover value. The Fund
intends to invest at least 65% of its total assets in the equity securities of
companies whose aggregate shares outstanding have a market value of less than $1
billion at the time of investment. See "Investment in Equity Securities."
THIRD AVENUE HIGH YIELD FUND seeks to achieve its objective by following a value
investing philosophy that seeks to acquire senior securities such as debt
instruments and preferred securities, both straight and convertible, of
companies whose securities are rated primarily below investment grade. The Fund
intends to invest at least 65% of its assets in a portfolio of non-investment
grade fixed income and other debt securities of companies whose capital
structures, in the opinion of the Adviser, have a market value priced below
their private market values. Securities emphasized will have above-average
yields in the case of straight senior issues, and in the case of convertible
issues, the possibility of capital appreciation should the underlying common
stock increase in value. See "Investment in High Yield Debt Securities" and
"Convertible Securities."
The Adviser may seek investments in the securities of companies in industries
that are temporarily depressed. The Adviser also seeks investments for THIRD
AVENUE VALUE FUND and THIRD AVENUE SMALL-CAP VALUE FUND in equity securities of
companies where debt service1 consumes a small part of such companies' cash
flow.
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1 "Debt Service" means the current annual required payment of interest and
principal to creditors.
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INVESTMENT PHILOSOPHY AND APPROACH
VALUE DISCIPLINE
The Adviser adheres to a strict value discipline when selecting securities for
the Funds. Contrary to conventional wisdom, which says that you have to take
greater risks to reap greater rewards, the Adviser seeks to invest in a
portfolio of securities where the prices at the time of acquisition are low
enough so that the Adviser can conclude that both the risk is lowered and
appreciation potential is enhanced.
INTENSIVE RESEARCH
The Adviser believes that value is created more by past corporate prosperity
than by bear markets. For this reason, the Adviser conducts intensive bottom-up
research to identify investment opportunities, and ignores general stock market
conditions and other macro factors.
DIVERSIFICATION
The Adviser believes that knowledge gained through intensive research lends more
toward reducing investment risk than does diversification. However, the Funds
will remain diversified in general, although probably less diversified than
other mutual funds of comparable size.
BUY AND HOLD
The Adviser follows a strategy of "buy and hold." This approach to achieving
growth over the long term means that the Funds should experience low turnover,
minimizing transaction costs and tax consequences.
INVESTMENT IN EQUITY SECURITIES
In selecting equity securities, the Adviser seeks issuing companies that exhibit
the following characteristics:
(1) A strong financial position, as measured not only by balance sheet data
but also by off-balance sheet assets, liabilities and contingencies (as
disclosed in footnotes to financial statements and as determined through
research of public information).
(2) Responsible management and control groups, as gauged by managerial
competence as operators and investors as well as by an apparent absence of
intent to profit at the expense of stockholders.
(3) Availability of comprehensive and meaningful financial and related
information. A key disclosure is audited financial statements and
information which the Adviser believes are reliable benchmarks to aid in
understanding the business, its values and its dynamics.
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(4) Availability of the security at a market price which the Adviser believes
is at a substantial discount to the Adviser's estimate of what the issuer
is worth as a private company or as a takeover or merger and acquisition
candidate.
Although the Adviser does not pay attention to market factors in making
investment decisions, the Funds are, of course, subject to the vagaries of the
markets. In particular, small-cap stocks have less market liquidity and tend to
have more price volatility than larger capitalization stocks.
INVESTMENT IN DEBT SECURITIES
Each of THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND intends its
investment in debt securities to be, for the most part, in securities which the
Adviser believes will provide above-average current yields, yields to events, or
yields to maturity. In selecting debt instruments for THIRD AVENUE VALUE FUND,
the Adviser requires the following characteristics:
1) Strong covenant protection, and
2) Yield to maturity at least 500 basis points above that of a comparable
credit.
In acquiring debt securities for THIRD AVENUE VALUE FUND, the Adviser generally
will look for covenants which protect holders of the debt issue from possible
adverse future events such as, for example, the addition of new debt senior to
the issue under consideration. Also, the Adviser will seek to analyze the
potential impacts of possible extraordinary events such as corporate
restructurings, refinancings, or acquisitions. The Adviser will also use its
best judgment as to the most favorable range of maturities. In general, THIRD
AVENUE VALUE FUND will acquire debt issues which have a senior position in an
issuer's capitalization and will avoid "mezzanine" issues such as
non-convertible subordinated debentures. THIRD AVENUE HIGH YIELD FUND may invest
in such "mezzanine" issues.
The market value of debt securities is affected by changes in prevailing
interest rates. When prevailing interest rates fall, the market values of debt
securities generally rise. Conversely, when interest rates rise, the market
values of debt securities generally decline. The magnitude of these fluctuations
will be greater when the average maturity of the portfolio securities is longer.
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CONVERTIBLE SECURITIES
THIRD AVENUE HIGH YIELD FUND intends to invest in convertible securities, which
are bonds, debentures, notes, preferred stocks or other securities that may be
converted into or exchanged for a prescribed amount of equity securities
(generally common stock) of the same or a different issuer within a particular
period of time at a specified price or formula. Convertible securities have
general characteristics similar to both fixed income and equity securities.
Yields for convertible securities tend to be lower than for non-convertible debt
securities but higher than for common stocks. Although to a lesser extent than
with fixed income securities generally, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the conversion
feature, the market value of convertible securities tends to vary with
fluctuations in the market value of the underlying security and therefore also
will react to variations in the general market for equity securities. While no
securities investments are without risk, investments in convertible securities
generally entail less risk than investments in common stock of the same issuer.
MORTGAGE-BACKED SECURITIES
Both THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND intend to invest
in mortgage-backed securities and derivative mortgage-backed securities,
including, with respect to THIRD AVENUE HIGH YIELD FUND, "principal only" and
"interest only" components. Mortgage-backed securities are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property. Those Funds intend to invest in
these securities only when they believe, after analysis, that there is unlikely
to ever be permanent impairment of capital as measured by whether there will be
a money default by either the issuer or the guarantor of these securities. These
securities do, nonetheless, entail considerable market risk, i.e., fluctuations
in quoted prices for the instruments, interest rate risk, prepayment risk and
inflation risk.
THIRD AVENUE VALUE FUND will not invest in non-investment grade subordinated
classes of residential mortgages and does not intend to invest in commercial
mortgage-backed securities. THIRD AVENUE HIGH YIELD FUND may invest in
commercial mortgage-backed securities if these securities are available at a
sufficient yield spread over risk-free investments. Prepayments of principal
generally may be made at any time without penalty on residential mortgages and
these prepayments are passed through to holders of
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one or more of the classes of mortgage-backed securities. Prepayment rates may
change rapidly and greatly, thereby also affecting yield to maturity,
reinvestment risk and market value of the mortgage-backed securities. As a
result, the high credit quality of many of these securities may provide little
or no protection against loss in market value, and there have been periods
during which many mortgage-backed securities have experienced substantial losses
in market value. The Adviser believes that, under certain circumstances, many of
these securities may trade at prices below their inherent value on a
risk-adjusted basis and believes that selective purchases by a Fund may provide
high yield and total return in comparison to risk levels.
ASSET-BACKED SECURITIES
Both THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND also intend to
invest in asset-backed securities that, through the use of trusts and special
purpose vehicles, are securitized with various types of assets, such as
automobile receivables, credit card receivables and home-equity loans in
pass-through structures similar to the mortgage-related securities described
above. In general, the collateral supporting asset-backed securities is of
shorter maturity than the collateral supporting mortgage loans and is less
likely to experience substantial prepayments. However, asset-backed securities
are not backed by any governmental agency.
FLOATING RATE, INVERSE FLOATING RATE AND INDEX OBLIGATIONS
Both THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND may invest in debt
securities with interest payments or maturity values that are not fixed, but
float in conjunction with (or inversely to) an underlying index or price. These
securities may be backed by U.S. Government or corporate issuers, or by
collateral such as mortgages. The indices and prices upon which such securities
can be based include interest rates, currency rates and commodities prices.
However, neither Fund will invest in any instrument whose value is computed
based on a multiple of the change in price or value of an asset or an index of
or relating to assets in which that Fund cannot or will not invest.
Floating rate securities pay interest according to a coupon which is reset
periodically. The reset mechanism may be formula based, or reflect the passing
through of floating interest payments on an underlying collateral pool. Inverse
floating rate securities are similar to floating rate securities except that
their coupon payments vary inversely with an underlying index by use of a
formula. Inverse floating rate securities tend to exhibit greater price
volatility than other floating rate securities.
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Neither Fund intends to invest more than 5% of its total assets in inverse
floating rate securities. Floating rate obligations generally exhibit a low
price volatility for a given stated maturity or average life because their
coupons adjust with changes in interest rates. Interest rate risk and price
volatility on inverse floating rate obligations can be high, especially if
leverage is used in the formula. Index securities pay a fixed rate of interest,
but have a maturity value that varies by formula, so that when the obligation
matures a gain or loss may be realized. The risk of index obligations depends on
the volatility of the underlying index, the coupon payment and the maturity of
the obligation.
INVESTMENT IN HIGH YIELD DEBT SECURITIES
THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND intend to invest in
high yield debt securities, including those rated below Baa by Moody's Investors
Service, Inc. ("Moody's") and below BBB by Standard & Poor's Ratings Group
("Standard & Poor's") and unrated debt securities. THIRD AVENUE HIGH YIELD FUND
intends to invest at least 65% of its net assets, under normal market
conditions, in non-investment grade high yield fixed income and other debt
securities, including straight debt instruments, convertible debt, preferred
securities and unrated securities. See also "Investment in Debt Securities" and
"Restricted and Illiquid Securities." Such securities are predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation, and may in fact be in
default. The ratings of Moody's and Standard & Poor's represent their opinions
as to the credit quality of the securities which they undertake to rate. It
should be emphasized, however, that ratings are relative and subjective and,
although ratings may be useful in evaluating the safety of interest and
principal payments, they do not evaluate the market price risk of these
securities. In seeking to achieve its investment objective, each such Fund
depends on the Adviser's credit analysis to identify investment opportunities.
For the Funds, credit analysis is not a process of merely measuring the
probability of whether a money default will occur, but also measuring how the
creditor would fare in a reorganization or liquidation in the event of a money
default.
Before investing in any high yield debt instruments, the Adviser will evaluate
the issuer's ability to pay interest and principal, as well as the seniority
position of such debt in the issuer's capital structure vis-a-vis any other
outstanding debt or potential debts. There appears to be a direct cause and
effect relationship between the weak financial conditions of issuers of high
yield bonds and the market valuation and prices of their credit instruments,
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as well as a direct relationship between the weak financial conditions of such
issuers and the prospects that principal or interest may not be paid.
The market price and yield of bonds rated below Baa by Moody's and below BBB by
Standard & Poor's are more volatile than those of higher rated bonds due to such
factors as interest rate sensitivity, market perception of the creditworthiness
of the issuer and general market liquidity and the risk of an issuer's inability
to meet principal and interest payments. In addition, the secondary market for
these bonds is generally less liquid than that for higher rated bonds.
Lower rated or unrated debt obligations also present reinvestment risks based on
payment expectations. If an issuer calls the obligation for redemption, the Fund
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors.
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. Companies that issue such bonds often are
highly leveraged and may not have available to them more traditional methods of
financing. Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations or to repay
their obligations upon maturity. Under deteriorating economic conditions or
rising interest rates, the capacity of issuers of lower-rated securities to pay
interest and repay principal is more likely to weaken significantly than that of
issuers of higher-rated securities. Investors should carefully consider the
relative risks of investing in high yield securities and understand that such
securities are generally not meant for short term investing.
Both THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND may also purchase
or retain debt obligations of issuers not currently paying interest or in
default. In addition, those Funds may purchase securities of companies that have
filed for protection under Chapter 11 of the United States Bankruptcy Code.
Defaulted securities will be purchased or retained if, in the opinion of the
Adviser, they may present an opportunity for subsequent price recovery, the
issuer may resume payments, or other advantageous developments appear likely.
ZERO-OUPON AND PAY-IN-KIND SECURITIES
THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND may invest in zero
coupon and pay-in-kind ("PIK") securities. Zero coupon securities are debt
securities that pay no cash income but are sold at substantial dis-
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counts from their value at maturity. PIK securities pay all or a portion of
their interest in the form of additional debt or equity securities. Because such
securities do not pay current cash income, the price of these securities can be
volatile when interest rates fluctuate. While these securities do not pay
current cash income, federal income tax law requires the holders of zero coupon
and PIK securities to include in income each year the portion of the original
issue discount (or deemed discount) and other non-cash income on such securities
accrued during that year. In order to continue to qualify for treatment as a
"regulated investment company" under the Internal Revenue Code and avoid a
certain excise tax, each Fund may be required to distribute a portion of such
discount and income and may be required to dispose of other portfolio
securities, which may occur in periods of adverse market prices, in order to
generate cash to meet these distribution requirements.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS
Both THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND may invest in
loans and other direct debt instruments owed by a borrower to another party.
They 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 a Fund in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. The markets in loans are not regulated by
federal securities laws or the SEC.
TRADE CLAIMS
Both THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND may invest 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. For purchasers such as a Fund, trade claims offer the potential for
profits since they are often purchased at a significant discount from face value
and, consequently, may generate capital appreciation in the event that the
market value of the claim increases as the debtor's financial position improves
or the claim is paid.
An investment in trade claims is speculative and carries a high degree of risk.
Trade claims are illiquid instruments 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
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unsecured, holders of trade claims may have a lower priority in terms of payment
than certain other creditors in a bankruptcy proceeding.
PORTFOLIO PRACTICES
FOREIGN SECURITIES
THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND and THIRD AVENUE HIGH
YIELD FUND may invest in foreign securities. Each Fund's foreign securities
investments will have characteristics similar to those of domestic securities
selected for the Fund. Each Fund intends to limit its investments in foreign
securities to companies issuing U.S. dollar-denominated American Depository
Receipts or who otherwise comply substantially with SEC disclosure requirements.
By limiting their investments in this manner, the Funds seek to avoid investing
in securities where there is no compliance with SEC requirements to provide
public financial information, or such information is unreliable as a basis for
analysis.
Foreign securities markets generally are not as developed or efficient as those
in the United States. Securities of some foreign issuers are less liquid and
more volatile than securities of comparable U.S. issuers. The Funds will be
subject to additional risks which include: possible adverse political and
economic developments, seizure or nationalization of foreign deposits and
adoption of governmental restrictions that may adversely affect the payment of
principal and interest on the foreign securities or currency blockage that would
restrict such payments from being brought back to the United States. Because
foreign securities often are purchased with and payable in foreign currencies,
the value of these assets as measured in U.S. dollars may be affected favorably
or unfavorably by changes in currency rates and exchange control regulations.
FOREIGN CURRENCY TRANSACTIONS
THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND and THIRD AVENUE HIGH
YIELD FUND may, from time to time, engage in foreign currency transactions in
order to hedge the value of their respective portfolio holdings denominated in
foreign currencies against fluctuations in foreign currency prices versus the
U.S. dollar. These transactions include forward currency contracts, exchange
listed and OTC options on currencies, currency swaps and other swaps
incorporating currency hedges.
The notional amount of a currency hedged by a Fund will be closely related to
the aggregate market value (at the time of making such sale) of the securities
held and reasonably expected to be held in its portfolio denominated or quoted
in or currently convertible into that particular currency or
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a closely related currency. If a Fund enters into a hedging transaction in which
such Fund is obligated to make further payments, its custodian will segregate
cash or readily marketable securities having a value at all times at least equal
to such Fund's total commitments.
The cost to a Fund of engaging in currency hedging transactions varies with
factors such as (depending upon the nature of the hedging transaction) the
currency involved, the length of the contract period, interest rates in foreign
countries for prime credits relative to U.S. interest rates for U.S. Treasury
obligations, the market conditions then prevailing and fluctuations in the value
of such currency in relation to the U.S. dollar. Transactions in currency
hedging contracts usually are conducted on a principal basis, in which case no
fees or commissions are involved. The use of currency hedging contracts does not
eliminate fluctuations in the prices in local currency of the securities being
hedged. The ability of a Fund to realize its objective in entering into currency
hedging transactions is dependent on the performance of its counterparties on
such contracts, which may in turn depend on the absence of currency exchange
interruptions or blockage by the governments involved, and any failure on their
part could result in losses to a Fund. The requirements for qualification as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"), may cause a Fund to restrict the degree to which it engages in
currency hedging transactions.
RESTRICTED AND ILLIQUID SECURITIES
None of THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND and THIRD
AVENUE HIGH YIELD FUND will purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets (taken at current market value) would be
invested in securities that are illiquid. Generally speaking, an illiquid
security is any asset or investment which a Fund cannot sell in the ordinary
course of business within seven days at approximately the value at which the
Fund has valued the asset or investment, including securities that cannot be
sold publicly due to legal or contractual restrictions.
Over the past several years, strong institutional markets have developed for
various types of restricted securities, including repurchase agreements,
commercial paper, and some corporate bonds and notes. Securities freely salable
among qualified institutional investors under special rules adopted by the SEC
or otherwise determined to be liquid may be treated as liquid if they satisfy
liquidity standards established by the Board of Trustees. The continued
liquidity of such securities is not as well assured as that of pub-
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<PAGE>
licly traded securities, and accordingly the Board of Trustees will monitor
their liquidity. The Board will review pertinent factors such as trading
activity, reliability of price information and trading patterns of comparable
securities in determining whether to treat any such security as liquid for
purposes of the foregoing 15% test. To the extent the Board treats such
securities as liquid, temporary impairments to trading patterns of such
securities may adversely affect the Fund's liquidity.
INVESTMENT IN RELATIVELY NEW ISSUES
Both THIRD AVENUE VALUE FUND and THIRD AVENUE SMALL-CAP VALUE FUND intend to
invest occasionally in the common stock of selected new issuers; THIRD AVENUE
HIGH YIELD FUND intends to invest occasionally in the debt securities of
selected new issuers. Investments in relatively new issuers, i.e., those having
continuous operating histories of less than three years, may carry special risks
and may be more speculative because such companies are relatively unseasoned.
Such companies may also lack sufficient resources, may be unable to generate
internally the funds necessary for growth and may find external financing to be
unavailable on favorable terms or even totally unavailable. Those companies will
often be involved in the development or marketing of a new product with no
established market, which could lead to significant losses.
TEMPORARY DEFENSIVE INVESTMENTS
When, in the judgment of the Adviser, a temporary defensive posture is
appropriate, a Fund may hold all or a portion of its assets in short-term U.S.
Government obligations, cash or cash equivalents. The adoption of a temporary
defensive posture does not constitute a change in such Fund's investment
objective.
BORROWING
THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND and THIRD AVENUE HIGH
YIELD FUND may also make use of bank borrowing as a temporary measure for
extraordinary or emergency purposes, such as for liquidity necessitated by
shareholder redemptions, and may use securities as collateral for such
borrowing. Such temporary borrowing may not exceed 5% of the value of the
applicable Fund's total assets at the time of borrowing.
INVESTMENT IN OTHER INVESTMENT COMPANIES
THIRD AVENUE SMALL-CAP VALUE FUND and THIRD AVENUE HIGH YIELD FUND may invest in
securities of other investment companies, to the extent per-
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mitted under the Investment Company Act of 1940, provided that after any
purchase the Fund does not own more than 3% of such investment company's
outstanding stock. THIRD AVENUE VALUE FUND may invest up to 10% of its total
assets in securities of other investment companies; up to 5% of its total assets
may be invested in any one investment company, provided that after its purchase
no more than 3% of such investment company's outstanding stock is owned by the
Fund. The Adviser will charge an advisory fee on the portion of a Fund's assets
that are invested in securities of other investment companies. Thus,
shareholders will be responsible for a "double fee" on such assets, since both
investment companies will be charging fees on such assets.
SIMULTANEOUS INVESTMENTS
Investment decisions for a Fund are made independently from those of the other
Funds advised by the Adviser. If, however, such other Funds wish to invest in,
or dispose of, the same securities as the Fund, available investments will be
allocated equitably to each Fund. This procedure may adversely affect the size
of the position obtained for or disposed of by a Fund or the price paid or
received by a Fund.
RESTRICTIONS ON INVESTMENTS
The Funds have adopted various investment restrictions, some of which are
fundamental policies that cannot be changed without shareholder approval and
others of which are operating investment restrictions that may be changed
without shareholder approval. Certain restrictions not described in this
Prospectus are set forth in full in the SAI. In the event any Fund changes an
operating investment restriction, the new restriction may not meet the
investment needs of every shareholder.
SECURITIES LENDING
THIRD AVENUE SMALL-CAP VALUE FUND and THIRD AVENUE HIGH YIELD FUND may lend
their portfolio securities to qualified institutions. By lending its portfolio
securities, a Fund attempts to increase its income through the receipt of
interest on the loan. Any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund. A Fund may lend its portfolio securities so long as the terms and the
structure of such loans are not inconsistent with the requirements of the
Investment Company Act of 1940, which currently provide that (a) the borrower
pledge and maintain with the Fund collateral consisting of cash, a letter of
credit issued by a domestic U.S. bank, or securities issued or guaranteed by the
U.S. government having a value at all times
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not less than 100% of the value of the securities loaned, (b) the borrower add
to such collateral whenever the price of the securities loaned rises (i.e., the
value of the loan is "marked to the market" on a daily basis), (c) the loan be
made subject to termination by the Fund at any time and the loaned securities be
subject to recall within the normal and customary settlement time for securities
transactions and (d) the Fund receive reasonable interest on the loan (which may
include the Fund's investing any cash collateral in interest bearing short-term
investments), any distributions on the loaned securities and any increase in
their market value.
A Fund will not lend portfolio securities if, as a result, the aggregate of such
loans exceeds 33 1/3% of the value of its total assets (including such loans).
Loan arrangements made by a Fund will comply with all other applicable
regulatory requirements. All relevant facts and circumstances, including the
creditworthiness of the qualified institution, will be monitored by the Adviser,
and will be considered in making decisions with respect to lending of
securities, subject to review by the Fund's Board of Trustees.
A Fund may pay reasonable negotiated fees in connection with loaned securities,
so long as such fees are set forth in a written contract and approved by its
Board of Trustees. In addition, the Fund shall, through the ability to recall
securities prior to any required vote, retain voting rights over the loaned
securities.
On behalf of THIRD AVENUE SMALL-CAP VALUE FUND and THIRD AVENUE HIGH YIELD FUND,
the Trust has entered into a master lending arrangement with Bear, Stearns
Securities Corp. in compliance with the foregoing requirements.
PORTFOLIO TURNOVER
The Funds' investment policies and objectives, which emphasize long-term
holdings, would tend to keep the number of portfolio transactions relatively
low. THIRD AVENUE VALUE FUND'S portfolio turnover rate for the years ended
October 31, 1996 and 1997 was 14% and 10%, respectively. THIRD AVENUE SMALL-CAP
VALUE FUND'S portfolio turnover rate for the period ended October 31, 1997 was
7%.
It is currently estimated that, under normal market conditions, the annual
portfolio turnover rate for THIRD AVENUE HIGH YIELD FUND will not exceed 75%.
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MANAGEMENT OF THE FUNDS
THE INVESTMENT ADVISER
EQSF Advisers, Inc. (the "Adviser") manages each Fund's investments, provides
various administrative services and supervises the Funds' daily business
affairs, subject to the authority of the Trust's Board of Trustees. The Adviser,
a New York corporation organized in 1986, is controlled by Martin J. Whitman and
has its offices at 767 Third Avenue, New York, NY 10017-2023.
Mr. Whitman, the Chairman, President and Chief Executive Officer of the Trust
and its Adviser, is responsible for the day-to-day management of the portfolios
of THIRD AVENUE VALUE FUND and THIRD AVENUE SMALL-CAP VALUE FUND. During the
past five years, he has also served in various executive capacities with M.J.
Whitman, Inc., the Fund's distributor and regular broker dealer and several
affiliated companies engaged in various investment and financial businesses; he
has served as a Distinguished Management Fellow at the Yale School of
Management; and has been a director of various public and private companies,
including Danielson Holding Corporation, an insurance holding company, and
Nabors Industries, Inc., an international oil drilling contractor.
Curtis Jensen has served as co-manager of THIRD AVENUE SMALL-CAP VALUE FUND
since inception. He has been employed by the Adviser since 1995 and also serves
as senior research analyst for THIRD AVENUE VALUE FUND. Prior to joining the
Adviser, Mr. Jensen was a graduate business student at the Yale School of
Management from 1993 to 1995 where he studied under Mr. Whitman. Prior to that,
Mr. Jensen was a director of and managed the operations of a specialty food
manufacturer.
Margaret Patel has served as the manager of THIRD AVENUE HIGH YIELD FUND since
inception. Prior to joining the Adviser, Ms. Patel was a portfolio manager of
several mutual funds which invested in high yield, convertible and government
securities at Northstar Investment Management Corp. from 1995 to 1997. Prior to
that, Ms. Patel was a portfolio manager of several mutual funds with investments
in high yield, convertibles, governments, and municipals at Boston Security
Counsellors, Inc., the investment advisor for the Advantage Funds, from 1988
until their acquisition by Northstar in 1995.
The portfolio managers and certain other persons related to the Adviser and the
Funds are subject to written policies and procedures designed to prevent abusive
personal securities trading and other activities.
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ADVISORY FEES
Each of THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND and THIRD
AVENUE HIGH YIELD FUND has agreed to pay the Adviser a flat rate of .90% of its
average daily net assets. Each Fund pays all costs of leased office space of or
allocable to such Fund. The Adviser's fee for the previous month is paid at the
beginning of the next month based upon the average daily net assets during the
previous month.
Each Fund pays all of its expenses other than those assumed by the Adviser. Any
expense which cannot be allocated to a specific Fund will be allocated to each
of the Funds based on their relative net asset values on the date the expense is
incurred. From time to time, the Adviser may waive receipt of its fees and/or
assume certain expenses of a Fund, which would have the effect of lowering the
expense ratio of the Fund and increasing yield to investors. Under current
arrangements, 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 1.9% of the first $100 million of average daily net
assets of the Fund, and 1.5% of assets in excess of $100 million, the Adviser is
obligated to reimburse the Fund in an amount equal to that excess. If a Fund's
operating expenses fall below the expense limitation, that Fund will begin
repaying the Adviser for the amount contributed on behalf of the Fund. This
repayment will continue for up to three years after the end of the fiscal year
in which an expense is reimbursed by the Adviser, subject to the expense
limitation, until the Adviser has been paid for the entire amount contributed or
such three year period expires. For the fiscal years ended October 31, 1996 and
1997, no reimbursement was required to be paid for THIRD AVENUE VALUE FUND. For
the period ended October 31, 1997, no reimbursement was required to be paid for
THIRD AVENUE SMALL-CAP VALUE FUND.
ADMINISTRATOR
FPS Services, Inc. ("FPS"), which has its principal business address at 3200
Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-0903, serves as
administrator of the Funds pursuant to an Administrative Services Agreement. The
services that FPS provides to the Funds include: coordinating and monitoring of
any third parties furnishing services to the Funds; providing the necessary
office space, equipment and personnel to perform administrative and clerical
functions for the Funds; preparing, filing and distributing proxy materials,
periodic reports to shareholders, registration statements and other documents;
and responding to shareholder inquiries.
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DISTRIBUTOR
M.J. Whitman, Inc. (together with its predecessors "MJW"), a registered
broker-dealer and member of the National Association of Securities Dealers
("NASD"), is the Distributor of the Funds' shares. MJW, whose business address
is 767 Third Avenue, New York, NY 10017-2023, is a wholly-owned subsidiary of
M.J. Whitman Holding Corp. ("MJWHC"). Martin J. Whitman, David M. Barse, Michael
Carney and Ian M. Kirschner are executive officers of the Trust, MJW and MJWHC,
as well as stockholders of MJWHC.
CUSTODIAN AND TRANSFER AGENT
The custodian acts as the depository for the Funds, is responsible for
safekeeping its portfolio securities, collects all income and other payments
with respect to portfolio securities, disburses monies at the Funds' request and
maintains records in connection with its duties. North American Trust Company,
525 B Street San Diego, CA 92101-4492, serves as custodian for THIRD AVENUE
VALUE FUND and Custodial Trust Company, 101 Carnegie Center, Princeton, NJ
08540-6231, serves as custodian for THIRD AVENUE SMALL-CAP VALUE FUND and THIRD
AVENUE HIGH YIELD FUND (each a "Custodian" and, collectively the "Custodians").
FPS serves as the Funds' Transfer Agent and also performs certain accounting and
pricing services for the Funds. FPS maintains shareholder records, answers
shareholder inquiries concerning their accounts, processes purchases and
redemptions of the Funds' shares, acts as dividend and distribution disbursing
agent and performs other shareholder services. All shareholder inquiries should
be directed to FPS. You may write to: FPS Services, Inc., 3200 Horizon Drive,
P.O. Box 61503, King of Prussia, PA 19406-0903 or you may telephone toll free
(800) 443-1021.
PORTFOLIO TRADING PRACTICES
The Adviser is responsible on a day-to-day basis for executing the Funds'
portfolio transactions, and seeks to obtain the most favorable price and best
available execution of orders. In principal trades, it normally deals with
market makers and will not deal with any affiliated broker. In agency trades, it
seeks to obtain reasonable commissions and may have the Funds pay a higher
commission than the broker might otherwise charge if the Funds determine that
the commission is reasonable in relation to, among other things, the value of
brokerage or research services provided by the broker to the Adviser. In agency
trades, the Adviser generally uses the services of its affiliated brokers, if in
the judgment of the Adviser, such affili-
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ates are able to obtain a price and execution at least as favorable as other
qualified brokers. For a more detailed description of the Funds' portfolio
trading practices, see "Portfolio Trading Practices" in the SAI.
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PERFORMANCE INFORMATION
PERFORMANCE ILLUSTRATIONS
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD
AVENUE VALUE FUND AND THE STANDARD & POOR'S 500 INDEX (S&P 500)
AVERAGE ANNUAL TOTAL RETURN
THIRD AVENUE VALUE FUND
YEAR VALUE OF
ENDED RETURN INVESTMENT INVESTMENT
10/31/90 $10,000.00 $10,000.00
Year 1 10/31/91 49.16% $14,916.00
Year 2 10/31/92 6.50% $15,884.48
Year 3 10/31/93 37.36% $21,818.91
Year 4 10/31/94 2.56% $22,377.48
Year 5 10/31/95 22.31% $27,369.89
Year 6 10/31/96 15.55% $31,625.91
Year 7 10/31/97 35.31% $42,793.02
S&P Index
YEAR VALUE OF
ENDED RETURN INVESTMENT INVESTMENT
10/31/90 $10,000.00 $10,000.00
Year 1 10/31/91 33.50% $13,350.00
Year 2 10/31/92 9.96% $14,679.66
Year 3 10/31/93 14.94% $16,872.80
Year 4 10/31/94 3.87% $17,525.78
Year 5 10/31/95 26.44% $22,159.59
Year 6 10/31/96 24.09% $27,498.71
Year 7 10/31/97 32.11% $36,328.55
THIRD AVENUE VALUE FUND Average Annual Return
1 Year 35.31%
2 Years 25.00%
3 Years 24.12%
4 Years 18.34%
5 Years 21.92%
6 Years 19.20%
7 Years 23.07%
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COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
THIRD AVENUE SMALL-CAP VALUE FUND AND THE RUSSELL 2000 INDEX
AVERAGE ANNUAL TOTAL RETURN
THIRD AVENUE SMALL-CAP VALUE FUND
PERIOD VALUE OF
ENDED* RETURN INVESTMENT INVESTMENT
$10,000.00 $10,000.00
Year 1 10/31/97 23.70% $12,370.00
Russell 2000 Index
PERIOD VALUE OF
ENDED* RETURN INVESTMENT INVESTMENT
$10,000.00 $10,000.00
Year 1 10/31/97 28.11% $12,811.00
THIRD AVENUE SMALL-CAP VALUE FUND Total Return Since Inception.
Seven months 23.70%
- --------------------------------------------------------------------------------
* Period beginning April 1, 1997 (THIRD AVENUE SMALL-CAP VALUE FUND'S
commencement of operations)
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DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES
Each of THIRD AVENUE VALUE FUND and THIRD AVENUE SMALL-CAP VALUE FUND expects to
declare and pay distributions annually, generally in December. THIRD AVENUE HIGH
YIELD FUND expects to declare and pay distributions quarterly. The Funds will
notify shareholders of the tax status of dividends and capital gain
distributions.
Each Fund intends to qualify annually for treatment as a regulated investment
company under Subchapter M of the Internal Revenue Code, and thus not be subject
to Federal income tax on the portion of its net investment income and net
realized capital gains that it distributes to shareholders. Each Fund intends to
continue its qualification as a regulated investment company in future years,
unless it determines that such tax treatment would not be advantageous to the
Fund and its shareholders. Each Fund intends to distribute substantially all of
its net investment income and net realized capital gain.
For the year ended October 31, 1997, THIRD AVENUE VALUE FUND distributed net
investment income of approximately $13,987,128 and net realized capital gains on
investments of approximately $3,539,465. A distribution of $0.572 per share,
consisting of $0.411 of income, $0.049 of short-term capital gain and $0.112 of
long-term capital gain was distributed to shareholders of record on December 30,
1997.
For the period ended October 31, 1997, THIRD AVENUE SMALL-CAP VALUE FUND did not
distribute net investment income or net realized capital gains. A distribution
of $0.062 per share, consisting solely of income, was distributed to
shareholders of record on December 30, 1997.
Distributions from net investment income and short-term capital gains are
taxable as ordinary income. A portion of these distributions may qualify for the
corporate dividends-received deduction available to corporate shareholders.
Distributions of net long-term capital gain realized by the Funds from the
purchase and sale of securities held by them for more than one year or eighteen
months, as the case may be, will be taxable to shareholders as a long-term
capital gain (even if the shareholder has held the shares for less than one
year) at the rate applicable to those respective holding periods. The Taxpayer
Relief Act of 1997 generally reduced the maximum federal tax rate for
noncorporate taxpayers on long-term capital gains generated from assets held for
more than eighteen months from 28% to 20%. Capital gains from assets held for
more than twelve months but not more than eighteen months are still taxed at a
maximum 28% rate. After the close of each calendar year, the shareholders of
each Fund will receive information regarding the amount and the
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<PAGE>
tax character of that Fund's distributions. If a shareholder who has received a
capital gain distribution suffers a loss on the sale of his shares not more than
six months after purchase, the loss will be treated as a long-term capital loss
to the extent of the capital gain distribution received.
Shareholders receiving distributions in the form of additional shares will be
treated for federal income tax purposes in the same manner as if they had
received cash distributions equal in value to the shares received, and will have
a cost basis for Federal income tax purposes in each share received equal to the
net asset value of a share of the applicable Fund on the date of distribution.
Shareholders will generally recognize taxable gain or loss on a redemption of
shares in an amount equal to the difference between the redemption proceeds and
the shareholder's basis in the shares redeemed. This gain or loss will generally
be capital, assuming that the shareholder held the shares as a capital asset,
and will be long-term capital gain or loss if the shares were held for longer
than one year, with gain taxed at a lower rate if the shares were held by a
noncorporate taxpayer for longer than eighteen months. A loss recognized on the
disposition of shares of a Fund will be disallowed if identical (or
substantially identical) shares are acquired in a 61-day period beginning 30
days before and ending 30 days after the date of disposition.
Depending on the residence of the shareholder for tax purposes, distributions
also may be subject to state and local taxes or withholding taxes. Shareholders
should consult their tax advisers as to the tax consequences to them of
ownership of shares of the Funds.
If a shareholder purchases shares shortly before the record date of a dividend
or capital gain distribution, such distribution will be taxable even though it
may represent in whole or in part a return of the purchase price, and the value
of the shares drops by the approximate amount of the distribution.
DISTRIBUTION OPTIONS
Shareholders should specify on their account application how they wish to
receive distributions. If no election is made on the account application, all
distributions will automatically be reinvested.
Each Fund offers four options:
(1) all income dividends and capital gain distributions paid in cash;
(2) income dividends paid in cash with capital gain distributions
reinvested;
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(3) income dividends reinvested with capital gain distributions paid in
cash; or
(4) both distributions automatically reinvested in additional shares of
that Fund.
Any distribution payments returned by the post office as undeliverable will be
reinvested in additional shares of the applicable Fund at the net asset value
next determined.
WITHHOLDING
The Funds may be required to withhold Federal income tax at the rate of 31%
(backup withholding) from dividend, capital gain and redemption payments to
shareholders (a) who fail to furnish the Funds with and to certify the payee's
correct taxpayer identification number or social security number, (b) when the
Internal Revenue Service notifies the Funds that the payee has failed to report
properly certain interest and dividend income to the IRS and to respond to
notices to that effect or (c) when the payee fails to certify that he is not
subject to backup withholding. Investors should be sure to provide this
information when they complete the application. Certain foreign accounts may be
subject to U.S. withholding tax on ordinary distributions. Investors should be
sure to provide their place of residence as well as citizenship status when
completing the application.
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HOW TO PURCHASE SHARES
The price paid for shares is the net asset value next determined following
receipt of the purchase order in proper form by the applicable Fund or its
authorized service agent or sub-agent. See "Determining Net Asset Value" below.
All purchase orders should be directed to the Funds' transfer agent, FPS
Services, Inc. 3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA
19406-0903.
The Funds reserve the right to reject any purchase order.
BUSINESS HOURS
The Funds are open for business each day the New York Stock Exchange ("NYSE") is
open. The NYSE and the Funds will be closed on the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
DETERMINING NET ASSET VALUE
Net asset value per share is calculated as of the close of regular trading on
the NYSE, normally 4:00 p.m., Eastern time, each day the NYSE is open for
trading. Net asset value of each Fund is determined by dividing the value of all
portfolio securities, cash, and other assets, including accrued interest and
dividends, owned by the Fund, less all liabilities, including accrued expenses
of the Fund, by the total number of shares of each Fund outstanding.
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 to a Fund if acquired within 60 days of maturity or, if already held
by the Fund on the day, based on the value determined on the day. This amortized
cost method will be used unless the Board of Trustees determines that such
method does not represent fair value.
Securities traded on any securities exchange or other market trading system
which reports actual transaction prices on a contemporaneous basis are valued at
the last quoted sales price or, in the absence of closing sales prices on that
day, securities will be valued at the mean between the closing bid and asked
price. Other readily marketable securities are valued at the mean between the
closing bid and asked prices. A Fund may utilize the services of one or more
pricing services to assist it in valuing the Fund's securities. Illiquid
securities and other securities and assets for which market quotations are not
readily available are valued at "fair value", as determined in
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good faith by or under the direction of the Board of Trustees of the Fund
holding such securities.
SHARE CERTIFICATES
Share certificates representing shares of a Fund will be delivered to
shareholders only upon written request.
THROUGH AN AUTHORIZED BROKER-DEALER OR INVESTMENT ADVISER
Shares of the Funds may also be purchased through an investor's broker-dealer or
investment adviser. The broker-dealer must be a member in good standing with the
NASD and have entered into a selling agreement with the Funds' distributor, MJW.
Investment advisers must be registered under federal securities laws.
Transactions in Fund shares made through an investor's broker-dealer or
investment adviser may be subject to charges imposed by the dealer or investment
adviser, who may also impose higher initial or additional amounts for investment
than those established by the Funds. In those situations, the investor's
broker-dealer or investment adviser is responsible for forwarding payment or
arranging for payment promptly. The Funds reserve the right to cancel any
purchase order for which payment has not been received by the third business day
following receipt of the purchase order. Telephone purchase orders will only be
accepted from financial institutions which have been approved previously by the
Funds or the Adviser.
NEW ACCOUNTS
An account application must be completed and signed for each new account opened,
regardless of the method chosen for making the initial investment.
INITIAL INVESTMENT
The minimum initial investment for each Fund is $1,000. Payment may be made by
check or money order payable to "THIRD AVENUE VALUE FUND," "THIRD AVENUE
SMALL-CAP VALUE FUND" or "THIRD AVENUE HIGH YIELD FUND."
BY MAIL
THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP VALUE FUND or
THIRD AVENUE HIGH YIELD FUND
c/o FPS Services, Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406-0903.
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Checks will be accepted if drawn in U.S. currency on a domestic bank. Checks
drawn against a non-U.S. bank may be subject to collection delays and will be
accepted only upon actual receipt of the funds by the transfer agent, FPS. The
Funds will not accept a check endorsed over by a third-party. A charge (minimum
of $20) will be imposed if any check used for the purchase of Fund shares is
returned unpaid. Investors who purchase Fund shares by check or money order may
not receive redemption proceeds until there is a reasonable belief that the
check has cleared, which may take up to fifteen calendar days after payment has
been received.
BY WIRE
Prior to sending wire instructions, notify FPS at (800) 443-1021, Option 2 to
insure proper credit to the shareholder's account. Direct shareholder's bank to
wire funds as follows:
UMB Bank KC NA
Kansas City, MO
ABA #: 10-10-00695
For FPS #: 98-7037-071-9
For further credit to: THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP
VALUE FUND or THIRD AVENUE HIGH YIELD FUND (Shareholder's name, exact
account title and account number)
Heavy wire traffic over the Federal Reserve System may delay the arrival of
purchase orders made by wire.
ADDITIONAL INVESTMENTS BY MAIL
Subsequent investments should be accompanied by the "payment stub" attached to
the shareholder's account statement and may be made in minimum amounts of $1,000
and mailed to:
THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP VALUE FUND or
THIRD AVENUE HIGH YIELD FUND
c/o FPS Services, Inc.
P.O. Box 412797
Kansas City, MO 64141-2797
At the sole discretion of the Adviser, the initial and any additional investment
minimums may be waived in new accounts opened by existing shareholders for
additional family members and by officers, trustees or employ-
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ees of the Funds, MJW, the Adviser or any affiliate of the Adviser (including
their spouses and children under age 21).
ADDITIONAL INVESTMENTS THROUGH THE AUTOMATIC INVESTMENT PLAN
This Plan provides shareholders with a convenient method by which they may
automatically make subsequent monthly purchases. A predetermined amount,
selected by the shareholder, will be deducted from the shareholder's checking
account. Subsequent investments under this Plan are subject to a monthly minimum
of $200. The Automatic Investment Plan option may be elected on the application.
INDIVIDUAL RETIREMENT ACCOUNTS
The Funds' Individual Retirement Account ("IRA") application and additional
forms required may be obtained by contacting FPS at (800) 443-1021, Option 1.
For IRA's, the initial minimum is $500 and the minimum subsequent contribution
is $200. The account will be maintained by the custodian, Semper Trust Company,
which currently charges an annual maintenance fee of $12. Fees are subject to
change by Semper Trust Company.
OTHER RETIREMENT PLANS
Investors who are self-employed may purchase shares of the Funds through
tax-deductible contributions to retirement plans for self-employed persons,
known as Keogh or H.R. 10 plans. However, the Funds do not currently act as a
sponsor or administrator for such plans. Fund shares may also be purchased for
other types of qualified pension or profit sharing plans which are
employer-sponsored, including deferred compensation or salary reduction plans
known as "401(k) Plans", which give participants the right to defer portions of
their compensation for investment on a tax-deferred basis until distributions
are made from the plan.
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HOW TO REDEEM SHARES
Shareholders may redeem shares on any business day during which the NYSE is
open. All redemption requests should be directed to FPS. Fund shares will be
redeemed at the net asset value next calculated after such request is received
by FPS in proper form. Redemption requests that contain a restriction as to the
time, date or share price at which the redemption is to be effective will not be
honored.
BY MAIL
Send a written request, together with any share certificates that have been
issued, to:
FPS Services, Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406-0903
Written redemption requests, stock powers and any share certificates issued must
be submitted and signed exactly as the account is registered. Such requests
generally require a signature guarantee and additional documents. See "Signature
Guarantees/Other Documents."
TELEPHONE REDEMPTION SERVICE
Shareholders who wish to redeem shares by telephone may elect this service on
the application. Such shareholders may thereafter redeem unissued shares valued
at not less than $1,000 on any business day by calling FPS at (800) 443-1021,
Option 2, prior to 4:00 p.m. Eastern time.
The Funds and FPS will not be liable for following telephone instructions
reasonably believed to be genuine. In this regard, FPS will require personal
identification information before accepting a telephone redemption order. If the
transfer agent fails to use reasonable procedures, the Funds or FPS might be
liable for losses due to fraudulent instructions.
Shareholders who did not previously elect the Telephone Redemption Service on
their application, or who wish to change any information previously provided,
including the address of record or the bank to which redemption proceeds are to
be wired, must submit a signature guaranteed letter of instructions. See
"Signature Guarantees/Other Documents."
FEES
There is no charge for redemption of shares tendered directly to FPS, except as
described below under "Early Redemption Fee." FPS currently charges a wire fee
of $9 for payment of redemption proceeds by federal
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funds. FPS will automatically deduct the wire fee from the redemption proceeds.
Broker-dealers handling redemption transactions generally will charge a service
fee.
REDEMPTION WITHOUT NOTICE
The Funds have the right, at any time and without prior notice to a shareholder,
to redeem shares held in any account registered in the name of such shareholder
at current net asset value, if and to the extent that such redemption is
necessary to reimburse the Funds for any loss sustained by reason of the failure
of such shareholder to make full payment for shares of the Funds previously
purchased or subscribed for by such shareholder.
ACCOUNT MINIMUM
A shareholder selling a partial amount of shares must leave at least $500 worth
of shares to keep the account open, or in the case of an IRA account, at least
$200. The Funds may also, upon 30 days prior written notice to a shareholder,
redeem shares in any account, other than an IRA account, containing shares
currently having an aggregate net asset value, not attributed to market
fluctuations, of less than $500.
PAYMENT OF REDEMPTION PROCEEDS
A Fund will usually make payment for redemptions of Fund shares within one
business day, but not later than seven calendar days after receipt of such
redemption requests. However, if the Fund has not collected the purchase price
of the shares being redeemed, the redemption will not be processed until such
collection has been completed.
Redemption of recently purchased Fund shares that have been paid for by check
may be delayed until the Fund has a reasonable belief that the check has
cleared, which may take up to fifteen calendar days after payment for the
purchase. Investors who anticipate that they may wish to redeem their shares
before fifteen calendar days are advised to pay for their shares by federal
funds wire.
WIRED PROCEEDS
In the case of redemption proceeds that are wired to a shareholder's bank,
payment will be transmitted only on days that commercial banks are open for
business and only to the bank and account previously authorized on the
application or shareholder's signature guaranteed letter of instruction. Neither
the Funds nor FPS will be responsible for any delays in wired redemption
proceeds due to heavy wire traffic over the Federal Reserve System.
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SIGNATURE GUARANTEES/OTHER DOCUMENTS
Signatures on any (1) request for redemption, payable to the registered
shareholder involving $5,000 or more, (2) redemption proceeds payable to and/or
mailed to other than the registered shareholder, or (3) requests to transfer
shares, must be guaranteed by an "eligible guarantor institution" as such term
is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, which
includes certain banks, brokers, dealers, credit unions, securities exchanges
and associations, clearing agencies and savings associations. A notary public is
not an acceptable guarantor. ADDITIONAL DOCUMENTS MAY BE REQUIRED WHEN SHARES
ARE REGISTERED IN THE NAME OF A CORPORATION, PARTNERSHIP, ASSOCIATION, AGENT,
FIDUCIARY, TRUST, ESTATE OR OTHER ORGANIZATION. Additional tax documents may
also be required in the case of redemptions from IRA accounts. For further
information, call FPS toll free at (800) 443-1021, Option 2.
SYSTEMATIC WITHDRAWAL PLAN
Shareholders owning or purchasing shares of the Funds having a current value of
at least $10,000 may participate in a Systematic Withdrawal Plan, which provides
for automatic redemption of at least $100 monthly, quarterly, semi-annually, or
annually. Shareholders may establish a Systematic Withdrawal Plan by sending a
letter to FPS. Notice of all changes concerning the Systematic Withdrawal Plan
must be received by FPS at least two weeks prior to the next scheduled payment.
Further information regarding the Systematic Withdrawal Plan and its
requirements can be obtained by contacting FPS at (800) 443-1021, Option 2.
EARLY REDEMPTION FEE
With respect to THIRD AVENUE HIGH YIELD FUND, upon the redemption or exchange of
shares held less than one year, a fee of 1% of the current net asset value of
the shares will be assessed and retained by the Fund for the benefit of the
remaining shareholders. This fee is intended to encourage long-term investment
in the Fund, to avoid transaction and other expenses caused by early
redemptions, and to facilitate portfolio management. The fee is not a deferred
sales charge, is not a commission paid to the Adviser, and does not benefit the
Adviser in any way. The Fund reserves the right to modify the terms of or
terminate this fee at any time. The fee applies to redemptions from the Fund and
exchanges to other THIRD AVENUE funds, but not to dividend or capital gains
distributions which have been automatically reinvested in the Fund. The fee is
applied to the shares being redeemed or exchanged in the order in which they
were purchased.
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For the foregoing purposes and without regard to the shares actually redeemed,
shares will be treated as redeemed as follows: first, reinvestment shares;
second, purchased shares held one year or more; and third, purchased shares held
for less than one year. No fee will be payable by shareholders who are omnibus
or similar account customers of certain Fund-approved broker-dealers and other
institutions.
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HOW TO EXCHANGE SHARES
INTER-FUND EXCHANGE PRIVILEGE
Shareholders may, in writing or by telephone, exchange shares of one Fund of the
Trust for shares of another Fund at net asset value without the payment of any
fee or charge, except as noted below under "Early Redemption Fee." An exchange
is considered a sale of shares and may result in capital gain or loss for
federal income tax purposes. Shareholders who wish to use this exchange
privilege may elect the service on the account application.
If FPS receives exchange instructions in writing or by telephone at (800)
443-1021, in good order by the valuation time on any business day, the exchange
will be effected that day. For an exchange request to be in good order, it must
include the shareholder's name as it appears on the account, the account number,
the amount to be exchanged, the names of the Funds from which and to which the
exchange is to be made and a signature guarantee as may be required. A written
request for an exchange in excess of $5,000 must be accompanied by a signature
guarantee as described under "Signature Guarantees/Other Documents."
MONEY MARKET EXCHANGE PRIVILEGE
Shareholders may redeem any or all shares of the Funds and automatically invest
the proceeds through the Third Avenue Money Market Fund account, in the Cash
Account Trust Money Market Portfolio, an unaffiliated, separately managed, money
market mutual fund. The exchange privilege with the money market portfolio does
not constitute an offering or recommendation of the shares of the money market
portfolio by the Funds or the Distributor. The Adviser is compensated for
administrative services it performs with respect to the money market portfolio.
Shareholders who wish to use this exchange privilege may elect the service on
the account application. The Funds' shareholders should not order shares of the
Money Market Fund without first receiving the current prospectus for the Money
Market Fund. By giving exchange instructions, a shareholder will be deemed to
have represented that he has received the current prospectus for the Money
Market Fund. Exchanges of Fund shares are subject to the other requirements of
the Money Market Fund into which the exchange is made.
The Funds reserve the right to reject any exchange request or otherwise modify,
restrict or terminate the exchange privilege at any time upon at least 60 days
prior written notice.
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<PAGE>
Shareholders should be aware that an exchange is treated for federal income tax
purposes as a sale and a purchase of shares, which may result in realization of
a gain or loss.
EARLY REDEMPTION FEE
See "How to Redeem Shares - Early Redemption Fee" for an explanation of a fee
that might be applicable upon the exchange of shares of THIRD AVENUE HIGH YIELD
FUND held for less than one year.
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SHAREHOLDER SERVICES
Each Fund provides you with helpful services and information about your account.
o A statement after every transaction.
o An annual account statement reflecting all transactions for the year.
o Tax information will be mailed by January 31 of each year, a copy of
which will also be filed with the Internal Revenue Service.
o The financial statements of the Fund with a summary of portfolio
composition and performance will be mailed at least twice a year.
o The Funds intend to continue to mail to shareholders quarterly reports
containing the Portfolio Managers' letters and a summary of portfolio
changes, composition and performance.
The Funds pay for shareholder services but not for special services such as
requests for historical transcripts of accounts. The Funds' transfer agent, FPS,
currently charges $10 per year for duplication of historical account activity
records, with a maximum fee of $100.
TELEPHONE INFORMATION
YOUR ACCOUNT: Questions about your account, purchases,
redemptions and distributions can be
answered by FPS Monday through Friday, 9:00
AM to 7:00 PM (Eastern time). Call toll free
(800) 443-1021, Option 2 or (610) 239-4600.
THE FUNDS: Questions about the Funds can be answered by
the Funds' telephone representatives Monday
through Friday 9:00 AM to 5:00 PM (Eastern
time). Call toll free (800) 443-1021 or
(212) 888-6685.
TO REDEEM SHARES: To redeem shares by telephone, call FPS
prior to 4:00 PM on the day you wish to
redeem, toll free (800) 443-1021, Option 2,
or (610) 239-4600.
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<PAGE>
TRANSFER OF OWNERSHIP
A shareholder may transfer Fund shares or change the name or form in which the
shares are registered by writing to FPS. The letter of instruction must clearly
identify the account number, name(s) and number of shares to be transferred, and
provide a certified tax identification number by way of a completed new account
application or W-9 form, and include the signature(s) of all registered owners,
and any share certificates issued. The signature(s) on the transfer instructions
or any stock power must be guaranteed as described under "Signature
Guarantees/Other Documents."
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APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
STANDARD & POOR'S RATINGS GROUP
The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources it considers reliable. Standard & Poor's
does not perform any audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed, suspended
or withdrawn as a result of changes in, or unavailability of, such information
or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-capacity and willingness of the obliger as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation.
II. Nature and provisions of the obligation.
III. Protection afforded by, and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA - Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB - Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB, B, CCC, CC, C - Debt rated "BB", "B", "CCC", "CC", and "C" is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms
of the obligation. "BB" indicates the lowest degree of speculation and "C"
the highest degree of speculation. While such debt will
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likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB - Debt rate "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied "BBB" rating.
B - Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
CCC - Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
"CCC" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "B" or "B-" rating.
CC - The rating "CC" is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
C - The rating "C" is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.
C1 - The rating "C1" is reserved for income bonds on which no interest is
being paid.
D - Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period.
The "D" rating also will be used upon the filing of a bankruptcy petition
if debt service payments are jeopardized.
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Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
MOODY'S INVESTORS SERVICE, INC.
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or there
may be other elements present which make the long-term risk appear
somewhat greater than the Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in
the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements:
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
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maintenance of other terms of the contract over any long period of time
may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Moody's applies numerical
modifiers: 1, 2 and 3 in each generic rating classification from Aa
through B in its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category,
the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
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BOARD OF TRUSTEES
Phyllis W. Beck
Lucinda Franks
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
INVESTMENT ADVISER
EQSF Advisers, Inc.
767 Third Avenue
New York, NY 10017-2023
DISTRIBUTOR
M.J. Whitman, Inc.
767 Third Avenue
New York, NY 10017-2023
TRANSFER AGENT
FPS Services, Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406-0903
(610) 239-4600
(800) 443-1021 (toll-free)
CUSTODIANS
THIRD AVENUE VALUE FUND THIRD AVENUE SMALL-CAP VALUE FUND
North American Trust Company THIRD AVENUE HIGH YIELD FUND
525 B Street Custodial Trust Company
San Diego, CA 92101-4492 101 Carnegie Center
Princeton, NJ 08540-6231
767 THIRD AVENUE
NEW YORK, NY 10017-2023
Phone (212) 888-6685
Toll Free (800) 443-1021
www.mjwhitman.com
