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THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP
VALUE FUND
THIRD AVENUE
HIGH YIELD FUND
SEMI-ANNUAL REPORT
(Unaudited)
------------
April 30, 1998
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THIRD AVENUE VALUE FUND
Dear Fellow Shareholders:
At April 30, 1998, the unaudited net asset value attributable to the 58,456,123
common shares outstanding of Third Avenue Value Fund ("TAVF", "Third Avenue" or
the "Fund") was $34.24 per share. This compares with unaudited net asset values
of $31.50 per share at January 31, 1998 and $26.29 per share at April 30, 1997
adjusted for distributions to shareholders at the end of calendar 1997. At May
22, 1998, the unaudited net asset value was $33.48 per share.
QUARTERLY ACTIVITY
During the second quarter of fiscal 1998, TAVF established positions in six
issues for the first time, of which one, Associates First Capital Corp. Common
Stock, was received as a spin-off to holders of Ford Motor Co. Common Stock.
Fourteen existing positions were increased during the quarter. One position,
CapMac Holdings, Inc. Common Stock, was eliminated when that company was merged
into MBIA, Inc. in a transaction which involved an exchange of common stocks.
Principal portfolio changes during the quarter were as follows:
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
13,104 shares Associates First Capital Corp.
Common Stock
475,100 shares AVX Corp. Common Stock
("AVX Common")
850,000 shares Nabors Industries, Inc. Common Stock
("Nabors Common")
27,600 shares National Media Corp. Common Stock
("National Media Common")
1,079,000 shares Toyoda Automatic Loom Works, Ltd
Common Stock ("Toyoda Common")
276,600 shares ValueVision International, Inc. Class A
Common Stock ("ValueVision Common")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
$50,000,000 notional amount Japanese Yen Put Options
("Japanese Yen Put Options")
$11,723,877 Montgomery Ward Trade Claims
("Ward Trade Claims")
157,500 shares Alexander & Baldwin, Inc. Common Stock
("Alexander & Baldwin Common")
78,000 shares American Physicians Service Group, Inc.
Common Stock ("American Physicians Common")
337,000 shares FSI International, Inc. Common Stock
("FSI Common")
104,675 shares MBIA Inc. Common Stock
2,725,000 shares Mitsui Marine & Fire Insurance Co., Ltd.
Common Stock ("Mitsui Common")
1,205,800 shares Silicon Valley Group, Inc. Common Stock
("Silicon Valley Common")
449,500 shares SpeedFam International, Inc. Common
("SpeedFam Common")
300,000 shares The Chiyoda Fire & Marine Insurance Co.,
Ltd. Common Stock ("Chiyoda Common")
3,113,000 shares The Long-Term Credit Bank of Japan, Ltd.
Common Stock ("LTCB Common")
35,000 shares The Nissan Fire & Marine Insurance Co.,
Ltd. Common Stock ("Nissan Common")
985,000 shares The Yasuda Fire & Marine Insurance Co.,
Ltd. Common Stock ("Yasuda Common")
200,000 shares 3Com Corp. Common Stock ("3Com Common")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES POSITIONS ELIMINATED
223,900 shares CapMac Holdings Inc. Common Stock
AVX is a well-financed manufacturer of passive electronic components:
capacitors, resistors, filters, and the like. The electronic components industry
is fairly cyclical in nature and is undergoing some difficulties near term, but
longer term, the outlook for components seems bright. While AVX is working
toward reducing its reliance on palladium in favor of nickel and copper,
financial results have been negatively impacted by the skyrocketing price of
palladium, a chief raw material used in the manufacture of ceramic capacitors.
Palladium spot prices have soared to an 18-year high recently, from a low of
around $150 per troy ounce last May to roughly $350 per troy ounce,
substantially driving up AVX's cost of goods. Longer term, we believe demand for
the passive components that AVX makes will be driven by increased use in
electronic devices, such as cellular phones, appliances and electronics in
automobiles. At December 31, 1997, AVX's cash and equivalents alone totaled 90%
of book liabilities.
ValueVision had been scheduled to merge with National Media. The transaction is
now "on hold." The Fund's position in both common stocks is teeny.
I am one of the founders of Nabors and still am a relatively large stockholder
and a director. I think the company is superbly managed by a team headed by Gene
Isenberg. Nabors Common was acquired at less than one-half the price the common
reached earlier this year, with the decline apparently attributable mostly to
cutbacks in oil drilling occasioned by declines in crude prices. Nabors, an oil
service company, is the largest contract land driller in the lower 48 States,
Canada and Alaska. It also has extensive interests throughout the world. Nabors
is, of course, extremely well-financed. The one problem I have with the Nabors
investment revolves around the possibility that over the real long term, demand
for automotive fuel will decline as automotive fuel economy increases. Toyota
Motors is selling token amounts of the Prius car in Japan, a hybrid
electric-gasoline powered vehicle that gets 70 miles per gallon. The demand for
the Prius is heavy. Meanwhile, oil demand has generally been increasing and
ought to continue to increase over the next 3 to 5 years. No matter what the
future holds, I have a reasonable degree of confidence that the Nabors
management is skilled enough, and alert enough, to deploy, or redeploy its high
quality resource base productively over the long term, whether in oil service,
or elsewhere.
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While I think that the bulk of the Fund's investments in Japan qualify as safe
and cheap, this probably would be less true were TAVF to be involved with
currency fluctuations between the U.S. Dollar and Japanese Yen. To minimize
currency risk, the Fund has been acquiring, at what appears to be nominal
prices, out-of-the money Japanese Yen Put Options. During the quarter we
increased our currency hedge by a $50,000,000 notional amount to $150,000,000.
TAVF is protected in the event that the value of the Yen relative to the Dollar
really nosedives, although the Fund is unprotected basically if the Yen falls in
value relative to the dollar, by 7%-10%. I have signed off on the proposition
that Japan will remain a politically stable industrial democracy for the
foreseeable future. In the interim, though, many fluctuations seem possible,
especially in the relative value of the Japanese Yen.
Sometimes, but hopefully not frequently, TAVF departs from its investment
standards. The acquisition of LTCB Common seems to be one of these times. LTCB
Common appears to be cheap, selling at maybe 50% to 60% of pro-forma book value,
but it is not safe given the huge amount of present and potential non-performing
loans this giant bank may have to rationalize. Also, LTCB conceivably could have
difficulty rolling over outstanding debentures which are part of the bank's
capitalization as these instruments mature. Specifically, while there probably
is no danger that this bank will be shut down, there may be considerable risk
that LTCB Common will be wiped out or be subject to massive dilution if there is
to be a recapitalization.
A primary reason for our speculating in LTCB Common is that LTCB Common ought to
have a huge upside potential based on its Strategic Alliance with Swiss Bank
Corporation. The core of the Strategic Alliance is to use three Japan-based
joint ventures to become involved in asset management, investment banking and
private banking in Japan and around the world. The prospects for asset
management in Japan may be particularly enticing. On April 15, LTCB and Swiss
Bank Corporation announced that each now owns 50% of a newly-formed company,
LTCB UBS Brinson Co., Ltd. Brinson, a quantitative money manager, seems to have
been super-successful in obtaining funds to manage in the U.S.
In the early 1990's when U.S. depository institutions were as troubled as
Japanese depository institutions are today, Third Avenue was very successful in
investing in depository institutions at prices usually no greater than 70% of
pro-forma book value. We observed at that time that since banks were so
undercapitalized, it made much more sense to buy common stocks directly from
banks rather than from stockholders. By buying directly from banks, TAVF
contributed to solving the problem of capital inadequacy. Further, the ability
to undertake "due diligence" investiga-
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tions was enhanced when investments were being made directly into depository
institutions. The Fund would like to duplicate its early 1990's U.S. experience
in Japan in the late 1990's. Whether this will be possible in actuality is hard
to say. TAVF has had some very preliminary, and indirect conversations with
several Japanese banks. Conceptually, the banks ought to be very interested in
TAVF:
1) Unlike U.S. banks that might buy Japanese bank common stocks, the Fund
is not interested in control, or in any way participating in management.
2) The Fund has little need for cash return in the form of dividends.
3) Third Avenue is a long-term value player, willing to live through
short-term difficulties provided the difficulties do not seem to result in
permanent impairments of capital.
4) Obtaining equity capital from TAVF probably entails less expense and
less uncertainty than trying to sell common stocks publicly.
All TAVF wants for delivering these benefits is highly attractive pricing.
In developing this approach to Japanese banks, it seemed logical to conclude
that Third Avenue might deliver the same kind of benefits to U.S. companies,
especially small cap - high tech issuers. To date, we have limited our
investments to companies that are exceptionally well capitalized. There may be a
number of companies out there with excellent operations which are not
well-capitalized. By investing directly, TAVF can contribute toward making these
companies well-capitalized using the concepts we developed in making direct
investments into banks.
The situation with Ward Trade Claims remains unchanged. At the Fund's pricing,
it may be hard to lose money - the upside potential, though, continues to seem
hard to gauge.
During the quarter, the Fund added modestly to its positions in Alexander &
Baldwin Common, American Physicians Common and 3Com Common. TAVF's major
commitments during the quarter were to the common stocks of companies in two
industries where there appear to be outstanding values in terms of safe and
cheap: Japanese non-life insurance companies and U.S. semi-conductor equipment
manufacturers. Japanese non-life company issues acquired were Chiyoda Common,
Mitsui Common, Nissan Common and Yasuda Common. U.S. semi-conductor equipment
issues acquired were FSI Common, Silicon Valley Common and SpeedFam Common.
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THE TAVF APPROACH TO VALUATION CONTRASTED WITH OTHER APPROACHES
The Fund acquired an initial position in Toyoda Common during the quarter at an
average price in U.S. dollars of $17.18 per share. Toyoda analytically consists
of three elements: manufacturing operations, an investment in Toyota Motors
Corporation Common Stock ("Toyota Motors Common"), and investments in other
marketable securities:
(000 AND PER SHARE)
---------------------------------------
PER TOYODA SHARE
(U.S.$) 315,000 SHARES (a)
----------------------- -----------------
Operating businesses valued at
6x and 8x operating income -
latest audit $1,555,477 2,073,968
Less non-convertible funded debt 225,600 225,600
---------- ----------
Value of operating business, net 1,329,246 1,848,368 $4.22 $5.87
192,735 shares Toyota Motors Common
valued at market of $26 5,010,850 5,010,850 15.91 15.91
Remaining Portfolio of Marketable
Securities valued at market
4/30/98 1,991,607 1,991,607 6.32 6.32
----- -----
Net Asset Value ("NAV") appraising
Toyoda as a closed-end investment
company $26.45 $28.10
------ ------
Discount from NAV at market price of $17.54
for Toyoda Common 33.7% 37.6%
(a) approximate number of common shares outstanding on an all-converted basis
after share repurchases
Toyoda had founded Toyota Motors in 1933. The two companies became separate
corporate entities in 1937. The relationship between Toyoda and Toyota Motors
has remained close ever since. Approximately 51% of Toyoda revenues in the
fiscal year ended March 31, 1997 were in the production of automobiles, castings
and engines for Toyota Motors, another 23% were in the production of industrial
equipment, notably forklifts, marketed under the Toyota name, and another 23% of
revenues were in air conditioning compressors for automobiles. Further, most of
Toyoda's
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remaining investment portfolio, other than the investment in Toyota Motors
Common, consists of the common stocks of other Toyota Motors' affiliates.
For TAVF, Toyoda Common is a very attractive value purchase at its current
price, which is about equal to the Fund's cost. TAVF has bought into a high
quality business at a substantial discount from NAV. I have long thought that
Toyota Motors was just about the best automotive company in the world. It, too,
is extremely well financed and seems to have decent, long-term growth prospects
not only as an automotive manufacturer with a world-wide presence, but also as a
promising participant in the telecommunications, housing and finance industries.
I am not quite sure of what the Fund's ultimate exit strategy for Toyoda Common
might be, but it could include market appreciation if Toyoda remains in its
current form, and/or appreciation arising out of a Toyoda resource conversion if
say, Toyoda is ever merged with Toyota Motors or if Toyoda's portfolio,
including Toyota Motors Common, is ever spun-off as a separate investment
company to Toyoda's shareholders. The largest Toyoda shareholder is Toyota
Motors, which holds an approximate 22% common stock interest in Toyoda on an
all-converted basis. Toyoda is the largest holder of Toyota Motors Common,
owning about 5% of the outstanding issue.
The principal drawback for the Toyoda investment to Third Avenue is that the
public disclosures are not as comprehensive (at least in the English language)
or as timely as they ought to be and as they would be were Toyoda a filing
company with the U.S. Securities and Exchange Commission. Other analysts will
find much else wrong with Toyoda Common.
It ought to be instructive in giving TAVF shareholders insight into the Fund's
investment approach to examine not only how we at Third Avenue look at Toyoda
Common but also how other analysts and money managers probably would view Toyoda
Common. This comparative examination, of course, results in overgeneralizations
about other analytic approaches since there will always be differences among
individual analysts in assessing any specific security. Nonetheless, the
exercise ought to be helpful. Other, non-TAVF, approaches include the following:
Control Investors
Risk Arbitrage
Academic Finance as embodied in the Efficient Market
Hypothesis ("EMH") and Efficient Portfolio Theory ("EPT")
Graham and Dodd Fundamentalism
Broker/Dealer Research Departments and Conventional Money Managers
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Most control investors, say Ron Perelman, Richard Rainwater and Larry Tisch,
probably would agree with TAVF that Toyoda is an attractive common stock,
price-wise. They probably would use pretty much the same analytic techniques as
the Fund to determine that Toyoda Common was an attractive security at its
current price. However, control investors probably would have no interest in
Toyoda Common because it does not seem to be a "do-able deal"; no elements of
control seem available to anyone outside the Toyota family of companies. Toyoda
Common seems like a lot of other common stocks control analysts look at. It
tends to be not that hard to find "attractive securities" among publicly-traded
common stocks from a control point of view. It tends to be a bitch, though, to
find issues which are not only "attractive securities" but also "do-able deals."
Risk Arbitrageurs would have no interest in Toyoda Common now. Risk arbitrage
exists where there are opportunities for profits from situations where there are
relatively determinant values to be realized in relatively determinant periods
of time. A risk arbitrage situation would exist, for example, if Toyoda and
Toyota Motors announced now that they intended to merge. In that instance, risk
arbitrageurs might acquire Toyoda Common at prices of, say, 24 or 27. Markets,
especially risk arbitrage markets, tend enough toward efficiency so that one
cannot engage in risk arbitrage unless one is willing to pay up compared with
pricing that is attractive for TAVF. Within the risk arbitrage community, what
Third Avenue does is known as "pre-deal" investing. However, what Third Avenue
is doing in Toyoda Common may really be "pre-pre-deal" investing since, aside
from a modest common stock buy-back program, there seem to be no indications
that Toyoda management contemplates having the company undertake any activities
outside of the ordinary course of business for the foreseeable future.
Academics would be unconscious of the business characteristics underlying Toyoda
Common. This is not what they do. If asked to explain why Toyoda Common as a
marketable security sells at such a substantial discount from the value of
Toyoda's net assets, which are also measured largely by the market values of its
portfolio securities, the likely explanation would revolve around something
called "investor expectations." The primary thrust of most academic analyses
would be to measure the past total return performance of the fund holding Toyoda
Common versus indexes or other funds with the same investment style. Academics
also might be interested in asset-allocation - how much of a fund's assets ought
to be in Japanese securities or automotive securities. If Toyoda Common were to
be valued independent of its market price, that value would be determined by
forecasts of discounted cash flows.
Some Academics might be aware of the efficient market arbitrage inherent in the
principal characteristics affecting Toyoda; to wit, the Company enjoys an
exception-
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ally strong financial position; Toyoda Common sells at a low price compared with
underlying values; and Japanese interest rates are ultra-low currently. For
example, Toyoda theoretically could borrow on a long-term basis the equivalent
of about $1,125,000,000 at 3% and use the proceeds to acquire via a Cash Tender
Offer 50,000,000 Toyoda Common at $22.50 per share, equal to a premium over
current market of about 28%. The net interest cost to Toyoda for the borrowing,
after eliminating the dividends on the 50,000,000 shares of Toyoda Common to be
acquired would be less than $28 million per year before taking account of
possible tax savings from substituting interest charges for dividend payments.
Partly because such a transaction would result in increasing Toyoda's pro-forma
earnings per share and Toyoda's pro-forma NAV per share, and partly because such
a transaction would indicate that Toyoda management is employing its resources
more aggressively, TAVF would conclude that the Cash Tender Offer would likely
result in an improved market price for Toyoda Common after the conclusion of the
Cash Tender Offer over what the market price would otherwise be. Most Academics,
in contrast, would likely conclude that the benefits of such a theoretical
buy-back are already reflected in the existing market price of Toyoda Common.
In an important sense, Graham and Dodd might be just like TAVF in finding Toyoda
Common attractive because it is priced below the per share value of its net
current assets, including investments at market value, after deducting all book
liabilities short term and long term, except for deferred income taxes on the
unrealized appreciation of portfolio securities. However, outside of these
"net-net" considerations, Graham and Dodd would tend to emphasize a whole gamut
of factors pretty much ignored by TAVF. Graham and Dodd probably would place
great weight on Toyoda's earnings record over the past five years; its present
dividend rate and dividend policy; and the immediate outlook for the Japanese
economy, the Japanese Stock Market, and the world-wide automotive industry. For
Graham and Dodd, the perceived exit strategy for Toyoda Common would be sale in
the stock market as reported earnings increase. Graham and Dodd probably would
weight much less heavily than TAVF, possible exit strategies occasioned by
resource conversion events such as mergers and acquisitions, spin-offs or
massive share repurchases.
The primary objective of Broker/Dealer Research Department Analysts and
Conventional Money Managers is to estimate the price, or range of prices, at
which Toyoda Common (or any equity security) might trade in markets for passive
investments over the next 30 days to, say, one year. The probable approach would
emphasize top-down considerations (rather than TAVF's bottom-up). Factors that
Research Departments and Conventional Money Managers probably would emphasize
encompass the following:
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1) Outlook for the Japanese Stock Market with the outlook for the Japanese
economy a principal variable in determining a market outlook.
2) Outlook for the world-wide automotive industry in the period just ahead.
3) Earnings outlooks for the next year for Toyoda and Toyota Motors.
4) Is Toyoda Common selling at a lower price earnings ratio than comparably
situated issues?
5) Is the fact that Toyoda Common trades at a discount from "net-net" asset
value unique? (A fair number of Japanese equities seem to be trading currently
at prices less than net-net asset value.)
6) Is there any resource conversion catalyst in evidence that might cause
the Toyoda common NAV discount to narrow or disappear over the next year or so?
7) Is Toyoda Common trading near the lows of recent years? (It is trading
about in the middle of its five year price range.)
Probably, neither the Research Department Analyst nor the Conventional Money
Manager would have any interest in Toyoda Common unless they thought there was a
rational basis for expecting near-term price appreciation in Toyoda Common. Many
of these analysts might conclude that Toyoda Common was a good way to
participate in a Japanese Stock Market rebound. But they would be unlikely to
become bullish about Toyoda Common unless they first foresaw a Japanese Stock
Market rebound.
I, personally, am very comfortable with the TAVF approach to analysis as
embodied in the reasoning behind the Fund's investment in Toyoda Common. While
the Fund seems quite different than others in its analytic approach,TAVF has no
magic formula. There are things to be said in favor of the approaches followed
by Risk Arbitrageurs, Academia, Graham and Dodd, and Conventional Money
Managers, especially if one's portfolio management bottoms on having concerns
about near-term market performance for individual securities. Many of these
near-term concerns are quite legitimate in connection with the management of
other portfolios. They just don't seem to have any relevance for the management
of the TAVF portfolio. I will write you again when the report for the period to
end July 31, 1998 is published.
Sincerely yours,
/s/ Martin J. Whitman
- ---------------------------
Martin J. Whitman
Chairman of the Board
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Securities - 4.26%
5,000,000 Arcadia Automobile Receivables Trust
Series 1997-C A3, Subordinated Bond,
6.25% due 11/15/01 $ 5,032,550
25,000,000 Ford Credit Auto Owner Trust
Series 1997-B A2, Subordinated Bond,
5.95% due 1/15/00 25,031,750
20,699,943 Honda Auto Receivables Grantor Trust
Series 1997-A A, Subordinated Bond,
5.85% due 2/15/03 20,695,182
1,259,802 Olympic Automobile Receivables Trust
Series 1995-E CTFS, Subordinated
Bond, 5.95% due 6/15/02 1,257,773
14,933,766 Residential Funding Mortgage
Securities Co., Inc. Series 1996-S9 A12,
7.25% due 4/25/26 15,032,079
12,500,000 Standard Credit Card Master Trust
Series 1993-3 A, Subordinated Bond,
5.50% due 2/7/00 12,500,000
2,907,455 The Money Store Home Equity Trust
Series 1992-A A, 6.95% due 1/15/07 2,920,190
2,796,631 The Money Store Home Equity Trust
Series 1995-B A3, 6.65% due 1/15/16 2,804,713
-----------
TOTAL ASSET BACKED SECURITIES
(Cost $85,164,465) 85,274,237 4.26%
-----------
- --------------------------------------------------------------------------------------------------
Bank and Other Debt - 1.27%
Oil Services 1,578,611 Cimarron Petroleum Corp. (c)(d) 1,597,837 0.08%
-----------
Retail 295,370 Lechmere, Inc. Trade Claim (c) 23,630
13,000,000 Montgomery Ward Series I 8.37%,
7/15/02 (c) * 5,330,000
8,571,364 Montgomery Ward Series C 9.24%,
3/15/03 (c) * 3,514,259
10,000,000 Montgomery Ward Series F 9.81%,
3/15/03 (c) * 4,100,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
11
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bank and Other Debt (continued)
Retail (continued) 26,576,795 Montgomery Ward Trade Claims (c) $ 10,896,486
------------
23,864,375 1.19%
------------
TOTAL BANK AND OTHER DEBT
(Cost $22,743,386) 25,462,212
------------
- ----------------------------------------------------------------------------------------------------
Corporate Bonds - 0.37%
Foreign Issuers- 6,428,575 CGA Special Account Trust (b) (c) 6,428,575 0.32%
Bermuda ------------
Membership Sports & 1,064,267 Thousand Trails, Inc.,
Recreation Clubs Pay-In-Kind Notes 12%, 7/15/03 968,483 0.05%
------------
TOTAL CORPORATE BONDS
(Cost $7,461,481) 7,397,058
------------
- -----------------------------------------------------------------------------------------------------
U.S. Government Agency Bonds (Collateralized Mortgage Obligations) - 20.03%
Planned Amortization 2,104,244 Fannie Mae
Classes Series X-188A E, 5.40% due 7/25/03 2,097,300
21,181,564 Fannie Mae
Series 1993-78 D, 5.95% due 5/25/05 21,155,299
4,552,551 Fannie Mae
Series 1993-131 C, 5.75% due 6/25/06 4,537,346
47,000,000 Fannie Mae
Series 1993-174 D, 6.00% due 7/25/06 46,846,310
16,875,000 Fannie Mae
Series 1993-191 PE, 5.80% due 9/25/06 16,815,431
15,801,436 Fannie Mae
Series 1998-20 A, 6.00% due 9/18/07 15,807,440
25,774,000 Fannie Mae
Series 1998-24 PA, 6.00% due 12/18/08 25,774,000
48,512,790 Fannie Mae
Series 1998-16 PA, 6.00% due 04/18/09 48,528,314
6,180,386 Fannie Mae
Series 1994-41 PD, 5.75% due 4/25/15 6,161,288
7,735,556 Fannie Mae
Series G-92-65 E, 6.50% due 12/25/16 7,757,912
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
12
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Agency Bonds (Collateralized Mortgage Obligations) (continued)
Planned Amortization 10,367,041 Freddie Mac
Classes (continued) Series 1586 E, 5.50% due 9/15/03 $ 10,337,703
5,000,000 Freddie Mac
Series 1580 N, 5.85% due 7/15/04 4,995,500
20,000,000 Freddie Mac
Series 1601 PE, 5.75% due 1/15/06 19,945,600
37,765,023 Freddie Mac
Series 1679 A, 5.25% due 9/15/06 37,448,552
16,948,032 Freddie Mac
Series 2031 PA, 5.75% due 2/15/07 17,099,717
39,035,000 Freddie Mac
Series 2046 PA, 6.50% due 7/15/08 39,278,969
23,700,000 Freddie Mac
Series 1985 PB, 6.25% due 8/17/12 23,686,965
6,000,000 Freddie Mac
Series 1998 PN, 6.25% due 7/15/14 6,003,180
20,000,000 Freddie Mac
Series 1978 PA, 6.30% due 8/15/16 20,099,600
12,000,000 Freddie Mac
Series 1547 PE, 6.00% due 3/15/17 11,987,880
10,000,000 Freddie Mac
Series 1610 PE, 6.00% due 4/15/17 10,000,100
4,403,061 Freddie Mac
Series 2007 CA, 7.50% due 9/15/23 4,493,015
------------
TOTAL U.S. GOVERNMENT AGENCY BONDS
(Cost $401,007,839) 400,857,421 20.03%
------------
SHARES
- ----------------------------------------------------------------------------------------------------
Common Stocks and Warrants - 62.41%
Annuities & Mutual Fund 163,300 John Nuveen & Co., Inc. Class A 5,919,625
Management & Sales 408,000 Liberty Financial Companies, Inc. 16,345,500
450,000 SunAmerica, Inc. 22,471,875
-----------
44,737,000 2.24%
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks and Warrants (continued)
Apparel Manufacturers 150,000 Kleinerts, Inc. (a) (c) $ 2,700,000 0.13%
-----------
Banking-Japan 261,000 The Chuo Trust & Banking Co., Ltd. 800,007
4,000,000 The Long-Term Credit Bank of
Japan, Ltd. 6,569,287
1,000,000 The Sakura Bank, Ltd. 3,443,578
-----------
10,812,872 0.54%
-----------
Bermuda Based 838,710 CGA Group, Ltd. (a) (b) (c) 4,193,550
Financial Institutions 91,999 Cobalt Holdings, LLC (c) 920
118,449 ESG Re, Ltd. (a) (c) 3,035,256
85,917 LaSalle Re Holdings, Ltd. 3,141,340
912,442 St. George Holdings, Ltd.
Class A (a) (b) (c) 91,244
7,549 St. George Holdings, Ltd.
Class B (a) (b) (c) 755
-----------
10,463,065 0.52%
-----------
Building Products 44,000 Central Sprinkler Corp. (a) 484,000
& Related 125,000 Cummins Engine Co., Inc. 6,796,875
145,000 H.B. Fuller Co. 9,098,750
125,400 Tecumseh Products Co. Class A (b) 6,317,025
417,300 Tecumseh Products Co. Class B (b) 22,038,656
-----------
44,735,306 2.23%
-----------
Business Development 43,200 Capital Southwest Corp. 4,546,800 0.23%
Companies -----------
Computers, Networks 651,300 3Com Corp. (a) 22,307,025
& Software 365,000 Electronics for Imaging, Inc. (a) 7,482,500
391,200 NCR Corp. (a) 14,352,150
100,000 Novell, Inc. (a) 1,000,000
-----------
45,141,675 2.26%
-----------
Depository Institutions 53,000 Astoria Financial Corp. 3,107,125
147,034 Bankers Trust New York Corp. 18,985,765
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
14
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks and Warrants (continued)
Depository Institutions 218,500 Carver Bancorp, Inc. (b) $ 3,250,188
(continued) 62,500 First Colorado Bancorp, Inc. 1,828,125
149,227 Golden State Bancorp., Inc. (a) 5,819,853
53,480 Golden State Bancorp., Inc.
Warrants, 8/21/00 (a) 1,453,987
20,000 Letchworth Independent
Bancshares Corp. 1,180,000
155,952 Marshall & Ilsley Corp. 9,123,192
34,783 Peoples Heritage Financial Group, Inc. 1,678,280
-----------
46,426,515 2.32%
-----------
Electronic Components 475,100 AVX Corp. 9,769,244 0.49%
-----------
Financial Insurance 200,000 Ambac Financial Group, Inc. 11,337,500
244,100 Enhance Financial Services Group, Inc. 16,751,364
750,000 Financial Security Assurance
Holdings Ltd. 44,906,250
344,675 MBIA Inc. 25,721,372
-----------
98,716,486 4.93%
-----------
Financial Services 13,104 Associates First Capital Corp. 979,524 0.05%
-----------
Food Manufacturers 328,000 J & J Snack Foods Corp. (a) 6,396,000
& Purveyors 95,000 Premark International, Inc. 3,170,625
172,200 Sbarro, Inc. 5,079,900
109,100 Weis Markets, Inc. 3,920,781
-----------
18,567,306 0.93%
-----------
Holding Companies 50,000 Aristotle Corp. (a) 306,250
21,400 White River Corp. (a) 1,872,500
-----------
2,178,750 0.11%
-----------
Industrial - Japan 1,079,000 Toyoda Automatic Loom Works, Ltd. 19,108,904 0.95%
-----------
Insurance Holding 189,978 ACMAT Corp. Class A (a) (b) 2,968,406
Companies 803,669 Danielson Holding Corp. (a) (b) (c) 6,228,435
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
15
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks and Warrants (continued)
Insurance Holding 50,000 Fund American Enterprises
Companies (continued) Holdings, Inc. $ 6,981,250
161,000 Leucadia National Corp. 6,027,438
409,700 Risk Capital Holdings, Inc. (a) 10,268,106
5,490 Sen-Tech International Holdings,
Inc. (a) (c) 2,139,837
-----------
34,613,472 1.73%
-----------
Life Insurance 434,536 ReliaStar Financial Corp. 19,825,705 0.99%
-----------
Manufactured Housing 89,000 Liberty Homes, Inc. Class A 956,750
40,000 Liberty Homes, Inc. Class B 435,000
13,500 Palm Harbor Homes, Inc. (a) 599,062
-----------
1,990,812 0.10%
-----------
Media 27,600 National Media Corp. (a) 41,400
276,600 ValueVision International, Inc.
Class A (a) 968,100
-----------
1,009,500 0.05%
-----------
Medical Supplies 81,400 Acuson Corp. (a) 1,526,250
& Services 342,300 Datascope Corp. (a) 9,627,187
348,500 Physio-Control International Corp. (a) 8,015,500
501,100 Protocol Systems, Inc. (a) (b) 4,854,406
90,750 St. Jude Medical, Inc. (a) 3,215,953
-----------
27,239,296 1.36%
-----------
Membership Sports & 237,267 Thousand Trails, Inc. (a) 882,337 0.04%
Recreation Clubs -----------
Mortgage Insurance 152,800 CMAC Investment Corp. 9,865,150 0.49%
-----------
Motor Vehicles & 50,000 Ford Motor Co. 2,290,625 0.11%
Cars' Bodies -----------
Non-Life 7,319,000 Mitsui Marine & Fire Insurance Co., Ltd. 37,611,444
Insurance-Japan 4,602,000 The Chiyoda Fire & Marine
Insurance Co., Ltd. 18,006,763
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
16
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks and Warrants (continued)
Non-Life 4,414,000 The Nissan Fire & Marine
Insurance-Japan Insurance Co., Ltd. $ 16,035,114
(continued) 3,246,000 The Sumitomo Marine & Fire Insurance
Co., Ltd. (a) 19,383,134
850,000 The Tokio Marine & Fire Insurance
Co., Ltd., Sponsored ADR 46,856,250
2,985,000 The Yasuda Fire & Marine
Insurance Co., Ltd. 13,554,830
-----------
151,447,535 7.58%
-----------
Oil Services 850,000 Nabors Industries, Inc. (a) 21,409,375 1.07%
-----------
Real Estate 657,500 Alexander & Baldwin, Inc. 18,820,937
31,000 Consolidated-Tomoka Land Co. 577,375
206,400 Forest City Enterprises, Inc. Class A 11,919,600
3,750 Forest City Enterprises, Inc. Class B 216,445
880,336 Koger Equity, Inc. 18,872,203
846 Public Storage, Inc. 26,015
163,200 St. Joe Corp. 5,161,200
3,045,508 Tejon Ranch Co. (b) (c) 71,199,835
-----------
126,793,610 6.33%
-----------
Security Brokers, 223,600 Jefferies Group, Inc. 11,054,225
Dealers & 446,666 Legg Mason, Inc. 26,353,294
Flotation Companies 1,181,250 Raymond James Financial, Inc. 38,464,453
161,941 Ryan, Beck & Co., Inc. 1,659,895
-----------
77,531,867 3.87%
-----------
Semiconductor 25,000 AG Associates, Inc. (a) 78,125
Equipment 400,000 Applied Materials, Inc. (a) 14,450,000
Manufacturers 793,400 Electro Scientific Industries, Inc. (a) (b) 30,149,200
1,189,100 Electroglas, Inc. (a) (b) 20,066,063
2,820,900 FSI International, Inc. (a) (b) 33,145,575
369,200 KLA-Tencor Corp. (a) 14,883,375
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
17
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks and Warrants (continued)
Semiconductor 300,000 Photronics, Inc. (a) $ 11,062,500
Equipment 2,360,400 Silicon Valley Group, Inc. (a) (b) 44,847,600
Manufacturers 776,200 SpeedFam International, Inc. (a) 22,509,800
(continued) 638,800 Veeco Instruments, Inc. (a) (b) 25,791,550
262,500 Zygo Corp. (a) 5,578,125
--------------
222,561,913 11.12%
--------------
Small-Cap Technology 108,750 AFC Cable Systems, Inc. (a) 3,779,062
537,000 American Physicians Service
Group, Inc. (a) (b) 3,826,125
127,000 Analogic Corp. 5,921,375
455,400 Boston Communications Group, Inc. (a) 4,383,225
168,500 Evans & Sutherland Computer Corp. (a) 4,865,437
81,500 FDP Corp. 978,000
1,324,200 Glenayre Technologies, Inc. (a) 20,773,388
140,600 H & Q Life Sciences Investors 2,012,337
154,800 Integrated Systems, Inc. (a) 2,921,850
300,000 Interphase Corp. (a) (b) 2,428,110
293,000 Mountbatten, Inc. (a) (b) 3,992,125
412,200 Planar Systems, Inc. (a) 5,049,450
53,600 Sparton Corp. (a) 515,900
612,000 Texas Micro, Inc. (a) 2,275,844
306,900 Vertex Communications Corp. (a) (b) 8,171,213
--------------
71,893,441 3.59%
--------------
Title Insurance 1,222,050 First American Financial Corp. (b) 86,841,928
975,700 Stewart Information Services Corp. (b) 34,271,463
--------------
121,113,391 6.05%
--------------
TOTAL COMMON STOCKS AND
WARRANTS (Cost $775,431,851) 1,249,351,476
--------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
18
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OR
INVESTMENT VALUE % OF
AMOUNT ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Preferred Stock - 0.58%
Bermuda Based 222,513 CGA Group, Ltd., Series A (b) (c $ 5,562,826
Financial Institutions 171,429 CGA Group, Ltd., Series B (b) (c) 4,285,725
-----------
9,848,551 0.49%
-----------
Depository Institutions 20,000 Golden State Bancorp Convertible,
Non-Cumulative, 8.75%, Series A 1,885,000 0.09%
-----------
Insurance Companies 4,775 Ecclesiastical Insurance, 8.625% 10,479 0.00%
-----------
TOTAL PREFERRED STOCK
(Cost $10,358,348) 11,744,030
-----------
- ----------------------------------------------------------------------------------------------------
Other Investments - 1.36%
Bermuda Based $ 2,215,000 ESG Partners, LP (c) 2,985,523 0.15%
-----------
Financial Institutions
Closed-End 652,100 American Government Income
Bond Funds Fund, Inc. 3,708,819 0.19%
-----------
Financial $ 15,000,000 American Capital Access
Insurance Holdings, LLC (c) 15,000,000 0.75%
-----------
Foreign Option $ 50,000,000 Japanese Yen November 1998
Contracts Put Options (c) (e) 1,158,750
$100,000,000 Japanese Yen April 1999
Put Options (c) (f) 1,047,500
-----------
2,206,250 0.11%
-----------
Insurance Holding $ 1,858,756 Head Insurance Investors LP (c) 1,858,756
Companies 100 HIPI Holdings, Inc. (c) 1,267,448
-----------
3,126,204 0.16%
-----------
TOTAL OTHER INVESTMENTS
(Cost $26,033,532) 27,026,796
-----------
Principal
Amount ($)
- ----------------------------------------------------------------------------------------------------
Short Term Investments - 9.38%
U.S. Government 35,000,000 Federal Farm Credit Bank
Agency Obligations 5.50%, 6/1/98 34,999,037
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
19
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short Term Investments (continued)
U.S. Government 28,000,000 Freddie Mac Discount Note
Agency Obligatio ns 5.50%, 8/4/98 $ 27,604,696
(continued) 17,993,000 Freddie Mac Discount Note
5.47%, 10/8/98 17,565,163
17,695,000 Freddie Mac Discount Note
5.47%, 10/9/98 17,271,629
--------------
97,440,525 4.87%
--------------
U.S. Treasury Bills 10,000,000 U.S. Treasury Bill 4.99%, 5/7/98 9,991,692
8,000,000 U.S. Treasury Bill 5.14%, 5/21/98 7,977,155
20,000,000 U.S. Treasury Bill 4.80%, 6/4/98 19,909,333
10,000,000 U.S. Treasury Bill 4.93%, 7/2/98 9,917,850
21,000,000 U.S. Treasury Bill 4.93%, 7/9/98 20,806,800
20,000,000 U.S. Treasury Bill 5.04%, 8/20/98 19,696,600
1,960,000 U.S. Treasury Bill 4.94%, 2/4/99 (g) 1,882,986
--------------
90,182,416 4.51%
--------------
TOTAL SHORT TERM INVESTMENTS 187,622,941
(Cost $187,615,052) --------------
TOTAL INVESTMENT PORTFOLIO - 99.66% 1,994,736,171
(Cost $1,515,815,954) --------------
CASH AND OTHER ASSETS
LESS LIABILITIES - 0.34% 6,752,970
--------------
NET ASSETS - 100.00% $2,001,489,141
(Applicable to 58,456,123 ==============
shares outstanding)
NET ASSET VALUE PER SHARE $34.24
======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
20
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1998
(UNAUDITED)
Notes:
(a) Non-income producing securities.
(b)Affiliated issuers-as defined under the Investment Company Act of 1940
(ownership of 5% or more of the outstanding voting securities of these
issuers).
(c) Restricted/fair valued securities.
(d) Interest accrued at a current rate of prime + 2%.
(e) 50 million U.S. Dollar notional amount may be exercised on November 10, 1998
to sell 6.7 billion Japanese Yen at a strike price of 134.2.
(f) 100 million U.S. Dollar notional amount may be exercised on April 17, 1999
to sell 14.4 billion Japanese Yen at a strike price of 143.8.
(g) Security segregated for future Fund commitments.
* Issuer in default.
ADR: American Depository Receipt.
FORWARD FOREIGN CURRENCY CONTRACTS (NOTE 1):
Third Avenue Value Fund had the following open forward currency contract as of
April 30, 1998:
Settlement Local Current Unrealized
Forward Foreign Currency Sale Contract Date Currency Value Gain
- --------------------------------------------------------------------------------
Japanese Yen 07/30/98 138,808,400 $1,050,404 $43,179
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
21
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1998
(UNAUDITED)
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $1,230,683,208) $1,563,785,593
Affiliated issuers (identified cost of $285,132,746) 430,950,578
--------------
Total investments (identified cost of $1,515,815,954) 1,994,736,171
Cash and cash equivalents (Note 1) 6,927,131
Receivable for fund shares sold 4,241,126
Dividends and interest receivable 4,891,114
Net unrealized appreciation on forward foreign currency contracts 43,179
Other assets 195,525
--------------
Total assets 2,011,034,246
--------------
LIABILITIES:
Payable for securities purchased 4,529,368
Payable for fund shares redeemed 3,203,122
Payable to investment adviser 1,472,682
Accounts payable and accrued expenses 286,092
Payable for service fees (Note 3) 53,841
Commitments (Note 6) --
--------------
Total liabilities 9,545,105
--------------
Net assets $2,001,489,141
==============
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par value,
58,456,123 shares outstanding $1,502,205,251
Accumulated undistributed net investment income 8,310,530
Accumulated undistributed net realized gains from
investment transactions 12,036,038
Net unrealized appreciation of investments 478,937,322
--------------
Net assets applicable to capital shares outstanding $2,001,489,141
==============
Net asset value, offering and redemption price per share $34.24
======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
22
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
INVESTMENT INCOME:
Interest-unaffiliated issuers $ 20,455,115
Interest-affiliated issuers 152,847
Dividends-unaffiliated issuers (net of foreign
withholding tax of $189,991) 4,283,943
Dividends-affiliated issuers 1,218,824
Other income 8,000
------------
Total investment income 26,118,729
------------
EXPENSES:
Investment advisory fees (Note 3) 8,086,274
Service fees (Note 3) 417,541
Transfer agent fees 409,916
Reports to shareholders 156,205
Administration fees (Note 3) 155,556
Custodian fees (Note 4) 133,554
Registration and filing fees 97,537
Accounting services 63,881
Miscellaneous expenses 46,542
Insurance expenses 42,835
Auditing and tax consulting fees 40,115
Legal fees 36,968
Directors' fees and expenses 27,977
------------
Total operating expenses 9,714,901
------------
Net investment income 16,403,828
------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on investments - unaffiliated issuers 10,390,478
Net realized gains on foreign currency transactions 2,377,500
Net change in unrealized appreciation on investments 135,707,665
Net change in unrealized appreciation on forward contracts 43,179
Net change in unrealized depreciation on translation of
other assets and liabilities denominated in
foreign currency (26,074)
------------
Net realized and unrealized gains on
investments 148,492,748
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $164,896,576
============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
23
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS FOR THE
ENDED YEAR
4/30/98 ENDED
(UNAUDITED) 10/31/97
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 16,403,828 $ 21,708,924
Net realized gains on investments - unaffiliated issuers 10,390,478 7,471,501
Net realized gains on investments - affiliated issuers -- 1,892,646
Net realized gains (losses) on foreign
currency transactions 2,377,500 (4,303,734)
Net change in unrealized appreciation on investments 135,707,665 236,395,374
Net change in unrealized appreciation on
forward contracts 43,179 --
Net change in unrealized depreciation on translation
of other assets and liabilities denominated in
foreign currency (26,074) --
-------------- --------------
Net increase in net assets resulting from operations 164,896,576 263,164,711
-------------- --------------
DISTRIBUTIONS:
Dividends to shareholders from net investment income (21,900,552) (13,987,128)
Distributions to shareholders from net realized gains
on investments (8,575,656) (3,539,465)
-------------- ---------------
(30,476,208) (17,526,593)
-------------- ---------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 443,119,232 1,019,596,272
Net asset value of shares issued in
reinvestment of dividends and
distributions 27,593,464 15,120,982
Cost of shares redeemed (249,884,238) (200,962,398)
-------------- --------------
Net increase in net assets resulting from
capital share transactions 220,828,458 833,754,856
-------------- --------------
Net increase in net assets 355,248,826 1,079,392,974
Net assets at beginning of period 1,646,240,315 566,847,341
-------------- --------------
Net assets at end of period (including undistributed
net investment income of $8,310,530 and
$13,807,254, respectively) $2,001,489,141 $1,646,240,315
============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
24
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
FINANCIAL HIGHLIGHTS
Selected data (for a share outstanding throughout
each period) and ratios are as follows:
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED YEARS ENDED OCTOBER 31,
APRIL 30, 1998 -------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $31.94 $24.26 $21.53 $18.01 $17.92 $13.57
------ ------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income .29 .48 .53 .38 .29 .18
Net gain on securities
(both realized and unrealized) 2.58 7.92 2.76 3.53 .16 4.77
------ ----- ----- ----- ----- ------
Total from Investment Opertions 2.87 8.40 3.29 3.91 .45 4.95
------ ----- ----- ----- ----- ------
Less Distributions:
Dividends from net investment income (.41) (.57) (.41) (.25) (.22) (.24)
Distributions from realized gains (.16) (.15) (.15) (.14) (.14) (.36)
------ ----- ----- ----- ----- ------
Total Distributions (.57) (.72) (.56) (.39) (.36) (.60)
------ ----- ----- ----- ----- ------
Net Asset Value, End of
Period $34.24 $31.94 $24.26 $21.53 $18.01 $17.92
====== ===== ===== ===== ===== ======
Total Return 9.15% 35.31% 15.55% 22.31% 2.56% 37.36%
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $2,001,489 $1,646,240 $566,847 $312,722 $187,192 $118,958
Ratio of Expenses to Average
Net Assets 1.08%(1) 11.13% 1.21% 1.25% 1.16% 1.42%
Ratio of Net Income to Average Net Assets 1.83%(1) 12.10% 2.67% 2.24% 1.85% 1.45%
Portfolio Turnover Rate 4% 10% 14% 15% 5% 17%
</TABLE>
(1) Annualized
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
25
<PAGE>
[LOGO]
THIRD AVENUE SMALL-CAP VALUE FUND
Dear Fellow Shareholders:
At April 30, 1998, the end of our second fiscal quarter, the unaudited net asset
value attributable to the 12,630,818 common shares outstanding of Third Avenue
Small-Cap Value Fund ("Small-Cap Value" or the "Fund") was $13.14, compared with
the Fund's unaudited net asset value of $11.85 at January 31, 1998 and $10.05 at
April 30, 1997. As of, May 22, 1998, the unaudited net asset value attributable
to the 12,951,572 common shares outstanding was $12.86. As the Fund finished its
first year in April, it's perhaps only appropriate that I thank those of you who
supported us in the past year. To those of you relatively new to Third Avenue,
read on. You'll discover more about what we do.
QUARTERLY ACTIVITY
During the quarter, Small-Cap Value established new positions in the common
stocks of two companies, and added to 14 of its 36 existing positions. At April
30, 1998, Small-Cap Value held positions in 38 companies, the top 10 positions
of which accounted for approximately 35% of the Fund's net assets. The Fund sold
parts of two smallish positions during the quarter, its only meaningful sales
since the Fund's inception more than a year ago.
NUMBER OF SHARES NEW POSITIONS ACQUIRED
199,300 Avatar Holdings, Inc. Common Stock
("Avatar Common")
713,700 TimberWest Timber Trust
("TimberWest Units")
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
11,100 Alico, Inc. Common Stock
("Alico Common")
7,000 Boston Communications Group, Inc.
Common Stock ("Boston Communications Common")
76,400 Cabot Industrial Trust Common Stock
("Cabot Common")
101,900 Centigram Communications Corp.
Common Stock ("Centigram Common")
26
<PAGE>
[LOGO]
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
80,000 C. P. Clare, Corp. Common Stock
("C. P. Clare Common")
118,400 Deltic Timber Corp. Common Stock
("Deltic Common")
112,700 FSI International, Inc. Common Stock
("FSI Common")
72,500 HomeBase, Inc. Common Stock
("HomeBase Common")
10,000 Koger Equity, Inc. Common Stock
("Koger Common")
42,500 Silicon Valley Group, Inc. Common Stock
("SVG Common")
15,000 Sparton Corp. Common Stock
("Sparton Common")
154,400 Spectran Corp. Common Stock
("Spectran Common")
84,500 SpeedFam International, Inc.
Common Stock ("SpeedFam Common")
11,000 The Nissan Fire & Marine
Insurance Co., Ltd. Common Stock
("Nissan Common")
NUMBER OF SHARES DECREASES IN EXISTING POSITIONS
81,900 National Media Corp. Common Stock
("National Media Common")
234,000 ValueVision International, Inc.
("ValueVision Common")
During the quarter, Small-Cap Value made meaningful commitments of capital to
Avatar Holdings and TimberWest Timber Trust. Prices paid by the Fund for these
securities represent significant discounts to our estimate of their respective
Net Asset Values, the economic value of a company's assets less its liabilities.
Avatar develops real estate and owns and operates water and waste water
utilities. Avatar's major land
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holdings -- much of which is fully entitled -- are located in key markets in
Florida and Arizona. In the latter part of 1997, Avatar, with the help of new
management, began to focus on developing active adult/retirement communities and
single and multi-family homes, and developing, leasing and improving its
commercial and industrial properties. The company's 56,000 acres of land
holdings are substantially debt-free, possess important zoning characteristics
and represent enough inventory to build on for many years to come. Avatar should
benefit from demographic trends as growing numbers of individuals choose Florida
or Arizona for retirement or second homes, and as immigation from Latin America
and the Caribbean also contribute to positive demographics in the Florida
region. It will probably take years to realize some of the values inherent in
the Avatar properties. Nonetheless, when one can buy dollar bills for 55 or 60
cents, one can afford to be patient.
Operating in the coastal region of British Columbia, TimberWest Timber Trust is
a Canadian natural resources company engaged in the harvesting and sale of logs
and the processing and sale of softwood lumber and chips. Formed in 1997,
TimberWest owns in fee simple 825,00 acres of private timberlands, representing
not only the most valuable tract of private timberlands in Canada, but a unique
and high quality asset. Importantly, management elected to use relatively modest
amounts of debt financing to build the company's asset base. Private timberlands
in Canada can operate more profitably than can government-owned operations,
which are subject to stumpage fees, export restrictions and other regulations,
critical when log and lumber markets are depressed -- as they are today.
TimberWest's business remains under pressure, as much of its value-added lumber
products end up in the Japanese residential construction market, a market
plagued by the same recessionary characteristics as the Japanese economy in
general. Nonetheless, TimberWest owns valuable assets, assets that will
literally continue to grow in the years ahead.
Investors often ask us about our sell discipline. I have to report that selling
is probably one of our weak points, that we are very reluctant sellers in any
case, and that our philosophy is probably much better suited to buying than to
selling. Generally, we sell a position when: (i) we determine that our original
analysis was wrong; (ii) the company has suffered a permanent impairment of
capital (i.e., irreparable damage to the business); (iii) the security appears
grossly overvalued (this happens rather infrequently); or (iv) one or more of
the above combines with portfolio management considerations (e.g., tax reasons).
What we do not do is set a "target price" at which to sell. Business values are
dynamic, and sometimes business values fall below stock prices and, at other
times, (and better for us as buyers), stock prices fall below business values.
If we do our jobs properly as buyers, however, we should not have to sell much,
if at all.
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An experience from this quarter helps illustrate our sell discipline. I reported
in our last letter that ValueVision, one of the Fund's holdings, had agreed to
merge with National Media, but that the transaction had not yet been approved by
shareholders. Following the release of the merger proxy, but prior to the April
14, 1998 shareholder vote, ValueVision management decided that it could not get
the necessary support for the deal and postponed the vote. As of today, no
decision has been made with respect to a transaction. Management seems
determined to hold a deal together, though our sense is that the original terms
may be altered significantly.
We sold most, but not all, of our holdings in both ValueVision and National
Media after reviewing the merger proxy. Our own analysis led us to believe that
the resources of the newly formed company would not provide an adequate margin
of safety relative to the needs of the business going forward. After reviewing
the merger proxy, it became evident that the QUALITY of the assets on which we
had made our original investment in ValueVision -- the very essence of our
investment thesis -- might be greatly diminished under the originally proposed
terms of the National Media deal.
We halted our sales of the shares, however, after meeting with management,
including the newly appointed prospective CEO, hearing that the vote had been
postponed and realizing that the two parties would have to strike a new deal.
At present the deal is on hold. If, however, ValueVision management cannot
salvage a deal, and the company remains independent, I believe that our
ValueVision position continues to represent a safe and cheap investment. To wit,
ValueVision's assets, which are largely unencumbered, could probably fetch north
of $6 per share if management picked up the phone today and sold them in a "fire
sale" versus our cost of roughly $4 per share. On the other hand, we might very
much like a ValueVision/National Media combination -- under the right terms.
THIRD AVENUE'S UNIQUE INVESTMENT PHILOSOPHY
Recognizing that the Fund is just over a year old, and that it may have a number
of relatively new investors, I think it's instructive to touch on the most
important aspects of our investment philosophy that set us apart from other
mutual funds and other styles of investing. I believe that it is good discipline
for us to write about our investment philosophy and why we do it. But it is
equally important for you, our shareholders, to understand what we do and what
you own.
29
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'SAFE AND CHEAP'
The centerpiece of Third Avenue's investment philosophy can be summed up in one
short phrase, "safe and cheap." We buy, WHAT IS TODAY, safe and cheap. Safety
derives from at least three characteristics. First, we buy into companies with
strong balance sheets, as evidenced by the presence of high quality assets, and
a lack of encumbrances, either on or off the balance sheet. A strong balance
sheet does at least two things for a company. It not only provides management
with greater flexibility in its operations, but it also means staying power in
times of duress. Safety also comes about by investing with managements who have
track records as reasonable operators, and who demonstrate an interest in the
needs of the outside, passive minority shareholders. Lastly, we try and protect
ourselves by purchasing companies whose businesses we can understand, and which
have audited financials and SEC filings that give us some objective benchmarks
by which we can judge the business. Cheapness comes by purchasing common stocks
at a significant discount to our estimate of a business' value were it to be
acquired by a reasonable and knowledgeable business person. Ideally, we would
like to pay no more than 50 cents for every dollar's worth of this "business"
value. In short, we make an assessment of what the business is worth and compare
it with the current market price. We do not try to predict macro trends like
interest rates, nor do we pay any heed to short-term considerations like next
quarter's earnings. Contrary to conventional thinking that sees a direct
relationship between risk and reward, we believe that the lower the price an
investor pays for a particular security, the lower the risk and the greater the
potential reward.
BUY AND HOLD AND HOLD...AND HOLD
Our ideal holding period for an investment is forever. If we have done our
homework properly before going into a particular situation, we should be able to
hang on to an investment for many years. Reflecting the work we do on the buy
side, the turnover of our portfolio has been, and should continue to be, very
low. Our low-turnover, buy and hold philosophy means at least a couple of things
for our shareholders. First, it lowers our trading and transaction costs, costs
borne directly by the shareholders. Secondly, it means that we are not
constantly generating taxable capital gains. Given the choice, we would rather
build our shareholders' wealth than transfer it to Uncle Sam.
MARKET RISK VERSUS INVESTMENT RISK
We are often asked about whether a particular situation or security is "risky."
At Third Avenue, we do not use the word risk without attaching a modifying
adjective to it. Market risk refers to the periodic fluctuations in a security's
price, and is
30
<PAGE>
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important only for those obtuse enough to care about the short-term,
mark-to-market performance of their portfolios. We care little, if at all, about
market risk. In fact, we often assume heavy market risk, purchasing securities
without regard to Wall Street sponsorship, liquidity, or near-term earnings
outlooks. We do, however, care a great deal about investment risk. Investment
risk refers to a company's underlying business and the virtues and weaknesses of
that business. Virtually all of our efforts, in fact, focus on the performance
of the business -- in contrast to the stock -- that we own.
WE ARE VALUE INVESTORS, NOT PERFORMANCE INVESTORS
We are not in the business of trying to outperform other mutual funds or the
various market indices. Instead, we believe that we serve our investors best by
sticking to our discipline. Adherence to his or her discipline is what money
managers should get paid for -- not trying to beat an index by speculating. When
we cannot find suitable investments, we elect to hold cash, cash equivalents or
other alternatives. We do not invest -- and are not paid to invest -- just for
the sake of investing. Most successful business people, we believe, understand
this approach. We do think that investors should want three things from their
mutual fund: good returns with a low level of investment risk and high quality
customer service. Ideally, we would like to compound our shareholders' equity at
an annual rate of 20% or so, regardless of what the general market does, while
assuming a below-market level of investment risk. To do this, we will need to be
both good and lucky.
I look forward to writing you again when we publish our Third Quarter Report
dated July 31, 1998.
Sincerely,
/s/ Curtis R. Jensen
- -------------------------
Curtis R. Jensen
Co-manager, Third Avenue Small-Cap Value Fund
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THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks - 80.88 %
Construction-Japan 431,900 Sawako Corp., Sponsored ADR $ 3,725,137 2.24%
-----------
Financial Insurance 40,300 Financial Security Assurance
Holdings Ltd. 2,412,962
113,324 MBIA Inc. 8,456,804
-----------
10,869,766 6.55%
------------
Life Insurance 129,800 FBL Financial Group, Inc. Class A 3,731,750 2.25%
-----------
Manufactured Housing 184,300 Skyline Corp. 5,598,113 3.37%
-----------
Media 55,800 National Media Corp. (a) 83,700
408,700 ValueVision International, Inc.
Class A (a) 1,430,450
-----------
1,514,150 0.91%
-----------
Medical Supplies 275,000 Protocol Systems, Inc. (a) 2,664,063 1.61%
& Services -----------
Non-Life 2,326,000 The Nissan Fire & Marine
Insurance-Japan Insurance Co., Ltd. 8,449,858 5.09%
-----------
Real Estate 187,500 Alexander & Baldwin, Inc. 5,367,188
203,400 Alico, Inc. 4,284,112
199,300 Avatar Holdings, Inc. (a) 5,331,275
91,400 Cabot Industrial Trust 2,067,925
149,400 Deltic Timber Corp. 4,267,238
110,000 Koger Equity, Inc. 2,358,125
200,000 Tejon Ranch Co. (b) 4,675,728
713,700 TimberWest Timber Trust 5,139,261
-----------
33,490,852 20.19%
-----------
Retail 406,100 HomeBase, Inc. (a) 3,401,088
250,000 Value City Department Stores, Inc. (a) 4,750,000
-----------
8,151,088 4.91%
-----------
Semiconductor 88,500 Electroglas, Inc. (a) 1,493,437
Equipment 412,700 FSI International, Inc. (a) 4,849,225
Manufacturers
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks (continued)
Semiconductor 147,500 Silicon Valley Group, Inc. (a) $ 2,802,500
Equipment 98,200 SpeedFam International, Inc. (a) 2,847,800
Manufacturers ------------
(continued) 11,992,962 7.23%
------------
Technology 275,000 ACT Networks, Inc. (a) 4,125,000
50,000 Bel Fuse, Inc. (a) 1,478,125
117,400 Boston Communications Group, Inc. (a) 1,129,975
326,900 Centigram Communications Corp. (a) 4,331,425
275,500 C.P. Clare Corp. (a) 3,547,062
257,300 Glenayre Technologies, Inc. (a) 4,036,394
161,500 PictureTel Corp. (a) 1,493,875
348,300 Planar Systems, Inc. (a) 4,266,675
101,500 Rofin-Sinar Technologies, Inc. (a) 2,277,406
244,800 Shiva Corp. (a) 2,723,400
53,400 Sparton Corp. (a) 513,975
460,500 SpecTran Corp. (a) 4,144,500
197,300 Summa Four, Inc. (a) 1,997,662
316,400 Xircom, Inc. (a) 5,398,575
------------
41,464,049 24.99%
------------
Title Insurance 36,000 First American Financial Corp. 2,558,250 1.54%
------------
Total Common Stocks
(Cost $120,046,850) 134,210,038
------------
Principal
Amount ($)
- ---------------------------------------------------------------------------------------------------
Other Investments - 0.13%
Foreign Option 10,000,000 Japanese Yen February 1999
Contracts Put Options (b) (c) 208,750
------------
Total Other Investments
(Cost $147,500) 208,750
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short Term Investments - 18.29%
Repurchase 30,343,380 Bear Stearns 5.40%, dated 4/30/98 (d) $ 30,343,380
------------
Agreements
TOTAL SHORT TERM INVESTMENTS 30,343,380
(Cost $30,343,380) ------------
TOTAL INVESTMENT PORTFOLIO - 99.30% 164,762,168
(Cost $150,537,730) ------------
CASH AND OTHER ASSETS
LESS LIABILITIES - 0.70% 1,154,318
------------
NET ASSETS - 100.00% $165,916,486
(Applicable to 12,630,818 ============
shares outstanding)
NET ASSET VALUE PER SHARE $13.14
======
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Restricted/fair valued securities.
(c) 10 million U.S. Dollar notional amount may be exercised on February 2, 1999
to sell 1.4 billion Japanese Yen at a strike price of 136.5.
(d) Repurchase agreement collateralized by: Prudential Home Mortgage Securities,
par value $64,605,000, 8.354%, matures 7/25/22: market value $7,424,744.
Ryland Mortgage Securities Corp., par value $7,712,906, 7.084%, matures
11/25/21: market value $7,862,305. Resolution Trust Corp., par value
$62,150,000, 7.532%, matures 5/25/28: market value $11,494,624.
Collateralized Mortgage Securities Corp., par value $274,680, 8.35%, matures
1/20/22: market value $644,489. Resolution Trust Corp., par value
$11,575,000, 7.64%, matures 7/25/28: market value $3,350,373.
ADR: American Depository Receipt.
FORWARD FOREIGN CURRENCY CONTRACTS (NOTE 1):
Third Avenue Small-Cap Value Fund had the following open forward currency
contract as of April 30, 1998:
Settlement Local Current Unrealized
Forward Foreign Currency Sale Contract Date Currency Value Gain
- --------------------------------------------------------------------------------
Japanese Yen 07/31/98 13,839,700 $104,729 $2,589
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE SMALL-CAP VALUE FUND
STATEMENTS OF ASSETS AND LIABILITIES
APRIL 30, 1998
(UNAUDITED)
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $150,537,730) $164,762,168
Cash and cash equivalents (Note 1) 10,562
Receivable for fund shares sold 1,494,828
Dividends and interest receivable 285,003
Deferred organizational costs (Note 1) 42,590
Net unrealized appreciation on forward foreign currency contracts 2,589
Other assets 2,590
------------
Total assets 166,600,330
------------
LIABILITIES:
Payable for securities purchased 241,622
Payable for fund shares redeemed 262,208
Payable to investment adviser 116,863
Accounts payable and accrued expenses 52,037
Payable for service fees (Note 3) 11,114
Commitments --
------------
Total liabilities 683,844
------------
Net assets 165,916,486
============
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par value,
12,630,818 shares outstanding $152,060,994
Accumulated undistributed net investment income 252,811
Accumulated undistributed net realized losses from
investment transactions (621,746)
Net unrealized appreciation of investments 14,224,427
------------
Net assets applicable to capital shares outstanding 165,916,486
============
Net asset value, offering and redemption price per share $13.14
======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
35
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THIRD AVENUE SMALL-CAP VALUE FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
INVESTMENT INCOME:
Interest $ 884,128
Dividends (net of foreign withholding tax of $18,943) 357,060
-----------
Total investment income 1,241,188
-----------
EXPENSES:
Investment advisory fees (Note 3) 573,155
Administration fees (Note 3) 45,136
Transfer agent fees 43,433
Registration and filing fees 38,109
Service fees (Note 3) 25,836
Accounting services 22,885
Directors' fees and expenses 22,780
Auditing and tax consulting fees 14,601
Custodian fees (Note 4) 10,998
Reports to shareholders 9,303
Legal fees 8,304
Amortization of organizational expenses (Note 1) 5,870
Miscellaneous expenses 4,931
Insurance expenses 937
-----------
Total operating expenses 826,278
-----------
Net investment income 414,910
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized losses on investments (461,469)
Net change in unrealized appreciation on investments 10,986,273
Net change in unrealized appreciation on forward contracts 2,589
Net change in unrealized depreciation on translation of other
assets and liabilities denominated in foreign currency (2,600)
-----------
Net realized and unrealized gains on investments 10,524,793
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $10,939,703
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE SMALL-CAP VALUE FUND
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE
SIX MONTHS FOR THE
ENDED PERIOD
4/30/98 ENDED
(UNAUDITED) 10/31/97*
------------- -------------
OPERATIONS:
Net investment income $ 414,910 $ 403,045
Net realized losses on investments (461,469) (160,277)
Net change in unrealized appreciation
on investments 10,986,273 3,238,165
Net change in unrealized appreciation on
forward contracts 2,589 --
Net change in unrealized depreciation on
translation of other assets and
liabilities denominated in foreign
currency (2,600) --
------------ ------------
Net increase in net assets resulting
from operations 10,939,703 3,480,933
------------ ------------
DISTRIBUTIONS:
Dividends to shareholders from net
investment income (565,144) --
------------ ------------
(565,144) --
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 76,452,091 117,966,913
Net asset value of shares issued in
reinvestment of dividends and
distributions 547,054 --
Cost of shares redeemed (28,713,064) (14,192,000)
------------ ------------
Net increase in net assets resulting
from capital share transactions 48,286,081 103,774,913
------------ ------------
Net increase in net assets 58,660,640 107,255,846
Net assets at beginning of period 107,255,846 --
------------ ------------
Net assets at end of period
(including undistributed net investment
income of $252,811 and $403,045,
respectively) $165,916,486 $107,255,846
============ ============
* The Fund commenced investment operations April 1, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE SMALL-CAP VALUE FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT
EACH PERIOD) AND RATIOS ARE AS FOLLOWS:
FOR THE
SIX MONTHS FOR THE
ENDED PERIOD
APRIL 30, 1998 ENDED
(UNAUDITED) 10/31/97*
------------- ---------
Net Asset Value, Beginning of Period $12.37 $10.00
----- -----
Income from Investment Operations:
Net investment income .03 .05
Net gain on securities (both realized
and unrealized) .80 2.32
----- -----
Total from Investment Operations .83 2.37
----- -----
Less Distributions:
Dividends from net investment income (.06) .00
----- -----
Total Distributions (.06) .00
----- -----
Net Asset Value, End of Period $13.14 $12.37
====== ======
Total Return 6.79% 23.70%
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $165,916 $107,256
Ratio of Expenses to Average Net Assets 1.30%(1) 1.65%(1)
Ratio of Net Income to Average Net Assets 0.65%(1) 1.44%(1)
Portfolio Turnover Rate 2% 7%
(1) Annualized
* The Fund commenced investment operations April 1, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE HIGH YIELD FUND
Dear Fellow Shareholders:
April 30, 1998 marks the end of the first quarterly reporting period since its
inception on February 12, 1998 of Third Avenue High Yield Fund (the "Fund"). The
Fund's initial offering price at $10.00 per share rose to an unaudited net asset
value of $10.42 on April 30, 1998, attributable to the 773,085 common shares
outstanding. At May 22, the unaudited net asset value was $10.32. On May 13,
1998, the Board of Trustees of the Fund determined to pay quarterly dividends
approximately equal to the Fund's net investment income at the end of each
calendar quarter.
During the February 12, 1998 to April 30, 1998 period, the Fund invested the
proceeds of new shares in 24 securities, leaving 2.6% of total assets in cash or
equivalents at month-end April. One position was bought and subsequently sold
during the partial quarter.
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
STRAIGHT BONDS
$500,000 BF Saul REIT 9.75% due 4/01/08
$500,000 Forest City Enterprises 8.5% 3/15/08
$500,000 Level 3 Communications 9.125%
due 5/01/08
$500,000 PSINet 10% due 2/15/05
CONVERTIBLE BONDS
$425,000 Adaptec 4.75% due 2/01/04
$375,000 Alpharma 5.75% due 4/01/05
$325,000 Atmel 3.25% due 6/01/02
$325,000 Columbia/HCA Healthcare 6.75%
due 10/01/06
$300,000 Credence Systems 5.25% due 9/15/02
$350,000 Cymer 3.5% due 8/06/04
$325,000 Cypress Semiconductor 6% due 10/01/02
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED (CONTINUED)
$300,000 DSC Communications 7% due 8/01/04
$300,000 HMT Technology 5.75% due 1/15/04
$400,000 Itron 6.75% due 3/31/04
$300,000 Key Energy Group 5% due 9/15/04
$300,000 Lam Research 5% due 9/01/02
$300,000 Mascotech 4.5% due 12/15/03
$400,000 Phymatrix 6.75% due 6/15/03
$300,000 Pogo Producing 5.5% due 6/15/06
$400,000 U.S. Office Products 5.5% due 5/15/03
CONVERTIBLE PREFERRED SHARES
7,000 shares BREED Technologies 6.5% due 11/15/27
5,000 shares Coltec Industries 5.25% due 4/15/28
5,000 shares Conseco 7% due 2/16/01
6,000 shares NEXTLINK Communications 6.5%
due 3/31/10
9,000 shares Sun Healthcare Group 7% due 5/01/28
POSITIONS ELIMINATED
$500,000 Forest City Enterprises 8.5% due 3/15/08
In meeting our objective of achieving total return through a combination of
income and capital appreciation, our initial portfolio holdings comprise
corporate bonds, convertible bonds, and convertible preferred issues. At the end
of April, the portfolio had the following asset allocation:
corporate bonds 18.7%
convertible bonds 61.0%
convertible preferred stock 17.7%
cash & equivalents 2.6%
-------
Total portfolio 100.0%
40
<PAGE>
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We expect that in the future, the asset allocation may vary widely from that
shown above, although we will of course continue to hold at least 65% of our
total assets in non-investment grade (so-called high yield) securities. Many of
the issues which were purchased were convertible issues. However, we did not
start by choosing an asset allocation, and then buying issues within that
security type.
In constructing the portfolio, we attempted to choose issues which we felt
provided the best combination of income and potential capital appreciation, and
which were selling at prices below their estimated intrinsic investment value.
We reviewed those companies whose long-term outlook is sound, but might be
encountering a cyclical industry downturn or temporary business setbacks. Often,
the market harshly penalizes the prices of securities of these companies over
the short term. This price penalty creates the opportunity to purchase such
issues at levels which we believe, based on our research, are below their fair
value after taking into account a company's long-term prospects.
In buying such issues cheaply, we try to build in some margin of safety, albeit
in a market sector--high yield fixed income issues--where the risk of loss
historically has been substantially higher than that of investment grade high
quality issues.
When considering issues for possible investment, we rely on quantative analysis
of the company's balance sheet, income and cash flow statements in order to
determine the degree to which our investment might become permanently impaired
should the company experience severe financial or operational difficulties. In
addition to analysis of audited financial statements, we think several
qualitative factors are important in selecting holdings. This analysis is
especially important for high yield/high risk issues, where because of high debt
levels, even small changes in revenues, unit output, or prices received or paid
can result in disproportionately large adverse changes in operating results.
We like companies which are leaders, with a #1 or #2 position in their industry
segments, with differentiated products and defensible market positions. We
prefer industries with high barriers to entry, so that new competitors cannot
easily enter and erode prices and market share. We also favor industries which
are growing, especially those with product demand expanding faster than the
overall economy. Industries undergoing consolidation, even those industries
where overall growth is muted, frequently can offer companies which are market
leaders the chance to grow faster than the underlying trend. Regulatory changes
can also transform industries, causing a sea change in demand, pricing, and
competitive opportunities.
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<PAGE>
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Our portfolio holdings reflect both our quantitative and qualitative criteria.
Our largest commitment--25.5% of total net assets at April 30, 1998--was to
issues in the technology area, broadly defined. Most industry observers expect
demand for products in this sector to grow 10% to 15% annually for the
foreseeable future, although strong demand will be occasionally punctuated by
short-term cyclical downturns, such as many companies are currently
experiencing.
Issues of semiconductor capital equipment companies (Lam Research, Credence
Systems and Cymer) comprise 10.2% of our portfolio. Holdings of semiconductor
manufacturers (Amtel and Cypress Semiconductor), whose chips are used in a wide
variety of computer, communications and industrial products amount to 7.5% of
assets. Securities of other segments of the technology industry--memory products
(HMT Technology) and network products ( Adaptec)--comprised 7.8% of assets.
You may note that while we share the enthusiasm of the Third Avenue Value Fund
(TAVF) and the Third Avenue Small-Cap Value Fund (TASCVF) for technology issues,
we do not have any overlapping names. Why? Because of our goal of investing in
income-producing securities, the Fund has focused on more leveraged companies
which have public debt outstanding. TAVF and TASCVF on the other hand,
concentrate on companies with little or no debt on their balance sheets in their
search for long-term capital appreciation. Thus, while the three Third Avenue
Funds use the same philosophy in considering potential investments, our
different emphasis on potential capital gains and income among our three funds
offer an excellent balance to our shareholders, who may well have diverse
investment goals.
Holdings in telecommunications and related companies made up 19.5% of the Fund's
portfolio. Local and long distance demand is growing at around 6% to 7%
annually, or higher than overall domestic economic growth, while demand for data
transmission and Internet services is growing at rates estimated at 30% to 40%
per annum. Further, the historic Telecommunications Act of 1996 was designed to
develop competition by encouraging the entry of new companies into the voice,
data and Internet markets. While still small, some of these new entrants have
very rapidly gained market share from local Bell operating companies and
traditional long distance carriers by using newer technology and aggressively
undercutting the incumbents' prices.
Our telecommunications holdings included:
PSINet, which provides Internet access, Web hosting and related network
services, both domestically and internationally;
42
<PAGE>
Level 3 Communications, which is building a local and long distance
domestic and international telecommunications network, based on so-called
Internet protocol technology, a system considered to offer substantially
cheaper transmission costs than that of traditional circuit-switched
networks;
NEXTLINK, one of the new competitive local exchange carriers which have
sprung up as a result of the Telecommunications Act. It provides telephone
services to small and medium sized businesses; and
DSC Communications, which manufactures digital access, switches,
transmission and private network systems products in more than 60 countries
to local and long distance, wireless, cellular and cable operators. Despite
leading market positions in several high growth products, the company has
stumbled with some regularity in executing too broad a product range, and
in controlling inventory and working capital.
Health care issues comprise 15.4% of the Fund's portfolio. Demand for health
services is rising faster than that of the overall economy. The industry is also
undergoing consolidation as a result of regulatory and cost pressures, and often
provides interesting investment opportunities when investor sentiment turns very
negative--a fairly frequent event.
Our health care holdings equaled 15.4% of total net assets, and included:
Columbia/HCA, which operates general and acute care hospitals as well
as outpatient surgical centers and services. Prices of Columbia securities
are substantially below levels of last spring, due to the government's
continuing broad investigation into its operations and the resultant
negative publicity. While we do not minimize the risk of an extremely large
financial settlement to conclude these investigations, we believe new
senior management has made positive steps to resolve these matters, and
subsequently may restructure the company's considerable assets, clarifying
the investment value of this holding.
Sun Healthcare Group focuses on long-term care ( nursing homes),
subacute care and specialty services, and it should benefit from fast
growing patient populations in their target markets, in addition to making
strategic acquisitions in this consolidating field.
PhyMatrix primarily develops specialized medical facilities such as
health parks, medical malls and medical office buildings. It also has a
physician practice management organization whose strategy has evolved to
develop disease
43
<PAGE>
management networks in specific geographic locations (Southeast and New
York City tri-state area).
Alpharma has restructured itself in the past few years into a
multinational pharmaceutical company with specialty generic and proprietary
human pharmaceuticals, and animal health products. A leader in its many
market niches, it is extremely well diversified both by product and
geography, and thus is not dependent on any blockbuster product or specific
geographic area in its high growth markets.
Component suppliers to the automotive industry made up 8.1% of the portfolio's
assets. While total industry output is expected to have low growth, suppliers to
the major auto makers are rapidly consolidating, providing growth for leading
companies far above unit growth, as successful companies provide ever larger and
more sophisticated components of the auto. We own two leading systems suppliers:
MascoTech, which after a number of asset sales and acquisitions, now
concentrates on metal formed components for engine and drive train applications;
and BREED Technologies, which has transformed itself through many acquisitions,
restructurings, and a Siemens joint venture, into a leading supplier of occupant
safety systems (airbags, restraint systems, steering wheels, and electronics).
Energy and energy services comprised 6.9% of total net assets. We own securities
in Pogo Producing, a relatively small oil and gas producer with an excellent
record of low cost discovery, operating offshore in the Gulf of Mexico, onshore
in the US, and owning promising concession acreage in the Gulf of Thailand. We
also hold Key Energy, which provides land based oilfield well services in the US
and Argentina. It has grown primarily through acquisitions in this rapidly
consolidating sector.
To summarize, all of the Fund's holdings have ratings or estimated ratings below
investment grade, otherwise known as high yield securities, or "junk bonds." We
take the yield to maturity calculations based on our purchase prices with a
grain of salt, simply as notational yields. We recognize that our actual
realized returns may well be much lower or even much higher than the initially
calculated yield to maturity, depending on capital losses or gains.
The goal of our focused research, as it is with TAVF and TASCVF, is to avoid
permanent impairment of the Fund's capital, the better to enjoy any income and
capital gains which may be achieved.
As Benjamin Graham states in his classic text, SECURITY ANALYSIS, fourth
edition, "Deficient safety cannot be compensated for by an abnormally high
coupon rate
44
<PAGE>
alone." We agree. We choose an issue because we believe the company is
undervalued at its current price, and select the income-producing
security--whether straight bond, convertible bond, or preferred stock--which
represents the best combination of minimizing principal loss, providing current
income and achieving capital gain.
Because we do not concentrate exclusively on maximizing current income when
investing in high yield securities, we do not focus on the average yield of the
high yield universe, or on the average default rate of these bonds, or on the
current or historic yield advantage of high yield bonds versus Treasury yields,
or on supply/demand conditions in the market, as measures to determine the
portfolio structure.
We follow such data with great interest, because they can be thought provoking.
However, this information has very little to do with how we select securities
for our portfolio, as the above discussion illustrates. I look forward to
discussing the portfolio with you again when our next quarterly report is
issued.
Sincerely,
/s/Margaret D. Patel
- --------------------
Margaret D. Patel
Portfolio Manager, Third Avenue High Yield Fund
45
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT($) ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------
Convertible Bonds - 61.02%
<S> <C> <C> <C> <C>
Capital Equipment - 300,000 Lam Research Corp., 5.00% due 9/1/02 $ 262,500 3.26%
Semiconductors ----------
Computers - Memory 300,000 HMT Technology Corp., 5.75%
Devices due 1/15/04 262,500 3.26%
----------
Diversified 300,000 MascoTech, Inc., 4.50% due 12/15/03 280,500 3.48%
Manufacturing ----------
Electronic Components - 325,000 Atmel SA, 3.25% due 6/1/02 305,094
Semiconductors 325,000 Cypress Semiconductor Corp.,
6.00% due 10/1/02 296,968
----------
602,062 7.47%
----------
Electric Utility Services 400,000 Itron, Inc., 6.75% due 3/31/04 374,000 4.64%
----------
Instrumentation - 300,000 Credence Systems Corp., 5.25%
Electronic Testing due 9/15/02 259,125 3.22%
----------
Lasers - 350,000 Cymer, Inc., 3.50% due 8/6/04 294,875 3.66%
Systems/Components ----------
Medical - Generic Drugs 375,000 Alpharma, Inc., 5.75% due 4/1/05 380,625 4.72%
----------
Medical - Hospitals 325,000 Columbia/HCA Medical Care, Int'l.,
6.75% due 10/1/06 294,125 3.65%
----------
Medical Management 400,000 PhyMatrix Corp., 6.75% due 6/15/03 329,000 4.08%
Services ----------
Networking 425,000 Adaptec, Inc., 4.75% due 2/1/04 365,500 4.54%
----------
Office Supplies 400,000 U.S. Office Products Co.,
5.50% due 5/15/03 378,000 4.69%
----------
Oil/Gas Exploration 300,000 Pogo Producing Co., 5.50% due 6/15/06 306,375 3.80%
----------
Oil Field Services 300,000 Key Energy Group, Inc.,
5.00% due 9/15/04 250,500 3.11%
----------
Telecommunication 300,000 DSC Communications Corp.,
Equipment 7.00% due 8/1/04 277,500 3.44%
----------
TOTAL CONVERTIBLE BONDS
(Cost $4,822,626) 4,917,187
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
46
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------
Convertible Preferred Stock - 17.68%
<S> <C> <C> <C> <C>
Auto Parts Original 7,000 BREED Technologies, Inc.,
6.50% due 11/15/27 $ 369,250 4.58%
----------
Insurance 5,000 Conseco Finance Trust IV
7.00% due 2/16/01 273,750 3.40%
----------
Medical - 9,000 Sun Financing I 7.00% due 5/1/28 236,250 2.93%
Long Term/Subacute ----------
Networking 5,000 Coltec Capital Trust 5.25%
due 4/15/28 260,000 3.23%
----------
Telephone Services 6,000 NEXTLINK Communications, Inc.,
6.50% due 3/31/10 285,000 3.54%
----------
TOTAL CONVERTIBLE PREFERRED STOCK 1,424,250
(Cost $1,401,988) ----------
PRINCIPAL
AMOUNT($)
- ---------------------------------------------------------------------------------------------------
Corporate Bonds - 18.74%
Internet Software 500,000 PSINet, Inc., 10.00% due 2/15/05 515,000 6.39%
----------
Real Estate 500,000 BF Saul REIT 9.75% due 4/1/08 498,750 6.19%
Development ----------
Telephone Services 500,000 Level 3 Communications, Inc.,
9.125% due 5/1/08 496,250 6.16%
----------
TOTAL CORPORATE BONDS 1,510,000
(Cost $1,497,896) ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
47
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT($) ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------
Short Term Investments - 4.33%
<S> <C> <C> <C> <C>
Repurchase Agreements 348,755 Bear Stearns 5.40% dated 4/30/98 (a) $ 348,755
----------
TOTAL SHORT TERM INVESTMENTS 348,755 4.33%
(Cost $348,755) ----------
TOTAL INVESTMENT PORTFOLIO - 101.77%
(Cost $8,071,265) 8,200,192
----------
LIABILITIES NET OF CASH
AND OTHER ASSETS - (1.77%) (142,879)
----------
NET ASSETS - 100.00% $8,057,313
(Applicable to 773,085 ==========
shares outstanding)
NET ASSET VALUE PER SHARE $10.42
======
</TABLE>
Notes:
(a) Repurchase agreement collateralized by:
Resolution Trust Corp., par value $1,230,000, 7.64% matures 7/25/28:
market value $356,022.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
48
<PAGE>
[LOGO]
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1998
(UNAUDITED)
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $8,071,265) $ 8,200,192
Cash and cash equivalents (Note 1) 9,882
Receivable for fund shares sold 138,878
Receivable from investment adviser 12,312
Interest receivable 78,800
Deferred organizational costs (Note 1) 28,751
Other assets 21,993
-----------
Total assets 8,490,808
-----------
LIABILITIES:
Payable for securities purchased 352,574
Payable for fund shares redeemed 20,552
Accounts payable and accrued expenses 60,369
Commitments --
-----------
Total liabilities 433,495
-----------
Net assets $ 8,057,313
===========
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par value,
773,085 shares outstanding $ 7,878,353
Accumulated undistributed net investment income 44,408
Accumulated undistributed net realized gains from
investment transactions 5,625
Net unrealized appreciation of investments 128,927
-----------
Net assets applicable to capital shares outstanding $ 8,057,313
===========
Net asset value and offering price per share $10.42
======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
49
<PAGE>
[LOGO]
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED APRIL 30, 1998*
(UNAUDITED)
INVESTMENT INCOME:
Interest $ 60,267
---------
EXPENSES:
Investment advisory fees (Note 3) 7,512
Directors' fees and expenses 10,523
Auditing and tax consulting fees 10,230
Administration fees (Note 3) 9,069
Registration and filing fees 8,354
Transfer agent fees 5,580
Accounting services 5,163
Custodian fees (Note 4) 2,923
Reports to shareholders 2,456
Amortization of organizational expenses (Note 1) 1,249
Miscellaneous expenses 294
---------
Total operating expenses 63,353
---------
Expenses waived and reimbursed (Note 3) (47,494)
---------
Net expenses 15,859
---------
Net investment income 44,408
---------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on investments 5,625
Net change in unrealized appreciation on investments 128,927
---------
Net realized and unrealized gains
on investments 134,552
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 178,960
=========
*The Fund commenced investment operations February 12, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
50
<PAGE>
[LOGO]
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE
PERIOD
ENDED
04/30/98*
(UNAUDITED)
-----------
OPERATIONS:
Net investment income $ 44,408
Net realized gains on investments 5,625
Net change in unrealized appreciation on investments 128,927
-----------
Net increase in net assets resulting from operations 178,960
-----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 7,903,190
Net asset value of shares issued in reinvestment of
dividends and distributions --
Cost of shares redeemed (24,837)
-----------
Net increase in net assets resulting from capital
share transactions 7,878,353
-----------
Net increase in net assets 8,057,313
Net assets at beginning of period 0
-----------
Net assets at end of period
(including undistributed net investment income of $44,408) $ 8,057,313
===========
* The Fund commenced investment operations February 12, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
51
<PAGE>
[LOGO]
THIRD AVENUE HIGH YIELD FUND
FINANCIAL HIGHLIGHTS
Selected data (for a share outstanding throughout the period) and ratios are as
follows:
FOR THE
PERIOD
ENDED
04/30/98*
(UNAUDITED)
-----------
Net Asset Value, Beginning of Period $10.00
------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .06
Net gain on securities (both realized and unrealized) .36
------
Total from Investment Operations .42
------
Net Asset Value, End of Period $10.42
======
Total Return (since inception) 4.20%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of period (in thousands) $8,057
Ratio of Expenses to Average Net Assets
Before expense reimbursement 7.59%(1)
After expense reimbursement 1.90%(1)
Ratio of Net Income to Average Net Assets
Before expense reimbursement (0.37%)(1)
After expense reimbursement 5.32%(1)
Portfolio Turnover Rate 11%
(1) Annualized
* The Fund commenced investment operations February 12, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
52
<PAGE>
[LOGO]
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1998
(UNAUDITED)
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization:
Third Avenue Trust (the "Trust") is an open-end, non-diversified management
investment company organized as a Delaware business trust pursuant to a Trust
Instrument dated October 31, 1996. The Trust currently consists of 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"). At the close of business on March 31, 1997, shareholders of Third
Avenue Value Fund, Inc., a Maryland corporation which was incorporated on
November 27, 1989 and began operations on October 9, 1990, became shareholders
of Third Avenue Value Fund. Third Avenue Small-Cap Value Fund commenced
investment operations on April 1, 1997. Third Avenue High Yield Fund commenced
investment operations on February 12, 1998. Third Avenue Value Fund and Third
Avenue Small-Cap Value Fund seek to achieve their investment objectives of
long-term capital appreciation by adhering to a strict value discipline when
selecting securities. While both Third Avenue Value Fund and Third Avenue
Small-Cap Value Fund 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 through a combination of income and capital
appreciation 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
53
<PAGE>
[LOGO]
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
(UNAUDITED)
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.
Accounting policies:
The policies described below are followed consistently by the Funds in the
preparation of their financial statements in conformity with generally accepted
accounting principles.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
Security valuation:
Securities traded on a principal stock exchange or the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ") are valued at the last
quoted sales price or, in the absence of closing sales prices on that day,
securities are valued at the mean between the closing bid and asked price.
Temporary cash investments are valued at cost, plus accrued interest, which
approximates market. Short-term securities with original or remaining maturities
in excess of 60 days are valued at the mean of their quoted bid and asked
prices. Short-term securities with 60 days or less to maturity are amortized to
maturity based on their cost if acquired within 60 days of maturity, or if
already held by a Fund on that day, based on the value determined on that day.
The Funds may invest up to 15% of their total assets in securities which are not
readily marketable, including those which are restricted as to disposition under
applicable securities laws ("restricted securities"). Restricted securities and
other securities and assets for which market quotations are not readily
available are valued at "fair value", as determined in good faith by the Board
of Trustees of the Funds, although actual evaluations may be made by personnel
acting under procedures established by the Board of Trustees. At April 30, 1998,
such securities had a total fair value of $154,647,147 or 7.73% of net assets of
Third Avenue Value Fund and
54
<PAGE>
[LOGO]
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
(UNAUDITED)
$4,884,478 or 2.94% of net assets of Third Avenue Small-Cap Value Fund. The cost
of these securities are $116,251,572 and $2,847,500, respectively, for Third
Avenue Value Fund and Third Avenue Small-Cap Value Fund. Among the factors
considered by the Board of Trustees in determining fair value are the type of
security, trading in unrestricted securities of the same issuer, the financial
condition of the issuer, a Fund's cost at the date of purchase, a percentage of
a Fund's beneficial ownership of the issuer's common stock and debt securities,
the operating results of the issuer, the discount from market value of any
similar unrestricted securities of the issuer at the time of purchase and
liquidation values of the issuer. The fair values determined in accordance with
these procedures may differ significantly from the amounts which would be
realized upon disposition of the securities. Restricted securities often have
costs associated with subsequent registration. The restricted securities
currently held by the Funds are not expected to incur any future registration
costs.
Security transactions and investment income:
Security transactions are accounted for on a trade date basis. Dividend income
is recorded on the ex-dividend date and interest income, including, where
applicable, amortization of premium and accretion of discount on investments, is
accrued daily, except when collection is not expected. Realized gains and losses
from securities transactions are reported on an identified cost basis.
Foreign currency translation and foreign investments:
The books and records of the Funds are maintained in U.S. dollars. Foreign
currency amounts are translated into U.S. dollars as follows:
o Investments: At the prevailing rates of exchange on the valuation date.
o Investment transactions and investment income: At the prevailing rates of
exchange on the date of such transactions.
Although the net assets of the Funds are presented at the foreign exchange rates
and market values at the close of the period, the Funds do not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Funds do not isolate
the effect of changes in foreign ex-
55
<PAGE>
[LOGO]
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
(UNAUDITED)
change rates from the fluctuations arising from changes in the market prices of
securities sold during the period. Accordingly, realized and unrealized foreign
currency gains (losses) are included in the reported net realized and unrealized
gains (losses) on investment transactions and balances.
Forward foreign currency contracts:
Third Avenue Value Fund and Third Avenue Small-Cap Value Fund engage in
portfolio hedging with respect to changes in currency exchange rates by entering
into forward foreign currency contracts to sell currencies. A forward currency
contract is a commitment to purchase or sell a foreign currency at a future date
at a negotiated forward rate. Risks associated with such contracts include
movement in the value of the foreign currency relative to the U.S. dollar and
the potential inability of the counter parties to meet the terms of the
contracts, which are generally limited to the amount of unrealized gain on the
contract at the date of default. Fluctuations in the value of forward foreign
currency contracts are recorded daily as net unrealized gains or losses. The
Funds realize a gain or loss upon settlement of contracts. The statement of
operations reflects net unrealized gains on these contracts.
Foreign option contracts:
An option contract gives the buyer the right, but not the obligation to buy
(call) or sell (put) an underlying item at a fixed exercise price on a certain
date or during a specified period. The use of option strategies provide the
Funds with protection against a rally in the U.S. dollar versus the Japanese Yen
while retaining the benefits of an appreciation in Japanese Yen on equity
holdings.
Loans of portfolio securities:
Third Avenue Small-Cap Value Fund and Third Avenue High Yield Fund loaned
securities during the period to certain brokers, with the Funds' custodian
acting as lending agent. Upon such loan, the Funds receive collateral which is
maintained by the custodian and earns income in the form of negotiated lenders'
fees, which are included in interest income in the Statements of Operations. On
a daily basis, the Funds monitor the market value of securities loaned and
maintain collateral against the securities loaned in an amount at least equal to
102% of the value of the security loaned. The cash collateral received is
invested in a short-term instrument. The Funds
56
<PAGE>
[LOGO]
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
(UNAUDITED)
had no securities on loan at April 30, 1998. Risks may arise upon entering into
securities lending to the extent that the value of the collateral declines below
the value of the securities loaned.
Repurchase agreements:
Securities pledged as collateral for repurchase agreements are held by the
Funds' custodian bank until maturity of the repurchase agreement. Provision of
the agreements ensure that the market value of the collateral is at least equal
to the repurchase value in the event of default. In the event of default, the
Funds have the right to liquidate the collateral and apply the proceeds in
satisfaction of the obligation. Under certain circumstances, in the event of
default or bankruptcy by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal proceedings.
Organizational costs:
Organizational costs of $56,000 for Third Avenue Small-Cap Value Fund, and
$30,000 for Third Avenue High Yield Fund are being amortized on a straight line
basis over five years from commencement of operations.
Distributions to shareholders:
Dividends from net investment income paid to shareholders and distributions from
realized gains on sales of securities paid to shareholders are recorded on the
ex-dividend date.
Federal income taxes:
The Funds have complied and intend to continue to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies.
Therefore, no Federal income tax provision is required.
Cash and cash equivalents:
The Funds have defined cash and cash equivalents as cash in interest bearing and
non-interest bearing accounts.
57
<PAGE>
[LOGO]
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
(UNAUDITED)
Expense Allocation:
Expenses attributable to a specific Fund are charged to that Fund. Expenses
attributable to the Trust are allocated using the ratio of each Fund's net
assets relative to the total net assets of the Trust, unless otherwise
specified.
2. SECURITIES TRANSACTIONS
Purchases and sales/conversions:
The aggregate cost of purchases, and aggregate proceeds from sales and
conversions of investments, excluding short-term investments, from unaffiliated
and affiliated issuers (as defined in the Investment Company Act of 1940, as
amended, ownership of 5% or more of the outstanding common stock of the issuer)
for the period ended April 30, 1998 were as follows:
Purchases Sales
--------- -----
Third Avenue Value Fund:
affiliated $ 85,801,776 $ 0
unaffiliated 703,578,482 52,153,364
Third Avenue Small-Cap Value Fund:
unaffiliated 59,708,236 1,826,063
Third Avenue High Yield Fund:
unaffiliated 8,211,608 505,625
3. INVESTMENT ADVISORY SERVICES AND SERVICE FEE AGREEMENT
The Funds have an Investment Advisory Agreement with EQSF Advisers, Inc. (the
"Adviser") for investment advice and certain management functions. The terms of
the Investment Advisory Agreement provide for a monthly fee of 1/12 of .90% (an
annual fee of .90%) of the total average daily net assets of each Fund, payable
each month. Additionally, under the terms of the Investment Advisory Agreement,
the Adviser pays certain expenses on behalf of the Funds, which are reimbursable
by the Funds, including salaries of non-officer employees, rent and other
miscellaneous expenses. Amounts reimbursed with respect to non-officer salaries
and rent are included under the caption Administration. Whenever, in any fiscal
year, a Fund's
58
<PAGE>
[LOGO]
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
(UNAUDITED)
normal operating expenses, including the investment advisory fee, but excluding
brokerage commissions and interest and taxes, exceeds 1.90% of the first $100
million of the Funds' average daily net assets, and 1.50% of average daily net
assets in excess of $100 million, the Adviser is obligated to reimburse the Fund
in an amount equal to that excess. No expense reimbursement was required for
Third Avenue Value Fund or Third Avenue Small-Cap Value Fund for the period
ended April 30, 1998. The adviser reimbursed Third Avenue High Yield Fund
$47,494 for the period ended April 30, 1998.
The Trust has entered into shareholder servicing agreements with certain service
agents for which the service agents receive a fee of up to .10% of the average
daily net assets invested into the Trust by the agents' customers in an omnibus
account. In exchange for these fees, the service agent renders to such customers
various administrative services, which the Trust would otherwise be obligated to
provide at its own expense.
4. RELATED PARTY TRANSACTIONS
Brokerage commissions:
Martin J. Whitman, the Chairman and a director of the Funds, is the Chairman and
Chief Executive Officer of M.J. Whitman Holding Corp., which is the parent of
both M.J. Whitman, Inc., a registered broker-dealer and M.J. Whitman Senior Debt
Corp., a dealer in the trading of bank debt and other private claims. For the
period ended April 30, 1998, Third Avenue Value Fund and Third Avenue Small-Cap
Value Fund incurred total brokerage commissions of $681,239 and $144,860,
respectively, of which approximately $524,111 and $74,904 was earned by M.J.
Whitman, Inc., and, with respect to Third Avenue Value Fund, $38,637 was earned
by M.J. Whitman Senior Debt Corp.
59
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
(UNAUDITED)
INVESTMENTS IN AFFILIATES:
A summary of Third Avenue Value Fund's transactions in securities of affiliated
issuers for the period ended April 30, 1998 is set forth below:
<TABLE>
<CAPTION>
SHARES/ SHARES/ DIVIDEND/
PRINCIPAL PRINCIPAL INTEREST
HELD AT SHARES/ HELD AT VALUE AT INCOME
OCT. 31, PRINCIPAL SHARES APRIL 30, APRIL 30, NOV. 1, 1997-
NAME OF ISSUER: 1997 PURCHASED SOLD 1998 1998 APRIL 30, 1998
- ------------- ------- --------- ---- ---------- ------------ --------------
<S> <C> <C> <C> <C>
ACMAT Corp. Class A 189,978 -- -- 189,978 $ 2,968,406 --
American Physicians Service Group, Inc. 200,000 337,000 -- 537,000 3,826,125 --
Carver Bancorp, Inc. 218,500 -- -- 218,500 3,250,188 --
CGA Group, Ltd. 838,710 -- -- 838,710 4,193,550 --
CGA Group, Ltd., Series A 207,969 14,544* -- 222,513 5,562,826 $ 363,600
CGA Group, Ltd., Series B 171,429 -- -- 171,429 4,285,725 --
CGA Special Account Trust $6,428,575 -- -- $6,428,575 6,428,575 152,847
Danielson Holding Corp. 803,669 -- -- 803,669 6,228,435 --
Electro Scientific Industries, Inc. 555,700 237,700 -- 793,400 30,149,200 --
Electroglas, Inc. 1,070,000 119,100 -- 1,189,100 20,066,063 --
First American Financial Corp. 814,700 407,350** -- 1,222,050 86,841,928 346,248
FSI International, Inc. 1,534,250 1,286,650 -- 2,820,900 33,145,575 --
Interphase Corp. 300,000 -- -- 300,000 2,428,110 --
Mountbatten, Inc. 293,000 -- -- 293,000 3,992,125 --
Protocol Systems, Inc. 0 501,100 -- 501,100 4,854,406 --
Silicon Valley Group, Inc 551,900 1,808,500 -- 2,360,400 44,847,600 --
Stewart Information Services Corp. 975,700 -- -- 975,700 34,271,463 136,598
St. George Holdings, Ltd. Class A 912,442 -- -- 912,442 91,244 920
St. George Holdings, Ltd. Class B 7,549 -- -- 7,549 755 --
Tecumseh Products Co. Class A 33,200 92,200 -- 125,400 6,317,025 62,580
Tecumseh Products Co. Class B 358,500 58,800 -- 417,300 22,038,656 232,740
Tejon Ranch Co. 3,045,508 -- -- 3,045,508 71,199,835 76,138
Veeco Instruments, Inc. 218,700 420,100 -- 638,800 25,791,550 --
Vertex Communications Corp. 306,900 -- -- 306,900 8,171,213 --
------------ ----------
Total Affiliates $430,950,578 $1,371,671
============ ==========
</TABLE>
* Increase due to pay-in-kind dividends.
** Increase due to a 3:2 stock split.
60
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
(UNAUDITED)
5. CAPITAL SHARE TRANSACTIONS
Each Fund is authorized to issue an unlimited number of shares of beneficial
interest with no par value. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
THIRD AVENUE THIRD AVENUE THIRD AVENUE
VALUE FUND SMALL-CAP VALUE FUND HIGH YIELD FUND
------------------------- --------------------------- ---------------
FOR THE FOR THE FOR THE FOR THE FOR THE
SIX MONTHS YEAR SIX MONTHS PERIOD PERIOD
ENDED ENDED ENDED ENDED ENDED
APRIL 30, 1998 OCTOBER 31, APRIL 30, 1998 OCTOBER 31, APRIL 30, 1998
(UNAUDITED) 1997 (UNAUDITED) 1997 (UNAUDITED)
------------ ---------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Increase in Fund shares:
Shares outstanding at
beginning of period 51,537,358 23,364,688 8,670,943 -- --
Shares sold 13,679,230 34,497,303 6,269,711 9,845,798 775,509
Shares reinvested from
dividends and
distributions 877,097 584,725 46,998 -- --
Shares redeemed (7,637,562) (6,909,358) (2,356,834) (1,174,855) (2,424)
---------- ---------- ---------- --------- -------
Net increase in Fund shares 6,918,765 28,172,670 3,959,875 8,670,943 773,085
---------- ---------- ---------- --------- -------
Shares outstanding at
end of period 58,456,123 51,537,358 12,630,818 8,670,943 773,085
========== ========== ========== ========= =======
</TABLE>
6. COMMITMENTS
Third Avenue Value Fund has committed a $5,000,000 capital investment to Head
Insurance Investors LP of which $3,126,204 has been funded as of April 30, 1998.
Securities valued at $1,882,986 have been segregated to meet the requirements of
this commitment.
7. RISKS RELATING TO CERTAIN INVESTMENTS
Foreign Securities:
The Funds intend to limit their investments in foreign securities to companies
issuing U.S. dollar-denominated American Depository Receipts or who otherwise
comply with Securities & Exchange Commission ("SEC") disclosure requirements.
Investments in the securities of foreign issuers may involve investment risks
different from those of U.S. issuers including possible political or economic
instability of the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of currency exchange controls, the
possible imposition of foreign with-
61
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998
(UNAUDITED)
holding tax on the dividend income and interest income payable on such
instruments, the possible establishment of foreign controls, the possible
seizure or nationalization of foreign deposits or assets, or the adoption of
other foreign government restrictions that might adversely affect the foreign
securities held by the Fund. Foreign securities may also be subject to greater
fluctuations in price than securities of domestic corporations or the U.S.
Government.
High Yield Debt:
Third Avenue Value Fund and Third Avenue High Yield Fund currently invest in
high yield lower grade debt. The market values of these higher yielding debt
securities tend to be more sensitive to economic conditions and individual
corporate developments than those of higher rated securities. In addition, the
secondary market for these bonds is generally less liquid.
Loans and Other Direct Debt Instruments:
Third Avenue Value Fund and Third Avenue High Yield Fund invest in loans and
other direct debt instruments by a corporate borrower to another party. These
loans represent amounts owed to lenders or lending syndicates (loans and loan
participations) or to other parties. Direct debt instruments may involve a risk
of loss in case of default or insolvency of the borrower and may offer less
legal protection to the Fund in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. The markets in loans are not regulated by
federal securities laws or the SEC.
Trade Claims:
Third Avenue Value Fund invests in trade claims. Trade claims are interests in
amounts owed to suppliers of goods or services and are purchased from creditors
of companies in financial difficulty. An investment in trade claims is
speculative and carries a high degree of risk. Trade claims are illiquid
securities which generally do not pay interest and there can be no guarantee
that the debtor will ever be able to satisfy the obligation on the trade claim.
The markets in trade claims are not regulated by federal securities laws or the
SEC. Because trade claims are unsecured, holders of trade claims may have a
lower priority in terms of payment than certain other creditors in a bankruptcy
proceeding.
62
<PAGE>
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
David M. Barse
Chief Operating Officer, President
Michael Carney
Chief Financial Officer, Treasurer
Kerri Weltz, Assistant Treasurer
Ian M. Kirschner, General Counsel and Secretary
TRANSFER AGENT
First Data Investor Services Group, Inc.
P.O. Box 61503
King of Prussia, PA 19406-0903
(610) 239-4600
(800) 443-1021 (toll-free)
INVESTMENT ADVISER
EQSF Advisers, Inc.
767 Third Avenue
New York, NY 10017-2023
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
CUSTODIANS
THIRD AVENUE VALUE FUND THIRD AVENUE SMALL-CAP VALUE FUND
North American Trust Company THIRD AVENUE HIGH YIELD FUND
225 Broadway Custodial Trust Company
San Diego, CA 92101-4492 101 Carnegie Center
Princeton, NJ 08540-6231
[LOGO]
767 Third Avenue
NEW YORK, NY 10017-2023
Phone (212) 888-6685
Toll Free (800) 443-1021
Fax (212) 888-6757
www.mjwhitman.com
