THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP
VALUE FUND
THIRD AVENUE
HIGH YIELD FUND
THIRD AVENUE
REAL ESTATE VALUE FUND
ANNUAL REPORT
-----------------
OCTOBER 31, 1998
<PAGE>
THIRD AVENUE VALUE FUND
Dear Fellow Shareholders:
At October 31, 1998, the audited net asset value attributable to the 51,081,171
common shares outstanding of the Third Avenue Value Fund ("TAVF", "Third Avenue"
or the "Fund") was $30.16 per share. This compares with an unaudited net asset
value of $30.90 per share at July 31, 1998 and an audited net asset value,
adjusted for subsequent distributions to shareholders, of $31.37 per share at
October 31, 1997. At December 11, 1998, the unaudited net asset value was $31.19
per share.
QUARTERLY ACTIVITY
During the fourth quarter of fiscal 1998, the Fund reduced its cash,
asset-backed and U.S. Government Agency holdings from $379 million, or about 22%
of net assets, to $168 million, or about 11% of net assets. Slightly over half
of the net cash reduction was attributable to shareholder redemptions of Fund
shares. Approximately $100 million net was invested into portfolio securities.
The largest investments were in the common stocks of well-financed semiconductor
equipment manufacturers. Substantial investments were also made into real
estate-related common stocks and the common stocks of financial guaranty
insurance companies. Overall, new positions were established in eleven issues,
of which eight were open market purchases; two - Commercial Federal Common and
Medtronic Common - were received in connection with merger transactions which
resulted in Third Avenue exchanging its positions in First Colorado Common and
Physio-Control Common, respectively; and one was a Japanese currency hedge.
Twenty-nine existing common stock positions were increased during the quarter,
virtually every one of which reflected opportunities for TAVF to average down
during a period when securities markets were declining relatively dramatically.
Positions in two issues were reduced. Five investments were eliminated by sales
in the open market, including a write-off of a "stub" position in LTCB Common;
two were the objects of the exchange of stock mergers; and one, Mountbatten
Common, was sold in a cash merger transaction.
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
$50,000,000 notional amount Japanese yen/U.S. dollar swap
("Swap")
$15,000,000 Cymer, Inc. 3.5%-7.25%
subordinates due 8/6/04
("Cymer Converts")
$1,128,000 PhyMatrix Corp 6.75% subordinates
due 6/15/03 ("PhyMatrix Converts")
100,000 shares Capital Re Corp. Common Stock
("Cap Re Common")
179,600 shares Catellus Development Corp. Common
Stock ("Catellus Common")
61,543 shares Commercial Federal Corp. Common
Stock ("Commercial Federal Common")
631,700 shares GaSonics International Corp. Common
Stock ("GaSononics Common")
265,000 shares Imperial Credit Commercial Mortgage
REIT ("Imperial Commercial Common")
376,400 shares Lam Research Corp. Common Stock
("Lam Research")
14,600 shares LNR Property Corp. Common Stock
("LNR Common")
167,429 shares Medtronic, Inc. Common Stock
("Medtronic Common")
INCREASES IN EXISTING POSITIONS
10,700 shares ACMAT Corp. Class A Common Stock
("ACMAT Common")
205,000 shares ADE Corp. Common Stock ("ADE Common")
160,000 shares Alexander & Baldwin, Inc. Common Stock
("Alexander & Baldwin Common")
2
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
100,900 shares American Physicians Service Group, Inc.
Common Stock ("American Physicians
Common")
176,700 shares Avatar Holdings, Inc. Common Stock
("Avatar Common")
200,000 shares AVX Corp. Common Stock ("AVX Common")
29,245 shares Capital Southwest Corp. Common Stock
("Capital Southwest Common")
432,500 shares C.P. Clare Corp. Common Stock
("CP Clare Common")
125,000 shares Cummins Engine Co., Inc. Common Stock
("Cummins Common")
333,900 shares Electro Scientific Industries, Inc.
Common Stock ("Electro Scientific Common")
263,700 shares Electroglas, Inc. Common Stock
("Electroglas Common")
120,300 shares Enhance Financial Services Group, Inc.
Common Stock ("Enhance Common")
61,500 shares Evans & Sutherland Computer Corp.
Common Stock ("Evans & Sutherland
Common")
200,000 shares Financial Security Assurance Holdings, Ltd.
Common Stock ("FSA Common")
137,200 shares Forest City Enterprises, Inc. Class A
Common Stock ("Forest City Common")
13,000 shares Glenayre Technologies, Inc. Common Stock
("Glenayre Common")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
367,500 shares Hologic, Inc. Common Stock ("Hologic
Common")
200,000 shares Koger Equity, Inc. Common Stock
("Koger Common")
150,600 shares Leucadia National Corp. Common Stock
("Leucadia Common")
50,000 shares MBIA Inc. Common Stock
("MBIA Common")
175,000 shares Nabors Industries, Inc. Common Stock
("Nabors Common")
269,100 shares Protocol Systems, Inc. Common Stock
("Protocol Common")
27,000 shares Risk Capital Holdings, Inc. Common
Stock ("Risk Capital Common")
75,000 shares St. Joe Co. Common Stock
("St. Joe Common")
586,300 shares Silicon Valley Group, Inc. Common
Stock ("Silicon Valley Common")
156,500 shares SpeedFam International, Inc. Common
Stock ("SpeedFam Common")
500,000 shares The Chiyoda Fire & Marine Insurance Co.,
Ltd. Common Stock ("Chiyoda Common")
170,800 shares The Tokio Marine & Fire Insurance Co.,
Ltd. Sponsored ADR ("Tokio ADRs")
100,000 shares Toyoda Automatic Loom Works, Ltd.
Common Stock ("Toyoda Common")
REDUCTIONS IN EXISTING POSITIONS
666,150 shares First American Financial Corp. Common
Stock ("First American Common")
34,500 shares H.B. Fuller Co. Common Stock
("Fuller Common")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES POSITIONS ELIMINATED
652,100 shares American Government Income Fund, Inc.
Common Stock ("American Income Common")
62,500 shares First Colorado Bancorp., Inc.
Common Stock
("First Colorado Common")
293,000 shares Mountbatten, Inc. Common Stock
("Mountbatten Common")
348,500 shares Physio-Control International Corp.
Common Stock ("Physio-Control Common")
261,000 shares The Chuo Trust & Banking Co., Ltd.
Common Stock ("Chuo Common")
50,000,000 shares The Long Term Credit Bank of Japan, Ltd.
Common Stock ("LTCB Common")
1,000,000 shares The Sakura Bank, Ltd. Common Stock
("Sakura Common")
At October 31, over 17% of Fund assets were invested in the common stocks of
well-capitalized semiconductor equipment manufacturers. Long term, the industry
seems to have explosive growth potential, notwithstanding the fact that the
current industry depression is deep and long-lasting. Common stock issues of
companies in this industry acquired during the quarter were GaSonics, Lam
Research, ADE, AVX, CP Clare, Electro Scientific, Electroglas, Silicon Valley,
and SpeedFam. All the issues were acquired at prices reflecting a less than 9
times multiple of past peak earnings. For at least several of the issuers, the
next peak earnings ought to be a lot better than the last peak.
TAVF also increased its position in four small cap-high tech common issuers
where I believe the long-term potentials parallel those existing for
semiconductor equipment manufacturers. These issues were Evans & Sutherland,
Glenayre, Hologic and Protocol.
Third Avenue also materially expanded its investments in the common stocks of
financial institutions and holding companies which became available at discounts
from adjusted net asset values. Issues acquired were Cap Re, Imperial
Commercial, ACMAT,
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<PAGE>
American Physicians, Capital Southwest, Chiyoda, Enhance, FSA, Leucadia, MBIA,
Risk Capital, Tokio, and Toyoda (Toyoda's largest and most important asset is
its holding of approximately 5% of the outstanding common stock of Toyota Motor
Corp.).
During the quarter, the Fund increased its holdings of real estate equities.
Acquired were common stocks issued by Catellus, Alexander & Baldwin, Avatar,
Forest City, Koger and St. Joe. TAVF also acquired additional common shares of
two large companies: Nabors Industries, a contract oil and gas driller; and
Cummins, a leading manufacturer of diesel engines.
Chaos, or at least semi-chaos, existed in U.S. credit markets during August and
September. The panic had large elements of irrationality since, for the first
time in recorded history, performing loans were dumped solely because of
marks-to-market, i.e., quoted prices in securities markets. There was no credit
risk, no interest rate risk, no failure to match maturities risk, and no
currency risk. It was just that market prices for many performing loans cratered
as yield spreads widened between U.S. Treasuries and other obligations,
triggered apparently by Russian government defaults. This unusual emphasis on
marks-to-market seems attributable to two developments during the 1990's:- one,
the securitization of all sorts of loans; and two, the growing influence of
Academic Finance which resulted in changed accounting rules and the increased
use of mark-to-market covenants in loan agreements. It ought to be obvious,
though, that however important marks-to-market are in evaluating portfolios of
common stocks, or portfolios of loans where money defaults exist,
marks-to-market ought to be unimportant in appraising portfolios of performing
loans as long as the cash paid on portfolio holdings exceeds the cash necessary
to service the borrowings that make up the right hand side of the balance sheet
where the assets on the left hand side of the balance sheet consist of
performing loans.
TAVF took advantage of this mark-to-market crisis in three ways - acquiring
Imperial Commercial Common at a price where the indicated dividend return is 15%
to 17%; Cymer Converts where at TAVF's cost, the yield-to-maturity is around
17%; and PhyMatrix Converts where the yield-to-maturity at the Fund's cost is
around 34%. Imperial Commercial is a Real Estate Investment Trust whose assets
consist only of performing real estate mortgage loans; it is comparatively
unleveraged. Cymer, a first-rate semiconductor equipment company, is
well-financed because, like many other well-managed companies, it raised money
by selling securities publicly when markets were highly favorable, even though
Cymer didn't need the money. Health care entrepreneurs we consulted tell us that
PhyMatrix is a very well-managed company. Assuming the loans involved remain
performing loans, the Fund's worst case
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on these investments is that returns will range between 17% and 34%, assuming
the issues are held to maturity.
Cymer Converts and PhyMatrix Converts are not without problems since the
instruments do not provide covenant protections for the Fund. For example, there
are no covenants protecting debt holders if the company chooses to distribute
cash to common shareholders, thereby diminishing the credit-worthiness of the
debt instruments held by TAVF. PhyMatrix announced on September 14 that "the
Company may repurchase up to $15,000,000 of its Common Stock from time to time
in the open market at prevailing market prices." PhyMatrix management does not
appear to be too swift. If one were looking to benefit the Company, and its
long-term stockholders, it would make much more sense were PhyMatrix to use $15
million to buy-in the PhyMatrix Converts at yields-to-maturity of, say, 20% or
better, than it would be to buy-in PhyMatrix Common. In any event, it seems
likely that Cymer Converts and PhyMatrix Converts will remain performing loans.
If these issues suffer money defaults, though, I will have wished that Third
Avenue would have had considerably larger positions in each issue so that the
Fund would have some voice in the reorganization processes.
Normally, Third Avenue attempts to acquire securities which I deem to be "safe
and cheap." It is rare that in trying to acquire securities "cheap" that the
Fund is able to acquire securities where there also seems to be a catalyst:- a
factor that suggests there might be profitable work-out opportunities over the
next year. Markets tend too much toward efficiency for catalysts to exist for
Third Avenue. However, four issues which seem to have catalysts were acquired
during the quarter: Cap Re Common, Chiyoda Common, Imperial Commercial Common,
and Leucadia Common.
Cap Re, a financial guarantor, was acquired for about $17 per share; adjusted
book value is around $24 to $26 per share. Cap Re's AAA claims paying ability is
under review by Moody's. Cap Re would be a disaster if its AAA claims paying
ability is negated. A number of institutions - especially European banks - are
interested in acquiring control of financial insurers and probably would pay a
meaningful premium over adjusted book value to acquire control of Cap Re. This
might well become a realistic scenario if the company's AAA rating appears to be
in jeopardy.
In September, Toyota Motor increased its ownership position in Chiyoda Common
from 37% of the issue to 47%, mostly by buying a new issue of Chiyoda Common at
500 yen, the then market price of Chiyoda Common. Chiyoda has a net asset value,
after deducting reserves for taxes on unrealized appreciation, of about 875 yen.
Toyota Motor informed us in a private letter that if it were to acquire Chiyoda
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<PAGE>
Common in an M&A type transaction, it would have to consider the equivalent of
"entire fairness," not just market price. On October 12, the president of Toyota
stated, "Toyota wants to establish a worldwide network of auto insurance and
finance companies like those of General Motors." The Fund has been buying
Chiyoda common for 380 yen. If there is to be an acquisition of Chiyoda by
Toyota Motor, a price in excess of 500 yen may be a realistic expectation.
At September 30, Imperial Commercial had a net asset value, based on
marks-to-market, of $14.43 per share, roughly equivalent to liquidation value.
The Fund acquired its position in Imperial Commercial Common for $7.85 per
share. In its Analyst Conference Call, the Chief Executive Officer of Imperial
Commercial stated that the company is examining all alternatives to maximize
shareholder value including, among others, liquidation.
Leucadia management has publicly announced that it is examining the feasibility
of making massive cash distributions to shareholders.
During the fourth quarter, the Fund reduced its holdings of First American
Common. This was merely for portfolio balance. First American Common is TAVF's
largest holding, and I thought it was desirable to keep that holding at around
6% of Fund assets. Third Avenue also sold shares in Fuller Common, probably a
prelude to disposing of the Fund's entire position in Fuller Common. American
Income Common represented shares in a closed-end fund acquired at a discount
from Net Asset Value; Third Avenue realized Net Asset Value on the sale.
The Fund closed out its position in Japanese bank common stocks, suffering a
loss of around $46 million, or 89(cent) per TAVF share. The only significant
position had been in LTCB Common. In acquiring LTCB Common, I had hoped the Fund
could replicate the enormous success TAVF had realized by investing in troubled
U.S. depository institutions in the early 1990's. This seems to have been
especially faulty analysis on my part. There never was any chance that LTCB
could have been like its U.S. counterparts and though I now have the benefit of
hindsight, I really think I should have known better. The problems with LTCB
revolved around three factors:
1) Japan, unlike the U.S., has no system for working out troubled loans.
2) The bureaucracy in Japan has power undreamed of in the U.S., The
Ministry of Finance had decided to make LTCB a scapegoat for Japanese banking
problems, the underlying merits of LTCB vis-a-vis other banks notwithstanding.
3) LTCB management had absolutely no interest in protecting the interests
of LTCB common shareholders under any circumstances. (I only became aware of
this when we visited management in Tokyo on September 25.)
8
<PAGE>
Just as a side-bar, two things ought to be noted about LTCB. The Third Avenue
lawsuit was mooted when LTCB gave up its attempts to forgive without
consideration $3.7 billion of senior loans; it is probable that one of the
minority parties, the Democratic Party of Japan, was much more a factor in
causing this result than was Third Avenue, especially since the Fund never could
interest LTCB in participating in the reorganization of the three troubled
debtors whose loans LTCB had tried to forgive. Second, 99% of the LTCB loss is a
realized loss for tax purposes. For a number of years to come, Third Avenue
seems bound to remain a tax efficient fund since it now has a substantial amount
of realized losses which can be used to offset realized gains.
WEIGHT TO PERFORMANCE
The Fund had essentially a break-even year in fiscal 1998. What kind of
consideration should mutual fund investors give to performance, especially
sub-par performance? For buy-and-hold, long-term growth investors such as TAVF,
its annual performance ought to be a symptom of one of two things.
Either
1) Poor performance could be a measure of a money manager's incompetence.
The investment in LTCB Common would seem to point in that direction.
or
2) Poor performance could be a measure indicating that terrific values in
the portfolio became even more terrific as the common stocks of strong
businesses with large long-term potentials became even more attractively priced
than when they were acquired initially. I believe that this is the case for the
twenty-nine common stock positions which were increased during the just-ended
quarter. Pricing for the particular issues seemed more like 1974 or 1982 to me
than they did like 1998.
Hopefully, the stockholders of TAVF will give much more weight to the quality of
the existing portfolio - and the prices paid to establish these positions - than
they will to LTCB. LTCBs do go with the territory. After all, Peter Lynch had
Crazy Eddie and Warren Buffett had U.S. Air.
Further, there are other ways to measure performance that may be more meaningful
than one-year results overall. For example, our investments in Japanese non-life
insurance companies have far outperformed relevant indexes. At October 31, the
market value of the Fund's investments in Japanese non-life insurance companies
virtually equaled TAVF's cost. Third Avenue had initially invested in these
issues in January
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1997 when the Nikkei Index stood at 19,446. At October 31, 1998, the Nikkei
Index closed at 13,564, for a decline in the January 1997 to October 1998 period
of a little over 30%. The experience for the Fund's investments in semiconductor
equipment common stocks seems to have been similar - the Fund's investments in
semis outperformed easily the semi-index.
This is the way it should be. First, the companies in which the Fund has
invested enjoy exceptional financial strength. As such, they are unlikely to be
victimized by dramatic, adverse, unpredictable business changes. Second, if
there is no evidence of permanent impairment of capital, Third Avenue averages
down by increasing its positions in the common stocks of solid companies at
lower and lower prices.
If we do the analysis right, long-term performance for TAVF ought to continue to
be satisfactory. I remain optimistic about the issues currently in the Fund's
portfolio, both in terms of quality and in terms of appreciation potential.
A BALANCED APPROACH TO VALUE INVESTING
Third Avenue uses a Balanced Approach in assessing investments. In this regard
TAVF is quite different from the vast majority of other mutual funds where,
instead of a Balanced Approach, money managers emphasize a Primacy of the Income
Account Approach. These other money managers focus on forecasts of future
flows:- either earnings or cash flows.
It may be helpful to Fund shareholders if they can gain an understanding of how
TAVF differs from most others. I try to provide such understanding in the
following paragraphs, most of which are excerpted from my new book scheduled to
be published by John Wiley & Sons next spring. The title of the book is VALUE
INVESTING - A BALANCED APPROACH.
Wall Street Analysts employed in the research departments of broker/dealers and
as money managers running mutual funds seem out of step with the rest of the
world when it comes to corporate valuations. Wall Street Analysts in their
valuations emphasize, sometimes to the exclusion of all other considerations,
forecasts of future flows:- either earning or cash flows. This emphasis does not
exist when it comes to the valuation of private businesses, or in the vast
majority of Merger and Acquisition (M&A) analyses undertaken by control
investors.
Benjamin Graham and David Dodd in the 1962 edition of their classic, SECURITY
ANALYSIS, describe this difference in analytical approaches. On page 551 it is
stated, "Security analysts -- should reflect fully on the rather startling truth
that as long as a business
10
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remains a PRIVATE corporation or partnership the net asset value appearing on
the balance sheet is likely to constitute the point of departure for determining
what the enterprise is `worth.' But once it makes its appearance as a publicly
held company - even though the shares distributed to the public constitute only
a small part of the total - the net worth figure seems to lose virtually all its
significance. `Value' then becomes dependent almost exclusively on the expected
future earnings."
Graham and Dodd were quite insightful in pointing to the strong tendency to look
at businesses quite differently when dealing with private entities rather than
publicly-traded common stocks. In my view, though, Graham and Dodd overstated
the importance of net asset value in appraising private businesses. Rather,
those valuing private businesses, or M&A opportunities, tend to have a balanced
approach consisting of three general factors:
1) The QUALITY of resources in a business; i.e., the financial strength to
be able to either expand, acquire, or refinance, businesses; or to withstand
future adversities.
2) The QUANTITY of resources in a business relative to the price paid to
acquire equity interests. This is akin to Graham and Dodd's net asset value, or
book value, but the accounting figures are almost always adjusted to reflect a
more realistic value for assets - e.g., real estate appraisals for income
producing properties, or equities in loss reserves for certain property and
casualty insurance companies.
The QUALITY of resources and the QUANTITY of resources are then translated
into another factor.
3) The prospects for long-term wealth creation.
Long-term wealth creation for private businesses, or in an M&A context, can come
in a number of forms, including improved operating earnings, prospects for
Initial Public Offerings, enhanced M&A prospects, abilities to refinance and/or
create unrealized appreciation. Except when taking advantage of Wall Street's
focus on reported earnings per share from operations, having such reported
earnings tends to be the least desirable method by which to create wealth.
Operating earnings usually are characterized by huge income tax disadvantages.
Such wealth creation usually is fully taxed (in a situation where it is hard for
the corporation to control timing of taxable events) as compared with, say,
unrealized appreciation which is not taxed at all.
The best investors on Wall Street: - Warren Buffett, Carl Icahn, Richard
Rainwater, et al - all seem to use the three-pronged balanced approach described
above in their investment activities. All are control, or elements of control,
investors who do not try to predict stock market prices but rather take
advantage of stock market prices
11
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whatever they may happen to be at a moment of time. The goal of these control
investors seems to be to determine what a business is worth and what the
internal dynamics of the business might be. Then they stop.
Wall Street Analysts on the other hand carry extra analytic burdens. Their
object is not so much to determine the underlying worth of a business, though
that is part of their job, but, more importantly to predict the price at which a
common stock will sell in stock markets in periods just ahead. In doing this,
Wall Street Analysts become involved in considering a whole gamut of factors
that have little, or nothing to do with determining underlying business values.
These non-business value factors include all technical-chartist considerations,
predictions about the direction of the general stock market, gauging investor
psychology, looking at corporate dividend policy, and studying the supply-demand
calculus inherent in figuring out who is buying a particular security and who is
selling.
Most buy-and-hold investors, who are interested in analyzing fundamentals,
probably can fare very well by emulating the best investors such as Warren
Buffett and Richard Rainwater. It has never been easier for outside, passive,
investors to understand most businesses, without the use of inside information.
Since Graham and Dodd wrote, there has been a true disclosure revolution.
Trained analysts now can make reasonably good decisions about most common stocks
an investor wants to hold for the long term simply by reviewing the public
record supplemented by interviews of managements and other knowledgeable
parties, -something that was not possible when Graham and Dodd were writing.
There is a great deal of comfort in investing using a balanced approach. It
seems particularly appropriate for investors with true long-term goals: -
retirement or a child's higher education. Here, rewards ought easily to outweigh
risk.
Using a balanced approach though, is not for everyone.
1) Do not use a balanced approach if you are untrained in fundamental
analysis, something true for many research department analysts and money
managers.
2) Fundamental investors try to guard against investment risk; i.e.,
permanent impairment of the capital of the underlying business. In doing this,
most fundamental investors end up taking huge market risks; i.e., the price of
the common stocks they own may decline. Market risk is particularly pertinent
because for most businesses to become attractively priced using a balanced
approach, the near-term outlook for the company is poor. If a near-term outlook
is poor, near-term stock price performance might be poor also.
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<PAGE>
3) Don't use a balanced approach where one's job depends on near-term
market performance, or where client redemptions are likely to occur based on
near-term common stock price performance.
4) Don't use a balanced approach where the portfolio is financed with
borrowed money where collateral is marked to market daily. Loans are likely to
be called if market prices decline, the underlying fundamental merits of a
business notwithstanding.
REOPENING THE FUND
The Fund has reopened for new investment now that large amounts of cash have
been invested.
1998 DISTRIBUTION
On November 18, 1998, TAVF declared a dividend from the Fund's estimated net
investment income through the period ending December 31, 1998. The amount is
estimated to be approximately $0.40 per Fund share. This dividend is payable
January 6, 1999 to Fund shareholders of record on December 30, 1998. The precise
amount of the dividend will be determined based on the number of total Fund
shares outstanding on the close of business on the record date, December 30,
1998. The dividend is payable in cash or, for those shareholders who have
elected the reinvestment option, in additional Fund shares at the Fund's net
asset value on December 31, 1998, the "ex" date, or valuation date, for
reinvestment.
I will write you again when the report for the period to end January 31, 1999 is
published. Best wishes for a Happy and Prosperous New Year.
Sincerely yours,
/s/Martin J. Whitman
- --------------------
Martin J. Whitman
Chairman of the Board
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<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 1998
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- -------------------------------------------------------------------------------------------------
ASSET BACKED SECURITIES - 1.73%
<S> <C> <C> <C>
14,565,176 Ford Credit Auto Owner Trust
Series 1997-B Class A-2, Subordinated
Bond, 5.95% due 1/15/00 $14,606,177
8,601,716 Residential Funding Mortgage
Securities Co., Inc.
Series 1996-S9 Class A-12,
7.25% due 4/25/26 8,656,380
2,328,541 The Money Store Home Equity Trust
Series 1992-A Class A,
6.95% due 1/15/07 2,325,386
1,020,922 The Money Store Home Equity Trust
Series 1995-B Class A-3,
6.65% due 1/15/16 1,022,326
-----------
TOTAL ASSET BACKED SECURITIES
(Cost $26,589,244) 26,610,269 1.73%
-----------
- -------------------------------------------------------------------------------------------------
BANK AND OTHER DEBT - 0.48%
Oil Services 1,445,208 Cimarron Petroleum Corp. (c) (d) 1,464,433 0.10%
-----------
Retail 295,370 Lechmere, Inc. Trade Claim (a) (c) 11,815
13,000,000 Montgomery Ward Series I
8.37%, 7/15/02 (a) (c)* 1,300,000
8,571,364 Montgomery Ward Series C
9.24%, 3/15/03 (a) (c)* 857,136
10,000,000 Montgomery Ward Series F
9.81%, 3/15/03 (a) (c)* 1,000,000
26,606,561 Montgomery Ward Trade Claim (a) (c) 2,660,656
-----------
5,829,607 0.38%
-----------
TOTAL BANK AND OTHER DEBT
(Cost $22,618,912) 7,294,040
-----------
- -------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS - 0.68%
Lasers - Systems /15,000,000 Cymer, Inc. 3.5%, due 8/6/04 10,031,250 0.65%
-----------
Components
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
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<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 1998
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- -------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS (CONTINUED)
<S> <C> <C> <C> <C>
Medical Management 1,128,000 PhyMatrix Corp. 6.75%, due 6/15/03 $ 452,610 0.03%
-----------
Services
Total Convertible Bonds
(Cost $9,502,997) 10,483,860
-----------
- -------------------------------------------------------------------------------------------------
CORPORATE BONDS - 0.49%
Bermuda Based 6,428,575 CGA Special Account Trust (b) (c) 6,428,575 0.42%
-----------
Financial Institutions
Membership Sports & 1,128,123 Thousand Trails, Inc.,
Recreation Clubs Pay-In-Kind Notes 12%, 7/15/03 1,071,717 0.07%
-----------
Total Corporate Bonds
(Cost $7,621,511) 7,500,292
-----------
- -------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY BONDS (COLLATERALIZED MORTGAGE OBLIGATIONS) - 8.14%
Planned Amortization 3,599,780 Fannie Mae
Classes Series 1993-131 C, 5.75% due 6/25/06 3,614,325
22,322,888 Fannie Mae
Series 1998-24 PA, 6.00% due 12/18/08 22,434,838
41,164,705 Fannie Mae
Series 1998-16 PA, 6.00% due 4/18/09 41,354,269
1,912,943 Fannie Mae
Series 1994-41 PD, 5.75% due 4/25/15 1,909,997
5,190,019 Fannie Mae
Series G92-65 E, 6.50% due 12/25/16 5,195,910
880,577 Freddie Mac
Series 1586 E, 5.50% due 9/15/03 879,217
4,631,896 Freddie Mac
Series 1580 N, 5.85% due 7/15/04 4,661,424
12,106,235 Freddie Mac
Series 1679 A, 5.25% due 9/15/06 12,081,236
20,000,000 Freddie Mac
Series 1978 PA, 6.30% due 8/15/16 20,125,500
9,529,815 Freddie Mac
Series 1610 PE, 6.00% due 4/15/17 9,577,273
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 1998
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- -------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY BONDS (COLLATERALIZED MORTGAGE OBLIGATIONS) (CONTINUED)
<S> <C> <C> <C> <C>
Planned Amortization 3,622,406 Freddie Mac
Classes (continued) Series 2007 CA, 7.50% due 9/15/23 $ 3,639,579
-----------
Total U.S. Government Agency Bonds
(Cost $124,898,684) 125,473,568 8.14%
-----------
- -------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS - 85.56%
Annuities & Mutual Fund163,300 John Nuveen & Co., Inc. Class A 5,695,088
Management & Sales 508,000 Liberty Financial Companies, Inc. 12,763,500
450,000 SunAmerica, Inc. 31,725,000
----------
50,183,588 3.26%
----------
Apparel Manufacturers 150,000 Kleinerts, Inc. (a) (c) 2,700,000 0.18%
----------
Banking-Japan 1,360,000 The Long-Term Credit Bank of Japan,
Ltd. (c) 0 0.00%
----------
Bermuda Based 838,710 CGA Group, Ltd. (a) (b) (c) 0
Financial Institutions 91,999 Cobalt Holdings, LLC (c) 920
118,449 ESG Re, Ltd. (a) (c) 2,176,500
85,917 LaSalle Re Holdings, Ltd. 2,029,789
912,442 St. George Holdings, Ltd. Class A (a)(b)(c) 91,244
7,549 St. George Holdings, Ltd. Class B (a)(b)(c) 755
----------
4,299,208 0.28%
----------
Building Products 44,000 Central Sprinkler Corp. (a) 412,500
& Related 250,000 Cummins Engine Co., Inc. 8,531,250
110,500 H.B. Fuller Co. 4,544,313
125,400 Tecumseh Products Co. Class A (b) 6,520,800
417,300 Tecumseh Products Co. Class B (b) 21,699,600
----------
41,708,463 2.71%
----------
Business Development 72,445 Capital Southwest Corp. 6,266,493 0.41%
Companies ----------
Computers, Networks 800,000 3Com Corp. (a) 28,850,000
& Software 365,000 Electronics for Imaging, Inc. (a) 8,782,812
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 1998
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- -------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
<S> <C> <C> <C> <C>
Computers, Networks 391,200 NCR Corp. (a) $ 13,154,100
& Software 100,000 Novell, Inc. (a) 1,487,500
(continued) ------------
52,274,412 3.39%
----------
Depository Institutions 53,000 Astoria Financial Corp. 2,279,000
123,237 BankAtlantic Bancorp, Inc. Class A 854,957
147,034 Bankers Trust New York Corp. 9,235,573
218,500 Carver Bancorp, Inc. (b) 1,966,500
61,543 Commercial Federal Corp. 1,396,257
197,307 Golden State Bancorp., Inc. (a) 3,785,828
53,480 Golden State Bancorp., Inc.
Warrants, 9/17/00 (a) 655,130
197,307 Golden State Bancorp, Inc.
Litigation Tracking Warrants (a) 961,872
60,000 Letchworth Independent Bancshares Corp. 900,000
155,952 Marshall & Ilsley Corp. 7,602,660
69,566 Peoples Heritage Financial Group, Inc. 1,252,188
-----------
30,889,965 2.00%
-----------
Financial Insurance 200,000 Ambac Financial Group, Inc. 11,637,500
100,000 Capital Re Corp. 1,831,250
608,500 Enhance Financial Services Group, Inc. 14,946,281
1,000,000 Financial Security Assurance
Holdings, Ltd. 49,812,500
394,673 MBIA Inc. 24,124,387
-----------
102,351,918 6.64%
-----------
Financial Services 13,104 Associates First Capital Corp. Class A 923,832 0.06%
-----------
Food Manufacturers 328,000 J & J Snack Foods Corp. (a) 7,380,000
& Purveyors 95,000 Premark International, Inc. 3,010,313
172,200 Sbarro, Inc. 4,046,700
109,100 Weis Markets, Inc. 3,913,963
-----------
18,350,976 1.19%
-----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 1998
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- -------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
<S> <C> <C> <C> <C>
Holding Companies 50,000 Aristotle Corp. (a) $ 287,500 0.02%
-----------
Industrial - Japan 2,200,000 Toyoda Automatic Loom Works, Ltd. 35,871,656 2.33%
-----------
Insurance Holding 200,678 ACMAT Corp. Class A (a) (b) 3,085,424
Companies 803,669 Danielson Holding Corp. (a) (b) (c) 3,164,447
50,000 Fund American Enterprises 6,337,500
Holdings, Inc.
648,200 Leucadia National Corp. 19,851,125
436,700 Risk Capital Holdings, Inc. (a) 9,061,525
5,490 Sen-Tech International Holdings,
Inc. (a) (c) 2,745,000
-----------
44,245,021 2.87%
-----------
Life Insurance 434,536 Reliastar Financial Corp. 19,038,109 1.24%
-----------
Manufactured Housing 89,000 Liberty Homes, Inc. Class A 1,056,875
40,000 Liberty Homes, Inc. Class B 482,500
16,875 Palm Harbor Homes, Inc. (a) 426,094
-----------
1,965,469 0.13%
-----------
Media 276,600 ValueVision International, Inc.
Class A (a) 1,089,113 0.07%
-----------
Medical Supplies 81,400 Acuson Corp. (a) 1,226,087
& Services 342,300 Datascope Corp. (a) 7,723,144
1,125,000 Hologic, Inc. (a) 15,398,437
167,429 Medtronic, Inc. 10,882,885
912,900 Protocol Systems, Inc. (a) (b) 7,246,144
90,750 St. Jude Medical, Inc. (a) 2,563,687
-----------
45,040,384 2.92%
-----------
Membership Sports & 237,267 Thousand Trails, Inc. (a) 904,580 0.06%
Recreation Clubs -----------
Mortgage Insurance 152,800 CMAC Investment Corp. 6,398,500 0.42%
-----------
Motor Vehicles & 50,000 Ford Motor Co. 2,712,500 0.18%
Cars' Bodies -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1998
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- -------------------------------------------------------------------------------------------------
Common Stocks and Warrants (continued)
<S> <C> <C> <C> <C>
Natural Resources & 1,160,000 Alexander & Baldwin, Inc. $23,562,500
Real Estate 474,300 Avatar Holdings, Inc. (a) (b) 8,596,687
179,600 Catellus Development Corp. (a) 2,469,500
31,000 Consolidated Tomoka Land Co. 418,500
550,000 Forest City Enterprises, Inc. Class A1 1,825,000
7,500 Forest City Enterprises, Inc. Class B 164,531
265,000 Imperial Credit Commercial Mortgage
Investment Corp. 2,219,375
1,080,336 Koger Equity, Inc. 18,230,670
14,600 LNR Property Corp. 259,150
846 Public Storage, Inc. 22,578
238,200 St. Joe Co. 5,701,912
3,045,508 Tejon Ranch Co. (b) (c) 60,856,925
-----------
134,327,328 8.72%
-----------
Non-Life 7,319,000 Mitsui Marine & Fire Insurance Co.,
Ltd. 36,366,830
Insurance-Japan 5,102,000 The Chiyoda Fire & Marine Insurance
Co., Ltd. 16,813,062
5,316,000 The Nissan Fire & Marine Insurance
Co., Ltd. 14,735,424
3,246,000 The Sumitomo Marine & Fire Insurance
Co., Ltd. (a) 18,998,006
1,020,800 The Tokio Marine & Fire Insurance Co.,
Ltd., Sponsored ADR 58,696,000
3,000,000 The Yasuda Fire & Marine Insurance
Co., Ltd. 14,777,749
-----------
160,387,071 10.41%
-----------
Oil Services 1,875,000 Nabors Industries, Inc. (a) 34,687,500 2.25%
-----------
Security Brokers, 223,600 Jefferies Group, Inc. 6,708,000
Dealers & 893,332 Legg Mason, Inc. 23,729,131
Flotation Companies 1,181,250 Raymond James Financial, Inc. 27,094,922
-----------
57,532,053 3.73%
-----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1998
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- -------------------------------------------------------------------------------------------------
Common Stocks and Warrants (continued)
<S> <C> <C> <C> <C>
Semiconductor 728,900 ADE Corp. (a) (b) $ 7,289,000
Equipment 25,000 AG Associates, Inc. (a) 56,250
Manufacturers and 400,000 Applied Materials, Inc. (a) 13,875,000
Related 1,700,000 AVX Corp. 30,175,000
1,004,500 C.P. Clare Corp. (a) (b) 5,022,500
1,600,300 Electro Scientific Industries,
Inc. (a) (b) 40,207,537
1,846,200 Electroglas, Inc. (a) (b) 23,192,887
2,820,900 FSI International, Inc. (a) (b) 18,335,850
631,700 GaSonics International Corp. (a) 3,237,462
369,200 KLA-Tencor Corp. (a) 13,614,250
376,400 Lam Research Corp. (a) 5,434,275
300,000 Photronics, Inc. (a) 6,543,750
4,234,800 Silicon Valley Group, Inc. (a) (b) 54,258,375
1,605,000 SpeedFam International, Inc. (a) (b) 25,880,625
663,200 Veeco Instruments, Inc. (a) (b) 19,688,750
262,500 Zygo Corp. (a) 2,559,375
-----------
269,370,886 17.48%
-----------
Small-Cap Technology 108,750 AFC Cable Systems, Inc. (a) 2,677,969
1,109,900 American Physicians Service Group,
Inc. (a) (b) 5,688,238
127,000 Analogic Corp. 4,857,750
455,400 Boston Communications Group, Inc. (a) 3,671,662
230,000 Evans & Sutherland Computer Corp. (a) 4,082,500
81,500 FDP Corp. 723,313
1,824,200 Glenayre Technologies, Inc. (a) 10,945,200
299,000 Hypercom Corp. (a) 2,840,500
140,600 H & Q Life Sciences Investors 1,652,050
154,800 Integrated Systems, Inc. (a) 1,741,500
300,000 Interphase Corp. (a) (b) 1,893,750
412,200 Planar Systems, Inc. (a) 3,709,800
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1998
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- -------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
<S> <C> <C> <C> <C>
Small-Cap Technology 53,600 Sparton Corp. (a) $ 331,650
(continued) 612,000 Texas Micro, Inc. (a) 1,683,000
306,900 Vertex Communications Corp. (a) (b) 4,948,763
-------------
51,447,645 3.34%
-------------
Title Insurance 3,000,000 First American Financial Corp. (b) 93,937,500
975,700 Stewart Information Services Corp. (b) 48,906,963
-------------
142,844,463 9.27%
-------------
TOTAL COMMON STOCKS AND
Warrants (Cost $1,040,965,964) 1,318,098,633
-------------
- -------------------------------------------------------------------------------------------------
PREFERRED STOCK - 0.55%
Bermuda Based 238,857 CGA Group, Ltd., Series A (b) (c) 5,971,427
Financial Institutions 171,429 CGA Group, Ltd., Series B (b) (c) 2,507,999
-------------
8,479,426 0.55%
-------------
Insurance Companies 4,775 Ecclesiastical Insurance, 8.625% 10,836 0.00%
-------------
Total Preferred Stock
(Cost $10,266,947) 8,490,262
-------------
- -------------------------------------------------------------------------------------------------
OTHER INVESTMENTS - 1.49%
Bermuda Based 2,215,000 ESG Partners, LP (c) 2,132,655 0.14%
Financial Institutions -------------
Financial $ 15,000,000 American Capital Access Holdings,
Insurance LLC (c) 15,000,000 0.97%
-------------
Foreign Option $ 50,000,000 Japanese Yen November 1998
Contracts Put Options (c) (e) 10,000
$100,000,000 Japanese Yen April 1999
Put Options (c) (f) 252,500
$ 50,000,000 Japanese Yen June 1999
Put Options (c) (g) 115,000
-------------
377,500 0.02%
-------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1998
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- -------------------------------------------------------------------------------------------------
OTHER INVESTMENTS (CONTINUED)
<S> <C> <C> <C> <C>
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 0.20%
-------------
Money Market Funds $2,437,038 Dreyfus Cash Management 2,437,038 0.16%
-------------
Total Other Investments
(Cost $25,860,742) 23,073,397
-------------
- -------------------------------------------------------------------------------------------------
U.S. Treasury Bills - 1.03%
$5,000,000 U.S. Treasury Bill 4.94%, 11/5/98 4,997,566
$9,000,000 U.S. Treasury Bill 4.94%, 11/12/98 8,990,375
$1,960,000 U.S. Treasury Bill 4.94%, 2/4/99 (h) 1,938,795
-------------
TOTAL U.S. TREASURY BILLS 15,926,736 1.03%
(Cost $15,922,391) -------------
TOTAL INVESTMENT PORTFOLIO -
100.15% 1,542,951,057
(Cost $1,284,247,392) --------------
LIABILITIES NET OF
CASH AND OTHER ASSETS - (0.15%) (2,239,991)
--------------
NET ASSETS - 100.00% $1,540,711,066
(Applicable to 51,081,171 ==============
shares outstanding)
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 134.20.
(f) 100 million U.S. Dollar notional amount may be exercised on April 7, 1999
to sell 14.4 billion Japanese Yen at a strike price of 143.80.
(g) 50 million U.S. Dollar notional amount may be exercised on June 8, 1999 to
sell 7.5 billion Japanese Yen at a strike price of 150.45.
(h) Security segregated for future Fund commitments. * Issuer in default.
ADR: American Depository Receipt.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
22
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $885,409,901) $1,065,563,793
Affiliated issuers (identified cost of $398,837,491) 477,387,264
--------------
Total investments (identified cost of $1,284,247,392) 1,542,951,057
Cash and cash equivalents (Note 1) 1,434
Receivable for fund shares sold 2,536,149
Dividends and interest receivable 1,787,378
Other assets 120,087
--------------
Total assets 1,547,396,105
--------------
LIABILITIES:
Payable for securities purchased 1,027,046
Payable for fund shares redeemed 3,730,723
Payable to investment adviser 1,097,763
Accounts payable and accrued expenses 426,316
Payable for service fees (Note 3) 59,436
Unrealized losses on foreign currency swap contract (Note 1) 343,755
Commitments (Note 6) --
--------------
Total liabilities 6,685,039
--------------
Net assets $1,540,711,066
==============
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par value,
51,081,171 shares outstanding $1,281,505,254
Accumulated undistributed net investment income 17,623,734
Accumulated net realized losses from
investment transactions (Note 8) (16,796,669)
Net unrealized appreciation on investments and translation of
foreign currency denominated assets and liabilities 258,378,747
--------------
Net assets applicable to capital shares outstanding $1,540,711,066
==============
Net asset value, offering and redemption price per share $30.16
======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
23
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1998
<S> <C>
Investment Income:
Interest-unaffiliated issuers $ 33,889,064
Interest-affiliated issuers 350,780
Dividends-unaffiliated issuers (net of foreign withholding tax of $212,018) 7,642,726
Dividends-affiliated issuers 2,543,250
------------
Total investment income 44,425,820
------------
EXPENSES:
Investment advisory fees (Note 3) 15,893,039
Service fees (Note 3) 890,003
Transfer agent fees 818,044
Reports to shareholders 396,180
Administration fees (Note 3) 286,436
Custodian fees 235,077
Accounting services 127,396
Registration and filing fees 107,893
Insurance expenses 91,294
Auditing and tax consulting fees 74,543
Miscellaneous expenses 73,499
Legal fees 61,504
Directors' fees and expenses 57,275
------------
Total operating expenses 19,112,183
------------
Net investment income 25,313,637
------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized losses on investments - unaffiliated issuers (38,668,472)
Net realized gains on investments - affiliated issuers 20,587,312
Net realized gains on foreign currency transactions 2,393,487
Net change in unrealized appreciation on investments (81,803,887)
Net change in unrealized depreciation on foreign currency swap contract (343,755)
Net change in unrealized appreciation on translation of other
assets and liabilities denominated in foreign currency (2,686,163)
------------
Net realized and unrealized losses on investments (100,521,478)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(75,207,841)
============
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR YEAR
ENDED ENDED
10/31/98 10/31/97
------------- -------------
OPERATIONS:
<S> <C> <C>
Net investment income $ 25,313,637 $ 21,708,924
Net realized gains (losses) on investments -
unaffiliated issuers (38,668,472) 7,471,501
Net realized gains on investments - affiliated issuers 20,587,312 1,892,646
Net realized gains (losses) on foreign
currency transactions 2,393,487 (4,303,734)
Net change in unrealized appreciation
(depreciation) on investments (81,803,887) 236,395,374
Net change in unrealized depreciation on
foreign currency swap contract (343,755) --
Net change in unrealized appreciation on translation
of other assets and liabilities denominated in
foreign currency (2,686,163) --
-------------- --------------
Net increase (decrease) in net assets
resulting from operations (75,207,841) 263,164,711
-------------- --------------
DISTRIBUTIONS:
Dividends to shareholders from net investment income (21,900,312) (13,987,128)
Distributions to shareholders from net realized gains
on investments (8,575,897) (3,539,465)
-------------- --------------
(30,476,209) (17,526,593)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 626,685,681 1,019,596,272
Net asset value of shares issued in reinvestment of
dividends and distributions 27,594,318 15,120,982
Cost of shares redeemed (654,125,198) (200,962,398)
-------------- --------------
Net increase in net assets resulting from
capital share transactions 154,801 833,754,856
-------------- --------------
Net increase (decrease) in net assets (105,529,249) 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 $17,623,734 and
$13,807,254, respectively) $1,540,711,066 $1,646,240,315
============== ==============
</TABLE>
25
<PAGE>
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>
YEARS ENDED OCTOBER 31,
------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $31.94 $24.26 $21.53 $18.01 $17.92
------ ------ ------ ------ ------
Income (loss) from Investment Operations:
Net investment income .48 .48 .53 .38 .29
Net gain (loss) on securities
(both realized and unrealized) (1.69) 7.92 2.76 3.53 .16
------ ------ ------ ------ ------
Total from Investment Operations (1.21) 8.40 3.29 3.91 .45
------ ------ ------ ------ ------
Less Distributions:
Dividends from net investment income (.41) (.57) (.41) (.25) (.22)
Distributions from realized gains (.16) (.15) (.15) (.14) (.14)
------ ------ ------ ------ ------
Total Distributions (.57) (.72) (.56) (.39) (.36)
------ ------ ------ ------ ------
Net Asset Value, End of Period $30.16 $31.94 $24.26 $21.53 $18.01
====== ====== ====== ====== ======
Total Return (3.86%) 35.31% 15.55% 22.31% 2.56%
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $1,540,711 $1,646,240 $566,847 $312,722 $187,192
Ratio of Expenses to Average Net Assets 1.08% 1.13% 1.21% 1.25% 1.16%
Ratio of Net Income to Average Net Assets 1.44% 2.10% 2.67% 2.24% 1.85%
Portfolio Turnover Rate 24% 10% 14% 15% 5%
The accompanying notes are an integral part of the financial statements.
</TABLE>
26
<PAGE>
PERFORMANCE INFORMATION
(UNAUDITED)
PERFORMANCE ILLUSTRATIONS
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
IN THIRD AVENUE VALUE FUND
AND THE STANDARD & POOR'S 500 INDEX (S&P 500)
Average Annual Total Return
1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year
-3.86% 14.06% 14.54% 16.44% 13.52% 17.19% 15.60% 19.33%
[The following table represents a line chart in the printed piece.]
TAVF S&P 500
--------- ---------
10/31/90 $10,000.00 $10,000.00
10/31/91 14,915.00 13,350.00
10/31/92 15,884.48 14,679.66
10/31/93 21,818.91 16,872.80
10/31/94 22,377.48 17,525.78
10/31/95 27,369.89 22,159.59
10/31/96 31,625.91 27,498.71
10/31/97 42,793.02 36,328.54
10/31/98 41,141.21 44,317.18
As with all mutual funds, past performance does not indicate future results.
27
<PAGE>
THIRD AVENUE SMALL-CAP VALUE FUND
Dear Fellow Shareholders:
At October 31, 1998, the end of our fiscal year, the audited net asset value
attributable to the 13,096,406 common shares outstanding of Third Avenue
Small-Cap Value Fund ("Small-Cap Value" or the "Fund") was $10.66, compared with
the Fund's unaudited net asset value at July 31, 1998 of $11.64. At December 11,
1998, the unaudited net asset value was $10.89.
QUARTERLY ACTIVITY
During the quarter, Small-Cap Value established new positions in the common
stocks of two companies, added to 19 of its 40 existing positions, and reduced
its holdings in two companies. At October 31, 1998, Small-Cap Value held
positions in 42 companies, the top 10 positions of which accounted for
approximately 42% of the Fund's net assets. At quarter's end, approximately 13%
of the Fund's assets were in cash.
NUMBER OF SHARES NEW POSITIONS ACQUIRED
27,600 Alamo Group, Inc. Common Stock
("Alamo Common")
25,000 Capital Re Corp. Common Stock
("Capital Re Common")
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
22,500 Alico, Inc. Common Stock
("Alico Common")
10,000 Avatar Holdings, Inc. Common
Stock ("Avatar Common")
4,500 Cabot Industrial Trust Common Stock
("Cabot Common")
15,700 Bel Fuse, Inc. Class B Common Stock
("Bel Fuse Common")
80,000 C. P. Clare Corp. Common Stock
("C. P. Clare Common")
20,000 Deltic Timber Corp. Common Stock
("Deltic Common")
28
<PAGE>
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
35,800 Electroglas, Inc. Common Stock
("Electroglas Common")
91,600 Evans & Sutherland Computer Corp.
Common Stock ("E&S Common")
29,200 FBL Financial Group, Inc. Class A
Common Stock ("FBL Common")
20,000 Financial Security Assurance Holdings Ltd.
Common Stock ("FSA Common")
4,700 FSI International, Inc. Common Stock
("FSI Common")
30,000 Hologic, Inc. Common Stock
("Hologic Common")
5,000 HomeBase, Inc. Common Stock
("HomeBase Common")
26,000 Koger Equity, Inc. Common Stock
("Koger Common")
22,000 Planar Systems, Inc. Common Stock
("Planar Common")
3,000 Protocol Systems, Inc. Common Stock
("Protocol Common")
25,500 Sparton Corp. Common Stock
("Sparton Common")
26,100 SpeedFam International, Inc.
Common Stock ("SpeedFam Common")
11,700 Value City Department Stores, Inc.
Common Stock ("Value City Common")
NUMBER OF SHARES DECREASES IN EXISTING POSITIONS
167,500 Summa Four, Inc. Common Stock
("Summa Common")
76,000 Xircom, Inc. Common Stock
("Xircom Common")
29
<PAGE>
Extreme volatility characterized securities prices across a variety of markets,
including those of the Small-Cap Value Fund's holdings, during much of the
Fund's fiscal fourth quarter ended October 31, 1998. In its various bouts of
irrationality, however, Mr. Market afforded the Fund some excellent
opportunities to increase its ownership in many existing holdings at very
attractive prices. Small-Cap Value also added two new names to its portfolio,
Alamo and Capital Re, albeit in rather modest quantities. While share prices of
many of our companies have rebounded from the depressed levels reached during
the quarter, the Fund's holdings remain undervalued when measured by the ratio
of public market share prices to corporate business values (the "price to value"
ratio). Just as the Fund tends to find LOWER prices more attractive than higher
prices, so too might you, our shareholders, find the low "price to value" ratio
that currently characterizes Small-Cap's holdings an attractive level at which
to add to your own holdings of the Fund.
Alamo is the world leader in the design, manufacture and distribution of
tractor-mounted mowing and other vegetation maintenance equipment. Serving both
agricultural and industrial markets, Alamo has achieved leading market shares in
the United States and Europe with broad product lines and more than 20
acquisitions under its belt. Alamo has received, and its shareholders recently
approved, a buyout offer from Woods Equipment of $18 1/2 cash in exchange for
all of Alamo's common shares outstanding. With Alamo shares trading around $12
1/2 today, Alamo common seems like it fits our "safe and cheap" investment
philosophy irrespective of the pending deal. At current prices, Small-Cap has an
opportunity to purchase shares of what appears to be an attractive business with
a healthy balance sheet and competent management at a reasonable valuation,
notwithstanding deteriorating business conditions among Alamo's customers.
Conditions in the high-yield markets and short-term weakness in Alamo's business
have cast a seemingly long shadow over completion of the deal. Regardless of
whether a deal is completed, however, we can be happy owners of Alamo Common.
That a deal may be completed in the coming months or that the business is likely
to be sold in the next couple of years, should only enhance our returns.
Capital Re is a fast-growing specialty insurance and reinsurance business with
products that include financial guaranty, mortgage guaranty, title and other
specialty insurance and reinsurance products. Fast growth and insurance may seem
like an oxymoron, but Capital Re has evolved rapidly from a monoline financial
guarantor with a focus on insuring municipal bonds, to a broader-based insurer
and reinsurer with numerous lines of business. Recently, fast growth has
ensnared the company with both real and perceived credit problems. Some of these
problems today may actually threaten the company's coveted AAA rating and have
buffeted the company's
30
<PAGE>
stock price. A loss of its AAA rating would be tantamount to Capital Re being
temporarily out of business and might require, among other things, an injection
of fresh equity or a merger into a larger, well-capitalized partner.
Nevertheless, Small-Cap purchased the shares at prices that, I believe, account
for any worst case scenarios and at prices substantially below reasonable
liquidation values of the company's assets and liabilities.
Generally speaking, the Fund is a reluctant seller of stocks, viewing its
holdings as permanent or semi-permanent ownership positions. We recognize that
company values are dynamic and that business values of well-managed companies
tend to grow over time. To the extent such business values continue to grow, we
think it makes sense to continue to hold the underlying securities. We will,
however, sell a security if 1) the company in question has dissipated its
resources, 2) our original analysis was flawed, 3) a stock appears grossly
overvalued or 4) portfolio considerations necessitate it. This quarter,
Small-Cap reduced its holdings in Summa Four Common and Xircom Common.
Cisco Systems, a giant in the data networking industry, acquired Summa Four, a
maker of programmable switches for telecommunications markets, in a
stock-for-stock exchange. Summa Common was one of Small-Cap's very first
investments and it was gratifying to see Cisco recognize the value in Summa.
Though Cisco appears to be a terrific company with impressive credentials, we
sold our Summa shares because the Cisco stock we would have received was, at
best, difficult to value, and may well have been grossly overvalued. In many
investment circles, selling Cisco stock is probably heretical, but the public
market value of Cisco shares left long-term investors with an unacceptably low
margin of safety, a cornerstone of Third Avenue's investment philosophy. Perhaps
I would have felt differently about selling Cisco's stock had it been
considerably cheaper, or if Cisco had been willing to pay a more handsome price
for Summa. While neither was the case, our investment in Summa can only be
described as extremely satisfactory.
We also reduced our holdings of Xircom Common. We had both investment
considerations as well as portfolio considerations for selling Xircom shares.
Xircom Common had appreciated rapidly, reflective, in part, of a strong product
cycle and excellent execution on the part of management. However, Xircom Common,
too, had reached price levels that significantly eroded our margin of safety.
Put another way, Xircom Common had become a high price-to-value situation: not
only were the stock market values at which the Fund sold probably well beyond
what a knowledgeable business-person might pay for the business in any
foreseeable time frame,
31
<PAGE>
but those values also reflected very high expectations and left almost no room
for error or disappointment in the company's business.
Layered on top of those key investment considerations was a portfolio
consideration: cash in the fund had dwindled below 10%, a rule-of-thumb "comfort
zone" for us at Third Avenue. While most other mutual funds believe in being
fully invested -- indeed most other funds fervently pound the table about being
fully invested -- we do not. Fully invested mutual funds subject to
unpredictable cash flows as well as individual liquidity issues could, in the
worst case, be forced to sell shares that it otherwise would not sell. For Third
Avenue, prudence dictates that we keep some of our assets in cash and 10% seems
like a reasonable level. When cash levels in the Fund fell below our 10% level
in October and appeared to be on the way down, it seemed prudent to increase our
cash cushion. We have, for the time being, suspended our sales of Xircom Common
as cash now sits comfortably above the 15% level. Xircom continues to prosper
and, despite the sales of nearly a third of our position, Xircom Common
continues to be one of the Fund's largest holdings.
1998 Distribution
On November 18, 1998, Small-Cap Value declared a dividend from the Fund's
estimated net investment income through the period ending December 31, 1998. The
amount is estimated to be approximately $0.09 per Fund share. This dividend is
payable January 6, 1999 to Fund shareholders of record on December 30, 1998. The
precise amount of the dividend will be determined based on the number of total
Fund shares outstanding on the close of business on the record date, December
30, 1998. The dividend is payable in cash or, for those shareholders who have
elected the reinvestment option, in additional Fund shares at the Fund's net
asset value on December 31, 1998, the "ex" date, or valuation date, for
reinvestment.
I look forward to writing you again when we publish our First Quarter Report
dated January 31, 1999.
Sincerely,
/s/ Curtis R. Jensen
- --------------------
Curtis R. Jensen
Co-manager, Third Avenue Small-Cap Value Fund
32
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 1998
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS - 86.21%
Construction-Japan 431,900 Sawako Corp., Sponsored ADR (b) $2,510,419 1.80%
----------
Financial Insurance 25,000 Capital Re Corp. 457,813
60,300 Financial Security Assurance
Holdings Ltd. (b) 3,003,694
113,324 MBIA Inc. 6,926,929
----------
10,388,436 7.45%
----------
Industrial Equipment 27,600 Alamo Group, Inc. 379,500 0.27%
----------
Life Insurance 179,000 FBL Financial Group, Inc. Class A (b) 4,553,313 3.26%
----------
Manufactured Housing 184,300 Skyline Corp. 5,724,819 4.10%
----------
Media 408,700 ValueVision International, Inc.
Class A (a) 1,609,256 1.15%
----------
Medical Supplies 10,000 Acuson Corp. (a) 150,625
110,000 Hologic, Inc (a) 1,505,625
278,000 Protocol Systems, Inc. (a) 2,206,625
----------
3,862,875 2.77%
----------
Natural Resources & 187,500 Alexander & Baldwin, Inc. 3,808,594
Real Estate 241,400 Alico, Inc. 4,133,975
235,000 Avatar Holdings, Inc. (a) (b) 4,259,375
126,900 Cabot Industrial Trust 2,538,000
226,800 Deltic Timber Corp. 5,528,250
186,000 Koger Equity, Inc. 3,138,750
200,000 Tejon Ranch Co (d) 3,996,504
1,104,700 The TimberWest Forest Corp. (Canada) 6,284,155
----------
33,687,603 24.14%
----------
Non-Life 2,425,000 The Nissan Fire & Marine
Insurance-Japan Insurance Co., Ltd. 6,721,859 4.82%
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
33
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1998
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ----------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
<S> <C> <C> <C>
Retail 411,100 HomeBase, Inc. (a) (b) $ 2,774,925
261,700 Value City Department Stores, Inc. (a) 2,404,369
-----------
5,179,294 3.71%
-----------
Semiconductor 520,000 C.P. Clare Corp. (a) (b) (c) 2,600,000
Equipment 154,500 Electroglas, Inc. (a) (b) 1,940,906
Manufacturers 417,400 FSI International, Inc. (a) 2,713,100
and Related 164,200 Silicon Valley Group, Inc. (a) 2,103,812
309,200 SpeedFam International, Inc. (a) (b) 4,985,850
-----------
14,343,668 10.28%
-----------
Technology 275,000 ACT Networks, Inc. (a) 2,337,500
25,000 Bel Fuse, Inc. Class A (a) (b) 621,875
40,700 Bel Fuse, Inc. Class B (a) 869,963
117,400 Boston Communications Group, Inc. (a) 946,538
326,900 Centigram Communications Corp. (a) (b) 2,165,712
116,600 Evans & Sutherland Computer Corp. (a) (b) 2,069,650
257,300 Glenayre Technologies, Inc. (a) 1,543,800
161,500 PictureTel Corp. (a) 1,191,062
370,300 Planar Systems, Inc. (a) 3,332,700
101,500 Rofin-Sinar Technologies, Inc. (a) (b) 837,375
244,800 Shiva Corp. (a) 1,384,638
114,500 Sparton Corp. (a) 708,469
490,600 SpecTran Corp. (a) (b) (c) 2,361,012
29,800 Summa Four, Inc. (a) 499,150
240,400 Xircom, Inc. (a) 7,091,800
-----------
27,961,244 20.04%
-----------
Title Insurance 108,000 First American Financial Corp. 3,381,750 2.42%
-----------
TOTAL COMMON STOCKS
(Cost $139,527,271) 120,304,036
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
34
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1998
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ----------------------------------------------------------------------------------------------------
OTHER INVESTMENTS - 0.19%
<S> <C> <C> <C>
Foreign Option 7,000,000 Canadian Dollar July 1999
Contracts Put Options (d) (e) $ 248,150
10,000,000 Japanese Yen February 1999
Put Options (d) (f) 23,750
-----------
TOTAL OTHER INVESTMENTS
(Cost $197,900) 271,900 0.19%
-----------
- ----------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 9.45%
Repurchase 13,185,940 Bear Stearns 5.29%,
Agreements due date November 2, 1998 (g) 13,185,940
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $13,185,940) 13,185,940 9.45%
-----------
TOTAL INVESTMENT PORTFOLIO - 95.85%
(Cost $152,911,111) 133,761,876
-----------
CASH AND OTHER ASSETS
LESS LIABILITIES - 4.15% 5,795,345
-----------
NET ASSETS - 100.00% $139,557,221
(Applicable to 13,096,406 ============
shares outstanding)
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Securities in whole or in part on loan: (See Note 1).
(c) Affiliated issuers-as defined under the Investment Company Act of 1940
(ownership of 5% or more of the outstanding voting securities of these
issuers).
(d) Restricted/fair valued securities.
(e) 7 million U.S. Dollar notional amount may be exercised on July 2,1999 to
sell 10.6 million Canadian Dollars at a strike price of 1.52.
(f) 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 136.50.
(g) Repurchase agreement collateralized by:
Nomura Asset Securities Corp. Commercial Paper, par value $13,345,227,
6.59%, matures 2/15/10: market value $13,401,478.
ADR: American Depository Receipt.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
35
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $141,921,955) $128,800,864
Affiliated issuers (identified cost of $10,989,156) 4,961,012
------------
Total investments (identified cost of $152,911,111) 133,761,876
Cash (Note 1) 7,236
Receivable for securites sold 2,867,609
Receivable for fund shares sold 3,273,669
Dividends and interest receivable 435,444
Collateral on loaned securities (Note 1) 8,735,664
Deferred organizational costs (Note 1) 37,107
Other assets 1,860
------------
Total assets 149,120,465
------------
LIABILITIES:
Payable for securities purchased 42,938
Payable for fund shares redeemed 572,442
Payable to investment adviser 95,061
Accounts payable and accrued expenses 105,649
Payable for service fees (Note 3) 7,687
Collateral on loaned securities (Note 1) 8,735,664
Other liabilities 3,803
------------
Total liabilities 9,563,244
------------
Net assets $139,557,221
============
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par value,
13,096,406 shares outstanding $158,683,792
Accumulated undistributed net investment income 828,935
Accumulated net realized losses from
investment transactions (Note 8) (802,468)
Net unrealized depreciation on investments and translation
of foreign currency denominated assets and liabilities (19,153,038)
------------
Net assets applicable to capital shares outstanding $139,557,221
============
Net asset value, offering and redemption price per share $10.66
======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
36
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1998
INVESTMENT INCOME:
Interest $ 1,496,540
Dividends (net of foreign withholding tax of $78,272) 1,281,627
----------
Total investment income 2,778,167
----------
EXPENSES:
Investment advisory fees (Note 3) 1,248,794
Transfer agent fees 94,684
Service fees (Note 3) 73,988
Administration fees (Note 3) 68,988
Directors' fees and expenses 54,500
Registration and filing fees 54,086
Accounting services 47,071
Reports to shareholders 42,716
Auditing and tax consulting fees 30,307
Custodian fees 23,228
Legal fees 18,118
Amortization of organizational expenses (Note 1) 11,353
Miscellaneous expenses 9,610
Insurance expenses 4,266
----------
Total operating expenses 1,781,709
----------
Net investment income 996,458
----------
REALIZED AND UNREALIZED LOSSES ON INVESTMENTS:
Net realized losses on investments (642,191)
Net realized losses on foreign currency transactions (5,424)
Net change in unrealized depreciation on investments (22,461,400)
Net change in unrealized appreciation on translation of other
assets and liabilities denominated in foreign currency 70,197
------------
Net realized and unrealized losses on investments (23,038,818)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(22,042,360)
============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
37
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR PERIOD
ENDED ENDED
10/31/98 10/31/97*
---------- ---------
OPERATIONS:
Net investment income $ 996,458 $ 403,045
Net realized losses on investments (642,191) (160,277)
Net realized losses on foreign
currency transactions (5,424) --
Net change in unrealized appreciation
(depreciation) on investments (22,461,400) 3,238,165
Net change in unrealized appreciation
on translation of other assets and
liabilities denominated in
foreign currency 70,197 --
------------ ------------
Net increase (decrease)
in net assets resulting from operations (22,042,360) 3,480,933
------------ ------------
DISTRIBUTIONS:
Dividends to shareholders from
net investment income (565,144) --
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 130,078,067 117,966,913
Net asset value of shares issued
in reinvestment of dividends
and distributions 547,053 --
Cost of shares redeemed (75,716,241) (14,192,000)
------------ ------------
Net increase in net assets resulting
from capital share transactions 54,908,879 103,774,913
------------ ------------
Net increase in net assets 32,301,375 107,255,846
Net assets at beginning of period 107,255,846 --
------------ ------------
Net assets at end of period
(including undistributed
net investment income of
$828,935 and $403,045, respectively) $139,557,221 $107,255,846
============ ============
* The Fund commenced investment operations April 1, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
38
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) AND RATIOS ARE AS
FOLLOWS:
FOR THE FOR THE
YEAR PERIOD
ENDED ENDED
10/31/98 10/31/97*
------------- --------
Net Asset Value, Beginning of Period $12.37 $10.00
------ ------
Income (loss) from Investment Operations:
Net investment income .08 .05
Net gain (loss) on securities
(both realized and unrealized) (1.73) 2.32
------ -----
Total from Investment Operations (1.65) 2.37
------ -----
Less Distributions:
Dividends from net investment income (.06) .00
------ -----
Net Asset Value, End of Period $10.66 $12.37
====== ======
Total Return (13.36)% 23.70% 2
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $139,557 $107,256
Ratio of Expenses to Average Net Assets 1.28% 1.65% 1
Ratio of Net Income to Average Net Assets 0.72% 1.44% 1
Portfolio Turnover Rate 6% 7% 2
1 Annualized
2 Not Annualized
* The Fund commenced investment operations April 1, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
39
<PAGE>
PERFORMANCE INFORMATION
(UNAUDITED)
PERFORMANCE ILLUSTRATIONS
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
THIRD AVENUE SMALL-CAP VALUE FUND AND THE RUSSELL 2000 INDEX
Average Annual Total Return
Since Inception
1 Year (4/1/97)
-13.36% 4.47%
[The following table represents a chart in the printed piece.]
TASCV Russell 2000
---------- ------------
4/1/97 $10,000.00 $10,000.00
10/31/97 12,370.00 12,811.00
10/31/98 10,717.00 11,320.00
As with all mutual funds, past performance does not indicate future results.
40
<PAGE>
THIRD AVENUE HIGH YIELD FUND
Dear Fellow Shareholders:
At October 31, 1998, the audited net asset value attributable to the 904,440
common shares outstanding of the Third Avenue High Yield Fund (the "Fund") was
$8.50 per share. This compares with an unaudited net asset value of $9.82 at
July 31, 1998, and a net asset value of $10.00 per share at February 12, 1998,
the date of the Fund's inception. At December 11, 1998, the unaudited net asset
value was $9.00 per share.
QUARTERLY ACTIVITY
During the fourth quarter of fiscal 1998, the Fund established one new position,
as new monies flowed into the Fund, and eliminated three positions in order to
raise cash to accommodate redemptions of shares by short-term investors on
several occasions.
Transactions made during the quarter are summarized below.
PAR VALUE NEW POSITION ACQUIRED
$500,000 CalEnergy Co., Inc 8.48%, due 9/15/28
POSITIONS ELIMINATED
$300,000 Alcatel SA 7.00%, due 8/01/04
$300,000 MascoTech 4.50%, due 12/15/03
$500,000 PSINet, Inc. 10.00%, due 2/15/05
PORTFOLIO ACTIVITY
The three months ending October 31 marked a once-in-a-decade chance for
investors in the high yield bond market, where the Fund has substantial
investments, to profit from disorderly market conditions. Because of lack of
liquidity and forced sales from leveraged investors, yields rose to levels which
on a relative basis were at least as attractive as in the 1990-1991 period, the
last such great unsettled period. Similarly, convertible bonds, where the bulk
of the Fund's assets is currently concentrated, dropped to levels seen only
fleetingly in 1990. Convertible bonds suffered from the combined effects of
lower stock prices and higher interest rates on below investment grade bonds in
general.
41
<PAGE>
We believe the Fund's portfolio of securities offers both high current income
and the possibility of future capital appreciation. Further, our holdings are
concentrated in companies and industries whose profits, we think, will expand
faster than the economy as a whole, either through internal growth or in
combination with restructuring and consolidating among companies. Such asset
transfer activity can improve profits and return on investment even in
businesses with slow underlying growth rates.
Our largest concentration of holdings, comprising just over 14% of total assets,
is in the semiconductor capital equipment industry. Our companies hold leading
technological positions in this multifaceted area, and have the financial
flexibility to ride out the rest of the current industry consolidation. We
believe they are well positioned for the next industry upswing, which some
industry analysts think is already underway.
Our second largest industry representation, about 13.5% of total assets,
consists of issues of corporations manufacturing a wide range of technology
products such as semiconductors, networking products and disks for computers.
Companies in these industries have just completed a period of relatively flat
demand, coupled with the worst excess inventory supply cycle seen in the
post-World War II period, causing sharp price erosion as inventories were worked
off. This process is nearly completed, and demand, especially for computer-based
products, seems to be moving up again at very healthy rates.
The third largest sector in the Fund, amounting to 11% of assets, is
telecommunications. This industry is undergoing dynamic change as a result of
the Telecommunications Act of 1996. This legislation provided for the
deregulation of the industry and has spawned a number of aggressive competitors
offering voice, data, and internet services using new technology to share in the
explosive growth in demand. We hold issues of several of these new entrants, and
think they will profit not only from new markets but also by taking market share
from existing incumbent service providers.
Healthcare makes up close to 11% of the Fund's total assets. Current industry
conditions are unsettled, as long-term care providers adjust their business
plans to new federal government regulations on reimbursement for care. The
number of people needing long-term care along with ancillary services is growing
much faster than the population as a whole. Once companies adapt to the new
reimbursement rules being phased into the system, we expect other investors will
recognize their bright future, as demand for both the quantity and quality of
healthcare expands faster than growth of the domestic economy.
42
<PAGE>
The electric and gas utility industry is our fifth largest sector, amounting to
close to 10% of the Fund's total assets. While this industry should grow at
levels in line with overall economic growth in the U.S., massive changes are
just starting to be felt as states begin to deregulate the power industry.
Similar deregulation moves are also going on in industrialized countries
overseas, which in some cases, notably the United Kingdom (U.K.), are actually
ahead of the U.S. in opening their power markets to free competition. We think
smart managements will be able to take advantage of these changes to grow their
revenues and profits far above the growth of the power market as a whole.
Further, the electric utility industry in the U.S. and other industrialized
countries is relatively insensitive to the recent economic declines in less
industrialized, so-called emerging market countries, primarily in Asia and Latin
America. These countries have begun to reduce their demand for many products
manufactured in the U.S., and are attempting to increase their exports to
industrialized countries, in an effort to solve their economic troubles. As a
result of this lowered export demand and increased import supply, many domestic
companies, especially those in commodity-based industries like metals, energy,
chemicals, paper and forest products, and textiles, will experience revenue and
profit pressure next year.
NEW PURCHASE
CalEnergy is a diversified global energy company which has grown by acquisition
of electric and gas companies in the U.S., U.K., Australia, Canada, and New
Zealand. Its recent purchase of Iowa-based MidAmerican Energy will provide
access to an attractive and growing market for its low cost power. As the
electric utility industry begins to deregulate, both in the U.S. and abroad,
CalEnergy should benefit from the knowledge it has gained since its 1997
acquisition of Northern Electric in the U.K.
POSITIONS ELIMINATED
Among the three positions which were eliminated in the quarter were bonds of
Alcatel, the large French telecommunications equipment company. Alcatel had
agreed in June, 1998, to take over DSC Communications, a Texas-based
telecommunications equipment company. The DSC bonds had a speculative grade
rating of "B" by the major rating services, and experienced substantial
appreciation in price due to Alcatel's higher investment grade credit rating of
"A" by the major rating agencies.
43
<PAGE>
MascoTech convertible bonds were sold, although our fundamentally favorable
opinion of the company has not changed, because we felt other holdings in the
portfolio had a likelihood of greater capital appreciation. Similarly, we also
sold our holding of PSINet, an Internet access and Web hosting provider to
corporations and other Internet service providers, because we felt its
continuing need to tap the high yield bond market at future dates would provide
other opportunities to reestablish a position in this credit in the future.
THE MISFORTUNE OF MARKET TIMING
Notably, redemptions of the Fund in the quarter were concentrated during the
first half of October, the very period when financial markets were at their most
stressed condition in many years, and short-term downward pressure was most
intense on all securities prices. You may recall that at this time, prices of
virtually all securities, except for U.S. Treasury issues, declined sharply, due
to liquidity pressures arising from forced sales of securities by numerous
leveraged investment funds. In addition, credit concerns about so-called
emerging market bonds, such as those from Russia which defaulted in the quarter,
caused prices of all emerging market debt, as well as prices of domestic high
yield bonds, to drop significantly. The combination of all these events led to
extremely illiquid market conditions not seen in many years.
Of course, we recognize that in future periods of market turmoil, the net asset
value per share of the Fund may well drop again, reflecting short-term changes
in the prices of securities held in the Fund. We regard such times as great
opportunities to purchase, but certainly not to sell. Lower prices allow us to
buy more bonds or shares for the same amount of money. If our intensive research
evaluations are accurate, we can take advantage of short-term price declines to
create even greater opportunity to increase our shareholders' investment over
the long term.
1998 DISTRIBUTIONS
On November 18, 1998, the Fund declared a dividend from the Fund's estimated net
investment income through the period ending December 31, 1998. The amount is
estimated to be approximately $0.16 per Fund share. This distribution is payable
January 6, 1999 to Fund shareholders of record on December 30, 1998. The precise
amount of the distribution will be determined based on the total number of Fund
44
<PAGE>
shares outstanding on the close of business on the record date, December 30,
1998. The distribution is payable in cash or, for those shareholders who have
elected the reinvestment option, in additional Fund shares at the Fund's net
asset value on December 31, 1998, the "ex" date, or valuation date, for
reinvestment.
I look forward to writing to you again when the first quarter report for the
period ending January 31, 1999 is published.
Sincerely,
/s/Margaret D. Patel
- --------------------
Margaret D. Patel
Portfolio Manager, Third Avenue High Yield Fund
45
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS - 58.07%
Capital Equipment - 450,000 Lam Research Corp. 5.00%,
Semiconductors due 9/1/02 $ 356,063 4.63%
---------
Computers - Memory 300,000 HMT Technology Corp. 5.75%,
Devices due 1/15/04 178,125 2.32%
---------
Electric Utility Services 400,000 Itron, Inc. 6.75%, due 3/31/04 285,500 3.71%
---------
Electronic Components - 325,000 Atmel SA 144A 3.25%, due 6/1/02 247,000
Semiconductors 325,000 Cypress Semiconductors Corp. 6.00%,
due 10/1/02 292,906
---------
539,906 7.02%
---------
Instrumentation - 600,000 Credence Systems Corp. 5.25%,
Electronic Testing due 9/15/02 444,000 5.77%
---------
Lasers - 450,000 Cymer, Inc. 3.50%, due 8/6/04 300,937 3.91%
Systems/Components ---------
Medical - Generic Drugs 475,000 Alpharma, Inc. 144A 5.75%, due 4/1/05 511,812 6.65%
---------
Medical - Hospitals 625,000 Columbia HCA Medical Care, Int'l.
6.75%, due 10/1/06 530,469 6.90%
---------
Medical Management 505,000 PhyMatrix Corp. 6.75%, due 6/15/03 202,631 2.63%
Services ---------
Networking 425,000 Adaptec, Inc. 4.75%, due 2/1/04 330,438 4.30%
---------
Oil/Gas Exploration 300,000 Range Resources Corp. 6.00%, due 2/1/07 193,500
300,000 Pogo Producing Co. 5.50%, due 6/15/06 208,500
---------
402,000 5.23%
---------
Oil Field Services 300,000 Key Energy Group, Inc. 5.00%,
due 9/15/04 190,875 2.48%
---------
Telecommunications - 500,000 P-Com, Inc 4.25%, due 11/1/02 193,125 2.51%
Wireless ---------
TOTAL CONVERTIBLE BONDS
(Cost $5,617,360) 4,465,881
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
46
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Convertible Preferred Stock - 19.24%
Auto Parts Original 7,000 Breed Technologies, Inc. 6.50%,
due 11/15/27 $ 137,375 1.79%
---------
Diversified 5,000 Coltec Capital Trust 144A 5.25%,
Manufacturing due 4/15/28 182,500 2.37%
---------
Electric Utility Services 4,000 Texas Utilities 9.25%, due 8/16/01 225,500 2.93%
---------
Insurance 5,000 Conseco Finance Trust IV 7.00%,
due 2/16/01 212,813 2.77%
---------
Medical - 9,000 Sun Financing I 144A 7.00%,
Long Term/Subacute due 5/1/28 102,375 1.33%
---------
Rental Auto Equipment 6,000 Budget Group Capital Trust 144A 6.25%,
due 6/15/05 246,000 3.20%
---------
Telecommunications - 5,000 Winstar Communications, Inc. 144A
Wireless 7.00% Due 3/15/10 143,750 1.87%
---------
Telephone Services 6,000 Nextlink Communications, Inc. 144A 6.50%,
due 3/31/10 229,500 2.98%
---------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost $2,164,353) 1,479,813
---------
PRINCIPAL
AMOUNT ($)
- ---------------------------------------------------------------------------------------------
CORPORATE BONDS - 18.32%
Electric Utility Services 500,000 CalEnergy Co., Inc. 8.48%,
due 9/15/28 520,625 6.77%
---------
Real Estate - 500,000 BF Saul REIT 144A 9.75%,
Commercial due 4/1/08 416,250 5.41%
---------
Telephone Services 500,000 Level 3 Communications, Inc. 144A
9.125%, due 5/1/08 472,500 6.14%
---------
TOTAL CORPORATE BONDS
(Cost $1,497,971) 1,409,375
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
47
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1998
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS - 0 .14%
Telecommunications - 399 Winstar Communications, Inc (a) $ 10,773 0.14%
Wireless ---------
TOTAL COMMON STOCK
(Cost $8,653) 10,773
---------
TOTAL INVESTMENT PORTFOLIO - 95.77%
(Cost $9,288,337) 7,365,842
---------
CASH AND OTHER ASSETS
LESS LIABILITIES - 4.23% 325,394
---------
NET ASSETS - 100.00% $7,691,236
(Applicable to 904,440 ==========
shares outstanding)
Notes:
(a) Non-income producing security.
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
48
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF ASSETS AND LIABILITIES
AT OCTOBER 31, 1998
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $9,288,337) $7,365,842
Cash (Note 1) 220,256
Receivable for fund shares sold 58,710
Interest receivable 106,000
Deferred organizational costs (Note 1) 12,865
Other assets 8,002
----------
Total assets 7,771,675
----------
LIABILITIES:
Payable for fund shares redeemed 15,031
Payable to investment adviser 5,610
Accounts payable and accrued expenses 59,798
----------
Total liabilities 80,439
----------
Net assets $7,691,236
==========
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par value,
904,440 shares outstanding $9,609,490
Accumulated undistributed net investment income 54,866
Accumulated net realized losses from
investment transactions (Note 8) (50,625)
Net unrealized depreciation of investments (1,922,495)
----------
Net assets applicable to capital shares outstanding $7,691,236
==========
Net asset value, offering and redemption price per share $8.50
=====
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
49
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED OCTOBER 31, 1998*
INVESTMENT INCOME:
Interest $ 400,869
Dividends 54,379
-----------
Total investment income 455,248
-----------
EXPENSES:
Investment advisory fees (Note 3) 50,472
Directors' fees and expenses 43,204
Administration fees (Note 3) 28,253
Registration and filing fees 23,756
Auditing and tax consulting fees 20,500
Transfer agent fees 18,939
Accounting services 18,622
Reports to shareholders 10,554
Custodian fees 5,138
Amortization of organizational expenses (Note 1) 2,135
Miscellaneous expenses 2,104
-----------
Total operating expenses 223,677
-----------
Expenses waived and reimbursed (Note 3) (117,110)
-----------
Net expenses 106,567
-----------
Net investment income 348,681
-----------
REALIZED AND UNREALIZED LOSSES ON INVESTMENTS:
Net realized losses on investments (50,625)
Net change in unrealized depreciation on investments (1,922,495)
-----------
Net realized and unrealized losses
on investments (1,973,120)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(1,624,439)
===========
* The Fund commenced investment operations on February 12, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
50
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE
PERIOD
ENDED
10/31/98*
---------
OPERATIONS:
Net investment income $ 348,681
Net realized losses on investments (50,625)
Net change in unrealized depreciation on investments (1,922,495)
----------
Net decrease in net assets resulting from operations (1,624,439)
----------
DISTRIBUTIONS:
Dividends to shareholders from net investment income (295,950)
----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 12,705,359
Net asset value of shares issued in reinvestment of
dividends and distributions 266,886
Cost of shares redeemed (3,360,620)
----------
Net increase in net assets resulting from capital
share transactions 9,611,625
----------
Net increase in net assets 7,691,236
Net assets at beginning of period 0
----------
Net assets at end of period
(including undistributed net investment income of $54,866) $7,691,236
==========
* The Fund commenced investment operations February 12, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
51
<PAGE>
THIRD AVENUE TRUST
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
10/31/98*
---------
Net Asset Value, Beginning of Period $10.00
-----
Income (losses) from Investment Operations:
Net investment income .34
Net loss on securities (both realized and unrealized) (1.56)
-----
Total from Investment Operations (1.22)
-----
Less Distributions:
Dividends from net investment income (.28)
-----
Net Asset Value, End of Period $8.50
=====
Total Return (since inception) (12.39%)1
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $7,691
Ratio of Expenses to Average Net Assets
Before expense reimbursement 3.99% 2
After expense reimbursement 1.90% 2
Ratio of Net Income to Average Net Assets
Before expense reimbursement 4.13% 2
After expense reimbursement 6.22% 2
Portfolio Turnover Rate 38% 1
1 Not Annualized
2 Annualized
* The Fund commenced investment operations February 12, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
52
<PAGE>
PERFORMANCE INFORMATION
(UNAUDITED)
PERFORMANCE ILLUSTRATIONS
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
THIRD AVENUE HIGH YIELD FUND AND THE MERRILL LYNCH HIGH YIELD
MASTER II INDEX AND THE MERRILL LYNCH INDEX OF
ALL CONVERTIBLES, SPECULATIVE QUALITY
Total Return Since Inception
-12.39%
[The following table represents a chart in the printed piece.]
TAHYF Merrill Lynch Merrill Lynch
High Yield Index of all Convertibles,
TAHYF Master II Index Speculative Quality
---------- --------------- -------------------------
2/12/98 $10,000.00 $10,000.00 $10,000.00
10/31/98 8,761.00 9,621.00 9,293.00
- --------------------------------------------------------------------------------
* Period beginning February 12, 1998 (THIRD AVENUE HIGH YIELD FUND'S
commencement of operations)
As with all mutual funds, past performance does not indicate future results.
53
<PAGE>
THIRD AVENUE REAL ESTATE VALUE FUND
Dear Fellow Shareholders:
Welcome to the Third Avenue family's newest fund, Third Avenue Real Estate Value
Fund ("TAREV" or the "Fund"), which commenced operations on September 17, 1998.
At October 31, 1998, the end of our first fiscal year, the audited net asset
value (NAV) attributable to the 69,355 shares outstanding of the Fund was $10.28
compared with the Fund's opening net asset value at September 17, 1998 of
$10.00. At December 11, 1998 the unaudited net assets totaled $2,602,648,
attributable to the 249,518 common shares outstanding with a net asset value of
$10.43.
QUARTERLY ACTIVITY
In its first partial quarter of operations, the Fund established positions in
the common stocks of 12 companies, representing 60.3% of the Fund's net assets,
as follows:
NUMBER OF SHARES POSITIONS ACQUIRED
3,000 Avatar Holdings, Inc. ("Avatar Common")
2,000 Catellus Development Corp.
("Catellus Common")
6,000 Commercial Assets, Inc.
("Commercial Assets Common")
1,000 Deltic Timber Corp. ("Deltic Common")
1,000 Forest City Enterprises, Inc. - Class A
("Forest City Common")
3,000 Imperial Credit Commercial Mortgage
Investment Corp. ("Imperial Common")
4,000 Koger Equity, Inc. ("Koger Common")
3,000 LNR Property Corp. ("LNR Common")
2,000 Security Capital Group, Inc. -
Class B ("Security Capital Common")
1,000 St. Joe Co. ("St. Joe Common")
4,000 The TimberWest Forest Corp. -
Stapled Units ("Timberwest Stapled Units")
6,000 United Investors Realty Trust
("United Investors Common")
54
<PAGE>
A few of our positions will be recognized by shareholders of Third Avenue Value
Fund ("TAVF") as long-time holdings of TAVF, including FOREST CITY COMMON, KOGER
COMMON and ST. JOE COMMON, each of which has declined to attractive buying
levels. FOREST CITY a real estate operating company (REOC) with one of the most
experienced management teams in the business - develops, owns and manages
commercial and residential properties nationwide. FOREST CITY is not a real
estate investment trust (REIT) and, therefore, is able to reinvest its
substantial internally-generated cash flow as opposed to paying it out in
dividends. FOREST CITY has higher leverage than most REITs, but uses primarily
non-recourse property-secured financing, thereby enhancing what we consider its
"safety factor". KOGER is a REIT that develops, owns and manages office parks
throughout the Southeast and Texas. Most of KOGER'S properties were developed
in-house, as it is one of the few office REITs that has always had development
expertise and the ability to create value. KOGER has a strong balance sheet and
at current levels, the stock is selling at a substantial discount to our
estimate of NAV. ST. Joe is the largest private landowner in Florida, with over
one million acres. Its balance sheet is ideally suited to develop its vast
holdings, with over $500 million in cash and marketable securities and no debt.
Additionally, ST. JOE has begun making strategic acquisitions, including
investments in and purchases of development companies and real estate brokerage
and service companies.
A few other positions also represent holdings in Third Avenue Small-Cap Value
Fund, including AVATAR COMMON, DELTIC COMMON and TIMBERWEST STAPLED UNITS, each
of which continued to be priced at attractive levels. AVATAR owns approximately
56,000 acres of land. Most of the property is located in Florida and is either
exempt from or complies with Florida's expensive and time-consuming DRI
(development of regional impact) process. AVATAR has owned its land for about 30
years at a very low cost basis. As a result, Avatar's balance sheet does not
reflect the true value of its land holdings. New management has developed a
comprehensive business plan to develop the land and unlock its value. Patience
is the key here. The new business plan includes major developments with emphasis
on active adult communities. Projects such as these have long lead times (albeit
shorter in AVATAR'S case because of the status of approvals) and we do not
expect to see positive results for a few more years. However, with its strong
balance sheet, the company should be able to maintain liquidity during its
start-up phases. AVATAR is typical of many Third Avenue Funds' long-term
investments - the near-term outlook is poor, but the company is well-financed
and has the staying power to create long-term value. DELTIC is a natural
resources company engaged primarily in the growing and harvesting of timber and
the manufacturing and marketing of lumber. DELTIC owns over 400,000 acres of
55
<PAGE>
timberland (primarily in Arkansas), 36,000 acres of farmland, two sawmills and
several real estate development projects including a 4,300-acre master-planned
community. Due in large part to reduced demand for lumber and wood products in
Asia, DELTIC'S margins at its mills have been poor the last few quarters. As a
result, the stock price has suffered additional declines - creating a terrific
buying opportunity. The company's balance sheet does not reflect the true value
of the company's land holdings, since most of the land has been owned for over
60 years. The company is conservatively financed with very little debt. At
current levels, the stock is trading at about one-half of our estimate of NAV.
TIMBERWEST is another natural resources company with over 800,000 acres of
private timberlands in British Columbia. The company is conservatively financed
with very little debt and currently trades at about a 50% discount to our
estimate of NAV, based on recent timberland sales in the Pacific Northwest.
CATELLUS is the second largest property owner in the state of California (the
government is first) and one of the nation's largest full-service real estate
companies. The company owns a portfolio of more than 18 million square feet of
industrial, office and retail buildings; a strategic land portfolio with
development potential of over 54 million square feet of new commercial space and
17,000 residential units; over 12,000 acres of income producing land leases; and
782,000 acres of desert and agricultural land. The company is conservatively
leveraged with primarily non-recourse mortgage debt, and at our acquisition
price we own CATELLUS COMMON at more than a 30% discount to our estimate of NAV.
COMMERCIAL ASSETS is a small REIT that has recently liquidated its portfolio of
primarily commercial mortgage-backed securities (CMBS). COMMERCIAL ASSETS COMMON
has a NAV of approximately $7.50 per share, which is primarily in cash, and
waiting to be reinvested in manufactured housing communities. Management has
experience investing in this asset class, which historically generates very
stable returns. Our average cost of about $5.63 per share represents a 25%
discount to the cash on the balance sheet versus no debt. IMPERIAL is a REIT
which invests primarily in performing small multi-family and commercial mortgage
loans. Unlike many other mortgage REITs that invested heavily in subordinate
tranches of CMBS and highly leveraged those investments with reverse repurchase
agreements, IMPERIAL has very low leverage (less than one-to-one
debt-to-equity). Due to the recent widening of spreads between U.S. treasury
securities and other bonds and the resulting mark-to-market price adjustments,
many mortgage REITs were subject to debilitating margin calls leading to a
liquidity crisis, and even bankruptcy (as in the case of Criimi Mae, Inc.).
Common stock prices for most (if not all) mortgage REITs fell precipitously in
September. IMPERIAL COMMON was not spared, but we believe it was misunderstood.
With a book value of approximately
56
<PAGE>
$14.33 per share, and our conservative estimate of "fire-sale" liquidation value
of approximately $12.00, our acquisition price of $7.52 seems like a good buy.
Additionally, the company's 33 cent quarterly dividend appears safe, and should
throw off a 17.5% yield. LNR is an opportunistic real estate operating company
(not a REIT) whose roots go back to the early 1990s when the RTC, FDIC and other
banks and thrifts were forced to liquidate large portfolios of non-performing
real estate loans. LNR accumulated a substantial portfolio of real estate assets
at distressed prices and currently has total assets of approximately $2 billion.
LNR COMMON has a book value of about $17 per share (which is about where we've
been buying it) and, based on the tremendous value management has been able to
add to the no-longer-distressed assets, we figure the NAV to be at least $30 per
share. SECURITY CAPITAL is a real estate investment and operating management
company that owns strategic positions in highly focused public real estate
operating companies. The company acts as the manager of several of its strategic
investees and generates substantial recurring fees. SECURITY CAPITAL is
different than a holding company or a closed-end fund that simply makes passive
investments, yet SECURITY CAPITAL COMMON trades at about a 30% discount to the
NAV of the underlying investments. UNITED INVESTORS is a small REIT ($70 million
equity capitalization) that invests in grocery-anchored neighborhood shopping
centers in the Southern U.S. The company was one of the last REITs to go public
earlier this year, with an IPO price of $10 per share. The company went public
with very little debt and has since made several acquisitions, primarily using
non-recourse mortgage loans. We estimate the NAV of UNITED INVESTORS COMMON to
be least $11.00 per share, and based on our cost of about $7.31 per share, we
are buying some pretty good assets at a 35% discount. Due to the company's size
and the fact that the secondary offering window for REITs has been closed, we
think there is a pretty good chance UNITED INVESTORS will go through some form
of resource conversion.
WHY START A REAL ESTATE FUND?
Real estate and real estate-related companies have always been a substantial
component of Third Avenue Value Fund, and represent a significant portion of its
unrealized gains. Third Avenue Value Fund was making significant investments in
real estate and real estate-related companies long before REIT funds were in
vogue. Investing in real estate securities - at least the way we do it - is
probably the purest form of value investing. Third Avenue's investment mantra
has always been: Buy what is today "SAFE AND CHEAP." Applying these principles
to real estate securities is much easier than applying them to, say, a
manufacturing company.
57
<PAGE>
Safety is measured first by examining the balance sheet to determine the
presence of high quality assets and lack of significant encumbrances. A real
estate company (whether a REIT or REOC), by its very nature, usually has high
quality assets. The assets are high quality because (i) they are convertible to
cash in a reasonable period of time, (ii) they tend not to depreciate in value -
in real dollars, (iii) they can be financed using non-recourse debt and (iv)
they have positive tax attributes. Our comfort level with a real estate
company's encumbrances (secured and/or unsecured debt) depends on the type of
assets owned. A company like Avatar, whose most significant asset is its land
and which does not yet have significant recurring cash flow, should have minimal
encumbrances. A company like Forest City, however, whose assets consist of a
diversified portfolio of income-producing properties, can afford to use much
higher leverage, especially non-recourse mortgage financing. Real estate is
subject to cycles which can affect rent levels, occupancy, cash flow and,
ultimately, property values. A strong balance sheet provides the staying power
necessary to weather down cycles. Additionally, it provides management with the
necessary tools to be an opportunistic buyer when others are forced to sell. Our
second measure of safety is our evaluation of management. We consider
management's track record of acquiring, owning, leasing, managing and developing
real estate in both up and down cycles. We also take into consideration whether
or not management's interests are significantly aligned with the shareholders
(i.e., is their stake in the company in the form of ownership, options, etc. or
do they benefit simply by accumulating more assets). Our third measure of safety
is the quality of financial and operating information provided by the company.
We rely heavily upon audited financial statements, SEC filings and our
interviews with management. We prefer to have as much detailed information as
possible, especially property-level information such as lease expirations,
rental rates, occupancy, etc.
Third Avenue's definition of "cheap" normally means a price that represents a
significant discount (ideally at least 50%) to a company's "business" value. For
most companies in which Third Avenue Value Fund and Third Avenue Small-Cap Value
Fund invest, "business" value is equal to the takeover, going-private or
liquidation value. From a real estate perspective, we are generally not as
focused on going-concern value (more on this later) as we are on liquidation
value. Liquidation value (or as we say, NAV) is quite simply our estimate of
what the shareholders would be entitled to receive if all the assets were sold
and all the encumbrances paid off. This is why I say it is easier to determine
NAV of a real estate company versus most other types of business. The typical
real estate company has assets (individual properties) that can be sold in any
number of ways. The entire company can be sold to one buyer, or the assets can
be sold to one or several buyers. In other words, the assets are
58
<PAGE>
separable from the business or, the business value is equal to the sum of its
parts. Theoretically, if a company owns 100 properties, in a liquidation there
could be 100 buyers. Conversely, it is not likely that the valuation of a
semiconductor equipment manufacturer is going to be based on the liquidation
value of its individual assets - it's much more difficult to determine. Since we
are likely to estimate the liquidation value of a real estate company with more
precision than most other businesses, as a general rule, we try to pay no more
than 70% of that value. As our valuations become more subjective, as the case
would be for a company with large land holdings, 50% is a better target.
GOOD VALUES HAVE BEEN HERE ALL ALONG...AND ARE BETTER TODAY
We are not market timers and we don't try to pick bottoms. When we first hatched
the idea of starting a real estate value fund (early in 1998), REIT stocks were
at record levels. Most were selling at 20% to 30% premiums over NAV, and the
industry was coming off three years of unprecedented growth. All of the REIT
analysts were forecasting double-digit growth in funds from operations (FFO)
along with the continuation of follow-on equity offerings to fund the massive
securitization of privately-owned real estate. Even in the midst of all this
momentum, we were still finding good value-investing opportunities. Those
opportunities were not necessarily in the securities of companies that are
widely followed by Wall Street. The companies that received significant analyst
coverage were the ones that had recently completed their IPOs or follow-on
equity offerings (this includes most of the REITs), and the companies that
didn't need to raise capital were all but ignored. Today, the values of some of
the companies we liked at the beginning of 1998 are even more compelling. Even
better, most REITs have been sold off because of fears of overbuilding or a
recession. The average REIT stock is down over 20% since the beginning of the
year. When asked why REIT stocks have gone down so much, the simple answer is
they were overpriced - recession or no recession. Are they overpriced today? I
believe many are, simply because they are still trading at premiums to NAV. Most
real estate analysts set a 12-month "target" price for a security based on
applying a multiple to either their estimate or the consensus estimate of next
year's FFO. Not that there is anything wrong with making FFO projections (again,
it's much easier than projecting earnings of a semiconductor equipment
manufacturer). The problem is trying to pick the right multiple. For example, at
the beginning of 1998, large-cap apartment REITs were trading at an average 12.2
multiple on projected 1998 FFO. At the end of the third quarter, they were
trading at an average 9.1 multiple on projected 1999 FFO. This 25% contraction
of multiples accounts for the average drop in REIT stocks. But I would argue
strongly (and I'm sure that most
59
<PAGE>
real estate analysts would agree with me) that the value of apartment properties
has not gone down by 25%. What really happened was that REIT stocks fell to
prices that more closely relate to NAV; and in many cases below NAV. Maybe real
estate analysts would be better off setting their "target" prices by making NAV
projections instead of applying going-concern-type multiples to FFO projections.
Predicting future stock prices is not something we will be doing. We will stick
to buying at a significant discount to today's NAV, and regardless of short-term
market fluctuations, we should do reasonably well in the long run.
1998 DISTRIBUTION
On November 18, 1998, TAREV declared a dividend from the Fund's estimated net
investment income through the period ending December 31, 1998. The amount is
estimated to be approximately $0.05 per Fund share. This dividend is payable
January 6, 1999 to Fund shareholders of record on December 30, 1998. The precise
amount of the dividend will be determined based on the number of total Fund
shares outstanding on the close of business on the record date, December 30,
1998. The dividend is payable in cash or, for those shareholders who have
elected the reinvestment option, in additional Fund shares at the Fund's net
asset value on December 31, 1998, the "ex" date, or valuation date, for
reinvestment.
I look forward to writing to you again when we publish our next quarterly report
for the period ended January 31, 1999.
Sincerely,
/S/ Michael H. Winer
- --------------------
Michael H. Winer
Co-manager, Third Avenue Real Estate Value Fund
60
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 1998
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 60.29%
Natural Resources 1,000 Deltic Timber Corp. $ 24,375
4,000 The TimberWest Forest Corp. (Canada) 22,754
-------
47,129 6.61%
-------
Real Estate Development 3,000 Avatar Holdings, Inc. (a) 54,375
2,000 Catellus Development Corp. (a) 27,500
1,000 Forest City Enterprises, Inc. Class A 21,500
3,000 LNR Property Corp. 53,250
1,000 St. Joe Co. 23,938
-------
180,563 25.33%
-------
Real Estate Holding 2,000 Security Capital Group, Inc. Class B (a) 31,875 4.47%
Company -------
Real Estate Investment 6,000 Commercial Assets, Inc. 33,375
Trust 3,000 Imperial Credit Commercial Mortgage 25,125
Investment Corp.
4,000 Koger Equity, Inc. 67,500
6,000 United Investors Realty Trust 44,250
-------
170,250 23.88%
-------
TOTAL COMMON STOCK
(Cost $410,411) 429,817
-------
TOTAL INVESTMENT PORTFOLIO - 60.29%
(Cost $410,411) 429,817
-------
CASH AND OTHER ASSETS
LESS LIABILITIES - 39.71% 283,135
-------
NET ASSETS - 100.00% $712,952
(Applicable to 69,355 ========
shares outstanding)
</TABLE>
Notes:
(a) Non-income producing securities.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
61
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $410,411) $429,817
Cash (Note 1) 281,363
Receivable for fund shares sold 34,270
Receivable from investment adviser 8,393
Dividends and interest receivable 1,782
Other assets 24,172
--------
Total assets 779,797
--------
LIABILITIES:
Payable for securities purchased 33,558
Accounts payable and accrued expenses 33,273
Other liabilities 14
--------
Total liabilities 66,845
--------
Net assets $712,952
========
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par value,
69,355 shares outstanding $688,412
Accumulated undistributed net investment income 6,679
Accumulated net realized losses from
investment transactions (Note 8) (1,531)
Net unrealized appreciation on investments and translation
of foreign currency denominated assets and liabilities 19,392
--------
Net assets applicable to capital shares outstanding $712,952
========
Net asset value, offering and redemption price per share $10.28
======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
62
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED OCTOBER 31, 1998*
INVESTMENT INCOME:
Interest $ 1,406
Dividends (net of foreign withholding tax of $108) 1,472
-------
Total investment income 2,878
-------
EXPENSES:
Investment advisory fees (Note 3) 568
Auditing and tax consulting fees 21,500
Directors' fees and expenses 10,500
Registration and filing fees 3,766
Transfer agent fees 3,367
Administration fees (Note 3) 3,154
Accounting services 2,867
Reports to shareholders 2,700
Legal fees 2,000
Custodian fees 1,000
Miscellaneous expenses 250
-------
Total operating expenses 51,672
-------
Expenses waived and reimbursed (Note 3) (50,473)
-------
Net expenses 1,199
-------
Net investment income 1,679
-------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
NET REALIZED LOSSES ON INVESTMENTS (1,531)
Net change in unrealized appreciation on investments 19,406
Net change in unrealized depreciation on translation of other
assets and liabilities denominated in foreign currency (14)
-------
Net realized and unrealized gains on investments 17,861
-------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $19,540
=======
*The Fund commenced investment operations September 17, 1998.
The accompanying notes are an integral part of the financial statements.
63
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE
PERIOD
ENDED
10/31/98*
---------
OPERATIONS:
Net investment income $ 1,679
Net realized losses on investments (1,531)
Net change in unrealized appreciation on investments 19,406
Net change in unrealized depreciation on translation of other
assets and liabilities denominated in foreign currency (14)
--------
Net increase in net assets resulting from operations 19,540
--------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 693,412
--------
Net increase in net assets 712,952
Net assets at beginning of period 0
--------
Net assets at end of period
(including undistributed net investment income of $6,679) $712,952
========
* The Fund commenced investment operations September 17, 1998.
The accompanying notes are an integral part of the financial statements.
64
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
FINANCIAL HIGHLIGHTS
Selected data (for a share outstanding throughout the period) and ratios are as
follows:
FOR THE
PERIOD
ENDED
10/31/98*
---------
Net Asset Value, Beginning of Period $10.00
------
Income from Investment Operations:
Net investment income .02
Net gain on securities (both realized and unrealized) .26
-----
Total from Investment Operations .28
-----
Net Asset Value, End of Period $10.28
=====
Total Return (since inception) 2.80%1
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $713
Ratio of Expenses to Average Net Assets
Before expense reimbursement 81.89%2
After expense reimbursement 1.90%2
Ratio of Net Income (Loss) to Average Net Assets
Before expense reimbursement (77.33%)2
After expense reimbursement 2.66%2
Portfolio Turnover Rate 0%1
1 Not Annualized
2 Annualized. Note that annualized expenses and net income (loss) before
expense reimbursement are not necessarily indicative of expected expenses due
to the annualization of certain fixed expenses.
* The Fund commenced investment operations September 17, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
65
<PAGE>
PERFORMANCE INFORMATION
(UNAUDITED)
PERFORMANCE ILLUSTRATIONS
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
THIRD AVENUE REAL ESTATE VALUE FUND AND THE BLOOMBERG REIT SMALL CAP INDEX
AND THE WILSHIRE REAL ESTATE SECURITIES INDEX
Total Return Since Inception
2.80%
[The following table represents a chart in the printed piece.]
BLOOMBERG REIT WILSHIRE REAL ESTATE
TAREVF SMALL CAP INDEX SECURITIES INDEX
--------- --------------- ---------------------
9/17/98* 10,000.00 10,000.00 10,000.00
10/31/98 10,280.00 10,296.00 10,468.00
- --------------------------------------------------------------------------------
* Period beginning September 17, 1998 (THIRD AVENUE REAL ESTATE VALUE FUND'S
commencement of operations)
As with all mutual funds, past performance does not indicate future results.
66
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
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 four separate
investment series: Third Avenue Value Fund, Third Avenue Small-Cap Value Fund,
Third Avenue High Yield Fund and Third Avenue Real Estate Value Fund (each a
"Fund" and, collectively, the "Funds"). At the close of business on March 31,
1997, shareholders of Third Avenue Value Fund, Inc., a Maryland corporation
which was incorporated on November 27, 1989 and began operations on October 9,
1990, became shareholders of Third Avenue Value Fund. Third Avenue Small-Cap
Value Fund commenced investment operations on April 1, 1997. Third Avenue High
Yield Fund commenced investment operations on February 12, 1998. Third Avenue
Real Estate Value Fund commenced investment operations on September 17, 1998.
Third Avenue Value Fund, Third Avenue Small-Cap Value Fund and Third Avenue Real
Estate Value Fund seek to achieve their investment objectives of long-term
capital appreciation by adhering to a strict value discipline when selecting
securities. While Third Avenue Value Fund, Third Avenue Small-Cap Value Fund and
Third Avenue Real Estate 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.
67
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
Third Avenue High Yield Fund seeks to achieve its objective by investing at
least 65% of its assets in a portfolio of non-investment grade fixed income or
other debt securities of companies whose capital structures, in the opinion of
EQSF Advisers, Inc., the Fund's investment adviser, have a market value priced
below their private market values.
Third Avenue Real Estate Value Fund seeks to achieve its objective by investing
at least 65% of its total assets in a portfolio of equity and debt securities of
well-financed companies in the real estate industry or related industries or
that own significant real estate assets at the time of investment.
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
68
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
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 October 31, 1998, such
securities had a total fair value of $114,574,191 or 7.44% of net assets of
Third Avenue Value Fund and $4,268,404 or 3.06% of net assets of Third Avenue
Small-Cap Value Fund. Among the factors considered by the Board of Trustees in
determining fair value are the type of security, trading in unrestricted
securities of the same issuer, the financial condition of the issuer, the Fund's
cost at the date of purchase, a percentage of the Fund's beneficial ownership of
the issuer's common stock and debt securities, the operating results of the
issuer, the discount from market value of any similar unrestricted securities of
the issuer at the time of purchase and liquidation values of the issuer. The
fair values determined in accordance with these procedures may differ
significantly from the amounts which would be realized upon disposition of the
securities. Restricted securities often have costs associated with subsequent
registration. The restricted securities currently held by the Funds are not
expected to incur any future registration costs.
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
69
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
the fluctuations arising from changes in the market prices of the securities
held at period end. Similarly, the Funds do not isolate the effect of changes in
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and balances.
FOREIGN CURRENCY SWAP CONTRACTS:
Third Avenue Value Fund has entered into foreign currency swaps to exchange
Japanese yen for U.S. dollars. A swap is an agreement that obligates two parties
to exchange a series of cash flows at specified intervals based upon or
calculated by reference to changes in specified prices or rates for a specified
amount of an underlying asset. These swaps are used to hedge the Fund's exposure
to Japanese yen denominated securities and the Japanese market. The payment
flows are usually netted against each other, with the difference being paid by
one party to the other.
Fluctuations in the value of open swap contracts are recorded daily as net
unrealized gains or losses. The Fund realizes a gain or loss upon termination or
reset of the contracts. The statement of operations reflects net realized and
unrealized gains (losses) on these contracts. At October 31, 1998, the Fund had
an outstanding foreign currency swap contract with Bear Stearns that commits the
Fund to pay 5.9 billion yen in exchange for 50 million U.S. dollars on October
26, 1999. The Fund will pay 0.14% interest on the 5.9 billion yen and Bear
Stearns will pay 4.63% interest on the 50 million U.S. dollars.
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. 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.
70
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
FOREIGN CURRENCY OPTION CONTRACTS:
An option contract gives the buyer the right, but not the obligation to buy
(call) or sell (put) an underlying item at a fixed exercise price on a certain
date or during a specified period. The use of foreign currency put option
strategies provide the Funds with protection against a rally in the U.S. dollar
versus the foreign currency while retaining the benefits (net of the option
cost) of appreciation in foreign currency on equity holdings.
LOANS OF PORTFOLIO SECURITIES:
Third Avenue Small-Cap Value Fund, Third Avenue High Yield Fund and Third Avenue
Real Estate Value Fund loaned securities during the period to certain brokers,
with the Funds' custodian acting as lending agent. Upon such loans, 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 it is the Funds' policy to monitor
the market value of securities loaned and maintain collateral against the
securities loaned in an amount not less than the value of the securities loaned.
The Funds may receive collateral in the form of cash or other eligible
securities. Risks may arise upon entering into securities lending to the extent
that the value of the collateral is less than the value of the securities loaned
due to changes in the value of collateral or the loaned securities.
During the period ending October 31, 1998, the following Funds had securities
lending income included in interest income totaling:
FUND
-----
Third Avenue Small-Cap Value Fund $24,645
Third Avenue High Yield Fund 2,203
Third Avenue Real Estate Value Fund 33
The value of loaned securities and related collateral outstanding at October 31,
1998, was as follows:
VALUE OF VALUE OF
FUND SECURITIES LOANED COLLATERAL
- ---- --------------- ---------
Third Avenue Small-Cap Value Fund $7,934,718 $8,735,664
The collateral consisted of cash which was invested in repurchase agreements
with Bear Stearns due November 2, 1998 collateralized by Nomura Asset Securities
Corp. Commercial Paper.
71
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
REPURCHASE AGREEMENTS:
Securities pledged as collateral for repurchase agreements are held by the
Funds' custodian bank until maturity of the repurchase agreement. Provisions in
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 $15,000 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. The amount of dividends and distributions from net investment
income and net realized capital gains are determined in accordance with Federal
income tax regulations which may differ from generally accepted accounting
principals. These "book/tax" differences are either temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their tax-basis treatment.
Temporary differences do not require reclassification.
For the year ended October 31, 1998, permanent differences were reclassified as
shown below:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
INCREASE (DECREASE) TO ACCUMULATED
TO ACCUMULATED UNDISTRIBUTED
UNDISTRIBUTED NET REALIZED GAIN INCREASE (DECREASE)
NET INVESTMENT (LOSS) ON INVESTMENTS TO ADDITIONAL
INCOME (LOSS) AND FOREIGN CURRENCY PAID-IN-CAPITAL
---------------- --------------------- -----------------
<S> <C> <C> <C>
Third Avenue Value Fund $403,155 $(376,815) $(26,340)
Third Avenue Small-Cap Value Fund (5,424) 5,424 --
Third Avenue High Yield Fund 2,135 -- (2,135)
Third Avenue Real Estate Value Fund 5,000 -- (5,000)
</TABLE>
72
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
FEDERAL INCOME TAXES:
The Funds have complied and intend to continue to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies.
Therefore, no Federal income tax provision is required.
CASH AND CASH EQUIVALENTS:
The Funds have defined cash and cash equivalents as cash in interest bearing and
non-interest bearing accounts.
EXPENSE ALLOCATION:
Expenses attributable to a 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.
TRUSTEES FEES:
The Trust does not pay any fees to its officers for their services as such, but
does pay Trustees who are not affiliated with the Investment Adviser a fee of
$1,500 per Fund for each meeting of the Board of Trustees that they attend, in
addition to reimbursing all Trustees for travel and incidental expenses incurred
by them in connection with their attendance at Board meetings. The Trust also
pays the non-interested Trustees an annual stipend of $2,000 per Fund in January
of each year for the previous year's service.
2. SECURITIES TRANSACTIONS
PURCHASES AND SALES/CONVERSIONS:
The aggregate cost of purchases, and aggregate proceeds from sales and
conversions of investments, excluding short-term investments, from unaffiliated
and affiliated issuers (as defined in the Investment Company Act of 1940, as
amended, ownership of 5% or more of the outstanding common stock of the issuer)
for the period ended October 31, 1998 were as follows:
73
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
PURCHASES SALES
--------- -----
Third Avenue Value Fund:
Affiliated $212,839,617 $28,886,241
Unaffiliated 887,357,535 326,424,420
Third Avenue Small-Cap Value Fund:
Affiliated 10,989,156 --
Unaffiliated 73,378,406 6,824,247
Third Avenue High Yield Fund:
Unaffiliated 12,101,863 2,835,350
Third Avenue Real Estate Value Fund:
Unaffiliated 411,942 --
At October 31, 1998, cost and gross unrealized appreciation and gross unrealized
depreciation, for Federal income tax purposes were as follows:
<TABLE>
<CAPTION>
GROSS GROSS NET APPRECIATION/
COST APPRECIATION DEPRECIATION DEPRECIATION
-------------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
Third Avenue Value Fund $1,285,195,721 $385,506,479 $(127,751,143) $257,755,336
Third Avenue Small-Cap Value Fund 153,120,656 13,402,776 (32,761,556) (19,358,780)
Third Avenue High Yield Fund 9,288,337 78,460 (2,000,955) (1,922,495)
Third Avenue Real Estate Value Fund 410,411 25,014 (5,608) 19,406
</TABLE>
3. INVESTMENT ADVISORY SERVICES AND SERVICE FEE AGREEMENT
The Funds have an Investment Advisory Agreement with EQSF Advisers, Inc. (the
"Adviser") for investment advice and certain management functions. The terms of
the Investment Advisory Agreement provide for a monthly fee of 1/12 of 0.90% (an
annual fee of 0.90%) of the total average daily net assets of each Fund, payable
each month. Additionally, under the terms of the Investment Advisory Agreement,
the
74
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
Adviser pays certain expenses on behalf of the Funds, which are reimbursable by
the Funds, including salaries of non-officer employees and other miscellaneous
expenses. Amounts reimbursed with respect to non-officer salaries are included
under the caption Administration fees. At October 31, 1998, Third Avenue Value
Fund, Third Avenue Small-Cap Value Fund, Third Avenue High Yield Fund and Third
Avenue Real Estate Value Fund had payables to affiliates of $14,917, $3,809,
$1,728 and $1,711, respectively, for reimbursement of expenses paid by such
affiliates. Whenever, in any fiscal year, a Fund's normal operating expenses,
including the investment advisory fee, but excluding brokerage commissions and
interest and taxes, exceeds 1.90% of the first $100 million of the Funds'
average daily net assets, and 1.50% of average daily net assets in excess of
$100 million, the Adviser is obligated to waive investment advisory fees or
reimburse the Fund in an amount equal to that excess. Such waived and reimbursed
expenses may be paid to the Adviser during the following three year period to
the extent that the payment of such expenses would not cause the Funds to exceed
the preceding limitations. No expense reimbursement was required for Third
Avenue Value Fund or Third Avenue Small-Cap Value Fund for the year ended
October 31, 1998. The Adviser waived fees of $50,472 and $568, and reimbursed
$66,638 and $49,905, for Third Avenue High Yield Fund and Third Avenue Real
Estate Value Fund, respectively, for the period ended October 31, 1998.
The Trust has entered into shareholder servicing agreements with certain service
agents for which the service agents receive a fee of up to 0.10% of the average
daily net assets invested into the Trust by the agent's customers in an omnibus
account. In exchange for these fees, the service agents render to such customers
various administrative services which the Trust would otherwise be obligated to
provide at its own expense.
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
75
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
October 31, 1998, the Funds incurred total brokerage commissions,
which includes commissions earned by M.J. Whitman and M.J. Whitman Senior Debt
Corp. as follows:
<TABLE>
<CAPTION>
M.J. WHITMAN SR.
FUND TOTAL COMMISSIONS M.J. WHITMAN DEBT CORP.
- ----- ----------------- ------------ ----------
<S> <C> <C> <C>
Third Avenue Value Fund $1,261,197 $1,026,034 $38,637
Third Avenue Small-Cap Value Fund 205,990 113,016 --
Third Avenue Real Estate Value Fund 1,670 1,470 --
</TABLE>
INVESTMENTS IN AFFILIATES:
A summary of the Funds' transactions in securities of affiliated issuers for the
year ended October 31, 1998 is set forth below:
THIRD AVENUE VALUE FUND
<TABLE>
<CAPTION>
SHARES/ SHARES/ DIVIDEND/INTEREST
PRINCIPAL SHARES/ PRINCIPAL INCOME
HELD AT PRINCIPAL SHARES HELD AT VALUE AT NOV. 1, 1997 -
NAME OF ISSUER: OCT. 31, 1997 PURCHASED SOLD OCT. 31, 1998 OCT. 31, 1998 OCT. 31, 1998
- --------------------------- ------------- ----------- ------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
ACMAT Corp. Class A 189,978 10,700 -- 200,678 $3,085,424 --
ADE Corp. -- 728,900 -- 728,900 7,289,000 --
American Physicians Service
Group, Inc. 200,000 909,900 -- 1,109,900 5,688,238 --
Avatar Holdings, Inc. -- 474,300 -- 474,300 8,596,687 --
Carver Bancorp, Inc. 218,500 -- -- 218,500 1,966,500 $ 10,925
CGA Group, Ltd. 838,710 -- -- 838,710 -- --
CGA Group, Ltd., Series A 207,969 30,888 -- 238,857 5,971,427 772,200
CGA Group, Ltd., Series B 171,429 -- -- 171,429 2,507,999 --
CGA Special Account
Trust $ 6,428,575 -- -- $6,428,575 6,428,575 350,780
C.P. Clare Corp. -- 1,004,500 -- 1,004,500 5,022,500 --
Danielson Holding Corp. 803,669 -- -- 803,669 3,164,447 --
Electro Scientific
Industries, Inc. 555,700 1,044,600 -- 1,600,300 40,207,537 --
Electroglas, Inc. 1,070,000 776,200 -- 1,846,200 23,192,887 --
</TABLE>
76
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
<TABLE>
<CAPTION>
SHARES/ SHARES/ DIVIDEND/INTEREST
PRINCIPAL SHARES/ PRINCIPAL INCOME
HELD AT PRINCIPAL SHARES HELD AT VALUE AT NOV. 1, 1997 -
NAME OF ISSUER: OCT. 31, 1997 PURCHASED SOLD OCT. 31, 1998 OCT. 31, 1998 OCT. 31, 1998
- --------------- ------------- ----------- ------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
First American
Financial Corp. 814,700 3,666,150* 666,150 3,000,000 93,937,500 709,555
FSI International, Inc. 1,534,250 1,286,650 -- 2,820,900 18,335,850 --
Interphase Corp. 300,000 -- -- 300,000 1,893,750 --
Mountbatten, Inc. 293,000 -- 293,000 -- -- --
Piper Jaffray Companies Inc. 146,300 -- 146,300 -- -- --
Protocol Systems, Inc. -- 912,900 -- 912,900 7,246,144 --
Ryan, Beck & Co., Inc. 161,941 -- 161,941 -- -- 3,239
Silicon Valley Group, Inc. 551,900 3,682,900 -- 4,234,800 54,258,375 --
SpeedFam International, Inc. -- 1,605,000 -- 1,605,000 25,880,625 --
Stewart Information
Services Corp. 975,700 -- -- 975,700 48,906,963 273,196
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 6,520,800 137,820
Tecumseh Products Co.
Class B 358,500 58,800 -- 417,300 21,699,600 483,120
Tejon Ranch Co. 3,045,508 -- -- 3,045,508 60,856,925 152,275
Veeco Instruments, Inc. 218,700 444,500 -- 663,200 19,688,750 --
Vertex Communications
Corp. 306,900 -- -- 306,900 4,948,763 --
----------- ----------
Total Affiliates $477,387,264 $2,894,030
============ ==========
</TABLE>
* Increase due to a 3:2 stock split on 1/15/98, and a 3:1 stock split on
7/17/98.
77
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
THIRD AVENUE SMALL-CAP VALUE FUND
<TABLE>
<CAPTION>
SHARES/ SHARES/ DIVIDEND/INTEREST
PRINCIPAL SHARES/ PRINCIPAL INCOME
HELD AT PRINCIPAL SHARES HELD AT VALUE AT NOV. 1, 1997 -
NAME OF ISSUER: OCT. 31, 1997 PURCHASED SOLD OCT. 31, 1998 OCT. 31, 1998 OCT. 31, 1998
- --------------------------- ------------- ----------- ------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
C.P. Clare Corp. -- 520,000 -- 520,000 $2,600,000 --
SpecTran Corp. 88,800 401,800 -- 490,600 2,361,012 --
----------- ----------
Total Affiliates $4,961,012 $0
========== ========
</TABLE>
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
THIRD AVENUE SMALL-CAP HIGH YIELD REAL ESTATE
VALUE FUND VALUE FUND FUND VALUE FUND
------------------------- ------------------------ ----------- --------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1998 1997 1998 1997 1998 1998
---------- ---------- ---------- ---------- --------- ---------
Increase in Fund shares:
Shares outstanding at
<S> <C> <C> <C>
beginning of period 51,537,358 23,364,688 8,670,943 -- -- --
Shares sold 19,502,035 34,497,303 11,057,081 9,845,798 1,266,191 69,355
Shares reinvested
from dividends
and distributions 877,124 584,725 46,997 -- 29,079 --
Shares redeemed (20,835,346) (6,909,358) (6,678,615) (1,174,855) (390,830) --
----------- ---------- ---------- --------- -------- ------
Net increase (decrease)
in Fund shares (456,187) 28,172,670 4,425,463 8,670,943 904,440 69,355
----------- ---------- ---------- --------- -------- ------
Shares outstanding at
end of period 51,081,171 51,537,358 13,096,406 8,670,943 904,440 69,355
=========== ========== ========== ========= ======== ======
</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 October 31,
1998. Securities valued at $1,938,795 have been segregated to meet the
requirements of this commitment. This commitment may be payable upon demand of
Head Insurance Investors LP.
78
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
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 withholding tax on the dividend income and
interest income payable on such instruments, the possible establishment of
foreign controls, the possible seizure or nationalization of foreign deposits or
assets, or the adoption of other foreign government restrictions that might
adversely affect the foreign securities held by the Funds. Foreign securities
may also be subject to greater fluctuations in price than securities of domestic
corporations or the U.S. Government.
FOREIGN CURRENCY CONTRACTS
The Funds may enter into foreign currency swap contracts, forward foreign
currency contracts and foreign currency option contracts. Such contracts are
over the counter contracts negotiated between two parties. There are both market
risks and credit risks associated with such contracts. Market risks are
generally limited to the movement in the value of the foreign currency relative
to the U.S. dollar. Credit risks typically involve the risk that the
counterparty to the transaction will be unable to meet the terms of the
contract. Foreign currency swap contracts and forward foreign currency contracts
may have risk which exceeds the amounts reflected on the statements of assets
and liabilities.
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.
79
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
LOANS AND OTHER DIRECT DEBT INSTRUMENTS:
Third Avenue Value Fund and Third Avenue High Yield Fund invest in loans and
other direct debt instruments issued 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 Funds 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.
8. CAPITAL LOSS CARRYFORWARDS
At October 31, 1998, the following Funds had available capital loss
carryforwards to offset future net capital gains, to the extent provided by
regulations, through October 31, 2006:
FUND
- ----
Third Avenue Value Fund $15,833,338
Third Avenue Small-Cap Value Fund 592,923
Third Avenue High Yield Fund 50,625
Third Avenue Real Estate Fund 1,531
To the extent that capital loss carryforwards are used to offset any future
capital gains realized during the carryover period as provided by U.S. Federal
income tax
80
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
regulations, no capital gains tax liability will be incurred by a Fund for gains
realized and not distributed. To the extent that capital gains are offset, such
gains will not be distributed to the shareholders.
81
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF
THIRD AVENUE TRUST
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Third Avenue Value Fund, Third
Avenue Small-Cap Value Fund, Third Avenue High Yield Fund, and Third Avenue Real
Estate Value Fund (together the "Funds," four series comprising Third Avenue
Trust) at October 31, 1998 and the results of each of their operations, the
changes in each of their net assets and the financial highlights for each of the
periods presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1998 by correspondence with the custodians and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
December 14, 1998
82
<PAGE>
THIRD AVENUE TRUST
FEDERAL TAX STATUS OF DIVIDENDS (UNAUDITED)
The following information represents the tax status of dividends and
distributions paid by the Funds during the fiscal year ended October 31, 1998.
This information is presented to meet regulatory requirements and no current
action on your part is required.
THIRD AVENUE VALUE FUND
Of the $0.572 per share paid to you in cash or reinvested into your account for
the fiscal year ended October 31, 1998, $0.411 was derived from net investment
income, $0.049 from short-term capital gains which are taxed as ordinary income
and $0.112 from long term capital gains. 30.15% of the ordinary income
distributed qualifies for the Corporate Dividends Received Deduction.
THIRD AVENUE SMALL-CAP VALUE FUND
Of the $0.062 per share paid to you in cash or reinvested into your account for
the fiscal year ended October 31, 1998, the entire amount was derived from net
investment income. 42.46% of the ordinary income distributed qualifies for the
Corporate Dividends Received Deduction.
THIRD AVENUE HIGH YIELD FUND
Of the $0.280 per share paid to you in cash or reinvested into your account for
the fiscal period ended October 31, 1998, the entire amount was derived from net
investment income. 15.50% of the ordinary income distributed qualifies for the
Corporate Dividends Received Deduction.
83
<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
President, Chief Operating Officer
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
PricewaterhouseCoopers 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 THIRD AVENUE REAL ESTATE VALUE FUND
San Diego, CA 92101-4492 Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540-6231
[LOGO]
767 THIRD AVENUE
NEW YORK, NY 10017-2023
Phone (212) 888-5222
Toll Free (800) 443-1021
Fax (212) 888-6757
www.thirdavenuefunds.com
