PIONEER HIGH YIELD FUND
STATEMENT OF ADDITIONAL INFORMATION
December 3, 1999
This Statement of Additional Information is not a Prospectus. It should be read
in conjunction with the related Prospectus (also dated December 3, 1999) which
covers Class A shares of beneficial interest of Pioneer High Yield Fund to be
issued in exchange for shares of beneficial interest of Third Avenue High Yield
Fund, a series of Third Avenue Trust. Please retain this Statement of Additional
Information for further reference.
The Prospectus is available to you free of charge (please call 1-800-443-1021,
or write to Third Avenue High Yield Fund at 767 Third Avenue, New York, New York
10017-2023).
TABLE OF CONTENTS
Exhibits......................................................................2
Introduction..................................................................3
ADDITIONAL INFORMATION ABOUT THIRD AVENUE HIGH YIELD FUND
Fund History.........................................................3
Description of the Fund and its Investment Risks.....................3
Management of Third Avenue High Yield Fund/Trust.....................3
Control Persons and Principal Holders of Securities..................3
Investment Advisory and Other Services...............................3
Brokerage Allocation and Other Practices.............................3
Capital Stock and Other Securities...................................3
Purchase, Redemption, and Pricing of Shares..........................4
Taxation of the Fund.................................................4
Underwriters.........................................................4
Calculation of Performance Data......................................4
Financial Statements.................................................4
ADDITIONAL INFORMATION ABOUT PIONEER HIGH YIELD FUND
Fund History.........................................................4
Description of the Fund and its Investment Risks.....................4
Management of Pioneer High Yield Fund................................4
Control Persons and Principal Holders of Securities..................4
Investment Advisory and Other Services...............................5
Brokerage Allocation and Other Practices.............................5
Capital Stock and Other Securities...................................5
Purchase, Redemption, and Pricing of Shares..........................5
Taxation of the Fund.................................................5
Underwriters.........................................................5
Calculation of Performance Data......................................5
Financial Statements.................................................5
<PAGE>
EXHIBITS
A - Statement of Additional Information, dated February 28 as supplemented
June 28, 1999, of Third Avenue Trust.
B - Preliminary Statement of Additional Information, dated February __, 2000,
of Pioneer High Yield Fund.
C - Audited financial statements of Third Avenue High Yield Fund at October 31,
1998.
D - Unaudited financial statements of Third Avenue High Yield Fund at April 30,
1999.
2
<PAGE>
INTRODUCTION
This Statement of Additional Information is intended to supplement the
information provided in a Proxy Statement and Prospectus dated December 3, 1999
(the "Proxy Statement and Prospectus"). The Proxy Statement and Prospectus has
been sent to the shareholders of Third Avenue High Yield Fund in connection with
the solicitation by the management of Third Avenue High Yield Fund of proxies to
be voted at the Meeting of Shareholders of Third Avenue High Yield Fund to be
held on February 23, 2000. This Statement of Additional Information includes the
statement of additional information, dated February 28 as supplemented June 28,
1999, of Third Avenue Trust (the "Third Avenue SAI"), a series of which is Third
Avenue High Yield Fund, and the Preliminary Statement of Additional Information,
dated February __, 2000, of Pioneer High Yield Fund (the "Pioneer SAI").
ADDITIONAL INFORMATION ABOUT
THIRD AVENUE HIGH YIELD FUND
FUND HISTORY
For additional information about Third Avenue High Yield Fund generally
and its history, see "General Information" in the Third Avenue SAI.
DESCRIPTION OF THE FUND AND ITS INVESTMENT RISKS
For additional information about Third Avenue High Yield Fund's
investment objective, policies, risks and restrictions, see "Investment
Policies," "Investment Restrictions" and "Appendix" in the Third Avenue SAI.
MANAGEMENT OF THIRD AVENUE HIGH YIELD FUND/TRUST
For additional information about Third Avenue High Yield Trust's Board
of Trustees, officers and management personnel, see "Management of the Trust" in
the Third Avenue SAI.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
For additional information about ownership of shares of Third Avenue
High Yield Fund, see "Principal Stockholders" in the Third Avenue SAI.
INVESTMENT ADVISORY AND OTHER SERVICES
For additional information, see "Investment Adviser," "Investment
Advisory Agreement," "Distributor," "Administrator," "Custodian," "Transfer
Agent" and "Independent Accountants" in the Third Avenue SAI.
BROKERAGE ALLOCATION AND OTHER PRACTICES
For additional information about Third Avenue High Yield Fund's
brokerage allocation practices, see "Portfolio and Trading Practices" in the
Third Avenue SAI.
CAPITAL STOCK AND OTHER SECURITIES
For additional information about the voting rights and other
characteristics of Third Avenue High Yield Fund's shares, see "Share
Information" in the Third Avenue SAI.
3
<PAGE>
PURCHASE, REDEMPTION AND PRICING OF SHARES
For additional information about share purchase, redemption and pricing
of Third Avenue High Yield Fund shares, see "Purchase Orders," "Redemption of
Shares" and "Redemption In Kind" in the Third Avenue SAI.
TAXATION OF THE FUND
For additional information about tax matters, see "Dividends, Capital
Gain Distributions and Taxes" in the Third Avenue SAI.
UNDERWRITERS
For additional information, see "Distributor" in the Third Avenue SAI.
CALCULATION OF PERFORMANCE DATA
For additional information about the investment performance of Third
Avenue High Yield Fund, see "Performance Information" in the Third Avenue SAI.
FINANCIAL STATEMENTS
For additional information, see "Financial Statements" in the Third
Avenue SAI.
ADDITIONAL INFORMATION ABOUT
PIONEER HIGH YIELD FUND
FUND HISTORY
For additional information about Pioneer High Yield Fund generally and
its history, see "Fund History" in the Pioneer SAI.
DESCRIPTION OF THE FUND AND ITS INVESTMENT RISKS
For additional information about Pioneer High Yield Fund's investment
objective, policies, risks and restrictions see "Investment Policies, Risks and
Restrictions" and "Appendix B" in the Pioneer SAI.
MANAGEMENT OF PIONEER HIGH YIELD FUND
For additional information about Pioneer High Yield Fund's Board of
Trustees, officers and management personnel, see "Management of the Fund" and
"Appendix A" in the Pioneer SAI.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
For additional information about ownership of shares of Pioneer High
Yield Fund, see "Share Ownership" and "Appendix A" in the Pioneer SAI.
4
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
For additional information, see "Investment Adviser," "Principal
Underwriter and Distribution Plans," "Shareholder Servicing/Transfer Agent,"
"Custodian," "Independent Public Accountants," "Appendix A" and "Appendix D" in
the Pioneer SAI.
BROKERAGE ALLOCATION AND OTHER PRACTICES
For additional information about Pioneer High Yield Fund's brokerage
allocation practices, see "Portfolio Transactions" in the Pioneer SAI.
CAPITAL STOCK AND OTHER SECURITIES
For additional information about the voting rights and other
characteristics of shares of beneficial interest of Pioneer High Yield Fund, see
"Description of Shares" in the Pioneer SAI.
PURCHASE, REDEMPTION AND PRICING OF SHARES
For additional information about purchase, redemption and pricing, see
"Sales Charges," "Redeeming Shares," "Telephone Transactions" and "Pricing of
Shares" in the Pioneer SAI.
TAXATION OF THE FUND
For additional information about tax matters, see "Tax Status " in the
Pioneer SAI.
UNDERWRITERS
For additional information about Pioneer High Yield Fund's principal
underwriter and distribution plans, see "Principal Underwriter and Distribution
Plans" and "Appendix A" in the Pioneer SAI.
CALCULATION OF PERFORMANCE DATA
For additional information about the investment performance of Pioneer
High Yield Fund, see "Investment Results," "Appendix A" and "Appendix B" in the
Pioneer SAI.
FINANCIAL STATEMENTS
For additional information, see "Financial Statements" in the Pioneer
SAI.
5
<PAGE>
Third Avenue Trust
Third Avenue Value Fund
Third Avenue Small-Cap Value Fund
Third Avenue High Yield Fund
Third Avenue Real Estate Value Fund
Supplement dated June 28, 1999 to Prospectus dated February 28, 1999 and
Statement of Additional Information dated February 28, 1999
The information below supplements and replaces any contrary information
contained in the Prospectus and Statement of Additional Information.
Effective June 28, 1999 please send any additional investments you wish to make
by mail to:
First Data Investor Services Group, Inc.
211 South Gulph Road
P.O. Box 61767
King of Prussia, PA 19406
Effective June 28, 1999 investments made by bank wire should be sent using the
following instructions:
Boston Safe Deposit & Trust
ABA#: 011001234
Credit: (Insert Name of Your Fund)
Acct#: 003514
FBO: (Insert Shareholder name and account number)
Please note, when making an initial purchase by wire, you must first telephone
the transfer agent at (800) 443-1021, Option 2 to receive an account number.
INVESTORS SHOULD RETAIN THIS SUPPLEMENT WITH THE PROSPECTUS FOR FUTURE REFERENCE
<PAGE>
(LOGO)
STATEMENT OF ADDITIONAL INFORMATION
Dated February 28, 1999
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP VALUE FUND
THIRD AVENUE HIGH YIELD FUND
THIRD AVENUE REAL ESTATE VALUE FUND
This Statement of Additional Information (SAI) is not a Prospectus and should be
read together with the Funds' Prospectus dated February 28, 1999. The Funds'
Annual Report to Shareholders is incorporated by reference in this SAI (is
legally considered part of this SAI). A copy of the Prospectus and the Funds'
reports to shareholders may be obtained without charge by writing to the Funds
at 767 Third Avenue, New York, NY 10017-2023, or by calling the Funds at (800)
443-1021 (toll free) or (212) 888-5222.
<PAGE>
Table of Contents
GENERAL INFORMATION 3
INVESTMENT POLICIES 3
INVESTMENT RESTRICTIONS 10
MANAGEMENT OF THE TRUST 12
COMPENSATION TABLE 16
PRINCIPAL STOCKHOLDERS 16
INVESTMENT ADVISER 18
INVESTMENT ADVISORY AGREEMENT 18
DISTRIBUTOR 19
ADMINISTRATOR 20
CUSTODIAN 20
TRANSFER AGENT 20
INDEPENDENT ACCOUNTANTS 20
PORTFOLIO TRADING PRACTICES 21
PURCHASE ORDERS 23
REDEMPTION OF SHARES 23
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES 23
SHARE INFORMATION 25
PERFORMANCE INFORMATION 25
FINANCIAL STATEMENTS 26
APPENDIX 27
-2-
<PAGE>
General Information
This Statement of Additional Information is in addition to and serves to expand
and supplement the current Prospectus of Third Avenue Trust (the "Trust"). The
Trust is an open-end, non-diversified management investment company which
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").
The Trust was organized as a business trust under the laws of the state of
Delaware pursuant to a Trust Instrument dated October 31, 1996. At the close of
business on March 31, 1997, shareholders of Third Avenue Value Fund, Inc.
("Third Avenue Maryland"), a Maryland corporation which was incorporated on
November 27, 1989 and began operations on October 9, 1990, became shareholders
of THIRD AVENUE VALUE FUND, a series of the Trust, pursuant to a merger
agreement which was approved by a majority of Third Avenue Maryland's
shareholders on December 13, 1996. Upon this merger, all assets, privileges,
powers, franchises, liabilities and obligations of Third Avenue Maryland were
assumed by the Trust. Except as noted herein, all information about THIRD AVENUE
VALUE FUND or the Trust, as applicable, includes information about its
predecessor, Third Avenue Maryland.
Investment Policies
The Funds, and particularly THIRD AVENUE VALUE FUND, expect to invest in a broad
range of securities (subject to each Fund's fundamental investment objective).
The particular types of securities and the percentage of a Fund's assets
invested in each type, will vary depending on where the Adviser sees the most
value at the time of investment. The following is a description of the different
types of securities that the Adviser may invest in and certain of the risks
relating to those securities.
Investment In Equity Securities
In selecting common stocks, the Adviser generally seeks issuing companies that
exhibit the following characteristics:
(1) A strong financial position, as measured not only by balance sheet
data but also by off-balance sheet assets, liabilities and
contingencies (as disclosed in footnotes to financial statements and
as determined through research of public information), where debt
service(1) consumes a small part of such companies' cash flow.
(2) Responsible management and control groups, as gauged by managerial
competence as operators and investors as well as by an apparent
absence of intent to profit at the expense of stockholders.
(3) Availability of comprehensive and meaningful financial and related
information. A key disclosure is audited financial statements and
information which the Adviser believes are reliable benchmarks to
aid in understanding the business, its values and its dynamics.
(4) Availability of the security at a market price which the Adviser
believes is at a substantial discount to the Adviser's estimate of
what the issuer is worth as a private company or as a takeover or
merger and acquisition candidate.
(1) "Debt Service" means the current annual required payment of interest and
principal to creditors.
In selecting preferred stocks, the Adviser will use its selection criteria for
either common stocks or debt securities, depending on the Adviser's
determination as to how the particular issue should be viewed, based, among
other things, upon the terms of the preferred stock and where it fits in the
issuer's capital structure.
-3-
<PAGE>
Although the Adviser does not pay attention to market factors in making
investment decisions, the Funds are, of course, subject to the vagaries of the
markets. In particular, small-cap stocks have less market liquidity and tend to
have more price volatility than larger capitalization stocks.
Investment In Debt Securities
Each of THIRD AVENUE VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE
REAL ESTATE VALUE FUND intends its investment in debt securities to be, for the
most part, in securities which the Adviser believes will provide above-average
current yields, yields to events, or yields to maturity. In selecting debt
instruments for THIRD AVENUE VALUE FUND, the Adviser requires the following
characteristics:
1) Strong covenant protection, and
2) Yield to maturity at least 500 basis points above that of a
comparable credit.
In acquiring debt securities for THIRD AVENUE VALUE FUND, the Adviser
generally will look for covenants which protect holders of the debt issue from
possible adverse future events such as, for example, the addition of new debt
senior to the issue under consideration. Also, the Adviser will seek to analyze
the potential impacts of possible extraordinary events such as corporate
restructurings, refinancings, or acquisitions. The Adviser will also use its
best judgment as to the most favorable range of maturities. In general, THIRD
AVENUE VALUE FUND will acquire debt issues which have a senior position in an
issuer's capitalization and will avoid "mezzanine" issues such as
non-convertible subordinated debentures. THIRD AVENUE HIGH YIELD FUND and THIRD
AVENUE REAL ESTATE VALUE FUND may invest in such "mezzanine" issues.
The market value of debt securities is affected by changes in prevailing
interest rates and the perceived credit quality of the issuer. When prevailing
interest rates fall or perceived credit quality is increased, the market values
of debt securities generally rise. Conversely, when interest rates rise or
perceived credit quality is lowered, the market values of debt securities
generally decline. The magnitude of these fluctuations will be greater when the
average maturity of the portfolio securities is longer.
Convertible Securities
THIRD AVENUE HIGH YIELD FUND, THIRD AVENUE VALUE FUND and THIRD AVENUE REAL
ESTATE VALUE FUND may invest in convertible securities, which are bonds,
debentures, notes, preferred stocks or other securities that may be converted
into or exchanged for a prescribed amount of equity securities (generally common
stock) of the same or a different issuer within a particular period of time at a
specified price or formula. Convertible securities have general characteristics
similar to both fixed income and equity securities. Yields for convertible
securities tend to be lower than for non-convertible debt securities but higher
than for common stocks. Although to a lesser extent than with fixed income
securities generally, the market value of convertible securities tends to
decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying security and therefore also will react to
variations in the general market for equity securities and the operations of the
issuer. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
Mortgage-Backed Securities
THIRD AVENUE VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE REAL
ESTATE VALUE FUND may invest in mortgage-backed securities and derivative
mortgage-backed securities, including, with respect to THIRD AVENUE HIGH YIELD
FUND, "principal only" and "interest only" components. Mortgage-backed
securities are securities that directly or indirectly represent a participation
in, or are secured by and payable from, mortgage loans on real property. Those
Funds intend to invest in these securities only when they believe, after
analysis, that there is unlikely to ever be permanent impairment of capital as
measured by whether there will be a money default by either the issuer or the
guarantor of these securities. These securities do,
-4-
<PAGE>
nonetheless, entail considerable market risk (meaning fluctuations in quoted
prices for the instruments), interest rate risk, prepayment risk and inflation
risk.
THIRD AVENUE VALUE FUND will not invest in non-investment grade subordinated
classes of residential mortgage-backed securities and does not intend to invest
in commercial mortgage-backed securities. THIRD AVENUE HIGH YIELD FUND and THIRD
AVENUE REAL ESTATE VALUE FUND may invest in commercial mortgage-backed
securities if these securities are available at a sufficient yield spread over
risk-free investments. Prepayments of principal generally may be made at any
time without penalty on residential mortgages and these prepayments are passed
through to holders of one or more of the classes of mortgage-backed securities.
Prepayment rates may change rapidly and greatly, thereby also affecting yield to
maturity, reinvestment risk and market value of the mortgage-backed securities.
As a result, the high credit quality of many of these securities may provide
little or no protection against loss in market value, and there have been
periods during which many mortgage-backed securities have experienced
substantial losses in market value. The Adviser believes that, under certain
circumstances, many of these securities may trade at prices below their inherent
value on a risk-adjusted basis and believes that selective purchases by a Fund
may provide high yield and total return in relation to risk levels.
Asset-Backed Securities
BOTH THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND may also invest in
asset-backed securities that, through the use of trusts and special purpose
vehicles, are securitized with various types of assets, such as automobile
receivables, credit card receivables and home-equity loans in pass-through
structures similar to the mortgage-related securities described above. In
general, the collateral supporting asset-backed securities is of shorter
maturity than the collateral supporting mortgage loans and is less likely to
experience substantial prepayments. However, asset-backed securities are not
backed by any governmental agency.
Floating Rate, Inverse Floating Rate And Index Obligations
Both THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND may invest in debt
securities with interest payments or maturity values that are not fixed, but
float in conjunction with (or inversely to) an underlying index or price. These
securities may be backed by U.S. Government or corporate issuers, or by
collateral such as mortgages. The indices and prices upon which such securities
can be based include interest rates, currency rates and commodities prices.
However, neither Fund will invest in any instrument whose value is computed
based on a multiple of the change in price or value of an asset or an index of
or relating to assets in which that Fund cannot or will not invest.
Floating rate securities pay interest according to a coupon which is reset
periodically. The reset mechanism may be formula based, or reflect the passing
through of floating interest payments on an underlying collateral pool. Inverse
floating rate securities are similar to floating rate securities except that
their coupon payments vary inversely with an underlying index by use of a
formula. Inverse floating rate securities tend to exhibit greater price
volatility than other floating rate securities.
Neither Fund intends to invest more than 5% of its total assets in inverse
floating rate securities. Floating rate obligations generally exhibit a low
price volatility for a given stated maturity or average life because their
coupons adjust with changes in interest rates. Interest rate risk and price
volatility on inverse floating rate obligations can be high, especially if
leverage is used in the formula. Index securities pay a fixed rate of interest,
but have a maturity value that varies by formula, so that when the obligation
matures a gain or loss may be realized. The risk of index obligations depends on
the volatility of the underlying index, the coupon payment and the maturity of
the obligation.
Investment In High Yield Debt Securities
THIRD AVENUE VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE REAL
ESTATE VALUE FUND may invest in high yield debt securities, including those
rated below Baa by Moody's Investors Service, Inc.
("Moody's") and below BBB by Standard & Poor's Ratings Group
-5-
<PAGE>
("Standard & Poor's") and unrated debt securities, commonly referred to as "junk
bonds". THIRD AVENUE HIGH YIELD FUND intends to invest at least 65% of its total
assets, under normal market conditions, in non-investment grade high yield fixed
income and other debt securities, including straight debt instruments,
convertible debt, preferred securities and unrated securities. See also
"Investment in Debt Securities" and "Restricted and Illiquid Securities." Such
securities are predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal in accordance with the terms of the
obligation, and may in fact be in default. THIRD AVENUE VALUE FUND and THIRD
AVENUE REAL ESTATE VALUE FUND do not intend to invest more than 35% of their
total assets in such securities. The ratings of Moody's and Standard & Poor's
represent their opinions as to the credit quality of the securities which they
undertake to rate (see Appendix A for a description of those ratings). It should
be emphasized, however, that ratings are relative and subjective and, although
ratings may be useful in evaluating the safety of interest and principal
payments, they do not evaluate the market price risk of these securities. In
seeking to achieve its investment objective, each such Fund depends on the
Adviser's credit analysis to identify investment opportunities. For the Funds,
credit analysis is not a process of merely measuring the probability of whether
a money default will occur, but also measuring how the creditor would fare in a
reorganization or liquidation in the event of a money default.
Before investing in any high yield debt instruments, the Adviser will evaluate
the issuer's ability to pay interest and principal, as well as the seniority
position of such debt in the issuer's capital structure vis-a-vis any other
outstanding debt or potential debts. There appears to be a direct cause and
effect relationship between the weak financial conditions of issuers of high
yield bonds and the market valuation and prices of their credit instruments, as
well as a direct relationship between the weak financial conditions of such
issuers and the prospects that principal or interest may not be paid.
The market price and yield of bonds rated below Baa by Moody's and below BBB by
Standard & Poor's are more volatile than those of higher rated bonds due to such
factors as interest rate sensitivity, market perception of the creditworthiness
of the issuer and general market liquidity and the risk of an issuer's inability
to meet principal and interest payments. In addition, the secondary market for
these bonds is generally less liquid than that for higher rated bonds.
Lower rated or unrated debt obligations also present reinvestment risks based on
payment expectations. If an issuer calls the obligation for redemption, the Fund
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors.
The market values of these higher yielding debt securities tend to be more
sensitive to economic conditions and individual corporate developments than
those of higher rated securities. Companies that issue such bonds often are
highly leveraged and may not have available to them more traditional methods of
financing. Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations or to repay
their obligations upon maturity. Under deteriorating economic conditions or
rising interest rates, the capacity of issuers of lower-rated securities to pay
interest and repay principal is more likely to weaken significantly than that of
issuers of higher-rated securities. Investors should carefully consider the
relative risks of investing in high yield securities and understand that such
securities are generally not meant for short-term investing.
THIRD AVENUE VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE REAL
ESTATE VALUE FUND may also purchase or retain debt obligations of issuers not
currently paying interest or in default (i.e., with a rating from Moody's of C
or lower or Standard & Poor's of C1 or lower). In addition, those Funds may
purchase securities of companies that have filed for protection under Chapter 11
of the United States Bankruptcy Code. Defaulted securities will be purchased or
retained if, in the opinion of the Adviser, they may present an opportunity for
subsequent price recovery, the issuer may resume payments, or other advantageous
developments appear likely.
Zero-Coupon and Pay-in-Kind Securities
THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND may invest in zero
coupon and pay-in-kind ("PIK") securities. Zero coupon securities are debt
securities that pay no cash income but
-6-
<PAGE>
are sold at substantial discounts from their value at maturity. PIK securities
pay all or a portion of their interest in the form of additional debt or equity
securities. Because such securities do not pay current cash income, the price of
these securities can be volatile when interest rates fluctuate. While these
securities do not pay current cash income, federal income tax law requires the
holders of zero coupon and PIK securities to include in income each year the
portion of the original issue discount (or deemed discount) and other non-cash
income on such securities accrued during that year. In order to continue to
qualify for treatment as a "regulated investment company" under the Internal
Revenue Code and avoid a certain excise tax, each Fund may be required to
distribute a portion of such discount and income and may be required to dispose
of other portfolio securities, which may occur in periods of adverse market
prices, in order to generate cash to meet these distribution requirements.
Loans And Other Direct Debt Instruments
THIRD AVENUE VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE REAL
ESTATE VALUE FUND may invest in loans and other direct debt instruments owed by
a borrower to another party. Each of THIRD AVENUE HIGH YIELD FUND and THIRD
AVENUE REAL ESTATE VALUE FUND may also from time to time make loans. These
instruments represent amounts owed to lenders or lending syndicates (loans and
loan participations) or to other parties. Direct debt instruments may involve a
risk of loss in case of default or insolvency of the borrower and may offer less
legal protection to a Fund in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. The markets in loans are not regulated by
federal securities laws or the SEC. THIRD AVENUE SMALL-CAP VALUE FUND may invest
in loans and other direct debt instruments but currently does not intend to do
so except to the extent it has excess cash or for temporary defensive purposes.
Trade Claims
Both THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND may invest in
trade claims. Trade claims are interests in amounts owed to suppliers of goods
or services and are purchased from creditors of companies in financial
difficulty. For purchasers such as a Fund, trade claims offer the potential for
profits since they are often purchased at a significant discount from face value
and, consequently, may generate capital appreciation in the event that the
market value of the claim increases as the debtor's financial position improves
or the claim is paid.
An investment in trade claims is speculative and carries a high degree of risk.
Trade claims are illiquid instruments which generally do not pay interest and
there can be no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim. The markets in trade claims are not regulated by
federal securities laws or the SEC. Because trade claims are unsecured, holders
of trade claims may have a lower priority in terms of payment than certain other
creditors in a bankruptcy proceeding.
Foreign Securities
Each Fund may invest in foreign securities. Each Fund's foreign securities
investments will have characteristics similar to those of domestic securities
selected for the Fund. Each Fund intends to limit its investments in foreign
securities to companies issuing U.S. dollar-denominated American Depository
Receipts or which, in the judgment of the Adviser, otherwise provide financial
information which provides the Adviser with substantively similar financial
information as SEC disclosure requirements. By limiting their investments in
this manner, the Funds seek to avoid investing in securities where there is no
compliance with SEC requirements to provide public financial information, or
such information is unreliable as a basis for analysis.
Foreign securities markets generally are not as developed or efficient as those
in the United States. Securities of some foreign issuers are less liquid and
more volatile than securities of comparable U.S. issuers. The Funds will be
subject to additional risks which include: possible adverse political and
economic developments, seizure or nationalization of foreign deposits and
adoption of governmental restrictions that may adversely affect the payment of
principal and interest on the foreign securities or currency blockage that would
restrict such payments from being brought back
-7-
<PAGE>
to the United States. Because foreign securities often are purchased with and
payable in foreign currencies, the value of these assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in currency rates
and exchange control regulations.
Foreign Currency Transactions
Each Fund may, from time to time, engage in foreign currency transactions in
order to hedge the value of its portfolio holdings denominated in foreign
currencies against fluctuations in foreign currency prices versus the U.S.
dollar. These transactions include forward currency contracts, exchange listed
and OTC options on currencies, currency swaps and other swaps incorporating
currency hedges.
The notional amount of a currency hedged by a Fund will be closely related to
the aggregate market value (at the time of making such hedge) of the securities
held and reasonably expected to be held in its portfolio denominated or quoted
in or currently convertible into that particular currency or a closely related
currency. If a Fund enters into a hedging transaction in which such Fund is
obligated to make further payments, its custodian will segregate cash or readily
marketable securities having a value at all times at least equal to such Fund's
total commitments.
The cost to a Fund of engaging in currency hedging transactions varies with
factors such as (depending upon the nature of the hedging transaction) the
currency involved, the length of the contract period, interest rates in foreign
countries for prime credits relative to U.S. interest rates for U.S. Treasury
obligations, the market conditions then prevailing and fluctuations in the value
of such currency in relation to the U.S. dollar. Transactions in currency
hedging contracts usually are conducted on a principal basis, in which case no
fees or commissions are involved. The use of currency hedging contracts does not
eliminate fluctuations in the prices in local currency of the securities being
hedged. The ability of a Fund to realize its objective in entering into currency
hedging transactions is dependent on the performance of its counterparties on
such contracts, which may in turn depend on the absence of currency exchange
interruptions or blockage by the governments involved, and any failure on their
part could result in losses to a Fund. The requirements for qualification as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"), may cause a Fund to restrict the degree to which it engages in
currency hedging transactions.
Restricted And Illiquid Securities
None of the Funds will purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets (taken at current market value) would be
invested in securities that are illiquid. Generally speaking, an illiquid
security is any asset or investment which a Fund cannot sell in the ordinary
course of business within seven days at approximately the value at which the
Fund has valued the asset or investment, including securities that cannot be
sold publicly due to legal or contractual restrictions.
Over the past several years, strong institutional markets have developed for
various types of restricted securities, including repurchase agreements,
commercial paper, and some corporate bonds and notes. Securities freely salable
among qualified institutional investors under special rules adopted by the SEC
or otherwise determined to be liquid, including "principal only" and "interest
only" components of mortgage-backed securities, may be treated as liquid if they
satisfy liquidity standards established by the Board of Trustees. The continued
liquidity of such securities is not as well assured as that of publicly traded
securities, and accordingly the Board of Trustees will monitor their liquidity.
The Board will review pertinent factors such as trading activity, reliability of
price information and trading patterns of comparable securities in determining
whether to treat any such security as liquid for purposes of the foregoing 15%
test. To the extent the Board treats such securities as liquid, temporary
impairments to trading patterns of such securities may adversely affect the
Fund's liquidity.
Investment In Relatively New Issues
THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND and THIRD AVENUE REAL
ESTATE VALUE FUND intend to invest occasionally in the common stock of selected
new issuers; THIRD
-8-
<PAGE>
AVENUE HIGH YIELD FUND intends to invest occasionally in the debt securities of
selected new issuers. Investments in relatively new issuers, i.e., those having
continuous operating histories of less than three years, may carry special risks
and may be more speculative because such companies are relatively unseasoned.
Such companies may also lack sufficient resources, may be unable to generate
internally the funds necessary for growth and may find external financing to be
unavailable on favorable terms or even totally unavailable. Those companies will
often be involved in the development or marketing of a new product with no
established market, which could lead to significant losses.
Temporary Defensive Investments
When, in the judgment of the Adviser, a temporary defensive posture is
appropriate, a Fund may hold all or a portion of its assets in short-term U.S.
Government obligations, cash or cash equivalents. The adoption of a temporary
defensive posture does not constitute a change in such Fund's investment
objective.
Borrowing
Each Fund may also make use of bank borrowing as a temporary measure for
extraordinary or emergency purposes, such as for liquidity necessitated by
shareholder redemptions, and may use securities as collateral for such
borrowing. Such temporary borrowing may not exceed 5% of the value of the
applicable Fund's total assets at the time of borrowing.
Investment In Other Investment Companies
THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE
REAL ESTATE VALUE FUND may invest in securities of other investment companies,
to the extent permitted under the Investment Company Act of 1940, provided that
after any purchase the Fund does not own more than 3% of such investment
company's outstanding stock. Third Avenue Value Fund may invest up to 10% of its
total assets in securities of other investment companies; up to 5% of its total
assets may be invested in any one investment company, provided that after its
purchase no more than 3% of such investment company's outstanding stock is owned
by the Fund. The Adviser will charge an advisory fee on the portion of a Fund's
assets that are invested in securities of other investment companies. Thus,
shareholders will be responsible for a "double fee" on such assets, since both
investment companies will be charging fees on such assets.
Simultaneous Investments
Investment decisions for a Fund are made independently from those of the other
accounts advised by the Adviser and its affiliates. If, however, such other
accounts wish to invest in, or dispose of, the same securities as one of the
Funds, available investments will be allocated equitably to each Fund and other
account. This procedure may adversely affect the size of the position obtained
for or disposed of by a Fund or the price paid or received by a Fund.
Securities Lending
THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE
REAL ESTATE VALUE FUND may lend their portfolio securities to qualified
institutions. By lending its portfolio securities, a Fund attempts to increase
its income through the receipt of interest on the loan. Any gain or loss in the
market price of the securities loaned that may occur during the term of the loan
will be for the account of the Fund. A Fund may lend its portfolio securities so
long as the terms and the structure of such loans are not inconsistent with the
requirements of the Investment Company Act of 1940, which currently provide that
(a) the borrower pledge and maintain with the Fund collateral consisting of
cash, a letter of credit issued by a domestic U.S. bank, or securities issued or
guaranteed by the U.S. government having a value at all times not less than 100%
of the value of the securities loaned, (b) the borrower add to such collateral
whenever the price of the securities loaned rises (i.e., the value of the loan
is "marked to the market" on a daily basis), (c) the loan be made subject to
termination by the Fund at any time and the loaned securities be subject to
recall within the normal and customary settlement time for securities
transactions and (d) the Fund receive reasonable interest on the loan (which may
include the
-9-
<PAGE>
Fund's investing any cash collateral in interest bearing short-term
investments), any distributions on the loaned securities and any increase in
their market value.
A Fund will not lend portfolio securities if, as a result, the aggregate of such
loans exceeds 33 1/3% of the value of its total assets (including such loans).
Loan arrangements made by a Fund will comply with all other applicable
regulatory requirements. All relevant facts and circumstances, including the
creditworthiness of the qualified institution, will be monitored by the Adviser,
and will be considered in making decisions with respect to lending of
securities, subject to review by the Fund's Board of Trustees.
A Fund may pay reasonable negotiated fees in connection with loaned securities,
so long as such fees are set forth in a written contract and approved by its
Board of Trustees. In addition, the Fund shall, through the ability to recall
securities prior to any required vote, retain voting rights over the loaned
securities.
On behalf of THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE HIGH YIELD FUND and
THIRD AVENUE REAL ESTATE VALUE FUND, the Trust has entered into a master lending
arrangement with Bear, Stearns Securities Corp. in compliance with the foregoing
requirements.
Portfolio Turnover
The Funds' investment policies and objectives, which emphasize long-term
holdings, would tend to keep the number of portfolio transactions relatively
low. Third Avenue Value Fund's portfolio turnover rate for the years ended
October 31, 1997 and 1998 was 10% and 24%, respectively. Third Avenue Small-Cap
Value Fund's portfolio turnover rate for the period ended October 31, 1997 was
7% and for the year ended October 31, 1998 was 6%. The portfolio turnover rate
for Third Avenue High Yield Fund and Third Avenue Real Estate Value Fund for the
period ended October 31, 1998 was 38% and 0%, respectively.
Short Sales
THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE
REAL ESTATE VALUE FUND may, but currently do not intend to, engage in short
sales. In a short sale transaction, the Fund sells a security it does not own in
anticipation of a decline in the market value of the security.
Commodities
THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE
REAL ESTATE VALUE FUND may, but currently do not intend to, invest in
commodities or commodity contracts and futures contracts.
Investment Restrictions
For the benefit of shareholders, each Fund has adopted the following
restrictions, which are fundamental policies and cannot be changed without the
approval of a majority of such Fund's outstanding voting securities.(1)
The following investment restrictions apply to each Fund. No Fund may:
1. Borrow money or pledge, mortgage or hypothecate any of its assets
except that each Fund may borrow on a secured or unsecured basis
as a temporary measure for extraordinary or emergency purposes.
Such temporary borrowing may not exceed 5% of the value of such
Fund's total assets when the borrowing is made.
2. Act as underwriter of securities issued by other persons, except
to the extent that, in connection with the disposition of
portfolio securities, it may technically be deemed to be an
underwriter under certain securities laws.
-10-
<PAGE>
3. Invest in interests in oil, gas, or other mineral exploration or
development programs, although it may invest in the marketable
securities of companies which invest in or sponsor such programs.
4. Issue any senior security (as defined in the Investment Company
Act of 1940, as amended) (the "1940 Act"). Borrowings permitted by
Item 1 above are not senior securities.
5. Invest 25% or more of the value of its total assets in the
securities (other than Government Securities or the securities of
other regulated investment companies) of any one issuer, or of two
or more issuers which the Fund controls and which are determined
to be engaged in the same industry or similar trades or businesses
or related trades or businesses.
6. Invest 25% or more of the value of its total assets in any one
industry, except that THIRD AVENUE REAL ESTATE VALUE FUND will
invest more than 25% of its total assets in the real estate
industry or related industries or that own significant real estate
assets at the time of investment.
- ----------
(1) As used in this Statement of Additional Information as to any matter
requiring shareholder approval, the phrase "majority of the outstanding
securities" means the vote at a meeting of (i) 67% or more of the shares present
or represented, if the holders of more than 50% of the outstanding voting
securities are present in person or represented by proxy, or (ii) more than 50%
of the outstanding voting securities, whichever is less.
The following investment restrictions apply only to THIRD AVENUE VALUE FUND. The
Fund may not:
1. Make short sales of securities or maintain a short position.
2. Buy or sell commodities or commodity contracts, futures contracts
or real estate or interests in real estate, although it may
purchase and sell securities which are secured by real estate and
securities of companies which invest or deal in real estate.
3. Invest in securities of other investment companies if the Fund,
after such purchase or acquisition owns, in the aggregate, (i) more
than 3% of the total outstanding voting stock of the acquired
company; (ii) securities issued by the acquired company having an
aggregate value in excess of 5% of the value of the total assets of
the Fund, or (iii) securities issued by the acquired company and
all other investment companies (other than treasury stock of the
Fund) having an aggregate value in excess of 10% of the value of
the total assets of the Fund.
4. Participate on a joint or joint and several basis in any trading account in
securities.
5. Make loans, except through (i) the purchase of bonds, debentures,
commercial paper, corporate notes, and similar evidences of
indebtedness of a type commonly sold to financial institutions, and
(ii) repurchase agreements. The purchase of a portion of an issue
of securities described under (i) above distributed publicly,
whether or not the purchase is made on the original issuance, is
not considered the making of a loan.
Each Fund is required to comply with the above fundamental investment
restrictions applicable to it only at the time the relevant action is taken. A
Fund is not required to liquidate an existing position solely because a change
in the market value of an investment or a change in the value of
-11-
<PAGE>
the Fund's net or total assets causes it not to comply with the restriction at a
future date. A Fund will not purchase any portfolio securities while any
borrowing exceeds 5% of its total assets.
Management of the Trust
The Board of Trustees of the Funds oversees the management of the Funds. The
Trustees are responsible for such matters as reviewing and approving fundamental
operating, financial, and corporate governance policies; evaluating the
Adviser's performance; detemining management fees; and reviewing and approving
procedures for providing financial and operational information to the Board.
Trustees and officers of the Funds, together with information as to their
principal business occupations during at least the last five years, are shown
below. Each trustee who is deemed to be an "interested person" of the Funds, as
defined in the 1940 Act, is indicated by an asterisk.
<TABLE>
<CAPTION>
Name & Address Age Position(s) Principal Occupation During Past 5 Years
Held with
Registrant
<S> <C> <C> <C>
PHYLLIS W. BECK* 72 Trustee An Associate Judge (1981 to Present) of the Superior Court
GSB Bldg. Suite 800 of Pennsylvania; Trustee or Director of the Trust or its
City Line & Belmont predecessor since November, 1992.
Ave.
Bala Cynwyd, PA
19004-1611
LUCINDA FRANKS 52 Trustee Journalist (1969 to Present); Author "Wild Apples" (1990),
64 East 86th Street "Waiting Out a War; The Exile of Private John Picciano
New York, NY 10028 (1974); Winner of the 1971 Pulitzer Prize for Journalism;
Trustee of the Trust since February, 1998.
GERALD HELLERMAN 61 Trustee Managing Director (8/93 to Present) of Hellerman
10965 Eight Bells Associates, a financial and corporate consulting firm;
Lane Chief Financial Analyst (1976 to 7/93) of the Antitrust
Columbia, MD 21044 Division of U.S. Department of Justice; Director of
Clemente Global Growth Fund, Inc. (9/98 to Present);
Trustee or Director of the Trust or its predecessor since
September, 1993.
MARVIN MOSER, M.D. 75 Trustee Trustee (1992 to Present) of the Trudeau Institute, a
13 Murray Hill Road medical research institute; Clinical Professor of Medicine
Scarsdale, NY 10583 (1984 to Present) at Yale University School of Medicine;
Senior Medical Consultant (1972 to Present) for the
National High Blood Pressure Education Program of the
National Heart, Lung and Blood Institute; Chairman
(1977) and a member in 1980, 1984, 1988, 1992 and 1996 of
the Joint National Committee on Detection, Evaluation and
Treatment of High Blood Pressure for the National
Heart, Lung and Blood Institute; Director of AMBI
Corp. (1997 to Present); Trustee or Director of the
Trust or its predecessor since November, 1994.
-12-
<PAGE>
MYRON M. SHEINFELD 68 Trustee Counsel to (12/96 to present) and Attorney and Shareholder
1001 Fannin St., (1986 to 12/96) of Sheinfeld, Maley & Kay P.C., a law
Suite 3700 firm; Adjunct Professor (1975 to 1991) of the University
Houston, TX 77002 of Texas Law School; Director (1984 to 1992) of Equity
Strategies Fund, Inc.; Director (1988 to Present)
of Nabors Industries, Inc., an international oil
drilling contractor; Director (11/98 to present)
of Anchor Glass Container Corp.; former Consultant
(11/90 to 4/95) to Meyer Hendricks Victor Osborn &
Maledon, a law firm in Phoenix, Arizona; Co-Editor
and Co-Author "Collier on Bankruptcy 15th Edition
Revised" and "Collier on Bankruptcy Taxation";
Trustee or Director of the Trust or its predecessor
since its inception.
MARTIN SHUBIK 72 Trustee Seymour H. Knox Professor (1975 to Present) of
Yale University Mathematical and Institutional Economics, Yale University;
Dept. of Economics Director (1984 to 4/94) of Equity Strategies Fund, Inc.;
Box 2125, Trustee or Director of the Trust or its predecessor since
Yale Station its inception.
New Haven, CT 06520
CHARLES C. WALDEN 54 Trustee Executive Vice-President--Investments (1973 to Present)
11 Williamsburg Cir. (Chief Investment Officer) of Knights of Columbus, a
Madison, CT 06443 fraternal benefit society selling life insurance and
annuities; Chartered Financial Analyst; Trustee
or Director of the Trust or its predecessor since May,
1996.
BARBARA WHITMAN* 40 Trustee Registered Securities Representative (11/96 to Present) of
767 Third Avenue M.J. Whitman, Inc., a broker-dealer and the Funds'
New York, NY underwriter; Director (4/95 to Present) of EQSF Advisers,
10017-2023 Inc., the Funds' investment adviser; Director (8/97 to
6/98) of Riverside Stage Company, a theater; House
Manager (1/94 to 8/94) of Whiting Auditorium, a
theater; Substitute Teacher (1/92 to 6/93) of
National-Louis University Movement Center, a
university. Trustee of the Trust since September, 1997.
-13-
<PAGE>
MARTIN J. WHITMAN* 74 Chairman, Chairman and CEO (3/90 to Present), President (1/91 to
767 Third Avenue Chief 5/98), of the Trust; Chairman and CEO (3/90 to Present),
New York, NY Executive President (1/91 to 2/98), of EQSF Advisers, Inc.;
10017-2023 Officer, Chairman, CEO (1/1/95 to Present), President (1/1/95 to
and Trustee 6/29/95) and Chief Investment Officer (10/92 to Present)
of M.J. Whitman Advisers, Inc., a subsidiary of M.J.
Whitman Holding Corp., (MJWHC), a holding company managing
investment subsidiaries and an investment adviser to
private and institutional clients; Chairman, CEO (1/1/95
to Present) and President (1/1/95 to 6/29/95) of MJWHC and
of M.J. Whitman, Inc., a subsidiary of MJWHC and the
successor broker-dealer of M.J. Whitman, L.P. (MJWLP), a
Delaware limited partnership which has been dissolved;
Distinguished Management Fellow (1972 to Present) and
Member of the Advisory Board (10/94 to 6/95) of the Yale
School of Management at Yale University; Director and
Chairman (8/90 to Present), President (8/90 to 12/90), CEO
(8/96 to Present) and Chief Investment Officer (12/90 to
8/96) of Danielson Holding Corporation, and a Director of
its subsidiaries; Director (3/91 to Present) of Nabors
Industries, Inc., an international oil drilling
contractor; Director (8/97 to Present) of Tejon Ranch Co.;
President and CEO (10/74 to Present) of Martin J. Whitman
& Co., Inc., (formerly M.J. Whitman & Co., Inc.), a
private investment company; Trustee or Director of the
Trust or its predecessor
since its inception;
Chartered Financial Analyst.
DAVID M. BARSE 36 President President (5/98 to Present), and Executive Vice President
767 Third Avenue and Chief (4/95 to 5/98) of the Trust; President, Chief Operating
New York, NY Operating Officer and Director (7/96 to Present) of Danielson
10017-2023 Officer Holding Corporation; Director (8/96 to Present) of
(COO) National American Insurance Company of California;
President (2/98 to Present), Executive Vice President
(4/95 to 2/98), and Director (4/95 to Present) of EQSF
Advisers, Inc.; President (6/95 to Present), Director,
Chief Operating Officer (1/95 to Present), Secretary (1/95
to 1/96) and Executive Vice President (1/95 to 6/95) of
MJWHC; President (6/95 to Present), Director and COO (1/95
to Present), Secretary (1/95 to 1/96), Executive Vice
President (1/95 to 6/95) of M.J. Whitman, Inc.; President
(6/95 to Present), Director and COO (1/95 to Present),
Executive Vice President (1/95 to 6/95) and Corporate
Counsel (10/92 to 12/95) of M.J. Whitman Advisers, Inc.;
Director (6/97 to Present) of CGA Group, Ltd.; Director
(7/94 to 12/94), Executive Vice President and Secretary
(1/92 to 12/94) of Whitman Securities Corp.
-14-
<PAGE>
MICHAEL CARNEY 45 Treasurer Director, (1/1/95 to Present) Executive Vice President,
767 Third Avenue Chief Chief Financial Officer (6/29/95 to Present) of MJWHC and
New York, NY Financial of M.J. Whitman, Inc.; Treasurer, Director (1/1/95 to
10017-2023 Officer Present), Executive Vice President (6/29/95 to Present)
(CFO) and CFO (10/92 to Present) of M.J. Whitman Advisers, Inc.;
Treasurer (12/93 to 4/96) of Longstreet Investment Corp.;
CFO (3/26/93 to 6/95) of Danielson Trust Company; Limited
Partner (1/92 to 12/31/94) of M.J. Whitman, L.P.; CFO of
WHR Management Corporation (8/91 to Present), Danielson
Holding Corporation (8/90 to Present) and Carl Marks
Strategic Investments, L.P., an investment partnership
(1/90 to 4/94); CFO (1/90 to 4/94) of Carl Marks & Co.,
Inc., a broker-dealer; CFO (8/89 to 12/90) of Whitman
Advisors, Ltd.; CFO and Treasurer (5/89 to 4/94) of Equity
Strategies Fund, Inc.; CFO and Treasurer (5/89 to Present)
of EQSF Advisers, Inc.; CFO (5/89 to Present) of Whitman
Heffernan Rhein & Co., Inc., Martin J. Whitman & Co.,
Inc., (formerly M.J. Whitman & Co., Inc.) and WHR
Management Company, L.P., a firm managing investment
partnerships.
KERRI WELTZ 31 Assistant Assistant Treasurer (5/96 to Present), Controller (1/96 to
Treasurer Present), Assistant Controller (1/93 to 12/95) and Staff
Accountant (1/92 to 12/92) for the Trust; Controller
(1/96 to Present), Assistant Controller (1/93 to 12/95),
and Staff Accountant (1/92 to 12/92) of EQSF Advisers,
Inc.; Controller (8/96 to Present), of Danielson
Holding Corp.; Controller (5/96 to Present) and
Assistant Controller (1/95 to 5/96) of Whitman
Heffernan & Rhein Workout Fund II, L.P. and Whitman
Heffernan & Rhein Workout Fund II-A, L.P.; Controller
(5/96 to Present) of WHR Management Corp.; Controller
(5/96 to present), Assistant Controller (1/93 to 5/96)
and Staff Accountant (5/91 to 12/92), of Whitman
Heffernan Rhein & Co., Inc.; Controller (5/96 to Present)
of Martin J. Whitman & Co., Inc.; Assistant Controller
(10/94 to 4/96) of Longstreet Investment Corp
and Emerald Investment Partners, L.P.; Assistant
Controller (1/93 to 4/94) and Staff Accountant (1/92
to 12/92) of Equity Strategies Fund, Inc.;
Payroll manager (5/91 to 12/93) of M.J. Whitman, L.P.
IAN M. KIRSCHNER 43 General General Counsel and Secretary (8/96 to Present) of
767 Third Avenue Counsel and Danielson Holding Corporation; General Counsel and
New York NY Secretary ecretary (1/96 to Present) of MJWHC, M.J. Whitman, Inc.,
10017-2023 and M. J. Whitman Advisers, Inc.; General Counsel and
Secretary (1/97 to Present) of the Trust; General Counsel
and Secretary (1/97 to Present) of EQSF Advisers, Inc.;
Vice-President, General Counsel and Secretary (2/93 to
6/95) of 2 I Inc.; Of Counsel (10/90 to 10/92) to
Morgan, Lewis & Bockius.
</TABLE>
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
-15-
<PAGE>
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. The Trust paid Trustees
in the aggregate, $165,479 in such fees and expenses for the year ended October
31, 1998. Trustees do not receive any pension or retirement benefits.
For the fiscal year ended October 31, 1998, the aggregate amount of compensation
paid to each Trustee by the Trust is listed below.
Compensation Table
Aggregate Compensation
From Registrant for Total Compensation From
Fiscal Year Ended Registrant and Fund
Name and Position Held October 31, 1998* Complex Paid to Trustees*
---------------------- ----------------- ------------------------
Phyllis W. Beck, Trustee $ 0 $ 0
Tibor Fabian ** $ 3,000 $ 3,000
Lucinda Franks, Trustee $19,666 $19,666
Gerald Hellerman, Trustee $28,166 $28,166
Marvin Moser, M.D., Trustee $28,166 $28,166
Myron M. Sheinfeld, Trustee $28,166 $28,166
Martin Shubik, Trustee $25,166 $25,166
Charles C. Walden, Trustee $28,166 $28,166
Barbara Whitman, Trustee $ 0 $ 0
Martin J. Whitman, Chairman and $ 0 $ 0
Chief Executive Officer
* Amount does not include reimbursed expenses for attending Board meetings,
which amounted to $4,983 for all Trustees as a group. Amounts for THIRD
AVENUE HIGH YIELD FUND are for the period from February 12, 1998
(inception) through October 31, 1998. Amounts for THIRD AVENUE REAL
ESTATE VALUE FUND are for the period from September 17, 1998 (inception)
through October 31, 1998. For the fiscal year ended October 31, 1999, it is
anticipated that in addition to the compensation specified above, the
Trustees will receive additional compensation from THIRD AVENUE HIGH YIELD
FUND and THIRD AVENUE REAL ESTATE VALUE FUND in an estimated amount equal
to $1,500 and $4,500 per Trustee, respectively, and THIRD AVENUE HIGH YIELD
FUND and THIRD AVENUE REAL ESTATE VALUE FUND will reimburse the Trustees
for approximately $2,500 in expenses in the aggregate (such estimated
amounts are based upon the aggregate compensation received and expenses
incurred by the Trustees for the fiscal year ended October 31, 1998).
** Mr. Fabian passed away on December 6, 1997.
Principal Stockholders
The following persons beneficially own of record or are known to beneficially
own of record 5 percent or more of the outstanding common stock of THIRD AVENUE
VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE HIGH YIELD FUND and
THIRD AVENUE REAL ESTATE VALUE FUND as of February 10, 1999:
THIRD AVENUE VALUE FUND
Percentage of
Name and Address Third Avenue Value Fund Number of Shares
- ---------------- ----------------------- ----------------
Charles Schwab & Co., Inc.(2) 41.73% 20,151,609
101 Montgomery Street
San Francisco, CA 94104
-16-
<PAGE>
Donaldson Lufkin & Jenrette 11.53% 5,568,039
Securities Corporation(3)
Mutual Funds Dept. 5th Floor
P.O. Box 2052
Jersey City, NJ 07303
National Financial Securities 9.95% 4,804,531
Corp.(3)
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
THIRD AVENUE SMALL-CAP VALUE FUND
Percentage of
Third Avenue
Name and Address Small-Cap Value Fund Number of Shares
- ---------------- -------------------- ----------------
Charles Schwab & Co., Inc.(2) 33.65% 4,236,663
101 Montgomery Street
San Francisco, CA 94104
National Financial Securities 19.82% 2,653,564
Corp.(3)
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Bear Stearns Securities Corp.(4) 7.57% 1,012,752
One Metrotech Center North
Brooklyn, NY 11201-3859
Donaldson Lufkin & Jenrette 6.63% 887,463
Securities Corporation(3)
Mutual Funds Dept. 5th Floor
P.O. Box 2052
Jersey City, NJ 07303
THIRD AVENUE HIGH YIELD FUND
Percentage of
Third Avenue
Name and Address High Yield Fund Number of Shares
- ---------------- --------------- ----------------
Bear Stearns Securities Corp.(4) 29.58% 274,114
One Metrotech Center North
Brooklyn, NY 11201-3859
Charles Schwab & Co., Inc.(2) 25.81% 239,227
101 Montgomery Street
San Francisco, CA 94104
National Financial Securities 10.85% 100,584
Corp.(3)
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
-17-
<PAGE>
THIRD AVENUE REAL ESTATE VALUE FUND
Percentage of
Third Avenue
Name and Address Real Estate Value Fund Number of Shares
- ---------------- ---------------------- ----------------
Bear Stearns Securities Corp.(4) 42.49% 141,330
One Metrotech Center North
Brooklyn, NY 11201-3859
National Financial Securities 12.79% 42,554
Corp.(3)
P.O. Box 3908
Church Street Station
New York, NY 10008-3908
Dobson Tape Ministry 8.65% 28,777
1306 S Church Street
Greenville, SC 29605
Charles Schwab & Co., Inc.(2) 7.39% 24,586
101 Montgomery Street
San Francisco, CA 94104
(2) Charles Schwab & Co., Inc. is a discount broker-dealer acting as a
nominee for registered investment advisers whose clients have purchased
shares of the Fund, and also holds shares for the benefit of its
clients.
(3) Donaldson Lufkin & Jenrette Securities Corporation and National
Financial Services Corp. are broker-dealers holding shares for the
benefit of their respective clients.
(4) Bear Stearns Securities Corp. is a broker-dealer holding shares for
the benefit of its clients, including, at such time, clients of MJW,
the Funds' affiliated broker-dealer, principal underwriter and
distributor.
The officers and Trustees of the Funds own in the aggregate 1.80% of THIRD
AVENUE VALUE FUND, 0.84% of THIRD AVENUE SMALL-CAP VALUE FUND, 3.25% of THIRD
AVENUE HIGH YIELD FUND, and 18.42% of THIRD AVENUE REAL ESTATE VALUE FUND.
Investment Adviser
The Investment Adviser to the Trust is EQSF Advisers, Inc. (the "Adviser").
Martin J. Whitman is a controlling person of the Adviser. His control is based
upon an irrevocable proxy signed by his children, who own in the aggregate 75%
of the outstanding common stock of the Adviser, pursuant to a shareholders'
agreement entered into by and among them. Mr. Whitman is Chairman and Chief
Executive Officer of the Adviser.
The following individuals are affiliated persons of the Trust and Adviser:
Capacity With Funds Capacity With Adviser
------------------- ---------------------
Martin J. Whitman Chairman and Chief Executive Chairman and Chief Executive
Officer Officer
David M. Barse President, Chief Operating President, Chief Operating
Officer Officer
Michael Carney Treasurer, Chief Financial Treasurer, Chief Financial
Officer Officer
Ian M. Kirschner General Counsel and Secretary General Counsel and Secretary
Kerri Weltz Assistant Treasurer Assistant Treasurer
Barbara Whitman Trustee Director
-18-
<PAGE>
Investment Advisory Agreement
The investment advisory services of the Adviser are furnished to each of the
Funds pursuant to an Investment Advisory Agreement approved by the Board of
Trustees of the Trust, including a majority of the Trustees who are not
"interested persons" as defined in the 1940 Act, and by the sole shareholder of
each Fund on the same date. The Adviser has provided investment advisory
services to the Funds since their inception.
After the initial two-year term, each Investment Advisory Agreement will
continue from year to year if approved annually by the Board of Trustees of the
Trust or a majority of the outstanding voting securities of the Trust, and by
vote of a majority of the Trustees who are not parties to the Investment
Advisory Agreements or "interested persons" (as defined in the 1940 Act) of such
parties, cast in person at a meeting called for the purpose of voting on such
approval. The Investment Advisory Agreements may be terminated at any time
without penalty, upon 60 days written notice by either party to the other, and
will automatically be terminated upon any assignment thereof.
For the investment advisory services provided by the Adviser, each Fund pays the
Adviser a monthly fee of 1/12 of .90% (an annual rate of .90%) on the average
daily net assets in the Fund during the prior month. During the fiscal years
ended October 31, 1998, 1997 and 1996, THIRD AVENUE VALUE FUND paid investment
advisory fees to the Adviser of $15,893,039, $9,303,435, and $3,976,741,
respectively. During the fiscal year ended October 31, 1998 and the period from
inception to October 31, 1997, THIRD AVENUE SMALL-CAP VALUE FUND paid investment
advisory fees to the Adviser of $1,248,794 and $252,298, respectively. During
the period from inception to October 31, 1998, THIRD AVENUE HIGH YIELD FUND paid
investment advisory fees to the Adviser of $50,472. During the period from
inception to October 31, 1998, THIRD AVENUE REAL ESTATE VALUE FUND paid
investment advisory fees to the Adviser of $568.
Under the Investment Advisory Agreements, the Adviser supervises and assists in
the management of the Trust, provides investment research and research
evaluation and makes and executes recommendations for the purchase and sale of
securities. The Adviser furnishes at its expense all necessary office equipment
and personnel necessary for performance of the obligations of the Adviser and
pays the compensation of officers of the Trust. However, in the event that any
person serving as an officer of the Trust has both executive duties attendant to
such offices and administrative duties to the Trust apart from such office, the
Adviser does not pay any amount relating to the performance of such
administrative duties.
All other expenses incurred in the operation of the Funds and the continuous
offering of its shares, including taxes, fees and commissions, bookkeeping
expenses, Fund employees, expenses of redemption of shares, charges of
administrators, custodians and transfer agents, auditing and legal expenses and
fees of outside Trustees are borne by the Funds. Any expense which cannot be
allocated to a specific Fund will be allocated to each of the Funds based on
their relative net asset values on the date the expense is incurred. From time
to time, the Adviser may waive receipt of its fees and/or assume certain
expenses of a Fund, which would have the effect of lowering the expense ratio of
the Fund and increasing yield to investors. Under current arrangements, whenever
in any fiscal year, a Fund's normal operating expenses, including the investment
advisory fee, but excluding brokerage commissions and interest and taxes,
exceeds 1.9% of the first $100 million of average daily net assets of the Fund,
and 1.5% of assets in excess of $100 million, the Adviser is obligated to
reimburse the Fund in an amount equal to that excess. If a Fund's operating
expenses fall below the expense limitation, that Fund will begin repaying the
Adviser for the amount contributed on behalf of the Fund. This repayment will
continue for up to three years after the end of the fiscal year in which an
expense is reimbursed by the Adviser, subject to the expense limitation, until
the Adviser has been paid for the entire amount contributed or such three year
period expires.
-19-
<PAGE>
Distributor
The distribution services of M.J. Whitman, Inc., 767 Third Avenue, New York, NY
10017 ("MJW" or the "Distributor") are furnished to each Fund pursuant to a
Distribution Agreement (the "Distribution Agreement"). Under such agreements,
the Distributor shall (1) assist in the sale and distribution of each Fund's
shares; and (2) qualify and maintain the qualification as a broker-dealer in
such states where shares of the Funds are registered for sale.
Each Distribution Agreement will remain in effect provided that it is approved
at least annually by the Board of Trustees or by a majority of the Fund's
outstanding shares, and in either case, by a majority of the Trustees who are
not parties to the Distribution Agreement or interested persons of any such
party. Each Distribution Agreement terminates automatically if it is assigned
and may be terminated without penalty by either party on not less than 60 days
written notice.
Administrator
The Funds have entered into an Administration Services Agreement (the
"Administration Agreement") with First Data Investor Services Group, Inc.
("Investor Services Group"), a wholly owned subsidiary of First Data
Corporation. The Administration Agreement provides that Investor Services Group
shall provide all administrative services to each Fund other than those relating
to the investment portfolio of the Funds, the distribution of the Funds and the
maintenance of each Fund's financial records. The Administration Agreement has
an initial two year term and may be terminated at any time (effective after such
initial term) without penalty, upon 180 days written notice by either party to
the other, and will automatically be terminated upon any assignment thereof. The
Trust has agreed to pay Investor Services Group an amount equal to $186,000 per
annum plus .01% of aggregate assets of the Funds in excess of $1 billion. During
the fiscal years ended October 31, 1998 and 1997, THIRD AVENUE VALUE FUND paid
fees to Investor Services Group of $236,033 and $143,175, respectively, for
these services. During the fiscal year ended October 31, 1998 and the period
from inception to October 31, 1997, THIRD AVENUE SMALL-CAP VALUE FUND paid fees
to Investor Services Group of $18,586 and $8,116, respectively, for these
services. During the period from inception to October 31, 1998, THIRD AVENUE
HIGH YIELD FUND paid fees to Investor Services Group of $9,207 for these
services. During the period from inception to October 31, 1998, THIRD AVENUE
REAL ESTATE VALUE FUND paid fees to Investor Services Group of $1,434 for these
services.
Custodian
Custodial Trust Company, 101 Carnegie Center, Princeton, NJ 08540-6231, serves
as custodian for the Funds pursuant to a custodian agreement. Under such
agreement, the Custodian (1) maintains a separate account or accounts in the
name of each Fund; (2) holds and transfers portfolio securities on account of
each Fund; (3) accepts receipts and makes disbursements of money on behalf of
each Fund; (4) collects and receives all income and other payments and
distributions on account of each Fund's securities; and (5) makes periodic
reports to the Board of Trustees concerning each Fund's operations.
Transfer Agent
First Data Investor Services Group, Inc., 3200 Horizon Drive, P.O. Box 61503,
King of Prussia, PA 19406-0903, is the transfer agent for each of the Funds.
Independent Accountants
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, NY 10036, is
the independent public accountants for the Funds. The independent public
accoutants audit the
-20-
<PAGE>
financial statements of the Funds following the end of each fiscal year and
provide a report to the Board of Trustees of the results of the audit.
Portfolio Trading Practices
Under the Investment Advisory Agreement between the Trust and the Adviser, the
Adviser has the responsibility of selecting brokers and dealers. The Adviser
must place portfolio transactions with brokers and dealers who render
satisfactory service in the execution of orders at the most favorable prices and
at reasonable commission rates, but has discretion to pay a greater amount if
it, in good faith, determines that such commission was reasonable in relation to
the value of the brokerage and research services provided by such broker or
dealer, either in terms of that particular transaction or in fulfilling the
overall responsibilities of the Adviser to the Funds. Where transactions are
executed in the over-the-counter market, or in the "third market" (the
over-the-counter market in listed securities), the Fund will normally first seek
to deal with the primary market makers. However, when the Funds consider it
advantageous to do so, they will utilize the services of brokers, but will, in
all cases, attempt to negotiate the best price and execution. The determination
of what may constitute the most favorable price and execution in a securities
transaction by a broker involves a number of considerations, including, without
limitation, the overall direct net economic result to the Funds (involving both
price paid or received and any commissions or other costs paid), the efficiency
with which the transaction is effected, the ability to effect the transaction at
all if selling large blocks is involved, the availability of the broker to stand
ready to execute possibly difficult transactions in the future and the financial
strength and stability of the broker. Such considerations are judgmental and are
weighed by management in determining the overall reasonableness of brokerage
commissions paid. In allocating any such portfolio brokerage on a national
securities exchange, the Funds may consider the research, statistical and other
factual information and services provided by brokers from time to time to the
Adviser. Such services and information are available to the Adviser for the
benefit of all clients of the Adviser and its affiliates and it is not practical
for the Adviser to assign a particular value to any such service.
The Adviser intends to use brokers affiliated with the Adviser as brokers for
the Funds where, in its judgment, such firms will be able to obtain a price and
execution at least as favorable as other qualified brokers. Martin J. Whitman,
David M. Barse, Michael Carney and Ian M. Kirschner, who are executive officers
of the Trust and the Adviser, are also executive officers of MJW and M.J.
Whitman Senior Debt Corp. ("Senior Debt Corp."), a broker of private debt
instruments under common control with MJW.
In determining the commissions to be paid to MJW and Senior Debt Corp., it is
the policy of the Funds that such commissions will, in the judgment of the
Adviser, be (i) at least as favorable as those which would be charged by other
qualified brokers having comparable execution capability and (ii) at least as
favorable as commissions contemporaneously charged by MJW or Senior Debt Corp.,
as the case may be, on comparable transactions for its most favored unaffiliated
customers, except for any customers of MJW or Senior Debt Corp., as the case may
be, considered by a majority of the disinterested Trustees not to be comparable
to the Funds. The Funds do not deem it practicable and in their best interests
to solicit competitive bids for commission rates on each transaction. However,
consideration is regularly given to information concerning the prevailing level
of commissions charged on comparable transactions by other qualified brokers.
The Trustees from time to time, at least on a quarterly basis, will review,
among other things, all the Funds' portfolio transactions including information
relating to the commissions charged by MJW and Senior Debt Corp. to the Funds
and to their other customers, and information concerning the prevailing level of
commissions charged by other qualified brokers. In addition, the procedures
pursuant to which MJW and Senior Debt Corp. effects brokerage transactions for
the Funds must be reviewed and approved no less often than annually by a
majority of the disinterested Trustees.
-21-
<PAGE>
The Adviser expects that it will execute a portion of the Funds' transactions
through qualified brokers other than MJW and Senior Debt Corp. In selecting such
brokers, the Adviser will consider the quality and reliability of the brokerage
services, including execution capability and performance, financial
responsibility, and investment information and other research provided by such
brokers. Accordingly, the commissions charged by any such broker may be greater
than the amount another firm might charge if management of the Trust determines
in good faith that the amount of such commissions is reasonable in relation to
the value of the brokerage services and research information provided by such
broker to the Funds. Management of the Trust believes that the research
information received in this manner provides the Funds with benefits by
supplementing the research otherwise available to the Funds. Over-the-counter
purchases and sales will be transacted directly with principal market makers,
except in those circumstances where the Funds can, in the judgment of their
management, otherwise obtain better prices and execution of orders.
To the knowledge of the Funds, no affiliated person of the Funds receives
give-ups or reciprocal business in connection with security transactions of the
Funds. The Funds do not effect securities transactions through brokers in
accordance with any formula, nor will they take the sale of Fund shares into
account in the selection of brokers to execute security transactions. However,
brokers who execute brokerage transactions for the Funds, including MJW and
Senior Debt Corp., from time to time may effect purchases of Fund shares for
their customers.
For the fiscal year ended October 31, 1998, THIRD AVENUE VALUE FUND incurred
total brokerage commissions of $1,261,197, of which approximately $1,026,034 (or
81%) was paid to MJW and $38,637 (or 3%) was paid to Senior Debt Corp. For the
fiscal year ended October 31, 1997, THIRD AVENUE VALUE FUND incurred total
brokerage commissions of $620,345 of which approximately $460,641 (or 74%) was
paid to MJW and $18,047 (or 3%) was paid to Senior Debt Corp. For the fiscal
year ended October 31, 1996, THIRD AVENUE VALUE FUND incurred total brokerage
commissions of $447,855 of which approximately $329,168 (or 73%) was paid to MJW
and $70,250 (or 16%) was paid to Senior Debt Corp.
For the fiscal year ended October 31, 1998, THIRD AVENUE SMALL-CAP VALUE FUND
incurred total brokerage commissions of $205,990 of which approximately $113,016
(or 55%) was paid to MJW. For the period from inception through October 31,
1997, THIRD AVENUE SMALL-CAP VALUE FUND incurred total brokerage commissions of
$78,938 of which approximately $50,977 (or 65%) was paid to MJW.
For the period from inception through October 31, 1998, THIRD AVENUE HIGH YIELD
FUND incurred total brokerage commissions of $600, none of which was paid to
MJW.
For the period from inception through October 31, 1998, THIRD AVENUE REAL ESTATE
VALUE FUND incurred total brokerage commissions of $1,670 of which approximately
$1,470 (or 88%) was paid to MJW.
These amounts include fees paid by MJW to its clearing agents. Commissions paid
by the Funds to MJW are paid at an average discount of at least 20% to the
normal fees charged by MJW.
For the fiscal year ended October 31, 1998, THIRD AVENUE VALUE FUND effected
40.48% and 0.57% of its total transactions for which commissions were paid
through MJW and Senior Debt Corp., respectively. For the fiscal year ended
October 31, 1998, THIRD AVENUE SMALL-CAP VALUE FUND effected 39.09% of its total
transactions for which commissions were paid through MJW. For the fiscal year
ended October 31, 1998, THIRD AVENUE HIGH YIELD FUND effected none of its total
transactions for which commissions were paid through MJW. For the fiscal year
ended October 31, 1998, THIRD AVENUE REAL ESTATE VALUE FUND effected 83.33% of
its total transactions for which commissions were paid through MJW.
-22-
<PAGE>
At October 31, 1998, THIRD AVENUE VALUE FUND held securities of the
following of the Fund's regular broker-dealers: Raymond James Financial, Inc.
(the market value of which was $27,094,922 at October 31, 1998).
Purchase Orders
Each Fund reserves the right, in its sole discretion, to refuse purchase orders.
Without limiting the foregoing, a Fund will consider exercising such refusal
right when it determines that it cannot effectively invest the available funds
on hand in accordance with the Fund's investment policies.
Redemption of Shares
The procedure for redemption of Fund shares under ordinary circumstances is set
forth in the Prospectus. In unusual circumstances, such as in the case of a
suspension of the determination of net asset value, the right of redemption is
also suspended and, unless redeeming shareholders withdraw their certificates
from deposit, they will receive payment of the net asset value next determined
after termination of the suspension. The right of redemption may be suspended or
payment upon redemption deferred for more than seven days: (a) when trading on
the New York Stock Exchange (the "NYSE") is restricted; (b) when the NYSE is
closed for other than weekends and holidays; (c) when the Securities and
Exchange Commission (the "SEC") has by order permitted such suspension; or (d)
when an emergency exists making disposal of portfolio securities or valuation of
net assets of a Fund not reasonably practicable; provided that applicable rules
and regulations of the SEC shall govern as to whether the conditions prescribed
in (a), (c) or (d) exist.
Redemption In Kind
Each Fund has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940 pursuant to which such Fund is obligated during any 90 day period to
redeem shares for any one shareholder of record solely in cash up to the lesser
of $250,000 or 1% of the net asset value of such Fund at the beginning of such
period. Should a redemption exceed such limitation, a Fund may deliver, in lieu
of cash, readily marketable securities from its portfolio. The securities
delivered will be selected at the sole discretion of such Fund, will not
necessarily be representative of the entire portfolio and may be securities
which the Fund would otherwise sell. The redeeming shareholder will usually
incur brokerage costs in converting the securities to cash. The method of
valuing securities used to make the redemptions in kind will be the same as the
method of valuing portfolio securities and such valuation will be made as of the
same time the redemption price is determined.
Dividends, Capital Gain Distributions and Taxes
Each Fund intends to qualify and to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). If they so qualify, the Funds will not be subject to
Federal income tax on their net investment income and net short-term capital
gain, if any, realized during any fiscal year to the extent that they distribute
such income and gain to their shareholders.
Each Fund will either distribute or retain for reinvestment all or part of any
net long-term capital gain. If any such net capital gain is retained, the Fund
will be subject to a tax of 35% of such amount. In that event, the Fund expects
to designate the retained amount as undistributed capital gains in a notice to
its shareholders, each of whom (1) will be required to include in income for tax
purposes, as long-term capital gains, its share of such undistributed amount,
(2) will be entitled to credit its proportionate share of the tax paid by the
Fund against its Federal income tax liability and to claim refunds to the extent
the credit exceeds such liability, and (3) will increase its basis in its shares
of such Fund by an amount equal to 65% of the amount of the
-23-
<PAGE>
undistributed capital gains included in such shareholder's gross income. A
distribution by a Fund will be treated as paid during any calendar year if it is
declared by the Fund in October, November or December of that year, payable to
shareholders of record on a date during such month and paid by the Fund during
January of the following year. Any such distribution paid during January of the
following year will be deemed to be received on December 31 of the year the
distribution is declared, rather than when the distribution is received.
Under the Code, amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a 4% excise tax. To avoid
the tax, each Fund must distribute during each calendar year, an amount equal to
at least the sum of (1) 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (2) 98% of its capital gains in
excess of its capital losses for the twelve-month period ending on October 31 of
the calendar year (unless an election is made by a Fund with a November or
December year end to use the Fund's fiscal year), and (3) all ordinary income
and net capital gains for previous years that were not previously distributed.
The Federal income tax treatment of the various high yield debt securities and
other debt instruments (collectively, "Instruments" and individually, an
"Instrument") to be acquired by the Funds will depend, in part, on the nature of
those Instruments and the application of various tax rules. The Funds may derive
interest income through the accrual of stated interest payments or through the
application of the original issue discount rules, the market discount rules or
other similar provisions. The Funds may be required to accrue original issue
discount income, and in certain circumstances the Funds may be required to
accrue stated interest even though no concurrent cash payments will be received.
Moreover, it is the position of the IRS that a holder of a debt instrument
subject to the original issue discount rules is required to recognize interest
income regardless of the financial condition of the obligor, even where there is
no reasonable expectancy that the Instrument will be redeemed according to its
terms. If a Fund acquires an Instrument at a discount and the terms of that
Instrument are subsequently modified, the Fund could be required to recognize
gain at the time of the modification even though no cash payments will have been
received at that time. The market discount rules, as well as certain other
provisions, may require that a portion of any gain recognized on the sale,
redemption or other disposition of an Instrument be treated as ordinary income
as opposed to capital gain. Also, under the market discount rules, if a Fund
were to receive a partial payment on an Instrument, the Fund could be required
to recognize ordinary income at the time of the partial payment, even though the
Instrument may ultimately be settled at an overall loss. As a result of these
and other rules, the Funds may be required to recognize taxable income which
they would be required to distribute, even though the underlying Instruments
have not made concurrent cash distributions to the Funds.
The body of law governing these Instruments is complex and not well developed.
Thus the Funds and their advisors may be required to interpret various
provisions of the Internal Revenue Code and Regulations and take certain
positions on the Funds' tax returns, in situations where the law is somewhat
uncertain.
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:
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 VALUE 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 regulations, no capital gains
-24-
<PAGE>
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.
Share Information
All shares of the Funds have one vote and when duly issued will be fully paid
and non-assessable. Shares have no preemptive, subscription or conversion rights
and are freely transferable. The Trustees are authorized to re-classify and
issue any unissued shares to any number of additional series without shareholder
approval. Accordingly, the Trustees in the future, for reasons such as the
desire to establish one or more additional funds with different objectives,
policies, risk considerations or restrictions, may create additional series or
classes of shares. Any issuance of shares of such additional series would be
governed by the Investment Company Act of 1940, as amended, and the laws of the
State of Delaware.
Performance Information
Performance information for the Funds may appear in advertisements, sales
literature, or reports to shareholders or prospective shareholders. Performance
information in advertisements and sales literature may be expressed as "average
annual return" and "total return."
Each Fund's average annual return quotation is computed in accordance with a
standardized method prescribed by rules of the SEC. The average annual return
for a specific period is found by first taking a hypothetical $1,000 investment
("initial investment") in the Fund's shares on the first day of the period and
computing the redeemable value of that investment at the end of the period. The
redeemable value is then divided by the initial investment, and this quotient is
taken to the Nth root (N representing the number of years in the period) and 1
is subtracted from the result, which is then expressed as a percentage. The
calculation assumes that all income and capital gains dividends paid by the Fund
have been reinvested at net asset value on the reinvestment dates during the
period.
THIRD AVENUE VALUE FUND'S average annual total return for the one year, five
year and since inception periods ending October 31, 1998 are -3.86%, 13.52% and
19.33%, respectively. THIRD AVENUE SMALL-CAP VALUE FUND'S average annual total
return for the one year and since inception periods ending October 31, 1998 are
- -13.36% and 4.47%, respectively.
Calculation of a Fund's total return is subject to a standardized formula. Total
return performance for a specific period is calculated by taking an initial
investment in the Fund's shares on the first day of the period and computing the
redeemable value of that investment at the end of the period. The total return
percentage is then determined by subtracting the initial investment from the
redeemable value and dividing the remainder by the initial investment and
expressing the result as a percentage. The calculation assumes that all income
and capital gains dividends by the Fund have been reinvested at net asset value
on the reinvestment dates during the period. Total return may also be shown as
the increased dollar value of the hypothetical investment over the period.
A Fund's yield is computed in accordance with a standardized method prescribed
by rules of the SEC. The Fund's yield is computed by dividing the net investment
income per share earned during the specified one month or 30-day period by the
net asset value per share on the last day of the period, according to the
following formula:
YIELD = 2[a-b + 1] 6 - 1
-----
[cd]
-25-
<PAGE>
Where:
a = dividends and interest earned during the period. b = expenses accrued for
the period (net of reimbursements).
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends. d = the maximum offering price per share on the
last day of the period.
The yield of the THIRD AVENUE HIGH YIELD FUND for the 30-day period ending on
October 31, 1998 was 10.27%.
Financial Statements
The Funds' financial statements and notes thereto appearing in their Annual
Report to Shareholders and the report thereon of PricewaterhouseCoopers LLP,
independent accountants, appearing therein, are incorporated by reference in
this Statement of Additional Information. The Funds will issue unaudited
semi-annual and audited annual financial statements.
-26-
<PAGE>
Appendix
Description of Corporate Bond Ratings
Standard & Poor's Ratings Group
The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources it considers reliable. Standard & Poor's
does not perform any audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed, suspended
or withdrawn as a result of changes in, or unavailability of, such information
or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance
with the terms of the obligation.
II. Nature and provisions of the obligation.
III. Protection afforded by, and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
AAA - Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small
degree.
A - Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB - Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB, B, CCC, CC, C - Debt rated "BB", "B", "CCC", "CC", and "C" is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the
terms of the obligation. "BB" indicates the lowest degree of
speculation and "C" the highest degree of speculation. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB - Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied "BBB" rating.
B - Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied "BB" or "BB-" rating.
CCC - Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal. The "CCC" rating category is also used for
-27-
<PAGE>
debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC - The rating "CC" is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
C - The rating "C" is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.
C1 - The rating "C1" is reserved for income bonds on which no interest
is being paid.
D - Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
-28-
<PAGE>
Moody's Investors Service, Inc.
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities,
fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risk
appear somewhat greater than the Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations.
Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment some time in the future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for
the present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements:
their future cannot be considered as well-assured. Often the protection
of interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect
to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing. Moody's applies numerical
modifiers: 1, 2 and 3 in each generic rating classification from Aa
through B in its corporate bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating
category, the modifier 2 indicates a mid-range ranking, and the
modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
-29-
<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
Investment Adviser
EQSF Advisers, Inc.
767 Third Avenue
New York, NY 10017-2023
Distributor
M.J. Whitman, Inc.
767 Third Avenue
New York, NY 10017-2023
Transfer Agent
First Data Investor Services Group, Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406-0903
(610) 239-4600
(800) 443-1021 (toll-free)
Custodian
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540-6231
[LOGO]
767 Third Avenue
New York, NY 10017
Phone (212) 888-5222
Toll Free (800) 443-1021
www.thirdavenuefunds.com
-30-
<PAGE>
Preliminary statement of additional information, subject to completion
PIONEER HIGH YIELD FUND
60 State Street
Boston, Massachusetts 02109
STATEMENT OF ADDITIONAL INFORMATION
CLASS A, CLASS B, CLASS C AND CLASS Y SHARES
FEBRUARY __, 2000
This statement of additional information is not a prospectus. It should be read
in conjunction with the fund's Class A, Class B and Class C shares prospectus
and its Class Y shares prospectus each dated February __, 2000, as supplemented
or revised from time to time. A copy of each prospectus can be obtained free of
charge by calling Shareholder Services at 1-800-225-6292 or by written request
to the fund at 60 State Street, Boston, Massachusetts 02109. You can also obtain
a copy of the fund's Class A, Class B and Class C shares prospectus from our
website at: www.pioneerfunds.com.
TABLE OF CONTENTS
PAGE
1. Fund History.........................................................2
2. Investment Policies, Risks and Restrictions..........................2
3. Management of the Fund..............................................23
4. Investment Adviser..................................................27
5. Principal Underwriter and Distribution Plans........................29
6. Shareholder Servicing/Transfer Agent................................33
7. Custodian...........................................................33
8. Independent Public Accountants......................................33
9. Portfolio Transactions..............................................34
10. Description of Shares...............................................35
11. Sales Charges.......................................................37
12. Redeeming Shares....................................................40
13. Telephone Transactions..............................................41
14. Pricing of Shares...................................................42
15. Tax Status..........................................................43
16. Investment Results..................................................47
17. Financial Statements................................................50
18. Appendix A - Annual Fee, Expense and Other Information..............51
19. Appendix B - Description of Short-Term Debt, Corporate
Bond and Preferred Stock Ratings....................................54
20. Appendix C - Performance Statistics.................................60
21. Appendix D - Other Pioneer Information..............................73
<PAGE>
1. FUND HISTORY
The fund is a non-diversified open-end management investment company. The fund
originally was established as Third Avenue High Yield Fund, a series of Third
Avenue Trust, a Delaware business Trust. Pursuant to an agreement and plan of
reorganization, the fund was reorganized as Pioneer High Yield Fund, a Delaware
business trust, on [February 25], 2000.
2. INVESTMENT POLICIES, RISKS AND RESTRICTIONS
The prospectuses present the investment objective and the principal investment
strategies and risks of the fund. This section supplements the disclosure in the
fund's prospectuses and provides additional information on the fund's investment
policies or restrictions. Restrictions or policies stated as a maximum
percentage of the fund's assets are only applied immediately after a portfolio
investment to which the policy or restriction is applicable (other than the
limitations on borrowing and illiquid securities). Accordingly, any later
increase or decrease resulting from a change in values, net assets or other
circumstances will not be considered in determining whether the investment
complies with the fund's restrictions and policies.
PRIMARY INVESTMENTS
Under normal circumstances, the fund invests at least 65% of its total assets in
below investment grade (high yield) debt securities and preferred stocks.
DEBT SECURITIES RATING CRITERIA
Investment grade debt securities are those rated "BBB" or higher by Standard &
Poor's Ratings Group ("Standard & Poor's") or the equivalent rating of other
national statistical rating organizations. Debt securities rated BBB are
considered medium grade obligations with speculative characteristics, and
adverse economic conditions or changing circumstances may weaken the issuer's
ability to pay interest and repay principal.
Below investment grade debt securities are those rated "BB" and below by
Standard & Poor's or the equivalent rating of other national statistical rating
organizations. See Appendix B for a description of rating categories. The fund
may invest in debt securities rated "D" or better.
Below investment grade debt securities or comparable unrated securities are
commonly referred to as "junk bonds" and are considered predominantly
speculative and may be questionable as to principal and interest payments.
Changes in economic conditions are more likely to lead to a weakened capacity to
make principal payments and interest payments. The amount of high yield
securities outstanding has proliferated as an increasing number of issuers have
used high yield securities for corporate financing. An economic downturn could
severely affect the ability of highly leveraged issuers to service their debt
obligations or to repay their obligations upon maturity. Factors having an
adverse impact on the market value of lower quality securities will have an
adverse effect on the fund's net asset value to the extent that it invests in
such securities. In addition, the fund may incur additional expenses to the
extent it is required to seek recovery upon a default in payment of principal or
interest on its portfolio holdings.
The secondary market for high yield securities may not be as liquid as the
secondary market for more highly rated securities, a factor which may have an
adverse effect on the fund's ability to dispose of a particular security when
necessary to meet its liquidity needs. Under adverse market or economic
conditions, the secondary market for high yield securities could contract
further, independent of any specific adverse changes in the condition of a
particular issuer. As a result, the fund could find it more
2
<PAGE>
difficult to sell these securities or may be able to sell the securities
only at prices lower than if such securities were widely traded. Prices realized
upon the sale of such lower rated or unrated securities, under these
circumstances, may be less than the prices used in calculating the fund's net
asset value.
Since investors generally perceive that there are greater risks associated with
lower quality debt securities of the type in which the fund may invest a portion
of its assets, the yields and prices of such securities may tend to fluctuate
more than those for higher rated securities. In the lower quality segments of
the debt securities market, changes in perceptions of issuers' creditworthiness
tend to occur more frequently and in a more pronounced manner than do changes in
higher quality segments of the debt securities market, resulting in greater
yield and price volatility.
Lower rated and comparable unrated debt securities tend to offer higher yields
than higher rated securities with the same maturities because the historical
financial condition of the issuers of such securities may not have been as
strong as that of other issuers. However, lower rated securities generally
involve greater risks of loss of income and principal than higher rated
securities. Pioneer Investment Management, Inc. ("Pioneer"), the fund's
investment adviser, will attempt to reduce these risks through portfolio
diversification and by analysis of each issuer and its ability to make timely
payments of income and principal, as well as broad economic trends and corporate
developments.
CONVERTIBLE DEBT SECURITIES
The fund may invest in convertible debt securities which are debt obligations
convertible at a stated exchange rate or formula into common stock or other
equity securities of or owned by the issuer. Convertible securities rank senior
to common stocks in an issuer's capital structure and consequently may be of
higher quality and entail less risk than the issuer's common stock. As with all
debt securities, the market values of convertible securities tend to increase
when interest rates decline and, conversely, tend to decline when interest rates
increase.
DEBT OBLIGATIONS OF FOREIGN GOVERNMENTS
An investment in debt obligations of foreign governments and their political
subdivisions (sovereign debt) involves special risks that are not present in
corporate debt obligations. The foreign issuer of the sovereign debt or the
foreign governmental authorities that control the repayment of the debt may be
unable or unwilling to repay principal or interest when due, and a fund may have
limited recourse in the event of a default. During periods of economic
uncertainty, the market prices of sovereign debt may be more volatile than
prices of debt obligations of U.S. issues. In the past, certain foreign
countries have encountered difficulties in servicing their debt obligations,
withheld payments of principal and interest and declared moratoria on the
payment of principal and interest on their sovereign debt.
A sovereign debtor's willingness or ability to repay principal and pay interest
in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward its principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multilateral agencies and other entities
to reduce principal and interest arrearages on their debt. The failure of a
sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
EURODOLLAR INSTRUMENTS AND SAMURAI AND YANKEE BONDS. The fund may invest in
Eurodollar instruments and Samurai and Yankee bonds. Eurodollar instruments are
bonds of corporate and
3
<PAGE>
government issuers that pay interest and principal in U.S. dollars but are
issued in markets outside the United States, primarily in Europe. Samurai bonds
are yen-denominated bonds sold in Japan by non-Japanese issuers. Yankee bonds
are U.S. dollar denominated bonds typically issued in the U.S. by foreign
governments and their agencies and foreign banks and corporations. The fund may
also invest in Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time
Deposits ("ETDs") and Yankee Certificates of Deposit ("Yankee CDs"). ECDs are
U.S. dollar-denominated certificates of deposit issued by foreign branches of
domestic banks; ETDs are U.S. dollar-denominated deposits in a foreign branch of
a U.S. bank or in a foreign bank; and Yankee CDs are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the U.S. These investments involve risks that are different from investments in
securities issued by U.S. issuers, including potential unfavorable political and
economic developments, foreign withholding or other taxes, seizure of foreign
deposits, currency controls, interest limitations or other governmental
restrictions which might affect payment of principal or interest.
RISKS OF NON-U.S. INVESTMENTS
To the extent that the fund invests in the securities of non-U.S. issuers, those
investments involve considerations and risks not typically associated with
investing in the securities of issuers in the U.S. These risks are heightened
with respect to investments in countries with emerging markets and economies.
The risks of investing in securities of non-U.S. issuers or issuers with
significant exposure to non-U.S. markets may be related, among other things, to
(i) differences in size, liquidity and volatility of, and the degree and manner
of regulation of, the securities markets of certain non-U.S. markets compared to
the securities markets in the U.S.; (ii) economic, political and social factors;
and (iii) foreign exchange matters, such as restrictions on the repatriation of
capital, fluctuations in exchange rates between the U.S. dollar and the
currencies in which the fund's portfolio securities are quoted or denominated,
exchange control regulations and costs associated with currency exchange. The
political and economic structures in certain non-U.S. countries, particularly
emerging markets, are expected to undergo significant evolution and rapid
development, and such countries may lack the social, political and economic
stability characteristic of more developed countries. Unanticipated political or
social developments may affect the values of the fund's investments in such
countries. The economies and securities and currency markets of many emerging
markets have experienced significant disruption and declines. There can be no
assurances that these economic and market disruptions will not continue.
FOREIGN SECURITIES MARKETS AND REGULATIONS. There may be less publicly available
information about non-U.S. markets and issuers than is available with respect to
U.S. securities and issuers. Non-U.S. companies generally are not subject to
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to U.S. companies. The trading
markets for most non-U.S. securities are generally less liquid and subject to
greater price volatility than the markets for comparable securities in the U.S.
The markets for securities in certain emerging markets are in the earliest
stages of their development. Even the markets for relatively widely traded
securities in certain non-U.S. markets, including emerging countries, may not be
able to absorb, without price disruptions, a significant increase in trading
volume or trades of a size customarily undertaken by institutional investors in
the U.S. Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity. The less liquid a market, the more difficult it may be for
the fund to accurately price its portfolio securities or to dispose of such
securities at the times determined by Pioneer to be appropriate. The risks
associated with reduced liquidity may be particularly acute in situations in
which the fund's operations require cash, such as in order to meet redemptions
and to pay its expenses.
ECONOMIC, POLITICAL AND SOCIAL FACTORS. Certain non-U.S. countries, including
emerging markets, may be subject to a greater degree of economic, political and
social instability than is the case in the U.S. and
4
<PAGE>
Western European countries. Such instability may result from, among other
things: (i) authoritarian governments or military involvement in political and
economic decision making; (ii) popular unrest associated with demands for
improved economic, political and social conditions; (iii) internal insurgencies;
(iv) hostile relations with neighboring countries; and (v) ethnic, religious and
racial disaffection and conflict. Such economic, political and social
instability could significantly disrupt the financial markets in such countries
and the ability of the issuers in such countries to repay their obligations.
Investing in emerging countries also involves the risk of expropriation,
nationalization, confiscation of assets and property or the imposition of
restrictions on foreign investments and on repatriation of capital invested. In
the event of such expropriation, nationalization or other confiscation in any
emerging country, the fund could lose its entire investment in that country.
Certain emerging market countries restrict or control foreign investment in
their securities markets to varying degrees. These restrictions may limit the
fund's investment in those markets and may increase the expenses of the fund. In
addition, the repatriation of both investment income and capital from certain
markets in the region is subject to restrictions such as the need for certain
governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the fund's operation.
Economies in individual non-U.S. countries may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross domestic product,
rates of inflation, currency valuation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many non-U.S. countries have
experienced substantial, and in some cases extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had,
and may continue to have, very negative effects on the economies and securities
markets of certain emerging countries.
Economies in emerging countries generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been, and may
continue to be, affected adversely by economic conditions in the countries with
which they trade.
CURRENCY RISKS. The value of the securities quoted or denominated in
international currencies may be adversely affected by fluctuations in the
relative currency exchange rates and by exchange control regulations. The fund's
investment performance may be negatively affected by a devaluation of a currency
in which the fund's investments are quoted or denominated. Further, the fund's
investment performance may be significantly affected, either positively or
negatively, by currency exchange rates because the U.S. dollar value of
securities quoted or denominated in another currency will increase or decrease
in response to changes in the value of such currency in relation to the U.S.
dollar.
CUSTODIAN SERVICES AND RELATED INVESTMENT COSTS. Custodial services and other
costs relating to investment in international securities markets generally are
more expensive than in the U.S. Such markets have settlement and clearance
procedures that differ from those in the U.S. In certain markets there have been
times when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions. The
inability of the fund to make intended securities purchases due to settlement
problems could cause the fund to miss attractive investment opportunities.
Inability to dispose of a portfolio security caused by settlement problems could
result either in losses to the fund due to a subsequent decline in value of the
portfolio security or could result in possible liability to the fund. In
addition, security settlement and clearance procedures in some emerging
countries may not fully protect the fund against loss or theft of its assets.
5
<PAGE>
WITHHOLDING AND OTHER TAXES. The fund will be subject to taxes, including
withholding taxes, on income (possibly including, in some cases, capital gains)
that are or may be imposed by certain non-U.S. countries with respect to the
fund's investments in such countries. These taxes will reduce the return
achieved by the fund. Treaties between the U.S. and such countries may not be
available to reduce the otherwise applicable tax rates.
ECONOMIC MONETARY UNION (EMU)
January 1, 1999, 11 European countries adopted a single currency - the Euro. The
conversion to the Euro is being phased in over a three-year period. During this
time, valuation, systems and other operational problems may occur in connection
with the fund's investments quoted in the Euro. For participating countries, EMU
will mean sharing a single currency and single official interest rate and
adhering to agreed upon limits on government borrowing. Budgetary decisions will
remain in the hands of each participating country but will be subject to each
country's commitment to avoid "excessive deficits" and other more specific
budgetary criteria. A European Central Bank is responsible for setting the
official interest rate to maintain price stability within the Euro zone.
EMU is driven by the expectation of a number of economic benefits, including
lower transaction costs, reduced exchange risk, greater competition, and a
broadening and deepening of European financial markets. However, there are a
number of significant risks associated with EMU. Monetary and economic union on
this scale has never been attempted before. There is a significant degree of
uncertainty as to whether participating countries will remain committed to EMU
in the face of changing economic conditions. This uncertainty may increase the
volatility of European markets.
U.S. GOVERNMENT SECURITIES
U.S. government securities in which the fund invests include debt obligations of
varying maturities issued by the U.S. Treasury or issued or guaranteed by an
agency or instrumentality of the U.S. government, including the Federal Housing
Administration, Federal Financing Bank, Farmers Home Administration,
Export-Import Bank of the U.S., Small Business Administration, Government
National Mortgage Association ("GNMA"), General Services Administration, Central
Bank for Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage
Association ("FNMA"), Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board, Student Loan Marketing Association,
Resolution Trust Corporation and various institutions that previously were or
currently are part of the Farm Credit System (which has been undergoing
reorganization since 1987). Some U.S. government securities, such as U.S.
Treasury bills, Treasury notes and Treasury bonds, which differ only in their
interest rates, maturities and times of issuance, are supported by the full
faith and credit of the United States. Others are supported by: (i) the right of
the issuer to borrow from the U.S. Treasury, such as securities of the Federal
Home Loan Banks; (ii) the discretionary authority of the U.S. government to
purchase the agency's obligations, such as securities of the FNMA; or (iii) only
the credit of the issuer, such as securities of the Student Loan Marketing
Association. No assurance can be given that the U.S. government will provide
financial support in the future to U.S. government agencies, authorities or
instrumentalities that are not supported by the full faith and credit of the
United States. Securities guaranteed as to principal and interest by the U.S.
government, its agencies, authorities or instrumentalities include: (i)
securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. government or any of its
agencies, authorities or instrumentalities; and (ii) participations in loans
made to foreign governments or other entities that are so guaranteed. The
secondary market for certain of these participations is limited and, therefore,
may be regarded as illiquid.
6
<PAGE>
U.S. government securities may include zero coupon securities that may be
purchased when yields are attractive and/or to enhance portfolio liquidity. Zero
coupon U.S. government securities are debt obligations that are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the security will accrue and compound over the
period until maturity or the particular interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
Zero coupon U.S. government securities do not require the periodic payment of
interest. These investments benefit the issuer by mitigating its need for cash
to meet debt service, but generally require a higher rate of return to attract
investors who are willing to defer receipt of cash. These investments may
experience greater volatility in market value than U.S. government securities
that make regular payments of interest. The fund accrues income on these
investments for tax and accounting purposes, which is distributable to
shareholders and which, because no cash is received at the time of accrual, may
require the liquidation of other portfolio securities to satisfy the fund's
distribution obligations, in which case the fund will forego the purchase of
additional income producing assets with these funds. Zero coupon U.S. government
securities include STRIPS and CUBES, which are issued by the U.S. Treasury as
component parts of U.S. Treasury bonds and represent scheduled interest and
principal payments on the bonds.
MUNICIPAL OBLIGATIONS
The fund may purchase municipal obligations when Pioneer believes that they
offer favorable rates of income or capital gain potential when compared to a
taxable investment. The term "municipal obligations" generally is understood to
include debt obligations issued by municipalities to obtain funds for various
public purposes, the interest on which is, in the opinion of bond counsel to the
issuer, excluded from gross income for federal income tax purposes. In addition,
if the proceeds from private activity bonds are used for the construction,
repair or improvement of privately operated industrial or commercial facilities,
the interest paid on such bonds may be excluded from gross income for federal
income tax purposes, although current federal tax laws place substantial
limitations on the size of these issues. The fund's distributions of any
interest it earns on municipal obligations will be taxable to shareholders as
ordinary income.
The two principal classifications of municipal obligations are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source, but not from the
general taxing power. Sizable investments in these obligations could involve an
increased risk to the fund should any of the related facilities experience
financial difficulties. Private activity bonds are in most cases revenue bonds
and do not generally carry the pledge of the credit of the issuing municipality.
There are, of course, variations in the security of municipal obligations, both
within a particular classification and between classifications.
The mortgage derivatives that the fund may invest in include interests in
collateralized mortgage obligations, real estate mortgage investment conduits,
stripped mortgage-backed securities.
MORTGAGE-BACKED SECURITIES
The fund may invest in mortgage pass-through certificates and multiple-class
pass-through securities, and mortgage derivative securities such as real estate
mortgage investment conduits ("REMIC") pass-through certificates, collateralized
mortgage obligations and stripped mortgage-backed securities ("SMBS"), interest
only mortgage-backed securities and principal only mortgage-backed securities
and other types of "mortgage-backed securities" that may be available in the
future. A mortgage-backed security is an obligation of the issuer backed by a
mortgage or pool of mortgages or a direct interest in an underlying
7
<PAGE>
pool of mortgages. Some mortgage-backed securities, such as collateralized
mortgage obligations (CMOs), make payments of both principal and interest at a
variety of intervals; others make semiannual interest payments at a
predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages including
those on commercial real estate or residential properties. Mortgage-backed
securities often have stated maturities of up to thirty years when they are
issued, depending upon the length of the mortgages underlying the securities. In
practice, however, unscheduled or early payments of principal and interest on
the underlying mortgages may make the securities' effective maturity shorter
than this, and the prevailing interest rates may be higher or lower than the
current yield of the fund's portfolio at the time the fund receives the payments
for reinvestment. Mortgage-backed securities may have less potential for capital
appreciation than comparable fixed income securities, due to the likelihood of
increased prepayments of mortgages as interest rates decline. If the fund buys
mortgage-backed securities at a premium, mortgage foreclosures and prepayments
of principal by mortgagors (which may be made at any time without penalty) may
result in some loss of the fund's principal investment to the extent of the
premium paid.
The value of mortgage-backed securities may also change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities markets as a whole. Non-governmental
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
governmental issues.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. Guaranteed mortgage pass-through
securities represent participation interests in pools of residential mortgage
loans and are issued by U.S. governmental or private lenders and guaranteed by
the U.S. government or one of its agencies or instrumentalities, including but
not limited to GNMA, FNMA and FHLMC. GNMA certificates are guaranteed by the
full faith and credit of the U.S. government for timely payment of principal and
interest on the certificates. FNMA certificates are guaranteed by FNMA, a
federally chartered and privately owned corporation, for full and timely payment
of principal and interest on the certificates. FHLMC certificates are guaranteed
by FHLMC, a corporate instrumentality of the U.S. government, for timely payment
of interest and the ultimate collection of all principal of the related mortgage
loans.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may,
in addition, be the originators and/or servicers of the underlying mortgage
loans as well as the guarantors of the mortgage-related securities. Because
there are no direct or indirect government or agency guarantees of payments in
pools created by such non-governmental issuers, they generally offer a higher
rate of interest than government and government-related pools. Timely payment of
interest and principal of these pools may be supported by insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers and the mortgage poolers. There can be no assurance
that the private insurers or guarantors can meet their obligations under the
insurance policies or guarantee arrangements.
Mortgage-related securities without insurance or guarantees may be purchased if
Pioneer determines that the securities meet the fund's quality standards.
Mortgage-related securities issued by certain private organizations may not be
readily marketable.
MULTIPLE-CLASS PASS-THROUGH SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS.
CMOs and REMIC pass-through or participation certificates may be issued by,
among others, U.S. government agencies and instrumentalities as well as private
issuers. REMICs are CMO vehicles that qualify for special tax treatment under
the Internal Revenue Code of 1986, as amended (the "Code") and invest in
mortgages principally secured by interests in real property and other
investments permitted by the Code.
8
<PAGE>
CMOs and REMIC certificates are issued in multiple classes and the
principal of and interest on the mortgage assets may be allocated among the
several classes of CMOs or REMIC certificates in various ways. Each class of
CMOs or REMIC certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Generally, interest is paid or accrues on all
classes of CMOs or REMIC certificates on a monthly basis.
Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates but also
may be collateralized by other mortgage assets such as whole loans or private
mortgage pass-through securities. Debt service on CMOs is provided from payments
of principal and interest on collateral of mortgaged assets and any reinvestment
income thereon.
STRIPPED MORTGAGE-BACKED SECURITIES. SMBS are multiple-class mortgage-backed
securities that are created when a U.S. government agency or a financial
institution separates the interest and principal components of a mortgage-backed
security and sells them as individual securities. The fund invests in SMBS that
are usually structured with two classes that receive different proportions of
interest and principal distributions on a pool of mortgage assets. A typical
SMBS will have one class receiving some of the interest and most of the
principal, while the other class will receive most of the interest and the
remaining principal. The holder of the "principal-only" security (PO) receives
the principal payments made by the underlying mortgage-backed security, while
the holder of the "interest-only" security (IO) receives interest payments from
the same underlying security. The prices of stripped mortgage-backed securities
may be particularly affected by changes in interest rates. As interest rates
fall, prepayment rates tend to increase, which tends to reduce prices of IOs and
increase prices of POs. Rising interest rates can have the opposite effect.
Although the market for these securities is increasingly liquid, Pioneer may
determine that certain stripped mortgage-backed securities issued by the U.S.
government, its agencies or instrumentalities are not readily marketable. If so,
these securities, together with privately-issued stripped mortgage-backed
securities, will be considered illiquid for purposes of the fund's limitation on
investments in illiquid securities. The yields and market risk of interest only
and principal only SMBS, respectively, may be more volatile than those of other
fixed income securities.
The fund also may invest in planned amortization class ("PAC") and target
amortization class ("TAC") CMO bonds which involve less exposure to prepayment,
extension and interest rate risks than other mortgage-backed securities,
provided that prepayment rates remain within expected prepayment ranges or
"collars." To the extent that the prepayment rates remain within these
prepayment ranges, the residual or support tranches of PAC and TAC CMOs assume
the extra prepayment, extension and interest rate risks associated with the
underlying mortgage assets.
RISK FACTORS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES. Investing in
mortgage-backed securities involves certain risks, including the failure of a
counterparty to meet its commitments, adverse interest rate changes and the
effects of prepayments on mortgage cash flows. In addition, investing in the
lowest tranche of CMOs and REMIC certificates involves risks similar to those
associated with investing in equity securities. However, due to adverse tax
consequences under current tax laws, the fund does not intend to acquire
"residual" interests in REMICs. Further, the yield characteristics of
mortgage-backed securities differ from those of traditional fixed income
securities. The major differences typically include more frequent interest and
principal payments (usually monthly), the adjustability of interest rates of the
underlying instrument, and the possibility that prepayments of principal may be
made substantially earlier than their final distribution dates.
Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. Both adjustable rate mortgage loans and fixed rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest
9
<PAGE>
rate environment. Under certain interest rate and prepayment rate
scenarios, the fund may fail to recoup fully its investment in mortgage-backed
securities notwithstanding any direct or indirect governmental, agency or other
guarantee. When the fund reinvests amounts representing payments and unscheduled
prepayments of principal, it may obtain a rate of interest that is lower than
the rate on existing adjustable rate mortgage pass-through securities. Thus,
mortgage-backed securities, and adjustable rate mortgage pass-through securities
in particular, may be less effective than other types of U.S. government
securities as a means of "locking in" interest rates.
STRUCTURED SECURITIES
The fund may invest in structured securities. The value of the principal and/or
interest on such securities is determined by reference to changes in the value
of specific currencies, interest rates, commodities, indices or other financial
indicators (the "Reference") or the relative change in two or more References.
The interest rate or the principal amount payable upon maturity or redemption
may be increased or decreased depending upon changes in the Reference. The terms
of the structured securities may provide in certain circumstances that no
principal is due at maturity and, therefor may result in a loss of the fund's
investment. Changes in the interest rate or principal payable at maturity may be
a multiple of the changes in the value of the Reference. Consequently,
structured securities may entail a greater degree of market risk than other
types of fixed income securities.
ASSET-BACKED SECURITIES
The fund may invest in asset-backed securities, which are securities that
represent a participation in, or are secured by and payable from, a stream of
payments generated by particular assets, most often a pool or pools of similar
assets (e.g., trade receivables). The credit quality of these securities depends
primarily upon the quality of the underlying assets and the level of credit
support and/or enhancement provided.
The underlying assets (e.g., loans) are subject to prepayments which shorten the
securities' weighted average maturity and may lower their return. If the credit
support or enhancement is exhausted, losses or delays in payment may result if
the required payments of principal and interest are not made. The value of these
securities also may change because of changes in the market's perception of the
creditworthiness of the servicing agent for the pool, the originator of the
pool, or the financial institution or trust providing the credit support or
enhancement.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The fund may purchase securities, including U.S. government securities, on a
when-issued basis or may purchase or sell securities for delayed delivery. In
such transactions, delivery of the securities occurs beyond the normal
settlement period, but no payment or delivery is made by the fund prior to the
actual delivery or payment by the other party to the transaction. The fund will
not earn income on these securities until delivered. The purchase of securities
on a when-issued or delayed delivery basis involves the risk that the value of
the securities purchased will decline prior to the settlement date. The sale of
securities for delayed delivery involves the risk that the prices available in
the market on the delivery date may be greater than those obtained in the sale
transaction. When-issued and delayed delivery transactions will be fully
collateralized by segregated liquid assets. See "Asset Segregation."
WARRANTS
The fund may invest in warrants, which are securities permitting, but not
obligating, their holder to subscribe for other securities. Warrants do not
carry with them the right to dividends or voting rights with respect to the
securities that they entitle their holders to purchase, and they do not
represent any rights in
10
<PAGE>
the assets of the issuer. As a result, an investment in warrants may be
considered more speculative than certain other types of investments. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities, and a warrant expires worthless if it is not
exercised on or prior to its expiration date.
PREFERRED SHARES
The fund may invest in preferred shares of beneficial interest of trust
instruments. Preferred shares are equity securities, but they have many
characteristics of fixed income securities, such as a fixed dividend payment
rate and/or a liquidity preference over the issuer's common shares. However,
because preferred shares are equity securities, they may be more susceptible to
risks traditionally associated with equity investments than the fund's fixed
income securities.
ILLIQUID SECURITIES
The fund will not invest more than 15% of its net assets in illiquid and other
securities that are not readily marketable. Repurchase agreements maturing in
more than seven days will be included for purposes of the foregoing limit.
Securities subject to restrictions on resale under the Securities Act of 1933,
as amended (the "1933 Act"), are considered illiquid unless they are eligible
for resale pursuant to Rule 144A or another exemption from the registration
requirements of the 1933 Act and are determined to be liquid by Pioneer. Pioneer
determines the liquidity of Rule 144A and other restricted securities according
to procedures adopted by the Board of Trustees. The Board of Trustees monitors
Pioneer's application of these guidelines and procedures. The inability of the
fund to dispose of illiquid investments readily or at reasonable prices could
impair the fund's ability to raise cash for redemptions or other purposes. If
the fund sold illiquid securities other than pursuant to an exception from
registration under the 1933 Act such as rule 144A, it may be deemed to be acting
as an underwriter and subject to liability under the 1933 Act.
REAL ESTATE INVESTMENT TRUSTS ("REITS") AND ASSOCIATED RISK FACTORS
REITs are pooled investment vehicles which invest primarily in income producing
real estate or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs or a combination of equity and
mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling properties that have appreciated
in value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. REITs are
not taxed on income distributed to shareholders provided they comply with the
applicable requirements of the Code. Debt securities issued by REITs, for the
most part, are general and unsecured obligations and are subject to risks
associated with REITs.
Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general. An equity REIT
may be affected by changes in the value of the underlying properties owned by
the REIT. A mortgage REIT may be affected by changes in interest rates and the
ability of the issuers of its portfolio mortgages to repay their obligations.
REITs are dependent upon the skills of their managers and are not diversified.
REITs are generally dependent upon maintaining cash flows to repay borrowings
and to make distributions to shareholders and are subject to the risk of default
by lessees or borrowers. REITs whose underlying assets are concentrated in
properties used by a particular industry, such as health care, are also subject
to risks associated with such industry.
REITs (especially mortgage REITs) are also subject to interest rate risks. When
interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest
11
<PAGE>
rates rise, the value of a REIT's investment in fixed rate obligations can
be expected to decline. If the REIT invests in adjustable rate mortgage loans
the interest rates on which are reset periodically, yields on a REIT's
investments in such loans will gradually align themselves to reflect changes in
market interest rates. This causes the value of such investments to fluctuate
less dramatically in response to interest rate fluctuations than would
investments in fixed rate obligations.
REITs may have limited financial resources, may trade less frequently and in a
limited volume and may be subject to more abrupt or erratic price movements than
larger company securities. Historically REITs have been more volatile in price
than the larger capitalization stocks included in Standard & Poor's 500 Stock
Index (the "S&P 500").
OTHER INVESTMENT COMPANIES
The fund may invest in the securities of other investment companies to the
extent that such investments are consistent with the fund's investment objective
and policies and permissible under the Investment Company Act of 1940, as
amended (the "1940 Act"). Under the 1940 Act, the fund may not acquire the
securities of other domestic or foreign investment companies if, as a result,
(i) more than 10% of the fund's total assets would be invested in securities of
other investment companies, (ii) such purchase would result in more than 3% of
the total outstanding voting securities of any one investment company being held
by the fund, or (iii) more than 5% of the fund's total assets would be invested
in any one investment company. These limitations do not apply to the purchase of
shares of any investment company in connection with a merger, consolidation,
reorganization or acquisition of substantially all the assets of another
investment company. The fund will not invest in other investment companies for
which Pioneer or any of its affiliates act as an investment adviser or
distributor.
The fund, as a holder of the securities of other investment companies, will bear
its pro rata portion of the other investment companies' expenses, including
advisory fees. These expenses are in addition to the direct expenses of the
fund's own operations.
REPURCHASE AGREEMENTS
The fund may enter into repurchase agreements with broker-dealers, member banks
of the Federal Reserve System and other financial institutions. Repurchase
agreements are arrangements under which the fund purchases securities and the
seller agrees to repurchase the securities within a specific time and at a
specific price. The repurchase price is generally higher than the fund's
purchase price, with the difference being income to the fund. The Board of
Trustees reviews and monitors the creditworthiness of any institution which
enters into a repurchase agreement with the fund. The counterparty's obligations
under the repurchase agreement are collateralized with U.S. Treasury and/or
agency obligations with a market value of not less than 100% of the obligations,
valued daily. Collateral is held by the fund's custodian in a segregated,
safekeeping account for the benefit of the fund. Repurchase agreements afford
the fund an opportunity to earn income on temporarily available cash at low
risk. In the event of commencement of bankruptcy or insolvency proceedings with
respect to the seller of the security before repurchase of the security under a
repurchase agreement, the fund may encounter delay and incur costs before being
able to sell the security. Such a delay may involve loss of interest or a
decline in price of the security. If the court characterizes the transaction as
a loan and the fund has not perfected a security interest in the security, the
fund may be required to return the security to the seller's estate and be
treated as an unsecured creditor of the seller. As an unsecured creditor, the
fund would be at risk of losing some or all of the principal and interest
involved in the transaction.
12
<PAGE>
SHORT SALES AGAINST THE BOX
The fund may sell securities "short against the box." A short sale involves the
fund borrowing securities from a broker and selling the borrowed securities. The
fund has an obligation to return securities identical to the borrowed securities
to the broker. In a short sale against the box, the fund at all times owns an
equal amount of the security sold short or securities convertible into or
exchangeable for, with or without payment of additional consideration, an equal
amount of the security sold short. The fund intends to use short sales against
the box to hedge. For example, when the fund believes that the price of a
current portfolio security may decline, the fund may use a short sale against
the box to lock in a sale price for a security rather than selling the security
immediately. In such a case, any future losses in the fund's long position
should be offset by a gain in the short position and, conversely, any gain in
the long position should be reduced by a loss in the short position.
If the fund effects a short sale against the box at a time when it has an
unrealized gain on the security, it may be required to recognize that gain as if
it had actually sold the security (a "constructive sale") on the date it effects
the short sale. However, such constructive sale treatment may not apply if the
fund closes out the short sale with securities other than the appreciated
securities held at the time of the short sale provided that certain other
conditions are satisfied. Uncertainty regarding certain tax consequences of
effecting short sales may limit the extent to which the fund may make short
sales against the box.
ASSET SEGREGATION
The 1940 Act requires that the fund segregate assets in connection with certain
types of transactions that may have the effect of leveraging the fund's
portfolio. If the fund enters into a transaction requiring segregation, such as
a forward commitment, the custodian or Pioneer will segregate liquid assets in
an amount required to comply with the 1940 Act. Such segregated assets will be
valued at market daily. If the aggregate value of such segregated assets
declines below the aggregate value required to satisfy the 1940 Act, additional
liquid assets will be segregated.
PORTFOLIO TURNOVER
Although it is the policy of the fund not to engage in trading for short-term
profits, portfolio turnover rate is not considered a limiting factor in the
execution of investment decisions for the fund and the fund's policy may result
in the fund having a high level of portfolio turnover. See Appendix A for the
fund's annual portfolio turnover rate.
FOREIGN CURRENCY TRANSACTIONS
The fund may engage in foreign currency transactions. These transactions may be
conducted at the prevailing spot rate for purchasing or selling currency in the
foreign exchange market. The fund also has authority to enter into forward
foreign currency exchange contracts involving currencies of the different
countries in which the fund invests as a hedge against possible variations in
the foreign exchange rates between these currencies and the U.S. dollar. This is
accomplished through contractual agreements to purchase or sell a specified
currency at a specified future date and price set at the time of the contract.
Transaction hedging is the purchase or sale of forward foreign currency
contracts with respect to specific receivables or payables of the fund, accrued
in connection with the purchase and sale of its portfolio securities quoted in
foreign currencies. Portfolio hedging is the use of forward foreign currency
contracts to offset portfolio security positions denominated or quoted in such
foreign currencies. There is no guarantee that the fund will be engaged in
hedging activities when adverse exchange rate movements
13
<PAGE>
occur. The fund will not attempt to hedge all of its foreign portfolio
positions and will enter into such transactions only to the extent, if any,
deemed appropriate by Pioneer.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also limit the opportunity
for gain if the value of the hedged currency should rise. Moreover, it may not
be possible for the fund to hedge against a devaluation that is so generally
anticipated that the fund is not able to contract to sell the currency at a
price above the devaluation level it anticipates.
The cost to the fund of engaging in foreign currency transactions varies with
such factors as the currency involved, the size of the contract, the length of
the contract period, differences in interest rates between the two currencies
and the market conditions then prevailing. Since transactions in foreign
currency and forward contracts are usually conducted on a principal basis, no
fees or commissions are involved. The fund may close out a forward position in a
currency by selling the forward contract or by entering into an offsetting
forward contract.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of the fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which the fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of the fund's foreign
assets.
While the fund will enter into forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. While
the fund may benefit from such transactions, unanticipated changes in currency
prices may result in a poorer overall performance for the fund than if it had
not engaged in any such transactions. Moreover, there may be imperfect
correlation between the fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by the
fund. Such imperfect correlation may cause the fund to sustain losses which will
prevent the fund from achieving a complete hedge or expose the fund to risk of
foreign exchange loss.
Over-the-counter markets for trading foreign forward currency contracts offer
less protection against defaults than is available when trading in currency
instruments on an exchange. Since a forward foreign currency exchange contract
is not guaranteed by an exchange or clearinghouse, a default on the contract
would deprive the fund of unrealized profits or force the fund to cover its
commitments for purchase or resale, if any, at the current market price.
If the fund enters into a forward contract to purchase foreign currency, the
custodian or Pioneer will segregate liquid assets. See "Asset Segregation."
OPTIONS ON FOREIGN CURRENCIES
The fund may purchase and write options on foreign currencies for hedging
purposes in a manner similar to that of transactions in forward contracts. For
example, a decline in the dollar value of a foreign currency in which portfolio
securities are quoted or denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In an
attempt to protect against such decreases in the value of portfolio securities,
the fund may purchase put options on the foreign
14
<PAGE>
currency. If the value of the currency declines, the fund will have the
right to sell such currency for a fixed amount of dollars which exceeds the
market value of such currency. This would result in a gain that may offset, in
whole or in part, the negative effect of currency depreciation on the value of
the fund's securities quoted or denominated in that currency.
Conversely, if a rise in the dollar value of a currency is projected for those
securities to be acquired, thereby increasing the cost of such securities, the
fund may purchase call options on such currency. If the value of such currency
increases, the purchase of such call options would enable the fund to purchase
currency for a fixed amount of dollars which is less than the market value of
such currency. Such a purchase would result in a gain that may offset, at least
partially, the effect of any currency related increase in the price of
securities the fund intends to acquire. As in the case of other types of options
transactions, however, the benefit the fund derives from purchasing foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, if currency exchange rates do not move in the
direction or to the extent anticipated, the fund could sustain losses on
transactions in foreign currency options which would deprive it of a portion or
all of the benefits of advantageous changes in such rates.
The fund may also write options on foreign currencies for hedging purposes. For
example, if the fund anticipated a decline in the dollar value of securities
quoted or denominated in a foreign currency because of declining exchange rates,
it could, instead of purchasing a put option, write a covered call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the decrease in value of portfolio securities will be
partially offset by the amount of the premium received by the fund.
Similarly, the fund could write a put option on the relevant currency, instead
of purchasing a call option, to hedge against an anticipated increase in the
dollar cost of securities to be acquired. If exchange rates move in the manner
projected, the put option will expire unexercised and allow the fund to offset
such increased cost up to the amount of the premium. However, as in the case of
other types of options transactions, the writing of a foreign currency option
will constitute only a partial hedge up to the amount of the premium, only if
rates move in the expected direction. If unanticipated exchange rate
fluctuations occur, the option may be exercised and the fund would be required
to purchase or sell the underlying currency at a loss which may not be fully
offset by the amount of the premium. As a result of writing options on foreign
currencies, the fund also may be required to forego all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
currency exchange rates.
A call option written on foreign currency by the fund is "covered" if the fund
owns the underlying foreign currency subject to the call, or if it has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration. A call option is also covered if the fund holds a call on
the same foreign currency for the same principal amount as the call written
where the exercise price of the call held is (a) equal to or less than the
exercise price of the call written or (b) greater than the exercise price of the
call written if the amount of the difference is maintained by the fund in cash
or liquid securities. See "Asset Segregation."
The fund may close out its position in a currency option by either selling the
option it has purchased or entering into an offsetting option. An
exchange-traded options position may be closed out only on an options exchange
which provides a secondary market for an option of the same series. Although the
fund will generally purchase or write only those options for which there appears
to be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option, or at any particular
time. For some options no secondary market on an exchange may exist. In such
event, it might not be possible to effect closing transactions in particular
options, with the result that the fund would have to exercise its options in
order to realize any profit and would incur transaction costs
15
<PAGE>
upon the sale of underlying currencies pursuant to the exercise of put
options. If the fund as a covered call option writer is unable to effect a
closing purchase transaction in a secondary market, it will not be able to sell
the underlying currency (or security quoted or denominated in that currency)
until the option expires or it delivers the underlying currency upon exercise.
The fund may purchase and write over-the-counter options to the extent
consistent with its limitation on investments in illiquid securities. Trading in
over-the-counter options is subject to the risk that the other party will be
unable or unwilling to close out options purchased or written by the fund.
OPTIONS ON SECURITIES AND SECURITIES INDICES
The fund may purchase put and call options on any security in which it may
invest or options on any securities index based on securities in which it may
invest. The fund would also be able to enter into closing sale transactions in
order to realize gains or minimize losses on options it has purchased.
WRITING CALL AND PUT OPTIONS ON SECURITIES. A call option written by the fund
obligates the fund to sell specified securities to the holder of the option at a
specified price if the option is exercised at any time before the expiration
date. All call options written by the fund are covered, which means that the
fund will own the securities subject to the options as long as the options are
outstanding, or the fund will use the other methods described below. The fund's
purpose in writing covered call options is to realize greater income than would
be realized on portfolio securities transactions alone. However, the fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by the fund would obligate the fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. All put options written by the
fund would be covered, which means that the fund would have segregated assets
with a value at least equal to the exercise price of the put option. The purpose
of writing such options is to generate additional income for the fund. However,
in return for the option premium, the fund accepts the risk that it may be
required to purchase the underlying security at a price in excess of its market
value at the time of purchase.
Call and put options written by the fund will also be considered to be covered
to the extent that the fund's liabilities under such options are wholly or
partially offset by its rights under call and put options purchased by the fund.
In addition, a written call option or put may be covered by entering into an
offsetting forward contract and/or by purchasing an offsetting option or any
other option which, by virtue of its exercise price or otherwise, reduces the
fund's net exposure on its written option position.
WRITING CALL AND PUT OPTIONS ON SECURITIES INDICES. The fund may also write
(sell) covered call and put options on any securities index composed of
securities in which it may invest. Options on securities indices are similar to
options on securities, except that the exercise of securities index options
requires cash payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segments of the securities market
rather than price fluctuations in a single security.
The fund may cover call options on a securities index by owning securities whose
price changes are expected to be similar to those of the underlying index, or by
having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional consideration if cash in such
amount is segregated) upon conversion or exchange of other securities in its
portfolio. The fund may cover call and put options on a securities index by
segregated assets with a value equal to the exercise price.
16
<PAGE>
PURCHASING CALL AND PUT OPTIONS. The fund would normally purchase call options
in anticipation of an increase in the market value of securities of the type in
which it may invest. The purchase of a call option would entitle the fund, in
return for the premium paid, to purchase specified securities at a specified
price during the option period. The fund would ordinarily realize a gain if,
during the option period, the value of such securities exceeded the sum of the
exercise price, the premium paid and transaction costs; otherwise the fund would
realize either no gain or a loss on the purchase of the call option.
The fund would normally purchase put options in anticipation of a decline in the
market value of securities in its portfolio ("protective puts") or in securities
in which it may invest. The purchase of a put option would entitle the fund, in
exchange for the premium paid, to sell specified securities at a specified price
during the option period. The purchase of protective puts is designed to offset
or hedge against a decline in the market value of the fund's securities. Put
options may also be purchased by the fund for the purpose of affirmatively
benefiting from a decline in the price of securities which it does not own. The
fund would ordinarily realize a gain if, during the option period, the value of
the underlying securities decreased below the exercise price sufficiently to
more than cover the premium and transaction costs; otherwise the fund would
realize either no gain or a loss on the purchase of the put option. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of the underlying portfolio securities.
The fund may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
RISKS OF TRADING OPTIONS. There is no assurance that a liquid secondary market
on an options exchange will exist for any particular exchange-traded option, or
at any particular time. If the fund is unable to effect a closing purchase
transaction with respect to covered options it has written, the fund will not be
able to sell the underlying securities or dispose of its segregated assets until
the options expire or are exercised. Similarly, if the fund is unable to effect
a closing sale transaction with respect to options it has purchased, it will
have to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation (the "OCC")
may not at all times be adequate to handle current trading volume; or (vi) one
or more exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on that exchange (or
in that class or series of options) would cease to exist, although outstanding
options on that exchange, if any, that had been issued by the OCC as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms.
The fund may purchase and sell both options that are traded on U.S. and foreign
exchanges and options traded over the counter with broker-dealers who make
markets in these options. The ability to terminate over-the-counter options is
more limited than with exchange-traded options and may involve the risk that
broker-dealers participating in such transactions will not fulfill their
obligations. Until such time as the staff of the Securities and Exchange
Commission (the "SEC") changes its position, the fund will treat purchased
over-the-counter options and all assets used to cover written over-the-counter
options as illiquid securities, except that with respect to options written with
primary dealers in U.S. government
17
<PAGE>
securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to the formula.
Transactions by the fund in options on securities and indices will be subject to
limitations established by each of the exchanges, boards of trade or other
trading facilities governing the maximum number of options in each class which
may be written or purchased by a single investor or group of investors acting in
concert. Thus, the number of options which the fund may write or purchase may be
affected by options written or purchased by other investment advisory clients of
Pioneer. An exchange, board of trade or other trading facility may order the
liquidations of positions found to be in excess of these limits, and it may
impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging purposes depends in part on Pioneer's ability to predict future
price fluctuations and the degree of correlation between the options and
securities markets.
The hours of trading for options may not conform to the hours during which the
underlying securities are traded. To the extent that the options markets close
before the markets for the underlying securities, significant price movements
can take place in the underlying markets that cannot be reflected in the options
markets.
In addition to the risks of imperfect correlation between the fund's portfolio
and the index underlying the option, the purchase of securities index options
involves the risk that the premium and transaction costs paid by the fund in
purchasing an option will be lost. This could occur as a result of unanticipated
movements in the price of the securities comprising the securities index on
which the option is based.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To hedge against changes in securities prices or currency exchange rates or to
seek to increase total return, the fund may purchase and sell various kinds of
futures contracts, and purchase and write (sell) call and put options on any of
such futures contracts. The fund may also enter into closing purchase and sale
transactions with respect to any of such contracts and options. The futures
contracts may be based on various securities (such as U.S. government
securities), securities indices, foreign currencies and other financial
instruments and indices. The fund will engage in futures and related options
transactions for bona fide hedging and non-hedging purposes as described below.
All futures contracts entered into by the fund are traded on U.S. exchanges or
boards of trade that are licensed and regulated by the Commodity Futures Trading
Commission (the "CFTC") or on foreign exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, the fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, the fund, through the purchase of futures
contracts, can attempt to secure better rates or prices than might later be
available in the market when it effects anticipated purchases. Similarly, the
fund can sell futures contracts on a specified currency to protect against a
decline in the value of such currency and a decline in the value of its
portfolio securities which are denominated in such currency. The fund can
purchase futures contracts on a foreign currency to establish the price in U.S.
dollars of a security denominated in such currency that the fund has acquired or
expects to acquire.
18
<PAGE>
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities or currency will usually be
liquidated in this manner, the fund may instead make, or take, delivery of the
underlying securities or currency whenever it appears economically advantageous
to do so. A clearing corporation associated with the exchange on which futures
on securities or currency are traded guarantees that, if still open, the sale or
purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to establish
with more certainty the effective price, rate of return and currency exchange
rate on portfolio securities and securities that the fund owns or proposes to
acquire. The fund may, for example, take a "short" position in the futures
market by selling futures contracts in order to hedge against an anticipated
rise in interest rates or a decline in market prices or foreign currency rates
that would adversely affect the value of the fund's portfolio securities. Such
futures contracts may include contracts for the future delivery of securities
held by the fund or securities with characteristics similar to those of the
fund's portfolio securities. Similarly, the fund may sell futures contracts in a
foreign currency in which its portfolio securities are denominated or in one
currency to hedge against fluctuations in the value of securities denominated in
a different currency if there is an established historical pattern of
correlation between the two currencies. If, in the opinion of Pioneer, there is
a sufficient degree of correlation between price trends for the fund's portfolio
securities and futures contracts based on other financial instruments,
securities indices or other indices, the fund may also enter into such futures
contracts as part of its hedging strategies. Although under some circumstances
prices of securities in the fund's portfolio may be more or less volatile than
prices of such futures contracts, Pioneer will attempt to estimate the extent of
this volatility difference based on historical patterns and compensate for any
such differential by having the fund enter into a greater or lesser number of
futures contracts or by attempting to achieve only a partial hedge against price
changes affecting the fund's portfolio securities. When hedging of this
character is successful, any depreciation in the value of portfolio securities
will be substantially offset by appreciation in the value of the futures
position. On the other hand, any unanticipated appreciation in the value of the
fund's portfolio securities would be substantially offset by a decline in the
value of the futures position.
On other occasions, the fund may take a "long" position by purchasing futures
contracts. This may be done, for example, when the fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices or rates that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on futures
contracts will give the fund the right (but not the obligation) for a specified
price to sell or to purchase, respectively, the underlying futures contract at
any time during the option period. As the purchaser of an option on a futures
contract, the fund obtains the benefit of the futures position if prices move in
a favorable direction but limits its risk of loss in the event of an unfavorable
price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the fund's assets. By writing a call
option, the fund becomes obligated, in exchange for the premium, to sell a
futures contract (if the option is exercised), which may have a value higher
than the exercise price. Conversely, the writing of a put option on a futures
contract generates a premium which may partially offset an increase in the price
of securities that the fund intends to purchase. However, the fund becomes
obligated to purchase a futures contract (if the option is exercised) which may
have a value lower than the exercise price. Thus, the loss incurred by the fund
in writing options on futures is potentially unlimited and may exceed the amount
of the premium received. The fund will incur transaction costs in connection
with the writing of options on futures.
19
<PAGE>
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series. There
is no guarantee that such closing transactions can be effected. The fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. The fund will engage in futures and related options
transactions only for bona fide hedging or non-hedging purposes in accordance
with CFTC regulations which permit principals of an investment company
registered under the 1940 Act to engage in such transactions without registering
as commodity pool operators. The fund will determine that the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the fund or
which the fund expects to purchase. Except as stated below, the fund's futures
transactions will be entered into for traditional hedging purposes--i.e.,
futures contracts will be sold to protect against a decline in the price of
securities (or the currency in which they are denominated) that the fund owns,
or futures contracts will be purchased to protect the fund against an increase
in the price of securities (or the currency in which they are denominated) it
intends to purchase. As evidence of this hedging intent, the fund expects that
on 75% or more of the occasions on which it takes a long futures or option
position (involving the purchase of futures contracts), the fund will have
purchased, or will be in the process of purchasing, equivalent amounts of
related securities or assets denominated in the related currency in the cash
market at the time when the futures or option position is closed out. However,
in particular cases, when it is economically advantageous for the fund to do so,
a long futures position may be terminated or an option may expire without the
corresponding purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging definition, a
CFTC regulation permits the fund to elect to comply with a different test, under
which the sum of the amounts of initial margin deposits on the fund's existing
non-hedging futures contracts and premiums paid for options on futures entered
into for non-hedging purposes (net of the amount the positions are "in the
money") would not exceed 5% of the market value of the fund's total assets. The
fund will engage in transactions in futures contracts and related options only
to the extent such transactions are consistent with the requirements of the Code
for maintaining its qualification as a regulated investment company for federal
income tax purposes.
Futures contracts and related options involve brokerage costs, require margin
deposits and, in the case of contracts and options obligating the fund to
purchase securities or currencies, require the fund to segregate assets to cover
such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while the fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for the fund than if it had not
entered into any futures contracts or options transactions. In the event of an
imperfect correlation between a futures position and a portfolio position which
is intended to be protected, the desired protection may not be obtained and the
fund may be exposed to risk of loss. It is not possible to hedge fully or
perfectly against the effect of currency fluctuations on the value of foreign
securities because currency movements impact the value of different securities
in differing degrees.
LENDING OF PORTFOLIO SECURITIES
The fund may lend portfolio securities to member firms of the New York Stock
Exchange (the "Exchange") under agreements which require that the loans be
secured continuously by collateral in cash, cash equivalents or U.S. Treasury
bills maintained on a current basis at an amount at least equal to the
20
<PAGE>
market value of the securities loaned. The fund continues to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned as well as the benefit of an increase and the detriment of any decrease
in the market value of the securities loaned and would also receive compensation
based on investment of the collateral. The fund would not, however, have the
right to vote any securities having voting rights during the existence of the
loan, but would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of consent on a
material matter affecting the investment.
As with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. The fund will lend portfolio securities only to firms that have
been approved in advance by the Board of Trustees, which will monitor the
creditworthiness of any such firms. At no time would the value of the securities
loaned exceed 33 1/3% of the value of the fund's total assets.
LOAN PARTICIPATIONS
The fund may invest a portion of its assets in loan participations
("Participations") and other direct claims against a borrower. By purchasing a
Participation, the fund acquires some or all of the interest of a bank or other
lending institution in a loan to a corporate or government borrower. The
Participations typically will result in the fund having a contractual
relationship only with the lender not the borrower. The fund will have the right
to receive payments of principal, interest and any fees to which it is entitled
only from the lender selling the Participation and only upon receipt by the
lender of the payments from the borrower. Many such loans are secured, although
some may be unsecured. Such loans may be in default at the time of purchase.
Loans that are fully secured offer a fund more protection than an unsecured loan
in the event of non-payment of scheduled interest or principal. However, there
is no assurance that the liquidation of collateral from a secured loan would
satisfy the corporate borrower's obligation, or that the collateral can be
liquidated.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS
The fund may invest in loans and other direct debt instruments owed by a
borrower to another party and may also from time to time make loans. These
instruments represent amounts owed to lenders or lending syndicates (loans and
loan participations) or to other parties. Direct debt instruments may involve a
risk of loss in case of default or insolvency of the borrower and may offer less
legal protection to the fund in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. The markets in loans are not regulated by
federal securities laws or the SEC.
MORTGAGE DOLLAR ROLLS
The fund may enter into mortgage "dollar rolls" in which the fund sells
securities for delivery in the current month and simultaneously contracts with
the same counterparty to repurchase similar (same type, coupon and maturity),
but not identical securities on a specified future date. During the roll period,
the fund loses the right to receive principal and interest paid on the
securities sold. However, the fund would benefit to the extent of any difference
between the price received for the securities sold and the lower forward price
for the future purchase (often referred to as the "drop") or fee income plus the
interest earned on the cash proceeds of the securities sold until the settlement
date of the forward purchase. Unless such benefits exceed the income, capital
appreciation and gain or loss due to mortgage prepayments that would have been
realized on the securities sold as part of the mortgage dollar roll, the use of
this technique will diminish the investment performance of the fund compared
with what such performance would have been without the use of mortgage dollar
rolls. All cash proceeds will be invested in
21
<PAGE>
instruments that are permissible investments for the fund. The fund will
hold and maintain in a segregated account until the settlement date cash or
liquid, high grade debt securities in an amount equal to its forward purchase
price.
For financial reporting and tax purposes, the fund treats mortgage dollar rolls
as two separate transactions; one involving the purchase of a security and a
separate transaction involving a sale. The fund does not currently intend to
enter into mortgage dollar rolls that are accounted for as financings.
Mortgage dollar rolls involve certain risks including the following: if the
broker-dealer to whom the fund sells the security becomes insolvent, the fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which the fund is
required to repurchase may be worth less than an instrument which the fund
originally held. Successful use of mortgage dollar rolls will depend upon
Pioneer's ability to manage its interest rate and mortgage prepayments exposure.
For these reasons, there is no assurance that mortgage dollar rolls can be
successfully employed.
MONEY MARKET INSTRUMENTS. The fund may invest in short term money market
instruments including commercial bank obligations and commercial paper. These
instruments may be denominated in both U.S. and non-U.S. currency. The fund's
investment in commercial bank obligations include certificates of deposit
("CDs"), time deposits ("TDs") and bankers' acceptances. Obligations of foreign
branches of U.S. banks and of foreign banks may be general obligations of the
parent bank in addition to the issuing bank, or may be limited by the terms of a
specific obligation and by government regulation. As with investment in non-U.S.
securities in general, investments in the obligations of foreign branches of
U.S. banks and of foreign banks may subject the fund to investment risks that
are different in some respects from those of investments in obligations of
domestic issuers.
The fund's investments in commercial paper consist of short-term (usually from 1
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. The fund may also invest in variable amount
master demand notes (which is a type of commercial paper) which represents a
direct borrowing arrangement involving periodically fluctuating rates of
interest under a letter agreement between a commercial paper issuer and an
institutional lender, pursuant to which the lender may determine to invest
varying amounts. Transfer of such notes is usually restricted by the issuer, and
there is no secondary trading market for such notes. To the extent the fund
invests in master demand notes, these investments will be included in the fund's
limitation on illiquid securities.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS. The fund has adopted certain investment
restrictions which, along with the fund's investment objective, may not be
changed without the affirmative vote of the holders of a "majority of the
outstanding voting securities" (as defined in the 1940 Act) of the fund.
Statements in italics are not part of the restriction. For this purpose, a
majority of the outstanding shares of the fund means the vote of the lesser of:
(i) 67% or more of the shares represented at a meeting, if the holders of more
than 50% of the outstanding shares are present in person or by proxy, or
(ii) more than 50% of the outstanding shares of the fund.
The fund may not:
22
<PAGE>
(1) Issue senior securities, except as permitted by the 1940 Act and the rules
and interpretive positions of the SEC thereunder. SENIOR SECURITIES THAT THE
FUND MAY ISSUE IN ACCORDANCE WITH THE 1940 ACT INCLUDE BORROWING, FUTURES,
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD FOREIGN CURRENCY
EXCHANGE TRANSACTIONS.
(2) Borrow money, except the fund may: (a) borrow from banks or through reverse
repurchase agreements in an amount up to 33 1/3% of the fund's total assets
(including the amount borrowed); (b) to the extent permitted by applicable law,
borrow up to an additional 5% of the fund's assets for temporary purposes; (c)
obtain such short-term credits as are necessary for the clearance of portfolio
transactions; (d) the fund may purchase securities on margin to the extent
permitted by applicable law; and (e) engage in transactions in mortgage dollar
rolls that are accounted for as financings.
(3) Invest in real estate, except that the fund may invest in securities of
issuers that invest in real estate or interests therein, securities that are
secured by real estate or interests therein, securities of real estate
investment trusts and mortgage-backed securities.
(4) Make loans, except by the purchase of debt obligations, by entering into
repurchase agreements or through the lending of portfolio securities.
(5) Invest in commodities or commodity contracts, except that the fund may
invest in currency instruments and contracts and financial instruments and
contracts that might be deemed to be commodities and commodity contracts. A
FUTURES CONTRACT, FOR EXAMPLE, MAY BE DEEMED TO BE A COMMODITY CONTRACT.
(6) Act as an underwriter, except as it may be deemed to be an underwriter in a
sale of restricted securities held in its portfolio.
It is the fundamental policy of the fund not to concentrate its investments in
securities of companies in any particular industry. In the opinion of the SEC,
investments are concentrated in a particular industry if such investments
aggregate 25% or more of the fund's total assets. The fund's policy does not
apply to investments in U.S. government securities. Although the fund is
classified as non-diversified for purposes of the 1940 Act, the fund will comply
with the diversification requirements of the Code applicable to regulated
investment companies.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS. The following restriction has been
designated as non-fundamental and may be changed by a vote of the fund's Board
of Trustees without approval of shareholders.
The fund may not:
(a) Purchase securities while borrowings are in excess of 5% of total assets.
3. MANAGEMENT OF THE FUND
The fund's Board of Trustees provides broad supervision over the affairs of the
fund. The officers of the fund are responsible for the fund's operations. The
Trustees and executive officers of the fund are listed below, together with
their principal occupations during the past five years. An asterisk indicates
those Trustees who are interested persons of the fund within the meaning of the
1940 Act.
23
<PAGE>
JOHN F. COGAN, JR.*, CHAIRMAN OF THE BOARD, PRESIDENT AND TRUSTEE,
DOB: JUNE 1926
President, Chief Executive Officer and a Director of The Pioneer Group,
Inc. ("PGI"); Chairman and a Director of Pioneer, Pioneer Funds Distributor,
Inc. ("PFD"), Pioneer Goldfields Limited, Teberebie Goldfields Limited, Closed
Joint-Stock Company "Amgun-Forest," Closed Joint-Stock Company "Udinskoye" and
Closed Joint-Stock Company "Tas-Yurjah" Mining Company; Director of Pioneer Real
Estate Advisors, Inc. ("PREA"), Pioneer Forest, Inc., Pioneer Management
(Ireland) Ltd. ("PMIL"), Pioneer First Investment Fund and Closed Joint-Stock
Company "Forest-Starma"; President and Director of Pioneer Metals and
Technology, Inc. ("PMT"), Pioneer International Corp. ("PIntl"), Pioneer First
Russia, Inc. and Pioneer Omega, Inc. ("Pioneer Omega"); Chairman of the
Supervisory Board of Pioneer Fonds Marketing, GmbH, Pioneer First Polish
Investment Fund Joint Stock Company, S.A. ("Pioneer First Polish") and Pioneer
Czech Investment Company, A.S. ("Pioneer Czech"); Member of the Supervisory
Board of Pioneer Universal Pension Fund Company; Chairman, President and Trustee
of all of the Pioneer mutual funds; Director of Pioneer Global Equity Fund Plc,
Pioneer Global Bond Fund Plc, Pioneer Euro Reserve Fund Plc, Pioneer European
Equity Fund Plc, Pioneer Emerging Europe Fund Plc, Pioneer US Real Estate Fund
Plc, Pioneer U.S. Growth Fund Plc, Pioneer Diversified Income Fund Plc and
Pioneer America Fund Plc (collectively, the "Irish Funds"); and Partner, Hale
and Dorr LLP (counsel to PGI and the fund).
MARY K. BUSH, TRUSTEE, DOB: APRIL 1948
4201 CATHEDRAL AVENUE, NW, WASHINGTON, DC 20016
President, Bush & Co. (international financial advisory firm); Director and/or
Trustee of Mortgage Guaranty Insurance Corporation, Novecon Management Company,
Hoover Institution, Folger Shakespeare Library, March of Dimes, Project 2000,
Inc. (not-for-profit educational organization), Wilberforce University and
Texaco, Inc.; Advisory Board Member, Washington Mutual Investors Fund
(registered investment company); and Trustee of all of the Pioneer mutual funds,
except Pioneer Variable Contracts Trust.
RICHARD H. EGDAHL, M.D., TRUSTEE, DOB: DECEMBER 1926
BOSTON UNIVERSITY HEALTH POLICY INSTITUTE, 53 BAY STATE ROAD, BOSTON, MA 02215
Alexander Graham Bell Professor of Health Care Entrepreneurship, Boston
University; Professor of Management, Boston University School of Management;
Professor of Public Health, Boston University School of Public Health; Professor
of Surgery, Boston University School of Medicine; University Professor, Boston
University; Director, Boston University Health Policy Institute, Boston
University Program for Health Care Entrepreneurship, CORE (management of
workers' compensation and disability costs - Nasdaq National Market), and
WellSpace (provider of complementary health care); Trustee, Boston Medical
Center; Honorary Trustee, Franciscan Children's Hospital; and Trustee of all of
the Pioneer mutual funds.
MARGARET B.W. GRAHAM, TRUSTEE, DOB: MAY 1947
THE KEEP, P.O. BOX 110, LITTLE DEER ISLE, ME 04650
Founding Director, The Winthrop Group, Inc. (consulting firm); Manager of
Research Operations, Xerox Palo Alto Research Center, from 1991 to 1994;
formerly Professor of Operations Management and Management of Technology and
Associate Dean, Boston University School of Management; and Trustee of all of
the Pioneer mutual funds, except Pioneer Variable Contracts Trust.
JOHN W. KENDRICK, TRUSTEE, DOB: JULY 1917
6363 WATERWAY DRIVE, FALLS CHURCH, VA 22044
Professor Emeritus, George Washington University; Director, American
Productivity and Quality Center; Adjunct Scholar, American Enterprise Institute;
Economic Consultant; and Trustee of all of the Pioneer mutual funds, except
Pioneer Variable Contracts Trust.
24
<PAGE>
MARGUERITE A. PIRET, TRUSTEE, DOB: MAY 1948
ONE BOSTON PLACE, 26TH FLOOR, BOSTON, MA 02108
President, Newbury, Piret & Company, Inc. (merchant banking firm); Trustee
of Boston Medical Center; Member of the Board of Governors of the Investment
Company Institute; Director, Organogenesis Inc. (tissue engineering company);
and Trustee of all of the Pioneer mutual funds.
DAVID D. TRIPPLE*, TRUSTEE AND EXECUTIVE VICE PRESIDENT, DOB: FEBRUARY 1944
Executive Vice President and a Director of PGI; President and a Director of
Pioneer and PFD; Director of Pioneering Services Corporation ("PSC"), PIntl,
PREA, Pioneer Omega, PMIL, Pioneer First Investment Fund and the Irish Funds;
Member of the Supervisory Board of Pioneer First Polish and Pioneer Czech; and
Executive Vice President and Trustee of all of the Pioneer mutual funds.
STEPHEN K. WEST, TRUSTEE, DOB: SEPTEMBER 1928
125 BROAD STREET, NEW YORK, NY 10004
Of Counsel, Sullivan & Cromwell (law firm); Director, Kleinwort Benson
Australian Income Fund, Inc. since May 1997 and The Swiss Helvetia Fund, Inc.
since 1995 (investment companies), AMVESCAP PLC (investment managers) since 1997
and ING American Insurance Holdings, Inc; Trustee, The Winthrop Focus Funds
(mutual funds); and Trustee of all of the Pioneer mutual funds.
JOHN WINTHROP, TRUSTEE, DOB: JUNE 1936
ONE NORTH ADGERS WHARF, CHARLESTON, SC 29401
President, John Winthrop & Co., Inc. (private investment firm); Director of
NUI Corp. (energy sales, services and distribution); and Trustee of all of the
Pioneer mutual funds, except Pioneer Variable Contracts Trust.
ERIC W. RECKARD, TREASURER, DOB: JUNE 1956
Executive Vice President, Chief Financial Officer and Treasurer of PGI since
June 1999; Treasurer of Pioneer, PFD, PSC, PIntl, PREA, PMT and Pioneer Omega
since June 1999; Vice President-Corporate Finance of PGI from February 1999 to
June 1999; Manager of Business Planning and Internal Audit of PGI since
September 1996; Manager of Fund Accounting of Pioneer since May 1994; Manager of
Auditing, Compliance and Business Analysis for PGI prior to May 1994; and
Treasurer of all of the Pioneer mutual funds (Assistant Treasurer prior to June
1999).
JOSEPH P. BARRI, SECRETARY, DOB: AUGUST 1946
Corporate Secretary of PGI and most of its subsidiaries; Secretary of all of the
Pioneer mutual funds; and Partner, Hale and Dorr LLP.
VINCENT NAVE, ASSISTANT TREASURER, DOB: JUNE 1945
Vice President-Fund Accounting, Administration and Custody Services of Pioneer
(Manager from September 1996 to February 1999); Senior Vice President of The
Boston Company's Investor Services Group prior to July 1994; and Assistant
Treasurer of all of the Pioneer mutual funds since June 1999.
ROBERT P. NAULT, ASSISTANT SECRETARY, DOB: MARCH 1964
Senior Vice President, General Counsel and Assistant Secretary of PGI since
1995; Assistant Secretary of Pioneer, certain other PGI subsidiaries and all of
the Pioneer mutual funds; Assistant Clerk of PFD and PSC; and junior partner of
Hale and Dorr LLP prior to 1995.
The business address of all officers is 60 State Street, Boston, Massachusetts
02109.
All of the outstanding capital stock of PFD, Pioneer and PSC is owned, directly
or indirectly, by PGI, a publicly owned Delaware corporation. Pioneer, the
fund's investment adviser, serves as the investment adviser for the Pioneer
mutual funds and manages the investments of certain institutional accounts.
25
<PAGE>
The table below lists all of the U.S.-registered Pioneer mutual funds currently
offered to the public and the investment adviser and principal underwriter for
each fund.
INVESTMENT ADVISER PRINCIPAL
FUND NAME UNDERWRITER
Pioneer International Growth Fund Pioneer PFD
Pioneer Europe Fund Pioneer PFD
Pioneer World Equity Fund Pioneer PFD
Pioneer Emerging Markets Fund Pioneer PFD
Pioneer Indo-Asia Fund Pioneer PFD
Pioneer Capital Growth Fund Pioneer PFD
Pioneer Mid-Cap Fund Pioneer PFD
Pioneer Growth Shares Pioneer PFD
Pioneer Small Company Fund Pioneer PFD
Pioneer Independence Fund Pioneer Note 1
Pioneer Micro-Cap Fund Pioneer PFD
Pioneer Balanced Fund Pioneer PFD
Pioneer Equity-Income Fund Pioneer PFD
Pioneer Fund Pioneer PFD
Pioneer II Pioneer PFD
Pioneer Real Estate Shares Pioneer PFD
Pioneer Limited Maturity Bond Fund Pioneer PFD
Pioneer America Income Trust Pioneer PFD
Pioneer Bond Fund Pioneer PFD
Pioneer Tax-Free Income Fund Pioneer PFD
Pioneer Cash Reserves Fund Pioneer PFD
Pioneer Interest Shares Pioneer Note 2
Pioneer Variable Contracts Trust Pioneer Note 3
Pioneer Strategic Income Fund Pioneer PFD
Pioneer Tax-Managed Fund Pioneer PFD
Pioneer High Yield Fund Pioneer PFD
Note 1 This fund is available to the general public only through Pioneer
Independence Plans, a systematic investment plan sponsored by PFD.
Note 2 This fund is a closed-end fund.
Note 3 This is a series of 12 separate portfolios designed to provide investment
vehicles for the variable annuity and variable life insurance contracts of
various insurance companies or for certain qualified pension plans.
SHARE OWNERSHIP
See Appendix A for annual information on the ownership of fund shares by the
Trustees, the fund's officers and owners in excess of 5% of any class of shares
of the fund.
COMPENSATION OF OFFICERS AND TRUSTEES
The fund pays no salaries or compensation to any of its officers. The fund
compensates each Trustee who is not affiliated with PGI, Pioneer, PFD or PSC
with a base fee, a variable fee calculated on the basis of
26
<PAGE>
average net assets of the fund, per meeting fees, and annual committee
participation fees for each committee member or chairperson that are based on
percentages of his or her aggregate annual fee. See the fee table in Appendix A.
SALES LOADS. Current and former Trustees and officers of the fund and other
qualifying persons may purchase the fund's Class A shares without an initial
sales charge.
4. INVESTMENT ADVISER
The fund has contracted with Pioneer to act as its investment adviser. Pioneer
is a wholly owned subsidiary of PGI. PGI is engaged in the financial services
business in the U.S. and other countries. Certain Trustees or officers of the
fund are also directors and/or officers of PGI and its subsidiaries (see
management biographies above).
As the fund's investment adviser, Pioneer provides the fund with investment
research, advice and supervision and furnishes an investment program for the
fund consistent with the fund's investment objective and policies, subject to
the supervision of the fund's Trustees. Pioneer determines what portfolio
securities will be purchased or sold, arranges for the placing of orders for the
purchase or sale of portfolio securities, selects brokers or dealers to place
those orders, maintains books and records with respect to the fund's securities
transactions, and reports to the Trustees on the fund's investments and
performance.
Under the terms of its contract with the fund, Pioneer pays all the operating
expenses, including executive salaries and the rental of office space, relating
to its services for the fund, with the exception of the following, which are to
be paid by the fund: (a) charges and expenses for fund accounting, pricing and
appraisal services and related overhead, including, to the extent such services
are performed by personnel of Pioneer, or its affiliates, office space and
facilities and personnel compensation, training and benefits; (b) the charges
and expenses of auditors; (c) the charges and expenses of any custodian,
transfer agent, plan agent, dividend disbursing agent and registrar appointed by
the fund; (d) issue and transfer taxes, chargeable to the fund in connection
with securities transactions to which the fund is a party; (e) insurance
premiums, interest charges, dues and fees for membership in trade associations
and all taxes and corporate fees payable by the fund to federal, state or other
governmental agencies; (f) fees and expenses involved in registering and
maintaining registrations of the fund and/or its shares with the SEC, state or
blue sky securities agencies and foreign jurisdictions, including the
preparation of prospectuses and statements of additional information for filing
with such regulatory agencies; (g) all expenses of shareholders' and Trustees'
meetings and of preparing, printing and distributing prospectuses, notices,
proxy statements and all reports to shareholders and to governmental agencies;
(h) charges and expenses of legal counsel to the fund and the Trustees; (i) any
distribution fees paid by the fund in accordance with Rule 12b-1 promulgated by
the SEC pursuant to the 1940 Act; (j) compensation of those Trustees of the fund
who are not affiliated with or interested persons of Pioneer, the fund (other
than as Trustees), PGI or PFD; (k) the cost of preparing and printing share
certificates; and (l) interest on borrowed money, if any. In addition, the fund
shall pay brokers' and underwriting commissions chargeable to the fund in
connection with securities transactions to which the fund is a party. The
Trustees' approval of and the terms, continuance and termination of the
management contract are governed by the 1940 Act and the Investment Advisers Act
of 1940, as applicable. Pursuant to the management contract, Pioneer will not be
liable for any error of judgment or mistake of law or for any loss sustained by
reason of the adoption of any investment policy or the purchase, sale or
retention of any securities on the recommendation of Pioneer. Pioneer, however,
is not protected against liability by reason of willful misfeasance, bad faith
or gross negligence in the performance of its duties or by reason of its
reckless disregard of its obligations and duties under the management contract.
27
<PAGE>
ADVISORY FEE. As compensation for its management services and expenses incurred,
the fund pays Pioneer an annual fee at the rate of 0.70% of the fund's average
daily net assets up to $500 million; 0.65% of the next $500 million; and 0.60%
of the excess over $1 billion. This fee is computed and accrued daily and paid
monthly.
Prior to the reorganization of Third Avenue High Yield Fund into the fund, Third
Avenue High Yield Fund's investment adviser was EQSF Advisers, Inc. ("EQSF").
The investment advisory services of EQSF were performed under an investment
advisory agreement, pursuant to which the fund paid EQSF a monthly fee equal to
1/12 of 0.90% of the average daily net assets of the fund during the prior month
(an annual rate of 0.90%). See the table in Appendix A for management fees paid
during recently completed fiscal years.
ADMINISTRATION AGREEMENT. The fund has entered into an administration agreement
with Pioneer pursuant to which certain accounting and legal services which are
expenses payable by the fund under the management contract are performed by
Pioneer and pursuant to which Pioneer is reimbursed for its costs of providing
such services.
Prior to the reorganization of Third Avenue High Yield Fund into the fund, Third
Avenue High Yield Fund had entered into an administration agreement with First
Data Investor Services Group, Inc. ("Investor Services Group"). The
administration agreement provided that Investor Services Group would provide all
administrative services to the fund other than those relating to the investment
portfolio of the fund, the distribution of the fund and the maintenance of the
fund's financial records. Third Avenue Trust had agreed to pay Investor Services
Group an amount equal to $186,000 per annum plus 0.01% of aggregate assets of
its series in excess of $1 billion. See Appendix A for fees the fund paid for
administration and related services.
EXPENSE LIMIT. Pioneer has agreed to waive all or part of its management fee or
to reimburse the fund for other expenses (other than extraordinary expenses) to
the extent the fund's expenses exceed 0.75% of average daily net assets until
such time as the net assets of the fund exceed $25 million. This agreement may
be terminated at any time by Pioneer. If Pioneer waives any fee or reimburses
any expenses, and the expenses of the fund are subsequently less than 0.75% of
the average daily net assets, the fund will reimburse Pioneer for such waived
fees or reimbursed expenses provided that such reimbursement does not cause the
fund's expenses to exceed 0.75% of the average daily net assets.
POTENTIAL CONFLICT OF INTEREST. The fund is managed by Pioneer which also serves
as investment adviser to other Pioneer mutual funds and private accounts with
investment objectives identical or similar to those of the fund. Securities
frequently meet the investment objectives of the fund, the other Pioneer mutual
funds and such private accounts. In such cases, the decision to recommend a
purchase to one fund or account rather than another is based on a number of
factors. The determining factors in most cases are the amount of securities of
the issuer then outstanding, the value of those securities and the market for
them. Other factors considered in the investment recommendations include other
investments which each fund or account presently has in a particular industry
and the availability of investment funds in each fund or account.
It is possible that at times identical securities will be held by more than one
fund and/or account. However, positions in the same issue may vary and the
length of time that any fund or account may choose to hold its investment in the
same issue may likewise vary. To the extent that more than one of the Pioneer
mutual funds or a private account managed by Pioneer seeks to acquire the same
security at about the same time, the fund may not be able to acquire as large a
position in such security as it desires or it may have to pay a higher price for
the security. Similarly, the fund may not be able to obtain as large an
execution of an order to sell or as high a price for any particular portfolio
security if Pioneer decides to
28
<PAGE>
sell on behalf of another account the same portfolio security at the same
time. On the other hand, if the same securities are bought or sold at the same
time by more than one fund or account, the resulting participation in volume
transactions could produce better executions for the fund. In the event more
than one account purchases or sells the same security on a given date, the
purchases and sales will normally be made as nearly as practicable on a pro rata
basis in proportion to the amounts desired to be purchased or sold by each
account. Although the other Pioneer mutual funds may have the same or similar
investment objectives and policies as the fund, their portfolios do not
generally consist of the same investments as the fund or each other, and their
performance results are likely to differ from those of the fund.
PERSONAL SECURITIES TRANSACTIONS. In an effort to avoid conflicts of interest
with the fund, the fund and Pioneer have adopted a code of ethics that is
designed to maintain a high standard of personal conduct by directing that all
personnel defer to the interests of the fund and its shareholders in making
personal securities transactions.
5. PRINCIPAL UNDERWRITER AND DISTRIBUTION PLANS
PRINCIPAL UNDERWRITER
PFD, 60 State Street, Boston, Massachusetts 02109, is the principal underwriter
for the fund in connection with the continuous offering of its shares. PFD is an
indirect wholly owned subsidiary of PGI.
The fund entered into an underwriting agreement with PFD which provides that PFD
will bear expenses for the distribution of the fund's shares, except for
expenses incurred by PFD for which it is reimbursed or compensated by the fund
under the distribution plans (discussed below). PFD bears all expenses it incurs
in providing services under the underwriting agreement. Such expenses include
compensation to its employees and representatives and to securities dealers for
distribution-related services performed for the fund. PFD also pays certain
expenses in connection with the distribution of the fund's shares, including the
cost of preparing, printing and distributing advertising or promotional
materials, and the cost of printing and distributing prospectuses and
supplements to prospective shareholders. The fund bears the cost of registering
its shares under federal and state securities law and the laws of certain
foreign countries. Under the underwriting agreement, PFD will use its best
efforts in rendering services to the fund.
See "Class A Share Sales Charges" for the schedule of initial sales charge
reallowed to dealers as a percentage of the offering price of the fund's Class A
shares.
See the tables in Appendix A for commissions retained by PFD and reallowed to
dealers in connection with PFD's offering of the fund's Class A shares during
recently completed fiscal years.
The fund will not generally issue fund shares for consideration other than cash.
At the fund's sole discretion, however, it may issue fund shares for
consideration other than cash in connection with a bona fide reorganization,
statutory merger or other acquisition of portfolio securities.
The redemption price of shares of beneficial interest of the fund may, at
Pioneer's discretion, be paid in cash or portfolio securities. The fund has,
however, elected to be governed by Rule 18f-1 under the 1940 Act pursuant to
which the fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the fund's net asset value during any 90-day period for any
one shareholder. Should the amount of redemptions by any shareholder exceed such
limitation, the fund will have the option of redeeming the excess in cash or
portfolio securities. In the latter case, the securities are taken at their
value employed in determining the fund's net asset value. A shareholder whose
shares are redeemed in-kind may
29
<PAGE>
incur brokerage charges in selling the securities received in-kind. The
selection of such securities will be made in such manner as the Board of
Trustees deems fair and reasonable.
DISTRIBUTION PLANS
The fund has adopted a plan of distribution pursuant to Rule 12b-1 under the
1940 Act with respect to its Class A shares (the "Class A Plan"), a plan of
distribution with respect to its Class B shares (the "Class B Plan") and a plan
of distribution with respect to its Class C shares (the "Class C Plan")
(together, the "Plans"), pursuant to which certain distribution and service fees
are paid to PFD. The fund has not adopted a plan of distribution with respect to
its Class Y shares. Because of the Plans, long-term shareholders may pay more
than the economic equivalent of the maximum sales charge permitted by the
National Association of Securities Dealers, Inc. (the "NASD") regarding
investment companies.
CLASS A PLAN. Pursuant to the Class A Plan the fund reimburses PFD for its
actual expenditures to finance any activity primarily intended to result in the
sale of Class A shares or to provide services to holders of Class A shares,
provided the categories of expenses for which reimbursement is made are approved
by the Board of Trustees. The Board of Trustees has approved the following
categories of expenses that may be reimbursed under the Class A Plan: (i) a
service fee to be paid to qualified broker-dealers in an amount not to exceed
0.25% per annum of the fund's daily net assets attributable to Class A shares;
(ii) reimbursement to PFD for its expenditures for broker-dealer commissions and
employee compensation on certain sales of the fund's Class A shares with no
initial sales charge; and (iii) reimbursement to PFD for expenses incurred in
providing services to Class A shareholders and supporting broker-dealers and
other organizations (such as banks and trust companies) in their efforts to
provide such services. Banks are currently prohibited under the Glass-Steagall
Act from providing certain underwriting or distribution services. If a bank is
prohibited from acting in any capacity or providing any of the described
services, management will consider what action, if any, would be appropriate.
The expenses of the fund pursuant to the Class A Plan are accrued daily at a
rate which may not exceed the annual rate of 0.25% of the fund's average daily
net assets attributable to Class A shares. Distribution expenses of PFD are
expected to substantially exceed the distribution fees paid by the fund in a
given year.
The Class A Plan does not provide for the carryover of reimbursable expenses
beyond 12 months from the time the fund is first invoiced for an expense. The
limited carryover provision in the Class A Plan may result in an expense
invoiced to the fund in one fiscal year being paid in the subsequent fiscal year
and thus being treated for purposes of calculating the maximum expenditures of
the fund as having been incurred in the subsequent fiscal year. In the event of
termination or non-continuance of the Class A Plan, the fund has 12 months to
reimburse any expense which it incurs prior to such termination or
non-continuance, provided that payments by the fund during such 12-month period
shall not exceed 0.25% of the fund's average daily net assets attributable to
Class A shares during such period. See Appendix A for the amount, if any, of
carryover of distribution expenses as of the end of the most recent calendar
year.
CLASS B PLAN. Commissions on the sale of Class B shares equal to 3.75% of the
amount invested are paid to broker-dealers who have sales agreements with PFD.
PFD may also advance to dealers the first-year service fee payable under the
Class B Plan at a rate up to 0.25% of the purchase price of such shares. As
compensation for such advance of the service fee, PFD may retain the service fee
paid by the fund with respect to such shares for the first year after purchase.
The Class B Plan provides that the fund shall pay PFD, as the fund's distributor
for its Class B shares, a daily distribution fee equal on an annual basis to
0.75% of the fund's average daily net assets attributable to Class B shares and
will pay PFD a service fee equal to 0.25% of the fund's average daily net assets
attributable to Class B shares (which PFD will in turn pay to securities dealers
which enter into a sales agreement with PFD at a rate of up to 0.25% of the
fund's average daily net assets attributable to Class B shares
30
<PAGE>
owned by investors for whom that securities dealer is the holder or dealer
of record). This service fee is intended to be in consideration of personal
services and/or account maintenance services rendered by the dealer with respect
to Class B shares. Commencing in the 13th month following the purchase of Class
B shares, dealers will become eligible for additional annual service fees of up
to 0.25% of the net asset value of such shares. Dealers may from time to time be
required to meet certain other criteria in order to receive service fees. PFD or
its affiliates are entitled to retain all service fees payable under the Class B
Plan for which there is no dealer of record or for which qualification standards
have not been met as partial consideration for personal services and/or account
maintenance services performed by PFD or its affiliates for shareholder
accounts.
The purpose of distribution payments to PFD under the Class B Plan is to
compensate PFD for its distribution services with respect to Class B shares of
the fund. PFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution-related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment. The Class B Plan also provides that PFD will receive all contingent
deferred sales charges ("CDSCs") attributable to Class B shares. When a
broker-dealer sells Class B shares and elects, with PFD's approval, to waive its
right to receive the commission normally paid at the time of the sale, PFD may
cause all or a portion of the distribution fees described above to be paid to
the broker-dealer.
The Class B Plan and underwriting agreement permit PFD to sell its right to
receive distribution fees under the Class B Plan and CDSCs to third parties. PFD
enters into such transactions to finance the payment of commissions to brokers
at the time of sale and other distribution-related expenses. In connection with
such arrangements, the fund has agreed that the distribution fee will not be
terminated or modified (including a modification by change in the rules relating
to the conversion of Class B shares into Class A shares) with respect to Class B
shares (a) issued prior to the date of any termination or modification or (b)
attributable to Class B shares issued through one or a series of exchanges of
shares of another investment company for which PFD acts as principal underwriter
which were initially issued prior to the date of such termination or
modification or (c) issued as a dividend or distribution upon Class B shares
initially issued or attributable to Class B shares issued prior to the date of
any such termination or modification except:
(i) to the extent required by a change in the 1940 Act, the rules or
regulations under the 1940 Act, the Conduct Rules of the NASD or an order of any
court or governmental agency;
(ii) in connection with a Complete Termination (as defined in the
Class B Plan); or
(iii) on a basis, determined by the Board of Trustees acting in good
faith, so long as from and after the effective date of such modification or
termination: neither the fund, the adviser nor certain affiliates pay, directly
or indirectly, a fee to any person for the provision of personal and account
maintenance services (as such terms are used in the Conduct Rules of the NASD)
to the holders of Class B shares of the fund and the termination or modification
of the distribution fee applies with equal effect to all Class B shares
outstanding from time to time.
The Class B Plan also provides that PFD shall be deemed to have performed all
services required to be performed in order to be entitled to receive the
distribution fee, if any, payable with respect to Class B shares sold through
PFD upon the settlement date of the sale of such Class B shares or in the case
of Class B shares issued through one or a series of exchanges of shares of
another investment company for which PFD acts as principal underwriter or issued
as a dividend or distribution upon Class B shares, on the settlement date of the
first sale on a commission basis of a Class B share from which such Class B
share was derived.
31
<PAGE>
In the underwriting agreement, the fund agreed that subsequent to the issuance
of a Class B share, it would not take any action to waive or change any CDSC
(including a change in the rules applicable to conversion of Class B shares into
another class) in respect of such Class B shares, except (i) as provided in the
fund's prospectus or statement of additional information, or (ii) as required by
a change in the 1940 Act and the rules and regulations thereunder, the Conduct
Rules of the NASD or any order of any court or governmental agency.
CLASS C PLAN. Commissions on the sale of Class C shares of up to 0.75% of the
amount invested in Class C shares are paid to broker-dealers who have sales
agreements with PFD. PFD may also advance to dealers the first-year service fee
payable under the Class C Plan at a rate up to 0.25% of the purchase price of
such shares. As compensation for such advance of the service fee, PFD may retain
the service fee paid by the fund with respect to such shares for the first year
after purchase.
The Class C Plan provides that the fund will pay PFD, as the fund's distributor
for its Class C shares, a distribution fee accrued daily and paid quarterly,
equal on an annual basis to 0.75% of the fund's average daily net assets
attributable to Class C shares and will pay PFD a service fee equal to 0.25% of
the fund's average daily net assets attributable to Class C shares. PFD will in
turn pay to securities dealers which enter into a sales agreement with PFD a
distribution fee and a service fee at rates of up to 0.75% and 0.25%,
respectively, of the fund's average daily net assets attributable to Class C
shares owned by investors for whom that securities dealer is the holder or
dealer of record. The service fee is intended to be in consideration of personal
services and/or account maintenance services rendered by the dealer with respect
to Class C shares. PFD will advance to dealers the first-year service fee at a
rate equal to 0.25% of the amount invested. As compensation therefor, PFD may
retain the service fee paid by the fund with respect to such shares for the
first year after purchase. Commencing in the 13th month following the purchase
of Class C shares, dealers will become eligible for additional annual
distribution fees and service fees of up to 0.75% and 0.25%, respectively, of
the net asset value of such shares. Dealers may from time to time be required to
meet certain other criteria in order to receive service fees. PFD or its
affiliates are entitled to retain all service fees payable under the Class C
Plan for which there is no dealer of record or for which qualification standards
have not been met as partial consideration for personal services and/or account
maintenance services performed by PFD or its affiliates for shareholder
accounts.
The purpose of distribution payments to PFD under the Class C Plan is to
compensate PFD for its distribution services with respect to Class C shares of
the fund. PFD pays commissions to dealers as well as expenses of printing
prospectuses and reports used for sales purposes, expenses with respect to the
preparation and printing of sales literature and other distribution-related
expenses, including, without limitation, the cost necessary to provide
distribution-related services, or personnel, travel, office expenses and
equipment. The Class C Plan also provides that PFD will receive all CDSCs
attributable to Class C shares. When a broker-dealer sells Class C shares and
elects, with PFD's approval, to waive its right to receive the commission
normally paid at the time of the sale, PFD may cause all or a portion of the
distribution fees described above to be paid to the broker-dealer.
GENERAL
In accordance with the terms of each Plan, PFD provides to the fund for review
by the Trustees a quarterly written report of the amounts expended under the
Plan and the purposes for which such expenditures were made. In the Trustees'
quarterly review of the Plans, they will consider the continued appropriateness
and the level of reimbursement or compensation the Plans provide.
No interested person of the fund, nor any Trustee of the fund who is not an
interested person of the fund, has any direct or indirect financial interest in
the operation of the Plans except to the extent that PFD and
32
<PAGE>
certain of its employees may be deemed to have such an interest as a result
of receiving a portion of the amounts expended under the Plans by the fund and
except to the extent certain officers may have an interest in PFD's ultimate
parent, PGI.
Each Plan's adoption, terms, continuance and termination are governed by Rule
12b-1 under the 1940 Act. The Board of Trustees believes that there is a
reasonable likelihood that the Plans will benefit the fund and its current and
future shareholders. The Plans may not be amended to increase materially the
annual percentage limitation of average net assets which may be spent for the
services described therein without approval of the shareholders of the fund
affected thereby, and material amendments of the Plans must also be approved by
the Trustees as provided in Rule 12b-1.
See Appendix A for fund expenses under the Class A Plan, Class B Plan and Class
C Plan and CDSCs paid to PFD for the most recently completed fiscal year.
Upon redemption, Class A shares may be subject to a 1% CDSC, Class B shares are
subject to a CDSC at a rate declining from a maximum 4% of the lower of the cost
or market value of the shares and Class C shares may be subject to a 1% CDSC.
6. SHAREHOLDER SERVICING/TRANSFER AGENT
The fund has contracted with PSC, 60 State Street, Boston, Massachusetts 02109,
to act as shareholder servicing and transfer agent for the fund.
Under the terms of its contract with the fund, PSC services shareholder
accounts, and its duties include: (i) processing sales, redemptions and
exchanges of shares of the fund; (ii) distributing dividends and capital gains
associated with the fund's portfolio; and (iii) maintaining account records and
responding to shareholder inquiries.
PSC receives an annual fee of $33.00 for each Class A, Class B, Class C and
Class Y shareholder account from the fund as compensation for the services
described above. PSC is also reimbursed by the fund for its cash out-of-pocket
expenditures. The fund may compensate entities which have agreed to provide
certain sub-accounting services such as specific transaction processing and
recordkeeping services. Any such payments by the fund would be in lieu of the
per account fee which would otherwise be paid by the fund to PSC.
7. CUSTODIAN
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109, is
the custodian of the fund's assets. The custodian's responsibilities include
safekeeping and controlling the fund's cash and securities, handling the receipt
and delivery of securities, and collecting interest and dividends on the fund's
investments.
8. INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, 225 Franklin Street, Boston, Massachusetts 02110, is the
fund's independent public accountants, providing audit services, tax return
review, and assistance and consultation with respect to the preparation of
filings with the SEC.
33
<PAGE>
9. PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed on behalf
of the fund by Pioneer pursuant to authority contained in the fund's management
contract. Securities purchased and sold on behalf of the fund normally will be
traded in the over-the counter market on a net basis (I.E. without commission)
through dealers acting for their own account and not as brokers or otherwise
through transactions directly with the issuer of the instrument. The cost of
securities purchased from underwriters includes an underwriter's commission or
concession, and the prices at which securities are purchased and sold from and
to dealers include a dealer's markup or markdown. Pioneer normally seeks to deal
directly with the primary market makers unless, in its opinion, better prices
are available elsewhere. Some securities are purchased and sold on an exchange
or in over-the-counter transactions conducted on an agency basis involving a
commission. Pioneer seeks to obtain the best execution on portfolio trades. The
price of securities and any commission rate paid are always factors, but
frequently not the only factors, in judging best execution. In selecting brokers
or dealers, Pioneer considers various relevant factors, including, but not
limited to, the size and type of the transaction; the nature and character of
the markets for the security to be purchased or sold; the execution efficiency,
settlement capability and financial condition of the dealer; the dealer's
execution services rendered on a continuing basis; and the reasonableness of any
dealer spreads. Transactions in foreign equity securities are executed by
broker-dealers in foreign countries in which commission rates are fixed and,
therefore, are not negotiable (as such rates are in the U.S.).
Pioneer may select broker-dealers that provide brokerage and/or research
services to the fund and/or other investment companies or other accounts managed
by Pioneer. In addition, consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended, if Pioneer determines in good faith that the
amount of commissions charged by a broker-dealer is reasonable in relation to
the value of the brokerage and research services provided by such broker, the
fund may pay commissions to such broker-dealer in an amount greater than the
amount another firm may charge. Such services may include advice concerning the
value of securities; the advisability of investing in, purchasing or selling
securities; the availability of securities or the purchasers or sellers of
securities; providing stock quotation services, credit rating service
information and comparative fund statistics; furnishing analyses, electronic
information services, manuals and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and performance of
accounts and particular investment decisions; and effecting securities
transactions and performing functions incidental thereto (such as clearance and
settlement). Pioneer maintains a listing of broker-dealers who provide such
services on a regular basis. However, because many transactions on behalf of the
fund and other investment companies or accounts managed by Pioneer are placed
with broker-dealers (including broker-dealers on the listing) without regard to
the furnishing of such services, it is not possible to estimate the proportion
of such transactions directed to such dealers solely because such services were
provided. Pioneer believes that no exact dollar value can be calculated for such
services.
The research received from broker-dealers may be useful to Pioneer in rendering
investment management services to the fund as well as other investment companies
or other accounts managed by Pioneer, although not all such research may be
useful to the fund. Conversely, such information provided by brokers or dealers
who have executed transaction orders on behalf of such other accounts may be
useful to Pioneer in carrying out its obligations to the fund. The receipt of
such research has not reduced Pioneer's normal independent research activities;
however, it enables Pioneer to avoid the additional expenses which might
otherwise be incurred if it were to attempt to develop comparable information
through its own staff.
In circumstances where two or more broker-dealers offer comparable prices and
executions, preference may be given to a broker-dealer which has sold shares of
the fund as well as shares of other investment companies
34
<PAGE>
managed by Pioneer. This policy does not imply a commitment to execute all
portfolio transactions through all broker-dealers that sell shares of the fund.
The Pioneer funds have entered into third-party brokerage and/or expense offset
arrangements to reduce the funds' total operating expenses. Pursuant to
third-party brokerage arrangements, certain of the funds that invest primarily
in U.S. equity securities may incur lower custody fees by directing brokerage to
third-party broker-dealers. Pursuant to expense offset arrangements, the funds
incur lower transfer agency expenses by maintaining their cash balances with the
custodian.
See the table in Appendix A for aggregate brokerage and underwriting commissions
paid by the fund in connection with its portfolio transactions during recently
completed fiscal years. The Board of Trustees periodically reviews Pioneer's
performance of its responsibilities in connection with the placement of
portfolio transactions on behalf of the fund.
10. DESCRIPTION OF SHARES
As an open-end management investment company, the fund continuously offers its
shares to the public and under normal conditions must redeem its shares upon the
demand of any shareholder at the next determined net asset value per share less
any applicable CDSC. See "Sales Charges." When issued and paid for in accordance
with the terms of the prospectus and statement of additional information, shares
of the fund are fully paid and non-assessable. Shares will remain on deposit
with the fund's transfer agent and certificates will not normally be issued. The
fund reserves the right to charge a fee for the issuance of Class A share
certificates; certificates will not be issued for Class B, Class C or Class Y
shares.
The fund's Agreement and Declaration of Trust, dated August 3, 1999 (the
"Declaration"), permits the Board of Trustees to authorize the issuance of an
unlimited number of full and fractional shares of beneficial interest which may
be divided into such separate series as the Trustees may establish. Currently,
the fund consists of only one series. The Trustees may, however, establish
additional series of shares and may divide or combine the shares into a greater
or lesser number of shares without thereby changing the proportionate beneficial
interests in the fund. The Declaration further authorizes the Trustees to
classify or reclassify any series of the shares into one or more classes.
Pursuant thereto, the Trustees have authorized the issuance of four classes of
shares of the fund, designated as Class A shares, Class B shares, Class C shares
and Class Y shares. Each share of a class of the fund represents an equal
proportionate interest in the assets of the fund allocable to that class. Upon
liquidation of the fund, shareholders of each class of the fund are entitled to
share pro rata in the fund's net assets allocable to such class available for
distribution to shareholders. The fund reserves the right to create and issue
additional series or classes of shares, in which case the shares of each class
of a series would participate equally in the earnings, dividends and assets
allocable to that class of the particular series.
The shares of each class represent an interest in the same portfolio of
investments of the fund. Each class has equal rights as to voting, redemption,
dividends and liquidation, except that each class bears different distribution
and transfer agent fees and may bear other expenses properly attributable to the
particular class. Class A, Class B and Class C shareholders have exclusive
voting rights with respect to the Rule 12b-1 Plans adopted by holders of those
shares in connection with the distribution of shares.
Shareholders are entitled to one vote for each share held and may vote in the
election of Trustees and on other matters submitted to a meeting of
shareholders. Although Trustees are not elected annually by the shareholders,
shareholders have, under certain circumstances, the right to remove one or more
Trustees. The fund is not required, and does not intend, to hold annual
shareholder meetings although special meetings may be called for the purpose of
electing or removing Trustees, changing fundamental investment restrictions or
approving a management contract.
35
<PAGE>
The shares of each series of the fund are entitled to vote separately to approve
investment advisory agreements or changes in investment restrictions, but
shareholders of all series vote together in the election and selection of
Trustees and accountants. Shares of all series of the fund vote together as a
class on matters that affect all series of the fund in substantially the same
manner. As to matters affecting a single series or class, shares of such series
or class will vote separately. No amendment adversely affecting the rights of
shareholders may be made to the Declaration without the affirmative vote of a
majority of the fund's shares. Shares have no preemptive or conversion rights
except that under certain circumstances Class B shares may convert to Class A
shares.
As a Delaware business trust, the fund's operations are governed by the
Declaration. Generally, Delaware business trust shareholders are not personally
liable for obligations of the Delaware business trust under Delaware law. The
Delaware Business Trust Act (the "Delaware Act") provides that a shareholder of
a Delaware business trust shall be entitled to the same limitation of liability
extended to shareholders of private for-profit corporations. The Declaration
expressly provides that the fund is organized under the Delaware Act and that
the Declaration is to be governed by Delaware law. There is nevertheless a
possibility that a Delaware business trust, such as the fund, might become a
party to an action in another state whose courts refused to apply Delaware law,
in which case the fund's shareholders could become subject to personal
liability.
To guard against this risk, the Declaration (i) contains an express disclaimer
of shareholder liability for acts or obligations of the fund and provides that
notice of such disclaimer may be given in each agreement, obligation or
instrument entered into or executed by the fund or its Trustees, (ii) provides
for the indemnification out of fund property of any shareholders held personally
liable for any obligations of the fund or any series of the fund and (iii)
provides that the fund shall, upon request, assume the defense of any claim made
against any shareholder for any act or obligation of the fund and satisfy any
judgment thereon. Thus, the risk of a shareholder incurring financial loss
beyond his or her investment because of shareholder liability is limited to
circumstances in which all of the following factors are present: (1) a court
refused to apply Delaware law; (2) the liability arose under tort law or, if
not, no contractual limitation of liability was in effect; and (3) the fund
itself would be unable to meet its obligations. In light of Delaware law, the
nature of the fund's business and the nature of its assets, the risk of personal
liability to a fund shareholder is remote.
In addition to the requirements under Delaware law, the Declaration provides
that a shareholder of the fund may bring a derivative action on behalf of the
fund only if the following conditions are met: (a) shareholders eligible to
bring such derivative action under Delaware law who hold at least 10% of the
outstanding shares of the fund, or 10% of the outstanding shares of the series
or class to which such action relates, shall join in the request for the
Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and investigate
the basis of such claim. The Trustees shall be entitled to retain counsel or
other advisers in considering the merits of the request and shall require an
undertaking by the shareholders making such request to reimburse the fund for
the expense of any such advisers in the event that the Trustees determine not to
bring such action.
The Declaration further provides that the fund shall indemnify each of its
Trustees and officers against liabilities and expenses reasonably incurred by
them in connection with, or arising out of, any action, suit or proceeding,
threatened against or otherwise involving such Trustee or officer, directly or
indirectly, by reason of being or having been a Trustee or officer of the fund.
The Declaration does not authorize the fund to indemnify any Trustee or officer
against any liability to which he or she would otherwise be subject by reason of
or for willful misfeasance, bad faith, gross negligence or reckless disregard of
such person's duties.
36
<PAGE>
The Declaration provides that any Trustee who is not an "interested person" of
Pioneer shall be considered to be independent for purposes of Delaware law
notwithstanding the fact that such Trustee receives compensation for serving as
a trustee of the fund or other investment companies for which Pioneer acts as
investment adviser.
11. SALES CHARGES
The fund continuously offers four classes of shares designated as Class A, Class
B, Class C and Class Y shares as described in the prospectus.
CLASS A SHARE SALES CHARGES
You may buy Class A shares at the public offering price, including a sales
charge, as follows:
SALES CHARGE AS A % OF
OFFERING NET AMOUNT DEALER
AMOUNT OF PURCHASE PRICE INVESTED REALLOWANCE
Less than $100,000 4.50 4.71 4.00
$100,000 but less than $250,000 3.50 3.63 3.00
$250,000 but less than $500,000 2.50 2.56 2.00
$500,000 but less than $1,000,000 2.00 2.04 1.75
$1,000,000 or more 0.00 0.00 see below
The schedule of sales charges above is applicable to purchases of Class A shares
of the fund by (i) an individual, (ii) an individual and his or her spouse and
children under the age of 21 and (iii) a trustee or other fiduciary of a trust
estate or fiduciary account or related trusts or accounts including pension,
profit-sharing and other employee benefit trusts qualified under Sections 401 or
408 of the Code although more than one beneficiary is involved. The sales
charges applicable to a current purchase of Class A shares of the fund by a
person listed above is determined by adding the value of shares to be purchased
to the aggregate value (at the then current offering price) of shares of any of
the other Pioneer mutual funds previously purchased and then owned, provided PFD
is notified by such person or his or her broker-dealer each time a purchase is
made which would qualify. Pioneer mutual funds include all mutual funds for
which PFD serves as principal underwriter. At the sole discretion of PFD,
holdings of funds domiciled outside the U.S., but which are managed by
affiliates of Pioneer, may be included for this purpose.
No sales charge is payable at the time of purchase on investments of $1 million
or more, or for purchases by participants in certain group plans described below
subject to a CDSC of 1% which may be imposed in the event of a redemption of
Class A shares within 12 months of purchase. PFD may, in its discretion, pay a
commission to broker-dealers who initiate and are responsible for such purchases
as follows: 1% on the first $5 million invested; 0.50% on the next $45 million
invested; and 0.25% on the excess over $50 million invested. These commissions
shall not be payable if the purchaser is affiliated with the broker-dealer or if
the purchase represents the reinvestment of a redemption made during the
previous 12 calendar months. Broker-dealers who receive a commission in
connection with Class A share purchases at net asset value by 401(a) or 401(k)
retirement plans with 1,000 or more eligible participants or with at least $10
million in plan assets will be required to return any commissions paid or a pro
rata portion thereof if the retirement plan redeems its shares within 12 months
of purchase. Contingent upon the achievement of certain sales objectives, PFD
may pay to Mutual of Omaha Investor Services, Inc. 50% of PFD's retention of any
sales commission on sales of the fund's Class A shares through such dealer. From
time to time, PFD may elect to reallow the entire initial sales charge to
participating dealers for all Class
37
<PAGE>
A sales with respect to which orders are placed during a particular period.
Dealers to whom substantially the entire sales charge is reallowed may be deemed
to be underwriters under the federal securities laws.
LETTER OF INTENT ("LOI"). Reduced sales charges are available for purchases of
$50,000 or more of Class A shares (excluding any reinvestments of dividends and
capital gains distributions) made within a 13-month period pursuant to an LOI
which may be established by completing the Letter of Intent section of the
Account Application. The reduced sales charge will be the charge that would be
applicable to the purchase of the specified amount of Class A shares as if the
shares had all been purchased at the same time. A purchase not made pursuant to
an LOI may be included if the LOI is submitted to PSC within 90 days of such
purchase. You may also obtain the reduced sales charge by including the value
(at current offering price) of all your Class A shares in the fund and all other
Pioneer mutual funds held of record as of the date of your LOI in the amount
used to determine the applicable sales charge for the Class A shares to be
purchased under the LOI. Five percent of your total intended purchase amount
will be held in escrow by PSC, registered in your name, until the terms of the
LOI are fulfilled. When you sign the Account Application, you agree to
irrevocably appoint PSC your attorney-in-fact to surrender for redemption any or
all shares held in escrow with full power of substitution. An LOI is not a
binding obligation upon the investor to purchase, or the fund to sell, the
amount specified in the LOI.
If the total purchases, less redemptions, exceed the amount specified under the
LOI and are in an amount which would qualify for a further quantity discount,
all transactions will be recomputed on the expiration date of the LOI to effect
the lower sales charge. Any difference in the sales charge resulting from such
recomputation will be either delivered to you in cash or invested in additional
shares at the lower sales charge. The dealer, by signing the Account
Application, agrees to return to PFD, as part of such retroactive adjustment,
the excess of the commission previously reallowed or paid to the dealer over
that which is applicable to the actual amount of the total purchases under the
LOI.
If the total purchases, less redemptions, are less than the amount specified
under the LOI, you must remit to PFD any difference between the sales charge on
the amount actually purchased and the amount originally specified in the LOI.
When the difference is paid, the shares held in escrow will be deposited to your
account. If you do not pay the difference in sales charge within 20 days after
written request from PFD or your dealer, PSC, after receiving instructions from
PFD, will redeem the appropriate number of shares held in escrow to realize the
difference and release any excess.
CLASS B SHARES
You may buy Class B shares at the net asset value per share next computed after
receipt of a purchase order without the imposition of an initial sales charge;
however, Class B shares redeemed within six years of purchase will be subject to
a CDSC at the rates shown in the table below. The charge will be assessed on the
amount equal to the lesser of the current market value or the original purchase
cost of the shares being redeemed. No CDSC will be imposed on increases in
account value above the initial purchase price, including shares derived from
the reinvestment of dividends or capital gains distributions.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of purchase until the time of redemption of Class B shares. For the
purpose of determining the number of years from the time of any purchase after
September 30, 1998, all payments during a month will be aggregated and deemed to
have been made on the first day of that month. For the purpose of determining
the number of years from the time of any purchase made prior to October 1, 1998,
all payments during a quarter will be aggregated and deemed to have been made on
the first day of that quarter. In processing redemptions of Class B shares, the
fund will first redeem shares not subject to any CDSC and then shares held
longest during the six-year period. As a result, you will pay the lowest
possible CDSC.
38
<PAGE>
The CDSC for Class B shares subject to a CDSC upon redemption will be determined
as follows:
CDSC AS A % OF DOLLAR
YEAR SINCE PURCHASE AMOUNT SUBJECT TO CDSC
First 4.0
Second 4.0
Third 3.0
Fourth 3.0
Fifth 2.0
Sixth 1.0
Seventh and thereafter 0.0
Proceeds from the CDSC are paid to PFD and are used in whole or in part to
defray PFD's expenses related to providing distribution-related services to the
fund in connection with the sale of Class B shares, including the payment of
compensation to broker-dealers.
Class B shares will automatically convert into Class A shares at the beginning
of the calendar month (or the calendar quarter for purchases made prior to
October 1, 1998) that is eight years after the purchase date, except as noted
below. Class B shares acquired by exchange from Class B shares of another
Pioneer mutual fund will convert into Class A shares based on the date of the
initial purchase and the applicable CDSC. Class B shares acquired through
reinvestment of distributions will convert into Class A shares based on the date
of the initial purchase to which such shares relate. For this purpose, Class B
shares acquired through reinvestment of distributions will be attributed to
particular purchases of Class B shares in accordance with such procedures as the
Trustees may determine from time to time. The conversion of Class B shares to
Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service (the "IRS") or an opinion of counsel that such
conversions will not constitute taxable events for federal tax purposes. The
conversion of Class B shares to Class A shares will not occur if such ruling or
opinion is not available and, therefore, Class B shares would continue to be
subject to higher expenses than Class A shares for an indeterminate period.
CLASS C SHARES
You may buy Class C shares at net asset value per share next computed after
receipt of a purchase order without the imposition of an initial sales charge;
however, Class C shares redeemed within one year of purchase will be subject to
a CDSC of 1%. The charge will be assessed on the amount equal to the lesser of
the current market value or the original purchase cost of the shares being
redeemed. No CDSC will be imposed on increases in account value above the
initial purchase price, including shares derived from the reinvestment of
dividends or capital gains distributions. Class C shares do not convert to any
other class of fund shares.
For the purpose of determining the time of any purchase after September 30,
1998, all payments during a month will be aggregated and deemed to have been
made on the first day of that month. For the purpose of determining the time of
any purchase made prior to October 1, 1998, all payments during a calendar
quarter will be aggregated and deemed to have been made on the first day of that
quarter. In processing redemptions of Class C shares, the fund will first redeem
shares not subject to any CDSC and then shares held for the shortest period of
time during the one-year period. As a result, you will pay the lowest possible
CDSC.
39
<PAGE>
Proceeds from the CDSC are paid to PFD and are used in whole or in part to
defray PFD's expenses related to providing distribution-related services to the
fund in connection with the sale of Class C shares, including the payment of
compensation to broker-dealers.
12. REDEEMING SHARES
Redemptions may be suspended or payment postponed during any period in which any
of the following conditions exist: the Exchange is closed or trading on the
Exchange is restricted; an emergency exists as a result of which disposal by the
fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the fund to fairly determine the value of the net
assets of its portfolio; or the SEC, by order, so permits.
Redemptions and repurchases are taxable transactions for shareholders that are
subject to U.S. federal income tax. The net asset value per share received upon
redemption or repurchase may be more or less than the cost of shares to an
investor, depending on the market value of the portfolio at the time of
redemption or repurchase.
SYSTEMATIC WITHDRAWAL PLAN(S) ("SWP") (CLASS A, CLASS B AND CLASS C SHARES). A
SWP is designed to provide a convenient method of receiving fixed payments at
regular intervals from fund share accounts having a total value of not less than
$10,000. You must also be reinvesting all dividends and capital gains
distributions to use the SWP option.
Periodic payments of $50 or more will be deposited monthly, quarterly,
semiannually or annually directly into a bank account designated by the
applicant or will be sent by check to the applicant, or any person designated by
the applicant. Payments can be made either by check or electronic funds transfer
to a bank account designated by you. Class B accounts must meet the minimum
initial investment requirement prior to establishing a SWP. Withdrawals from
Class B and Class C share accounts are limited to 10% of the value of the
account at the time the SWP is established. See "Qualifying for a reduced sales
charge" in the prospectus. If you direct that withdrawal payments be paid to
another person, want to change the bank where payments are sent or designate an
address that is different from the account's address of record after you have
opened your account, a signature guarantee must accompany your instructions.
Withdrawals under the SWP are redemptions that may have tax consequences for
you.
Purchases of Class A shares of the fund at a time when you have a SWP in effect
may result in the payment of unnecessary sales charges and may, therefore, be
disadvantageous. SWP redemptions reduce and may ultimately exhaust the number of
shares in your account. In addition, the amounts received by a shareholder
cannot be considered as yield or income on his or her investment because part of
such payments may be a return of his or her investment.
A SWP may be terminated at any time (1) by written notice to PSC or from PSC to
the shareholder; (2) upon receipt by PSC of appropriate evidence of the
shareholder's death; or (3) when all shares in the shareholder's account have
been redeemed.
You may obtain additional information by calling PSC at 1-800-225-6292.
REINSTATEMENT PRIVILEGE (CLASS A SHARES). If you redeem all or part of your
Class A shares of the fund, you may reinvest all or part of the redemption
proceeds without a sales charge in Class A shares of the fund if you send a
written request to PSC not more than 90 days after your shares were redeemed.
Your redemption proceeds will be reinvested at the next determined net asset
value of the Class A shares of the fund after receipt of the written request for
reinstatement. You may realize a gain or loss for federal income tax purposes as
a result of the redemption, and special tax rules may apply if a reinstatement
40
<PAGE>
occurs. For example, if a redemption resulted in a loss and an investment is
made in shares of the fund within 30 days before or after the redemption, you
may not be able to recognize the loss for federal income tax purposes. Subject
to the provisions outlined in the prospectus, you may also reinvest in Class A
shares of other Pioneer mutual funds; in this case you must meet the minimum
investment requirements for each fund you enter.
The 90-day reinstatement period may be extended by PFD for periods of up to one
year for shareholders living in areas that have experienced a natural disaster,
such as a flood, hurricane, tornado or earthquake.
13. TELEPHONE TRANSACTIONS
You may purchase, exchange or sell Class A, Class B or Class C shares by
telephone. Class Y shares may not be purchased by telephone. See the prospectus
for more information. For personal assistance, call 1-800-225-6292 between 8:00
a.m. and 9:00 p.m. (Class Y account holders should contact Pioneer's Group Plans
Department at 1-888-294-4480 between 9:00 a.m. and 6:00 p.m.) Eastern time on
weekdays. Computer-assisted transactions may be available to shareholders who
have prerecorded certain bank information (see "FactFoneSM"). YOU ARE STRONGLY
URGED TO CONSULT WITH YOUR INVESTMENT PROFESSIONAL PRIOR TO REQUESTING ANY
TELEPHONE TRANSACTION.
To confirm that each transaction instruction received by telephone is genuine,
the fund will record each telephone transaction, require the caller to provide
the personal identification number ("PIN") for the account and send you a
written confirmation of each telephone transaction. Different procedures may
apply to accounts that are registered to non-U.S. citizens or that are held in
the name of an institution or in the name of an investment broker-dealer or
other third party. If reasonable procedures, such as those described above, are
not followed, the fund may be liable for any loss due to unauthorized or
fraudulent instructions. The fund may implement other procedures from time to
time. In all other cases, neither the fund, PSC nor PFD will be responsible for
the authenticity of instructions received by telephone; therefore, you bear the
risk of loss for unauthorized or fraudulent telephone transactions.
During times of economic turmoil or market volatility or as a result of severe
weather or a natural disaster, it may be difficult to contact the fund by
telephone to institute a purchase, exchange or redemption. You should
communicate with the fund in writing if you are unable to reach the fund by
telephone.
FACTFONESM. FactFoneSM is an automated inquiry and telephone transaction system
available to Pioneer mutual fund shareholders by dialing 1-800-225-4321.
FactFoneSM allows shareholder access to current information on Pioneer mutual
fund accounts and to the prices and yields of all publicly available Pioneer
mutual funds. In addition, you may use FactFoneSM to make computer-assisted
telephone purchases, exchanges or redemptions from your Pioneer mutual fund
accounts, access your account balances and last three transactions and order a
duplicate statement if you have activated your PIN. Telephone purchases or
redemptions require the establishment of a bank account of record.
Computer-assisted Class Y share telephone purchases, exchanges and redemptions
and certain other FactFoneSM features for Class Y shareholders are not currently
available through FactFoneSM. YOU ARE STRONGLY URGED TO CONSULT WITH YOUR
INVESTMENT PROFESSIONAL PRIOR TO REQUESTING ANY TELEPHONE TRANSACTION.
Shareholders whose accounts are registered in the name of a broker-dealer or
other third party may not be able to use FactFoneSM. Call PSC for assistance.
41
<PAGE>
FactFoneSM allows shareholders to hear the following recorded fund information:
o net asset value prices for all Pioneer mutual funds;
o annualized 30-day yields on Pioneer's fixed income funds;
o annualized 7-day yields and 7-day effective (compound) yields for Pioneer's
money market fund; and
o dividends and capital gains distributions on all Pioneer mutual funds.
Yields are calculated in accordance with SEC mandated standard formulas.
All performance numbers communicated through FactFoneSM represent past
performance, and figures include the maximum applicable sales charge. A
shareholder's actual yield and total return will vary with changing market
conditions. The value of Class A, Class B, Class C and Class Y shares (except
for Pioneer Cash Reserves Fund, which seeks to maintain a stable $1.00 share
price) will also vary, and such shares may be worth more or less at redemption
than their original cost.
14. PRICING OF SHARES
The net asset value per share of each class of the fund is determined as of the
close of regular trading on the Exchange (normally 4:00 p.m. Eastern time) on
each day on which the Exchange is open for trading. As of the date of this
statement of additional information, the Exchange is open for trading every
weekday except for the following holidays: New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. The net asset value per share of each
class of the fund is also determined on any other day on which the level of
trading in its portfolio securities is sufficiently high that the current net
asset value per share might be materially affected by changes in the value of
its portfolio securities. The fund is not required to determine its net asset
value per share on any day on which no purchase orders in good order for fund
shares are received and no shares are tendered and accepted for redemption.
Ordinarily, investments in debt securities are valued on the basis of
information furnished by a pricing service which utilizes primarily a matrix
system (which reflects such factors as security prices, yields, maturities and
ratings), supplemented by dealer and exchange quotations, to recommend
valuations for normal institutional-sized trading units of debt securities.
Securities are valued at the last sale price on the principal exchange or market
where they are traded. Securities which have not traded on the date of valuation
or securities for which sales prices are not generally reported are valued at
the mean between the current bid and asked prices. Securities quoted in foreign
currencies are converted to U.S. dollars utilizing foreign exchange rates
employed by the fund's independent pricing services. Generally, trading in
foreign securities is substantially completed each day at various times prior to
the close of regular trading on the Exchange. The values of such securities used
in computing the net asset value of the fund's shares are determined as of such
times. Foreign currency exchange rates are also generally determined prior to
the close of regular trading on the Exchange. Occasionally, events which affect
the values of such securities and such exchange rates may occur between the
times at which they are determined and the close of regular trading on the
Exchange and will therefore not be reflected in the computation of the fund's
net asset value. If events materially affecting the value of such securities
occur during such period, then these securities may be valued at their fair
value as determined in good faith by the Trustees. All assets of the fund for
which there is no other readily available valuation method are valued at their
fair value as determined in good faith by the Trustees, although the actual
computations may be made by persons acting pursuant to the direction of the
Board of Trustees.
42
<PAGE>
The net asset value per share of each class of the fund is computed by taking
the value of all of the fund's assets attributable to a class, less the fund's
liabilities attributable to that class, and dividing the result by the number of
outstanding shares of that class. For purposes of determining net asset value,
expenses of the classes of the fund are accrued daily and taken into account.
The fund's maximum offering price per Class A share is determined by adding the
maximum sales charge to the net asset value per Class A share. Class B, Class C
and Class Y shares are offered at net asset value without the imposition of an
initial sales charge (Class B and Class C shares may be subject to a CDSC).
15. TAX STATUS
The fund intends to elect to be treated and to qualify each year as a "regulated
investment company" under Subchapter M of the Code so that it will not pay
federal income tax on income and capital gains distributed to shareholders as
required under the Code. If the fund did not qualify as a regulated investment
company, it would be treated as a U.S. corporation subject to federal income
tax. Under the Code, the fund will be subject to a nondeductible 4% federal
excise tax on a portion of its undistributed ordinary income and capital gains
if it fails to meet certain distribution requirements with respect to each
calendar year. The fund intends to make distributions in a timely manner and
accordingly does not expect to be subject to the excise tax.
The fund declares a dividend from any net investment income each business
day. Dividends are normally paid on the last business day of the month or
shortly thereafter. The fund distributes net short- and long-term capital gains,
if any, in November. Dividends from income and/or capital gains may also be paid
at such other times as may be necessary for the fund to avoid federal income or
excise tax.
In order to qualify as a regulated investment company under Subchapter M, the
fund must, among other things, derive at least 90% of its gross income for each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% income test") and satisfy certain annual
distribution and quarterly diversification requirements. For purposes of the 90%
income test, income the fund earns from equity interests in certain entities
that are not treated as corporations (e.g., are treated as partnerships or
trusts) for U.S. tax purposes will generally have the same character for the
fund as in the hands of such entities. Consequently, the fund may be required to
limit its equity investments in such entities that earn fee income, rental
income or other nonqualifying income.
Unless shareholders specify otherwise, all distributions will be automatically
reinvested in additional full and fractional shares of the fund. For federal
income tax purposes, all dividends are taxable as described below whether a
shareholder takes them in cash or reinvests them in additional shares of the
fund. Dividends from investment company taxable income, which includes net
investment income, net short-term capital gain in excess of net long-term
capital loss and certain net foreign exchange gains, are taxable as ordinary
income. Dividends from net long-term capital gain in excess of net short-term
capital loss ("net capital gain"), if any, are taxable to the fund's
shareholders as long-term capital gains for federal income tax purposes without
regard to the length of time shares of the fund have been held. The federal
income tax status of all distributions will be reported to shareholders
annually.
Any dividend declared by the fund in October, November or December as of a
record date in such a month and paid during the following January will be
treated for federal income tax purposes as received by shareholders on December
31 of the calendar year in which it is declared.
43
<PAGE>
Foreign exchange gains and losses realized by the fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain options and futures contracts relating to foreign currency, foreign
currency forward contracts, foreign currencies, or payables or receivables
denominated in a foreign currency are subject to Section 988 of the Code, which
generally causes such gains and losses to be treated as ordinary income and
losses and may affect the amount, timing and character of distributions to
shareholders. Under future regulations, any such transactions that are not
directly related to the fund's investments in stock or securities (or its
options contracts or futures contracts with respect to stock or securities) may
need to be limited in order to enable the fund to satisfy the 90% income test.
If the net foreign exchange loss for a year were to exceed the fund's investment
company taxable income (computed without regard to such loss), the resulting
ordinary loss for such year would not be deductible by the fund or its
shareholders in future years.
If the fund acquires any equity interest (under proposed regulations, generally
including not only stock but also an option to acquire stock such as is inherent
in a convertible bond) in certain foreign corporations that receive at least 75%
of their annual gross income from passive sources (such as interest, dividends,
certain rents and royalties, or capital gains) or hold at least 50% of their
assets in investments producing such passive income ("passive foreign investment
companies"), the fund could be subject to federal income tax and additional
interest charges on "excess distributions" received from such companies or gain
from the sale of stock in such companies, even if all income or gain actually
received by the fund is timely distributed to its shareholders. The fund would
not be able to pass through to its shareholders any credit or deduction for such
a tax. An election may generally be available that would ameliorate these
adverse tax consequences, but any such election could require the fund to
recognize taxable income or gain (subject to tax distribution requirements)
without the concurrent receipt of cash. These investments could also result in
the treatment of associated capital gains as ordinary income. The fund may limit
and/or manage its holdings in passive foreign investment companies to limit its
tax liability or maximize its return from these investments.
The fund may invest to a significant extent in debt obligations that are in the
lowest rating categories or are unrated, including debt obligations of issuers
not currently paying interest or who are in default. Investments in debt
obligations that are at risk of or in default present special tax issues for the
fund. Tax rules are not entirely clear about issues such as when the fund may
cease to accrue interest, original issue discount or market discount when and to
what extent deductions may be taken for bad debts or worthless securities, how
payments received on obligations in default should be allocated between
principal and income and whether exchanges of debt obligations in a workout
context are taxable. These and other issues will be addressed by the fund, in
the event it invests in such securities, in order to seek to ensure that it
distributes sufficient income to preserve its status as a regulated investment
company and does not become subject to federal income or excise tax.
If the fund invests in certain pay-in-kind securities, zero coupon securities,
deferred interest securities or, in general, any other securities with original
issue discount (or with market discount if the fund elects to include market
discount in income currently), the fund must accrue income on such investments
for each taxable year, which generally will be prior to the receipt of the
corresponding cash payments. However, the fund must distribute, at least
annually, all or substantially all of its net income, including such accrued
income, to shareholders to qualify as a regulated investment company under the
Code and avoid federal income and excise taxes. Therefore, the fund may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash, or may have to leverage itself by borrowing the cash, to satisfy
distribution requirements.
For federal income tax purposes, the fund is permitted to carry forward a net
capital loss for any year to offset its capital gains, if any, during the eight
years following the year of the loss. To the extent subsequent capital gains are
offset by such losses, they would not result in federal income tax liability to
44
<PAGE>
the fund and are not expected to be distributed as such to shareholders. See
Appendix A for the fund's available capital loss carryforwards.
At the time of an investor's purchase of fund shares, a portion of the purchase
price may be attributable to realized or unrealized appreciation in the fund's
portfolio or undistributed taxable income of the fund. Consequently, subsequent
distributions by the fund on these shares from such appreciation or income may
be taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares and the distributions economically represent a return of a portion of the
investment.
Redemptions and exchanges are taxable events for shareholders that are subject
to tax. Shareholders should consult their own tax advisers with reference to
their individual circumstances to determine whether any particular transaction
in fund shares is properly treated as a sale for tax purposes, as the following
discussion assumes, and the tax treatment of any gains or losses recognized in
such transactions. Any loss realized by a shareholder upon the redemption,
exchange or other disposition of shares with a tax holding period of six months
or less will be treated as a long-term capital loss to the extent of any amounts
treated as distributions of long-term capital gain with respect to such shares.
In addition, if Class A shares redeemed or exchanged have been held for less
than 91 days, (1) in the case of a reinvestment in the fund or another mutual
fund at net asset value pursuant to the reinstatment privilege, the sales charge
paid on such shares is not included in their tax basis under the Code, or (2) in
the case of an exchange, all or a portion of the sales charge paid on such
shares is not included in their tax basis under the Code, to the extent a sales
charge that would otherwise apply to the shares received is reduced pursuant to
the reinstatement or exchange privilege. In either case, the portion of the
sales charge not included in the tax basis of the shares redeemed or surrendered
in an exchange is included in the tax basis of the shares acquired in the
reinvestment or exchange. Losses on redemptions or other dispositions of shares
may be disallowed under "wash sale" rules in the event of other investments in
the fund (including those made pursuant to reinvestment of dividends and/or
capital gain distributions) within a period of 61 days beginning 30 days before
and ending 30 days after a redemption or other disposition of shares. In such a
case, the disallowed portion of any loss would be included in the federal tax
basis of the shares acquired in the other investments.
Options written or purchased and futures contracts entered into by the fund on
certain securities, indices and foreign currencies, as well as certain forward
foreign currency contracts, may cause the fund to recognize gains or losses from
marking-to-market even though such options may not have lapsed, been closed out,
or exercised or such futures or forward contracts may not have been performed or
closed out. The tax rules applicable to these contracts may affect the
characterization as long-term or short-term of some capital gains and losses
realized by the fund. Certain options, futures and forward contracts relating to
foreign currency may be subject to Section 988, as described above, and
accordingly produce ordinary income or loss. Additionally, the fund may be
required to recognize gain if an option, futures contract, forward contract,
short sale or other transaction that is not subject to the mark-to-market rules
is treated as a "constructive sale" of an "appreciated financial position" held
by the fund under Section 1259 of the Code. Any net mark-to-market gains and/or
gains from constructive sales may also have to be distributed to satisfy the
distribution requirements referred to above even though no corresponding cash
amounts may concurrently be received, possibly requiring the disposition of
portfolio securities or borrowing to obtain the necessary cash. Losses on
certain options, futures or forward contracts and/or offsetting positions
(portfolio securities or other positions with respect to which the fund's risk
of loss is substantially diminished by one or more options, futures or forward
contracts) may also be deferred under the tax straddle rules of the Code, which
may also affect the characterization of capital gains or losses from straddle
positions and certain successor positions as long-term or short-term. Certain
tax elections may be available that would enable the fund to ameliorate some
adverse effects of the tax rules described in this
45
<PAGE>
paragraph. The tax rules applicable to options, futures, forward contracts
and straddles may affect the amount, timing and character of the fund's income
and gains or losses and hence of its distributions to shareholders.
For purposes of the 70% dividends-received deduction generally available to
corporations under the Code, dividends received by the fund from U.S.
corporations in respect of any share of stock with a tax holding period of at
least 46 days (91 days in the case of certain preferred stock) extending before
and after each dividend held in an unleveraged position and distributed and
designated by the fund may be treated as qualifying dividends. Any corporate
shareholder should consult its tax adviser regarding the possibility that its
tax basis in its shares may be reduced, for federal income tax purposes, by
reason of "extraordinary dividends" received with respect to the shares and, to
the extent such basis would be reduced below zero, current recognition of income
may be required. In order to qualify for the deduction, corporate shareholders
must meet the minimum holding period requirement stated above with respect to
their fund shares, taking into account any holding period reductions from
certain hedging or other transactions or positions that diminish their risk of
loss with respect to their fund shares, and, if they borrow to acquire or
otherwise incur debt attributable to fund shares, they may be denied a portion
of the dividends-received deduction. The entire qualifying dividend, including
the otherwise deductible amount, will be included in determining the excess, if
any, of a corporation's adjusted current earnings over its alternative minimum
taxable income, which may increase a corporation's alternative minimum tax
liability.
The fund may be subject to withholding and other taxes imposed by foreign
countries, including taxes on interest, dividends and capital gains with respect
to its investments in those countries, which would, if imposed, reduce the yield
on or return from those investments. Tax conventions between certain countries
and the U.S. may reduce or eliminate such taxes in some cases. The fund does not
expect to satisfy the requirements for passing through to its shareholders their
pro rata shares of qualified foreign taxes paid by the fund, with the result
that shareholders will not include such taxes in their gross incomes and will
not be entitled to a tax deduction or credit for such taxes on their own tax
returns.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent the fund's distributions are
derived from interest on (or, in the case of intangible property taxes, the
value of its assets is attributable to) certain U.S. government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. The fund will not seek to satisfy
any threshold or reporting requirements that may apply in particular taxing
jurisdictions, although the fund may in its sole discretion provide relevant
information to shareholders.
Different tax treatment, including penalties on certain excess contributions and
deferrals, certain pre-retirement and post-retirement distributions and certain
prohibited transactions, is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
Federal law requires that the fund withhold (as "backup withholding") 31% of
reportable payments, including dividends, capital gain distributions and the
proceeds of redemptions (including exchanges) or repurchases of fund shares paid
to shareholders who have not complied with IRS regulations. In order to avoid
this withholding requirement, shareholders must certify on their Account
Applications, or on separate IRS Forms W-9, that the Social Security Number or
other Taxpayer Identification Number they provide is their correct number and
that they are not currently subject to backup withholding, or that they are
exempt from backup withholding. The fund may nevertheless be required to
withhold if it receives notice from the IRS or a broker that the number provided
is incorrect or backup withholding is applicable as a result of previous
underreporting of interest or dividend income.
46
<PAGE>
If, as anticipated, the fund qualifies as a regulated investment company under
the Code, it will not be required to pay any Massachusetts income, corporate
excise or franchise taxes or any Delaware corporation income tax.
The description of certain federal tax provisions above relates only to U.S.
federal income tax consequences for shareholders who are U.S. persons, i.e.,
U.S. citizens or residents or U.S. corporations, partnerships, trusts or
estates, and who are subject to U.S. federal income tax. This description does
not address the special tax rules that may be applicable to particular types of
investors, such as financial institutions, insurance companies, securities
dealers, or tax-exempt or tax-deferred plans, accounts or entities. Investors
other than U.S. persons may be subject to different U.S. tax treatment,
including a possible 30% non-resident alien U.S. withholding tax (or
non-resident alien withholding tax at a lower treaty rate) on amounts treated as
ordinary dividends from the fund and, unless an effective IRS Form W-8, Form
W-8BEN, or other authorized withholding certificate is on file, to 31% backup
withholding on certain other payments from the fund. Shareholders should consult
their own tax advisers on these matters and on state, local and other applicable
tax laws.
16. INVESTMENT RESULTS
QUOTATIONS, COMPARISONS AND GENERAL INFORMATION
From time to time, in advertisements, in sales literature or in reports to
shareholders, the past performance of the fund may be illustrated and/or
compared with that of other mutual funds with similar investment objectives and
to stock or other relevant indices. For example, total return of the fund's
classes may be compared to averages or rankings prepared by Lipper, Inc., a
widely recognized independent service which monitors mutual fund performance;
the Merrill Lynch High Yield Master II Index and the Merrill Lynch Index of all
Convertibles, Speculative Quality, recognized measures of the performance of
high yield securities; the S&P 500, an index of unmanaged groups of common
stock; or any other appropriate index.
In addition, the performance of the classes of the fund may be compared to
alternative investment or savings vehicles and/or to indices or indicators of
economic activity, e.g., inflation or interest rates. The fund may also include
securities industry or comparative performance information generally and in
advertising or materials marketing the fund's shares. Performance rankings and
listings reported in newspapers or national business and financial publications,
such as BARRON'S, BUSINESS WEEK, CONSUMERS DIGEST, CONSUMER REPORTS, FINANCIAL
WORLD, FORBES, FORTUNE, INVESTORS BUSINESS DAILY, KIPLINGER'S PERSONAL FINANCE
MAGAZINE, MONEY MAGAZINE, NEW YORK TIMES, SMART MONEY, USA TODAY, U.S. NEWS AND
WORLD REPORT, THE WALL STREET JOURNAL and WORTH may also be cited (if the fund
is listed in any such publication) or used for comparison, as well as
performance listings and rankings from various other sources including Bloomberg
Financial Markets, CDA/Wiesenberger, Donoghue's Mutual Fund Almanac, Ibbotson
Associates, Investment Company Data, Inc., Johnson's Charts, Kanon Bloch Carre
and Co., Lipper, Inc., Micropal, Inc., Morningstar, Inc., Schabacker Investment
Management and Towers Data Systems, Inc.
In addition, from time to time quotations from articles from financial
publications such as those listed above may be used in advertisements, in sales
literature or in reports to shareholders of the fund.
The fund may also present, from time to time, historical information depicting
the value of a hypothetical account in one of more classes of the fund since
inception.
47
<PAGE>
In presenting investment results, the fund may also include references to
certain financial planning concepts, including (a) an investor's need to
evaluate his financial assets and obligations to determine how much to invest;
(b) his need to analyze the objectives of various investments to determine where
to invest; and (c) his need to analyze his time frame for future capital needs
to determine how long to invest. The investor controls these three factors, all
of which affect the use of investments in building assets.
STANDARDIZED YIELD QUOTATIONS
The yield of a class is computed by dividing the class' net investment income
per share during a base period of 30 days, or one month, by the maximum offering
price per share of the class on the last day of such base period in accordance
with the following formula:
a-b
YIELD = 2[ ( ----- +1)6[superscript]-1]
cd
Where:
a = interest earned during the period
b = net expenses accrued for the period
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = the maximum offering price per share on the last day of the period
For purposes of calculating interest earned on debt obligations as provided in
item "a" above:
(i) The yield to maturity of each obligation held by the fund is
computed based on the market value of the obligation (including actual accrued
interest, if any) at the close of business each day during the 30-day base
period, or, with respect to obligations purchased during the month, the purchase
price (plus actual accrued interest, if any) on settlement date, and with
respect to obligations sold during the month the sale price (plus actual accrued
interest, if any) between the trade and settlement dates.
(ii) The yield to maturity of each obligation is then divided by 360
and the resulting quotient is multiplied by the market value of the obligation
(including actual accrued interest, if any) to determine the interest income on
the obligation for each day. The yield to maturity calculation has been made on
each obligation during the 30 day base period.
(iii) Interest earned on all debt obligations during the 30-day or one
month period is then totaled.
(iv) The maturity of an obligation with a call provision(s) is the next
call date on which the obligation reasonably may be expected to be called or, if
none, the maturity date.
With respect to the treatment of discount and premium on mortgage- or other
receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), the fund accounts for gain or
loss attributable to actual monthly pay downs as an increase or decrease to
interest income during the period. In addition, the fund may elect (i) to
amortize the discount or premium remaining on a security, based on the cost of
the security, to the weighted average maturity date, if such
48
<PAGE>
information is available, or to the remaining term of the security, if the
weighted average maturity date is not available, or (ii) not to amortize the
remaining discount or premium on a security.
For purposes of computing yield, interest income is recognized by accruing 1/360
of the stated interest rate of each obligation in the fund's portfolio each day
that the obligation is in the portfolio. Expenses of Class A and Class B accrued
during any base period, if any, pursuant to the respective Distribution Plans
are included among the expenses accrued during the base period.
See Appendix A for the standardized yield quotation for each class of fund
shares as of the most recently completed fiscal year.
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN QUOTATIONS
One of the primary methods used to measure the performance of a class of the
fund is "total return." Total return will normally represent the percentage
change in value of an account, or of a hypothetical investment in a class of the
fund, over any period up to the lifetime of that class of the fund. Total return
calculations will usually assume the reinvestment of all dividends and capital
gain distributions and will be expressed as a percentage increase or decrease
from an initial value for the entire period or for one or more specified periods
within the entire period. Total return percentages for periods of less than one
year will usually be annualized; total return percentages for periods longer
than one year will usually be accompanied by total return percentages for each
year within the period and/or by the average annual compounded total return for
the period. The income and capital components of a given return may be separated
and portrayed in a variety of ways in order to illustrate their relative
significance. Performance may also be portrayed in terms of cash or investment
values without percentages. Past performance cannot guarantee any particular
future result.
The fund's average annual total return quotations for each of its classes as
that information may appear in the fund's prospectus, this statement of
additional information or in advertising are calculated by standard methods
prescribed by the SEC.
Average annual total return quotations for each class of shares are computed by
finding the average annual compounded rates of return that would cause a
hypothetical investment in the class made on the first day of a designated
period (assuming all dividends and distributions are reinvested) to equal the
ending redeemable value of such hypothetical investment on the last day of the
designated period in accordance with the following formula:
P(1+T)n[superscript] = ERV
Where:
P = a hypothetical initial payment of $1,000, less the
maximum sales load of $57.50 for Class A shares or
the deduction of the CDSC for Class B and Class C
shares at the end of the period; for Class Y shares,
no sales load or CDSC applies
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $1,000
initial payment made at the beginning of the designated
period (or fractional portion thereof)
49
<PAGE>
For purposes of the above computation, it is assumed that all dividends and
distributions made by the fund are reinvested at net asset value during the
designated period. The average annual total return quotation is determined to
the nearest 1/100 of 1%.
In determining the average annual total return (calculated as provided above),
recurring fees, if any, that are charged to all shareholder accounts of a
particular class of shares are taken into consideration. For any account fees
that vary with the size of the account, the account fee used for purposes of the
above computation is assumed to be the fee that would be charged to the class'
mean account size.
See Appendix A for the annual total returns for each class of fund shares as of
the most recently completed fiscal year.
17. FINANCIAL STATEMENTS
Third Avenue High Yield Fund's audited financial statements for the period ended
October 31, 1998 and its unaudited financial statements for the six months ended
April 30, 1999 are included herein. The October 31, 1998 financial statements,
including the financial highlights in the fund's Class A, Class B and Class C
shares prospectus, have been audited by PricewaterhouseCoopers LLP, independent
accountants, as indicated in their report with respect to those financial
statements and are included in reliance upon the authority of
PricewaterhouseCoopers LLP as experts in accounting and auditing in giving their
report.
50
<PAGE>
18. APPENDIX A - ANNUAL FEE, EXPENSE AND OTHER INFORMATION
PORTFOLIO TURNOVER
The fund's annual portfolio turnover rate was __% for the fiscal period ended
October 31, 1999.
SHARE OWNERSHIP
Not applicable.
COMPENSATION OF OFFICERS AND TRUSTEES
The following table sets forth certain information with respect to the
compensation of each Trustee of the fund.
<TABLE>
<CAPTION>
PENSION OR RETIREMENT
BENEFITS ACCRUED AS TOTAL COMPENSATION FROM
AGGREGATE PART OF FUND EXPENSES OTHER PIONEER MUTUAL
COMPENSATION FROM FUNDS**
NAME OF TRUSTEE FUND* [UPDATE @ 12/31/99]
<S> <C> <C> <C>
John F. Cogan, Jr.*** $ 750.00 $0 $ 18,750.00
Mary K. Bush 1,806.00 0 77,125.00
Richard H. Egdahl, M.D. 1,806.00 0 79,125.00
Margaret B.W. Graham 1,812.00 0 81,750.00
John W. Kendrick 1,456.00 0 65,900.00
Marguerite A. Piret 1,906.00 0 98,750.00
David D. Tripple*** 750.00 0 18,750.00
Stephen K. West 1,731.00 0 85,050.00
John Winthrop 1,906.00 0 85,875.00
-------- - ---------
$13,923.00 $0 $611,075.00
- ------------------------
* Estimated for the fiscal year ended October 31, 2000.
** For the calendar year ended December 31, 1999.
*** Under the management contract, Pioneer reimburses the fund for any
Trustees fees paid by the fund.
</TABLE>
APPROXIMATE MANAGEMENT FEES THE FUND PAID OR OWED PIONEER (OR EQSF)
- ------------------------------------------------------------
FOR THE FISCAL PERIODS ENDED OCTOBER 31,
- ------------------------------------------------------------
- ------------------------------- ----------------------------
1999 1998*
- ------------------------------- ----------------------------
- ------------------------------- ----------------------------
$0** $0**
- ------------------------------- ----------------------------
* Period from February 12, 1998 (commencement of investment operations) to
October 31, 1998.
** Paid to EQSF. An expense limitation was in effect for these periods. In
the absence of the expense limitation, the fund would have paid $______ and
$50,472 in management fees for such periods.
51
<PAGE>
FEES THE FUND PAID TO PIONEER (OR INVESTOR SERVICES GROUP) UNDER THE
ADMINISTRATION AGREEMENTS
- ------------------------------------------------------------
FOR THE FISCAL PERIODS ENDED OCTOBER 31,
- ------------------------------------------------------------
- ------------------------------- ----------------------------
1999 1998
- ------------------------------- ----------------------------
- ------------------------------- ----------------------------
$______* $9,207*
- ------------------------------- ----------------------------
* Paid to Investor Services Group. An expense limitation was in effect for
these periods. In the absence of the expense limitation, the fund would have
paid $______ and $28,253 in administration fees for such periods.
CARRYOVER OF DISTRIBUTION PLAN EXPENSES
Not applicable.
APPROXIMATE NET UNDERWRITING COMMISSIONS RETAINED BY PFD
Not applicable.
APPROXIMATE COMMISSIONS REALLOWED TO DEALERS
Not applicable.
FUND EXPENSES UNDER THE DISTRIBUTION PLANS
Not applicable.
CDSCS
Not applicable.
APPROXIMATE BROKERAGE AND UNDERWRITING COMMISSIONS (PORTFOLIO TRANSACTIONS)
1999 1998
$600
CAPITAL LOSS CARRYFORWARDS
At October 31, 1998, the fund had a capital loss carryforward of $50,625 which
will expire in 2006 if not used.
AVERAGE ANNUAL TOTAL RETURNS (OCTOBER 31, 1999)
- ------------------------------------ -------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (%)
- ------------------------------------ -------------------------------------------
- ------------------------------------ ------------- -------------- --------------
SINCE INCEPTION
CLASS OF SHARES ONE YEAR INCEPTION DATE
- ------------------------------------ ------------- -------------- --------------
- ------------------------------------ ------------- -------------- --------------
Class A Shares __.__ __.__ 02/12/98
Class B Shares N/A N/A N/A
Class C Shares N/A N/A N/A
Class Y Shares N/A N/A N/A
- ------------------------------------ ------------- -------------- --------------
52
<PAGE>
STANDARDIZED 30-DAY YIELD (OCTOBER 31, 1999)
CLASS OF SHARES YIELD (%)
Class A Shares _.__
Class B Shares N/A
Class C Shares N/A
Class Y Shares N/A
53
<PAGE>
19. APPENDIX B - DESCRIPTION OF SHORT-TERM DEBT, CORPORATE BOND AND
PREFERRED STOCK RATINGS1[superscript]
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") PRIME RATING SYSTEM
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Prime-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
Leading market positions in well-established industries.
High rates of return on funds employed.
Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Obligations of a branch of a bank are considered to be domiciled in the country
in which the branch is located. Unless noted as an exception, Moody's rating on
a bank's ability to repay senior obligations extends only to branches located in
countries which carry a Moody's Sovereign Rating for Bank Deposits. Such branch
obligations are rated at the lower of the bank's rating or Moody's Sovereign
Rating for Bank Deposits for the country in which the branch is located.
When the currency in which an obligation is denominated is not the same as the
currency of the country in which the obligation is domiciled, Moody's ratings do
not incorporate an opinion as to whether payment of the obligation will be
affected by actions of the government controlling the currency of denomination.
In addition, risks associated with bilateral conflicts between an investor's
home country
- ----------------
1[superscript] The ratings indicated herein are believed to be the most
recent ratings available at the date of this statement of additional information
for the securities listed. Ratings are generally given to securities at the time
of issuance. While the rating agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings indicated do not
necessarily represent ratings which will be given to these securities on the
date of the fund's fiscal year-end.
54
<PAGE>
country and either the issuer's home country or the country where an
issuer's branch is located are not incorporated into Moody's short-term debt
ratings.
If an issuer represents to Moody's that its short-term debt obligations are
supported by the credit of another entity or entities, then the name or names of
such supporting entity or entities are listed within the parenthesis beneath the
name of the issuer, or there is a footnote referring the reader to another page
for the name or names of the supporting entity or entities. In assigning ratings
to such issuers, Moody's evaluates the financial strength of the affiliated
corporations, commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating assessment.
MOODY'S DEBT RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
55
<PAGE>
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's bond ratings, where specified, are applicable to financial contracts,
senior bank obligations and insurance company senior policyholder and claims
obligations with an original maturity in excess of one year. Obligations relying
upon support mechanisms such as letters-of-credit and bonds of indemnity are
excluded unless explicitly rated. Obligations of a branch of a bank are
considered to be domiciled in the country in which the branch is located.
Unless noted as an exception, Moody's rating on a bank's ability to repay senior
obligations extends only to branches located in countries which carry a Moody's
Sovereign Rating for Bank Deposits. Such branch obligations are rated at the
lower of the bank's rating or Moody's Sovereign Rating for the Bank Deposits for
the country in which the branch is located. When the currency in which an
obligation is denominated is not the same as the currency of the country in
which the obligation is domiciled, Moody's ratings do not incorporate an opinion
as to whether payment of the obligation will be affected by the actions of the
government controlling the currency of denomination. In addition, risk
associated with bilateral conflicts between an investor's home country and
either the issuer's home country or the country where an issuer branch is
located are not incorporated into Moody's ratings.
Moody's makes no representation that rated bank obligations or insurance company
obligations are exempt from registration under the 1933 Act or issued in
conformity with any other applicable law or regulation. Nor does Moody's
represent any specific bank or insurance company obligation is legally
enforceable or a valid senior obligation of a rated issuer.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicated that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicated
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and bonds, a
variation of Moody's familiar bond rating symbols is used in the quality ranking
of preferred stock. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stock occupies a junior position to bonds within a
particular capital structure and that these securities are rated within the
universe of preferred stocks.
aaa: An issue which is rated aaa is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa: An issue which is rated aa is considered a high-grade preferred stock. This
rating indicates that there is a reasonable assurance the earnings and asset
protection will remain relatively well maintained in the foreseeable future.
a: An issue which is rated a is considered to be an upper-medium grade preferred
stock. While risks are judged to be somewhat greater then in the aaa and aa
classification, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
baa: An issue which is rated baa is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
56
<PAGE>
ba: An issue which is rated ba is considered to have speculative elements and
its future cannot be considered well assured. Earnings and asset protection may
be very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
b: An issue which is rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
caa: An issue which is rated caa is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
ca: An issue which is rated ca is speculative in a high degree and is likely to
be in arrears on dividends with little likelihood of eventual payments.
c: This is the lowest rated class of preferred or preference stock. Issues so
rated can thus be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
A-1: A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B: A short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C: A short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated D is in payment default. The D rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating
57
<PAGE>
also will be used upon the filing of a bankruptcy petition or the taking of
a similar action if payments on an obligation are jeopardized.
STANDARD & POOR'S LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based, in varying degrees, on the following
considerations:
Likelihood of payment-capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
Nature of and provisions of the obligation;
Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA: An obligation rated AA differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and C
the highest. While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB: An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
CCC: An obligation rated CCC is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the
58
<PAGE>
obligation. In the event of adverse business, financial, or economic
conditions, the obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation rated C is CURRENTLY HIGHLY
VULNERABLE to nonpayment. The C rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken, but
payments on this obligation are being continued. A C also will be assigned to a
preferred stock issue in arrears on dividends or sinking fund payments but that
is currently paying.
D: An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments are jeopardized.
Plus (+) or Minus (-): The rating from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk, such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
N.R.: This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
LOCAL CURRENCY AND FOREIGN CURRENCY RISKS
Country risk considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key factor
in this analysis. An obligor's capacity to repay foreign currency obligations
may be lower than its capacity to repay obligations in its local currency due to
the sovereign government's own relatively lower capacity to repay external
versus domestic debt. These sovereign risk considerations are incorporated in
the debt ratings assigned to specific issues. Foreign currency issuer ratings
are also distinguished from local currency issuer ratings to identify those
instances where sovereign risks make them different for the same issuer.
59
<PAGE>
20. APPENDIX C - PERFORMANCE STATISTICS
<TABLE>
<CAPTION>
PIONEER HIGH YIELD FUND
CLASS A SHARES
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
SALES CHARGE NET ASSET INITIAL NET
INITIAL OFFERING PRICE INCLUDED SHARES VALUE PER ASSET VALUE
DATE INVESTMENT PURCHASED SHARE
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
2/12/98 $10,000 $ 4.50% $ $
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
<CAPTION>
VALUE OF SHARES
(DIVIDENDS AND CAPITAL GAINS REINVESTED)
- ----------------------- ---------------- ----------------------- -------------------- -----------------------
FROM INVESTMENT FROM CAPITAL GAINS FROM DIVIDENDS
DATE REINVESTED REINVESTED TOTAL VALUE
- ----------------------- ---------------- ----------------------- -------------------- -----------------------
- ----------------------- ---------------- ----------------------- -------------------- -----------------------
<S> <C> <C> <C> <C>
- ----------------------- ---------------- ----------------------- -------------------- -----------------------
- ----------------------- ---------------- ----------------------- -------------------- -----------------------
12/31/98 $_____ $_____ $_____ $_____
- ----------------------- ---------------- ----------------------- -------------------- -----------------------
- ----------------------- ---------------- ----------------------- -------------------- -----------------------
12/31/99 $_____ $_____ $_____ $_____
- ----------------------- ---------------- ----------------------- -------------------- -----------------------
Past performance does not guarantee future results. Return and share price
fluctuate and your shares when redeemed may be worth more or less than your
original cost.
</TABLE>
60
<PAGE>
COMPARATIVE PERFORMANCE INDEX DESCRIPTIONS
The following securities indices are well known, unmanaged measures of market
performance. Advertisements and sales literature for the fund may refer to these
indices or may present comparisons between the performance of the fund and one
or more of the indices. Other indices may also be used, if appropriate. The
indices are not available for direct investment. The data presented are not
meant to be indicative of the performance of the fund, do not reflect past
performance and do not guarantee future results.
S&P 500. This index is a readily available, carefully constructed, market value
weighted benchmark of common stock performance. Currently, the S&P 500 includes
500 of the largest stocks (in terms of stock market value) in the U.S.
DOW JONES INDUSTRIAL AVERAGE. This is a total return index based on the
performance of stocks of 30 blue chip companies widely held by individuals and
institutional investors. The 30 stocks represent about a fifth of the $8
trillion-plus market value of all U.S. stocks and about a fourth of the value of
stocks listed on the New York Stock Exchange (NYSE).
U.S. SMALL STOCK INDEX. This index is a market value weighted index of the
ninth and tenth deciles of the NYSE, plus stocks listed on the American Stock
Exchange and over the counter with the same or less capitalization as the upper
bound of the NYSE ninth decile.
U.S. INFLATION. The Consumer Price Index for All Urban Consumers (CPI-U), not
seasonally adjusted, is used to measure inflation, which is the rate of change
of consumer goods prices. Unfortunately, the inflation rate as derived by the
CPI is not measured over the same period as the other asset returns. All of the
security returns are measured from one month-end to the next month-end. CPI
commodity prices are collected during the month. Thus, measured inflation rates
lag the other series by about one-half month. Prior to January 1978, the CPI (as
compared with CPI-U) was used. Both inflation measures are constructed by the
U.S. Department of Labor, Bureau of Labor Statistics, Washington, DC.
S&P/BARRA INDEXES. The S&P/BARRA Growth and Value Indexes are constructed by
dividing the stocks in the S&P 500 according to price-to-book ratios. The Growth
Index contains stocks with higher price-to-book ratios, and the Value Index
contains stocks with lower price-to-book ratios. Both indexes are market
capitalization weighted.
MERRILL LYNCH MICRO-CAP INDEX. The Merrill Lynch Micro-Cap Index represents the
performance of 1,980 stocks ranging in market capitalization from $50 million to
$125 million. Index returns are calculated monthly.
MERRILL LYNCH HIGH YIELD MASTER II INDEX. [Insert description]
MERRILL LYNCH INDEX OF ALL CONVERTIBLES, SPECULATIVE QUALITY [Insert
description]
LONG-TERM U.S. GOVERNMENT BONDS. The total returns on long-term government bonds
after 1977 are constructed with data from The Wall Street Journal and are
calculated as the change in the flat price or and-interest price. From 1926 to
1976, data are obtained from the government bond file at the Center for Research
in Security Prices (CRSP), Graduate School of Business, University of Chicago.
Each year, a one-bond portfolio with a term of approximately 20 years and a
reasonably current coupon was used and whose returns did not reflect potential
tax benefits, impaired negotiability or special redemption or call privileges.
Where callable bonds had to be used, the term of the bond was assumed to be a
simple average
61
<PAGE>
of the maturity and first call dates minus the current date. The bond was
"held" for the calendar year and returns were computed.
INTERMEDIATE-TERM U.S. GOVERNMENT BONDS. Total returns of intermediate-term
government bonds after 1987 are calculated from The Wall Street Journal prices,
using the change in flat price. Returns from 1934 to 1986 are obtained from the
CRSP government bond file.
Each year, one-bond portfolios are formed, the bond chosen is the shortest
noncallable bond with a maturity not less than five years, and this bond is
"held" for the calendar year. Monthly returns are computed. (Bonds with impaired
negotiability or special redemption privileges are omitted, as are partially or
fully tax-exempt bonds starting with 1943.) From 1934 to 1942, almost all bonds
with maturities near five years were partially or fully tax-exempt and were
selected using the rules described above. Personal tax rates were generally low
in that period, so that yields on tax-exempt bonds were similar to yields on
taxable bonds. From 1926 to 1933, there are few bonds suitable for construction
of a series with a five-year maturity. For this period, five-year bond yield
estimates are used.
MORGAN STANLEY CAPITAL INTERNATIONAL ("MSCI"). These indices are in U.S. dollar
terms with gross dividends reinvested and measure the performance of 45 stock
markets around the world. MSCI All Country indices represent both the developed
and the emerging markets for a particular region. These indices are unmanaged.
The free indices exclude shares which are not readily purchased by non-local
investors. MSCI covers over 1,700 securities in 28 emerging markets and 2,600
securities in 23 developed markets, totalling over $15 trillion in market
capitalization.
Countries in the MSCI EAFE Index are: Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Netherlands, New
Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and United
Kingdom.
Countries in the MSCI Emerging Markets Free Index are: Argentina, Brazil, Chile,
China Free, Colombia, Czech Republic, Greece, Hungary, India, Indonesia Free,
Israel, Jordan, Korea (at 50%), Malaysia Free, Mexico Free, Pakistan, Peru,
Philippines Free, Poland, Singapore, South Africa, Sri Lanka, Taiwan (at 50%),
Thailand Free, Turkey and Venezuela.
MSCI All Country (AC) Asia Free ex Japan: This index is made up of the following
12 countries: China Free, Hong Kong, India, Indonesia Free, Korea @50%, Malaysia
Free, Pakistan, Philippines Free, Singapore Free, Sri Lanka, Taiwan @50% and
Thailand Free.
MSCI All Country (AC) Asia Pacific Free ex Japan: This index is made up of the
following 14 countries: Australia, China Free, Hong Kong, India, Indonesia Free,
Korea @50%, Malaysia Free, New Zealand, Pakistan, Philippines Free, Singapore
Free, Sri Lanka, Taiwan @50% and Thailand Free.
6-MONTH CDS. Data sources include the Federal Reserve Bulletin and The Wall
Street Journal.
LONG-TERM U.S. CORPORATE BONDS. Since 1969, corporate bond total returns are
represented by the Salomon Brothers Long-Term High-Grade Corporate Bond Index.
As most large corporate bond transactions take place over the counter, a major
dealer is the natural source of these data. The index includes nearly all Aaa-
and Aa-rated bonds with at least 10 years to maturity. If a bond is downgraded
during a particular month, its return for the month is included in the index
before removing the bond from future portfolios.
From 1926 to 1968 the total returns were calculated by summing the capital
appreciation returns and the income returns. For the period 1946 to 1968,
Ibbotson and Sinquefield backdated the Salomon Brothers'
62
<PAGE>
index, using Salomon Brothers' monthly yield data with a methodology
similar to that used by Salomon Brothers for 1969 to 1995. Capital appreciation
returns were calculated from yields assuming (at the beginning of each monthly
holding period) a 20-year maturity, a bond price equal to par, and a coupon
equal to the beginning-of-period yield. For the period 1926 to 1945, Standard &
Poor's monthly high-grade corporate composite yield data were used, assuming a
4% coupon and a 20-year maturity. The conventional present-value formula for
bond price for the beginning and end-of-month prices was used. (This formula is
presented in Ross, Stephen A., and Westerfield, Randolph W., Corporate Finance,
Times Mirror/Mosby, St. Louis, 1990, p. 97 ["Level-Coupon Bonds"].) The monthly
income return was assumed to be one-twelfth the coupon.
LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX - INTERMEDIATE. This index is
comprised of securities with one to ten years to maturity. It includes Treasury
and government agency securities, investment-grade corporate bonds and Yankee
bonds.
U.S. (30-DAY) TREASURY BILLS. For the U.S. Treasury Bill Index, data from The
Wall Street Journal are used after 1977; the CRSP government bond file is the
source until 1976. Each month a one-bill portfolio containing the shortest-term
bill having not less than one month to maturity is constructed. (The bill's
original term to maturity is not relevant.) To measure holding period returns
for the one-bill portfolio, the bill is priced as of the last trading day of the
previous month-end and as of the last trading day of the current month.
NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT TRUSTS ("NAREIT") EQUITY REIT
INDEX. All of the data are based upon the last closing price of the month for
all tax-qualified REITs listed on the NYSE, AMEX and NASDAQ. The data are
market-value-weighted. Prior to 1987 REITs were added to the index the January
following their listing. Since 1987 newly formed or listed REITs are added to
the total shares outstanding figure in the month that the shares are issued.
Only common shares issued by the REIT are included in the index. The total
return calculation is based upon the weighting at the beginning of the period.
Only those REITs listed for the entire period are used in the total return
calculation. Dividends are included in the month based upon their payment date.
There is no smoothing of income.
Liquidating dividends, whether full or partial, are treated as income.
RUSSELL U.S. EQUITY INDEXES. The Russell 3000(R) Index (the "Russell 3000") is
comprised of the 3,000 largest U.S. companies as determined by market
capitalization representing approximately 98% of the U.S. equity market. The
average market capitalization is approximately $3.7 billion. The Russell 2500TM
Index measures performance of the 2,500 smallest companies in the Russell 3000.
The average market capitalization is approximately $931 million, and the largest
company in the index has an approximate market capitalization of $3.7 billion.
The Russell 2000(R) Index measures performance of the 2,000 smallest stocks in
the Russell 3000; the largest company in the index has a market capitalization
of approximately $1.4 billion. The Russell 1000(R) Index (the "Russell 1000")
measures the performance of the 1,000 largest companies in the Russell 3000. The
average market capitalization is approximately $9.9 billion. The smallest
company in the index has an approximate market capitalization of $1.4 billion.
The Russell MidcapTM Index measures performance of the 800 smallest companies in
the Russell 1000. The largest company in the index has an approximate market
capitalization of $10.3 billion.
The Russell indexes are reconstituted annually as of July 1, based on May 31
market capitalization rankings.
WILSHIRE REAL ESTATE SECURITIES INDEX. The Wilshire Real Estate Securities Index
is a market capitalization weighted index of 119 publicly traded real estate
securities, such as REITs, real estate operating companies ("REOCs") and
partnerships.
63
<PAGE>
The index contains performance data on five major categories of property:
office, retail, industrial, apartment and miscellaneous. The companies in the
index are 94.11% equity and hybrid REITs and 5.89% REOCs.
STANDARD & POOR'S MIDCAP 400 INDEX. The S&P 400 is a
market-capitalization-weighted index. The performance data for the index were
calculated by taking the stocks presently in the index and tracking them
backwards in time as long as there were prices reported. No attempt was made to
determine what stocks "might have been" in the S&P 400 five or ten years ago had
it existed. Dividends are reinvested on a monthly basis prior to June 30, 1991,
and are reinvested daily thereafter.
LIPPER BALANCED FUNDS INDEX. This index represents equally weighted performance,
adjusted for capital gains distributions and income dividends, of approximately
30 of the largest funds with a primary objective of conserving principal by
maintaining at all times a balanced portfolio of stocks and bonds.
Typically, the stock/bond ratio ranges around 60%/40%.
LEHMAN BROTHERS AGGREGATE BOND INDEX. The Lehman Brothers Aggregate Bond Index
is composed of the Lehman Brothers Government/Corporate Index, the Lehman
Brothers Mortgage-Backed Securities Index and the Lehman Brothers Asset-Backed
Securities Index. The index includes fixed rate debt issues rated investment
grade or higher by Moody's Investors Service, Standard & Poor's Corporation or
Fitch Investors Service, in that order. All issues have at least one year to
maturity with intermediate indices including bonds with maturities up to ten
years and long-term indices composed of bonds with maturities longer than ten
years. All returns are market value weighted inclusive of accrued interest.
BANK SAVINGS ACCOUNT. Data sources include the U.S. League of Savings
Institutions Sourcebook; average annual yield on savings deposits in FSLIC
[FDIC] insured savings institutions for the years 1963 to 1987; and The Wall
Street Journal thereafter.
Sources: Ibbotson Associates, Towers Data Systems, Lipper, Inc. and PGI
64
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE STATISTICS - TOTAL RETURN PERCENT
DOW S&P/ S&P/
JONES U.S. SMALL BARRA BARRA MERRILL LYNCH
S&P INDUSTRIAL STOCK U.S. 500 500 MICRO-CAP
500 AVERAGE INDEX INFLATION GROWTH VALUE INDEX
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dec 1925 N/A N/A N/A N/A N/A N/A N/A
Dec 1926 11.62 N/A 0.28 -1.49 N/A N/A N/A
Dec 1927 37.49 N/A 22.10 -2.08 N/A N/A N/A
Dec 1928 43.61 55.38 39.69 -0.97 N/A N/A N/A
Dec 1929 -8.42 -13.64 -51.36 0.20 N/A N/A N/A
Dec 1930 -24.90 -30.22 -38.15 -6.03 N/A N/A N/A
Dec 1931 -43.34 -49.02 -49.75 -9.52 N/A N/A N/A
Dec 1932 -8.19 -16.88 -5.39 -10.30 N/A N/A N/A
Dec 1933 53.99 73.72 142.87 0.51 N/A N/A N/A
Dec 1934 -1.44 8.08 24.22 2.03 N/A N/A N/A
Dec 1935 47.67 43.77 40.19 2.99 N/A N/A N/A
Dec 1936 33.92 30.23 64.80 1.21 N/A N/A N/A
Dec 1937 -35.03 -28.88 -58.01 3.10 N/A N/A N/A
Dec 1938 31.12 33.16 32.80 -2.78 N/A N/A N/A
Dec 1939 -0.41 1.31 0.35 -0.48 N/A N/A N/A
Dec 1940 -9.78 -7.96 -5.16 0.96 N/A N/A N/A
Dec 1941 -11.59 -9.88 -9.00 9.72 N/A N/A N/A
Dec 1942 20.34 14.13 44.51 9.29 N/A N/A N/A
Dec 1943 25.90 19.06 88.37 3.16 N/A N/A N/A
Dec 1944 19.75 17.19 53.72 2.11 N/A N/A N/A
Dec 1945 36.44 31.60 73.61 2.25 N/A N/A N/A
Dec 1946 -8.07 -4.40 -11.63 18.16 N/A N/A N/A
Dec 1947 5.71 7.61 0.92 9.01 N/A N/A N/A
Dec 1948 5.50 4.27 -2.11 2.71 N/A N/A N/A
Dec 1949 18.79 20.92 19.75 -1.80 N/A N/A N/A
Dec 1950 31.71 26.40 38.75 5.79 N/A N/A N/A
Dec 1951 24.02 21.77 7.80 5.87 N/A N/A N/A
Dec 1952 18.37 14.58 3.03 0.88 N/A N/A N/A
Dec 1953 -0.99 2.02 -6.49 0.62 N/A N/A N/A
Dec 1954 52.62 51.25 60.58 -0.50 N/A N/A N/A
Dec 1955 31.56 26.58 20.44 0.37 N/A N/A N/A
Dec 1956 6.56 7.10 4.28 2.86 N/A N/A N/A
Dec 1957 -10.78 -8.63 -14.57 3.02 N/A N/A N/A
Dec 1958 43.36 39.31 64.89 1.76 N/A N/A N/A
Dec 1959 11.96 20.21 16.40 1.50 N/A N/A N/A
Dec 1960 0.47 -6.14 -3.29 1.48 N/A N/A N/A
Dec 1961 26.89 22.60 32.09 0.67 N/A N/A N/A
Dec 1962 -8.73 -7.43 -11.90 1.22 N/A N/A N/A
Dec 1963 22.80 20.83 23.57 1.65 N/A N/A N/A
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE STATISTICS - TOTAL RETURN PERCENT
DOW S&P/ S&P/
JONES U.S. SMALL BARRA 500 BARRA MERRILL LYNCH
S&P INDUSTRIAL STOCK U.S. GROWTH 500 MICRO-CAP
500 AVERAGE INDEX INFLATION VALUE INDEX
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dec 1964 16.48 18.85 23.52 1.19 N/A N/A N/A
Dec 1965 12.45 14.39 41.75 1.92 N/A N/A N/A
Dec 1966 -10.06 -15.78 -7.01 3.35 N/A N/A N/A
Dec 1967 23.98 19.16 83.57 3.04 N/A N/A N/A
Dec 1968 11.06 7.93 35.97 4.72 N/A N/A N/A
Dec 1969 -8.50 -11.78 -25.05 6.11 N/A N/A N/A
Dec 1970 4.01 9.21 -17.43 5.49 N/A N/A N/A
Dec 1971 14.31 9.83 16.50 3.36 N/A N/A N/A
Dec 1972 18.98 18.48 4.43 3.41 N/A N/A N/A
Dec 1973 -14.66 -13.28 -30.90 8.80 N/A N/A N/A
Dec 1974 -26.47 -23.58 -19.95 12.20 N/A N/A N/A
Dec 1975 37.20 44.75 52.82 7.01 31.72 43.38 N/A
Dec 1976 23.84 22.82 57.38 4.81 13.84 34.93 N/A
Dec 1977 -7.18 -12.84 25.38 6.77 -11.82 -2.57 N/A
Dec 1978 6.56 2.79 23.46 9.03 6.78 6.16 27.76
Dec 1979 18.44 10.55 43.46 13.31 15.72 21.16 43.18
Dec 1980 32.42 22.17 39.88 12.40 39.40 23.59 32.32
Dec 1981 -4.91 -3.57 13.88 8.94 -9.81 0.02 9.18
Dec 1982 21.41 27.11 28.01 3.87 22.03 21.04 33.62
Dec 1983 22.51 25.97 39.67 3.80 16.24 28.89 42.44
Dec 1984 6.27 1.31 -6.67 3.95 2.33 10.52 -14.97
Dec 1985 32.16 33.55 24.66 3.77 33.31 29.68 22.89
Dec 1986 18.47 27.10 6.85 1.13 14.50 21.67 3.45
Dec 1987 5.23 5.48 -9.30 4.41 6.50 3.68 -13.84
Dec 1988 16.81 16.14 22.87 4.42 11.95 21.67 22.76
Dec 1989 31.49 32.19 10.18 4.65 36.40 26.13 8.06
Dec 1990 -3.17 -0.56 -21.56 6.11 0.20 -6.85 -29.55
Dec 1991 30.55 24.19 44.63 3.06 38.37 22.56 57.44
Dec 1992 7.67 7.41 23.35 2.90 5.07 10.53 36.62
Dec 1993 9.99 16.94 20.98 2.75 1.68 18.60 31.32
Dec 1994 1.31 5.06 3.11 2.67 3.13 -0.64 1.81
Dec 1995 37.43 36.84 34.46 2.54 38.13 36.99 30.70
Dec 1996 23.07 28.84 17.62 3.32 23.96 21.99 13.88
Dec 1997 33.36 24.88 22.78 1.70 36.52 29.98 24.61
Dec 1998 28.58 18.15 -7.31 1.80 42.16 14.67 -6.15
Dec 1999
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE STATISTICS - TOTAL RETURN PERCENT
LONG- INTERMEDIATE- MSCI LONG-
TERM TERM U.S. EAFE 6- TERM U.S. U.S.
U.S. GOV'T GOVERNMENT (NET OF MONTH CORPORATE LB IT T-BILL
BONDS BONDS TAXES) CDS BONDS GOV'T/CORP (30-DAY)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dec 1925 N/A N/A N/A N/A N/A N/A N/A
Dec 1926 7.77 5.38 N/A N/A 7.37 N/A 3.27
Dec 1927 8.93 4.52 N/A N/A 7.44 N/A 3.12
Dec 1928 0.10 0.92 N/A N/A 2.84 N/A 3.56
Dec 1929 3.42 6.01 N/A N/A 3.27 N/A 4.75
Dec 1930 4.66 6.72 N/A N/A 7.98 N/A 2.41
Dec 1931 -5.31 -2.32 N/A N/A -1.85 N/A 1.07
Dec 1932 16.84 8.81 N/A N/A 10.82 N/A 0.96
Dec 1933 -0.07 1.83 N/A N/A 10.38 N/A 0.30
Dec 1934 10.03 9.00 N/A N/A 13.84 N/A 0.16
Dec 1935 4.98 7.01 N/A N/A 9.61 N/A 0.17
Dec 1936 7.52 3.06 N/A N/A 6.74 N/A 0.18
Dec 1937 0.23 1.56 N/A N/A 2.75 N/A 0.31
Dec 1938 5.53 6.23 N/A N/A 6.13 N/A -0.02
Dec 1939 5.94 4.52 N/A N/A 3.97 N/A 0.02
Dec 1940 6.09 2.96 N/A N/A 3.39 N/A 0.00
Dec 1941 0.93 0.50 N/A N/A 2.73 N/A 0.06
Dec 1942 3.22 1.94 N/A N/A 2.60 N/A 0.27
Dec 1943 2.08 2.81 N/A N/A 2.83 N/A 0.35
Dec 1944 2.81 1.80 N/A N/A 4.73 N/A 0.33
Dec 1945 10.73 2.22 N/A N/A 4.08 N/A 0.33
Dec 1946 -0.10 1.00 N/A N/A 1.72 N/A 0.35
Dec 1947 -2.62 0.91 N/A N/A -2.34 N/A 0.50
Dec 1948 3.40 1.85 N/A N/A 4.14 N/A 0.81
Dec 1949 6.45 2.32 N/A N/A 3.31 N/A 1.10
Dec 1950 0.06 0.70 N/A N/A 2.12 N/A 1.20
Dec 1951 -3.93 0.36 N/A N/A -2.69 N/A 1.49
Dec 1952 1.16 1.63 N/A N/A 3.52 N/A 1.66
Dec 1953 3.64 3.23 N/A N/A 3.41 N/A 1.82
Dec 1954 7.19 2.68 N/A N/A 5.39 N/A 0.86
Dec 1955 -1.29 -0.65 N/A N/A 0.48 N/A 1.57
Dec 1956 -5.59 -0.42 N/A N/A -6.81 N/A 2.46
Dec 1957 7.46 7.84 N/A N/A 8.71 N/A 3.14
Dec 1958 -6.09 -1.29 N/A N/A -2.22 N/A 1.54
Dec 1959 -2.26 -0.39 N/A N/A -0.97 N/A 2.95
Dec 1960 13.78 11.76 N/A N/A 9.07 N/A 2.66
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE STATISTICS - TOTAL RETURN PERCENT
LONG- INTERMEDIATE- MSCI LONG-
TERM TERM U.S. EAFE 6- TERM U.S. U.S.
U.S. GOV'T GOVERNMENT (NET OF MONTH CORPORATE LB IT T-BILL
BONDS BONDS TAXES) CDS BONDS GOV'T/CORP (30-DAY)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dec 1961 0.97 1.85 N/A N/A 4.82 N/A 2.13
Dec 1962 6.89 5.56 N/A N/A 7.95 N/A 2.73
Dec 1963 1.21 1.64 N/A N/A 2.19 N/A 3.12
Dec 1964 3.51 4.04 N/A 4.17 4.77 N/A 3.54
Dec 1965 0.71 1.02 N/A 4.68 -0.46 N/A 3.93
Dec 1966 3.65 4.69 N/A 5.76 0.20 N/A 4.76
Dec 1967 -9.18 1.01 N/A 5.47 -4.95 N/A 4.21
Dec 1968 -0.26 4.54 N/A 6.45 2.57 N/A 5.21
Dec 1969 -5.07 -0.74 N/A 8.70 -8.09 N/A 6.58
Dec 1970 12.11 16.86 -11.66 7.06 18.37 N/A 6.52
Dec 1971 13.23 8.72 29.59 5.36 11.01 N/A 4.39
Dec 1972 5.69 5.16 36.35 5.39 7.26 N/A 3.84
Dec 1973 -1.11 4.61 -14.92 8.60 1.14 3.34 6.93
Dec 1974 4.35 5.69 -23.16 10.20 -3.06 5.58 8.00
Dec 1975 9.20 7.83 35.39 6.51 14.64 9.50 5.80
Dec 1976 16.75 12.87 2.54 5.22 18.65 12.34 5.08
Dec 1977 -0.69 1.41 18.06 6.11 1.71 3.31 5.12
Dec 1978 -1.18 3.49 32.62 10.21 -0.07 2.13 7.18
Dec 1979 -1.23 4.09 4.75 11.90 -4.18 6.00 10.38
Dec 1980 -3.95 3.91 22.58 12.33 -2.76 6.41 11.24
Dec 1981 1.86 9.45 -2.28 15.50 -1.24 10.50 14.71
Dec 1982 40.36 29.10 -1.86 12.18 42.56 26.10 10.54
Dec 1983 0.65 7.41 23.69 9.65 6.26 8.61 8.80
Dec 1984 15.48 14.02 7.38 10.65 16.86 14.38 9.85
Dec 1985 30.97 20.33 56.16 7.82 30.09 18.05 7.72
Dec 1986 24.53 15.14 69.44 6.30 19.85 13.12 6.16
Dec 1987 -2.71 2.90 24.63 6.59 -0.27 3.67 5.47
Dec 1988 9.67 6.10 28.27 8.15 10.70 6.78 6.35
Dec 1989 18.11 13.29 10.54 8.27 16.23 12.76 8.37
Dec 1990 6.18 9.73 -23.45 7.85 6.78 9.17 7.81
Dec 1991 19.30 15.46 12.13 4.95 19.89 14.63 5.60
Dec 1992 8.05 7.19 -12.17 3.27 9.39 7.17 3.51
Dec 1993 18.24 11.24 32.56 2.88 13.19 8.73 2.90
Dec 1994 -7.77 -5.14 7.78 5.40 -5.76 -1.95 3.90
Dec 1995 31.67 16.80 11.21 5.21 27.20 15.31 5.60
Dec 1996 -0.93 2.10 6.05 5.21 1.40 4.06 5.21
Dec 1997 15.85 8.38 1.78 5.71 12.95 7.87 5.26
Dec 1998 13.06 10.21 20.00 5.34 10.76 8.42 4.86
Dec 1999
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE STATISTICS - TOTAL RETURN PERCENT
NAREIT LIPPER MSCI
EQUITY RUSSELL WILSHIRE BALANCED EMERGING BANK
REIT 2000 REAL ESTATE S&P FUND MARKETS SAVINGS
INDEX INDEX SECURITIES 400 INDEX FREE INDEX ACCOUNT
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dec 1925 N/A N/A N/A N/A N/A N/A N/A
Dec 1926 N/A N/A N/A N/A N/A N/A N/A
Dec 1927 N/A N/A N/A N/A N/A N/A N/A
Dec 1928 N/A N/A N/A N/A N/A N/A N/A
Dec 1929 N/A N/A N/A N/A N/A N/A N/A
Dec 1930 N/A N/A N/A N/A N/A N/A 5.30
Dec 1931 N/A N/A N/A N/A N/A N/A 5.10
Dec 1932 N/A N/A N/A N/A N/A N/A 4.10
Dec 1933 N/A N/A N/A N/A N/A N/A 3.40
Dec 1934 N/A N/A N/A N/A N/A N/A 3.50
Dec 1935 N/A N/A N/A N/A N/A N/A 3.10
Dec 1936 N/A N/A N/A N/A N/A N/A 3.20
Dec 1937 N/A N/A N/A N/A N/A N/A 3.50
Dec 1938 N/A N/A N/A N/A N/A N/A 3.50
Dec 1939 N/A N/A N/A N/A N/A N/A 3.40
Dec 1940 N/A N/A N/A N/A N/A N/A 3.30
Dec 1941 N/A N/A N/A N/A N/A N/A 3.10
Dec 1942 N/A N/A N/A N/A N/A N/A 3.00
Dec 1943 N/A N/A N/A N/A N/A N/A 2.90
Dec 1944 N/A N/A N/A N/A N/A N/A 2.80
Dec 1945 N/A N/A N/A N/A N/A N/A 2.50
Dec 1946 N/A N/A N/A N/A N/A N/A 2.20
Dec 1947 N/A N/A N/A N/A N/A N/A 2.30
Dec 1948 N/A N/A N/A N/A N/A N/A 2.30
Dec 1949 N/A N/A N/A N/A N/A N/A 2.40
Dec 1950 N/A N/A N/A N/A N/A N/A 2.50
Dec 1951 N/A N/A N/A N/A N/A N/A 2.60
Dec 1952 N/A N/A N/A N/A N/A N/A 2.70
Dec 1953 N/A N/A N/A N/A N/A N/A 2.80
Dec 1954 N/A N/A N/A N/A N/A N/A 2.90
Dec 1955 N/A N/A N/A N/A N/A N/A 2.90
Dec 1956 N/A N/A N/A N/A N/A N/A 3.00
Dec 1957 N/A N/A N/A N/A N/A N/A 3.30
Dec 1958 N/A N/A N/A N/A N/A N/A 3.38
Dec 1959 N/A N/A N/A N/A N/A N/A 3.53
Dec 1960 N/A N/A N/A N/A 5.77 N/A 3.86
Dec 1961 N/A N/A N/A N/A 20.59 N/A 3.90
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE STATISTICS - TOTAL RETURN PERCENT
NAREIT LIPPER MSCI
EQUITY RUSSELL WILSHIRE BALANCED EMERGING BANK
REIT 2000 REAL ESTATE S&P FUND MARKETS SAVINGS
INDEX INDEX SECURITIES 400 INDEX FREE INDEX ACCOUNT
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dec 1962 N/A N/A N/A N/A -6.80 N/A 4.08
Dec 1963 N/A N/A N/A N/A 13.10 N/A 4.17
Dec 1964 N/A N/A N/A N/A 12.36 N/A 4.19
Dec 1965 N/A N/A N/A N/A 9.80 N/A 4.23
Dec 1966 N/A N/A N/A N/A -5.86 N/A 4.45
Dec 1967 N/A N/A N/A N/A 15.09 N/A 4.67
Dec 1968 N/A N/A N/A N/A 13.97 N/A 4.68
Dec 1969 N/A N/A N/A N/A -9.01 N/A 4.80
Dec 1970 N/A N/A N/A N/A 5.62 N/A 5.14
Dec 1971 N/A N/A N/A N/A 13.90 N/A 5.30
Dec 1972 8.01 N/A N/A N/A 11.13 N/A 5.37
Dec 1973 -15.52 N/A N/A N/A -12.24 N/A 5.51
Dec 1974 -21.40 N/A N/A N/A -18.71 N/A 5.96
Dec 1975 19.30 N/A N/A N/A 27.10 N/A 6.21
Dec 1976 47.59 N/A N/A N/A 26.03 N/A 6.23
Dec 1977 22.42 N/A N/A N/A -0.72 N/A 6.39
Dec 1978 10.34 N/A 13.04 N/A 4.80 N/A 6.56
Dec 1979 35.86 43.09 70.81 N/A 14.67 N/A 7.29
Dec 1980 24.37 38.58 22.08 N/A 19.70 N/A 8.78
Dec 1981 6.00 2.03 7.18 N/A 1.86 N/A 10.71
Dec 1982 21.60 24.95 24.47 22.68 30.63 N/A 11.19
Dec 1983 30.64 29.13 27.61 26.10 17.44 N/A 9.71
Dec 1984 20.93 -7.30 20.64 1.18 7.46 N/A 9.92
Dec 1985 19.10 31.05 22.20 35.58 29.83 N/A 9.02
Dec 1986 19.16 5.68 20.30 16.21 18.43 N/A 7.84
Dec 1987 -3.64 -8.77 -7.86 -2.03 4.13 N/A 6.92
Dec 1988 13.49 24.89 24.18 20.87 11.18 40.43 7.20
Dec 1989 8.84 16.24 2.37 35.54 19.70 64.96 7.91
Dec 1990 -15.35 -19.51 -33.46 -5.12 0.66 -10.55 7.80
Dec 1991 35.70 46.05 20.03 50.10 25.83 59.91 4.61
Dec 1992 14.59 18.41 7.36 11.91 7.46 11.40 2.89
Dec 1993 19.65 18.91 15.24 13.96 11.95 74.83 2.73
Dec 1994 3.17 -1.82 1.64 -3.57 -2.05 -7.32 4.96
Dec 1995 15.27 28.44 13.65 30.94 24.89 -5.21 5.24
Dec 1996 35.26 16.49 36.87 19.20 13.05 6.03 4.95
Dec 1997 20.29 22.36 19.80 32.26 20.30 -11.59 5.17
Dec 1998 -17.51 -2.55 -17.63 19.12 15.09 -25.34 4.63
Dec 1999
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE STATISTICS - TOTAL RETURN PERCENT
MERRILL LYNCH INDEX
MSCI ALL COUNTRY OF ALL CONVERTIBLES,
MSCI ALL COUNTRY (AC) (AC) ASIA PACIFIC LEHMAN BROTHERS MERRILL LYNCH HIGH SPECULATIVE QUALITY
ASIA FREE EX JAPAN FREE EX JAPAN AGGREGATE BOND INDEX YIELD MASTER II INDEX
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dec 1925 N/A N/A N/A
Dec 1926 N/A N/A N/A
Dec 1927 N/A N/A N/A
Dec 1928 N/A N/A N/A
Dec 1929 N/A N/A N/A
Dec 1930 N/A N/A N/A
Dec 1931 N/A N/A N/A
Dec 1932 N/A N/A N/A
Dec 1933 N/A N/A N/A
Dec 1934 N/A N/A N/A
Dec 1935 N/A N/A N/A
Dec 1936 N/A N/A N/A
Dec 1937 N/A N/A N/A
Dec 1938 N/A N/A N/A
Dec 1939 N/A N/A N/A
Dec 1940 N/A N/A N/A
Dec 1941 N/A N/A N/A
Dec 1942 N/A N/A N/A
Dec 1943 N/A N/A N/A
Dec 1944 N/A N/A N/A
Dec 1945 N/A N/A N/A
Dec 1946 N/A N/A N/A
Dec 1947 N/A N/A N/A
Dec 1948 N/A N/A N/A
Dec 1949 N/A N/A N/A
Dec 1950 N/A N/A N/A
Dec 1951 N/A N/A N/A
Dec 1952 N/A N/A N/A
Dec 1953 N/A N/A N/A
Dec 1954 N/A N/A N/A
Dec 1955 N/A N/A N/A
Dec 1956 N/A N/A N/A
Dec 1957 N/A N/A N/A
Dec 1958 N/A N/A N/A
Dec 1959 N/A N/A N/A
Dec 1960 N/A N/A N/A
Dec 1961 N/A N/A N/A
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
PERFORMANCE STATISTICS - TOTAL RETURN PERCENT
MERRILL LYNCH INDEX
MSCI ALL COUNTRY OF ALL CONVERTIBLES,
MSCI ALL COUNTRY (AC) (AC) ASIA PACIFIC LEHMAN BROTHERS MERRILL LYNCH HIGH SPECULATIVE QUALITY
ASIA FREE EX JAPAN FREE EX JAPAN AGGREGATE BOND INDEX YIELD MASTER II INDEX
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dec 1962 N/A N/A N/A
Dec 1963 N/A N/A N/A
Dec 1964 N/A N/A N/A
Dec 1965 N/A N/A N/A
Dec 1966 N/A N/A N/A
Dec 1967 N/A N/A N/A
Dec 1968 N/A N/A N/A
Dec 1969 N/A N/A N/A
Dec 1970 N/A N/A N/A
Dec 1971 N/A N/A N/A
Dec 1972 N/A N/A N/A
Dec 1973 N/A N/A N/A
Dec 1974 N/A N/A N/A
Dec 1975 N/A N/A N/A
Dec 1976 N/A N/A 15.62
Dec 1977 N/A N/A 3.05
Dec 1978 N/A N/A 1.39
Dec 1979 N/A N/A 1.94
Dec 1980 N/A N/A 2.70
Dec 1981 N/A N/A 6.23
Dec 1982 N/A N/A 32.62
Dec 1983 N/A N/A 8.37
Dec 1984 N/A N/A 15.14
Dec 1985 N/A N/A 22.11
Dec 1986 N/A N/A 15.29
Dec 1987 N/A N/A 2.75
Dec 1988 30.00 30.45 7.89
Dec 1989 32.13 21.43 14.53
Dec 1990 -6.54 -11.86 8.95
Dec 1991 30.98 32.40 16.00
Dec 1992 21.81 9.88 7.40
Dec 1993 103.39 84.94 9.75
Dec 1994 -16.94 -12.59 -2.92
Dec 1995 4.00 10.00 18.48
Dec 1996 10.05 8.08 3.61
Dec 1997 -40.31 -34.20 9.68
Dec 1998 -7.79 -4.42 8.67
Dec 1999
Source: Lipper, Inc.
</TABLE>
72
<PAGE>
21. APPENDIX D - OTHER PIONEER INFORMATION
The Pioneer group of mutual funds was established in 1928 with the creation of
Pioneer Fund. Pioneer is one of the oldest and most experienced money managers
in the U.S.
As of June 30, 1999, Pioneer employed a professional investment staff of __.
Total assets of all Pioneer mutual funds at December 31, 1999, were
approximately $__ billion representing ___________ shareholder accounts,
___________ non-retirement accounts and ___________ retirement accounts.
73
<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.
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
<PAGE>
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.
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,
2
<PAGE>
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.
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 $0.16 per Fund share. This distribution is payable
January 6, 1999 to Fund shareholders of record on December 30, 1998. The precise
amount of the distribution will be determined based on the total number of Fund
shares outstanding on the close of business on the record date, December 30,
1998. The distribution is payable in cash or, for those shareholders who have
elected the reinvestment option, in additional Fund shares at the Fund's net
asset value on December 31, 1998, the "ex" date, or valuation date, for
reinvestment.
3
<PAGE>
I look forward to writing to you again when the first quarter report for the
period ending January 31, 1999 is published.
Sincerely,
/s/ Margaret D. Patel
Margaret D. Patel
Portfolio Manager, Third Avenue High Yield Fund
4
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 1998
PRINCIPAL VALUE % OF NET
AMOUNT ($) ISSUES (NOTE 1) 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 Devices 300,000 HMT Technology Corp. 5.75%,
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
Semiconductors 247,000
325,000 Cypress Semiconductors Corp.
6.00%, due 10/1/02 292,906
--------------
539,906 7.02%
--------------
Instrumentation - Electronic 600,000 Credence Systems Corp. 5.25%,
Testing due 9/15/02 444,000 5.77%
--------------
Lasers - Systems/Components 450,000 Cymer, Inc. 3.50%, due
8/6/04 300,937 3.91%
--------------
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 Services 505,000 PhyMatrix Corp. 6.75%, due
6/15/03 202,631 2.63%
--------------
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 - Wireless 500,000 P-Com, Inc 4.25%, due 11/1/02 193,125 2.51%
--------------
TOTAL CONVERTIBLE BONDS
(Cost $5,617,360) 4,465,881
--------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1998
VALUE % OF NET
SHARES ISSUES (NOTE 1) 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 $ 137,374 1.79%
--------------
Diversified Manufacturing 5,000 Coltec Capital Trust 144A 5.25%,
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 - Long Term/Subacute 9,000 Sun Financing I 144A 7.00%, 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 - Wireless 5,000 Winstar Communications, Inc.
144A 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 $2,164,353) 1,479,813
--------------
<CAPTION>
PRINCIPAL
AMOUNT ($)
- ------------------------------ --------------- ---------------------------------- -------------- -----------
<S> <C> <C> <C> <C>
CORPORATE BONDS - 18.32%
Electric Utility Services 500,000 CalEnergy Co., Inc. 8.48%, due
9/15/28 520,625 6.77%
--------------
Real Estate - Commercial 500,000 BF Saul REIT 144A 9.75%, 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
--------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1998
VALUE % OF NET
SHARES ISSUES (NOTE 1) ASSETS
- ------------------------------ --------------- ---------------------------------- -------------- -----------
<S> <C> <C> <C> <C>
COMMON STOCKS - 0.14%
Telecommunications - Wireless 399 Winstar Communications, Inc (a)
$ 10,773 0.14%
--------------
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%
(Applicable to 904,440 shares
outstanding) $7,691,236
==============
Notes:
(a) Non-income producing security.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
<S> <C>
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.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED OCTOBER 31, 1998*
<S> <C>
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.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD
ENDED 10/31/98*
<S> <C>
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.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
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*
<S> <C>
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.
</TABLE>
11
<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,
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.
12
<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.
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-
13
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
term securities with original or remaining maturities in excess of 60 days are
valued at the mean of their quoted bid and asked prices. Short-term securities
with 60 days or less to maturity are amortized to maturity based on their cost
if acquired within 60 days of maturity, or if already held by a Fund on that
day, based on the value determined on that day.
The Funds may invest up to 15% of their total assets in securities which are not
readily marketable, including those which are restricted as to disposition under
applicable securities laws ("restricted securities"). Restricted securities and
other securities and assets for which market quotations are not readily
available are valued at "fair value", as determined in good faith by the Board
of Trustees of the Funds, although actual evaluations may be made by personnel
acting under procedures established by the Board of Trustees. At 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 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
14
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
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.
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 SECURITIES VALUE OF
FUND 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.
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
15
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
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)
TO ACCUMULATED
INCREASE (DECREASE) UNDISTRIBUTED
TO ACCUMULATED NET REALIZED INCREASE
UNDISTRIBUTED GAIN (LOSS) ON (DECREASE) TO
NET INVESTMENT INVESTMENTS AND ADDITIONAL
INCOME (LOSS) 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>
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.
16
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
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:
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>
NET
GROSS GROSS 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 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.
17
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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
FUND TOTAL COMMISSIONS M.J. WHITMAN SR. 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:
<TABLE>
<CAPTION>
THIRD AVENUE VALUE FUND
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>
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 --
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, 551,900 3,682,900 -- 4,234,800 54,258,375 --
Inc.
SpeedFam International,
Inc. -- 1,605,000 -- 1,605,000 25,880,625 --
18
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
<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>
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
============ ==========
* Increase due to a 3:2 stock split on 1/15/98, and a 3:1 stock split on
7/17/98.
</TABLE>
<TABLE><CAPTION>
THIRD AVENUE SMALL-CAP VALUE FUND
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 THIRD AVENUE
THIRD AVENUE AVENUE HIGH REAL ESTATE
THIRD AVENUE VALUE FUND SMALL-CAP VALUE FUND YIELD FUND VALUE FUND
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE FOR THE PERIOD FOR THE
ENDED ENDED ENDED PERIOD ENDED ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1998 1998 1998 1998 1998 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Increase in Fund shares:
Shares outstanding at
beginning of period 51,537,358 23,364,688 8,670,943 -- -- --
Shares sold 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
19
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
segregated to meet the requirements of this commitment. This commitment may
be payable upon demand of Head Insurance Investors LP.
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.
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:
20
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1998
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 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.
21
<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
22
<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.
23
<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
THIRD AVENUE FUNDS
767 THIRD AVENUE
NEW YORK, NY 10017-2023
Phone (212) 888-5222
Toll Free (800) 443-1021
Fax (212) 888-6757
www.thirdavenuefunds.com
24
<PAGE>
THIRD AVENUE HIGH YIELD FUND
Dear Fellow Shareholders:
At April 30, 1999, the unaudited net asset value attributable to the 916,197
common shares outstanding of the Third Avenue High Yield Fund (the "Fund") was
$9.41 per share. On March 31, 1999, the most recent dividend date, the Fund paid
$0.167 per share in dividends, representing income received from the Fund's
holdings of fixed income securities. Since the end of the Fund's last fiscal
year, ending on October 31, 1998, when the Fund's net asset value was $8.50, a
total of $0.35 per share has been paid in dividends. On January 31, 1999, the
last day of the Fund's first fiscal quarter, the net asset value per share was
$9.58. At May 20, 1999, the net asset value per share was $9.64.
QUARTERLY ACTIVITY
During the second quarter of fiscal 1999, the Fund made small reductions in
three holdings, and established three new positions, as shown below.
PAR VALUE
OR NUMBER OF SHARES REDUCTIONS IN EXISTING POSITIONS
$100,000 Alpharma, Inc. 144A 5.75% due 4/01/05
$100,00 Credence Systems Corp. 5.25% due 9/15/02
1,000 shares Nextlink Communications, Inc. 144A 6.50%,
due 3/31/10
These reductions were made in order to better reflect what we thought were
appropriate weightings for these holdings, given their substantial appreciation
at the time of their sales in the fiscal year. We continue to regard the
business prospects of these companies favorably, and expect to retain our still
significant positions.
Alpharma is a generic pharmaceutical company which develops and sells a wide
range of human and animal health products worldwide, and has grown steadily
through development of new products and selected acquisitions.
Credence Systems makes automatic test equipment and software used in the
production of semiconductors. It sells its products worldwide to semiconductor
makers, and after some delays in the introduction of new products, should have a
good increase in sales as these products have been received quite favorably by
its customers. Its equipment is increasingly focused on the most rapidly growing
segments of the semiconductor market: those used in telecommunications, internet
applications, media and consumer devices.
NEXTLINK is a new telecommunications company established in 1996 to provide
local, long distance and data communication services. The company was formed to
take advantage of the many growth opportunities in the industry following the
federal telecommunication act of 1996 which opened competition in
telecommunication services to new entrants.
<PAGE>
PAR VALUE
OR NUMBER OF SHARES NEW POSITIONS ACQUIRED
$500,000 Webb (Del E.) Corp. 10.25% due 2/15/10
4,000 shares KN Energy, Inc. 8.25% due 11/30/01
$250,000 NCI Building Systems, Inc. 144A 9.25% due 5/01/09
Del Webb is one of the US's biggest residential real estate developers, and the
nation's largest developer of planned age-restricted retirement communities,
with operations primarily in the sunbelt states of Nevada, Arizona, California,
Florida, and South Carolina, as well as in Illinois. Recently, the company has
expanded its development activities to include communities without the age
restrictions. It has an excellent track record, diversified locations, and is
well positioned for the move-up buyer, as well as the active adult market
segment.
KN Energy gathers, processes, stores and transports natural gas, and operates
pipelines in the central and western US. It is the nation's sixth largest
integrated natural gas company. Above-normal winter temperatures have reduced
demand for natural gas, and the resulting depressed prices for gas, along with
low oil prices, have recently caused financial results to decline. However, the
company is well run, has diversified operations, and earnings are expected to
recover with more normal seasonal temperatures and higher energy prices in
general. Recently, Sempra Energy offered to acquire KN Energy. San Diego-based
Sempra has started the process of restructuring, as California begins to
deregulate the retail power market, and has sold some assets, while expanding
further into the gas industry, through its offer to purchase KN Energy. The
credit quality of KN Energy would be improved if the acquisition were made,
since Sempra's corporate debt is A-rated, or one level above that of KN Energy.
NCI Building Systems was substantially expanded a year ago with the acquisition
of a major competitor. The company is one of the largest integrated
manufacturers of metal products for the nonresidential building industry. It
operates in 17 states and Mexico. NCI makes and sells metal components and
engineered building systems such as metal roof and wall systems; overhead,
interior and exterior doors; and related accessories, both to the new
construction and renovation markets. With its recent acquisition, it is now
twice as large as its next competitor, has substantial purchasing power because
of its size in a fragmented market, and has proprietary techniques for producing
higher margin coated metal products. Metal roofing products comprise only 6% of
the $21 billion roofing market, but this segment is growing faster than the
industry as a whole due to low cost, flexibility of use, and improvements in
function and appearance.
PORTFOLIO STRUCTURE
The table below lists our largest sector concentrations for the portfolio as of
April 30, 1999, reflecting our emphasis on industries which we feel represent
attractive value.
INDUSTRY PERCENTAGE OF TOTAL ASSETS
Telecommunications 14.54%
Semiconductor capital equipment 13.66%
Diversified technology 12.33%
Real estate 11.56%
Electric and gas utilities 10.58%
We think the telecommunications industry remains an excellent investment, and
have made a substantial commitment. Lower prices, faster transmission speed, and
greater functionality have dramatically changed the nature of telecommunications
in the last few years, and these trends
2
<PAGE>
should continue into the future. Usage of traditional voice services has
expanded much faster than growth of the general economy, as falling prices have
stimulated demand. In addition, increasing amounts of data are being transported
as information needs grow. New demand for an enlarged range of data, video and
voice services, spawned by ever growing internet usage, has also dramatically
multiplied.
Increased uses of semiconductors in a widening array of products continue to
drive the revenues of technology companies, for both SEMICONDUCTOR CAPITAL
EQUIPMENT issuers, and in other TECHNOLOGY based companies. The capital
equipment sector has bottomed out from a two year cyclical decline in new
capacity, but early indications are that an upswing in new investment is
underway. Technology demand is growing not only from augmenting computer sales,
but also from telecommunications' increased utilization of complex chips, as
discussed above. In addition, industrial processes and consumer products
continue to incorporate more intelligence on chips to increase efficiency and
performance characteristics, and always at continuously declining prices.
We believe increasing use of intelligent silicon has been a big contributor to
the higher productivity of the American worker over the past few years.
Technology comprises an ever larger share of our economic activity, with
constantly falling prices, yet offering much higher functionality. So we think
the Fund should reflect these positive trends through the industries in which we
invest.
We regard the REAL ESTATE sector as undervalued, and therefore we have
moderately increased our exposure to this area, as discussed in the new
purchases section above. Our positive view of real estate is shared by our other
Third Avenue funds, which have also increased their commitments.
Our investment in the ELECTRIC AND GAS UTILITY industry has grown in the
quarter. We consider this sector to be under-appreciated by many investors. We
think that deregulation of the retail market, now proceeding on a state by state
basis, will create opportunities for well-run companies to restructure by
selling under-performing assets, and to increase their investment in activities
which will expand their operations and improve their efficiency.
We want to keep the portfolio positioned in front of these high growth trends,
as well as to emphasize those areas that are undervalued in today's often fickle
and short-term oriented marketplace.
Sincerely,
/s/ Margaret D. Patel
Margaret D. Patel
Portfolio Manager, Third Avenue High Yield Fund
3
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1999
(UNAUDITED)
PRINCIPAL VALUE % OF NET
AMOUNT ($) ISSUES (NOTE 1) ASSETS
- ------------------------------ --------------- ---------------------------------- -------------- -----------
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS - 52.46%
Capital Equipment - 450,000 Lam Research Corp. 5.00%,
Semiconductors due 9/1/02 $ 387,000 4.49%
--------------
Computers - Memory Devices 300,000 HMT Technology Corp. 5.75%,
due 1/15/04 111,000 1.29%
--------------
Electric Utility Services 400,000 Itron, Inc. 6.75%, due 3/31/04 286,000 3.32%
--------------
Electronic Components - 325,000 Atmel SA 144A 3.25%, due 6/1/02
Semiconductors 289,656
325,000 Cypress Semiconductors Corp.
6.00%, due 10/1/02 297,781
--------------
587,437 6.81%
--------------
Instrumentation - Electronic 500,000 Credence Systems Corp. 5.25%,
Testing due 9/15/02 418,125 4.85%
--------------
Lasers - Systems/Components 450,000 Cymer, Inc. 3.50%, due
8/6/04 372,375 4.32%
--------------
Medical - Generic Drugs 275,000 Alpharma, Inc. 144A 5.75%, due
4/1/05 335,156 3.89%
--------------
Medical - Hospitals 625,000 Columbia\HCA Medical Care,
Int'l. 6.75%, due 10/1/06 532,813 6.18%
--------------
Medical Management Services 505,000 PhyMatrix Corp. 6.75%, due
6/15/03 238,613 2.77%
--------------
Networking 425,000 Adaptec, Inc. 4.75%, due 2/1/04 364,437 4.23%
--------------
Oil/Gas Exploration 300,000 Range Resources Corp. 6.00%, due
2/1/07 140,250
300,000 Pogo Producing Co. 5.50%, due
6/15/06 240,000
--------------
380,250 4.41%
--------------
Oil Field Services 300,000 Key Energy Group, Inc. 5.00%,
due 9/15/04 175,875 2.04%
--------------
Telecommunications - Wireless 500,000 P-Com, Inc 4.25%, due
11/1/02 (b) 333,125 3.86%
--------------
TOTAL CONVERTIBLE BONDS
(Cost $5,386,485) 4,522,206
--------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1999
(UNAUDITED)
VALUE % OF NET
SHARES ISSUES (NOTE 1) ASSETS
- ------------------------------ --------------- ---------------------------------- -------------- -----------
<S> <C> <C> <C> <C>
CONVERTIBLE PREFERRED STOCK - 21.04%
Auto Parts Original 7,000 Breed Technologies, Inc. 6.50%,
due 11/15/27 $ 73,500 0.85%
--------------
Diversified Manufacturing 5,000 Coltec Capital Trust 144A 5.25%,
due 4/15/28 236,250 2.74%
--------------
Electric Utility Services 4,000 KN Energy, Inc. 8.25%, due
11/30/01 137,000
4,000 Texas Utilities 9.25%, due
8/16/01 205,750
--------------
342,750 3.98%
--------------
Insurance 5,000 Conseco Finance Trust IV 7.00%,
due 2/16/01 210,313 2.44%
--------------
Medical - Long Term/Subacute 9,000 Sun Financing I 144A 7.00%, due
5/1/28 16,875 0.20%
--------------
Rental Auto Equipment 6,000 Budget Group Capital Trust 144A
6.25%, due 6/15/05 223,500 2.59%
--------------
Telecommunications - Wireless 5,000 Winstar Communications, Inc.
144A 7.00% due 3/15/10 283,125 3.28%
--------------
Telephone Services 5,000 NEXTLINK Communications, Inc.
144A 6.50%, due 3/31/10 427,500 4.96%
--------------
TOTAL CONVERTIBLE PREFERRED
Stock (Cost $2,248,256) 1,813,813
--------------
<CAPTION>
PRINCIPAL
AMOUNT ($)
- ------------------------------ --------------- ---------------------------------- -------------- -----------
<S> <C> <C> <C> <C>
CORPORATE BONDS - 26.99%
Building and Construction 250,000 NCI Building Systems, Inc.
Products 9.25%, due 5/1/09 250,000 2.90%
--------------
Electric Utility Services 500,000 MidAmerican Energy Holdings Co.
8.48%, due 09/15/28 568,750 6.60%
--------------
Real Estate - Commercial 500,000 BF Saul REIT 144A 9.75%, due
4/1/08 477,500
500,000 Webb (Del E.) Corp. 10/25%, due
02/15/10 518,750
--------------
996,250 11.56%
--------------
Telephone Services 500,000 Level 3 Communications, Inc.
144A 9.125%, due 5/1/08 511,250 5.93%
--------------
TOTAL CORPORATE BONDS
(Cost $2,240,075) 2,326,250
--------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1999
(UNAUDITED)
VALUE % OF NET
SHARES ISSUES (NOTE 1) ASSETS
- ------------------------------ --------------- ---------------------------------- -------------- -----------
<S> <C> <C> <C> <C>
COMMON STOCKS - 0.37%
Telecommunications - Wireless 663 Winstar Communications, Inc (a)
$ 32,321 0.37%
--------------
TOTAL COMMON STOCK
(Cost $17,403) 32,321
--------------
TOTAL INVESTMENT
PORTFOLIO - 100.86%
(Cost $9,892,219) 8,694,590
--------------
LIABILITIES NET OF CASH AND
OTHER ASSETS - (0.86%) (74,328)
--------------
NET ASSETS - 100.00%
(Applicable to 916,197 shares
outstanding) $8,620,262
==============
NET ASSET VALUE PER SHARE $9.41
==============
Notes:
(a) Non-income producing security.
(b) Securities in whole or in part on loan (See Note 1).
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1999
(UNAUDITED)
<S> <C>
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $9,892,219) $8,694,590
Cash and cash equivalents (Note 1) 134,400
Receivable for fund shares sold 54,841
Receivable from investment adviser 18,762
Interest receivable 112,840
Collateral on loaned securities (Note 1) 345,325
Deferred organizational costs (Note 1) 11,379
Other assets 417
----------
Total assets 9,372,554
----------
LIABILITIES:
Payable for fund shares purchased 250,000
Payable for fund shares redeemed 114,195
Accounts payable and accrued expenses 42,772
Collateral on loaned securities (Note 1) 345,325
----------
Total liabilities 752,292
----------
Net assets $8,620,262
==========
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par value,
916,197 shares outstanding $9,735,622
Accumulated undistributed net investment income 43,103
Accumulated undistributed net realized gains from investment transactions 39,166
Net unrealized depreciation of investments (1,197,629)
----------
Net assets applicable to capital shares outstanding $8,620,262
==========
Net asset value, offering and redemption price per share $9.41
=====
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1999
(UNAUDITED)
<S> <C>
INVESTMENT INCOME:
Interest $ 301,878
Dividends 72,359
----------
Total investment income 374,237
----------
EXPENSES:
Investment advisory fees (Note 3) 37,096
Administration fees (Note 3) 33,784
Directors' fees and expenses 24,453
Registration and filing fees 20,356
Transfer agent fees 13,759
Accounting services 13,528
Auditing and tax consulting fees 9,872
Reports to shareholders 8,183
Custodian fees 3,571
Legal fees 2,474
Amortization of organizational expenses (Note 1) 1,486
Miscellaneous expenses 1,331
----------
Total operating expenses 169,893
----------
Expenses waived and reimbursed (Note 3) (91,578)
----------
Net expenses 78,315
----------
Net investment income 295,922
----------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on investments 89,791
Net change in unrealized appreciation on investments 724,866
----------
Net realized and unrealized gains on investments 814,657
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,110,579
==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX
MONTHS ENDED FOR THE YEAR
4/30/99 ENDED
(UNAUDITED) 10/31/98*
<S> <C> <C>
OPERATIONS:
Net investment income $ 295,922 $ 348,681
Net realized gains (losses) on investments 89,791 (50,625)
Net change in unrealized appreciation (depreciation) on
investments 724,866 (1,922,495)
---------- ----------
Net increase (decrease) in net assets resulting from operations 1,110,579 (1,624,439)
---------- ----------
DISTRIBUTIONS:
Dividends to shareholders from net investment income (307,685) (295,950)
---------- ----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 1,635,584 12,705,359
Net asset value of shares issued in reinvestment of
dividends and distributions 269,624 266,886
Cost of shares redeemed (1,779,076) (3,360,620)
---------- ----------
Net increase in net assets resulting from capital
share transactions 126,132 9,611,625
---------- ----------
Net increase in net assets 929,026 7,691,236
Net assets at beginning of period 7,691,236 0
---------- ----------
Net assets at end of period (including undistributed net
investment income of $43,103 and $54,866, respectively) $8,620,262 $7,691,236
========== ==========
* The Fund commenced investment operations on February 12, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
FINANCIAL HIGHLIGHTS
Selected data (for a share outstanding throughout each period) and ratios are as
follows:
FOR THE SIX
MONTHS FOR THE
ENDED PERIOD
4/30/99 ENDED
(UNAUDITED) 10/31/98*
<S> <C> <C>
Net Asset Value, Beginning of Period $8.50 $10.00
----- ------
Income (loss) from Investment Operations:
Net investment income .34 .34
Net gain (loss) on securities (both realized and unrealized) .92 (1.56)
----- ------
Total from Investment Operations 1.26 (1.22)
----- ------
Less Distributions:
Dividends from net investment income (.35) (.28)
----- ------
Net Asset Value, End of Period $9.41 $ 8.50
===== ======
Total Return 15.02%1 (12.39%)1
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $8,620 $7,691
Ratio of Expenses to Average Net Assets
Before expense reimbursement 4.12%2 3.99%2
After expense reimbursement 1.90%2 1.90%2
Ratio of Net Income to Average Net Assets
Before expense reimbursement 4.96%2 4.13%2
After expense reimbursement 7.18%2 6.22%2
Portfolio Turnover Rate 5%1 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.
</TABLE>
10
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1999
(UNAUDITED)
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
Third Avenue Trust (the "Trust") is an open-end, non-diversified management
investment company organized as a Delaware business trust pursuant to a Trust
Instrument dated October 31, 1996. The Trust currently consists of 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 capitalization of below $1 billion at the time of
investment and believed to be priced below their private market values.
Third Avenue High Yield Fund seeks to achieve its objective by investing at
least 65% of its assets in a portfolio of non-investment grade fixed income or
other debt securities of companies whose capital structures, in the opinion of
EQSF Advisers, Inc., the Fund's investment adviser, have a market value priced
below their private market values.
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.
11
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
Temporary cash investments are valued at cost, plus accrued interest, which
approximates market. Short-term securities with original or remaining maturities
in excess of 60 days are valued at the mean of their quoted bid and asked
prices. Short-term securities with 60 days or less to maturity are amortized to
maturity based on their cost if acquired within 60 days of maturity, or if
already held by a Fund on that day, based on the value determined on that day.
The Funds may invest up to 15% of their total assets in securities which are not
readily marketable, including those which are restricted as to disposition under
applicable securities laws ("restricted securities"). Restricted securities and
other securities and assets for which market quotations are not readily
available are valued at "fair value" as determined in good faith by the Board of
Trustees of the Funds, although actual evaluations may be made by personnel
acting under procedures established by the Board of Trustees. At April 30, 1999,
such securities had a total fair value of $141,497,764 or 10.53% of net assets
of Third Avenue Value Fund and $4,125,327 or 3.09% 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 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.
12
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
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 unrealized
gains (losses) on these contracts. At April 30, 1999, the Fund had two
outstanding foreign currency swap contracts with Bear Stearns. The first swap
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. The second
swap commits the Fund to pay 10.8 billion yen in exchange for 90 million U.S.
dollars on April 22, 2000. The Fund will pay 0.22% interest on the 10.8 billion
yen and Bear Stearns will pay 5.18% interest on the 90 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.
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 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, the Funds 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 April 30, 1999, the following Funds had securities
lending income included in interest income totaling:
FUND
Third Avenue Small-Cap Value Fund $10,512
Third Avenue High Yield Fund 1,461
Third Avenue Real Estate Value Fund 190
The value of loaned securities and related collateral outstanding at April 30,
1999, was as follows:
VALUE OF SECURITIES VALUE OF
FUND LOANED COLLATERAL
Third Avenue Small-Cap Value Fund $8,306,575 $8,875,129
Third Avenue High Yield Fund 345,325 345,325
Third Avenue Real Estate Value Fund 182,500 192,500
13
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
The collateral for all Funds consisted of cash which was invested in repurchase
agreements with Bear Stearns due May 3, 1999 collateralized by U.S. Treasury
securities.
REPURCHASE AGREEMENTS:
The Funds may enter into repurchase agreements whereby the Funds purchase
securities (which are maintained as collateral) with an agreement to resell such
securities upon maturity of the repurchase agreement. 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.
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 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 April 30, 1999 were as follows:
14
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
PURCHASES SALES
Third Avenue Value Fund:
Affiliated $35,368,172 $ 9,482,753
Unaffiliated 23,891,121 288,530,371
Third Avenue Small-Cap Value Fund:
Unaffiliated 10,004,245 12,797,221
Third Avenue High Yield Fund:
Unaffiliated 884,725 428,250
Third Avenue Real Estate Value Fund:
Unaffiliated 3,543,718 --
3. INVESTMENT ADVISORY SERVICES AND SERVICE FEE AGREEMENT
The Funds have an Investment Advisory Agreement with EQSF Advisers, Inc. (the
"Adviser") for investment advice and certain management functions. The terms of
the Investment Advisory Agreement provide for a monthly fee of 1/12 of 0.90% (an
annual fee of 0.90%) of the total average daily net assets of each Fund, payable
each month. Additionally, under the terms of the Investment Advisory Agreement,
the Adviser pays certain expenses on behalf of the Funds, which are reimbursable
by the Funds, including salaries of non-officer employees and other
miscellaneous expenses. Amounts reimbursed with respect to non-officer salaries
are included under the caption Administration fees. At April 30, 1999, 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
$5,226, $2,770, $2,516 and $2,511, 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 period
ended April 30, 1999. The adviser waived fees of $37,096 and $14,139, and
reimbursed $54,482 and $107,704, for Third Avenue High Yield Fund and Third
Avenue Real Estate Value Fund, respectively, for the period ended April 30,
1999.
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 April 30, 1999, the Funds incurred total brokerage commissions,
which includes commissions earned by M.J. Whitman as follows:
15
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
FUND TOTAL COMMISSIONS M.J. WHITMAN
- ---- ----------------- ------------
Third Avenue Value Fund $465,280 $425,490
Third Avenue Small-Cap Value Fund 52,869 44,716
Third Avenue High Yield Fund 400 --
Third Avenue Real Estate Value Fund 15,937 14,924
INVESTMENTS IN FUNDS' AFFILIATES:
A summary of the transactions in securities of affiliated issuers for the period
ended April 30, 1999 is set forth below:
<TABLE>
<CAPTION>
THIRD AVENUE VALUE FUND
SHARES/ SHARES/ DIVIDEND/INTEREST
PRINCIPAL SHARES/ PRINCIPAL INCOME
HELD AT PRINCIPAL SHARES HELD AT VALUE AT NOV. 1, 1998 -
NAME OF ISSUER: OCT. 31, 1998 PURCHASED SOLD APR. 30, 1999 APR. 30, 1999 APR. 30, 1999
- --------------- ------------- --------- ---- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ACMAT Corp. Class A 200,678 -- -- 200,678 $ 2,985,085 --
ADE Corp. 728,900 -- 372,100 356,800 + --
American Physicians
Service Group, Inc. 1,109,900 -- 1,109,900* -- -- --
Avatar Holdings, Inc. 474,300 -- 143,100 331,200 + --
Carver Bancorp, Inc. 218,500 -- -- 218,500 2,021,125 --
CGA Group, Ltd. 838,710 2,502,993 -- 3,341,703 2,925,991 --
CGA Group, Ltd., Series A 238,857 323,379** -- 562,236 14,055,902 $672,400
CGA Group, Ltd., Series B 171,429 28,571 200,000* -- -- --
CGA Group, Ltd., Series C -- 6,045,667 -- 6,045,667 7,039,179 --
CGA Special Account
Trust $6,428,575 $1,071,425 -- $7,500,000 7,500,000 152,847
C.P. Clare Corp. 1,004,500 -- -- 1,004,500 4,018,000 --
Cummins Engine Co., Inc. 250,000 -- -- 250,000 13,375,000 137,500
Danielson Holding Corp. 803,669 -- -- 803,669 3,968,116 --
Electro Scientific
Industries, Inc. 1,600,300 -- -- 1,600,300 61,011,438 --
Electroglas, Inc. 1,846,200 36,300 -- 1,882,500 25,766,719 --
First American Financial
Corp. 3,000,000 75,000 -- 3,075,000 54,965,625 363,000
FSI International, Inc. 2,820,900 -- -- 2,820,900 19,569,994 --
Hologic, Inc. 1,125,000 -- 131,000 994,000 6,771,625 --
Interphase Corp. 300,000 -- 300,000 -- + --
Protocol Systems, Inc. 912,900 1,000 -- 913,900 5,940,350 --
Repap Enterprises Inc. -- 126,605,679 -- 126,605,679 8,862,398 --
Silicon Valley Group, 4,234,800 -- -- 4,234,800 56,111,100 --
Inc.
SpeedFam International,
Inc. 1,605,000 -- -- 1,605,000 18,457,500 --
Stewart Information
Services Corp. 975,700 -- -- 975,700 38,967,019 $146,355
St. George Holdings, Ltd.
Class A 912,442 152,074 -- 1,064,516 106,451 --
St. George Holdings, Ltd.
Class B 7,549 1,495 -- 9,044 905 --
Tecumseh Products Co.
Class A 125,400 -- -- 125,400 7,665,075 75,240
Tecumseh Products Co.
Class B 417,300 -- -- 417,300 23,733,938 250,380
Tejon Ranch Co. 3,045,508 -- -- 3,045,508 61,584,192 76,138
Veeco Instruments, Inc. 663,200 -- -- 663,200 + --
Vertex Communications
Corp. 306,900 -- -- 306,900 4,795,312 --
------------ ----------
Total Affiliates $452,198,039 $1,873,860
============ ==========
* Sold due to merger
** 28,896 share increase due to pay-in-kind dividends.
+ as of April 30, 1999, no longer an affiliate.
</TABLE>
16
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THIRD AVENUE SMALL-CAP VALUE FUND
SHARES/ SHARES/ DIVIDEND/INTEREST
PRINCIPAL SHARES/ PRINCIPAL INCOME
HELD AT PRINCIPAL SHARES HELD AT VALUE AT NOV. 1, 1998 -
NAME OF ISSUER: OCT. 31, 1998 PURCHASED SOLD APR. 30, 1999 APR. 30, 1999 APR. 30, 1999
- --------------- ------------- --------- ---- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Centigram
Communications Corp. 326,900 -- -- 326,900 $2,942,100 --
C.P. Clare Corp. 520,000 -- -- 520,000 2,080,000 --
SpecTran Corp. 490,600 -- -- 490,600 2,820,950 --
---------- --
Total Affiliates $7,843,050 $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 VALUE FUND SMALL-CAP VALUE FUND
FOR THE FOR THE FOR THE FOR THE
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
APRIL 30 1999 OCTOBER 31, APRIL 30, 1999 OCTOBER 31,
(UNAUDITED) 1998 (UNAUDITED) 1998
<S> <C> <C> <C> <C>
Increase (decrease) in Fund shares:
Shares outstanding at beginning
of period 51,081,171 51,537,358 13,096,406 8,670,943
Shares sold 4,160,194 19,502,035 3,169,623 11,057,081
Shares reinvested from dividends
and distributions 578,492 877,124 96,740 46,997
Shares redeemed (13,209,018) (20,835,346) (4,284,849) (6,678,615)
----------- ----------- ---------- ----------
Net increase (decrease) in Fund shares (8,470,332) (456,187) (1,018,486) 4,425,463
----------- ----------- ---------- ----------
Shares outstanding at end of period 42,610,839 51,081,171 12,077,920 13,096,406
========== ========== ========== ==========
<CAPTION>
THIRD AVENUE
THIRD AVENUE HIGH YIELD FUND REAL ESTATE VALUE FUND
FOR THE FOR THE FOR THE FOR THE
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
APRIL 30 1999 OCTOBER 31, APRIL 30, 1999 OCTOBER 31,
(UNAUDITED) 1998 (UNAUDITED) 1998
<S> <C> <C> <C> <C>
Increase in Fund shares:
Shares outstanding at beginning
of period 904,440 -- 69,355 --
Shares sold 177,654 1,266,191 569,411 69,355
Shares reinvested from dividends
and distributions 29,744 29,079 2,473 --
Shares redeemed (195,641) (390,830) (92,204) --
-------- --------- ------- --
Net increase in Fund shares 11,757 904,440 479,680 69,355
-------- --------- ------- ------
Shares outstanding at end of period 916,197 904,440 549,035 69,355
======== ========= ======= ======
</TABLE>
6. COMMITMENTS
Third Avenue Value Fund has committed a $1,900,000 capital investment to
Insurance Partners II Equity Fund, LP of which $380,000 has been funded as of
April 30, 1999. Securities valued at $1,545,234 have been segregated to meet the
requirements of this commitment. This commitment may be payable upon demand of
Insurance Partners II Equity Fund, LP.
17
<PAGE>
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
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 which, in the
judgment of the Funds' Adviser, otherwise provide financial information which
provides the Adviser with substantially similar financial information as
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 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.
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.
18
<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.
3200 Horizon Drive
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
CUSTODIAN
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540-6231
THIRD AVENUE FUNDS
767 THIRD AVENUE
NEW YORK, NY 10017-2023
Phone (212) 888-5222
Toll Free (800) 443-1021
Fax (212) 888-6757
www.thirdavenuefunds.com
19
