[Logo omitted]
THIRD AVENUE HIGH YIELD FUND
ANNUAL REPORT
--------------
October 31, 1999
<PAGE>
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THIRD AVENUE HIGH YIELD FUND
Dear Fellow Shareholders:
At October 31, 1999, the audited net asset value attributable to the 786,343
common shares outstanding of the Third Avenue High Yield Fund (the "Fund") was
$9.65 per share. On September 30, 1999, the most recent dividend date, the Fund
paid $0.175 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 $0.692 per share has been paid in dividends. On July 30, 1999, the last
day of the Fund's third quarter, the unaudited net asset value per share was
$9.89. At December 13, 1999, the unaudited net asset value per share was $10.51.
QUARTERLY ACTIVITY
During the fourth quarter of fiscal 1999, the Fund eliminated 13 positions,
reduced three positions, established 10 new positions and increased three
positions, as shown below:
PAR VALUE
OR
NUMBER OF SHARES REDUCTIONS IN EXISTING POSITIONS
$500,000 American Tower Corp. 144A 6.25% due 10/15/09
$400,000 Cirrus Logic, Inc. 6.00% due 12/15/03
$400,000 Fisher Scientific International Inc. 9.00% due 2/1/08
$400,000 MascoTech, Inc. 4.50% due 12/15/03
$300,000 Parker Drilling Co. 5.50% due 8/1/04
$400,000 R&B Falcon Corp. 9.50% due 12/15/08
$435,000 SBA Communications Corp. 12.00% due 3/1/08
$250,000 Scotts Co. 144A 8.63% due 1/15/09
$250,000 Toll Corp. 8.13% due 2/1/09
$400,000 WESCO Distribution, Inc. 9.13% due 6/1/08
INCREASES IN EXISTING POSITIONS
1,500 shares Conseco Finance Trust IV 7.00% due 2/16/01
$150,000 NCI Building Systems, Inc. 144A 9.25% due 5/1/09
$100,000 Pogo Producing Co. 5.50% due 6/15/06
1
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PAR VALUE
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
$200,000 Credence Systems Corp. 5.25% due 9/15/02
$300,000 Safeguard Scientifics, Inc. 144A 5.00% due 6/15/06
744 shares Winstar Communications, Inc. Common
POSITIONS ELIMINATED
$425,000 Adaptec, Inc. 4.75% due 2/1/04
$100,000 Adaptive Broadband Corp. 5.25% due 12/15/03
$275,000 Alpharma, Inc. 5.75% due 4/1/05
$325,000 Atmel SA 3.25% due 6/1/02
7,000 shares Breed Technologies, Inc. 6.50% due 11/15/27
$325,000 Cypress Semiconductors Corp. 6.00% due 10/1/02
$450,000 Cymer, Inc. 3.50% due 8/6/04
$450,000 Lam Research Corp. 5.00% due 9/1/02
$500,000 Level 3 Communications, Inc. 9.13% due 5/1/08
$250,000 MidAmerican Energy Holdings Co. 8.48% due 9/15/28
5,000 shares NEXTLINK Communications, Inc. 6.50% due 3/31/10
9,000 shares Sun Financing I 7.00% due 5/1/28
5,000 shares Winstar Communications, Inc. 7.00% due 3/15/10
During the quarter, the Fund had a considerable amount of portfolio
repositioning. Most issues which were sold or reduced in size had reached price
levels which we felt had reached their full investment value, and offered little
price appreciation potential from then current levels. These securities included
some of our technology and telecommunications holdings. In the technology area,
sales included Adaptec, Atmel, Cypress Semiconductor, Cymer, and Lam Research.
Telecommunications issues sold were Adaptive Broadband, Level3 Communications,
and WinStar Communications. We also eliminated MidAmerican Energy bonds after
the bond price moved up in response to the company receiving a buyout bid from
the principals of Berkshire Hathaway, Inc. to take the company private.
We reduced somewhat our holding of Credence Systems bonds after the underlying
stock advanced considerably in response to the company's substantially improved
results. The company makes equipment to test semiconductors. Despite the
reduction, we still have a major position in the bonds, and expect the company
to prosper as demand for their test equipment continues to grow. Our position in
the bonds of Safeguard Scientifics, a company which makes venture capital
investments in internet companies, was lowered because its advancing price had
raised our holdings to an outsized position for the Fund. Winstar Communications
common stock was sold, having been received as an in kind dividend from our
preferred holdings.
2
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Among our new positions acquired were several straight high yield bonds which we
felt had improving operating results, and would provide a relatively high yield.
These issues include Fisher Scientific, which makes and distributes instruments
and supplies to corporate customers worldwide. We also purchased bonds issued by
Scotts, the world's largest supplier of lawn and garden care products. Toll
Corp. bonds were added--Toll is a very well managed home builder located in the
mid-Atlantic area, and has recently expanded into California and the upper
Midwest. Another issue purchased was WESCO International bonds. This company is
one of the nation's largest distributors of electrical products and supplies for
the maintenance and repair activities of industrial and commercial customers.
We added two holdings in the tower industry: one was a convertible bond of
American Tower, and another was an original discount bond of SBA Communications.
We feel the wireless telecommunications market will grow very strongly for the
forseeable future to serve the markets for cellular phones, as well as for
transmittal of voice and data from fixed locations. These companies control
valuable and increasingly scarce locations for towers, and will benefit from
industry consolidation which is eliminating small entities that control
relatively few towers in their portfolios.
Convertible bonds of Parker Drilling, a company which specializes in onshore and
offshore drilling rigs, and straight bonds of R&B Falcon, which operates the
world's largest marine-based drilling units, were also purchased in the quarter.
These purchases, as well as an addition to our holding in convertible bonds of
Pogo Producing, a smaller exploration and production company, reflect our
optimism for stable energy prices and increases in drilling activity over the
next few years.
Cirrus Logic, a semiconductor manufacturer of analog and mixed signal chips, has
convertible bonds trading at deeply discounted levels, which we felt had an
attractive combination of yield and total return potential. Thus we have made
initial purchases of these bonds in the quarter. Also purchased in the quarter
were deeply discounted bonds of MascoTech. This company has world-leading metal
forming process capabilities and proprietary product positions. It serves
companies in the transportation, industrial and consumer markets with products
such as transmission and drive applications, towing systems, ferrous and
nonferrous industrial fasteners, and packaging and sealing products for
industrial fluids.
We made small additions to our position in Conseco preferred shares. This
holding has been a disappointment in terms of price performance since it was
purchased last year, as financial stocks have fallen out of favor in the general
market. Recently Conseco received a $500 million investment in the form of
preferred stock from Thomas H. Lee, the well regarded buyout investor. In
recognition of this infusion as well as some additional restructuring moves made
by the company, the investment rating firm of Moody's Investors Service has put
Conseco's bonds under review for upgrading from below investment grade to
investment grade.
Sincerely,
/s/ Margaret D. Patel
- ---------------------
Margaret D. Patel
Portfolio manager
3
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS - 52.14%
Computers - Memory 300,000 HMT Technology Corp. 5.75%, due 1/15/04 $ 111,000 1.46%
-----------
Devices
Computer Software 200,000 Safeguard Scientifics, Inc. 144A 5.00%,
due 6/15/06 256,250 3.38%
-----------
& Services
Electric Utility
Services 400,000 Itron, Inc. 6.75%, due 3/31/04 219,000 2.88%
-----------
Industrial 400,000 MascoTech, Inc. 4.50%, due 12/15/03 314,000 4.14%
-----------
Instrumentation - 300,000 Credence Systems Corp. 5.25%, due 9/15/02 292,125 3.85%
-----------
Electronic Testing
Medical - Hospitals 625,000 Columbia\HCA Medical Care, Int'l. 6.75%,
due 10/1/06 528,125 6.96%
-----------
Oil/Gas Exploration 300,000 Range Resources Corp. 6.00%, due 2/1/07 185,625
400,000 Pogo Producing Co. 5.50%, due 6/15/06 309,500
-----------
495,125 6.52%
-----------
Oil Field Services 300,000 Key Energy Group, Inc. 5.00%, due 9/15/04 (b) 205,875
300,000 Parker Drilling Co. 5.50%, due 8/1/04 213,000
-----------
418,875 5.52%
-----------
Pharmaceutical 505,000 Innovative Clinical Solutions, Ltd. 6.75%,
due 6/15/03 252,500 3.33%
-----------
Services
Semiconductors 400,000 Cirrus Logic, Inc. 6.00%, due 12/15/03 298,500 3.93%
-----------
Telecommunications - 500,000 P-Com, Inc. 4.25%, due 11/1/02 269,375
Wireless 500,000 American Tower Corp. 144A 6.25%, due 10/15/09 502,500
-----------
771,875 10.17%
-----------
TOTAL CONVERTIBLE BONDS
(Cost $4,891,047) 3,957,375
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
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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
Average Annual Total Return
Since Inception
1 Year (2/12/98)
22.20% 4.06%
[CHART]
* 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.
5
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1999
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONVERTIBLE PREFERRED STOCK - 7.31%
Electric Utility
Services 4,000 K N Energy, Inc. 8.25%, due 11/30/01 $ 137,000
4,000 Texas Utilities 9.25%, due 8/16/01 (b) 203,250
-----------
340,250 4.48%
-----------
Insurance 6,500 Conseco Finance Trust IV 7.00%, due 2/16/01 214,906 2.83%
-----------
TOTAL CONVERTIBLE PREFERRED STOCK 555,156
(Cost $650,438) -----------
PRINCIPAL
AMOUNT ($)
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS - 35.24%
Building and
Construction 400,000 NCI Building Systems, Inc. 144A 9.25%, due 5/1/09 379,000 4.99%
-----------
Products
Industrial 400,000 Fisher Scientific International Inc. 9.00%,
due 2/1/08 378,000
250,000 Scotts Co. 144A 8.63%, due 1/15/09 238,125
-----------
616,125 8.12%
-----------
Instrumentation- 400,000 WESCO Distribution, Inc. 9.13%, due 6/1/08 360,000 4.74%
-----------
Electronic Testing
Oil Field Services 400,000 R&B Falcon Corp. 9.50%, due 12/15/08 (b) 384,000 5.06%
-----------
Real Estate -
Commercial 500,000 BF Saul REIT 144A 9.75%, due 4/1/08 472,500
250,000 Toll Corp. 8.13%, due 2/1/09 228,750
-----------
701,250 9.24%
-----------
Telecommunications - 435,000 SBA Communications Corp. 12.00%, due 3/1/08 234,900 3.09%
-----------
Wireless
TOTAL CORPORATE BONDS 2,675,275
(Cost $2,732,950) -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
6
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1999
`
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK - 0.03%
Telecommunications -
Wireless 65 Winstar Communications, Inc. (a) $ 2,523 0.03%
-----------
TOTAL COMMON STOCK 2,523
(Cost $3,500) -----------
PRINCIPAL
AMOUNT ($)
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 1.71%
Repurchase Agreements 129,536 Bear Stearns 5.23%, due date November 1, 1999 (c) 129,536 1.71%
-----------
TOTAL SHORT TERM INVESTMENTS 129,536
-----------
(Cost $129,536)
TOTAL INVESTMENT PORTFOLIO - 96.43% 7,319,865
-----------
(Cost $8,407,471)
CASH AND OTHER ASSETS
LESS LIABILITIES - 3.57% 270,808
-----------
NET ASSETS - 100.00% $7,590,673
(Applicable to 786,343 ==========
shares outstanding)
</TABLE>
Notes:
(a)Non-income producing security.
(b)Securities in whole or in part on loan.
(c)Repurchase agreement collateralized by:
U.S. Treasury Strips, par value $715,000, 6.29%, matures 11/15/26:
market value $132,275.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1999
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $8,407,471) $ 7,319,865
Receivable for securities sold 111,246
Receivable for fund shares sold 39,300
Receivable from investment adviser 2,491
Dividends and interest receivable 157,614
Collateral on loaned securities (Note 1) 57,081
Deferred organizational costs (Note 1) 9,869
Other assets 270
-----------
Total assets 7,697,736
-----------
LIABILITIES:
Payable for fund shares redeemed 1,060
Accounts payable and accrued expenses 48,922
Collateral on loaned securities (Note 1) 57,081
-----------
Total liabilities 107,063
-----------
Net assets $ 7,590,673
===========
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par value,
786,343 shares outstanding $ 8,486,591
Accumulated undistributed net investment income 59,002
Accumulated undistributed net realized gains from
investment transactions 132,686
Net unrealized depreciation of investments (1,087,606)
-----------
Net assets applicable to capital shares outstanding $ 7,590,673
===========
Net asset value, offering and redemption price per share $ 9.65
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
8
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1989
INVESTMENT INCOME:
Interest $ 634,714
Dividends 116,954
-----------
Total Investment Income 751,668
-----------
EXPENSES:
Investment advisory fees (Note 3) 74,907
Directors' fees and expenses 61,420
Administration fees (Note 3) 56,596
Transfer agent fees 26,948
Accounting services 25,592
Auditing and tax consulting fees 22,987
Registration fees 16,498
Custodian fees 7,606
Reports to shareholders 4,409
Legal fees 3,724
Amortization of organizational expenses (Note 1) 2,997
Miscellaneous expenses 1,568
Insurance expenses 370
-----------
Total operating expenses 305,622
-----------
Expenses waived and reimbursed (Note 3) (147,482)
-----------
Net expenses 158,140
-----------
Net investment income 593,528
-----------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on investments 183,311
Net change in unrealized appreciation on investments 834,889
-----------
Net realized and unrealized gains on investments 1,018,200
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,611,728
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
9
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR PERIOD
ENDED ENDED
10/31/99 10/31/98*
----------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income $ 593,528 $ 348,681
Net realized gains (losses) on investments 183,311 (50,625)
Net change in unrealized appreciation (depreciation) on investments 834,889 (1,922,495)
Net increase (decrease) in net assets resulting from operations 1,611,728 (1,624,439)
----------- -----------
DISTRIBUTIONS:
Dividends to shareholders from net investment income (592,389) (295,950)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 3,087,088 12,705,359
Net asset value of shares issued in reinvestment of
dividends and distributions 529,189 266,886
Cost of shares redeemed (4,736,179) (3,360,620)
----------- -----------
Net increase (decrease) in net assets resulting from capital
share transactions (1,119,902) 9,611,625
----------- -----------
Net increase (decrease) in net assets (100,563) 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
$59,002 and $54,866, respectively) $ 7,590,673 $ 7,691,236
=========== ===========
* The Fund commenced investment operations on February 12, 1998.
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
10
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
FINANCIAL HIGHLIGHTS
OCTOBER 31, 1999
<TABLE>
<CAPTION>
SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) AND RATIOS ARE AS FOLLOWS:
FOR THE FOR THE
YEAR PERIOD
ENDED ENDED
10/31/99 10/31/98*
----------- -----------
<S> <C> <C>
Net Asset Value, Beginning of Period $8.50 $10.00
----------- -----------
Income (loss) from Investment Operations:
Net investment income .70 .34
Net income (loss) on securities (both realized
and unrealized) 1.14 (1.56)
----------- -----------
Total from Investment Operations 1.84 (1.22)
----------- -----------
Less Distributions:
Dividends from net investment income (.69) (.28)
----------- -----------
Net Asset Value, End of Period $9.65 $8.50
=========== ===========
Total Return 22.20% (12.39%)1
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $7,591 $7,691
Ratio of Expenses to Average Net Assets
Before expense reimbursement 3.67% 3.99%2
After expense reimbursement 1.90% 1.90%2
Ratio of Net Income to Average Net Assets
Before expense reimbursement 5.36% 4.13%2
After expense reimbursement 7.13% 6.22%2
Portfolio Turnover Rate 64% 38%1
1 Not Annualized
2 Annualized
* The Fund commenced investment operations February 12, 1998.
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
11
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1999
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. The
information presented in these financial statements pertains to the Third Avenue
High Yield Fund (the "Fund"). Third Avenue Value Fund, Third Avenue Small-Cap
Value Fund and Third Avenue Real Estate Value Fund are presented under separate
cover. Third Avenue High Yield Fund commenced investment operations on February
12, 1998. The Fund seeks to achieve its objective of maximizing total return
through a combination of income and capital appreciation by adhering to a strict
value discipline in selecting securities.
The 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 are believed to have a market value priced
below their private market values.
The Fund has entered into an Agreement and Plan of Reorganization with Pioneer
High Yield Fund. Under this agreement, the Fund will transfer all of its assets
to Pioneer High Yield Fund in exchange for Class A shares of Pioneer High Yield
Fund and Pioneer High Yield Fund will assume the liabilities of the Fund. Class
A shares of Pioneer High Yield Fund having a value on the reorganization date
equal to the value of Fund shares will be distributed to Fund shareholders in
exchange for their Fund shares. The consummation of this transaction is subject
to, among other things, approval by the Fund's shareholders of the Agreement and
Plan of Reorganization. It is anticipated that a meeting of shareholders to
approve the Agreement and Plan of Reorganization will be held in February, 2000.
ACCOUNTING POLICIES:
The policies described below are followed consistently by the Fund in the
preparation of its financial statements in conformity with accounting principles
generally accepted in the United States of America.
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
SECURITY VALUATION:
Securities traded on a principal stock exchange or the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ") are valued at the last
quoted sales price or, in the absence of closing sales prices on that day,
securities are valued at the mean between the closing bid and asked price.
Temporary cash investments are valued at cost, plus accrued interest, which
approximates market. Short-term securities with original or remaining maturities
in
12
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
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 Fund may invest up to 15% of its 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 Fund although actual evaluations may be made by personnel
acting under procedures established by the Board of Trustees. At October 31,
1999, the Fund did not hold any restricted securities. 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.
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.
LOANS OF PORTFOLIO SECURITIES:
The Fund loaned securities during the year to certain brokers, with the Fund's
custodian acting as lending agent. Upon such loans, the Fund receives collateral
which is maintained by the custodian and earns income in the form of negotiated
lenders' fees, which are included in interest income in the Statement of
Operations. On a daily basis, the Fund monitors the market value of securities
loaned and maintain collateral against the securities loaned in an amount not
less than the value of the securities loaned. The Fund 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 year ended October 31, 1999, the Fund had securities lending income
included in interest income totaling $490. The value of loaned securities and
related collateral outstanding at October 31, 1999 was $54,550 and $57,081,
respectively. The collateral consisted of cash, which was invested in repurchase
agreements with Bear Stearns due November 1, 1999, collateralized by U.S.
Treasury securities.
13
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
REPURCHASE AGREEMENTS:
Securities pledged as collateral for repurchase agreements are held by the
Fund's 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
Fund has 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 $15,000 are being amortized on a straight line basis
over five years from commencement of operations.
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income paid to shareholders and distributions from
realized gains on sales of securities 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 accounting principles generally
accepted in the United States of America. 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, 1999, permanent differences were reclassified as
shown below:
INCREASE TO
ACCUMULATED DECREASE TO
UNDISTRIBUTED NET ADDITIONAL PAID-IN-
INVESTMENT INCOME CAPITAL
-------------- ---------------
2,997 (2,997)
FEDERAL INCOME TAXES:
The Fund has complied and intends 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 Fund has defined cash and cash equivalents as cash in interest bearing and
non-interest bearing accounts.
14
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
EXPENSE ALLOCATION:
Expenses attributable to the Fund are charged to the 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 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 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 year ended October 31, 1999 were as follows:
PURCHASES SALES
--------- -----
Unaffiliated $5,078,813 $6,271,463
At October 31, 1999, cost and gross unrealized appreciation and gross unrealized
depreciation, for Federal income tax purposes were as follows:
GROSS GROSS NET
COST APPRECIATION DEPRECIATION DEPRECIATION
---- ------------ ------------ ------------
$8,407,471 $100,584 $(1,188,190) $(1,087,606)
3. INVESTMENT ADVISORY SERVICES AND SERVICE FEE AGREEMENT
The Fund has 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 the Fund, payable
each month. Additionally, under the terms of the Investment Advisory Agreement,
the Adviser pays certain expenses on behalf of the Fund, which is reimbursable
by the Fund, including salaries of non-officer employees and other miscellaneous
expenses. Amounts
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
reimbursed with respect to non-officer salaries are included under the caption
Administration fees. At October 31, 1999, the Fund had a payable to affiliates
of $4,360, for reimbursement of expenses paid by such affiliates. Under current
arrangements, whenever, in any fiscal year, the 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 Fund's average daily net assets, and 1.50% of average daily net assets in
excess of $100 million, the Adviser is obligated to to 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 Fund to exceed the preceding
limitations. The adviser waived fees of $74,907, and reimbursed $72,575, for the
year ended October 31, 1999. For the period ended October 31, 1998, the adviser
waived fees of $50,472, and reimbursed $66,638.
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
year ended October 31, 1999, the Fund incurred total brokerage commissions of
$803, which includes commissions earned by M.J. Whitman, Inc. of $313.
5. CAPITAL SHARE TRANSACTIONS
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998
---------------- ----------------
Increase in Fund shares:
Shares outstanding at beginning of period 904,440 --
Shares sold 326,545 1,266,191
Shares reinvested from dividends
and distributions 56,746 29,079
Shares redeemed (501,388) (390,830)
---------- ---------
Net increase (decrease) in Fund shares (118,097) 904,440
---------- ---------
Shares outstanding at end of period 786,343 904,440
========== =========
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
6. RISKS RELATING TO CERTAIN INVESTMENTS
HIGH YIELD DEBT:
The Fund currently invests in high yield lower grade debt. The market values of
these higher yielding debt securities tend to be more sensitive to economic
conditions and individual corporate developments than those of higher rated
securities. In addition, the secondary market for these bonds is generally less
liquid.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS:
The Fund invests 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 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.
7. CAPITAL LOSS CARRYFORWARDS
During the year ended October 31, 1999, the Fund utilized approximately $50,625
of its net capital loss carryforward. No further capital loss carryforwards are
available.
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To The Trustees and Shareholders of
Third Avenue Trust--Third Avenue High Yield Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations, of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Third Avenue High Yield Fund (the
"Fund", one of the four series comprising Third Avenue Trust) at October 31,
1999, the results of its operations for the year then ended, and the changes in
net assets and the financial highlights for the year then ended and for the
period February 12, 1998 (commencement of operations) to October 31, 1998, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Fund's 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 auditing standards generally accepted in the United States of
America, 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, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
As more fully described in Note 1 to the financial statements, the Fund has
entered into an Agreement and Plan of Reorganization between the Fund and
Pioneer High Yield Fund. The consummation of this transaction is subject to,
among other things, approval by the Fund's shareholders of the Agreement and
Plan of Reorganization.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
December 17, 1999
18
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
FEDERAL TAX STATUS OF DIVIDENDS
(UNAUDITED)
The following information represents the tax status of dividends and
distributions paid by the Fund during the fiscal year ended October 31, 1999.
This information is presented to meet regulatory requirements and no current
action on your part is required.
Of the $0.692 per share paid to you in cash or reinvested into your account for
the fiscal year ended October 31, 1999, the entire amount was derived from net
investment income. 21.63% of the ordinary income distributed qualifies for the
Corporate Dividends Received Deduction.
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Third Avenue Value Fund
Third Avenue Small-Cap Value Fund
Third Avenue Real Estate Value Fund
Third Avenue High Yield Fund
<PAGE>
BOARD OF TRUSTEES
Phyllis W. Beck
Lucinda Franks
Gerald Hellerman
Marvin Moser
Donald Rappaport
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
PFPC Inc.
211 South Gulph Road
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
[Logo omitted]
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
