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THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP VALUE FUND
THIRD AVENUE HIGH YIELD FUND
THIRD AVENUE REAL ESTATE VALUE FUND
SEMI-ANNUAL REPORT
(Unaudited)
---------------
April 30, 1999
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THIRD AVENUE VALUE FUND
Dear Fellow Shareholders:
At April 30, 1999, the unaudited net asset value attributable to the 42,610,839
common shares outstanding of the Third Avenue Value Fund ("TAVF", "Third Avenue"
or the "Fund") was $31.54 per share. This compares with an unaudited net asset
value of $33.18 per share at January 31, 1999, and an unaudited net asset value,
adjusted for a subsequent distribution, of $33.84 per share at April 30, 1998.
At May 20, 1999, the unaudited net asset value was $32.77 per share.
QUARTERLY ACTIVITY
The dominant activity during the last quarter was the sale of securities to
raise cash to meet redemptions by selling shareholders of the Fund. The common
capitalization of TAVF, as measured by shares outstanding, shrunk by 12% during
the three month interim. Without this need to raise cash, Third Avenue would not
have sold the vast majority of securities it did sell. The exceptions to this
were the disposals of Acuson Corp. Common Stock, Glenayre Technologies, Inc.
Common Stock and Hologic, Inc. Common Stock where, in each case, I believe some
permanent impairments of capital may be taking place. Despite the large amount
of securities sales, I expect that Third Avenue will remain a tax-efficient
fund. This will entail taking a considerable amount of losses by further sales
of securities during the second half of the Fund's fiscal year which ends
October 31, 1999.
The only new names acquired for the portfolio during the quarter were the
results of resource conversion activities. 223,600 shares of Investment
Technology Group, Inc. Common Stock ("ITG Common") were obtained as a result of
the spin-off of ITG by Jefferies Group, Inc.; 554,950 shares of Prime Medical
Services, Inc. Common Stock ("Prime Common") were received via a voluntary swap
of all of the Fund's holdings of American Physicians Service Group Common Stock
("APSG Common") for Prime Common; and 33,529 shares of SunGard Data Systems,
Inc. Common Stock ("SunGard Common") were received as a result of the
acquisition by SunGard of FDP Corp. in a merger transaction. The Fund also
increased its investment in Insurance Partners II Equity Fund, LP by $190,000
pursuant to a capital call.
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
$132,000 PhyMatrix Corp. 6.75% debentures
due 6/15/03 ("PhyMatrix Subordinates")
Various Issues-debt, CGA Group, Ltd. ("CGA Equity")
preferred and common
75,000 shares First American Financial Corp.
Common Stock ("FAF Common")
125,000 shares Hypercom Corp. Common Stock
("Hypercom Common")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
25,000 shares LaSalle Re Holdings, Ltd. Common Stock
("LaSalle Common")
10,600 shares Liberty Financial Companies, Inc. Common
Stock ("Liberty Common")
25,000 shares Sbarro, Inc. Common Stock
("Sbarro Common")
REDUCTIONS IN EXISTING POSITIONS
372,100 shares ADE Corp. Common Stock
("ADE Common")
294,750 shares American International Group, Inc.
Common Stock ("AIG Common")
143,100 shares Avatar Holdings, Inc. Common Stock
("Avatar Common")
47,034 shares Bankers Trust New York Corp.
Common Stock ("BT Common")
1,358,500 shares Glenayre Technologies, Inc. Common
Stock ("Glenayre Common")
131,000 shares Hologic, Inc. Common Stock
("Hologic Common")
925,000 shares Nabors Industries, Inc. Common
Stock ("Nabors Common")
13,700 shares Palm Harbor Homes, Inc.
Common Stock ("Palm Harbor Common")
95,000 shares Raymond James Financial, Inc.
Common Stock ("Raymond James Common")
500,000 shares 3Com Corp. Common Stock
("3Com Common")
POSITIONS ELIMINATED
$15,000,000 Cymer, Inc. Subordinated Debentures
("Cymer Subordinates")
81,400 shares Acuson Corp. Common Stock
("Acuson Common")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES POSITIONS ELIMINATED (CONTINUED)
25,000 shares AG Associates, Inc. Common Stock
("AG Common")
50,000 shares Aristotle Corp. Common Stock
("Aristotle Common")
26,208 shares Associates First Capital Corp. Class A
Common Stock ("Associates Common")
445,400 shares Boston Communications Group, Inc.
Common Stock ("BCG Common")
152,800 shares CMAC Investment Corp. Common
Stock ("CMAC Common")
365,000 shares Electronics for Imaging, Inc. Common
Stock ("EFI Common")
50,000 shares Ford Motor Co. Common Stock
("Ford Common")
140,600 shares H&Q Life Sciences Investors Common
Stock ("H&Q Common")
300,000 shares Interphase Corp. Common Stock
("Interphase Common")
155,952 shares Marshall & Ilsley Corp. Common Stock
("M & I Common")
167,429 shares Medtronic, Inc.
Common Stock ("Medtronic Common")
391,200 shares NCR Corp. Common Stock
("NCR Common")
95,000 shares Premark International, Inc. Common
Stock ("Premark Common")
53,600 shares Sparton Corp. Common Stock
("Sparton Common")
237,267 shares Thousand Trails, Inc. Common Stock
("Thousand Trails Common")
124,400 shares ValueVision International, Inc. Class A
Common Stock ("ValueVision Common")
262,500 shares Zygo Corp. Common Stock
("Zygo Common")
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PhyMatrix Subordinates were acquired because it seems probable that the
PhyMatrix Subordinates will remain a performing loan. If so, the yield to
maturity in June 2003 will be around 27%. If there is to be a money default,
however, TAVF wants to own up to 50% of this issue so that PhyMatrix will not be
able to reorganize, either in court or out of court, absent TAVF's approval if
any value is to be preserved for PhyMatrix Common Stock. PhyMatrix remains with
a fairly strong balance sheet. At present, Third Avenue holds slightly over 40%
of the outstanding PhyMatrix subordinates. We probably will continue to
accumulate this performing loan insofar as it becomes available at prices that
reflect a better than 27% yield to maturity.
CGA Group is a Bermuda-based financial guaranty insurer whose claims-paying
ability is rated AAA by Duff & Phelps. CGA got into trouble because of mark to
market problems with its portfolios of performing loans which seem to carry
little or no credit risk, or interest rate risk, and also because it had issued
one financial guaranty policy where fraud was discovered subsequently. TAVF took
a lead role in providing new financing for CGA by acquiring CGA Equity. The CGA
business now seems to be prospering. With luck, and while there can be no
assurance, CGA might be able to go public within the next 12 months to 18
months. If so, the Fund's returns on its investments ought to be very
attractive, indeed.
The small amounts of Hypercom Common, LaSalle Common and Liberty Common acquired
reflected the fact that these securities were available at what seemed to be
ultra depressed prices. Each of the three companies is extremely well financed.
The Fund does not engage in short-term trading except for risk arbitrage
situations. In other words, we do not try to predict near-term securities prices
where no catalyst exists, nor does the Fund buy and sell based on views about
the near-term outlook for the general market. Risk arbitrage exists only where
there are relatively determinant workouts in relatively determinant periods of
time. Sbarro is a risk arbitrage situation. Sbarro is attempting to go private
and proposes to buy out its public shareholders at a cash price of $28.85 per
share, net. I think the transaction has a 90% chance of closing by July 31. If
it does not close, Sbarro Common might sell down to the high teens or low 20's.
TAVF's all-in cost for the arbitrage is about $26 per share. Assuming a July 31,
1999 closing, the annualized return to TAVF on its investment would be 37%.
Unfortunately, there is not much money involved for the Fund in the Sbarro
arbitrage, but it still seemed a worthwhile endeavor for TAVF.
THE IMPORTANCE, OR UNIMPORTANCE, OF TAVF PERFORMANCE OVER THE PAST YEAR
In appraising an investment fund and its management, two separate factors ought
to be weighted:
1) Past performance
2) Present quality of the portfolio
In the appraisal of many investment funds, almost 100% weight to past
performance is justified, and in any event, little or no weight ought to be
given to the present quality of the portfolio. Funds where this is so seem to
have one, or more, of the following characteristics:
1) The managers are involved in trading so that the present portfolio,
whatever its quality, is likely to be altered in short order.
2) The object of the portfolio manager is to outperform, or equal, the
performance of outside benchmarks consistently, or almost consistently.
Consistently means all the time.
3) The portfolio manager and his or her investors believe that market
prices in outside passive markets such as the New York Stock Exchange or NASDAQ
constitute the sole measure of the underlying value of a business. (It is hard
to
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believe that anyone really believes this, given the markedly different prices
that prevail in markets for control of companies compared with public market
prices.)
4) Portfolios are financed with borrowed money. Here, marks to market,
i.e., daily prices for the portfolio's securities, tend to be of crucial
importance. In the appraisal of TAVF, though, I think that considerably less
than 50% weight ought to be given to recent past performance, and considerably
more than 50% weight should be given to the present quality of the portfolio.
Funds where predominant weight ought to be given to the present quality of the
portfolio seem to have the following characteristics:
1) The basic investment strategy is buy and hold. If there is trading, it
only occurs in a risk arbitrage context.
2) The object of the portfolio manager is to earn a reasonable return over
time without taking undue risk, and without trying to compete with benchmarks
and other funds. Third Avenue Value Fund, in this regard, has a 20% annual
bogey, which it has come pretty close to meeting since inception, the relatively
poor results of the past 12 months notwithstanding.
3) The portfolio manager is largely unconcerned with daily price
fluctuations; in part because the portfolio is not financed with borrowings; and
in part because 100% of the analysis is involved with figuring out underlying
corporate values, and 0% is involved in figuring out investor psychology.
The present quality of the TAVF portfolio seems never to have been better. Much
of this seems directly traceable to the disappointing price performance over
most of the past 12 months. As a consequence, values for the securities held in
the portfolios now seem analogous to prices that prevailed in securities markets
in 1974 and 1982 when the Dow-Jones Industrial Average ranged around 800 and
1000, respectively. The ensuing discussion of the Fund's portfolio revolves
around three factors:
1) An absence of permanent impairments of capital for the various companies
whose securities are held in the portfolio.
2) The common stocks of well-capitalized semiconductor equipment companies
seem, by far, the best way for passive investors to play the internet long term.
3) Resource conversion activities were rife among portfolio companies in
the last six months, indicating that at these prices there will be a large
number of profitable exits from portfolio securities, not by sale to the outside
passive investor market, but rather in takeovers, mergers, hostiles,
going-privates, LBOs, massive share repurchases, and liquidations.
THE ABSENCE OF PERMANENT IMPAIRMENTS
Third Avenue restricts investments in common stocks (with only minor exceptions)
to the issues of companies which are strongly capitalized and which seem to have
strong competitive positions in viable industries. Sometimes we'll be wrong;
companies will dissipate financial strength without converting the strength to
earning power, and/or the company will appear to demonstrate an inability to
compete effectively. At December 31, 1998, Third Avenue Value Fund held 111
common stock issues. Only three were issues of companies where we thought there
might be some permanent impairment of capital. These issues were Acuson Common,
Glenayre Common and Hologic Common, all of which have either been sold or are in
the process of being sold.
Interestingly enough, during the quarter ended April 30, eleven common stock
issues held in the TAVF portfolio suffered price declines of 25% or more. Other
than for Glenayre Common and Hologic Common, there does not
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appear to be any evidence of permanent impairments of capital for the other nine
issues, the change in stock prices during the quarter notwithstanding. The
companies whose common stocks declined so sharply in price were either going
through a rough earnings period, e.g., 3Com and FSI International, or investor
psychology had turned against the company even though earnings results are
likely to be such that the common stocks are selling at no more than 6 times
1999 forecasted earnings, e.g., First American Financial and Stewart Information
Services. The Common Stocks whose prices declined by over 25% during the quarter
are those of the following issuers:
Issuer Percentage Decline
- ------ ------------------
ADE Corp. 28.3%
C.P. Clare Corp. 39.7
First American Financial Corp. 41.5
FSI International, Inc. 50.2
Glenayre Technologies, Inc. 33.8
Hologic, Inc. 47.1
Hypercom Corp. 49.3
Risk Capital Holdings, Inc. 29.3
SpeedFam International, Inc. 44.9
Stewart Information Services Corp. 25.3
3Com Corp. 44.4
Nine of the eleven poorest performing common stocks during the calendar quarter
ended April 30, 1999 seem to be solid companies which either have promise of
very good operating outlooks or are candidates for takeovers, refinancings, or
liquidations.
SEMICONDUCTOR EQUIPMENT COMMON STOCKS AND THE INTERNET
The common stocks of well-capitalized semiconductor equipment companies are the
most important single portion of the TAVF portfolio, accounting for 23% of net
assets at April 30.
If the internet is to realize its huge promise over the long term, it most
likely will be accompanied by an explosive growth in demand for increasingly
sophisticated semiconductor chips. Thus semiconductor equipment manufacturers
are internet related even though they are not "pure plays," as are Amazon, Yahoo
and America On-Line.
In terms of pricing, it seems obvious that TAVF is buying into semiconductor
equipment commons at prices that appear to be no more than 50% of what a first
stage venture capitalist would pay were the venture capitalist to be financing
these enterprises as private companies where there was hope of going public at a
later date. In contrast, the pricing for internet "pure plays" in public markets
appears to be anywhere from 50 times to, say, 200 times what a first stage
venture capitalist would pay to get into a private company which it was hoped
could go public. Risk considered, and with a long-term point of view, the Fund
seems to be participating in the potential of the internet on a far sounder
basis than exists for those currently acquiring "pure play" internet common
stocks in the open market.
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RESOURCE CONVERSION ACTIVITIES ARE RIFE AMONG OUR PORTFOLIO COMPANIES
One of the huge advantages that value investing has over other investment styles
is that, on a long-term basis, the value investor can look confidently to a
multiplicity of exit strategies. In contrast, in other investment styles the
only exit on which to concentrate is sale in the open market to other passive
minority investors. Value investors ought to benefit not only from open market
price improvements, but if their basic analysis is close to right and open
market prices remain depressed, values for stockholders would still get created
because companies will be taken over at prices that represent a premium over
market, companies will refinance and restructure, and companies with strong
financial positions will make acquisitions that enhance future earning power.
Given the depressed market prices that existed in the six months since the end
of the Fund's fiscal year, it is to be expected that resource conversion
activities -- takeovers, acquisitions, hostiles and other events outside the
ordinary course of business -- would accelerate. That is exactly what seems to
have happened.
At October 31, 1998, Third Avenue Value Fund had investments in 22
publicly-traded affiliates, i.e., companies in which the Fund had 5% to 26%
ownership interests. During the six month period to April 30, 1999, 13 of these
22 companies, to our knowledge, were engaged in resource conversion activities
outside the ordinary course of business. Some transactions were completed; some
are pending; and some may never get off the ground. A summary of the 13 resource
conversion activities are as follows:
2 cash sales of control at market premiums
1 exchange of stock merger at a market premium
3 approaches to the Fund about hostile takeovers, only one of which has
been made public at this date
5 acquisitions of smaller companies
1 partial liquidation through the attempted ongoing sale of significant
operations
1 sale of a new issue of common stock to a strategic investor
Completion of most of these resource conversion activities ought to result in
appreciation of the prices of the underlying common stocks.
A FEW GENERAL OBSERVATIONS ABOUT CURRENT MARKET CONDITIONS
The markets populated by Outside Passive Minority Investors (OPMIs) as
exemplified by the New York Stock Exchange and NASDAQ, seem to be
manic-depressive; the securities that are loved are loved unconditionally
without any price considerations; and the securities that are unpopular are to
be avoided completely, no matter what their prices are. Not since at least the
late 1960's-early 1970's has market performance been so driven by investor
psychology and investor fads so that corporate fundamentals are pretty much
ignored. The managers of Third Avenue ignore investor psychology. We analyze
business fundamentals. In any event, we would not be much good at trying to
fathom abnormal behavior inherent in predicting short-run price movements in the
general market.
Long-term markets, though, seem to be driven by a tendency toward efficiency
where fundamental values will be realized eventually, either by sale to the OPMI
market, mergers and acquisitions, hostile takeovers, refinancings and
restructurings, or liquidations. The principal modification to this is that
common stock prices can affect fundamental values available for the OPMI
shareholder or the corporation. Common stock prices impact corporate values, or
eventual realizations for OPMIs, in three ways:
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1) Access to capital markets. Many companies have to seek outside capital,
and the price of a common stock can very much affect their ability to raise
capital. This is not much of a factor for TAVF because of our proclivity in
common stock analysis to stick with companies that are very strongly
capitalized, the very issuers which do not need access to capital markets,
especially equity markets.
2) An overpriced common stock is a currency to be used in mergers and
acquisitions. An overpriced common stock becomes an important corporate asset
which can be used to acquire other companies on attractive bases. Overpriced
equity securities not only facilitate bargain purchases from the point of view
of the acquiring company but also the issuance of equity securities usually is
the only way to make transactions tax-free from the point of view of the
acquired company and its shareholders. Many of the companies in TAVF's portfolio
are, for practical purposes, limited to making acquisitions for cash and debt in
taxable transactions.
3) The "takeunder phenomenon." The managers of Third Avenue Funds analyze
companies exactly as do most control buyers concentrating on three general
factors: ability to finance, long-term outlook, and the multiplicity of exit
strategies. In contrast, most other money managers concentrate on other factors,
e.g., the immediate outlook for reported earnings or guessing which industry
sectors may gain general popularity. As an OPMI using the same analytic
techniques as control buyers, the Fund is vulnerable to having control buyers
pre-empt a substantial portion of those values for themselves when the control
buyers, who above all control timing, know that they can squeeze out OPMI
shareholders by offering a premium over depressed market prices. This recently
happened or seems about to happen for Third Avenue positions in Imperial Credit
Commercial Mortgage Common Stock and Sbarro Common. Even at the takeunder
prices, though, our exits from Imperial Credit and Sbarro ought to result in
profits for the Fund. Takeunders, in general, do not seem to happen often enough
to really detract from the appeal of asset value investing. Furthermore, I
believe that "takeunders" will be less frequent going forward than had been the
case when many securities prices were ultra-depressed in the 1970's. A majority
of public corporations are incorporated in Delaware. Because of changes in
Delaware law, i.e., the so-called "Revlon Rules," takeunders now may be harder
to complete than was the case 20 to 25 years ago.
In growth investing, most exit strategies have to revolve around selling common
stocks at ever increasing prices to other OPMIs. Some businesses can grow by
increasing earnings consistently, but this is almost impossible for the vast
majority of companies to do. Another way of creating corporate values is to keep
issuing equity once a common stock becomes overpriced in the hope of building
real values. Amazon recently did this through the sale of $1.25 billion of
convertible debentures, and Yahoo is in the process of trying to issue common
stocks in merger transactions as are a plethora of other internet and
telecommunications companies.
I've seen many speculative bubbles in my investment career. But I've yet to see
one that did not have elements of fundamental reality such as seems to be the
case for today's internet bubble and large cap growth bubble. (I was not around
for the "tulip bulb craze"). Yet, most of the time in most of the cases, the
denouement of the bubble has spelled disaster for OPMIs. I doubt things will be
different this time around.
I shall write you again at the end of the next quarter.
Sincerely yours,
/s/Martin J. Whitman
- --------------------
Martin J. Whitman
Chairman of the Board
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT($) ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
BANK AND OTHER DEBT - 1.09%
<S> <C> <C> <C>
Oil Services 1,356,272 Cimarron Petroleum Corp. (c) (d) $ 1,375,187 0.10%
--------------
Retail 295,370 Lechmere, Inc. Trade Claim (a) (c) 8,861
13,000,000 Montgomery Ward Series I 8.37%, 7/15/02 (a) (c) * 3,055,000
8,571,364 Montgomery Ward Series C 9.24%, 3/15/03 (a) (c) * 2,014,270
10,000,000 Montgomery Ward Series F 9.81%, 3/15/03 (a) (c) * 2,350,000
26,606,561 Montgomery Ward Trade Claim (a) (c) 5,853,444
--------------
13,281,575 0.99%
--------------
TOTAL BANK AND OTHER DEBT
(Cost $22,529,976) 14,656,762
--------------
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CONVERTIBLE BONDS - 1.08%
Medical Management 30,669,000 PhyMatrix Corp. 6.75%, due 6/15/03 14,491,102 1.08%
Services --------------
TOTAL CONVERTIBLE BONDS
(Cost $15,913,538) 14,491,102
--------------
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CORPORATE BONDS - 0.56%
Bermuda Based Financial 7,500,000 CGA Special Account Trust (b) (c) 7,500,000 0.56%
Institutions --------------
TOTAL CORPORATE BONDS
(Cost $7,500,000) 7,500,000
--------------
SHARES
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS - 92.32%
Annuities & Mutual Fund 163,300 John Nuveen & Co., Inc. Class A 6,491,175
Management & Sales 518,600 Liberty Financial Companies, Inc. 11,636,087
--------------
18,127,262 1.35%
--------------
Apparel Manufacturers 150,000 Kleinerts, Inc. (a) (c) 1,800,000 0.13%
--------------
Bermuda Based 3,341,703 CGA Group, Ltd. (a) (b) (c) 2,925,991
Financial Institutions 91,999 Cobalt Holdings, LLC (c) 920
118,449 ESG Re, Ltd. (a) (c) 2,006,230
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
<S> <C> <C> <C>
Bermuda Based 110,917 LaSalle Re Holdings, Ltd. $ 1,629,093
Financial Institutions 1,064,516 St. George Holdings, Ltd. Class A (a) (b) (c) 106,451
(continued) 9,044 St. George Holdings, Ltd. Class B (a) (b) (c) 905
--------------
6,669,590 0.50%
--------------
Building Products 250,000 Cummins Engine Co., Inc. (b) 13,375,000
& Related 125,400 Tecumseh Products Co. Class A (b) 7,665,075
417,300 Tecumseh Products Co. Class B (b) 23,733,938
--------------
44,774,013 3.33%
--------------
Business Development 72,445 Capital Southwest Corp. 5,551,098 0.41%
Companies --------------
Computerized Trading 223,600 Investment Technology Group, Inc. 7,742,150 0.57%
--------------
Computers, Networks 300,000 3Com Corp. (a) 7,837,500
& Software 100,000 Novell, Inc. (a) 2,225,000
--------------
10,062,500 0.75%
--------------
Depository Institutions 53,000 Astoria Financial Corp. 2,656,625
123,237 BankAtlantic Bancorp, Inc. Class A 916,575
100,000 Bankers Trust New York Corp. 9,006,250
218,500 Carver Bancorp, Inc. (b) 2,021,125
39,500 CNY Financial Corp. 459,188
61,543 Commercial Federal Corp. 1,492,418
197,307 Golden State Bancorp., Inc. (a) 4,846,353
53,480 Golden State Bancorp., Inc. Warrants, 9/17/00 (a) 778,802
197,307 Golden State Bancorp, Inc. Litigation Tracking Warrants (a) 369,951
60,000 Letchworth Independent Bancshares Corp. 795,000
69,566 Peoples Heritage Financial Group, Inc. 1,347,841
--------------
24,690,128 1.84%
--------------
Financial Insurance 200,000 Ambac Financial Group, Inc. 12,075,000
133,900 Capital Re Corp. 2,619,419
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
<S> <C> <C> <C>
Financial Insurance 608,500 Enhance Financial Services Group, Inc. $ 12,588,344
(continued) 1,000,000 Financial Security Assurance Holdings, Ltd. 57,125,000
394,673 MBIA Inc. 26,541,759
--------------
110,949,522 8.25%
--------------
Food Manufacturers 328,000 J & J Snack Foods Corp. (a) 7,134,000
& Purveyors 197,200 Sbarro, Inc. 5,164,175
109,100 Weis Markets, Inc. 3,818,500
--------------
16,116,675 1.20%
--------------
Industrial Equipment 250,000 Alamo Group, Inc. 2,359,375 0.18%
--------------
Industrial - Japan 2,200,000 Toyoda Automatic Loom Works, Ltd. 42,115,813 3.13%
--------------
Insurance Holding 200,678 ACMAT Corp. Class A (a) (b) 2,985,085
Companies 90,000 American International Group, Inc. 10,569,375
803,669 Danielson Holding Corp. (a) (b) (c) 3,968,116
50,000 Fund American Enterprises Holdings, Inc. 7,200,000
648,200 Leucadia National Corp. 19,932,150
438,300 Risk Capital Holdings, Inc. (a) 6,355,350
5,490 Sen-Tech International Holdings, Inc. (a) (c) 2,745,000
--------------
53,755,076 4.00%
--------------
Life Insurance 434,536 ReliaStar Financial Corp. 15,969,198 1.19%
--------------
Manufactured Housing 89,000 Liberty Homes, Inc. Class A 789,875
40,000 Liberty Homes, Inc. Class B 345,000
3,175 Palm Harbor Homes, Inc. (a) 63,897
--------------
1,198,772 0.09%
--------------
Medical Supplies 135,500 Analogic Corp. 4,979,625
& Services 342,300 Datascope Corp. (a) 9,734,156
994,000 Hologic, Inc. (a) (b) 6,771,625
554,950 Prime Medical Services, Inc. (a) 3,988,703
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
<S> <C> <C> <C>
Medical Supplies 913,900 Protocol Systems, Inc. (a) (b) $ 5,940,350
& Services (continued) 90,750 St. Jude Medical, Inc. (a) 2,529,656
--------------
33,944,115 2.53%
--------------
Natural Resources & 1,160,000 Alexander & Baldwin, Inc. 25,230,000
Real Estate 331,200 Avatar Holdings, Inc. (a) 6,417,000
179,600 Catellus Development Corp. (a) 2,761,350
31,000 Consolidated-Tomoka Land Co. 403,000
550,000 Forest City Enterprises, Inc. Class A 13,578,125
7,500 Forest City Enterprises, Inc. Class B 186,094
955,000 Imperial Credit Commercial Mortgage Investment Corp. 9,370,937
1,180,336 Koger Equity, Inc. 17,336,185
14,600 LNR Property Corp. 286,525
846 Public Storage, Inc. 23,582
238,200 St. Joe Co. 6,059,212
3,045,508 Tejon Ranch Co. (b) (c) 61,584,192
--------------
143,236,202 10.66%
--------------
Non-Life Insurance-Japan 7,319,000 Mitsui Marine & Fire Insurance Co., Ltd. 40,592,522
6,056,000 The Chiyoda Fire & Marine Insurance Co., Ltd. 21,613,832
5,316,000 The Nissan Fire & Marine Insurance Co., Ltd. 17,636,665
3,246,000 The Sumitomo Marine & Fire Insurance Co., Ltd. (a) 22,027,734
1,020,800 The Tokio Marine & Fire Insurance Co., Ltd.,
Sponsored ADR 60,354,800
3,000,000 The Yasuda Fire & Marine Insurance Co., Ltd. 16,638,553
--------------
178,864,106 13.31%
--------------
Oil Services 950,000 Nabors Industries, Inc. (a) 19,534,375 1.45%
--------------
Paper & Related Products 126,605,679 Repap Enterprises Inc. (a) (b) 8,862,398 0.66%
--------------
Security Brokers, 223,600 Jefferies Group, Inc. 5,114,850
Dealers & 893,332 Legg Mason, Inc. 31,154,954
Flotation Companies 1,086,250 Raymond James Financial, Inc. 23,422,266
--------------
59,692,070 4.44%
--------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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12
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
<S> <C> <C> <C>
Semiconductor 356,800 ADE Corp. (a) $ 3,657,200
Equipment Manufacturers 400,000 Applied Materials, Inc. (a) 21,450,000
and Related 1,748,000 AVX Corp. 34,413,750
1,004,500 C.P. Clare Corp. (a) (b) 4,018,000
1,600,300 Electro Scientific Industries, Inc. (a) (b) 61,011,438
1,882,500 Electroglas, Inc. (a) (b) 25,766,719
2,820,900 FSI International, Inc. (a) (b) 19,569,994
631,700 GaSonics International Corp. (a) 7,580,400
369,200 KLA-Tencor Corp. (a) 18,321,550
376,400 Lam Research Corp. (a) 11,856,600
300,000 Photronics, Inc. (a) 7,181,250
4,234,800 Silicon Valley Group, Inc. (a) (b) 56,111,100
1,605,000 SpeedFam International, Inc. (a) (b) 18,457,500
663,200 Veeco Instruments, Inc. (a) 25,533,200
--------------
314,928,701 23.43%
--------------
Small-Cap Technology 108,750 AFC Cable Systems, Inc. (a) 3,588,750
230,000 Evans & Sutherland Computer Corp. (a) 4,025,000
565,700 Glenayre Technologies, Inc. (a) 1,873,881
424,000 Hypercom Corp. (a) 2,756,000
154,800 Integrated Systems, Inc. (a) 2,109,150
412,200 Planar Systems, Inc. (a) 3,039,975
33,529 SunGard Data Systems Inc. (a) 1,070,836
612,000 Texas Micro, Inc. (a) 2,754,000
306,900 Vertex Communications Corp. (a) (b) 4,795,312
--------------
26,012,904 1.93%
--------------
Title Insurance 3,075,000 First American Financial Corp. (b) 54,965,625
975,700 Stewart Information Services Corp. (b) 38,967,019
--------------
93,932,644 6.99%
--------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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13
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<PAGE>
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
<S> <C> <C> <C>
TOTAL COMMON STOCKS AND WARRANTS
(Cost $957,535,215) $1,240,888,687
--------------
- ------------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK - 1.57%
Bermuda Based 562,236 CGA Group, Ltd., Series A (b) (c) 14,055,902
Financial Institutions 6,045,667 CGA Group, Ltd., Series C (b) (c) 7,039,179
--------------
21,095,081 1.57%
--------------
Insurance Companies 4,775 Ecclesiastical Insurance, 8.625% 10,091 0.00%
--------------
TOTAL PREFERRED STOCK
(Cost $18,881,254) 21,105,172
--------------
SHARES OR
INVESTMENT
AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS - 1.71%
Bermuda Based $2,215,000 ESG Partners, LP (c) 1,948,847 0.14%
Financial Institutions --------------
Financial Insurance $15,000,000 American Capital Access Holdings, LLC (c) 15,000,000
$380,000 Insurance Partners II Equity Fund, LP (c) 380,000
--------------
15,380,000 1.14%
--------------
Foreign Currency Swap $50,000,000 Bear Stearns Currency Swap,
Contracts Termination Date10/26/99 (c) (e) (448,146)
$90,000,000 Bear Stearns Currency Swap,
Termination Date 4/22/00 (c) (f) 954,461
--------------
506,315 0.04%
--------------
Foreign Option Contracts $50,000,000 Japanese Yen June 1999 Put Options (c) (g) 0
$15,000,000 Japanese Yen January 2000 Put Options (c) (h) 282,750
--------------
282,750 0.02%
--------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OR
INVESTMENT VALUE % OF
AMOUNT ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS (CONTINUED)
<S> <C> <C> <C>
Insurance Holding $3,722,756 Head Insurance Investors LP (c) $ 3,722,756
Companies 100 HIPI Holdings, Inc. (c) 1,267,448
--------------
4,990,204 0.37%
--------------
TOTAL OTHER INVESTMENTS
(Cost $23,814,789) 23,108,116
--------------
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 1.30%
Repurchase Agreements $14,358,674 Bear Stearns 4.88%, due date May 3, 1999 (i) 14,358,674 1.07%
--------------
U.S. Treasury Bills $1,517,000 U.S. Treasury Bill 4.51%, 05/13/99 1,514,813
$1,583,000 U.S. Treasury Bill 4.39%, 11/12/99 (j) 1,545,234
--------------
3,060,047 0.23%
--------------
TOTAL SHORT TERM INVESTMENTS
(Cost $17,419,744) 17,418,721
--------------
TOTAL INVESTMENT PORTFOLIO - 99.63%
(Cost $1,063,594,516) 1,339,168,560
--------------
CASH AND OTHER ASSETS
LESS LIABILITIES - 0.37% 4,981,223
--------------
NET ASSETS - 100.00% $1,344,149,783
(Applicable to 42,610,839 ==============
shares outstanding)
NET ASSET VALUE PER SHARE $31.54
======
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Affiliated issuers-as defined under the Investment Company Act of 1940
(ownership of 5% or more of the outstanding voting securities of these
issuers).
(c) Restricted/fair valued securities.
(d) Interest accrued at a current rate of prime + 2%.
(e) The Fund is selling 5.9 billion Yen and paying an interest rate of 0.14% in
exhange for 50 million U.S. Dollars and an interest rate of 4.63%.
(f) The Fund is selling 10.8 billion Yen and paying an interest rate of 0.22% in
exhange for 90 million U.S. Dollars and an interest rate of 5.18%.
(g) 50 million U.S. Dollar notional amount may be exercised on June 8, 1999 to
sell 7.5 billion Japanese Yen at a strike price of 150.45.
(h) 15 million U.S. Dollar notional amount may be exercised on January 10, 2000
to sell 1.9 billion Japanese Yen at a strike price of 125.00.
(i) Repurchase agreement collateralized by:
U.S. Treasury Strips, par value $9,210,000, matures 2/15/06: market value
$6,386,582.
U.S. Treasury Strips, par value $17,660,000, matures 11/15/13: market value
$7,466,825.
U.S. Treasury Strips, par value $3,122,000, matures 2/15/22: market value
$794,174.
(j) Security segregated for future Fund commitments.
* Issuer in default.
ADR: American Depository Receipt.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
15
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1999
(UNAUDITED)
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $651,882,855) $ 886,970,521
Affiliated issuers (identified cost of $411,711,661) 452,198,039
--------------
Total investments (identified cost of $1,063,594,516) 1,339,168,560
Cash and cash equivalents (Note 1) 993,504
Receivable for securities sold 5,046,499
Receivable for fund shares sold 1,427,527
Dividends and interest receivable 3,589,057
Other assets 144,052
--------------
Total assets 1,350,369,199
--------------
LIABILITIES:
Payable for fund shares redeemed 4,782,198
Payable to investment adviser 993,503
Accounts payable and accrued expenses 346,091
Payable for service fees (Note 3) 81,225
Other liabilities 16,399
Commitments (Note 6) --
--------------
Total liabilities 6,219,416
--------------
Net assets $1,344,149,783
==============
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par value,
42,610,839 shares outstanding $1,019,279,321
Accumulated undistributed net investment income 2,376,674
Accumulated undistributed net realized gains from
investment transactions 46,936,143
Net unrealized appreciation of investments and
translation of foreign currency denominated
assets and liabilities 275,557,645
--------------
Net assets applicable to capital shares outstanding $1,344,149,783
==============
Net asset value, offering and redemption price per share $31.54
======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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16
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1999
(UNAUDITED)
INVESTMENT INCOME:
Interest - unaffiliated issuers $5,239,047
Interest - affiliated issuers 152,847
Dividends - unaffiliated issuers (net of foreign
withholding tax of $246,070) 5,845,502
Dividends - affiliated issuers 1,721,013
-----------
Total investment income 12,958,409
-----------
EXPENSES:
Investment advisory fees (Note 3) 6,734,248
Transfer agent fees 411,427
Service fees (Note 3) 396,647
Reports to shareholders 210,753
Administration fees (Note 3) 138,047
Custodian fees 86,923
Accounting services 61,602
Registration and filing fees 54,548
Legal fees 47,792
Auditing and tax consulting fees 37,906
Miscellaneous expenses 37,192
Insurance expenses 36,003
Directors' fees and expenses 29,220
-----------
Total operating expenses 8,282,308
-----------
Net investment income 4,676,101
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on investments - unaffiliated issuers 71,525,050
Net realized losses on investments - affiliated issuers (4,152,789)
Net realized losses on foreign currency transactions (3,639,449)
Net change in unrealized appreciation on investments 16,364,064
Net change in unrealized appreciation on foreign
currency swap contracts 850,070
Net change in unrealized depreciation on translation
of other assets and liabilities denominated in foreign currency (35,236)
-----------
Net realized and unrealized gains on investments 80,911,710
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $85,587,811
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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17
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS FOR THE
ENDED YEAR
4/30/99 ENDED
(UNAUDITED) 10/31/98
----------- --------
OPERATIONS:
<S> <C> <C>
Net investment income $ 4,676,101 $ 25,313,637
Net realized gains (losses) on investments - unaffiliated issuers 71,525,050 (38,668,472)
Net realized gains (losses) on investments - affiliated issuers (4,152,789) 20,587,312
Net realized gains (losses) on foreign currency transactions (3,639,449) 2,393,487
Net change in unrealized appreciation (depreciation) on investments 16,364,064 (81,803,887)
Net change in unrealized appreciation (depreciation) on foreign
currency swap contracts 850,070 (343,755)
Net change in unrealized depreciation on translation of other
assets and liabilities denominated in foreign currency (35,236) (2,686,163)
-------------- --------------
Net increase (decrease) in net assets resulting from operations 85,587,811 (75,207,841)
-------------- --------------
DISTRIBUTIONS:
Dividends to shareholders from net investment income (19,923,161) (21,900,312)
Distributions to shareholders from net realized gains on investments -- (8,575,897)
-------------- --------------
(19,923,161) (30,476,209)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 130,340,338 626,685,681
Net asset value of shares issued in reinvestment of dividends
and distributions 18,679,522 27,594,318
Cost of shares redeemed (411,245,793) (654,125,198)
-------------- --------------
Net increase (decrease) in net assets resulting from capital
share transactions (262,225,933) 154,801
-------------- --------------
Net decrease in net assets (196,561,283) (105,529,249)
Net assets at beginning of period 1,540,711,066 1,646,240,315
-------------- --------------
Net assets at end of period
(including undistributed net investment income of $2,376,674
and $17,623,734, respectively) $1,344,149,783 $1,540,711,066
============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) AND RATIOS ARE AS
FOLLOWS:
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED YEARS ENDED OCTOBER 31,
04/30/99 --------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $30.16 $31.94 $24.26 $21.53 $18.01 $17.92
------ ------ ------ ------ ------ ------
Income (loss) from Investment Operations:
Net investment income .11 .48 .48 .53 .38 .29
Net gain (loss) on securities
(both realized and unrealized) 1.67 (1.69) 7.92 2.76 3.53 .16
------ ------ ------ ------ ------ ------
Total from Investment Operations 1.78 (1.21) 8.40 3.29 3.91 .45
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends from net investment income (.40) (.41) (.57) (.41) (.25) (.22)
Distributions from realized gains .00 (.16) (.15) (.15) (.14) (.14)
------ ------ ------ ------ ------ ------
Total Distributions (.40) (.57) (.72) (.56) (.39) (.36)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period $31.54 $30.16 $31.94 $24.26 $21.53 $18.01
------ ------ ------ ------ ------ ------
====== ====== ====== ====== ====== ======
Total Return 5.88%1 (3.86%) 35.31% 15.55% 22.31% 2.56%
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $1,344,150 $1,540,711 $1,646,240 $566,847 $312,722 $187,192
Ratio of Expenses to Average Net Assets 1.11%2 1.08% 1.13% 1.21% 1.25% 1.16%
Ratio of Net Income to Average Net Assets 0.62%2 1.44% 2.10% 2.67% 2.24% 1.85%
Portfolio Turnover Rate 4%1 24% 10% 14% 15% 5%
</TABLE>
1 Not Annualized
2 Annualized
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE SMALL-CAP VALUE FUND
Dear Fellow Shareholders:
At April 30, 1999, the end of the second fiscal quarter of 1999, the unaudited
net asset value attributable to the 12,077,920 common shares outstanding of
Third Avenue Small-Cap Value Fund ("Small-Cap Value" or the "Fund") was $11.06,
compared with the Fund's unaudited net asset value at January 31, 1999 of
$11.91. At May 20, 1999, the unaudited net asset value was $11.59.
QUARTERLY ACTIVITY
During the quarter, Small-Cap Value established new positions in the common
stocks of two companies, added to four of its 42 existing positions, and reduced
or eliminated its holdings in nine companies. At April 30, 1999, Small-Cap Value
held positions in 41 companies, the top 10 positions of which accounted for
approximately 42% of the Fund's net assets. At quarter's end, approximately 7%
of the Fund's assets were in cash and cash equivalents.
NUMBER OF SHARES NEW POSITIONS ACQUIRED
143,100 Gleason Corp. Common
Stock ("Gleason Common")
42,500 LaSalle Re Holdings, Ltd. Common
Stock ("LaSalle Common")
Increases in Existing Positions
143,100 Alamo Group, Inc. Common
Stock ("Alamo Common")
90,800 Capital Re Corp. Common Stock
("Capital Re Common")
25,100 Evans & Sutherland Computer Corp. Common Stock
("E&S Common")
31,000 First American Financial Corp. Common Stock
("First American Common")
POSITIONS ELIMINATED OR REDUCED
10,000 Acuson Corp. Common Stock
("Acuson Common")
36,800 Boston Communications Group, Inc. Common Stock
("BCG Common")
89,900 Glenayre Technologies, Inc. Common Stock
("Glenayre Common")
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20
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[THIRD AVENUE FUNDS LOGO]
NUMBER OF SHARES POSITIONS ELIMINATED OR REDUCED (CONTINUED)
28,500 Hologic, Inc. Common Stock
("Hologic Common")
111,500 PictureTel Corp. Common Stock
("PictureTel Common")
244,800 Shiva Corp. Common Stock
("Shiva Common")
122,000 Sparton Corp. Common Stock
("Sparton Common")
40,300 ValueVision International, Inc.
Class A Common Stock
("ValueVision Common")
21,000 Xircom, Inc. Common Stock
("Xircom Common")
Small-Cap Value Fund added two new positions during the quarter, Gleason
Corporation and LaSalle Re Holdings. Founded in 1865, Rochester-based Gleason is
a world leader in the manufacture of gear production equipment and related
tools. The company's end markets include the automotive and truck industries, as
well as the construction, aerospace, farm and marine markets. Despite very
modest financial leverage, the business historically has generated returns on
equity in excess of 20%. With an under-leveraged balance sheet and cash
generation in excess of current needs, the company seems well positioned to
enhance value, either through acquisitions or returning capital to shareholders.
Management seems to run a conservative show, and much of the company's installed
base of equipment seems ripe for replacement or upgrade. Despite all of these
positive characteristics, Gleason's business is headed for at least a temporary
slowdown. Its current backlog of orders has shrunk from year ago levels and
earnings are likely to contract, at least in the near-term.
LaSalle Re Holdings is a property and casualty reinsurer with a focus on
catastrophe coverages. The company's contracts with primary insurers cover an
array of man-made and natural disasters. 1998 was an unusually tough year for
reinsurers, owing to a nearly unique confluence of events. Industry studies
indicate that 1998 insured losses totaled $17.5 billion - more than 2.5 times
the 1997 figure - including three billion-dollar events. Catastrophic events
ranged from Hurricane Georges to satellite losses to the Yangtze floods. LaSalle
was not immune from these events, reporting significant losses during the past
couple of quarters after years of excellent results.
The problems plaguing the insurance industry go beyond 1998's record insured
losses, however. Extraordinary losses for the industry coincide with
industry-wide structural problems, namely too much capacity. Overcapacity for
much of the insurance industry (e.g., excess capital built up during the past
few years as a result of the bull market and favorable underwriting results) has
today resulted in a brutal pricing environment for many insurers and reinsurers.
Partly as a result of this difficult environment, both the insurance and
reinsurance industries have begun consolidating. The best known of the 1998
reinsurance deals, of course, involved Berkshire Hathaway's purchase of General
Re. But other, lesser-known deals, for example, EXEL Limited's purchase of 73%
of Mid Ocean Limited; Swiss Re's purchase of Life Re; GE Capital's purchase of
Kemper Re; XL Capital's purchase of NAC Re; and Ace Limited's purchase of Cat
Limited, highlight an important and growing trend of consolidation in the
reinsurance markets.
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[THIRD AVENUE FUNDS LOGO]
The extraordinary losses suffered by the industry in 1998, while hard on
investors, are probably healthy for the industry longer-term as they eliminate
capacity. Extraordinary losses, coupled with substantial consolidation, should
help to restore the reinsurance industry to some level of health, manifested by
more disciplined underwriting and improved pricing.
Today, one can buy LaSalle's common stock at prices probably well below what an
acquirer might pay for the whole company and well below a reasonable liquidation
value of the company's assets and liabilities. It's unclear whether LaSalle can
continue to stand alone as an independent entity. Given trends in the industry,
it may well make sense for LaSalle to become part of a larger organization.
Much of the Fund's disposition activity during the quarter arose from the need
to raise cash in order to meet shareholder redemptions and a desire to maintain
cash on the order of 5% to 10% of assets. The actual dollar amount of
redemptions, while disappointing, is by no means life threatening. However, the
cash generation activity has forced the Fund to part with positions that I
probably would not otherwise sell. From that perspective, the redemptions are an
irritant because they have, in some real sense, altered our approach to
investing. It goes without saying -- but it bears repeating because much of the
sales do not reflect portfolio company fundamentals -- that all trading is done
with an eye toward minimizing adverse tax consequences and expenses.
Sales of BCG Common, ValueVision Common and Xircom Common were conducted in
response to market price appreciation that exceeded our view of the longer-term,
economic values inherent in the businesses. Shiva Common was sold to Intel
Corporation. Small-Cap Value Fund also sold all or a portion of its positions in
Acuson, Glenayre, Hologic and PictureTel Common as it appeared that, in each
instance, permanent impairments of capital had occurred. Sparton Common was a
small position that was unlikely to play an important part in the portfolio
going forward.
REFLECTING ON FUND PERFORMANCE
At April 1, 1999, Small-Cap Value Fund passed its second anniversary. The
record, while probably too short to draw any firm conclusions, has fallen short
of my own goals and merits some deeper reflection. Below, I have tried to
quantify the main "anchors" weighing most negatively on the Fund's portfolio
performance, and speak qualitatively about what the numbers might mean.
As outlined in the table below, five issues -- in a portfolio of 41 companies --
account for almost the entire unrealized loss at April 30, 1999 of $16.5
million. Translated, roughly one out of eight picks had a disproportionately
large and negative impact on the Fund's value. What's common to each of these
positions is their large size (based on the Fund's cost) relative to the
portfolio. In almost every case, these positions were added at a time of rapid
growth for the Fund, a time when the Fund looked like it might become much, much
larger than it is today, and the positions, as a percent of Fund assets, would
become significantly smaller than they are today. In some sense then, these
disappointments -- and it's premature to call them mistakes at this point as
further described below -- may be attributed more to position size rather than
to actual stock selection.
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22
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[THIRD AVENUE FUNDS LOGO]
Largest contributors to current unrealized losses at 4/30/99
UNREALIZED LOSS UNREALIZED LOSS % DOWN VS.
ISSUE ($ MILLIONS) ($ PER SHARE) COST BASIS
CP Clare ($3.9) $0.32 65%
Nissan Fire & Marine ($2.9) $0.24 27%
SpeedFam International ($2.9) $0.24 45%
FSI International ($2.8) $0.23 50%
Spectran ($2.2) $0.18 43%
------ -----
Totals ($14.7) $1.21 --
Our positions in the semiconductor equipment companies SpeedFam and FSI remain
deeply undervalued, as a bear market for smaller company equipment stocks
continues to persist. Parenthetically, it's worth noting that both SpeedFam and
FSI had enjoyed a brief, one-quarter, respite from the bear market and, as
recently as January, were at break-even relative to our cost. The rapid erosion
in market value since January -- approximating 50% -- has been disappointing,
but also is suggestive of how quickly the values may be restored.
Our position in Japanese insurer Nissan also remains undervalued by almost any
measure. Despite a 24% increase in Nissan's share price during the past quarter,
the shares remain well below our cost basis.
CP Clare has encountered difficulties in its business, though it's not clear at
the time of this writing that it has experienced a permanent impairment of
capital, a catalyst for sale from the portfolio. Spectran's business operations
have improved, but conditions in its fiber optic markets remain highly
competitive.
We draw some measure of comfort, and you may as well, knowing that the Fund's
major value detractors are isolated to a small handful of issues. More
importantly, shares of these companies almost certainly remain deeply discounted
to their business values and may turn out to be tremendous generators of value
for the Fund down the track. Overall, the Fund's price to value ratio continues
to be very compelling for both long-time as well as new investors.
Sincerely,
/S/Curtis Jensen
- ----------------
Curtis Jensen
Co-manager, Third Avenue Small-Cap Value Fund
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS - 92.48%
Bermuda Based Financial 42,500 LaSalle Re Holdings, Ltd. $ 624,219 0.47%
Institutions ------------
Construction-Japan 431,900 Sawako Corp., Sponsored ADR (b) 2,375,450 1.78%
------------
Financial Insurance 135,800 Capital Re Corp. 2,656,587
60,300 Financial Security Assurance Holdings Ltd. (b) 3,444,637
113,324 MBIA Inc. 7,621,039
------------
13,722,263 10.27%
------------
Industrial Equipment 286,600 Alamo Group, Inc. (b) 2,704,787
143,100 Gleason Corp. 2,441,644
------------
5,146,431 3.85%
------------
Life Insurance 179,000 FBL Financial Group, Inc. Class A (b) 3,557,625 2.66%
------------
Manufactured Housing 184,300 Skyline Corp. 5,402,294 4.04%
------------
Media 139,700 ValueVision International, Inc. Class A (a) 2,008,187 1.50%
------------
Medical Supplies 84,000 Hologic, Inc. (a) 572,250
& Services 278,000 Protocol Systems, Inc. (a) (b) 1,807,000
------------
2,379,250 1.78%
------------
Natural Resources & 187,500 Alexander & Baldwin, Inc. 4,078,125
Real Estate 241,400 Alico, Inc. 3,922,750
238,500 Avatar Holdings, Inc. (a ) (b) 4,620,938
126,900 Cabot Industrial Trust 2,585,587
234,300 Deltic Timber Corp. 6,501,825
206,000 Koger Equity, Inc. 3,025,625
200,000 Tejon Ranch Co. (d) 4,044,264
1,104,700 The TimberWest Forest Corp. (Canada) 7,585,625
------------
36,364,739 27.21%
------------
Non-Life 2,425,000 The Nissan Fire & Marine
Insurance-Japan Insurance Co., Ltd. 8,045,318 6.02%
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
Paper & Related 13,000,000 Repap Enterprises Inc. (a) $ 910,000 0.68%
Products ------------
Retail 426,100 HomeBase, Inc. (a) (b) 2,130,500
261,700 Value City Department Stores, Inc. (a) 2,257,162
------------
4,387,662 3.29%
------------
Semiconductor 520,000 C.P. Clare Corp. (a) (c) 2,080,000
Equipment Manufacturers 154,500 Electroglas, Inc. (a) 2,114,719
and Related 417,400 FSI International, Inc. (a) 2,895,713
164,200 Silicon Valley Group, Inc. (a) 2,175,650
309,200 SpeedFam International, Inc. (a) 3,555,800
------------
12,821,882 9.60%
------------
Technology 275,000 ACT Networks, Inc. (a) 4,950,000
25,000 Bel Fuse, Inc. Class A (a) 951,563
40,700 Bel Fuse, Inc. Class B (a) 1,343,100
80,600 Boston Communications Group, Inc. (a) 826,150
326,900 Centigram Communications Corp. (a) (c) 2,942,100
158,300 Evans & Sutherland Computer Corp. (a) (b) 2,770,250
167,400 Glenayre Technologies, Inc. (a) 554,513
50,000 PictureTel Corp. (a) 412,500
370,300 Planar Systems, Inc. (a) 2,730,963
101,500 Rofin-Sinar Technologies, Inc. (a) (b) 596,313
490,600 SpecTran Corp. (a) (b) (c) 2,820,950
108,400 Xircom, Inc. (a) 2,439,000
------------
23,337,402 17.47%
------------
Title Insurance 139,000 First American Financial Corp. 2,484,625 1.86%
------------
TOTAL COMMON STOCKS
(Cost $139,878,539) 123,567,347
------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT($) ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER INVESTMENTS - 0.06%
Foreign Option Contracts 7,000,000 Canadian Dollar July 1999 Put Options (d) (e) $ 5,338
6,500,000 Japanese Yen February 2000 Put Options (d) (f) 75,725
------------
TOTAL OTHER INVESTMENTS
(Cost $268,150) 81,063 0.06%
------------
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 7.16%
Repurchase Agreements 9,568,942 Bear Stearns 4.88%, due date May 3, 1999 (g) 9,568,942 7.16%
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $9,568,942)
TOTAL INVESTMENT PORTFOLIO - 99.70%
(Cost $149,715,631) 133,217,352
------------
CASH AND OTHER ASSETS
LESS LIABILITIES - 0.30% 406,563
------------
NET ASSETS - 100.00% $133,623,915
------------
(Applicable to 12,077,920
shares outstanding)
NET ASSET VALUE PER SHARE $11.06
======
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Securities in whole or in part on loan. (See Note 1)
(c) Affiliated issuers-as defined under the Investment Company Act of 1940
(ownership of 5% or more of the outstanding voting securities of these
issuers).
(d) Restricted/fair valued securities.
(e) 7 million U.S. Dollar notional amount may be exercised on July 2,1999 to
sell 10.6 million Canadian Dollars at a strike price of 1.52.
(f) 6.5 million U.S. Dollar notional amount may be exercised on February 23,
2000 to sell 854.8 million Japanese Yen at a strike price of 131.50.
(g) Repurchase agreement collateralized by:
Paine Webber Mortgage Acceptance Corp., par value $12,340,000, 6.75%,
matures 9/25/28: market value $9,772,517.
ADR: American Depository Receipt.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1999
(UNAUDITED)
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $133,751,602) $125,374,302
Affiliated issuers (identified cost of $15,964,029) 7,843,050
------------
Total investments (identified cost of $149,715,631) 133,217,352
------------
Cash and cash equivalents (Note 1) 103,871
Receivable for securities sold 604,401
Receivable for fund shares sold 630,922
Dividends and interest receivable 283,717
Collateral on loaned securities (Note 1) 8,875,129
Deferred organizational costs (Note 1) 31,713
Other assets 13,247
------------
Total assets 143,760,352
------------
LIABILITIES:
Payable for securities purchased 456,201
Payable for fund shares redeemed 652,926
Payable to investment adviser 96,543
Accounts payable and accrued expenses 48,308
Payable for service fees (Note 3) 7,330
Collateral on loaned securities (Note 1) 8,875,129
------------
Total liabilities 10,136,437
------------
Net assets $133,623,915
============
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized,
no par value, 12,077,920 shares outstanding $147,770,447
Accumulated undistributed net investment income 132,454
Accumulated undistributed net realized gains
from investment transactions 2,216,675
Net unrealized depreciation of investments and translation of
foreign currency denominated assets and liabilities (16,495,661)
------------
Net assets applicable to capital shares outstanding $133,623,915
============
Net asset value, offering and redemption price per share $11.06
=====
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1999
(UNAUDITED)
INVESTMENT INCOME:
Interest $ 436,358
Dividends (net of foreign withholding tax of $59,291) 898,482
----------
Total investment income 1,334,840
----------
EXPENSES:
Investment advisory fees (Note 3) 635,056
Transfer agent fees 50,839
Administration fees (Note 3) 37,153
Service fees (Note 3) 37,063
Directors' fees and expenses 24,910
Accounting services 23,803
Reports to shareholders 19,562
Auditing and tax consulting fees 15,953
Legal fees 15,521
Custodian fees 15,182
Registration and filing fees 12,893
Amortization of organizational expenses (Note 1) 5,394
Miscellaneous expenses 4,711
Insurance expenses 2,766
----------
Total operating expenses 900,806
----------
Net investment income 434,034
----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on investments 3,143,788
Net realized losses on foreign currency transactions (124,645)
Net change in unrealized appreciation on investments 2,650,956
Net change in unrealized appreciation on translation of
other assets and liabilities denominated in foreign currency 6,421
----------
Net realized and unrealized gains on investments 5,676,520
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,110,554
==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS FOR THE
ENDED YEAR
4/30/99 ENDED
(UNAUDITED) 10/31/98
----------- --=-----
<S> <C> <C>
OPERATIONS:
Net investment income $ 434,034 $ 996,458
Net realized gains (losses) on investments 3,143,788 (642,191)
Net realized losses on foreign currency transactions (124,645) (5,424)
Net change in unrealized appreciation (depreciation) on investments 2,650,956 (22,461,400)
Net change in unrealized appreciation on translation of
other assets and liabilities denominated in foreign currency 6,421 70,197
----------- -----------
Net increase (decrease) in net assets resulting from operations 6,110,554 (22,042,360)
----------- -----------
DISTRIBUTIONS:
Dividends to shareholders from net investment income (1,130,515) (565,144)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 35,119,626 130,078,067
Net asset value of shares issued in reinvestment of
dividends and distributions 1,086,390 547,053
Cost of shares redeemed (47,119,361) (75,716,241)
----------- -----------
Net increase (decrease) in net assets resulting from
capital share transactions (10,913,345) 54,908,879
----------- -----------
Net increase (decrease) in net assets (5,933,306) 32,301,375
Net assets at beginning of period 139,557,221 107,255,846
----------- -----------
Net assets at end of period
(including undistributed net investment income of
$132,454 and $828,935, respectively) $133,623,915 $139,557,221
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
AND RATIOS ARE AS FOLLOWS:
FOR THE
SIX MONTHS FOR THE FOR THE
ENDED YEAR PERIOD
4/30/99 ENDED ENDED
(UNAUDITED) 10/31/98 10/31/97*
----------- -------- ---------
Net Asset Value, Beginning of Period $10.66 $12.37 $10.00
------ ------ ------
Income (loss) from Investment Operations:
Net investment income .04 .08 .05
Net gain (loss) on securities
(both realized and unrealized) .45 (1.73) 2.32
------ ------ ------
Total from Investment Operations .49 (1.65) 2.37
------ ------ ------
Less Distributions:
Dividends from net investment income (.09) (.06) .00
------ ------ ------
Net Asset Value, End of Period $11.06 $10.66 $12.37
====== ====== ======
Total Return 4.57%1 (13.36%) 23.70%1
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $133,624 $139,557 $107,256
Ratio of Expenses to Average Net Assets 1.28%2 1.28% 1.65%2
Ratio of Net Income to Average Net Assets 0.62%2 0.72% 1.44%2
Portfolio Turnover Rate 8%1 6% 7%1
1 Not Annualized
2 Annualized
* The Fund commenced investment operations April 1, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
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
$100,000 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.
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[THIRD AVENUE FUNDS LOGO]
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%
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[THIRD AVENUE FUNDS LOGO]
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 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
Manager, Third Avenue High Yield Fund
- --------------------------------------------------------------------------------
33
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT($) ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONVERTIBLE BONDS - 52.46%
Capital Equipment - 450,000 Lam Research Corp. 5.00%, due 9/1/02 $ 387,000 4.49%
Semiconductors ----------
Computers - Memory 300,000 HMT Technology Corp. 5.75%, due 1/15/04 111,000 1.29%
Devices ----------
Electric Utility Services 400,000 Itron, Inc. 6.75%, due 3/31/04 286,000 3.32%
----------
Electronic Components - 325,000 Amtel SA 144A 3.25%, due 6/1/02 289,656
Semiconductors 325,000 Cypress Semiconductors Corp. 6.00%, due 10/1/02 297,781
----------
587,437 6.81%
----------
Instrumentation - 500,000 Credence Systems Corp. 5.25%, due 9/15/02 418,125 4.85%
Electronic Testing
----------
Lasers - 450,000 Cymer, Inc. 3.50%, due 8/6/04 372,375 4.32%
Systems/Components ----------
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 505,000 PhyMatrix Corp. 6.75%, due 6/15/03 238,613 2.77%
Services ----------
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 - 500,000 P-Com, Inc 4.25% due 11/1/02 (b) 333,125 3.86%
Wireless ----------
TOTAL CONVERTIBLE BONDS
(Cost $5,386,485) 4,522,206
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <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 5,000 Coltec Capital Trust 144A 5.25%, due 4/15/28 236,250 2.74%
Manufacturing ----------
Electric Utility Services 4,000 K N Energy, Inc. 8.25%, due 11/30/01 137,000
4,000 Texas Utilities 9.25%, due 8/16/01 205,750
----------
342,750 3.98%
----------
Insurance 5,000 Conseco Finance Trust IV 7.00%, due 2/16/01 210,313 2.44%
----------
Medical - 9,000 Sun Financing I 144A 7.00%, due 5/1/28 16,875 0.20%
Long Term/Subacute ----------
Rental Auto Equipment 6,000 Budget Group Capital Trust 144A 6.25%, due 6/15/05 223,500 2.59%
----------
Telecommunications - 5,000 Winstar Communications, Inc. 144A 7.00% due 3/15/10 283,125 3.28%
Wireless ----------
Telephone Services 5,000 Nextlink Communications, Inc. 144A 6.50%, due 3/31/10 427,500 4.96%
----------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost $2,248,256) 1,813,813
----------
PRINCIPAL
AMOUNT($)
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS - 26.99%
Building and Construction 250,000 NCI Building Systems, Inc. 144A 9.25%, due 5/1/09 250,000 2.90%
Products ----------
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
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS - 0.37%
Telecommunications - 663 Winstar Communications, Inc. (a) 32,321 0.37%
Wireless ----------
x 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% $8,620,262
==========
(Applicable to 916,197
shares outstanding)
NET ASSET VALUE PER SHARE $9.41
=====
</TABLE>
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 THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1999
(UNAUDITED)
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 securities 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 THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1999
(UNAUDITED)
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 THIS FINANCIAL STATEMENT.
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS FOR THE
ENDED 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
========== ==========
</TABLE>
* The Fund commenced investment operations on February 12, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
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*
----------- ---------
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 THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE REAL ESTATE VALUE FUND
DEAR FELLOW SHAREHOLDERS:
At April 30, 1999, the end of our second fiscal quarter, the unaudited net asset
value attributable to the 549,035 shares outstanding of the Third Avenue Real
Estate Value Fund (the "Fund") was $11.26 per share. This compared with the
Fund's audited net asset value at October 31, 1998 of $10.28 per share and net
asset value at January 31, 1999 of $10.82 per share. As of May 20, 1999, the
unaudited net assets totaled $6,929,832, attributable to the 594,084 common
shares outstanding with a net asset value of $11.66 per share.
QUARTERLY ACTIVITY
During the second quarter of fiscal 1999, the Fund established new positions in
the common stocks of three companies, and increased its position in the common
stocks of 13 companies. At April 30, 1999, the Fund held positions in 20
companies, and was approximately 69% invested. As of May 20, 1999, the Fund was
78% invested. The Fund's top 10 positions accounted for approximately 42% of the
Fund's net assets. The Fund did not reduce or sell any positions during the
quarter.
NUMBER OF SHARES POSITIONS ACQUIRED
31,000 Chastain Capital Corp.
("Chastain Common")
10,000 First American Financial Corp. ("First American Common")
14,000 Prime Group Realty Trust ("Prime Common")
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
3,000 Aegis Realty Inc. ("Aegis Common")
6,500 Anthracite Capital Inc. ("Anthracite Common")
2,500 Avatar Holdings, Inc. ("Avatar Common")
5,000 Catellus Development Corp. ("Catellus Common")
28,500 Commercial Assets, Inc. ("Commercial Common")
2,000 Consolidated-Tomoka Land Co. ("Consolidated Common")
1,000 Echelon International Corp., Inc. ("Echelon Common")
10,000 Forest City Enterprises, Inc. Class A ("Forest City Common")
8,000 Imperial Credit Commercial Mortgage Investment Corp.
("Imperial Common")
3,000 Koger Equity, Inc. ("Koger Common")
2,000 Security Capital Group, Inc. Class B
("Security Capital Common")
3,000 St. Joe Co. ("St. Joe Common")
8,700 Wellsford Real Properties, Inc. ("Wellsford Common")
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[THIRD AVENUE FUNDS LOGO]
OVERVIEW OF NEW POSITIONS ESTABLISHED DURING THE QUARTER
CHASTAIN CAPITAL is the Fund's third investment in a mortgage real estate
investment trust (REIT). Imperial Common and Anthracite Common were the first
two. Chastain completed its IPO in April 1998 and was organized to originate
commercial and multifamily mortgage loans for the purpose of securitizing the
loans by issuing collateralized mortgage obligations ("CMOs") and retaining
residual interests in the mortgage loans subject to the CMO debt. The company
was also organized to acquire subordinate commercial mortgage-backed securities
("CMBS"), originate and acquire subordinate loans on real property ("Mezzanine
loans") and acquire real property.
The turmoil in the credit markets during the second half of 1998 resulted in the
company taking significant mark-to-market losses. The losses were due to a
decline in the market value of the company's portfolio, and not to a
deterioration of its credit quality (see a similar discussion regarding
Anthracite Common in the Fund's First Quarter Report dated January 31, 1999). As
a result of the losses, the company was in violation of net worth covenants
under its credit facilities. The credit facilities were restructured and the
company agreed to dispose of certain assets and cease acquiring new investments.
The restructured credit facilities were set to mature on March 31, 1999. During
the first quarter of 1999, the company received a payoff on a mortgage loan and
it sold a significant portion of its CMBS portfolio as well as one of its real
estate assets. The proceeds were used to retire the outstanding credit
facilities.
At March 31, 1999, the company has a book value of about $8.00 per share (after
mark-to-market adjustments). We have been buying Chastain Common at about a 35%
discount to book value. On May 14, 1999, Chastain's Board of Directors voted to
sell all of the company's assets, either through a plan of liquidation or
through a sale of the company. The liquidation is subject to shareholder
approval.
FIRST AMERICAN FINANCIAL is the leading provider of title insurance and real
estate-related information products and services, including tax monitoring,
flood certification, mortgage credit reporting and document preparation, among
others. Title insurance covers the property owner or mortgage lender against
losses or damages resulting from title defects or encumbrances that are not
identified in the underwriting process. The title insurance industry is
attractive to us because its results are driven by the expense ratio, not the
loss ratio; insurers can theoretically write to a zero loss standard. In other
words, if title underwriting is done properly, insurance claims should be
minimal. Where all other types of insurance companies (e.g., casualty, life and
bond insurers) receive premiums to "accept" risk, title insurance companies
receive premiums to "eliminate" risk.
The U.S. real estate market has a strong cyclical tendency, driven by interest
rate volatility and economic trends. Title insurance sales are sensitive to
these cycles with housing purchases and refinancings tending to slow when
interest rates rise. Since the last cycle, First American has diversified from
title insurance alone to become a provider of real estate information services,
which are less cyclical. While operating revenues from title insurance increased
by 75% from 1996 to 1998, operating revenues from the real estate information
division increased by 150% during the same period, representing 21% of total
operating revenue in 1998. Since the beginning of the year, the price of First
American Common has fallen dramatically due to fear of an increase in interest
rates and a recession. The Fund was able to take advantage of depressed prices
by purchasing First American Common at less than 6 times trailing earnings.
Regardless of short-term economic factors, at current levels, First American
Common is very cheap.
PRIME GROUP REALTY is a REIT that develops, owns, and manages high-quality
office and industrial properties primarily in the Chicago metropolitan area. The
Chicago office market is still in an expansion phase (i.e., rents are increasing
and absorption is positive). The company also owns 225 acres of developable land
with rights to acquire an additional 325 acres. Combined, the acreage could
support new developments totaling more than 12 million square feet of office
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[THIRD AVENUE FUNDS LOGO]
and industrial space. The company is conservatively financed with primarily
non-recourse mortgage debt. Management is composed of seasoned real estate
executives with core competancies that include the development and redevelopment
of office and industrial properties. The Fund has been buying Prime Common at
about a 35% discount to our estimate of net asset value and a 43% discount to
the company's estimate of net asset value. Additionally, we are earning a
dividend yield of about 9.6%.
OPPORTUNITIES IN REITS AND NON-REITS
For the outside passive minority investor ("OPMI") who wants to invest in real
estate, there have never been as many choices as there are today. Until 1986,
the most popular real estate investment vehicle for an OPMI was a public or
private real estate limited partnership. Many, if not most, of these investments
were tax-shelter driven, subject to heavy promotes by sponsors, lacked adequate
public disclosures, and ended up as financial disasters. The Tax Reform Act of
1986 took away many of the tax incentives that, while originally legislated to
stimulate capital investments, were abused by deal promoters. The 1986 Act also
changed legislation regarding REITs, permitting them to operate and manage
properties (as opposed to being passive owners).
According to the National Association of Real Estate Investment Trusts (NAREIT),
at the end of 1998, there were 211 publicly traded REITs with a total equity
market capitalization of $138 billion. Ten years ago, there were slightly more
than half as many REITs (117), but with a total equity market capitalization of
only $11 billion. The explosive growth in the number and size of REITs can be
attributed, first, to the 1986 tax law changes, and, second, to the recovery of
the real estate industry over the last 5 years. In addition to REITs, there are
dozens of publicly traded real estate operating companies that are regular C
corporations that have not elected to be taxed as REITs.
A REIT must pay out at least 95% of its taxable income to shareholders in the
form of dividends. The company pays no corporate income tax, and its
shareholders include the REIT dividends in their taxable income (if dividends
exceed taxable income, the excess is considered a return of capital). The
benefit to the REIT structure is the avoidance of double taxation. A regular C
corporation pays corporate income tax and its dividends are generally taxed to
its shareholders. In order to qualify as a REIT, the company must meet certain
ownership, income and asset tests each year. These tests restrict the activities
of REITs primarily to the long-term ownership, leasing, operation and management
of real estate. The requirement that REITs pay dividends restricts the amount of
earnings that may be retained and used for reinvestment purposes. Until about a
year ago, this wasn't a problem. During the real estate recovery (1994 through
1997), when a REIT needed additional funds for acquisitions or development, it
simply raised new equity. Share prices were high enough so that issuing new
shares did not dilute existing shareholders. Today, the situation is quite
different. Secondary offerings for most REITs are not viable without diluting
existing shareholders. Many REITs are looking for alternative sources of
capital, including additional debt and/or sale of properties.
A regular C corporation, while subject to corporate income tax, may choose to
pay no dividends and therefore retain all of its earnings for reinvestment
purposes. By reinvesting its earnings, a company is more apt to create wealth in
both strong and weak markets. Without the asset and income restrictions of a
REIT, a C corporation is able to diversify its operations to include (i) land
acquisition, development and tract sales; (ii) home building; (iii) providing
development and/or management services to third parties; (iv) buying and selling
real estate as a trade or business; and (v) non-real estate activities.
Corporations can take steps to reduce their effective tax rates. For example,
Wellsford Real Properties acquired Value Property Trust, a REIT that owned 20
properties and had $85 million of net operating loss carryforwards (NOLs).
Wellsford "flipped" 13 of the 20 properties, retaining 7 properties and the
NOLs. Wellsford will be able to offset its
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[THIRD AVENUE FUNDS LOGO]
taxable income with the NOLs. LNR Property Corp. has made a substantial
investment in "affordable housing" developments that generate tax credits. By
doing so, LNR has been able to substantially reduce its corporate tax rate.
There are over 250 publicly traded REITs and C corporations to choose from.
However, probably 90% of the REITs don't currently meet our criteria for "SAFE
AND CHEAP." Most equity REITs are safe enough (i.e., they have fairly
conservative balance sheets), but I refuse to pay retail when I can go down the
street and buy below wholesale. Additionally, real estate is a very
capital-intensive business and I believe the best way to create wealth is to
reinvest earnings. The requirement that REITs pay out 95% of their taxable
income is contrary to the nature of the business. When I invest in an equity
REIT, I am doing it for an entirely different reason than most REIT mutual
funds. The equity REITs in which the Fund has invested to date are generally
small-cap REITs that we bought at 30% to 40% discounts to NAV and which I view
as potential resource conversions. I don't expect that these REITs will be
long-term core holdings of the Fund, but they present tremendous upside
potential with very limited downside. The average dividend yield on the Fund's
equity REIT investments is about 9.5% on cost (the yield on our mortgage REITs
is about 11.8%). At this yield, we can afford to be patient while waiting for
our discounts to be realized.
I look forward to writing to you again when we publish our quarterly report for
the period ending July 31, 1999.
Sincerely,
/s/ Michael H. Winer
- --------------------------
Michael H. Winer
Co-manager, Third Avenue Real Estate Value Fund
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS - 68.72%
Natural Resources 6,500 Deltic Timber Corp. $ 180,375
4,000 The TimberWest Forest Corp. (Canada) 27,467
----------
207,842 3.36%
----------
Real Estate Development 15,000 Avatar Holdings, Inc. (a) 290,625
7,000 Catellus Development Corp. (a) 107,625
8,000 Consolidated-Tomoka Land Co. 104,000
8,900 Echelon International Corp., Inc. (a) 203,031
16,000 Forest City Enterprises, Inc. Class A 395,000
9,000 LNR Property Corp. 176,625
11,500 St. Joe Co. 292.531
26,000 Wellsford Real Properties Inc. (a) 260,000
----------
1,829,437 29.59%
----------
Real Estate 18,500 Security Capital Group, Inc. Class B (a) 279,812 4.53%
Holding Company ----------
Real Estate 21,000 Aegis Realty Inc. 210,000
Investment Trust 35,500 Anthracite Capital Inc. 268,469
31,000 Chastain Capital Corp. 174,375
34,500 Commercial Assets, Inc. 181,125
32,000 Imperial Credit Commercial Mortgage Investment Corp. 314,000
14,000 Koger Equity, Inc. 205,625
14,000 Prime Group Realty Trust 204,750
25,000 United Investors Realty Trust 193,750
----------
1,752,094 28.34%
----------
Title Insurance 10,000 First American Financial Corp. 178,750 2.89%
----------
TOTAL COMMON STOCKS
(Cost $3,920,571) 4,247,935
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
(NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
TOTAL INVESTMENT PORTFOLIO - 68.72%
(Cost $3,920,571) $4,247,935
----------
CASH AND OTHER ASSETS
LESS LIABILITIES - 31.28% 1,933,942
----------
NET ASSETS - 100.00% $6,181,877
(Applicable to 549,035 ==========
shares outstanding)
NET ASSET VALUE PER SHARE $11.26
======
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Securities in whole or in part on loan. (See Note 1)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1999
(UNAUDITED)
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $3,920,571) $4,247,935
Cash and cash equivalents (Note 1) 1,819,710
Receivable for fund shares sold 195,021
Receivable from investment adviser 29,125
Dividends and interest receivable 16,636
Collateral on loaned securities (Note 1) 192,000
Other assets 10,763
----------
Total assets 6,511,190
----------
LIABILITIES:
Payable for securities purchased 38,741
Payable for fund shares redeemed 55,000
Accounts payable and accrued expenses 43,572
Collateral on loaned securities (Note 1) 192,000
----------
Total liabilities 329,313
----------
Net assets $6,181,877
==========
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par value,
549,035 shares outstanding $5,817,375
Accumulated undistributed net investment income 38,576
Accumulated net realized losses from investment transactions (1,448)
Net unrealized appreciation of investments and translation of
foreign currency denominated assets and liabilities 327,374
----------
Net assets applicable to capital shares outstanding $6,181,877
==========
Net asset value, offering and redemption price per share $11.26
======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1999
(UNAUDITED)
INVESTMENT INCOME:
Interest $ 14,879
Dividends (net of foreign withholding tax of $215) 73,306
--------
Total investment income 88,185
--------
EXPENSES:
Investment advisory fees (Note 3) 14,139
Administration fees (Note 3) 33,776
Registration and filing fees 26,026
Directors' fees and expenses 24,458
Transfer agent fees 12,870
Accounting services 11,901
Legal fees 9,677
Auditing and tax consulting fees 9,190
Custodian fees 5,175
Reports to shareholders 4,091
Miscellaneous expenses 390
--------
Total operating expenses 151,693
--------
Expenses waived and reimbursed (Note 3) (121,843)
--------
Net expenses 29,850
--------
Net investment income 58,335
--------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on foreign currency transactions 83
Net change in unrealized appreciation on investments 307,959
Net change in unrealized appreciation on translation of
other assets and liabilities denominated in foreign currency 23
--------
Net realized and unrealized gains on investments 308,065
--------
Net increase in net assets resulting from operations $366,400
========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS FOR THE
ENDED PERIOD
4/30/99 ENDED
(UNAUDITED) 10/31/98*
-------- -------
<S> <C> <C>
OPERATIONS:
Net investment income $ 58,335 $ 1,679
Net realized losses on investments -- (1,531)
Net realized gains on foreign currency transactions 83 --
Net change in unrealized appreciation on investments 307,959 19,406
Net change in unrealized appreciation (depreciation) on translation
of other assets and liabilities denominated in foreign currency 23 (14)
--------- -------
Net increase in net assets resulting from operations 366,400 19,540
--------- -------
DISTRIBUTIONS:
Dividends to shareholders from net investment income (26,438) --
--------- -------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 6,073,987 693,412
Net asset value of shares issued in reinvestment of
dividends and distributions 26,336 --
Cost of shares redeemed (971,360) --
--------- -------
Net increase in net assets resulting from capital share transactions 5,128,963 693,412
--------- -------
Net increase in net assets 5,468,925 712,952
Net assets at beginning of period 712,952 0
--------- -------
Net assets at end of period
(including undistributed net investment income of
$38,576 and $6,679, respectively) $6,181,877 $712,952
========== ========
</TABLE>
* The Fund commenced investment operations September 17, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) AND RATIOS ARE AS
FOLLOWS:
FOR THE
SIX MONTHS FOR THE
ENDED PERIOD
4/30/99 ENDED
(UNAUDITED) 10/31/98*
----------- ---------
Net Asset Value, Beginning of Period $10.28 $10.00
------ ------
Income from Investment Operations:
Net investment income .07 .02
Net gain on securities
(both realized and unrealized) 1.01 .26
------ ------
Total from Investment Operations 1.08 .28
------ ------
Less Distributions:
Dividends from net investment income (.10) .00
------ ------
Net Asset Value, End of Period $11.26 $10.28
====== ======
Total Return 10.53%1 2.80%1
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of period (in thousands) $6,182 $713
Ratio of Expenses to Average Net Assets
Before expense reimbursement 9.66%2 81.89%2
After expense reimbursement 1.90%2 1.90%2
Ratio of Net Income (Loss) to Average Net Assets
Before expense reimbursement (4.04%)2 (77.33%)2
After expense reimbursement 3.71%2 2.66%2
Portfolio Turnover Rate 0%1 0%1
1 Not Annualized
2 Annualized
* The Fund commenced investment operations September 17, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
SECURITY VALUATION:
Securities traded on a principal stock exchange or the National Association of
Securities Dealers' Automated Quotation system ("NASDAQ") are valued at the last
quoted sales price or, in the absence of closing sales prices on that day,
securities are valued at the mean between the closing bid and asked price.
Temporary cash investments are valued at cost, plus accrued interest, which
approximates market. Short-term securities with original or remaining maturities
in excess of 60 days are valued at the mean of their quoted bid and asked
prices. Short-term securities with 60 days or less to maturity are amortized to
maturity based on their cost if acquired within 60 days of maturity, or if
already held by a Fund on that day, based on the value determined on that day.
The Funds may invest up to 15% of their total assets in securities which are not
readily marketable, including those which are restricted as to disposition under
applicable securities laws ("restricted securities"). Restricted securities and
other securities and assets for which market quotations are not readily
available are valued at "fair value" as determined in good faith by the Board of
Trustees of the Funds, although actual evaluations may be made by personnel
acting under procedures established by the Board of Trustees. At April 30, 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.
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
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 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.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
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 Value of
VALUE OF VALUE OF
FUND SECURITIES 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 182,500 192,000
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.
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
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:
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[THIRD AVENUE FUNDS LOGO]
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.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
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:
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
INVESTMENT IN FUNDS' AFFILIATES:
A summary of the transactions in securities of affiliated issuers for the period
ended April 30, 1999 is set forth below:
THIRD AVENUE VALUE FUND
<TABLE>
<CAPTION>
SHARES/ SHARES/ DIVIDEND/INTEREST
PRINCIPAL SHARES/ PRINCIPAL INCOME
HELD AT PRINCIPAL SHARES HELD AT VALUE AT NOV. 1, 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 -- + --
</TABLE>
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
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>
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, Inc. 4,234,800 -- -- 4,234,800 56,111,100 --
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
Vecco 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.
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>
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
5. CAPITAL SHARE TRANSACTIONS
Each Fund is authorized to issue an unlimited number of shares of beneficial
interest with no par value. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
THIRD AVENUE THIRD AVENUE
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
========== ========== ========== ==========
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
------------ ------------ ------------ -------------
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>
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
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.
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
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1999
(UNAUDITED)
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.
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BOARD OF TRUSTEES
Phyllis W. Beck
Lucinda Franks
Gerald Hellerman
Marvin Moser
Myron M. Sheinfeld
Martin Shubik
Charles C. Walden
Barbara Whitman
Martin J. Whitman
OFFICERS
Martin J. Whitman
Chairman, Chief Executive Officer
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
[LOGO]
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
