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Trends come and go.
VALUE IS CONSTANT.
Third Avenue Funds celebrates 10 YEARS
of delivering superior results to our shareholders,
investing for growth by adhering to a disciplined
fundamental value approach.
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People buy into fads and trends. Yet they also make room for a few classics,
like THIRD AVENUE VALUE FUND - an investment that makes sense in any market, any
time. This is because we buy stable businesses, not fleeting, ever-changing
earnings estimates.
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For ten years, we've been investing in thoroughly researched companies that we
deem to have STRONG FINANCES, COMPETENT MANAGEMENT AND CLEAR BUSINESS MODELS. We
look for stocks that we can acquire for no more than 50% of what we estimate a
private buyer might pay.
This approach enhances the opportunity to achieve MEANINGFUL LONG-TERM GROWTH,
and has historically reduced fluctuation in returns. And because we tend to buy
stocks and hold them until their value is realized, our funds are more
tax-efficient than most. Of course, past performance is no guarantee of future
returns.
THIRD AVENUE VALUE FUND HAS
PREVAILED IN BOTH VALUE AND GROWTH
MARKETS, AND WHEN COMPARED TO
BOTH VALUE AND GROWTH INDEXES.
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[The table below represents a bar chart in the printed piece.]
10 Year 5 Year 3 Year 1 Year 2000 YTD
Russell 2000 Value 17.73 12.94 2.93 17.30 13.21
Russell 2000 Growth 15.95 11.65 8.11 16.16 (10.68)
THIRD AVENUE VALUE 19.56 16.87 11.72 24.07 18.59
Returns are as of 10/31/00 and include reinvestment of dividends and capital
gains distributions.
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Third Avenue Value Fund is offered by prospectus only. Prospectuses contain more
complete information on advisory fees and other expenses and should be read
carefully before investing or sending money. Please read the prospectus
carefully before you send money. Third Avenue Value Fund's one year, three year,
five year, and since inception (11/01/90) average annual returns for the period
ending September 30, 2000 are 31.71%, 10.04%, 16.75%, and 19.83%, respectively.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than the original cost. M.J. Whitman, Inc. Distributor.
December 22, 2000.
The Russell 2000 Growth Index measures the performance of those companies with
higher price to book ratios and higher forecasted growth. The Russell 2000 Value
Index measures the performance of those companies with lower price to book
ratios and lower forecasted growth values. Neither index is a security that can
be purchased or sold, and their total returns are reflective of an unmanaged
portfolio. The Russell 2000 indexes are trademarks of Frank Russell Company. The
Fund is not sponsored, endorsed, sold or promoted by Frank Russell Company.
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THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP VALUE FUND
THIRD AVENUE REAL ESTATE VALUE FUND
ANNUAL REPORT
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October 31, 2000
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THIRD AVENUE VALUE FUND
Dear Fellow Shareholders:
At October 31, 2000, the audited net asset value attributable to the 48,237,053
common shares outstanding of the Third Avenue Value Fund ("TAVF," "Third
Avenue," or the "Fund") was $38.48 per share. This compares with an unaudited
net asset value at July 31, 2000, of $37.10 per share; and an audited net asset
value, adjusted for subsequent distributions, of $30.40 per share at October 31,
1999. At December 11, 2000, the unaudited net asset value was $39.67 per share.
QUARTERLY ACTIVITY
During the quarter, new positions were established in the distressed credits of
two issuers, and four new common stock positions were acquired. Existing
positions were increased through purchases of two distressed debt issues and
twenty common stock issues. Two new common stock issues - Florida East Coast
Industries and Trenwick Group - were obtained as the results of a spin-off and a
merger involving an exchange of common stocks, respectively. The Chapter 11
reorganizations of Innovative Clinical Solutions and Safelite Glass were
completed. As a result, Innovative Clinical Solutions Subordinates were
converted into Innovative Clinical Solutions Common Stock and Safelite Bank Debt
was converted into units consisting of new Safelite Secured Debt and Safelite
Common Stocks.
Two equity investments were eliminated during the quarter because the businesses
were taken over in cash mergers. One private placement investment - Head
Insurance Investors LP - was written down.
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
$15,925,000 USG Corp. 9.25% Senior Notes due 9/15/01 ("USG Notes")
$20,000,000 USG Corp. 8.50% Senior Notes due 8/1/05 ("USG Notes")
$2,000,000 Home Products Int'l. Inc. Senior Subordinates 9.625%,
due 5/15/08 ("Home Products Subordinates")
630,600 shares American Power Conversion Corp. Common Stock
("APC Common")
440,000 shares CIT Group Holdings Inc. Common Stock ("CIT Common")
226,700 shares Lindsay Manufacturing Co. Common Stock
("Lindsay Common")
300,000 shares Paccar, Inc. Common Stock ("Paccar Common")
INCREASES IN EXISTING POSITIONS
$2,850,000 CareMatrix Corp. 6.25% Subordinates due 8/15/04
("Carematrix Subordinates")
$8,551,000 Frank's Nursery & Crafts, Inc. 10.25% Subordinates,
due 3/1/08 ("Frank's Subordinates")
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NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
170,400 shares Alamo Group, Inc. Common Stock ("Alamo Common")
156,000 shares Alico, Inc. Common Stock ("Alico Common")
97,800 shares Analogic Corp. Common Stock ("Analogic Common")
658,600 shares AVX Corp. Common Stock ("AVX Common")
59,130 shares DR Horton, Inc. Common Stock ("DR Horton Common")
141,000 shares Electro Scientific Industries, Inc. Common Stock
("Electro Scientific Common")
1,121,000 shares Electroglas, Inc. Common Stock ("Electroglas Common")
493,500 shares Enhance Financial Services Group, Inc. Common Stock
("Enhance Common")
697,500 shares FSI International, Inc. Common Stock ("FSI Common")
301,300 shares GaSonics International Corp. Common Stock ("GaSonics
Common")
167,000 shares J&J Snack Foods Corp. Common Stock ("J&J Common")
10,000 shares Kendle International Inc. Common Stock ("Kendle
Common")
167,400 shares Mestek, Inc. Common Stock ("Mestek Common")
6,000 shares The Nissan Fire & Marine Insurance Co, Ltd. Common
Stock ("Nissan Common")
409,900 shares Silicon Valley Group, Inc. Common Stock ("Silicon
Valley Common")
231,500 shares Standex International Corp. Common Stock ("Standex
Common")
532,000 shares Toyoda Automatic Loom Works. Ltd. Common Stock
("Toyoda Common")
197,000 shares Trinity Industries, Inc. Common Stock ("Trinity
Common")
970,100 shares USG Corp. Common Stock ("USG Common")
658,400 shares Value City Department Stores, Inc. Common Stock
("Value City Common")
POSITIONS ELIMINATED
110,174,479 shares Repap Enterprises, Inc. Common Stock ("Repap Common")
5,490 shares Sen-Tech International Holdings, Inc. Common Stock
("Sen-Tech Common")
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USG REVISITED
TAVF established its first position in USG Common during the July 2000 quarter.
The analysis used in making that decision was flawed. The largest USG
subsidiary, U.S. Gypsum Company ("US Gypsum"), faces a huge, and unknowable,
amount of personal injury claims in connection with asbestos contained in
certain products that the subsidiary had manufactured before 1973. In the July
quarterly report it was stated, "TAVF is betting that USG can handle safely
whatever liabilities still might be out there without compromising its very good
financial position. This now seems a reasonably safe bet." It became apparent
that this was not a reasonably safe bet, especially after Owens-Corning
Corporation, because of its huge potential asbestos liabilities, filed for
Chapter 11 relief on October 5.
The truth is there is no way that USG, or any company with asbestos liabilities
- running the gamut from Owens-Corning to General Electric to Viacom - are going
to get their arms around future asbestos liabilities as long as claimants have
access to U.S. courts, especially state courts. Here companies, such as US
Gypsum, face thousands of lawsuits for bodily injury, which suits, if not
settled, can result in gargantuan jury awards to plaintiffs. Suits are brought
and settled on behalf of plaintiffs who may have been exposed to asbestos
sometime in the previous 60 years even if those plaintiffs manifest little, or
no, medical symptoms. Companies, like US Gypsum, are forced to settle claims
rather than play "Russian Roulette" with the tort system as it exists in this
country. In the last 20 years, many companies with asbestos liabilities have
been forced to seek Chapter 11 relief. Frequently, in a Chapter 11
Reorganization, old common stock has been rendered valueless, or almost
valueless.
USG, though, seems different from the "run of the mill" companies facing
asbestos liabilities because, unlike companies such as Owens-Corning or
Armstrong Holdings, USG enjoys exceptional financial strength; and USG never was
involved in producing products, such as insulation, which are the most likely to
cause people involved with the products to suffer from asbestos related
illnesses which may not show up for as long as 40 years after exposure. The
essential arithmetic necessary to understanding USG is about as follows:
Payments on asbestos claims, before insurance reimbursements, have ranged from
$100 million in 1999 to $61.1 million in 1998 and $31.6 million in 1997. For the
first 9 months of calendar 2000, accrued asbestos charges were $77 million
compared with $62.5 million during the 9 month interim in 1999. For practical
purposes, USG will have exhausted its insurance coverage from existing policies
in the years just ahead.
In 1999, USG's operating profit before asbestos charges was reported at $801
million, of which it is estimated fairly reliably, about $200 million were
earned at subsidiaries other than US Gypsum. For the first 9 months of 2000,
operating profit before asbestos charges was reported at $548 million, of which
it is estimated about $150 million were earned at subsidiaries other than US
Gypsum. In five years ahead, over the next business cycle, it seems a fair guess
that USG operating profits, before asbestos charges, will average, say, $500
million to $600 million per year. Cash flow from operations after 2001, though,
should be somewhat better than operating profit because massive capital
expenditure programs at US Gypsum will have been completed. It also seems a fair
guess that average annual operating profits at subsidiaries other than US
Gypsum, ought to average, say, $150 million to $180 million over the business
cycle.
At September 30, 2000, USG debt aggregated only $650 million and annual interest
charges were running at about $50 million.
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Put otherwise it can be fairly stated, using the essential arithmetic, that ex
asbestos liabilities, USG has a reorganization value ranging between $2.5
billion to $5 billion available for USG Common. USG Common had a market value at
October 31 of about $750 million on the 44 million common shares outstanding.
Theoretically, there are three ways USG might be able to get its arms around the
future asbestos liabilities of United States Gypsum Company:
Legislation, which would effectively remove most asbestos disputes from court
adjudication. Such legislation remains bottled up in Congress as embodied in a
bill, HR 1283. Neither HR 1283, nor its Senate counterpart, seems likely to pass
in the foreseeable future.
Chapter 11, which could result in setting up an asbestos trust to settle claims
as was pioneered by Johns-Manville. Asbestos Trusts are enabled under Bankruptcy
Code Section 524(g). This is an absolute non-starter for USG because, unlike
Owens-Corning, which intends to avail itself of the Trust mechanism to largely
escape from the tort system, USG's very strong financial position precludes it
from complying with strictures mandated by 524(g) Trusts.
USG might be able to obtain insurance of some sort, under which catastrophe
insurers would assume asbestos liabilities after US Gypsum has paid out the
first $1 billion or so of claims. Premiums charged would, of course, be high. In
1996, as one precedent, T & N Companies, a subsidiary of Federal-Mogul
Corporation, obtained similar insurance coverage.
To the TAVF way of thinking, USG Common appears to be very cheap but not safe.
The Fund tries to own common stocks that are both safe and cheap. There is no
way in our definition of "safe" that a common stock can be safe where one cannot
reasonably estimate what the amount of ultimate liabilities may be. Since the
Fund has already made the investment, TAVF intends to retain its position in USG
Common at these prices. However, given the essential arithmetic surrounding USG,
all of the Fund's new investments in USG will be as a senior creditor. If USG
can get its arms around asbestos liabilities, the appreciation potential for USG
Common ought to be huge even after allowing for material dilution, as might
occur in the event substantial insurance premium expenses were incurred in order
to obtain asbestos liability catastrophe coverage. The appreciation potential
for USG Common might be enhanced by the following factors:
USG management recently suspended its massive share repurchase program. If
reinstated and the USG Common remains very cheap, it is probably more realistic
to think in terms of 40 million, or fewer, shares outstanding rather than 44
million.
Asbestos payments and insurance premiums are fully deductible for income tax
purposes. The figures used in the essential arithmetic above are all pre-tax
numbers. The potential costs of asbestos liabilities, though unknowable, will be
borne in part by the taxing authorities.
There could very well be significant "claims-over" against tobacco companies.
Almost all of the victims of asbestos disease were also cigarette smokers. In
recent years it has been shown that the tobacco industry, and the companies in
the industry, had tried to suppress evidence. Important cases against the
tobacco industry brought by Johns-Manville and Owens-Corning either have gone to
trial, or are scheduled to go to trial in February 2001. A fair reading of the
US District Court's findings which were part of an opinion rendered May 1, 2000
in Falise, et al, v. American Tobacco Company, et al, a case involving the
Johns-Manville Asbestos Trust and the Tobacco Industry, (the "Falise" Case)
indi-
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cates that tobacco has huge asbestos problems. Sooner or later the tobacco
companies ought to become responsible for paying a substantial part of asbestos
claimants' recoveries based strictly on the facts recited in the Falise opinion.
Despite all of the above, TAVF may well exit from its investment in USG Common
sometime next year unless there can be reasonable assurances as to what the
maximum asbestos liabilities might be. If TAVF exits, it won't be because USG
Common is not cheap; it will be because the investment is unsuitable for a
portfolio consisting of common stocks, which are, by our definition, safe.
On the other hand, USG Notes, both the 9 1/4% due September 15, 2001 and the 8
1/2% due August 1, 2005 appear to be safe and cheap. The 9 1/4% Notes, a 10 1/2
month debt instrument, were acquired at a yield to maturity of 21.1%. The 8 1/2%
have a cost basis of 73.25% of claim, a yield to maturity of 16.9%, and a
current yield of 11.6%. TAVF management hasn't figured out any likely scenario
under which these issues will be paid less than their principal amounts, plus
interest, no matter how asbestos claims are resolved, given the essential
arithmetic described above. In other words, the USG Notes seem to carry little,
or no, credit risk.
The best argument made that there might be credit risk in USG Notes is that the
Notes might be structurally subordinated to perfected asbestos liabilities
because the USG Notes are parent obligations while perfected asbestos
liabilities would be obligations of USG's largest subsidiary, US Gypsum. This
analysis seems weak on two counts:
1. There seems to be more than enough earnings and assets in the other USG
subsidiaries, which are not involved with asbestos, to service the Notes in
full.
2. The Indentures for the Notes seem to prohibit United States Gypsum Company
from incurring massive liabilities, e.g., asbestos claims. Thus, a pretty
good argument can be made for substantive consolidation in which case the
Notes would have the same seniority status as perfected asbestos claims if
somehow or other the Notes could not be serviced out of other assets and
earnings of USG which do not have an asbestos taint.
Thus, the odds seem overwhelming that the Notes will be "money good" no matter
the amount of asbestos claims that are perfected as long as any value is given
to USG Common Stock. Admittedly, it is possible that the Notes, especially the 8
1/2%, might not receive the full value to which they are entitled in cash.
Rather such value might be paid in reorganization securities, including USG
Common Stock.
Analyzing credits tends to be different than analyzing common stocks. Assume
that the TAVF analysis of the USG Notes is wildly optimistic and that USG turns
out not to be creditworthy. The holders of the Notes, unlike the holders of
common stock, are unlikely to be wiped out. Substantial value ought to remain
for the Notes, even though such value might be less than the Fund's cost basis.
There are a few other things to keep in mind when analyzing the Notes:
1. Unless USG seeks Chapter 11 relief, a very unlikely event, USG has to keep
up service in cash on the Notes as to interest, principal, and premium, if
any.
2. Even in Chapter 11, there may be some chance that the Notes would receive
the equivalent of "adequate protection" payments so that no interest
payments would be missed.
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3. The appreciation potential of the 8 1/2% could be huge. Suppose asbestos
matters do get resolved, even partially, relatively soon, then the annual
"yield to an improved credit rating" for the 8 1/2% might be, say 50% to
80%.
The financial community has been in a state of pure panic in regard to asbestos
related securities, whether credit instruments or equities, since Owens-Corning
sought Chapter 11 relief on October 5. The current climate seems to be similar
to the climate that existed in the general market for common stocks on October
19, 1987, or even the year 1933. The current panic does seem to be grounded in
reality for many asbestos related securities, especially the common stocks of
companies that were poorly financed to begin with. However, the current panic
hardly seems grounded in reality when it comes to an analysis of the USG Notes,
or even USG Common.
DISTRESS CREDITS
During the quarter, the Fund established a new position in Home Products
Subordinates at a price of $55.25, and a yield to maturity of 22.1%. TAVF also
expanded its positions in Frank's Subordinates and CareMatrix Subordinates.
Subsequent to the end of the quarter, CareMatrix sought Chapter 11 relief. On
reorganization, TAVF expects to become a major shareholder of this owner and
operator of assisted living facilities for the elderly. TAVF management is
deeply involved in the CareMatrix reorganization. Home Products has grown
rapidly. Home Products, several months back, looked to be acquired. If Home
Products experiences a change of control, the Home Products Subordinates are
entitled to be redeemed at $101, in cash.
OTHER SECURITIES ACQUIRED
During the quarter, the common stocks of a large number of well-capitalized
companies were acquired. In each of these common stock acquisitions, the common
stocks were selling at less than 10x our estimate of 2001 or 2002 earnings; or,
alternatively, were available at discounts of 40% or more, from readily
ascertainable net asset values. After our purchases, four of the companies whose
common stocks we acquired became the subject of take-overs: Enhance Financial,
GaSonics, Nissan and Silicon Valley Group. I suspect that takeovers will
continue to occur with some regularity among the common stocks in the TAVF
portfolio.
Common stock issues acquired during the quarter, where the prices seem to be
less than 10x our estimate of 2000 or 2001 earnings are as follows:
(Incidentally, the under 10x earnings compares with a PE ratio for the NASDAQ
composite based on trailing 12 months earnings of over 120 times.)
Alamo Group, Inc.
American Power Conversion Corp.
Analogic Corp.
AVX Corp.
CIT Group, Inc.
DR Horton, Inc.
Electro Scientific Industries, Inc.
Electroglas, Inc.
FSI International, Inc.
J&J Snack Foods Corp.
Kendle International, Inc.
Lindsay Manufacturing Co.
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Mestek, Inc.
Paccar, Inc.
Standex International Corp.
Trinity Industries, Inc.
Value City Department Stores, Inc.
Two issues of common stocks which were available at prices which seem to
represent discounts of at least 40% from readily ascertainable asset values were
acquired during this quarter: - Alico Common and Toyoda Common.
THE SELL SIDE, OR SOMETIMES LUCK BEATS BRAINS
The principal sale during the quarter was the Fund's entire position in Repap
Common at a substantial profit. Repap was acquired by a Finnish paper maker.
Repap operates perhaps the most efficient coated paper mill in North America.
The problems with owning Repap Common were that it was badly capitalized with
all the economic (but not governance or control) value belonging to the
creditors. Further, persons associated with management were not bashful about
the compensation they wanted for themselves. TAVF owned about 15% of the Repap
Common outstanding. Repap is a situation in which the Fund never should have
been involved - another flawed judgment.
There were, and are, important disputes between present Repap management and the
former Chairman of the Board who had entered into an employment contract with
Repap that was extraordinarily attractive for the former Chairman. Myron
("Mickey") Sheinfeld, an independent TAVF Director, was elected to the Repap
Board after the dispute with the former Chairman arose. Mickey was instrumental
in rationalizing the Repap situation. Without Mickey's help, I suspect the Repap
investment could have proved to have been a disaster, or near disaster. In this
connection, it ought to be noted how constructive and helpful our independent
directors, including Mickey, are to the Fund directly. Much of our success to
date is attributable to them. Thanks!
Sen-Tech International is an insurance holding company whose common stock was
acquired in a private placement. Control was sold at a good enough price so that
the investment worked out reasonably well for TAVF.
THE IMPORTANCE OF BUYING CHEAP, OR WELL BELOW FAIR VALUE
TAVF seems to have avoided a lot of trouble by being price-conscious. The
financial world is so complex and unpredictable that a fair amount of our
analyses will prove to have been flawed. See USG Common and Repap Common. A
dirt-cheap price is an anchor to windward against misperceiving current
situations, or being unable to make accurate forecasts.
Over and above flawed analyses, it is important to buy cheap because
increasingly, it seems as if activists are ripping off outside security holders,
whether creditors or common stockholders, for ever increasing amounts of wealth.
These rip-off activists include corporate managements; lawyers and investment
bankers involved with troubled company workouts; investment bankers in merger
and acquisition situations; and members of the Plaintiffs' Bar involved with
asbestos litigation.
In dollar amount, our largest single holding at October 31 was Silicon Valley
Common. On October 2, Silicon Valley announced that it was merging with ASM
Lithography Holding, N. V. ("ASM") in a common for common exchange as a result
of which the former holders of Silicon Valley Common would own a 10% equity
interest in the merged company. While the market value of the proposed
transaction represented a substantial premium for Silicon Valley
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Common, the percentage ownership to be received by Silicon Valley Common seems
unconscionably low, smacking more of an ASM takeunder than an ASM takeover. In
addition, the terms of the merger agreement were markedly in favor of ASM, as
for example no walk-away by Silicon Valley if the price of ASM Common craters
while the merger is pending; and a bust-up fee of $47 million for ASM if a more
attractive offer for Silicon Valley Common stockholders emerges. Still, it is
hard for TAVF to argue against a substantial price premium above the
pre-announcement market prices. On November 3, the preliminary merger proxy
statement was made public. There it was disclosed that the top three members of
Silicon Valley management had on October 1 entered into termination and
separation agreements. Under these agreements, upon conclusion of the ASM
transaction, the three are to receive compensation, mostly in cash, with a net
present value of about $20 million. Perhaps, were termination payments lower,
there might be more in the deal for the holders of Silicon Valley Common. As far
as I can tell, Silicon Valley management is not acting differently than the way
a majority of American corporate managements would act in similar circumstances.
It just goes with the territory. Incidentally, the Silicon Valley merger
transaction fees mostly payable to lawyers and investment bankers are estimated
at $28 million.
When companies in distress are reorganized, either out of court or in Chapter
11, the company (sometimes known as the "Estate") picks up with minor
exceptions, such as U.S. government agencies, all the fees and expenses of all
professionals: - attorneys, investment bankers, consultants and appraisers not
only for the company but also for various classes of creditors and frequently,
the common stockholders. These fees and expenses become priority claims, payable
in full before amounts are paid to most pre-reorganization creditors.
Professional fees and expenses have grown to such an extent that it tends to be
utterly uneconomic to become a general creditor of a small, troubled, company.
Thus, TAVF's results as a Hechinger creditor are likely to prove to have been
unsatisfactory solely because so much of the Estate is being eaten up by
payments to attorneys and investment bankers. Put simply, these payments to
attorneys and investment bankers come directly out of the hide of pre-petition
creditors.
Payments to investment bankers by the distressed company are particularly
galling to me. Over the years, I have been involved in the reorganization of
many troubled companies. Most of the time, investment bankers have been much
more disruptive than they have been constructive.
In 1993, I was the senior author of a law journal article in which it was
suggested that no professionals, other than those representing the company,
ought to be paid by the company before the end of a Chapter 11 case. Then those
professionals ought only to be paid if the court finds they had made a
"Substantial Contribution" to the case. This idea seems to have no chance
whatsoever of being implemented. This is, in fact, how the Plaintiffs' Bar,
which takes cases on a contingency basis, is compensated. No one is complaining
that the Plaintiffs' Bar does not attract highly skilled and highly motivated
practitioners even though they work on contingencies rather than for fixed fees;
and their contingent payments are mostly subject to approvals by courts of law.
Finally, USG would not have the problems outlined above were it not for the
Plaintiffs' Bar in asbestos cases, where as a result of asbestos litigation,
many lawyers have become very rich.
Note, though, that my statements here are financial commentary, not a statement
of social and political philosophy. Indeed, our economy and our markets just
would not function if it were not possible for insiders and activists to earn
excess returns whether those are people who foster IPO's, mergers and
acquisitions, the reorganization of troubled companies, stockholder lawsuits, or
the pursuit of redress for otherwise helpless citizens, such as individual
asbestos
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victims. The point here is that it is important to realize that outside passive
investors, whether creditors or stockholders, are going to have to pay the
freight for these very expensive activist activities. To compensate for this
disadvantage, the outsider ought to buy cheap: - say pay no more than 50 cents
for each dollar a common stock would be worth were the company a private company
or a take-over candidate; or acquire credits on a basis where the yield to
maturity is at least 1000 basis points more than could be obtained from a
comparable credit where people in the market do not foresee problems.
Buying at such prices is exactly what TAVF tries to do.
THE VALUE TRAP VERSUS THE GROWTH STOCK TRAP
A number of people have asked me if I am concerned about the "Value Trap", i.e.,
having the Fund own cheap stocks that just stay cheap forever. After all, the
trader's credo is, "A bargain that stays a bargain is not a bargain". I don't
think the Value Trap really has any validity for the Third Avenue portfolio of
value common stocks. Either portions of the portfolio are always working out,
whether in takeovers or general market recognition, or the value analysis was
not very valid to begin with.
In any event, it seems to be much more comfortable to be stuck in the "Value
Trap" than to be caught in the "Growth Stock Trap". Participants in conventional
growth stock situations are bound to be really trapped if a) general market
conditions change such as might be the case if the NASDAQ Composite were selling
at, say, 80 times trailing earnings rather than 120 times earnings or b) the
growth stock investor, or analyst, turns out to have been overoptimistic in
forecasts of revenues, cash flows or earnings.
SHAREHOLDER DISTRIBUTIONS
While Fund management tries to be as tax effective as is feasible, and tends to
be far more tax efficient than most mutual funds, TAVF realized more long-term
capital gains in fiscal 2000 than had ever before occurred in the Fund's ten
year history. On May 31, 2000 a $4.00 per share distribution was paid to Fund
shareholders, all of which represented long-term capital gains. On December 15,
2000, a further distribution of approximately $2.81 per share is to be made to
shareholders of record as of December 14, 2000. Of this estimated amount, $2.09
per share represents long-term capital gains, $0.07 per share represents
short-term capital gains and $0.65 per share represents ordinary income.
Shareholders, as always, have the option of receiving distributions either in
cash or in newly issued shares of TAVF Common Stock.
I will write you again when the report for the period to end January 31, 2001 is
published. Best wishes for a happy and prosperous New Year.
Sincerely yours,
/s/ Martin J. Whitman
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Martin J. Whitman
Chairman of the Board
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 2000
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PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET BACKED SECURITIES - 5.48%
23,713,146 Capital Auto Receivables Asset Trust
Series 1999-1 Class A-2, 5.58%, due 6/15/02 $ 23,637,619
9,100,000 Capital Auto Receivables Asset Trust
Series 2000-1 Class A-2, 6.81%, due 2/17/03 9,106,051
1,830,561 Ford Credit Auto Owner Trust
Series 1999-B Class A-3, 5.47%, due 9/15/01 1,829,802
3,159,565 Ford Credit Auto Owner Trust
Series 1998-B Class A-3, 5.85%, due 10/15/01 3,158,412
4,183,288 Ford Credit Auto Owner Trust
Series 1999-C Class A-3, 5.77%, due 11/15/01 4,179,502
4,419,314 Ford Credit Auto Owner Trust
Series 1998-C Class A-4, 5.81%, due 3/15/02 4,410,296
13,619,000 Ford Credit Auto Owner Trust
Series 1999-B Class A-4, 5.80%, due 6/15/02 13,565,001
1,400,000 Ford Credit Auto Owner Trust
Series 1998-B Class A-4, 5.90%, due 6/15/02 1,394,729
15,532,795 Ford Credit Auto Owner Trust
Series 2000-A Class A-3, 6.82%, due 6/17/02 15,543,901
5,000,000 Ford Credit Auto Owner Trust
Series 2000-C Class A-3, 7.13%, due 9/15/02 5,012,025
15,000,000 Ford Credit Auto Owner Trust
Series 1999-C Class A-4, 6.08%, due 9/16/02 14,942,325
5,000,000 Ford Credit Auto Master Trust
Series 1996-1 Class A, 5.50%, due 2/15/03 4,982,875
-------------
TOTAL ASSET BACKED SECURITIES
(Cost $101,388,426) 101,762,538 5.48%
-------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
10
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<PAGE>
================================================================================
[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK AND OTHER DEBT - 1.01%
Healthcare 12,419,888 Genesis Health Ventures Revolving Loan (c) $ 7,886,628 0.43%
-----------
Insurance Services 6,332,902 Safelite Glass Corp. Term A Note (c) 4,907,999
Companies 6,332,902 Safelite Glass Corp. Term B Note (c) 4,907,999
-----------
9,815,998 0.53%
-----------
Oil Services 933,827 Cimarron Petroleum Corp. (c) (d) 953,052 0.05%
-----------
Retail 150,959 Montgomery Ward Trade Claim (a) (c) 53,402 0.00%
TOTAL BANK AND OTHER DEBT -----------
(Cost $19,944,067) 18,709,080
-----------
----------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS - 0.56%
Assisted Living
Facilities 59,384,000 CareMatrix Corp. 6.25%, due 8/15/04 (a)* 10,392,200 0.56%
-----------
TOTAL CONVERTIBLE BONDS
(Cost $17,260,378) 10,392,200
-----------
----------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS - 2.52%
Bermuda Based
Financial
Institutions 7,500,000 CGA Special Account Trust (b) (c) 7,500,000 0.40%
Building & -----------
Construction 15,925,000 USG Corp. 9.25%, due 9/15/01 14,866,832
20,000,000 USG Corp. 8.50%, due 8/01/05 13,618,860
-----------
28,485,692 1.54%
-----------
Consumer Products 2,000,000 Home Products International, Inc. 9.625%,
due 5/15/08 1,110,000 0.06%
-----------
Hard Goods Retail 24,900,000 Hechinger Co. 6.95%, due 10/15/03 (a) * 2,116,500
8,500,000 Hechinger Co. 9.45%, due 11/15/12 (a) * 722,500
-----------
2,839,000 0.15%
-----------
Lawn & Garden
Retail 17,003,000 Frank's Nursery & Crafts, Inc. 10.25%, due 3/1/08 6,886,215 0.37%
TOTAL CORPORATE BONDS -----------
(Cost $48,254,148) 46,820,907
-----------
SHARES
----------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS - 83.24%
Annuities & 10,000 Atalanta/Sosnoff Capital Corp. (a) 107,500
Mutual Fund
Management & Sales
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
11
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<PAGE>
================================================================================
[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 2000
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Annuities &
Mutual Fund 163,300 John Nuveen & Co., Inc. Class A (e) $ 7,797,575
Management & 1,050,000 Liberty Financial Companies, Inc. (e) 28,350,000
Sales (continued) -----------
36,255,075 1.95%
Apparel -----------
Manufacturers 150,000 Kleinerts, Inc. (a) (c) 1,800,000 0.10%
-----------
Bermuda Based 3,341,703 CGA Group, Ltd. (a) (b) (c) 0
Financial 91,999 Cobalt Holdings, LLC (c) 920
Institutions 118,449 ESG Re, Ltd. (a) 344,242
15,675 ESG Re, Ltd. Warrants (c) 1
1,064,516 St. George Holdings, Ltd. Class A (a) (b) (c) 106,451
9,044 St. George Holdings, Ltd. Class B (a) (b) (c) 905
295,217 Trenwick Group, Ltd. 5,793,634
-----------
6,246,153 0.34%
-----------
Building Materials 1,493,400 USG Corp. (e) 25,481,138 1.37%
-----------
Business Development 432,300 Arch Capital Group, Ltd. (a) 6,700,650
& Investment Companies 78,245 Capital Southwest Corp. 4,176,327
-----------
10,876,977 0.59%
-----------
Computerized Trading 223,600 Investment Technology Group, Inc. 8,049,600 0.43%
-----------
Computers, Networks 100,000 3Com Corp. (a) 1,775,000
& Software 148,320 Palm, Inc. 7,944,390
-----------
9,719,390 0.52%
-----------
Depository 53,000 Astoria Financial Corp. 1,987,500
Institutions 69,566 Banknorth Group, Inc. 1,260,884
218,500 Carver Bancorp, Inc. (b) 1,584,125
61,543 Commercial Federal Corp. 1,077,002
250,787 Golden State Bancorp., Inc. (a) 6,551,810
250,787 Golden State Bancorp, Inc.
Litigation Tracking Warrants (a)329,158
41,100 Tompkins Trustco, Inc. (e) 1,135,388
402,800 Woronoco Bancorp, Inc. (b) 4,682,550
-----------
18,608,417 1.00%
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
12
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<PAGE>
================================================================================
[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 2000
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Electronics 630,600 American Power Conversion Corp. $ 8,158,387
4,193,000 AVX Corp. 120,024,625
1,266,000 Electro Scientific Industries, Inc. (a) 44,230,875
-----------
172,413,887 9.29%
-----------
Finance 440,000 C.I.T. Group, Inc. Class A 7,672,500 0.41%
-----------
Financial Insurance 200,000 Ambac Financial Group, Inc. 15,962,500
2,444,500 Enhance Financial Services Group, Inc. (b) 28,417,313
1,076,073 MBIA Inc. 78,217,056
-----------
122,596,869 6.61%
-----------
Food Manufacturers 495,000 J & J Snack Foods Corp. (a) (b) 6,651,563
& Purveyors 109,100 Weis Markets, Inc. 4,009,425
-----------
10,660,988 0.58%
-----------
Homebuilding 716,130 D.R. Horton, Inc. 13,248,405 0.71%
-----------
Industrial Equipment 594,300 Alamo Group, Inc. (b) 7,688,756
123,900 Cummins Engine Co., Inc. 4,212,600
226,700 Lindsay Manufacturing Co. (e) 4,760,700
292,600 Mestek, Inc. (a) 4,937,625
300,000 Paccar, Inc. 12,618,750
480,500 Standex International Corp. 8,799,156
385,400 Tecumseh Products Co. Class A (b) 15,367,825
626,400 Tecumseh Products Co. Class B (b) 24,429,600
897,000 Trinity Industries, Inc. 21,584,063
-----------
104,399,075 5.63%
-----------
Industrial - Japan 3,532,000 Toyoda Automatic Loom Works, Ltd. 63,888,064 3.44%
-----------
Insurance Holding 87,035 ACE Ltd. 3,416,124
Companies 200,678 ACMAT Corp. Class A (a) (b) (e) 1,893,898
803,669 Danielson Holding Corp. (a) (b) (c) 3,164,447
58,300 White Mountains Insurance Group Inc. 15,332,900
-----------
23,807,369 1.28%
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
13
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<PAGE>
================================================================================
[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 2000
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Insurance Services 569,960 Safelite Glass Corp. (c) $ 1,139,920
Companies 38,473 Safelite Realty Corp. (c) 76,946
-----------
1,216,866 0.07%
-----------
Manufactured Housing 89,000 Liberty Homes, Inc. Class A 506,188
40,000 Liberty Homes, Inc. Class B 212,500
-----------
718,688 0.04%
-----------
Medical Supplies 243,300 Analogic Corp. 8,591,531
& Services 342,300 Datascope Corp. (a) 11,852,137
554,950 Prime Medical Services, Inc. (a) (e) 4,023,388
90,750 St. Jude Medical, Inc. (a) 4,991,250
-----------
29,458,306 1.59%
-----------
Natural Resources & 1,160,000 Alexander & Baldwin, Inc. 28,927,500
Real Estate 166,000 Alico, Inc. 2,635,250
179,600 Catellus Development Corp. (a) 3,266,475
31,000 Consolidated-Tomoka Land Co. 358,437
573,500 Forest City Enterprises, Inc. Class A 21,219,500
7,500 Forest City Enterprises, Inc. Class B 278,625
473,489 HomeFed Corp. (a) 269,889
1,180,336 Koger Equity, Inc. 18,811,605
14,600 LNR Property Corp. 315,725
846 Public Storage, Inc. 19,035
238,200 The St. Joe Co. 4,808,663
3,045,508 Tejon Ranch Co. (a) (b) (c) 68,523,930
-----------
149,434,634 8.05%
-----------
Non-Life 7,319,000 Mitsui Marine & Fire Insurance Co., Ltd. 37,135,856
Insurance-Japan 7,399,000 The Chiyoda Fire & Marine Insurance Co., Ltd. 19,787,358
2,350,000 The Nissan Fire & Marine Insurance Co., Ltd. 6,801,221
3,246,000 The Sumitomo Marine & Fire Insurance Co., Ltd. 19,799,521
1,520,800 The Tokio Marine & Fire Insurance Co., Ltd.,
Sponsored ADR 85,164,800
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
14
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<PAGE>
================================================================================
[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 2000
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
3,000,000 The Yasuda Fire & Marine Insurance Co., Ltd. $ 15,468,976
-----------
184,157,732 9.92%
-----------
Oil Services 500,000 Nabors Industries, Inc. (a) 25,450,000 1.37%
-----------
Pharmaceutical 5,308,740 Innovative Clinical Solutions, Ltd. (b) (e) 5,640,536
Services 929,500 Kendle International, Inc. (a) (b) 8,597,875
588,000 PAREXEL International Corp. (a) 5,145,000
400,000 Pharmaceutical Product Development, Inc. (a) 12,525,000
-----------
31,908,411 1.72%
-----------
Retail 873,100 Value City Department Stores, Inc. 7,093,937 0.38%
-----------
Security Brokers, 223,600 Jefferies Group, Inc. 6,093,100
Dealers & 893,332 Legg Mason, Inc. 46,397,431
Flotation Companies 1,086,250 Raymond James Financial, Inc. 36,728,828
-----------
89,219,359 4.81%
-----------
Semiconductor 200,000 Applied Materials, Inc. (a) (e) 10,625,000
Equipment
Manufacturers 1,004,500 C.P. Clare Corp. (a) (b) 5,085,281
& Related 2,863,300 Electroglas, Inc. (a) (b) 40,265,156
3,018,400 FSI International, Inc. (a) (b) 28,108,850
401,300 GaSonics International Corp. (a) 8,201,569
100,000 KLA-Tencor Corp. (a) (e) 3,381,250
300,000 Photronics, Inc. (a) 6,768,750
4,504,100 Silicon Valley Group, Inc. (a) (b) 148,353,794
500,000 Veeco Instruments, Inc. (a) (e) 33,101,563
-----------
283,891,213 15.29%
-----------
Small-Cap Technology 424,000 Hypercom Corp. (a) 2,915,000
247,200 Planar Systems, Inc. (a) 4,202,400
1,499 Simione Central Holdings, Inc. (a) 5,059
-----------
7,122,459 0.38%
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
15
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<PAGE>
================================================================================
[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 2000
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Title Insurance 3,201,800 First American Corp. (b) $ 67,037,687
1,951,400 Stewart Information Services Corp. (b) 30,734,550
--------------
97,772,237 5.27%
--------------
Transportation 55,032 Florida East Coast Industries 1,874,527 0.10%
--------------
TOTAL COMMON STOCKS AND WARRANTS
(Cost $1,067,142,946) 1,545,042,276
--------------
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK - 1.44%
Bermuda Based 688,630 CGA Group, Ltd., Series A (b) (c) 17,215,751
Financial
Institutions 6,045,667 CGA Group, Ltd., Series C (b) (c) 7,039,176
--------------
24,254,927 1.31%
--------------
Financial Insurance 2,500 American Capital Access Holdings, LLC (c) 2,500,000 0.13%
--------------
Insurance Holding
Companies 4,775 Ecclesiastical Insurance, 8.625% 7,419 0.00%
--------------
TOTAL PREFERRED STOCK
(Cost $24,541,101) 26,762,346
--------------
INVESTMENT
AMOUNT ($)
----------------------------------------------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 0.51%
Bermuda Based 2,202,000 ESG Partners, LP (c) 148,261 0.01%
Financial --------------
Institutions
Financial
Insurance 15,000,000 American Capital Access Holdings, LLC (c) 7,500,000 0.40%
--------------
Insurance Holding 3,264,756 Head Insurance Investors LP (c) 548,213
Companies 1,330,000 Insurance Partners II Equity Fund, LP (c) 1,330,000
--------------
1,878,213 0.10%
--------------
TOTAL LIMITED PARTNERSHIPS
(Cost $21,796,756) 9,526,474
--------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
16
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<PAGE>
================================================================================
[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT TERM INVESTMENTS - 5.18%
Repurchase
Agreements 18,634,096 Bear Stearns 6.56%, due 11/01/00 (f) $ 18,634,096 1.01%
--------------
U.S. Treasury Bills 570,000 U.S. Treasury Bill 5.57%+ , 12/07/00 (g) 566,759
35,000,000 U.S. Treasury Bill 5.96%+ , 12/21/00 34,716,500
40,000,000 U.S. Treasury Bill 5.93%+ , 01/25/01 39,417,240
2,500,000 U.S. Treasury Bill 6.15%+ , 04/26/01 (g) 2,425,565
350,000 U.S. Treasury Bill 6.19%+ , 04/26/01 339,579
--------------
77,465,643 4.17%
--------------
TOTAL SHORT TERM INVESTMENTS
(Cost $96,094,285) 96,099,739
--------------
TOTAL INVESTMENT PORTFOLIO - 99.94%
(Cost $1,396,422,107) 1,855,115,560
--------------
CASH AND OTHER ASSETS
LESS LIABILITIES - 0.06% 1,104,726
--------------
NET ASSETS - 100.00%
(Applicable to 48,237,053
shares outstanding) $1,856,220,286
==============
</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) Securities in whole or in part on loan.
(f) Repurchase agreement collateralized by:
U.S. Treasury Strips, par value
$41,075,000, matures 11/15/16, market value $15,813,875.
U.S. Treasury Strips, par value $8,590,000, matures 05/15/17,
market value $3,194,449.
(g) Security segregated for future Fund commitments.
* Issuer in default.
+ Annualized yield at date of purchase.
ADR: American Depository Receipt.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
17
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<PAGE>
================================================================================
[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2000
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of
$976,780,760) $1,327,025,541
Affiliated issuers (identified cost of
$419,641,347) 528,090,019
--------------
Total investments (identified cost of $1,396,422,107) 1,855,115,560
Cash 4,977,574
Receivable for securities sold 31,530,675
Receivable for fund shares sold 4,642,300
Dividends and interest receivable 3,098,116
Collateral on loaned securities (Note 1) 8,337,805
Other assets 112,274
--------------
Total assets 1,907,814,304
--------------
LIABILITIES:
Payable for securities purchased 37,991,630
Payable for fund shares redeemed 1,993,323
Payable to investment adviser 1,424,477
Accounts payable and accrued expenses 320,065
Payable for service fees (Note 3) 78,584
Unrealized losses on foreign currency swap
contract (Note 1) 1,448,134
Collateral on loaned securities (Note 1) 8,337,805
Commitments (Note 6) --
--------------
Total liabilities 51,594,018
--------------
Net assets $1,856,220,286
==============
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, $0.001
par value, 48,237,053 shares outstanding $1,264,378,406
Accumulated undistributed net investment income 28,625,412
Accumulated undistributed net realized gains from
investment transactions 106,003,347
Net unrealized appreciation of investments
and translation of foreign currency denominated
assets and liabilities 457,213,121
--------------
Net assets applicable to capital shares outstanding $1,856,220,286
==============
Net asset value, offering and redemption price
per share $38.48
======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
18
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<PAGE>
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2000
INVESTMENT INCOME:
Interest-unaffiliated issuers $25,333,581
Interest-affiliated issuers 364,679
Dividends-unaffiliated issuers (net of foreign
withholding tax of $288,137) 9,698,768
Dividends-affiliated issuers 4,535,814
Other Income 98,829
-----------
Total investment income 40,031,671
-----------
EXPENSES:
Investment advisory fees (Note 3) 14,443,111
Service fees (Note 3) 805,017
Transfer agent fees 618,593
Reports to shareholders 456,623
Administration fees (Note 3) 310,384
Miscellaneous expenses 170,257
Custodian fees 165,061
Accounting services 121,158
Insurance expenses 99,078
Auditing and tax consulting fees 83,114
Directors' fees and expenses 75,847
Legal fees 68,352
Registration fees 57,017
-----------
Total operating expenses 17,473,612
-----------
Net investment income 22,558,059
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on investments-unaffiliated issuers 162,685,542
Net realized gains on investments-affiliated issuers 102,725,271
Net realized gains on foreign currency transactions 7,999,708
Net change in unrealized appreciation on investments 25,778,194
Net change in unrealized depreciation on foreign
currency swaps and option contracts (900,052)
Net change in unrealized depreciation on translation
of other assets and liabilities denominated in
foreign currency (32,012)
-----------
Net realized and unrealized gains on investments 298,256,651
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $320,814,710
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
19
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<PAGE>
================================================================================
[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR YEAR
ENDED ENDED
10/31/00 10/31/99
-------------- --------------
OPERATIONS:
Net investment income $ 22,558,059 $ 18,120,662
Net realized gains on investments-
unaffiliated issuers 162,685,542 73,612,251
Net realized gains (losses) on
investments-affiliated issuers 102,725,271 (25,736,873)
Net realized gains (losses) on
foreign currency transactions 7,999,708 (21,743,326)
Net change in unrealized appreciation
on investments 25,778,194 174,211,595
Net change in unrealized depreciation
on foreign currency swaps and
option contracts (900,052) (204,327)
Net change in unrealized depreciation
on translation of other assets
and liabilities denominated in
foreign currency (32,012) (19,024)
-------------- --------------
Net increase in net assets resulting
from operations 320,814,710 218,240,958
-------------- --------------
DISTRIBUTIONS:
Dividends to shareholders from net
investment income -- (19,923,268)
Distributions to shareholders from
net realized gains on investments (177,417,471) --
-------------- --------------
(177,417,471) (19,923,268)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 607,310,132 237,803,848
Net asset value of shares issued in
reinvestment of dividends and
distributions 170,182,851 18,679,630
Cost of shares redeemed (404,941,809) (655,240,361)
-------------- --------------
Net increase (decrease) in net assets
resulting from capital
share transactions 372,551,174 (398,756,883)
-------------- --------------
Net increase (decrease) in net assets 515,948,413 (200,439,193)
Net assets at beginning of period 1,340,271,873 1,540,711,066
-------------- --------------
Net assets at end of period
(including undistributed net
investment income of $28,625,412
and $308,571, respectively) $1,856,220,286 $1,340,271,873
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
20
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<PAGE>
================================================================================
[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>
YEARS ENDED OCTOBER 31,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 34.82 $ 30.16 $ 31.94 $ 24.26 $ 21.53
---------- ---------- ---------- ---------- --------
Income (loss) from Investment Operations:
Net investment income 0.47 0.47 0.48 0.48 0.53
Net gain (loss) on securities (both realized
and unrealized) 7.61 4.59 (1.69) 7.92 2.76
---------- ---------- ---------- ---------- --------
Total from Investment Operations 8.08 5.06 (1.21) 8.40 3.29
---------- ---------- ---------- ---------- --------
Less Distributions:
Dividends from net investment income -- (0.40) (0.41) (0.57) (0.41)
Distributions from realized gains (4.42) -- (0.16) (0.15) (0.15)
---------- ---------- ---------- ---------- --------
Total Distributions (4.42) (0.40) (0.57) (0.72) (0.56)
---------- ---------- ---------- ---------- --------
Net Asset Value, End of Period $ 38.48 $ 34.82 $ 30.16 $ 31.94 $ 24.26
========== ========== ========== ========== ========
Total Return 24.07% 16.89% (3.86%) 35.31% 15.55%
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $1,856,220 $1,340,272 $1,540,711 $1,646,240 $566,847
Ratio of Expenses to Average Net Assets 1.09% 1.10% 1.08% 1.13% 1.21%
Ratio of Net Income to Average Net Assets 1.41% 1.27% 1.44% 2.10% 2.67%
Portfolio Turnover Rate 30% 5% 24% 10% 14%
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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21
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<PAGE>
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[THIRD AVENUE FUNDS LOGO]
PERFORMANCE INFORMATION
(UNAUDITED)
PERFORMANCE ILLUSTRATIONS
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE VALUE FUND
AND THE STANDARD & POOR'S 500 INDEX (S&P 500) AND THE RUSSELL 2000 INDEX
AND THE RUSSELL 2000 VALUE INDEX
Average Annual Total Return
<TABLE>
<CAPTION>
1 Year 2 Years 3 Years 4 Years 5 Years 6 Years 7 Years 8 Years 9 Years 10 Years
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
24.07% 20.43% 11.72% 17.20% 16.87% 17.76% 15.45% 17.99% 16.65% 19.56%
</TABLE>
{The table below represents a line chart in the printed piece.]
Russell 2000 Russell 2000
TAVF S & P500 Index Value Index
10/31/90 10000 10000 10000 10000
10/31/91 14915 13350 15566 15158
10/31/92 15884 14879.7 16738 18082
10/31/93 21818.9 16872.8 21811 24685.5
10/31/94 22377.5 17525.8 21461 24651
10/31/95 27369.9 22159.6 24932 28585.2
10/31/96 31625.9 27498.7 29109.7 34182.2
10/31/97 42793 36328.5 37581.1 46891.2
10/31/98 41141.2 44317.2 33206.6 43285.3
10/31/99 48090 55692 38167.7 43596.9
10/31/00 59665.2 59084.3 44887 51139.2
*All returns include reinvestment of dividends.
As with all mutual funds, past performance does not indicate future results.
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22
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<PAGE>
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE SMALL-CAP VALUE FUND
Dear Fellow Shareholders:
At October 31, 2000, the end of the fiscal year, the audited net asset value
attributable to the 10,278,682 common shares outstanding of Third Avenue
Small-Cap Value Fund ("Small-Cap Value" or the "Fund") was $13.86 per share.
This compares with an unaudited net asset value at July 31, 2000 of $13.26 per
share; and an audited net asset value, adjusted for subsequent distribution of
$11.23 per share at October 31, 1999. At December 11, 2000, the unaudited net
asset value was $14.54 per share.
QUARTERLY ACTIVITY
During the quarter, Small-Cap Value established four new positions, added to
nine of its 37 existing positions, reduced its holdings in two companies, and
eliminated positions in four companies. At October 31, 2000, Small-Cap Value
held positions in 36 companies, the top 10 positions of which accounted for
approximately 40% of the Fund's net assets.
NUMBER OF SHARES NEW POSITIONS ACQUIRED
46,200 Brooks Automation, Inc. Common Stock ("Brooks Common")
58,100 Credence Systems Corp. Common Stock ("Credence Common")
42,200 Electro Scientific Industries, Inc. Common Stock
("ESI Common")
140,900 GaSonics International Corp. Common Stock
("GaSonics Common")
INCREASES IN EXISTING POSITIONS
9,500 Alamo Group, Inc. Common Stock ("Alamo Common")
89,000 Century Aluminum Co. Common Stock ("Century Common")
28,000 Deltic Timber Corp. Common Stock ("Deltic Common")
121,800 Enhance Financial Services Group, Inc. Common Stock
("EFS Common")
51,000 FSI International, Inc. Common Stock ("FSI Common")
19,400 Silicon Valley Group, Inc. Common Stock ("SVG Common")
19,000 Trinity Industries, Inc. Common Stock ("Trinity Common")
61,600 USG Corp. Common Stock ("USG Common")
64,800 Value City Department Stores, Inc. Common Stock
("Value City Common")
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23
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[THIRD AVENUE FUNDS LOGO]
NUMBER OF SHARES REDUCTIONS IN EXISTING POSITIONS
188,200 HomeBase, Inc. Common Stock ("HomeBase Common")
82,300 Planar Systems, Inc. Common Stock ("Planar Common")
POSITIONS ELIMINATED
94,400 ACT Networks, Inc. Common Stock ("Act Common")
165,000 Centigram Communications Corp. Common Stock
("Centigram Common")
12,253,700 Repap Enterprises, Inc. Common Stock ("Repap Common")
293,900 Sawako Corp. Sponsored ADR Common Stock ("Sawako Common")
In the Fund's January 1998 shareholder letter, I outlined the Fund's case for
investing in the semiconductor capital equipment industry - the companies that
make the tools that make semiconductors. Quite literally, these companies are
the toolmakers of the information age.
In that letter I wrote "Our investment thesis rests on at least three important
legs. Broadly speaking, these legs include (i) extraordinary balance sheet
quality; (ii) healthy long-term industry growth; and (iii) growing industry
consolidation. At a minimum, these characteristics make the case for investment
in the semiconductor equipment industry quite compelling." This thesis is as
true today as it was when I wrote it nearly three years ago, and explains, in
simplified terms, this quarter's new positions. The Fund's recent buying
opportunity arose because many investors, during the last quarter, apparently
focused on a near-term slowdown in the industry (as evidenced by declining
levels of new bookings) and had bid down stock prices to levels suggestive of an
imminent and major industry recession. In contrast, we remained focused on our
aforementioned investment thesis and initiated purchases of companies whose
long-term prospects appear bright.
Brooks, Credence and GaSonics had accessed the generous public markets
prevailing in the first part of the year in order to refinance themselves at
super attractive prices, and to build virtually debt-free, highly liquid balance
sheets (Electro Scientific was already cash rich at the start of the year.) The
table below outlines the positive changes that occurred as a result of these
refinancings, and the easy access to capital - defined as richly valued common
stock - that each company took advantage of during the year.
The Fund has now expanded its investments in these companies with "all-weather"
balance sheets, and leading market positions in businesses whose growth during
the past 15 or so years has averaged 17% to 18% (including three or four
cyclical downturns!).
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24
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[THIRD AVENUE FUNDS LOGO]
REFINANCED AND CASH RICH
================================================================================
BROOKS CREDENCE GASONICS
AUTOMATION SYSTEMS INTERNATIONAL
--------------------------------------------------------------------------------
Cash/Share - 12/31/99(2) $4.56 $1.83 $1.70
Secondary Issue Price $76.00 $57.50 $24.88
Cash/Share - 9/30/00(2) $12.87 $6.33 $3.70
Current Share Price(1) $23.75 $18.50 $14.75
Cash/Assets - 9/30/00 46% 39% 33%
================================================================================
(1) Closing prices as of 11/28/00
(2) Cash is net of long-term debt
The Fund also benefited during the quarter from merger and acquisition ("M&A")
activity in this industry. Silicon Valley Group, a long-time Fund holding, and
GaSonics both received acquisition proposals from other equipment companies at
significant premiums to the Fund's cost basis.
The Fund made significant sales during the quarter, primarily in response to M&A
transactions. ACT Common, Centigram Common and Repap Common were all sold during
the quarter at substantial premiums to the Fund's cost in connection with
takeovers or mergers. I concluded that our positions in Sawako and HomeBase had
become permanently impaired - the result of faulty analysis on my part - and
realized losses from their sales that helped to offset realized gains in the
portfolio. As a result of takeovers and year-end tax planning-related sales, the
Fund today holds an above-average amount of cash. We remain patient in
allocating that cash, continuing to adhere to our well-defined investment
philosophy that has generally served Third Avenue shareholders well for many
years.
RESULTS
The Small-Cap Value Fund returned 23.3% for the fiscal year ended October 31,
2000. Importantly, the Fund achieved these results assuming what is, in my view,
a below-average amount of investment risk, a concept critically important to
investment success but lost, I'm afraid, on many of today's investors. It's also
worth noting that these results came with only modest amounts of taxable gains
and income.
Fund shareholders should not, however, accord investment performance a 100%
weighting. Performance should be balanced within the context of the current
portfolio. With above-average levels of cash enabling our opportunistic
investment style, and a significant under-valuation of many of the portfolio
holdings, the Fund should represent a compelling investment for both current and
prospective shareholders.
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25
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[THIRD AVENUE FUNDS LOGO]
MODIFIED SMALL-CAP DESCRIPTION
With the approval of the Fund's Trustees, the Fund's description of "Small-Cap"
has been modified somewhat. The modification was made to enhance the Fund's
investment flexibility, as well as to bring it more into line with current
industry practices. It does not change the Fund's investment philosophy or its
approach to investing. The modification reads as follows:
"Under normal circumstances, the Fund expects to invest at least 65% of its
assets in equity securities of small companies. The Fund considers a "small
company" to be one whose market capitalization is no greater than nor less than
the range of market capitalizations of companies in the Russell 2000 Index at
the time of the initial investment. The Fund may continue to hold or buy
additional stock in a company that exceeds this range if the stock remains
attractive."
SHAREHOLDER DISTRIBUTIONS
On December 15, 2000 a distribution of approximately $0.89 per share is to be
made to shareholders of record as of December 14, 2000. Of this estimated
amount, $0.58 per share represents long-term capital gains, $0.10 per share
represents short-term capital gains, and $0.21 per share represents ordinary
income. Shareholders, as always, have the option of receiving distributions
either in cash or in newly issued shares of Small-Cap Value Common Stock.
I look forward to writing you again when we publish our First Quarter Report
dated January 31, 2001. May you and your families enjoy a healthy and prosperous
New Year.
Sincerely,
/s/ CURTIS R. JENSEN
--------------------
Curtis R. 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 OCTOBER 31, 2000
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS - 80.62%
Bermuda Based Financial 135,400 Trenwick Group, Ltd. $ 2,657,225 1.87%
Institutions -----------
Building Materials 100,000 USG Corp. (b) 1,706,250 1.20%
-----------
Electronics 42,200 Electro Scientific Industries, Inc. (a) 1,474,362 1.04%
-----------
Financial Insurance 163,300 Enhance Financial Services Group, Inc. 1,898,363
154,822 MBIA, Inc. 11,253,624
-----------
13,151,987 9.23%
-----------
Industrial Equipment 319,500 Alamo Group, Inc. 4,133,531
169,000 Trinity Industries, Inc. 4,066,563
-----------
8,200,094 5.76%
-----------
Life Insurance 179,000 FBL Financial Group, Inc. Class A 2,875,187 2.02%
-----------
Manufactured Housing 184,300 Skyline Corp. 3,950,931 2.77%
-----------
Media 120,000 ValueVision International, Inc. Class A (a) 2,430,000 1.71%
-----------
Metal & Metal Products 128,000 Century Aluminum Co. (b) 1,120,000 0.79%
-----------
Natural Resources & 187,500 Alexander & Baldwin, Inc. 4,675,781
Real Estate 187,300 Alico, Inc. 2,973,387
139,000 Avatar Holdings, Inc. (a) (b) 2,675,750
126,900 Cabot Industrial Trust 2,395,238
255,400 Deltic Timber Corp. 4,964,338
206,000 Koger Equity, Inc. 3,283,125
200,000 Tejon Ranch Co. (a) (d) 4,500,000
1,104,700 The TimberWest Forest Corp. (Canada) 7,631,142
-----------
33,098,761 23.23%
-----------
Non-Life 2,025,000 The Nissan Fire & Marine Insurance Co., Ltd. 5,860,626 4.11%
Insurance - Japan -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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27
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<PAGE>
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 2000
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONTINUED)
Pharmaceutical Services 76,400 Kendle International, Inc. (a) $ 706,700
58,100 PAREXEL International Corp. (a) 508,375
93,000 Pharmaceutical Product Development, Inc. (a) (b) 2,912,062
-----------
4,127,137 2.90%
-----------
Retail 237,900 HomeBase, Inc. (a) (b) 416,325
326,500 Value City Department Stores, Inc. (a) 2,652,813
-----------
3,069,138 2.15%
-----------
Semiconductor 46,200 Brooks Automation, Inc. (a) 1,224,300
Equipment Manufacturers 484,800 C.P. Clare Corp. (a) (c) 2,454,300
& Related 58,100 Credence Systems Corp. (a) 1,089,375
100,000 Electroglas, Inc. (a) (b) 1,406,250
344,900 FSI International, Inc. (a) 3,211,881
140,900 GaSonics International Corp. (a) 2,879,644
128,400 Silicon Valley Group, Inc. (a) 4,229,175
150,000 SpeedFam-IPEC, Inc. (a) (b) 1,425,000
-----------
17,919,925 12.58%
-----------
Technology 26,000 Bel Fuse, Inc. Class A (a) 1,109,875
133,400 Bel Fuse, Inc. Class B 5,352,675
175,000 Planar Systems, Inc. (a) 2,975,000
-----------
9,437,550 6.62%
-----------
Title Insurance 179,800 First American Corp. 3,764,563 2.64%
-----------
TOTAL COMMON STOCKS
(Cost $108,454,040) 114,843,736
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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28
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT TERM INVESTMENTS - 19.00%
Repurchase Agreements 18,209,015 Bear Stearns 6.56%, due 11/01/00 (e) $ 18,209,015 12.78%
------------
8,500,000 U.S. Treasury Bill 6.26%+ , 1/25/01 8,376,164
500,000 U.S. Treasury Bill 6.27%+ , 4/26/01 (f) 485,113
------------
8,861,277 6.22%
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $27,070,722) 27,070,292
------------
TOTAL INVESTMENT PORTFOLIO - 99.62%
(Cost $135,524,762) 141,914,028
------------
CASH AND OTHER ASSETS
LESS LIABILITIES - 0.38% 544,821
------------
NET ASSETS - 100.00%
(Applicable to 10,278,682
shares outstanding) $142,458,849
============
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Securities in whole or in part on loan.
(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) Repurchase agreement collateralized by: U.S. Treasury Strips, par value
$48,245,000, matures 11/15/16, market value $18,574,325.
(f) Security segregated for future Fund Commitments.
ADR: American Depository Receipt.
+ Annualized yield at date of purchase.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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29
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<PAGE>
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2000
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $130,006,859) $139,459,728
Affiliated issuers (identified cost of $5,517,903) 2,454,300
------------
Total investments (identified cost of $135,524,762) 141,914,028
Receivable for fund shares sold 1,293,445
Receivable for securities sold 193,206
Dividends and interest receivable 350,533
Collateral on loaned securities (Note 1) 2,944,203
Deferred organizational costs (Note 1) 15,323
Other assets 3,227
------------
Total assets 146,713,965
------------
LIABILITIES:
Payable for securities purchased 726,980
Payable for fund shares redeemed 269,601
Payable to investment adviser 108,182
Accounts payable and accrued expenses 85,305
Payable for service fees (Note 3) 5,935
Unrealized losses on foreign currency swap contract (Note 1) 114,910
Collateral on loaned securities (Note 1) 2,944,203
Commitments (Note 6) --
------------
Total liabilities 4,255,116
------------
Net assets $142,458,849
============
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, $0.001
par value, 10,278,682 shares outstanding $127,666,151
Accumulated undistributed net investment income 1,532,726
Accumulated undistributed net realized gains from
investment transactions 6,985,616
Net unrealized appreciation of investments and translation
of foreign currency denominated assets and liabilities 6,274,356
------------
Net assets applicable to capital shares outstanding $142,458,849
============
Net asset value, offering and redemption price per share $13.86
======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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30
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2000
INVESTMENT INCOME:
Interest $ 1,151,438
Dividends (net of foreign withholding tax of $25,339) 2,402,167
Other income 1,293
-----------
Total investment income 3,554,898
-----------
EXPENSES:
Investment advisory fees (Note 3) 1,172,900
Administration fees (Note 3) 101,209
Transfer agent fees 69,750
Service fees (Note 3) 65,980
Directors' fees and expenses 62,710
Reports to shareholders 47,377
Accounting services 46,551
Auditing and tax consulting fees 37,554
Custodian fees 32,166
Miscellaneous expenses 17,183
Registration fees 14,722
Amortization of organizational expenses (Note 1) 10,907
Insurance expenses 8,429
Legal fees 7,253
-----------
Total operating expenses 1,694,691
-----------
Net investment income 1,860,207
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on investments - unaffiliated issuers 5,607,969
Net realized gains on investments - affiliated issuers 1,456,089
Net realized losses on foreign currency transactions (4,108)
Net change in unrealized appreciation on investments 17,960,975
Net change in unrealized depreciation on foreign
currency swaps and option contracts 100,890
Net change in unrealized depreciation on translation
of other assets and liabilities denominated in
foreign currency 844
-----------
Net realized and unrealized gains on investments 25,122,659
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $26,982,866
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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31
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<PAGE>
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR YEAR
ENDED ENDED
10/31/00 10/31/99
------------ ------------
OPERATIONS:
Net investment income $ 1,860,207 $ 1,002,937
Net realized gains on investments -
unaffiliated issuers 5,607,969 841,964
Net realized gains on investments -
affiliated issuers 1,456,089 --
Net realized losses on foreign
currency transactions (4,108) (151,197)
Net change in unrealized appreciation
on investments 17,960,975 7,651,526
Net change in unrealized appreciation
(depreciation) on foreign currency swaps
and option contracts 100,890 (289,800)
Net change in unrealized appreciation on
translation of other assets and liabilities
denominated in foreign currency 844 2,959
------------ ------------
Net increase in net assets resulting
from operations 26,982,866 9,058,389
------------ ------------
DISTRIBUTIONS:
Dividends to shareholders from net
investment income (991,471) (1,130,515)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 74,284,343 54,380,491
Net asset value of shares issued in
reinvestment of dividends and distributions 963,645 1,086,390
Cost of shares redeemed (80,675,545) (81,056,965)
------------ ------------
Net decrease in net assets resulting
from capital share transactions (5,427,557) (25,590,084)
------------ ------------
Net increase (decrease) in net assets 20,563,838 (17,662,210)
Net assets at beginning of period 121,895,011 139,557,221
------------ ------------
Net assets at end of period
(including undistributed net investment
income of $1,532,726 and $748,060,
respectively) $142,458,849 $121,895,011
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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32
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<PAGE>
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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:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------------
2000 1999 1998 1997*
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.33 $ 10.66 $ 12.37 $ 10.00
-------- -------- -------- --------
Income (loss) from Investment Operations:
Net investment income 0.19 0.09 0.08 0.05
Net gain (loss) on securities (both realized
and unrealized) 2.44 0.67 (1.73) 2.32
-------- -------- -------- --------
Total from Investment Operations 2.63 0.76 (1.65) 2.37
-------- -------- -------- --------
Less Distributions:
Dividends from net investment income (0.10) (0.09) (0.06) 0.00
-------- -------- -------- --------
Net Asset Value, End of Period $ 13.86 $ 11.33 $ 10.66 $ 12.37
======== ======== ======== ========
Total Return 23.30% 7.12% (13.36%) 23.70%(1)
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $142,459 $121,895 $139,557 $107,256
Ratio of Expenses to Average Net Assets 1.30% 1.28% 1.28% 1.65%(2)
Ratio of Net Income to Average Net Assets 1.43% 0.72% 0.72% 1.44%(2)
Portfolio Turnover Rate 19% 10% 6% 7%(1)
</TABLE>
(1) Not Annualized
(2) Annualized
* The Fund commenced investment operations on April 1, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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<PAGE>
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[THIRD AVENUE FUNDS LOGO]
PERFORMANCE INFORMATION
(UNAUDITED)
PERFORMANCE ILLUSTRATIONS
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
THIRD AVENUE SMALL-CAP VALUE FUND AND THE RUSSELL 2000 INDEX
AND THE RUSSELL 2000 VALUE INDEX
Average Annual Total Return
Since Inception
1 Year 2 Years 3 Years (4/1/97)
23.30% 14.92% 4.59% 10.16%
[The table below represents a line chart in the printed piece.]
Rusell 2000 Rusell 2000
TASCVF Index Value Index
4/1/97 10000 10000 10000
10/31/97 12370 12811 11690
10/31/98 10717.4 11319.8 10791
10/31/99 11480.4 13011 10868.7
10/31/00 14156.4 15300.9 12749
* All returns include reinvestment of dividends.
As with all mutual funds, past performance does not indicate future results.
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34
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE REAL ESTATE VALUE FUND
Dear Fellow Shareholders:
I am pleased to provide you with Third Avenue Real Estate Value Fund's (the
"Fund") report for the fiscal year ended October 31, 2000 (the Fund's second
full year of operation since its inception on September 17, 1998). At October
31, 2000, the audited net asset value attributable to the 1,756,328 shares
outstanding was $13.64 per share. This compared with the Fund's unaudited net
asset value of $13.05 per share at July 31, 2000 and an audited net asset value,
adjusted for subsequent distributions to shareholders, of $10.78 per share at
October 31, 1999. The Fund's one-year return of 26.5% and since-inception total
return of 41.6% compares very favorably with relevant benchmarks and similar
funds. At December 11, 2000, the unaudited net asset value was $14.09 per share.
QUARTERLY ACTIVITY
During the fourth quarter of fiscal 2000, the Fund established new positions in
the senior notes of two companies and the common stocks of two companies. Both
new common stock positions were the result of resource conversions as explained
below. The Fund increased its positions in the senior subordinated notes of one
company, the senior notes of one company, and the common stock of nine
companies. The Fund decreased its position in the common stock of one company,
and eliminated its position in the common stock of one company. At October 31,
2000, the Fund held 32 positions in 31 companies, and was approximately 97.4%
invested. The Fund's top 10 positions accounted for approximately 52% of the
Fund's net assets.
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
$500,000 Imperial Credit Industries, Inc. 9.875% Senior Notes due
1/15/07 ("Imperial Notes")
$300,000 USG Corp. 9.25% Senior Notes due 9/15/01 ("USG Notes")
80,698 shares American Land Lease, Inc. Common Stock
("American Land Common")
17,073 shares Florida East Coast Industries, Inc. Class B Common Stock
("Florida Common")
INCREASES IN EXISTING POSITIONS
$434,000 Frank's Nursery and Crafts, Inc. 10.25% Senior
Subordinated Notes due 3/1/08 ("Frank's Notes")
$300,000 Ocwen Asset Investment Corp. 11.50% Senior Notes due 7/1/05
("Ocwen Notes")
32,300 shares Aegis Realty, Inc. Common Stock ("Aegis Common")
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NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
8,000 shares Avatar Holdings, Inc. Common Stock ("Avatar Common")
4,968 shares D.R. Horton, Inc. Common Stock ("Horton Common")
15,000 shares Deltic Timber Corp. Common Stock ("Deltic Common")
20,500 shares Koger Equity, Inc. Common Stock ("Koger Common")
18,000 shares Prime Group Realty Trust Common Stock ("Prime Common")
37,200 shares The St. Joe Company Common Stock ("St. Joe Common")
5,000 shares USG Corp. Common Stock ("USG Common")
8,000 shares Wellsford Real Properties, Inc. Common Stock
("Wellsford Common")
REDUCTIONS IN EXISTING POSITIONS
44,000 shares AMRESCO Capital Trust, Inc. Common Stock ("Amresco Common")
POSITION ELIMINATED
150,700 shares Commercial Assets, Inc. Common Stock ("Commercial Common")
IMPERIAL NOTES
Imperial Credit Industries, Inc. is a diversified commercial lending and
financial services holding company whose primary operating subsidiary is
Southern Pacific Bank ("SPB"), a California industrial bank. SPB primarily makes
mortgage loans on income-producing properties, including apartments (about 70%)
and commercial properties (about 30%). SPB also has several operating
subsidiaries and divisions, including Coast Business Credit ("Coast") and Loan
Participation and Investment Group ("LPIG").
Coast is an asset-based lender that makes revolving lines of credit and term
loans available to growth companies in manufacturing, distribution, technology,
telecommunications and retail industries. LPIG invests in and purchases senior
secured debt of other companies offered by commercial banks in the secondary
market. SPB's loan origination business is funded primarily by FDIC insured
deposits. During 2000, as a result of a routine FDIC examination, SPB recorded a
substantial provision for loan losses. Most of the provision was related to
Coast and LPIG loans. The loan losses caused SPB's capital ratios to fall below
the minimum levels to be classified as a "well-capitalized" institution. The
company has invested additional capital in SPB in the form of cash and the
conversion of subordinated debt to preferred stock. These additional capital
infusions, along with the likely restriction of dividend payments from SPB, have
decreased the company's financial flexibility and its ability to service its
debt. The Imperial Notes are obligations of the company and its non-bank
subsidiary guarantors, but not of SPB.
The Fund purchased Imperial Notes at about a 30% yield to maturity. We are
fairly comfortable with the actions taken by the company to quantify loan losses
and correct risk management practices. Additionally, the company is in the
process of selling non-core holding company assets, which will significantly
improve liquidity. We expect that the
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Imperial Notes will continue to perform. However, in the event of default, our
liquidation analysis indicates a probable par recovery with minimal risk of
loss.
USG NOTES
Prices of both USG Notes and USG Common dropped precipitously in October as a
result of Owens-Corning filing Chapter 11 Bankruptcy to deal with its asbestos
liabilities. USG's exposure to asbestos, while still not quantifiable, should
not be anywhere close to Owens-Corning's. Furthermore, USG's financial position
is extremely strong compared to other companies that have filed bankruptcy as a
result of asbestos litigation. The bottom line is USG Notes appear to be very
safe. The Fund took advantage of what appears to be market panic, and purchased
USG Notes at a 25% yield to maturity in September 2001. Please see the detailed
discussion of USG in the Chairman's letter to shareholders of Third Avenue Value
Fund.
AMERICAN LAND COMMON
The Fund received American Land Common and cash in exchange for Commercial
Common as a result of the acquisition of Commercial Assets, Inc. by American
Land Lease, Inc. American Land Lease is a real estate investment trust that
holds interests in 33 manufactured home communities with over 6,000 developed
homesites, 3,850 expansions sites and 216 RV sites. Manufactured home
communities are known for their stable cash flow, low operating expenses and low
tenant turnover. We estimate that American Land common trades at about a 35%
discount to net asset value, and at current trading prices the dividend yield is
about 10%. This is a good example of a company that appears to be on the verge
of a resource conversion. In fact, the company recently announced an
authorization to repurchase up to 2 million of its shares, which represents
27.7% of the outstanding shares.
FLORIDA COMMON
In October 2000, The St. Joe Company completed a tax-free spin-out of its 54%
interest in Florida East Coast Industries, Inc. to St. Joe Common shareholders.
The Fund received .231 shares of Florida Common for each share of St. Joe
Common. This spin-out was part of St. Joe's continuing effort to divest non-core
assets and focus its attention on developing its vast land resources into unique
properties and communities. Florida East Coast Industries is an extremely well
financed company (it is debt-free) that is engaged, through four wholly-owned
subsidiaries, in rail and trucking operations; real estate ownership,
development and management; and telecommunications (dark fiber and broadband
capacity sales). The company's subsidiaries are Florida East Coast Railway
("Railway"), International Transit ("Transit"), Flagler Development Company
("Flagler"), and EPIK Communications ("EPIK").
Railway operates a Class II railroad along 350 miles of mainline track and the
only coastal right-of-way between Jacksonville and Miami. Railway is the
exclusive rail service provider to the Ports of Palm Beach, Ft. Lauderdale and
Miami. Railway principally transports trailers and containers on flatcars, rail
carloads of crushed stone and other construction material, motor vehicles,
foodstuffs and other consumer products, chemicals and paper.
Transit is a common and contract motor carrier operating throughout the U.S.,
offering truckload over-the-road service, as well as intermodal drayage,
transportation logistics and brokerage services.
Flagler owns, operates, and leases commercial and industrial properties
throughout Florida. It owns approximately 17,000 acres of property in four of
Florida's fastest growing markets - Jacksonville, Orlando, Ft. Lauderdale, and
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Miami. Flagler owns 5.9 million square feet of Class A office and industrial
space and has entitlements for 16 million additional square feet of space.
EPIK is a wholesale provider of telecommunications private line services
("bandwidth") and dark fiber over its 1,890 mile Florida-based network. EPIK's
optical fiber network runs along Railway's right-of-way and in conduits on other
routes acquired through asset swaps. EPIK operates as a "carriers' carrier,"
providing high-bandwidth optic capacity and dark fiber to competitive local
exchange carriers, Internet service providers and long-distance phone companies.
EPIK currently has 1,500 miles of its network lit, delivering capacity to most
major markets in Florida and Atlanta. EPIK is also developing a national fiber
footprint by judiciously making fiber swaps throughout the United States.
The ultimate goal of the company is clearly a segregation of its distinct
businesses. One could easily foresee a sale or spin-off of the transportation
and real estate subsidiaries or a spin-off of EPIK along with an initial public
offering. At current prices for Florida Common, it appears that the market is
valuing the company based on its real estate and transportation holdings, with
little or no value attributed to EPIK. I cannot estimate what the ultimate
valuation will be for EPIK, or what valuation metrics will be employed (e.g.,
multiple of route miles or fiber miles). It does seem clear, however, that
owning Florida Common is an inexpensive way to play the telecom market while
holding high quality real estate and transportation assets. If EPIK is
ultimately spun-off to Florida Common holders, we will have to determine if it
makes sense for the Fund to continue holding its position in a non-real estate
related company.
WHAT IS A REAL ESTATE COMPANY?
Since the inception of the Fund in September 1998, our investment strategy -
investing in the securities of well-financed real estate and real estate-related
companies at prices substantially below their takeover or liquidation value -
seems to be working well. We are primarily focused on investing in common stocks
of well-financed companies that are leaders in their respective industries.
Forest City Enterprises, Catellus Development and St. Joe Company are leaders in
the real estate development business. D.R. Horton, Lennar and Centex are leaders
in the homebuilding business. USG and Centex are leaders in the building
materials/supply business, First American is a leader in the title insurance
business, and LNR Property Corp. is the leading opportunistic real estate
investment company. The Fund's core holdings are comprised of investments in the
common stocks of these companies and several others.
Part of our success to date can be attributed to our ability to be opportunistic
based on our flexible definition of a real estate or real estate-related
company. We believe this gives us a competitive advantage over other real estate
mutual funds, most of which invest almost exclusively in real estate investment
trust common stocks. If the Fund were restricted to investing only in REIT
common stocks, we would have missed several investment opportunities that have
worked out nicely, including homebuilder and title insurance common stocks and
distressed companies' debt securities.
The following is an excerpt from the Fund's Prospectus:
"Third Avenue Real Estate Value Fund seeks long-term capital appreciation. The
Fund seeks to achieve its objective by investing at least 65% of its total
assets in equity and debt securities of well-financed companies in the real
estate industry or related industries or in companies which own significant real
estate assets at the time of investment. The Fund
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seeks to acquire these securities at a substantial discount to the Adviser's
estimate of the issuing company's takeover value or liquidation value.
o A company is considered to be in the real estate industry if at least 50%
of its gross revenues or net profits at the time of investment come from
(a) construction, ownership, management, operation, financing, refinancing,
sales, leasing, development or rehabilitation of real estate; or (b)
extraction of timber or minerals from real estate.
o A company is considered to be in a related industry if at least 50% of its
gross revenues or net profits at the time of investment are derived from
providing goods (e.g., building materials and/or supplies) or services
(e.g., consulting, legal or insurance) to real estate companies.
o A company is considered to own significant real estate assets if at least
50% of the fair market value of its assets at the time of investment is
attributable to one or more of the following: (a) real estate owned or
leased by the company as lessor or as lessee; (b) timber or minerals on
such real estate; or (c) the discounted value of the stream of fees or
revenues to be derived from the management or operation of real estate or
the rights to extract timber or minerals from real estate.
Examples of companies that might qualify under one of these categories include:
o Real estate development companies (including commercial/industrial
developers and homebuilders);
o Real estate investment trusts (REITs) and master limited partnerships;
o Hotel and hotel management companies;
o Real estate brokerage companies and/or management companies;
o Financial institutions that make or service mortgage loans;
o Title insurance companies;
o Lumber, paper, forest product, timber, mining and oil companies;
o Companies with significant real estate holdings such as supermarkets,
restaurant chains and retail chains; and
o Manufacturers or distributors of construction materials and/or building
supplies."
SHAREHOLDER DISTRIBUTIONS
On December 15, 2000 a distribution of approximately $0.59 per share is to be
made to shareholders of record as of December 14, 2000. Of this estimated
amount, $0.10 per share represents long-term capital gains, $0.19 per share
represents short-term capital gains, and $0.30 per share represents ordinary
income. Shareholders, as always, have the option of receiving distributions
either in cash or in newly issued shares of Real Estate Value Common Stock.
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I look forward to writing to you again when we publish our quarterly report for
the period ending January 31, 2001. Best wishes for a healthy and prosperous New
Year.
Sincerely,
/s/ MICHAEL H. WINER
---------------------
Michael H. Winer
Co-manager, Third Avenue Real Estate Value Fund
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THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS - 2.85%
Assisted Living Facilities 1,000,000 CareMatrix Corp. 6.25%, due 8/15/04 (a) * $ 175,000 0.73%
----------
Financial Services 3,500,000 ContiFinancial Corp. 8.38%, due 8/15/03 (a) * 507,500 2.12%
----------
TOTAL CONVERTIBLE BONDS
(Cost $647,715) 682,500
----------
--------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS - 9.14%
Building Materials 300,000 USG Corp. 9.25%, due 9/15/01 280,066 1.17%
----------
Diversified Financial 500,000 Imperial Credit Industries, Inc. 9.875%, due 1/15/07 218,125 0.91%
Services ----------
Lawn & Garden Retail 734,600 Frank's Nursery & Crafts, Inc. 10.25%, due 3/1/08 297,513 1.24%
----------
Real Estate Investment Trust 1,050,000 Ocwen Asset Investment Corp. 11.50%, due 7/1/05 792,750 3.31%
----------
Real Estate Operating 700,000 Rockefeller Center Property Trust 0.00%, due 12/31/00 (a) 602,000 2.51%
Companies ----------
TOTAL CORPORATE BONDS
(Cost $2,303,675) 2,190,454
----------
SHARES
--------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - 85.41%
Building Materials 18,000 USG Corp. (b) 307,125 1.28%
----------
Homebuilding 24,500 Centex Corp. 906,500
60,168 D.R. Horton, Inc. 1,113,108
21,928 Lennar Corp. 704,437
----------
2,724,045 11.37%
----------
Natural Resources 26,500 Deltic Timber Corp. 515,094
4,000 The TimberWest Forest Corp. (Canada) 27,632
----------
542,726 2.26%
----------
Real Estate Holding Companies 25,500 Security Capital Group, Inc. Class B (a) 486,094 2.03%
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 2000
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONTINUED)
Real Estate Investment Trusts 84,600 Aegis Realty, Inc. $ 840,712
80,698 American Land Lease, Inc. 822,111
25,000 AMRESCO Capital Trust Inc. 259,375
75,500 Anthracite Capital, Inc. 556,812
40,200 Captec Net Lease Realty, Inc. 427,125
42,500 Koger Equity, Inc. 677,344
78,800 Prime Group Realty Trust 1,172,150
107,700 United Investors Realty Trust 612,544
----------
5,368,173 22.40%
----------
Real Estate Operating 69,100 Avatar Holdings, Inc. (a) 1,330,175
Companies 99,000 Catellus Development Corp. (a) 1,800,562
29,900 Consolidated-Tomoka Land Co. 345,719
30,700 Forest City Enterprises, Inc. Class A 1,135,900
63,300 LNR Property Corp. 1,368,862
39,100 Tejon Ranch Co. (a) 879,750
83,900 The St. Joe Co. 1,693,731
64,550 Wellsford Real Properties, Inc. (a) 1,149,797
----------
9,704,496 40.49%
----------
Title Insurance 36,000 First American Corp. 753,750 3.15%
----------
Transportation 17,073 Florida East Coast Industries, Inc. Class B (a) 581,549 2.43%
----------
TOTAL COMMON STOCKS
(Cost $17,660,012) 20,467,958
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT TERM INVESTMENTS - 3.28%
Repurchase Agreements 786,170 Bear Stearns 6.56%, due 11/01/00 (c) $ 786,170 3.28%
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $786,170) 786,170
-----------
TOTAL INVESTMENT PORTFOLIO - 100.68%
(Cost $21,397,572) 24,127,082
-----------
LIABILITIES NET OF CASH AND
OTHER ASSETS - (0.68%) (162,126)
-----------
NET ASSETS - 100.00% $23,964,956
(Applicable to 1,756,328 ===========
shares outstanding)
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Securities in whole or in part on loan.
(c) Repurchase agreements collateralized by:
U.S. Treasury Strips, par value $2,085,000, matures 11/15/16, market value
$802,725.
* Issuer in default.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
FOR THE YEAR ENDED OCTOBER 31, 2000
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $21,397,572) $24,127,082
Cash 9,985
Receivable for fund shares sold 61,840
Dividends and interest receivable 123,694
Collateral on loaned securities (Note 1) 394
Other assets 344
-----------
Total assets 24,323,339
-----------
LIABILITIES:
Payable for fund shares redeemed 15,532
Payable for securities purchased 269,123
Payable to investment adviser 17,468
Accounts payable and accrued expenses 55,866
Collateral on loaned securities (Note 1) 394
Commitments (Notes 6) --
-----------
Total liabilities 358,383
-----------
Net assets $23,964,956
===========
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, $0.001 par value,
1,756,328 shares outstanding $20,136,017
Accumulated undistributed net investment income 538,778
Accumulated undistributed net realized gains from
investment transactions 560,651
Net unrealized appreciation of investments and translation
of foreign currency denominated assets and liabilities 2,729,510
-----------
Net assets applicable to capital shares outstanding $23,964,956
===========
Net asset value, offering and redemption price per share $13.64
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2000
INVESTMENT INCOME:
Interest $ 311,754
Dividends 553,363
Other income 24
-----------
Total investment income 865,141
-----------
EXPENSES:
Investment advisory fees (Note 3) 144,365
Administration fees (Note 3) 83,987
Directors' fees and expenses 61,625
Accounting services 26,514
Transfer agent fees 26,100
Auditing and tax consulting fees 25,049
Reports to shareholders 15,339
Registration fees 11,273
Custodian fees 11,039
Legal fees 5,572
Miscellaneous expenses 2,476
Insurance expenses 563
-----------
Total operating expenses 413,902
-----------
Expenses waived and reimbursed (Note 3) (173,152)
-----------
Net expenses 240,750
-----------
Net investment income 624,391
-----------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gains on investments 558,562
Net change in unrealized appreciation on investments 2,724,624
-----------
Net realized and unrealized gains on investments 3,283,186
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 3,907,577
===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR YEAR
ENDED ENDED
10/31/00 10/31/99
----------- -----------
OPERATIONS:
Net investment income $ 624,391 $ 170,060
Net realized gains on investments 558,562 55,843
Net realized gains on foreign
currency transactions -- 183
Net change in unrealized appreciation
(depreciation) on investments 2,724,624 (14,517)
Net change in unrealized appreciation
on translation of other assets
and liabilities denominated in
foreign currency -- 11
----------- -----------
Net increase in net assets resulting
from operations 3,907,577 211,580
----------- -----------
DISTRIBUTIONS:
Dividends to shareholders from net
investment income (233,622) (26,438)
Distributions to shareholders from net
realized gains on investments (54,698) --
----------- -----------
(288,320) (26,438)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 16,579,930 8,594,336
Net asset value of shares issued in
reinvestment of dividends
and distributions 274,613 26,336
Cost of shares redeemed (4,821,157) (1,206,453)
----------- -----------
Net increase in net assets resulting
from capital share transactions 12,033,386 7,414,219
----------- -----------
Net increase in net assets 15,652,643 7,599,361
Net assets at beginning of period 8,312,313 712,952
----------- -----------
Net assets at end of period
(including undistributed net
investment income of $538,778 and
$150,484, respectively) $23,964,956 $ 8,312,313
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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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:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------
2000 1999 1998*
------- ------- -------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.09 $ 10.28 $ 10.00
------- ------- -------
Income from Investment Operations:
Net investment income 0.36 0.20 0.02
Net gain on securities (both realized
and unrealized) 2.50 0.71 0.26
------- ------- -------
Total from Investment Operations 2.86 0.91 0.28
------- ------- -------
Less Distributions:
Dividends from net investment income (0.25) (0.10) 0.00
Distributions from realized gains (0.06) 0.00 0.00
------- ------- -------
Total Distributions (0.31) (0.10) 0.00
------- ------- -------
Net Asset Value, End of Period $ 13.64 $ 11.09 $ 10.28
======= ======= =======
Total Return 26.51% 8.86% 2.80%(1)
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $23,965 $ 8,312 $ 713
Ratio of Expenses to Average Net Assets
Before expense reimbursement 2.58% 5.38% 81.89%(2)
After expense reimbursement 1.50% 1.87% 1.90%(2)
Ratio of Net Income (Loss) to Average Net Assets
Before expense reimbursement 2.81% (0.31%) (77.33%)(2)
After expense reimbursement 3.89% 3.20% 2.66%(2)
Portfolio Turnover Rate 23% 5% 0%(1)
</TABLE>
(1) Not Annualized
(2) Annualized. Note that annualized expenses and net income (loss) before
expense reimbursement are not necessarily indicative of expected expenses
due to the annualization of certain fixed expenses.
* The Fund commenced investment operations September 17, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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PERFORMANCE INFORMATION
(UNAUDITED)
PERFORMANCE ILLUSTRATIONS
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE REAL
ESTATE VALUE FUND AND THE BLOOMBERG REIT SMALL CAP INDEX AND THE BLOOMBERG REAL
ESTATE OPERATING COMPANY INDEX AND THE WILSHIRE REAL ESTATE SECURITIES INDEX
Average Annual Total Return
Since Inception
1 Year 2 Years (9/17/98)
26.51% 17.35% 17.76%
[The table below represents a line chart in the printed piece.]
Bloomberg Wilshire
Bloomberg REIT Real Estate Real Estate
TAREVF Small Cap Operating Co. Securities
9/17/98 10000 10000 10000 10000
10/31/98 10280 10402 10471.4 10567
10/31/99 11190.8 10129.5 10426.3 10060.5
10/31/00 14157.5 11140.4 11990.7 12280.8
* All returns include reinvestment of dividends.
As with all mutual funds, past performance does not indicate future results.
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
Third Avenue Trust (the "Trust") is an open-end, non-diversified management
investment company organized as a Delaware business trust pursuant to a Trust
Instrument dated October 31, 1996. The Trust currently consists of three
separate investment series: Third Avenue Value Fund, Third Avenue Small-Cap
Value Fund and Third Avenue 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 Real Estate
Value Fund commenced investment operations on September 17, 1998. The Funds seek
to achieve their investment objectives of long-term capital appreciation by
adhering to a strict value discipline when selecting securities.While the Funds
pursue a capital appreciation objective, each Fund has a distinct investment
approach.
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 equity securities of small companies having market
capitalizations no greater than nor less than the range of market
capitalizations of companies in the Russell 2000 Index at the time of the
initial investment and believed to be 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 accounting
principles generally accepted in the United States of America.
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000
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 October 31,
2000, such securities had a total fair value of $137,304,003 or 7.40% of net
assets of Third Avenue Value Fund and $4,500,000 or 3.16% of net assets of Third
Avenue Small-Cap Value Fund. Among the factors considered by the Board of
Trustees in determining fair value are the type of security, trading in
unrestricted securities of the same issuer, the financial condition of the
issuer, the Fund's cost at the date of purchase, a percentage of the Fund's
beneficial ownership of the issuer's common stock and debt securities, the
operating results of the issuer, the discount from market value of any similar
unrestricted securities of the issuer at the time of purchase and liquidation
values of the issuer. The fair values determined in accordance with these
procedures may differ significantly from the amounts which would be realized
upon disposition of the securities. Restricted securities often have costs
associated with subsequent registration. The restricted securities currently
held by the Funds are not expected to incur any future registration costs.
SECURITY TRANSACTIONS AND INVESTMENT INCOME:
Security transactions are accounted for on a trade date basis. Dividend income
is recorded on the ex-dividend date and interest income, including, where
applicable, amortization of premium and accretion of discount on investments, is
accrued daily, except when collection is not expected. Realized gains and losses
from securities transactions are reported on an identified cost basis.
FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS:
The books and records of the Funds are maintained in U.S. dollars. Foreign
currency amounts are translated into U.S. dollars as follows:
o INVESTMENTS: At the prevailing rates of exchange on the valuation date.
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000
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.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from foreign currency exchange contracts and
swap contracts, disposition of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions, and
the difference between the amount of investment income and foreign withholding
taxes recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net unrealized currency gains (losses) from valuing
foreign currency denominated assets and liabilities at period end exchange rates
are reflected as a component of unrealized appreciation (depreciation) on the
Statement of Assets and Liabilities. The change in net unrealized currency gains
(losses) for the period is reflected on the Statement of Operations.
Pursuant to U.S. Federal income tax regulations, gains and losses from certain
foreign currency transactions and the foreign currency portion of gains and
losses realized on sales and maturities of foreign denominated debt securities
are treated as ordinary income for U.S. Federal income tax purposes.
FOREIGN CURRENCY SWAP CONTRACTS:
Third Avenue Value Fund and Third Avenue Small-Cap Value Fund have 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 Funds' 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 Funds realize a gain or loss upon termination or
reset of the contracts.
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000
At October 31, 2000, the Third Avenue Value Fund and Third Avenue Small-Cap
Value Fund had outstanding foreign currency swap contracts with Bear Stearns
that commit the Funds to pay 15.9 billion and 666 million Japanese yen,
respectively, in exchange for 150 million and 6 million U.S. dollars,
respectively. The Funds will pay 0.38% and 0.25% on the Japanese yen,
respectively, and Bear Stearns will pay 6.85% and 6.73%, respectively, on the
U.S. dollars.
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:
The Funds loaned securities during the year 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 year ended October 31, 2000, the following Funds had securities
lending income included in interest income totaling:
FUND
-----
Third Avenue Value Fund $15,494
Third Avenue Small-Cap Value Fund 13,562
Third Avenue Real Estate Value Fund 1,649
The value of loaned securities and related collateral outstanding at October 31,
2000, was as follows:
VALUE OF VALUE OF
FUND SECURITIES LOANED COLLATERAL
----- --------------- ---------
Third Avenue Value Fund $8,133,362 $8,337,805
Third Avenue Small-Cap Value Fund 2,764,401 2,944,203
Third Avenue Real Estate Value Fund 394 394
The collateral for the Funds consisted of cash which was invested in repurchase
agreements with Bear Stearns due November 1, 2000, collateralized by U.S.
Treasury securities.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000
REPURCHASE AGREEMENTS:
Securities pledged as collateral for repurchase agreements are held by the
Funds' custodian bank until maturity of the repurchase agreement. Provisions in
the agreements ensure that the market value of the collateral is at least equal
to the repurchase value in the event of default. In the event of default, the
Funds have the right to liquidate the collateral and apply the proceeds in
satisfaction of the obligation. Under certain circumstances, in the event of
default or bankruptcy by the other party to the agreement, realization and/or
retention of the collateral may be subject to legal proceedings.
ORGANIZATIONAL COSTS:
Organizational costs of $56,000 for Third Avenue Small-Cap Value Fund are being
amortized on a straight line basis over five years from commencement of
operations.
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income paid to shareholders and distributions from
realized gains on sales of securities paid to shareholders are recorded on the
ex-dividend date. The amount of dividends and distributions from net investment
income and net realized capital gains are determined in accordance with Federal
income tax regulations which may differ from accounting principles generally
accepted in the United States of America. These "book/tax" differences are
either temporary or permanent in nature. To the extent these differences are
permanent in nature, such amounts are reclassified within the capital accounts
based on their tax-basis treatment. Temporary differences do not require
reclassification.
For the year ended October 31, 2000, permanent differences were reclassified as
shown below:
INCREASE (DECREASE)
TO ACCUMULATED
INCREASE UNDISTRIBUTED
(DECREASE) NET REALIZED
TO ACCUMULATED GAIN (LOSS)
UNDISTRIBUTED ON INVESTMENTS INCREASE TO
NET INVESTMENT AND FOREIGN ADDITIONAL
INCOME CURRENCY PAID-IN-CAPITAL
-------------- --------------- ---------------
Third Avenue Value Fund 5,758,782 (19,480,091) 13,721,309
Third Avenue Small-Cap Value Fund (84,070) 84,070 --
Third Avenue Real Estate Value Fund (2,475) 2,475 --
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.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000
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, as ownership of 5% or more of the outstanding common stock of the
issuer) for the year ended October 31, 2000 were as follows:
PURCHASES SALES
--------- -----
Third Avenue Value Fund:
Affiliated $112,897,161 $157,712,733
Unaffiliated 543,834,002 228,994,851
Third Avenue Small-Cap Value Fund:
Affiliated -- 11,902,235
Unaffiliated 22,761,354 30,878,952
Third Avenue Real Estate Value Fund:
Unaffiliated 15,789,686 3,362,028
3. INVESTMENT ADVISORY SERVICES, ADMINISTRATION AND SERVICE FEE AGREEMENTS
Each Fund has an Investment Advisory Agreement with EQSF Advisers, Inc. (the
"Adviser") for investment advice and certain management functions. The terms of
the Investment Advisory Agreement provide for a monthly fee of 1/12 of 0.90% (an
annual fee of 0.90%) of the total average daily net assets of the applicable
Fund, payable each month. Additionally, under the terms of the Investment
Advisory Agreements, the Adviser pays certain expenses on behalf of the Funds,
which are reimbursable by the Funds, including salaries of non-officer employees
and other miscellaneous expenses. Amounts reimbursed with respect to non-officer
salaries are included under the caption Administration fees. At October 31,
2000, Third Avenue Value Fund, Third Avenue Small-Cap Value Fund and Third
Avenue Real Estate
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000
Value Fund had payables to affiliates of $108,746, $14,269 and $6,566,
respectively, for reimbursement of expenses paid by such affiliates. Under
current arrangements for the Third Avenue Value Fund and Third Avenue Small-Cap
Value Fund, whenever, in any fiscal year, the Fund's normal operating expenses,
including the investment advisory fee, but excluding brokerage commissions and
interest and taxes, exceeds 1.90% of the first $100 million of the Fund's
average daily net assets, and 1.50% of average daily net assets in excess of
$100 million, the Adviser is obligated to reimburse the Fund in an amount equal
to that excess. Effective October 15, 1999, whenever, in any fiscal year, Third
Avenue Real Estate Value Fund's normal operating expenses, including the
investment advisory fee, but excluding brokerage commissions and taxes, exceeds
1.50% of the Fund's average daily net assets, the Adviser is obligated to
reimburse the Fund in an amount equal to that excess. Prior to this date, the
Adviser was obligated to reimburse Third Avenue Real Estate Value Fund per the
agreement stated above for the Third Avenue Value Fund and Third Avenue
Small-Cap Value Fund. Such waived and reimbursed expenses may be paid to the
Adviser during the following three year period to the extent that the payment of
such expenses would not cause the Funds to exceed the preceding limitations. No
expense reimbursement was required for Third Avenue Value Fund or Third Avenue
Small-Cap Value Fund for the year ended October 31, 2000. The Adviser waived
fees of $144,365, and reimbursed $28,787 for Third Avenue Real Estate Value
Fund, for the year ended October 31, 2000.
The Trust has entered into an administration agreement with the Adviser pursuant
to which the Adviser, as administrator, is responsible for providing various
administrative services to the Trust. The Adviser has in turn entered into a
sub-administration agreement with PFPC, Inc. pursuant to which PFPC, Inc.
provides certain of these administrative services on behalf of the Adviser. The
Adviser earns a fee from the Trust equal to $150,000 plus 50% of the difference
between (i) $174,000 plus .01% of the Fund's average net assets in excess of $1
billion and (ii) $150,000 plus $65 per permit for Blue Sky Services. The Adviser
pays PFPC, Inc. a sub-administration fee for sub-administration services
provided to the Trust equal to $150,000 plus $65 per permit for Blue Sky
Services.
The Trust has entered into shareholder servicing agreements with certain service
agents for which the service agents receive a fee of up to 0.10% of the average
daily net assets invested into the Trust by the agent's customers in an omnibus
account. In exchange for these fees, the service agents render to such customers
various administrative services which the Trust would otherwise be obligated to
provide at its own expense.
4. RELATED PARTY TRANSACTIONS
BROKERAGE COMMISSIONS:
Martin J. Whitman, the Chairman and a director of the Funds, is the Chairman and
Chief Executive Officer of M.J. Whitman Holding Corp., which is the parent of
M.J. Whitman, Inc., a registered broker-dealer. For the year ended October 31,
2000, the Funds incurred total brokerage commissions, which includes commissions
earned by M.J. Whitman, Inc. as follows:
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000
FUND TOTAL COMMISSIONS M.J. WHITMAN, INC.
---- ----------------- ------------------
Third Avenue Value Fund $1,155,239 $1,055,188
Third Avenue Small-Cap Value Fund 69,067 41,252
Third Avenue Real Estate Value Fund 58,011 51,213
INVESTMENT IN AFFILIATES:
A summary of the Funds' transactions in securities of affiliated issuers for the
year ended October 31, 2000 is set forth below:
THIRD AVENUE VALUE FUND
<TABLE>
<CAPTION>
DIVIDEND/
SHARES/PRINCIPAL SHARES/PRINCIPAL INTEREST
HELD AT SHARES/ HELD AT VALUE AT INCOME
OCT. 31, PRINCIPAL SHARES OCT. 31, OCT. 31, NOV. 1, 1999 -
NAME OF ISSUER: 1999 PURCHASED SOLD 2000 2000 OCT. 31, 2000
-------------- ---------------- --------- ------- ---------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
ACMAT Corp. Class A 200,678 -- -- 200,678 $ 1,893,898 --
Alamo Group, Inc. 215,100 379,200 -- 594,300 7,688,756 $ 95,784
C.P. Clare Corp. 1,004,500 -- -- 1,004,500 5,085,281 --
Carver Bancorp, Inc. 218,500 -- -- 218,500 1,584,125 10,925
CGA Group, Ltd. 3,341,703 -- -- 3,341,703 -- --
CGA Group, Ltd., Series A 601,554 87,076(1) -- 688,630 17,215,751 2,176,899
CGA Group, Ltd., Series C 6,045,667 -- -- 6,045,667 7,039,176 --
CGA Special Account Trust $ 7,500,000 -- -- $7,500,000 7,500,000 364,679
Danielson Holding Corp. 803,669 -- -- 803,669 3,164,447 --
Electro Scientific Industries, Inc. 1,600,300 703,500(4) 1,037,800 1,266,000 + --
Electroglas, Inc. 1,882,500 1,471,000 490,200 2,863,300 40,265,156 --
Enhance Financial Services Group, Inc. 608,500 1,836,000 -- 2,444,500 28,417,313 368,676
First American Corp. 3,145,000 56,800 -- 3,201,800 67,037,687 765,024
FSI International, Inc. 2,320,900 697,500 -- 3,018,400 28,108,850 --
Innovative Clinical Solutions, Ltd. -- 5,308,740(3) -- 5,308,740 5,640,536 --
J & J Snack Foods Corp. 328,000 167,000 -- 495,000 6,651,563 --
Kendle International, Inc. -- 929,500 -- 929,500 8,597,875 --
Protocol Systems, Inc. 788,900 -- 788,900(2) -- -- --
Repap Enterprises, Inc. 126,605,679 -- 126,605,679(2) -- -- --
Silicon Valley Group, Inc. 3,734,500 769,600 -- 4,504,100 148,353,794 --
St. George Holdings, Ltd. Class A 1,064,516 -- -- 1,064,516 106,451 --
St. George Holdings, Ltd. Class B 9,044 -- -- 9,044 905 --
Stewart Information Services Corp. 1,951,400 -- -- 1,951,400 30,734,550 78,056
Tecumseh Products Co. Class A 125,400 260,000 -- 385,400 15,367,825 243,712
Tecumseh Products Co. Class B 417,300 209,100 -- 626,400 24,429,600 673,536
Tejon Ranch Co. 3,045,508 -- -- 3,045,508 68,523,930 76,138
Veeco Instruments, Inc. 663,200 -- 163,200 500,000 + --
Vertex Communications Corp. 306,900 -- 306,900(2) -- -- --
Woronoco Bancorp, Inc. -- 402,800 -- 402,800 4,682,550 47,064
------------ ----------
Total Affiliates $528,090,019 $4,900,493
============ ==========
</TABLE>
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000
THIRD AVENUE SMALL-CAP VALUE FUND
<TABLE>
<CAPTION>
DIVIDEND/INTEREST
SHARES SHARES INCOME
HELD AT OCT. 31, SHARES SHARES HELD AT OCT. 31, VALUE AT NOV. 1, 1999 -
NAME OF ISSUER: 1999 PURCHASED SOLD 2000 OCT. 31, 2000 OCT. 31, 2000
------------- ---------------- --------- -------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Centigram Communications Corp. 326,900 -- 326,900(2) -- + --
C.P. Clare Corp. 520,000 -- 35,200 484,800 2,454,300 --
SpecTran Corp. 490,600 -- 490,600 -- + --
----------- ---------
Total Affiliates $2,454,300 $0
=========== =========
</TABLE>
(1) Increase due to pay-in-kind dividends
(2) sold due to merger
(3) Increase due to exchange
(4) Increase of 562,500 shares due to stock split.
+ As of October 31, 2000, no longer an affiliate.
5. CAPITAL SHARE TRANSACTIONS
Each Fund is authorized to issue an unlimited number of shares of beneficial
interest with $0.001 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
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999 OCTOBER 31, 2000 OCTOBER 31, 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Increase/(Decrease) in Fund shares:
Shares outstanding at beginning
of period 38,490,806 51,081,171 10,761,465 13,096,406
Shares sold 15,714,962 7,411,681 5,821,974 4,834,365
Shares reinvested from dividends
and distributions 4,668,507 578,496 77,713 96,740
Shares redeemed (10,637,222) (20,580,542) (6,382,470) (7,266,046)
----------- ----------- ----------- -----------
Net increase (decrease) in Fund shares 9,746,247 (12,590,365) (482,783) (2,334,941)
----------- ----------- ----------- -----------
Shares outstanding at end of period 48,237,053 38,490,806 10,278,682 10,761,465
=========== =========== =========== ===========
</TABLE>
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000
THIRD AVENUE
REAL ESTATE VALUE FUND
----------------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------- ----------------
Increase in Fund shares:
Shares outstanding at beginning of period 749,696 69,355
Shares sold 1,373,638 791,345
Shares reinvested from dividends
and distributions 25,217 2,473
Shares redeemed (392,223) (113,477)
----------- -----------
Net increase in Fund shares 1,006,632 680,341
----------- -----------
Shares outstanding at end of period 1,756,328 749,696
=========== ===========
6. COMMITMENTS AND CONTINGENCIES
Third Avenue Value Fund has committed a $1,900,000 capital investment to
Insurance Partners II Equity Fund, LP of which $1,330,000 has been funded as of
October 31, 2000. Securities valued at $566,759 have been segregated to meet the
requirements of this commitment. This commitment may be payable upon demand of
Insurance Partners II Equity Fund, LP.
Pursuant to the swap contract between the Third Avenue Value Fund and Bear
Stearns, whenever fluctuations in the value of the contract results in a loss to
the Fund of $2,500,000 the Fund is obligated to reset the contract resulting in
a payment to Bear Stearns equal to the loss. Accordingly securities valued at
$2,425,565 have been segregated to meet this contingency.
Pursuant to the swap contract between the Third Avenue Small-Cap Value Fund and
Bear Stearns, whenever fluctuations in the value of the contract results in a
loss to the Fund of $500,000 the Fund is obligated to reset the contract
resulting in a payment to Bear Stearns equal to the loss. Accordingly,
Securities valued at $485,113 have been segregated to meet this contingency.
As indicated in Note 3, the Adviser has waived or reimbursed certain expenses of
the Third Avenue Real Estate Value Fund since its inception. To the extent that
such waived or reimbursed fees and expenses can be repaid to the Adviser within
a three year period without exceeding the expense cap in a given year, such
amounts will be repaid. The total amount of waivers and reimbursements since the
Fund's inception through October 31, 2000 amount to $410,437.
7. RISKS RELATING TO CERTAIN INVESTMENTS
FOREIGN SECURITIES:
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 pos-
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 2000
sible 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 for the purpose of
hedging a Fund's foreign currency exposure. 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. Additionally a Fund may
not perfectly hedge its foreign currency exposure and therefore risks may arise
from movements in the related currency.
HIGH YIELD DEBT:
Third Avenue Value Fund currently invests in high yield lower grade debt. The
market values of these higher yielding debt securities tend to be more sensitive
to economic conditions and individual corporate developments than those of
higher rated securities. In addition, the secondary market for these bonds is
generally less liquid.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS:
Third Avenue Value Fund invests in loans and other direct debt instruments
issued by a corporate borrower to another party. These loans represent amounts
owed to lenders or lending syndicates (loans and loan participations) or to
other parties. Direct debt instruments may involve a risk of loss in case of
default or insolvency of the borrower and may offer less legal protection to the
Fund in the event of fraud or misrepresentation. In addition, loan
participations involve a risk of insolvency of the lending bank or other
financial intermediary. The markets in loans are not regulated by federal
securities laws or the SEC.
TRADE CLAIMS:
Third Avenue Value Fund invests in trade claims. Trade claims are interests in
amounts owed to suppliers of goods or services and are purchased from creditors
of companies in financial difficulty. An investment in trade claims is
speculative and carries a high degree of risk. Trade claims are illiquid
securities which generally do not pay interest and there can be no guarantee
that the debtor will ever be able to satisfy the obligation on the trade claim.
The markets in trade claims are not regulated by federal securities laws or the
SEC. Because trade claims are unsecured, holders of trade claims may have a
lower priority in terms of payment than certain other creditors in a bankruptcy
proceeding.
8. CAPITAL LOSS CARRYFORWARDS
During the year ended October 31, 2000, Third Avenue Small-Cap Value Fund
utilized net capital loss carryforwards of $69,341. At October 31, 2000, no
further capital loss carryforwards were available for Third Avenue Small-Cap
Value Fund.
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REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF
THIRD AVENUE TRUST
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Third Avenue Value Fund, Third
Avenue Small-Cap Value Fund and Third Avenue Real Estate Value Fund
(constituting Third Avenue Trust, hereafter referred to as the "Fund") at
October 31, 2000 and the results of each of their operations for the year then
ended, the changes in each of their net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
December 1, 2000
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
FEDERAL TAX STATUS OF DIVIDENDS
(UNAUDITED)
The following information represents the tax status of dividends and
distributions paid by the Funds during the fiscal year ended October 31, 2000.
This information is presented to meet regulatory requirements and no current
action on your part is required.
THIRD AVENUE VALUE FUND
Of the $4.424 per share paid to you in cash or reinvested into your account for
the fiscal year ended October 31, 2000, the entire amount was derived from
long-term capital gains.
THIRD AVENUE SMALL-CAP VALUE FUND
Of the $0.098 per share paid to you in cash or reinvested into your account for
the fiscal year ended October 31, 2000, the entire amount was derived from net
investment income. 100% of the ordinary income distributed qualifies for the
Corporate Dividends Received Deduction.
THIRD AVENUE REAL ESTATE VALUE FUND
Of the $0.311 per share paid to you in cash or reinvested into your account for
the fiscal year ended October 31, 2000, $0.252 was derived from net investment
income and $0.059 was derived from short-term capital gains which are taxed as
ordinary income. 77.73% of the ordinary income distributed qualifies for the
Corporate Dividends Received Deduction.
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BOARD OF TRUSTEES
Phyllis W. Beck
Lucinda Franks
Gerald Hellerman
Marvin Moser
Donald Rappaport
Myron M. Sheinfeld
Martin Shubik
Charles C. Walden
Barbara Whitman
Martin J. Whitman
OFFICERS
Martin J. Whitman
Chairman, Chief Executive Officer
David M. Barse
President, Chief Operating Officer
Michael Carney
Chief Financial Officer, Treasurer
Kerri Weltz, Assistant Treasurer
W. James Hall, General Counsel and Secretary
TRANSFER AGENT
PFPC Inc.
211 South Gulph Road
P.O. Box 61503
King of Prussia, PA 19406-0903
(610) 239-4600
(800) 443-1021 (toll-free)
INVESTMENT ADVISER
EQSF Advisers, Inc.
767 Third Avenue
New York, NY 10017-2023
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
CUSTODIAN
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540-6231
[THIRD AVENUE FUNDS 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
TAF-A10/00
