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THIRD AVENUE VARIABLE SERIES TRUST
THIRD AVENUE VALUE PORTFOLIO
ANNUAL REPORT
-------------
DECEMBER 31, 1999
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THIRD AVENUE VALUE PORTFOLIO
Dear Third Avenue Value Portfolio Shareholder:
At December 31, 1999, the net asset value ("NAV") attributable to the 402,689
common shares outstanding of the Third Avenue Value Portfolio ("TAVP" or the
"Portfolio") was $10.84. The Portfolio's inception date was September 21, 1999.
The initial net asset value was $10.00 per share. As of December 31, 1999, the
return since inception was 8.40%. At February 10, 2000, the unaudited net asset
value attributable to the 558,230 common shares outstanding was $10.87 per
share.
SEMI-ANNUAL ACTIVITY
During the period, the Portfolio established positions in the common stocks of
25 companies.
<TABLE>
<CAPTION>
NUMBER OF SHARES NEW POSITIONS ACQUIRED
<S> <C>
16,300 ACT Networks, Inc. ("ACT Networks Common")
12,500 Alamo Group, Inc. ("Alamo Common")
4,000 Analogic Corp. ("Analogic Common")
1,700 Capital Southwest Corp. ("Capital Southwest Common")
14,000 Catellus Development Corp. ("Catellus Common")
6,000 Deltic Timber Corp. ("Deltic Common")
13,000 Enhance Financial Services Group, Inc. ("Enhance Common")
19,000 Evans & Sutherland Computer Corp. ("ESCC Common")
9,000 FSI International, Inc. ("FSI Common")
5,000 Financial Security Assurance Holdings, Ltd. ("FSA Common")
12,000 First American Financial Corp. Class A ("First American Common")
3,600 Forest City Enterprises, Inc. Class A ("Forest City Common")
1,200 Gleason Corp. ("Gleason Common")
5,000 Koger Equity, Inc. ("Koger Common")
7,000 LNR Property Corp. ("LNR Common")
10,000 LaSalle Re Holdings, Ltd. ("LaSalle Common")
6,000 Leucadia National Corp. ("Leucadia Common")
8,000 Liberty Financial Companies, Inc. ("Liberty Common")
4,000 MBIA Inc. ("MBIA Common")
11,000 Parexel International Corp. ("Parexel Common")
15,000 Pharmaceutical Product Development, Inc. ("PPDI Common")
6,500 Risk Capital Holdings, Inc. ("Risk Capital Common")
12,500 Stewart Information Services Corp. ("Stewart Common")
5,000 Vertex Communications Corp. ("Vertex Common")
15,000 Wellsford Real Properties, Inc. ("Wellsford Common")
</TABLE>
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PERFORMANCE INFORMATION
Performance Illustration: Comparison of change in value of a $10,000 investment
in the Third Avenue Value Portfolio, the Standard & Poor's 400 Index ("S&P
400"), and the Russell 2000 Value Index.
[Figures below represents chart in its printed form]
as of 12/31/99
TAVP S&P 400 Russell 2000 Value
- ------- ------- ------------------
$10,840 $10,974 $9,700
Past performance is not indicative of future results.
COMMENTARY
The Portfolio benefited from a rally in small-cap technology, in particular its
exposure to the equities of FSI International and Analogic Corp. FSI
International is a leading manufacturer of microlithography and surface
conditioning machines used by the semiconductor and microelectronics
manufacturing industry. The semiconductor capital equipment industry continues
to recover from the most severe downturn in the industry's history. We expect
the growth in this industry to continue for the foreseeable future based on the
increasing number of applications, beyond personal computers, that use
semiconductors--from household appliances and cellular phones to automotive
applications, for example--and because chip manufacturers will have to re-equip
facilities due to technological innovation. As of November 27, 1999, FSI had
cash of $2.00 per share and cash to total book liabilities of over 115%.
Analogic Corp. designs and manufactures advanced electronic systems used to
convert analog signals to and from digital signals for display or processing by
Original Equipment Manufacturers (OEMs) in various medical, industrial and
telecommunications applications. Recently, Analogic received certification from
the Federal Aviation Administration for its innovative CT system used to scan
luggage for explosives at airports. Its cash holdings as of October 31, 1999 of
$121.9 million equaled 268% of total book liabilities alone. Additionally, under
the leadership of the new CEO, Tom Miller, the company recently announced plans
to unlock the value of its computer telephony group (by way of an IPO).
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We took advantage of the relative bargains in the insurance sector,
specifically, in the areas of financial guarantee insurance and title insurance.
We are attracted to this area because the results are driven by the expense
ratio instead of the loss ratio. The recent rise in interest rates has put a
damper on the market's perception of the companies in these industries. However,
higher interest rate environments are not necessarily negative - not only do
they improve pricing for the financial guarantors typically, but they also
improve net interest income for both sectors. The Portfolio acquired positions
in Financial Security Assurance, MBIA and Enhance Financial Services common,
each at a discount to adjusted book value.
The title insurers, First American Financial Corp. and Stewart Information
Services are each at the forefront of technology. Due to innovation, what was
once an extremely people-intensive business is becoming less so, which will
eventually lead to higher margins and less cyclicality longer term. The
Portfolio was able to acquire positions in the equities of these two companies
at less than 4x peak earnings achieved over the last cycle.
Pharmaceutical companies are increasingly outsourcing research to Clinical
Research Organizations ("CROs"). Pharmaceutical companies are under pressure to
contain costs and increase revenues through faster development of drugs and
other therapies. We have invested in the equities of two of the leading CROs,
Parexel and Pharmaceutical Product Development ("PPD"), which specialize in
providing worldwide clinical research and development of pharmaceutical
products. The common stocks of these issuers are in the midst of an extreme bear
market stemming from a flow of negative announcements over the past year. Among
the problems were cancellations of major contracts, concerns over increased M&A
among the pharmaceutical companies, and the threat of further healthcare reform.
We believe outsourcing of clinical research is likely to continue to grow
longer-term, although contracts will tend to be lumpy. Both Parexel and PPD are
well capitalized and well positioned to participate in this growth, particularly
given their global exposures. TAVP acquired its positions in these common stocks
at discounts to what we believe a first stage venture capitalist would pay and
at roughly 10 times trailing earnings.
Investing in real estate securities - or at least the way we do it - is probably
the purest form of value investing. Third Avenue's investment mantra has always
been: buy what is "SAFE AND CHEAP". Applying these principles to real estate
securities is much easier than applying them to many other sectors. During the
quarter, the Portfolio was able to acquire positions in six real estate common
stocks at favorable prices. We have invested in companies that we believe have
terrific management teams, high quality assets and lack significant
encumbrances. Catellus Development Corp. is the largest private land owner in
California and one of the nation's largest full-services real estate companies.
Deltic Timber owns more than 400,000 acres of timberland, 36,000 acres of
farmland, two sawmills, and several real estate development projects including a
4,300-acre master-planned-community. The company's balance sheet does not
reflect the true value of the company's land holdings, since most of the land
has been owned for 60 years. Forest City Enterprises is a real estate
development and operating company that develops, owns, operates and manages
commercial and multi-family properties across the United States. The company has
over $3.6 billion of assets (at cost) and has a 20-year record of consistent
cash flow growth.
During the quarter, we established positions in two small-cap companies that are
going through resource conversions, Gleason Corp. and Vertex Communications
Corp. Gleason is a world leader in the manufacture of gear production equipment
and related tools. The company's end markets include the automotive and truck
industries, as well as the construction, aerospace, farm and marine markets. On
December 9, 1999, a group, led by the senior management team and a private
equity firm, announced a tender offer to purchase all of the outstanding common
shares for $23.00 per share, in cash. Although we feel that the board of
directors is agreeing to sell the company at the bottom of its business cycle,
we will take the cash and redeploy it. The portfolio's cost basis is $16.94 per
share. Vertex Communications Corp. is a leading supplier of satellite and
wireless communications products. On November 12, 1999, Vertex announced that it
entered into an agreement under which Tripoint Global Communications would
acquire all outstanding shares of the company for $22.00 per share, in cash. On
February 4, 2000, Vertex received early termination
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of the waiting period under the Hart-Scott-Rodino Act, essentially absolving the
deal of any antitrust concerns. The cost basis of the shares held by TAVP is
$16.51 per share.
The Portfolio held a relatively high cash position of 20.76% at the end of the
quarter, which was a function of an evolving portfolio, rather than an attempt
to keep cash on the sideline.
Investment Philosophy
It ought to be constructive for clients if I explain our investment approach in
some detail, describing both what Third Avenue does and does not do. While I
refer to myself in the narrative below as the manager, it is important to
remember that I function as manager with the assistance of securities
professionals who are involved in the portfolio management and the research of
individual securities.
Third Avenue is a BUY AND HOLD investor. The businesses in which Third Avenue
invests, whether as a creditor or equity participant, are characterized by
staying power. Fluctuations in market prices for securities tend to be ignored.
General market, as distinct from fundamental, factors are always ignored. One
reason is that the "market" tends to emphasize different things than Third
Avenue does. For example, most analysts in research departments appear to be
interested in current earnings and short-term earnings forecasts. Third Avenue
is interested in LONG-TERM BASIC EARNING POWER. Another reason is that Third
Avenue's investments tend to grow out of intensive research. If we do not
believe that we know much more than the "market" about a particular investment,
we ought not to be in that investment.
BUY DISCIPLINE
Our investment philosophy encompasses two disciplines -- one used in acquiring
and holding common stocks, and one used in acquiring and holding credit
instruments.
In acquiring common stocks, Third Avenue focuses on four characteristics:
1) The issuer has to have a strong financial position, measured not only by
balance sheet data but also by the relative absence of off balance sheet
liabilities and contingencies, whether or not disclosed in footnotes to
financial statements.
2) The issuer should be run by reasonable control groups and managements, as
gauged by managerial competence as operators and investors, as well as by an
apparent absence of intent to profit at the expense of stockholders.
3) The business has to be one we understand, which generally means that the
numbers reported (which are usually in accordance with Generally Accepted
Accounting Principles) have to be reliable as objective benchmarks to aid in
understanding the business, its values and its dynamics.
4) The price Third Avenue pays for a common stock ought to be no more than
one-half of what we believe the issuer is worth as a private company or a
take-over candidate.
DISREGARD FOR THE MARKET
Third Avenue's analyses concentrate strictly on "what is" in terms of
understanding a company and its securities. In contrast, most other analysts
give considerable weight to attempting to fathom "what the market thinks," best
described by John Maynard Keynes as gauging "the average opinion of the average
opinion." There is an economic reality to these "average opinion" searches from
a company point of view, since, if a company needs periodic access to capital
markets, whether credit markets or equity markets, then what the market thinks
has a lot to do with whether or not a company and its security holders will
prosper. In the Third Avenue case, though, a need for access to capital markets
for the companies whose common stocks are in the Portfolio is most often
non-existent. The companies in which Third Avenue has common stock investments
are all well financed. This leaves us free to concentrate on "what is."
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Third Avenue pays no attention to macro factors such as stock market levels,
general interest rates, and business cycles -- the various top-down factors on
which most analysts concentrate. We, like almost all others, are not very good
at predicting macro factors. Furthermore, such factors historically have not
been of overriding importance to dedicated investors, or to business people
concentrating on a bottom-up approach. It's difficult to spend a lot of time
learning the "nitty gritty" facts about an issuer and its securities; on the
other hand, it's easy to have opinions about things like the outlook for the
overall economy.
RISK AND REWARD
Third Avenue views risk and reward quite differently than is conventional. The
common view is that there is an elementary trade-off: you have to take risks to
obtain rewards. In the Third Avenue view, there is no such trade-off, but
rather, THE CHEAPER YOU BUY, THE GREATER THE REWARD AND THE CHEAPER YOU BUY, THE
LESS THE RISK. In conventional thinking, there are two components of the measure
of degrees of speculation: quality of the issuer and terms of the issue. Third
Avenue emphasizes a third consideration: price of the issue. Conventional wisdom
assumes that securities prices at any moment of time are in equilibrium, i.e.,
the price is right. THIRD AVENUE'S UNDERLYING ASSUMPTION IS THAT THE STOCK
MARKET PRICE IS WRONG.
It is a mistake to talk about general risk. Rather, the focus should be on
specific risks -- market risk, investment risk, interest rate risk, currency
risk, etc. Third Avenue tends to take huge market risks in that no attention is
paid to predicting near-term market prices. Indeed, I know from long experience
when acquiring securities that no matter how low I think a price can go, it can,
and usually does, go a lot lower. In contrast, Third Avenue goes to great
lengths to try to AVOID INVESTMENT RISK, i.e., even using worst case scenarios,
the underlying values attributable to the securities in which Third Avenue
invests ought to be greater than Third Avenue's cost basis after allowing for a
considerable dissipation of future values as events unfold.
I shall write to you again when the semi-annual report for the period to end
June 30, 2000 is published.
Sincerely yours,
/s/ Martin J. Whitman
- ---------------------
Martin J. Whitman
Chairman of the Board
EQSF Advisers, Inc.
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THIRD AVENUE VARIABLE SERIES TRUST
THIRD AVENUE VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS - 82.45%
Annuities & Mutual Fund 8,000 Liberty Financial Companies, Inc. $ 183,500 4.20%
-----------
Management & Sales
Bermuda Based Financial 10,000 LaSalle Re Holdings, Ltd. 165,000 3.78%
-----------
Institutions
Business Development 1,700 Capital Southwest Corp. 101,787 2.33%
-----------
Companies
Financial Insurance 13,000 Enhance Financial Services Group, Inc. 211,250
5,000 Financial Security Assurance Holdings, Ltd. 260,625
4,000 MBIA Inc. 211,250
-----------
683,125 15.64%
Industrial Equipment 12,500 Alamo Group, Inc. 125,000
1,200 Gleason Corp. 27,900
-----------
152,900 3.50%
-----------
Insurance Holding Companies 6,000 Leucadia National Corp. 138,750
6,500 Risk Capital Holdings, Inc. (a) 82,062
-----------
220,812 5.06%
Medical Supplies & Services 4,000 Analogic Corp. (b) 132,000 3.02%
Natural Resources & 14,000 Catellus Development Corp. (a) 179,375
Real Estate 6,000 Deltic Timber Corp. 131,250
3,600 Forest City Enterprises, Inc. Class A 100,800
5,000 Koger Equity, Inc. 84,375
7,000 LNR Property Corp. 139,125
15,000 Wellsford Real Properties, Inc. (a) 127,500
-----------
762,425 17.46%
-----------
Pharmaceutical Services 11,000 PAREXEL International Corp. (a) 129,938
15,000 Pharmaceutical Product Development, Inc. (a) 178,125
-----------
308,063 7.06%
Semiconductor Equipment 9,000 FSI International, Inc. (a) 103,500 2.37%
Manufacturers and Related
Technology 16,300 ACT Networks, Inc. (a) 151,794
19,000 Evans & Sutherland Computer Corp. (a) 217,313
5,000 Vertex Communications Corp. (a) 102,500
-----------
471,607 10.80%
-----------
Title Insurance 12,000 First American Financial Corp. Class A 149,250
12,500 Stewart Information Services Corp. 166,406
-----------
315,656 7.23%
-----------
TOTAL COMMON STOCKS
(Cost $3,342,769) 3,600,375
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE VARIABLE SERIES TRUST
THIRD AVENUE VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS - 11.88%
U.S. Treasury Bills 400,000 U.S. Treasury Bill 5.10%+, 3/30/00 $ 395,017 9.04%
-----------
Repurchase Agreement - 123,975 Bear Stearns 5.23%, due date 1/3/00 (c) 123,975 2.84%
Collateral on Securities -----------
Loaned
TOTAL SHORT TERM INVESTMENTS
(Cost $518,992) 518,992
-----------
TOTAL INVESTMENT PORTFOLIO - 94.33%
(Cost $3,861,761) 4,119,367
-----------
OTHER ASSETS
LESS LIABILITIES - 5.67% 247,677
-----------
NET ASSETS - 100.00%
(Applicable to 402,689
shares outstanding) $4,367,044
-----------
</TABLE>
Notes:
(a) Non-income producing security.
(b) Security in whole or in part on loan.
(c) Repurchase agreement collateralized by:
U.S. Treasury Strips, par value $180,000, matures 2/15/05,market value
$129,206.
+ Annualized yield at date of purchase.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE VARIABLE SERIES TRUST
THIRD AVENUE VALUE PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
AT DECEMBER 31, 1999
ASSETS:
Investments at value (identified cost of $3,861,761)(Notes 1 and 4) $4,119,367
Cash 511,492
Receivable for fund shares sold 42,908
Receivable from investment adviser 46,586
Dividends and interest receivable 7,946
----------
Total assets 4,728,299
----------
Liabilities:
Payable for securities purchased 190,410
Payable for shares redeemed 866
Accounts payable and accrued expenses 46,004
Collateral due on loaned securities (Note 1) 123,975
----------
Total liabilities 361,255
----------
Net assets $4,367,044
==========
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par value,
402,689 shares outstanding $4,096,210
Accumulated undistributed net investment income 13,228
Net unrealized appreciation of investments 257,606
----------
Net assets applicable to capital shares outstanding $4,367,044
==========
Net asset value, offering and redemption price per share $ 10.84
==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE VARIABLE SERIES TRUST
THIRD AVENUE VALUE PORTFOLIO
STATEMENT OF OPERATIONS
AT DECEMBER 31, 1999
INVESTMENT INCOME:
Interest $ 9,613
Dividends 9,359
---------
Total Investment Income 18,972
---------
EXPENSES:
Investment advisory fees (Note 3) 4,011
Organizational expenses 91,367
Auditing and tax consulting fees 17,000
Directors' fees and expenses 11,355
Administration fees (Note 3) 8,800
Accounting services 6,875
Transfer agent fees 6,600
Custodian fees 3,922
Miscellaneous expenses 2,130
---------
Total operating expenses 152,060
---------
Expenses waived and reimbursed (Note 3) (146,316)
---------
Net expenses 5,744
---------
Net investment income 13,228
---------
UNREALIZED GAINS ON INVESTMENTS:
Net unrealized appreciation on investments 257,606
---------
Net unrealized gains on investments 257,606
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 270,834
=========
*The Fund commenced investment operations on September 21, 1999.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE VARIABLE SERIES TRUST
THIRD AVENUE VALUE PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
For the
Period Ended
December 31, 1999*
------------------
OPERATIONS:
Net investment income $ 13,228
Net unrealized appreciation on investments 257,606
----------
Net increase in net assets resulting from operations 270,834
----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 4,149,770
Cost of shares redeemed (53,660)
----------
Net increase in net assets resulting from capital
share transactions 4,096,110
----------
Net increase in net assets 4,366,944
Net assets at beginning of period 100
----------
Net assets at end of period
(including undistributed net investment income of $13,228) $4,367,044
==========
*The Fund commenced investment operations on September 21, 1999.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE VARIABLE SERIES TRUST
THIRD AVENUE VALUE PORTFOLIO
FINANCIAL HIGHLIGHTS
SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) AND RATIOS ARE AS
FOLLOWS:
For the
Period Ended
December 31, 1999*
------------------
Net Asset Value, Beginning of Period $10.00
-------
Income from Investment Operations:
Net investment income .03
Net unrealized gain on investments .81
-------
Total from Investment Operations .84
-------
Net Asset Value, End of Period $10.84
=======
Total Return 8.40%1
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $4,367
Ratio of Expenses to Average Net Assets
Before expense reimbursement 34.43%2
After expense reimbursement 1.30%2
Ratio of Net Income (Loss) to Average Net Assets
Before expense reimbursement (30.14%)2
After expense reimbursement 2.99%2
Portfolio Turnover Rate 0%1
1 Not Annualized
2 Annualized--Note that annualized expenses and net income (loss) before
expense reimbursement are not necessarily indicative of expected expenses due
to the annualization of certain fixed expenses.
* The Fund commenced investment operations on September 21, 1999.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE VARIABLE SERIES TRUST
THIRD AVENUE VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
AT DECEMBER 31, 1999
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
Third Avenue Variable Series Trust (the "Trust") is an open-end, non-diversified
management investment company organized as a Delaware business trust pursuant to
a Trust Instrument dated June 16, 1999. The Trust currently consists of one
investment series, Third Avenue Value Portfolio (the "Portfolio"). The Portfolio
seeks to achieve its investment objective of long-term capital appreciation by
adhering to a strict value discipline when selecting securities. The Portfolio
seeks to achieve its objective mainly by acquiring common stocks of
well-financed companies (meaning companies without significant debt in
comparison to their cash resources) at a substantial discount to what the
Adviser believes is their true value.
The shares of the Portfolio may be purchased only by the separate accounts of
insurance companies for the purpose of funding variable life insurance policies
and variable annuity contracts. At December 31, 1999, the Trust was offered by
one insurance company and accordingly a decision by such insurance company to
withdraw its participation may have a negative impact on the Trust.
ACCOUNTING POLICIES:
The policies described below are followed consistently by the Portfolio in the
preparation of its financial statements in conformity with accounting principles
generally accepted in the United States of America.
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
SECURITY VALUATION:
Securities traded on a principal stock exchange or the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ") are valued at the last
quoted sales price or, in the absence of closing sales prices on that day,
securities are valued at the mean between the closing bid and asked price.
Temporary cash investments are valued at cost, plus accrued interest, which
approximates market. Short-term securities with 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 the Portfolio on the 60th day prior to maturity, based on the value
determined on that day.
The Portfolio may invest up to 15% of its total assets in securities which are
not readily marketable, including those which are restricted as to disposition
under applicable securities laws ("restricted securities"). Restricted
securities and other securities and assets for which market quotations are not
readily available are valued at "fair value", as determined in good faith by the
Board of Trustees, although actual evaluations may be made by personnel acting
under procedures established by the Board of Trustees.
SECURITY TRANSACTIONS AND INVESTMENT INCOME:
Security transactions are accounted for on a trade date basis. Dividend income
is recorded on the ex-dividend date and interest income, including, where
applicable, amortization of premium and accretion of discount on investments, is
accrued daily, except when collection is not expected. Realized gains and losses
from securities transactions are reported on an identified cost basis.
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THIRD AVENUE VARIABLE SERIES TRUST
THIRD AVENUE VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AT DECEMBER 31, 1999
LOANS OF PORTFOLIO SECURITIES:
The Portfolio loaned securities during the period to certain brokers, with the
Portfolio's custodian acting as lending agent. Upon such loans, the Portfolio
receives collateral, which is maintained by the custodian and earns income in
the form of negotiated lenders' fees, which is included in interest income in
the Statement of Operations. On a daily basis, it is the Portfolio's policy to
monitor the market value of securities loaned and maintain collateral against
the securities loaned in an amount not less than the value of the securities
loaned. The Portfolio may receive collateral in the form of cash or other
eligible securities. Risks may arise upon entering into securities lending to
the extent that the value of the collateral is less than the value of the
securities loaned due to changes in the value of collateral or the loaned
securities.
During the period ended December 31, 1999, the Portfolio had securities lending
income included in interest income totaling $10.
The value of the loaned security and related collateral outstanding at December
31, 1999, was as follows:
VALUE OF VALUE OF
SECURITY LOANED COLLATERAL
--------------- ----------
$120,417 $123,975
The collateral for the Portfolio consisted of cash, which was invested in
repurchase agreements with Bear Stearns due 1/3/00, collateralized by U.S.
Treasury securities.
REPURCHASE AGREEMENTS:
Securities pledged as collateral for repurchase agreements are held by the
Portfolio's custodian bank until maturity of the repurchase agreement.
Provisions in the agreements state that the market value of the collateral will
be at least equal to the repurchase value in the event of default. In the event
of default, the Portfolio has the right to liquidate the collateral and apply
the proceeds in satisfaction of the obligation. Under certain circumstances, in
the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings.
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.
FEDERAL INCOME TAXES:
The Portfolio intends to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies. Therefore, no Federal income
tax provision is required.
TRUSTEES FEES:
The Trust does not pay any fees to its officers for their services as such, but
does pay Trustees who are not affiliated with the Investment Adviser a fee of
$1,500 for each meeting of the Board of Trustees that they attend, in addition
to
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THIRD AVENUE VARIABLE SERIES TRUST
THIRD AVENUE VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AT DECEMBER 31, 1999
reimbursing all Trustees for travel and incidental expenses incurred by them in
connection with their attendance at Board meetings. The Trust also pays
non-interested Trustees an annual stipend of $2,000 in January of each year for
the previous year's service.
2. SECURITIES TRANSACTIONS
PURCHASES AND SALES:
The cost of purchases of investments, excluding short-term investments, was
$3,342,769. There were no sales during the period ended December 31, 1999.
At December 31, 1999, cost, gross unrealized appreciation and gross unrealized
depreciation, for Federal income tax purposes were as follows:
NET APPRECIATION/
COST GROSS APPRECIATION GROSS DEPRECIATION (DEPRECIATION)
---------- ----------------- ------------------ ----------------
$3,861,761 $274,312 $16,706 $257,606
3. INVESTMENT ADVISORY AND administration SERVICES
The Trust 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 Portfolio,
payable each month.
Under current arrangements, whenever, in any fiscal year, the Portfolio's normal
operating expenses, including the investment advisory fee, but excluding broker
commissions, exceeds 1.30% of the Portfolio's average net assets, the Adviser is
obligated to reimburse the Portfolio in an amount equal to that excess. The
Adviser waived fees of $4,011, and reimbursed $142,305 for the period ended
December 31, 1999.
The Trust has entered into an Administration Agreement with the Adviser under
which the Adviser provides all administrative services to the Trust other than
providing investment advice, distribution and maintenance of the Portfolio's
accounting records. The Adviser has entered into a sub-administration agreement
with PFPC Inc. For such services, the Portfolio pays the Adviser an annual fee
of $32,000 of which a portion is paid to PFPC Inc.
4. RELATED PARTY TRANSACTIONS
BROKERAGE COMMISSIONS:
Martin J. Whitman, the Chairman and a director of the Trust, and the majority
shareholder of the Adviser, is the Chairman and Chief Executive Officer of M.J.
Whitman Holding Corp., which is the parent of both M.J. Whitman, Inc., a
registered broker-dealer and M.J. Whitman Senior Debt Corp., a dealer in the
trading of bank debt and other private claims. For the period ended December 31,
1999, the Portfolio incurred total brokerage commissions, which includes
commissions earned by M.J. Whitman, Inc. as follows:
TOTAL COMMISSIONS M.J. WHITMAN, INC.
----------------- ------------------
$11,404 $9,062
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THIRD AVENUE VARIABLE SERIES TRUST
THIRD AVENUE VALUE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AT DECEMBER 31, 1999
5. CAPITAL SHARE TRANSACTIONS
The Portfolio is authorized to issue an unlimited number of shares of beneficial
interest with no par value.
Transactions in capital stock were as follows:
FOR THE
PERIOD ENDED
DECEMBER 31, 1999
-----------------
Increase in Portfolio shares:
Shares outstanding at beginning of period 10
Shares sold 408,116
Shares redeemed (5,437)
-------
Net increase in Portfolio shares 402,679
-------
Shares outstanding at end of period 402,689
=======
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REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF
THIRD AVENUE VARIABLE SERIES TRUST-THIRD AVENUE VALUE PORTFOLIO
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio 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 Variable Series Trust
- - Third Avenue Value Portfolio (hereafter referred to as the "Portfolio") at
December 31, 1999, and the results of its operations, the changes in its net
assets and the financial highlights for the period September 21, 1999
(commencement of operations) through December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Portfolio's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with auditing standards generally accepted in the United States, 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 audit, which included confirmation
of securities at December 31, 1999 by correspondence with the custodian and
brokers, provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 14, 2000
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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
Ian M. Kirschner, General Counsel and Secretary
TRANSFER AGENT
PFPC Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406-0903
(610) 239-4600
(800) 443-1021 (toll-free)
INVESTMENT ADVISER
EQSF Advisers, Inc.
767 Third Avenue
New York, NY 10017-2023
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, N.Y. 10036
CUSTODIAN
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540-6231
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THIRD AVENUE FUNDS
767 THIRD AVENUE
NEW YORK, NY 10017-2023
PHONE (212)888-5222
TOLL FREE (800)443-1021
WWW.THIRDAVENUEFUNDS.COM
