June 14, 1996
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549-1004
Re: Third Avenue Value Fund, Inc.
File No. 811-6086
Dear Ladies and Gentlemen:
On behalf of Third Avenue Value Fund, Inc. (the "Fund"), an open-end investment
company registered under the Investment Company Act of 1940 (the "Act"), and
pursuant to Fule 30b2-1 of the Act, enclosed herewith and filed electronically
via EDGAR, is a copy of the Fund's Semi-Annual Report dated April 30, 1996 and
mailed to shareholders on May 31, 1996.
Sincerely,
/s/ Jill Kopin
Jill Kopin
Fund Administrator
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Semi-Annual Report
(unaudited)
April 30, 1996
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Dear Fellow Shareholders:
At April 30, 1996, the unaudited net asset value attributable to the 19,841,246
common shares outstanding of the Third Avenue Value Fund, Inc. ("TAVF", or the
"Fund") was $23.14 per share. This compares with an unaudited net asset value of
$22.05 per share at January 31, 1996, and an unaudited net asset value of $18.26
per share, as adjusted for subsequent distributions, at April 30, 1995.
At May 21, 1996, the unaudited net asset value was $23.55 per share.
QUARTERLY ACTIVITY
During the second quarter of fiscal 1996, the Fund established new positions in
11 issues, increased its holdings of 15 issues, eliminated holdings of 7 issues,
reduced its positions in 2 issues, and, after consultation with TAVF's auditors,
reclassified 1 issue:
Investment Amount
or
Number of Shares New Positions Acquired
$10,403,584 Combined Investors, LLC
("Grossman's Units")
87,000 shares AFC Cable Systems, Inc. Common Stock
("AFC Common")
50,000 shares Electro Scientific Industries, Inc.
Common Stock ("ESI Common")
100,000 shares FSI International, Inc. Common Stock
("FSI Common")
$500,000 Head Insurance Investors LP ("Head LP")
180,100 shares J & J Snack Foods Corp. Common Stock
("J& J Common")
150,000 shares Kleinert's, Inc. Common Stock
("Kleinert's Common")
143,000 shares Mountbatten, Inc. Common Stock
("Mountbatten Common")
100,000 shares Novell, Inc. Common Stock
("Novell Common")
50,000 shares Tecumseh Products Co. Common Stock
("Tecumseh Common")
25,000 shares Veeco Instruments, Inc. Common Stock
("Veeco Common")
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Number of Shares Increases in Existing Positions
20,500 shares American Physicians Service Group,
Inc. Common Stock ("APSG Common")
34,000 shares Carver Federal Savings Bank Common
Stock ("Carver Common")
50,000 shares Datascope Corp. Common Stock
("Datascope Common")
295,000 shares Electroglas, Inc. Common Stock
("Electroglas Common")
44,500 shares Emerging Markets Infrastructure Fund,
Inc. Common Stock ("EMIF Common")
10,000 shares Evans & Sutherland Computer
Corp. Common Stock ("Evans &
Sutherland Common")
100,000 shares Financial Security Assurance Holdings Ltd.
Common Stock ("FSA Common")
100,000 shares The First American Financial Corp.
Common Stock ("FAF Common")
9,000 shares Gish Biomedical, Inc. ("Gish Common")
5,400 shares Legg Mason Inc. Common Stock
("Legg Mason Common")
12,200 shares Sbarro, Inc. Common Stock ("Sbarro Common")
85,300 shares Sequoia Systems, Inc. Common Stock
("Sequoia Common")
59,600 shares Stewart Information Services Corp.
Common Stock ("Stewart Common")
18,200 shares United Coasts Corp. Common Stock
("United Coasts Common")
61,600 shares Vertex Communications Corp. Common Stock
("Vertex Common")
Number of Shares Positions Eliminated
95,000 shares Apple Computer, Inc. Common Stock
("Apple Common")
189,100 shares Charming Shoppes, Inc. Common Stock
("Charming Common")
100,000 shares Handex Environmental Recovery, Inc.
("Handex Common")
130,000 shares Meadowbrook Rehabilitation Group, Inc.
Common Stock ("Meadowbrook Common")
105,000 shares Mellon Participating Mortgage Trust Co.
Common Stock ("MPMT Common")
50,000 shares Metricom, Inc. Common Stock
("Metricom Common")
100,000 shares UTILX Corp. Common Stock ("UTILX Common")
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Positions Reduced
42,897 shares Cray Research, Inc. Common Stock
("Cray Common")
51,700 shares Perini Corp. Common Stock
("Perini Common")
Principal
Amount Reclassification
$25,000,000 from Kmart Trade Claims due 1/22/97
("Kmart Trade Claims")
$21,750,000 to Heller Financial, Inc.
Medium Term Note due 1/22/97
An aggregate total of $31 million of Grossman's Units were purchased for cash at
their principal amount by four investors, including TAVF, in order to provide
financing for Grossman's Inc. which is liquidating its lumber yards and home
improvement business located in the Northeast. About 87% of the moneys invested
in the Grossman's Units by TAVF consist of notes secured by first mortgages on
55 owned Grossman's properties scheduled to be liquidated over the next two
years. If the liquidation goes forward as per forecasts, the effective yield to
maturity for TAVF should be slightly in excess of 20%. The remaining 13% of the
Fund's investment is in zero-coupon mortgage debt convertible into Grossman's
Common at 75 cents per share (vs. a current market of about 1 1/2 bid).
Grossman's as a going concern continues with two operating businesses:
Contractors' Warehouse operating 15 lumber yard-building materials facilities in
California, Nevada, Ohio and Indiana; and Mr. 2nd's Bargain Outlet Stores,
operating close-out retail stores in 24 locations in Massachusetts, upstate New
York and Rhode Island. TAVF has agreed to sell a portion of its position to
another investor, Goldman Sachs, so that the net investment by the Fund will be
approximately $7.8 million rather than the $10.4 million shown here.
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During the second fiscal quarter, the common stocks of companies which
produce equipment for semi-conductor manufacturers fell into what appears to be
extreme disfavor, apparently because growth in demand for personal computers may
be slowing. Many of these equipment manufacturers are extremely well financed
and many also appear to be reasonably well situated from a long-term point of
view. The Fund acquired interests in a number of these equipment manufacturers
during the quarter: ESI Common, FSI Common, Electroglas Common and Veeco Common.
Other common stocks of extremely well-financed high-tech companies which seemed
to be available at attractive prices were also acquired. These issues
encompassed AFC Common, Novell Common, APSG Common, Datascope Common, Evans and
Sutherland Common, Gish Common, Sequoia Common and Vertex Common.
I am a great admirer of Warren Buffett, not so much for his financial
acumen as for his uncanny ability to judge people well, especially management
people. Judging managements is the toughest thing we do at TAVF and I'm not so
sure we do it that well. However, during the quarter, the Fund made two
"Buffett" type investments where the driving force behind the investment was my
being very high on management rather than on the issuer's financial strength.
The first of such investments was in Kleinert's Common which is run by Jack
Brier whom I've known for over 30 years. The second investment was a $5 million
commitment in Head LP, of which $500,000 was funded during the quarter. John
Head is one of the outstanding successes in the insurance industry.
There is not a much better compound engine for growth than equity
investments in insurance companies, provided the companies selected combine
increasing premiums and consistent underwriting profits with prudent investment
practices. An underlying problem is that most non-life insurance companies do
not enjoy underwriting profits. For those that do, though, positive compounding
is created by the combination of cash throw-offs from increasing premium
revenues, from underwriting profits and from net investment income. During the
quarter we not only committed to Head LP, but also acquired new positions, or
added to old positions, in Mountbatten Common, a start-up surety underwriter,
FSA Common, FAF Common, Stewart Common and United Coasts Common. Other
acquisitions during the quarter were issues of well-financed, conservatively
managed companies: J & J Common, Tecumseh Common, Carver Common, Legg Mason
Common and Sbarro Common.
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The Fund disposed of a number of securities during the quarter where it
became obvious that the issuers no longer enjoyed strong financial positions.
Even though some of the securities might be "cheap", they no longer appeared to
be "safe." Such sales were made in Apple Common, Charming Common, Handex Common,
Meadowbrook Common, UTILX Common and Perini Common. In each instance, other than
Charming Common, the Fund realized a capital loss for both tax and book
purposes. Metricom Common was sold because of a lack of corporate profitability,
even though the issuer remains very strongly capitalized.
Cray Common was sold pursuant to a cash tender offer which was the first
step of a two-step transaction which will result in the acquisition of Cray
Research by Silicon Graphics. MPMT Common was also sold pursuant to a cash
tender offer.
The economics of the Heller Note are that if Kmart Corp. is to file, or be
filed, in Chapter 11 on, or before, January 22, 1997, Heller can satisfy its
obligation to TAVF, at Heller's option, by either satisfying in cash, the
$21,750,000 obligation, or by delivering to the Fund $25,000,000 of Kmart Trade
Claims. I had been of the view that since the nature of the transaction was that
TAVF essentially was taking a Kmart credit risk, rather than a Heller credit
risk (Heller is probably AAA), the position is more accurately described as a
Kmart obligation. Other authorities demurred. The important thing in reporting
to you, though, is not how the position is carried on TAVF's books, but rather
that its economic meaning be explained to you.
In past letters, I've contrasted the TAVF approach with that of academic
finance. In this letter I thought it might be useful for TAVF shareholders if I
compared the TAVF approach with that followed by those involved with more
traditional fundamental analysis.
Graham & Dodd Revisited
(Copyright 1996 by Martin J. Whitman)
The Graham & Dodd book, "Security Analysis", is widely recognized as the
bible of fundamental analysis. The funny thing about the book, though, is that
very few people seem to ever have actually read it.
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Graham & Dodd (G&D) in their approach have a number of things in common
with the TAVF approach. Both focus on long-term fundamentals and reject all
chartist-technical approaches whether promulgated by practitioners or academics
involved with efficient markets and efficient portfolios. Both G&D and TAVF have
long-term investment strategies but pretty much ignore trading strategies (The
newest edition of G&D however has a chapter on speculating on short-run changes
in interest rates and the TAVF approach in this area has been used by TAVF in
its sometimes forays into risk arbitrage). Both G&D and TAVF reject heavy
emphasis on short-run operating results in analyzing companies, and when it
comes to financial accounting both believe that what the numbers mean tends to
be far more important than what the numbers are reported to be most of the time.
Yet, the TAVF fundamental analysis is, by and large, different than the G&D
fundamental analysis. G&D essentially is analyzing from the point of view of a
minority holder of marketable securities seeking high dividends and capital
appreciation. TAVF is essentially analyzing from the points of view of the
company itself, and/or senior creditors and control shareholders, present and
potential. There seem to be four basic areas of difference between G&D and TAVF:
1) The G&D objective is to estimate prices at which securities will sell in
markets populated by Outside Passive Minority Investors (OPMIs); while TAVF
focuses on what a business could be worth as a private entity or take-over
candidate. G&D attempts to guard against market risk. TAVF attempts to guard
against investment risk and ignores market risk rather completely.
2) The G&D credit analysis of debt instruments is involved solely with
estimating the probabilities of money defaults; while the TAVF credit analysis
of debt instruments focuses on estimating what values are likely to be realized
by a creditor in a reorganization or liquidation assuming that a money default
does occur.
3) G&D believe that macro factors, for example, "The economic forecast; An
earnings estimate for the Standard & Poor's 500 or other broad index; and Sector
and industry earnings forecasts" are crucial to the analysis of a corporate
security. TAVF believes such macro factors are irrelevant.
4) In common stock analysis G&D subscribes to a primacy of the income
account theory--analysis starts with an examination of the past earnings record,
and future returns to stockholders will be measured in part by future operating
performance and in part by having acquired a security at a price below "central
value", where "central value" is essentially a function of general stock market
statistics. For TAVF, there is a primacy of the quality and quantity of
resources existing in a business at the time of analysis, and future returns to
stockholders will be measured in part by any number of possible scenarios
including future operating performance, mergers and acquisitions, refinancings
on ultra-attractive terms, spin-offs, divestitures and going-privates; and in
part by having acquired a security at a price below a private business or
takeover value.
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MARKET RISK VS. INVESTMENT RISK
On Page 441 of the 1988 edition of G&D, there is this remarkable statement,
"Clearly, the bond contract is inherently unattractive. In exchange for limited
rights to share in future earning power, the bondholder obtains a prior claim on
cash generated by the borrower and a definite promise of repayment at a stated
date. Profitable growth will bring confidence to the investor but no material
increase in return. The deterioration of profitability, however, will bring both
anxiety and a downward market valuation of the issue." Why wouldn't a downward
deterioration in profitability bring even greater anxiety and even greater
downward market valuation to the holders of that company's common stock issue?
As a matter of fact, if the bond is adequately secured or otherwise well
covenanted, no money defaults might occur, and the bondholder would feel no
anxiety about his holding regardless of market price. The sophisticated
bondholder would probably conclude that he was incapable of predicting bond
prices in OPMI markets for lower-rated issues to begin with; TAVF would
certainly so conclude. G&D are probably right that there is a lot of OPMI market
risk in holding the bonds of debtors experiencing a downward deterioration in
profitability. However, TAVF finds that great investment opportunities are
created when market risk is ignored and investment risk is examined and guarded
against. Assuming good covenant protections, isn't the bond form inherently
attractive when purchases occur subsequent to a downward market valuation caused
by anxiety and a downward deterioration in profitability? Were TAVF unwilling to
ignore market risk it never would have acquired, among others, Forest City
Enterprises Common in 1991, Inverse Floaters in 1994 and Kmart Debentures in
1995. The investment analyses by TAVF were that Forest City Enterprises has
unlimited staying power and an ability to continue to create valuable real
estate; Forest City Enterprises Common might be a "home run" by 1997 or 1999 or
whenever the real estate depression ends; Inverse Floaters were priced so that a
reasonably attractive yield to maturity could be achieved on a reasonable "worst
case basis" through owning government agency guaranteed instruments; it seemed
likely that an above-average long-term return would be earned on Kmart
Debentures whether the instruments were performing loans or participating
creditors in a Kmart Chapter 11. I single out Forest City Enterprises, Inverse
Floaters and Kmart because at the time of purchase I thought each issue had huge
market risk. It would have been utterly unreasonable to conclude that these
issues were being acquired at prices that represented a bottom or even anything
close to a bottom because, in each case, the OPMI consensus, which could have
proved right, was that the near-term outlooks were horrible.
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CREDIT ANALYSIS
G&D state on page 242 of the 1988 edition, "Safety is measured by the issuer's
ability to meet all its obligations under adverse economic and financial
conditions, not by contractual terms of the specific issue." Also it is stated
on page 447, "-- if a company is credit worthy, the investor should buy the
higher yielding issue, which would be the junior or subordinated obligation."
There might be something to buying the junior issue if the analyst is in a
position to determine that a credit worthy company will continue to remain
credit worthy until after the bond owned matures. TAVF is just not that good
about predicting future corporate outlooks--not even close. Further, many
companies, if not most companies, issue junior debt and preferred obligations,
i.e., mezzanine securities, because of senior lender requirements that the
businesses have expanded borrowing bases. Put otherwise, if these companies were
so credit worthy to begin with they never would have issued mezzanine securities
in the first place. In any event, TAVF is covenant driven, the exact opposite of
G&D. About $14 million principal amount of Eljer Industries Secured Bank Debt
has been held in the TAVF portfolio for several years as a performing loan. A
principal subsidiary of Eljer, US Brass, is in Chapter 11 and it remains
theoretically possible that a huge amount of product liability claims will be
perfected against Eljer. If so, those claims should become unsecured
obligations, junior to Eljer Bank Debt. Overall coverage for Eljer obligations
could conceivably become quite weak; further, there might even be some market
risk in holding Eljer Bank Debt. However, I still have not figured out what the
credit risk in holding Eljer Bank Debt might be for TAVF.
MACRO FACTORS
G&D are very involved with macro factors. As is stated on page 9 of the 1988
edition,"--the profitability of all business enterprises and the market value of
their shares are to some degree affected by (or conditional on) external
factors--principally the economy and the stock market." On page 14 G&D state, "A
competent analyst should be sufficiently familiar with important price patterns
of the securities markets to draw intelligent conclusions about probable price
movements of different types of securities issues." And on page 52 there appears
the following statement, "Economic forecasts provide essential underpinning for
stock and bond market, industry, and company projections."
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TAVF believes that, at least for the U.S. Economy, spending a lot of time
on macro factors, whether for the overall economy or for securities markets,
e.g., the S&P 500, is not only a waste of time but also a refuge for articulate
incompetents who are untrained in any aspect of corporate analysis but can sound
intelligent by making predictions about things that are unpredictable. In terms
of the general business cycle relationship to the TAVF portfolio, it seems
obvious that it will affect directly, and be affected by, the demand for
automobiles and heavy duty trucks. As such, Ford Motor and Cummins Engine
earnings ought to be influenced by factors such as the Gross Domestic Product
(GDP) and the general level of interest rates on a year to year basis. However,
it is hard for me to figure out what the effect of such "big picture" items
ought to be on the rest of the portfolio, positive or negative-- credit
instruments with strong covenants; the common stocks of very well financed
companies engaged in funds management and insurance; depository institutions;
real estate companies; credit enhancers; high tech manufacturers; medical
suppliers; and food purveyors. Some of the issues owned by TAVF might be hurt by
"bad times"; some ought to be helped given that they tend to be a lot stronger
financially than their direct competitors. Suppose there is rampant inflation.
Some issuers owned by TAVF might be hurt because the cost to replace existing
assets as they depreciate might skyrocket; others might be helped because the
cost of entry into the industry will go up precluding new competition from
coming in; further, prices paid to acquire control of certain companies in the
TAVF portfolio might increase dramatically.
One reason, but far from the only reason, that TAVF ignores factoring into its
investment decisions any views about general economic outlooks, about stock
market outlooks, and about interest rate outlooks, is that we are no good at
making such predictions and we have never run into anybody who is. Furthermore,
we are buy and hold investors who are prepared to average down as long as the
company in which we have invested continues to appear to be solid. Continuing to
appear to be solid is a function of corporate analysis, not market prices. Since
we are likely to hold the securities of good companies over their business
cycles, and we know that we will rarely, if ever, buy at, or near, a low, why
should TAVF be hung up today on attempting to gauge for 1996 and 1997, the
levels of inflation, the GDP, the S&P 500 and interest rates?
From the TAVF point of view, securities bargains are created much more by
past corporate prosperity than by bear markets. Value is a dynamic concept ever
changing, and if TAVF is putting the right issues in its common stock portfolio,
ever increasing. For example, SunAmerica, Capital Southwest, Zygo, Raymond James
Financial, St. Jude Medical and MBIA Inc. are far more valuable properties today
because of their corporate achievements than they were when TAVF first acquired
their common stocks. Assume that each of those companies are to have very
disappointing operations in 1996 and 1997. Each would still remain far more
valuable than when TAVF acquired their common stocks--their ultra-high PE ratios
for 1996 and 1997 notwithstanding--provided, of course, that each continues to
enjoy exceptionally strong financial positions.
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TAVF invests on the basis that there has been a fundamental change in the
business cycle since the end of World War II. It is not that industries no
longer have depressions that are as bad as anything experienced in the 1930's;
but it is that such depressions seem to have little, or no, domino effect. There
have been a plethora of severe industry depressions in the last 20 years:
energy, automobiles, steel, aluminum, row crops, real estate, retail, savings
and loan, and commercial banks. These depressions tend to result in the creation
of attractive buy and hold opportunities for fundamental investors with a
long-term point of view regardless of the levels of the general market as
measured by popular indices.
Only infrequently over the years has general market performance been of
such overwhelming significance as to overshadow the performance of specific
corporations whose common stocks are held in the portfolios of fundamentalist
buy and hold investors who have staying power. Changes in general market levels
became of paramount importance, I suppose, in 1929, 1933, 1937, 1974 and maybe,
1962 and 1987. These occurrences are just not frequent enough so that
fundamentalists ought to worry much about them even assuming the fundamentalists
had useful tools for predicting the timing and severity of draconian bear
markets.
I've said in previous letters that TAVF ought to do okay for its
shareholders as long as the U.S., or wherever TAVF invests, enjoys political
stability and an absence of physical violence in the streets; and TAVF avoids
investing substantial funds into outright clinkers. None of these three things
seem to me to be "slam-dunks", especially the third one, avoiding clinkers. As
to avoiding material clinkers, it's been achieved over the first five years of
TAVF's existence. TAVF will continue to stick to its discipline but believe me,
there can't be any guarantees. Corporate futures are just too unpredictable.
In terms of meeting the needs of the TAVF shareholder constituency,
analyzing our securities as long-term buy and holds seems appropriate for those
of us, myself included, who have long-term objectives such as retirements,
college educations for children, meeting pension fund obligations, etc. If an
investor needs near-term performance, or a fund that will outperform an index or
peer group consistently, TAVF is not for him or her.
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MICRO FACTORS
The underlying G&D assumption is that a company ought to be viewed as a
stand-alone going concern that is going to continue to operate in the future in
the same industry as it has in the past. The rewards to the holders of common
stock will come from the sale in a public marketplace of the common shares of a
business which has increased its earning power and distributable income. Insofar
as the common stock was acquired at prices below a "central value," the greater
the profit to be realized. Against this stand-alone, going concern background,
it is thoroughly understandable that G&D adopt the position that the past
earnings record is the starting point for the analysis of an equity security. As
G&D state on page 533, "The concept of earning power has a definite and
important place in investment theory. It combines a history of actual earnings
performance over a period of years with a reasonable expectation that the past
level or trend will be approximated unless extraordinary conditions supervene.
This performance may be measured in terms of either 1) the earnings per share of
common stock or 2) the rate of return earned on the common stock equity." Also
the following statement appears on page 595, "In 1962 we stated, `The basic fact
is that except in certain limited parts of the common stock universe, asset
values are virtually ignored in the stock market.' Since then there has been a
modest shift toward greater use. The rash of mergers and acquisitions has
focused attention on asset values, particularly when a portion of the acquired
company may be sold off."
Further, the purpose of the G&D fundamental analys is is to make a judgment
about what future prices are likely to be in an OPMI trading market. At any
time, and for most issues, G&D have correctly observed that for the stand-alone
going concern, the market price of its common stock is likely to be influenced
much more by current earnings than by current book value. As is stated on page
597, "The asset factor is a primary consideration in valuing most privately
owned businesses. This procedure is not followed for publicly traded, marketable
common stocks." Thus the G&D emphasis on the primacy of the income account is
also understandable.
The TAVF approach turns G&D on its head. TAVF does not think of the
companies in which it invests as merely stand-alone going concerns. Given any
three to five year period, TAVF believes that for most companies whose common
stocks are in its portfolio, to use G&D language, "extraordinary conditions are
bound to supervene." These extraordinary conditions, or conversion events,
encompass mergers and acquisitions, hostile take-overs, massive refinancings,
divestitures, spin-offs, refinancings, accessing public or private markets at
ultra-attractive prices and going privates. I think the evidence is overwhelming
that few, if any, companies remain stand-alone going concerns for protracted
periods. This used to be true for electric utilities but such no longer appears
to be the case even in that industry. Against this background it is
understandable that TAVF would focus first on the quality and quantity of
resources in a business, a balance sheet approach, rather than on the earnings
record, an income account approach. G&D appraises managements as operators of
going concerns; TAVF appraises managements not only as operators of going
concerns, but also as investors engaged in employing and redeploying assets and
refinancing liabilities.
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Also, TAVF does not look to OPMI markets for bailouts from its common stock
investments. Rather, TAVF looks for premium prices out of future conversion
events such as mergers, spin-offs, divestitures, recapitalizations and share
repurchases, including Leveraged Buy Outs (LBOs) accomplished via cash tender
offers, exchange offers or merger transactions. If such conversion events are to
be a long-term norm, it seems logical again that the TAVF approach should
emphasize the quality and quantity of resources in a business rather than
earnings.
G&D does not ignore asset values. TAVF does not ignore earnings or the
earnings record. However, the relative weights assigned to earnings and assets
in an analysis tend to be quite different as between G&D and TAVF.
In practical terms, the micro factors G&D concentrate on in most security
analyses seem to encompass the following:
Earnings
Trend of earnings
Dividends
Industry identification
Return on equity
Comparative analysis vs. other industry participants.
In practical terms, the micro factors TAVF seems to concentrate on are similar
to the variables LBO promoters concentrate on:
Ability to finance
Long-term outlook
Exit Strategies
a) Future sale to OPMI market
b) Refinance
c) Get acquired.
TAVF is, of course, in a different position than an LBO buyer who can use
corporate assets to help finance his purchase of control. TAVF also gets no
control benefits from its passive investment. And TAVF cannot precipitate
changes in returns on corporate assets by causing them to be used smarter or
more aggressively. TAVF tries to compensate for this by buying much safer and
much cheaper than would be the case for an LBO. In virtually every case, the
common stocks of companies in which TAVF invests have extremely strong financial
positions and TAVF, at the time of purchase, tries to pay no more than 50% of
the price we think would be paid for the common stock were the company an LBO or
merger candidate.
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It ought to be noted too that many control buyers are at times a lot less
divorced from the G&D micro standards than is TAVF. Insofar as a control person
is looking at exit strategies that entail going public via an Initial Public
Offering (IPO), the G&D considerations tend to be a lot more important than the
TAVF considerations in both getting better pricing for the IPO, or getting the
IPO off at all.
Obviously I think the TAVF methodology has many advantages over the G&D
methodology. Two advantages come immediately to mind. First, it's a lot
less competitive; there are any number of smart analysts focused on earnings.
Not too many seem to care about balance sheets. Second, I'm convinced that those
of us who focus on the quality of resources existing in a business are a lot
less subject to truly unpleasant surprises than are those whose primary emphases
are elsewhere.
A FINAL WORD
We receive many inquiries about who in the way of a successor to me is being
groomed at TAVF, although I have no intention of quitting. In any event, rest
assured that the Fund employs two terrific, young analysts, Juliet Wensley and
Curtis Jensen, who seem to embrace the TAVF investment discipline--both on the
credit and equity side--even more religiously than I do.
The Fund has approximately 23,000 beneficial shareholders as far as we can
tell. Yet the print run for these quarterly letters is now over 60,000, and
demand is growing. I'm amazed!
I will write you again when we publish the report for the quarter to end
July 31, 1996.
Sincerely yours,
Martin J. Whitman
Chairman of the Board
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Third Avenue Value Fund, Inc.
Portfolio of Investments
at April 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
% of
Principal Value Net
Amount($) Issues (Note 1) Assets
- --------------------------------------------------------------------------------
Bank Debt--3.37%
<S> <C> <C> <C>
Oil 1,889,887 Cimarron Petroleum Corp.(c)(d) 1,909,112 0.41%
----------
Plumbing 13,993,025 Eljer Industries, Inc. (c)(e) 13,573,235 2.96%
Fixtures ----------
Total Bank Debt(Cost $14,694,941) 15,482,347
----------
- --------------------------------------------------------------------------------
Bonds--5.70%
Membership Sports & 2,891,000 USTrails Inc., Secured Notes 12%, 2,081,520 0.45%
Recreation Clubs 07/15/98 ----------
Real Estate 958,997 Olympia & York Maiden Lane Finance Corp.,
Secured Notes 10.375%, 12/31/95* 465,114 0.10%
----------
Retail 3,350,000 Kmart Corp., 8.61%, 4/10/97 3,199,250
800,000 Kmart Corp., 8.56%, 4/21/97 764,000
850,000 Kmart Corp., 8.54%, 5/08/97 811,750
1,400,000 Kmart Corp., 9.55%, 6/30/98 1,337,000
8,000,000 Kmart Corp., 7.77%, 7/02/02 7,200,000
1,000,000 Kmart Corp., 8.13%, 12/01/06 840,000
3,000,000 Kmart Corp., 8.38%, 7/01/22 2,227,500
9,400,000 Kmart Corp., 7.95%, 2/01/23 7,238,000
----------
23,617,500 5.15%
----------
Total Bonds (Cost $22,479,446) 26,164,134
----------
- ------------------------------------------------------------------------------------------------------------------------------------
Government Agency Bonds--2.62%
2,058,631 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1993-129 S, Inverse Floater
4.94526% due 8/25/08 (g) 1,158,515
2,889,650 Federal Home Loan Mortgage Corp.
Collateralized Mortgage Obligation,
Series 1635 K, Inverse Floater
5.78234% due 12/15/08 (g) 1,571,825
6,600,000 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1993-229 SB, Inverse Floater
5.13555% due 12/25/08 (g) 3,461,304
The accompanying notes are an integral part of the financial statements.
14
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Third Avenue Value Fund, Inc.
Portfolio of Investments (continued)
at April 30, 1996
(Unaudited)
Principal Value % of
Amount($) Issues (Note 1) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Government Agency Bonds (continued)
300,000 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1993-221 SG, Inverse Floater
3.35051% due 12/25/08 (g) $ 156,030
3,000,000 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1994-13 SM, Inverse Floater
7.49084% due 2/25/09 (g) 1,720,170
2,683,270 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1994-13 SK, Inverse Floater
6.84527% due 2/25/09 (g) 1,795,483
5,000,000 Federal Home Loan Mortgage Corp.
Collateralized Mortgage Obligation,
Series 1518 G, Inverse Floater
3.74% due 5/15/23 (g) 2,180,150
----------
Total Government Agency Bonds
(Cost $11,282,541) 12,043,477 2.62%
----------
- ------------------------------------------------------------------------------------------------------------------------------------
Structured Notes--4.74%
Finance Companies 21,750,000 Heller Financial, Inc.-Medium Term
Note, 1/22/97 (c) (f) (h) 21,750,000 4.74%
----------
Total Structured Notes
(Cost $21,108,489) 21,750,000
----------
Shares
or Units
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stocks and
Limited Partnership Units--56.64%
Annuities & Mutual Fund 150,000 SunAmerica Inc. 8,175,000 1.78%
Management & Sales ---------
Apparel Manufacturers 150,000 Kleinert's, Inc. (b) 2,512,500 0.55%
---------
Building Products & 44,000 Central Sprinkler Corp. (b) 1,204,500
Related 125,000 Cummins Engine Co., Inc. 5,843,750
50,000 H.B. Fuller Co. 1,637,500
33,200 Tecumseh Products Co. Class A 1,875,800
16,800 Tecumseh Products Co. Class B 890,400
---------
11,451,950 2.50%
----------
The accompanying notes are an integral part of the financial statements.
15
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Third Avenue Value Fund, Inc.
Portfolio of Investments (continued)
at April 30, 1996
(Unaudited
Principal Value % of
Amount($) Issues (Note 1) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stocks and Limited Partnership Units (continued
Business Development 43,200 Capital Southwest Corp. $ 2,721,600 0.59%
Companies ----------
Cogeneration Services & 176,900 Destec Energy, Inc. (b 2,078,575 0.45%
Small Power Producers ----------
Computer & Software 12,103 Cray Research, Inc. (b) 357,038
195,000 Digital Equipment Corp. (b) 11,651,250
100,000 Novell, Inc. (b) 1,450,000
----------
13,458,288 2.93%
----------
Contract Construction 115,200 Perini Corp. (b) 1,022,400 0.22%
----------
Depository Institutions 26,500 Astoria Financial Corp. 1,411,125
114,000 Carver Federal Savings Bank (b) 983,250
62,500 First Colorado Bancorp, Inc. 757,812
149,227 Glendale Federal Bank 2,611,472
53,480 Glendale Federal Bank Warrants (b 434,526
10,000 Letchworth Independent Bancshares Corp. 300,000
10,000 Letchworth Independent Bancshares Corp.
Warrants (b) 86,250
34,783 People's Heritage Financial Group, Inc. 726,095
80,000 Security Capital Corp. (b) 4,660,000
----------
11,970,530 2.61%
----------
Financial Insurance 100,000 AMBAC Inc. 4,862,500
244,100 Enhance Financial Services Corp. 6,621,212
612,800 Financial Security Assurance
Holdings Ltd. 16,545,600
120,000 MBIA Inc. 8,565,000
----------
36,594,312 7.97%
----------
Food Manufacturers 180,100 J & J Snack Foods Corp. (b) 2,206,225
& Purveyors 72,200 Sbarro, Inc. 1,895,250
100,000 Weis Markets, Inc. 2,962,500
----------
7,063,975 1.54%
----------
The accompanying notes are an integral part of the financial statements.
16
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Third Avenue Value Fund, Inc.
Portfolio of Investments (continued)
at April 30, 1996
(Unaudited)
Shares Value % of
or Units Issues (Note 1) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Forest Products 54,400 St. Joe Paper Co. $ 3,440,800 0.75%
----------
Holding Companies 50,000 Aristotle Corp. (b) 146,875
21,400 White River Corp. (b) 834,600
----------
981,475 0.21%
----------
Insurance Holding 100,000 ACMAT Corp. Class A (b) 1,237,500
Companies 803,669 Danielson Holding Corp. (a) (b) (c) 6,630,269
50,000 Fund American Enterprises
Holdings, Inc. (b) 3,825,000
5,490 Sen-Tech Int'l Holdings, Inc. (c) 1,749,718
138,200 United Coasts Corp. (b) 1,079,688
----------
14,522,175 3.16%
----------
Life Insurance 138,000 ReliaStar Financial Corp. 6,020,250
107,600 Security-Connecticut Corp. 2,824,500
----------
8,844,750 1.93%
----------
Manufactured Housing 89,000 Liberty Homes, Inc. Class A 1,045,750
40,000 Liberty Homes, Inc. Class B 485,000
8,640 Palm Harbor Homes, Inc. (b) 239,760
----------
1,770,510 0.39%
----------
Medical Supplies 81,400 Acuson Corp. (b) 1,546,600
& Services 237,300 Datascope Corp. (b) 4,182,412
288,438 Progressions Health Systems,Inc.(a) (b) 90,858
90,750 St. Jude Medical, Inc. (b) 3,312,375
----------
9,132,245 1.99%
----------
Membership Sports & 107,172 USTrails, Inc. (b) 63,633 0.01%
Recreation Clubs ----------
Mortgage Insurance 76,400 CMAC Investment Corp. 4,278,400 0.93%
----------
Motor Vehicles & 50,000 Ford Motor Co. 1,793,750 0.39%
Cars' Bodies ----------
The accompanying notes are an integral part of the financial statements.
17
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Third Avenue Value Fund, Inc.
Portfolio of Investments (continued)
at April 30, 1996
(Unaudited)
Shares Value % of
or Units Issues (Note 1) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stocks and Limited Partnership Units (continued)
Real Estate 31,000 Consolidated-Tomoka Land Co. $ 558,000
117,600 Forest City Enterprises, Inc. Class A 4,439,400
2,500 Forest City Enterprises, Inc. Class B 95,625
10,000 Royal Palm Beach Colony,
Partnership Units (b) 7,500
----------
5,100,525 1.11%
----------
Real Estate 480,336 Koger Equity, Inc. (b) 5,523,864
Investment Trusts 5,100 Public Storage Properties XV, Inc. 93,075
16,300 Public Storage Properties XVI, Inc. 279,137
5,200 Public Storage Properties XVII, Inc. 89,050
15,000 Public Storage Properties XVIII, Inc. 258,750
----------
6,243,876 1.36%
----------
Reinsurance Companies 85,917 LaSalle Re Holdings Limited (c) 1,696,861 0.37%
----------
Security Brokers,
Dealers & Flotation 118,100 Alex. Brown Inc. 6,392,162
Companies 111,800 Jefferies Group, Inc. 3,591,575
222,600 Legg Mason Inc. 6,399,750
362,100 Piper Jaffray Companies Inc. (a) 4,933,612
525,000 Raymond James Financial, Inc. 11,878,125
161,941 Ryan, Beck & Co., Inc. (a) (c) 1,153,830
----------
34,349,054 7.48%
----------
Title Insurance 369,600 Stewart Information Services Corp.(a) 7,345,800
615,000 First American Financial Corp. (a) 16,912,500
----------
24,258,300 5.29%
----------
Venture Capital 87,000 AFC Cable Systems, Inc. (b) 1,370,250
61,500 American Physicians Service
Group, Inc. (b) 599,625
100,000 Analogic Corp. 2,050,000
50,000 Electro Scientific
Industries, Inc. (b) 1,200,000
320,000 Electroglas, Inc. 6,240,000
63,700 Emerging Markets Infrastructure
Fund, Inc. 668,850
125,000 Evans & Sutherland Computer Corp. (b) 3,375,000
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
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Third Avenue Value Fund, Inc.
Portfolio of Investments (continued)
at April 30, 1996
(Unaudited)
Shares Value % of
or Units Issues (Note 1) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stocks and Limited Partnership Units (continued)
Venture Capital 100,000 FSI International, Inc. $ 1,462,500
(continued) 109,000 Gish Biomedical, Inc. (a) (b) 803,875
80,000 H & Q Life Sciences Investors (b) 1,270,000
154,800 Integrated Systems, Inc. (b) 4,527,900
300,000 Interphase Corp. (a) (b) 4,687,500
143,000 Mountbatten, Inc. (a) (b) 844,587
190,000 NetFRAME Systems Inc. (b) 938,125
269,600 PharmChem Laboratories, Inc. (b) 909,900
150,000 Photronics, Inc. (b) 3,956,250
200,000 Sequoia Systems, Inc. (b) 725,000
100,000 Telco Systems, Inc. (b) 1,200,000
122,500 Tricord Systems, Inc. (b) 581,875
25,000 Veeco Instruments, Inc. (b) 437,500
108,600 Vertex Communications Corp. (b) 1,791,900
131,250 Zygo Corp. (b) 6,857,813
----------
46,498,450 10.13%
----------
Total Common Stocks and
Limited Partnership Units 260,023,934
----------
(Cost $178,102,481)
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock--0.21%
Depository Institutions 20,000 Glendale Federal Bank Convertible,
Non-Cumulative, 8 3/4%, Series E 940,000 0.21%
----------
Total Preferred Stock (Cost $500,000) 940,000
----------
Investment
Amount ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Other Investments--2.38%
Insurance Holding 500,000 Head Insurance Investors LP (c) 500,000 0.11%
Companies ----------
Real Estate 10,403,584 Combined Investors, LLC (c) 10,403,584 2.27%
----------
Total Other Investments
(Cost $10,903,584) 10,903,584
----------
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
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Third Avenue Value Fund, Inc.
Portfolio of Investments (continued)
at April 30, 1996
(Unaudited)
Principal Value % of
Amount($) Issues (Note 1) Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bills--23.37%
18,000,000 U.S. Treasury Bill 4.97%, 5/2/96 $ 17,997,515
23,500,000 U.S. Treasury Bill 4.84%, 5/9/96 23,474,724
26,500,000 U.S. Treasury Bill 4.82%, 5/16/96 26,446,779
4,517,000 U.S. Treasury Bill 4.86%, 5/23/96 4,503,585
1,506,000 U.S. Treasury Bill 4.85%, 5/23/96 1,501,536
33,500,000 U.S. Treasury Bill 4.91%, 5/30/96 33,367,498
----------
Total U.S. Treasury Bills 17,291,637 23.37%
(Cost $107,291,637) ----------
Total Investment Portfolio--99.03% 454,599,113
(Cost $366,363,119) ----------
Cash and Other Assets
Less Liabilities--0.97% 4,470,536
----------
NET ASSETS--100.00% $459,069,649
(Applicable to 19,841,246 shares ==========
outstanding)
NET ASSET VALUE PER SHARE $23.14
=====
</TABLE>
Notes
(a) Affiliated issuers-as defined under the Investment Company Act of 1940
(ownership of 5% or more of the outstanding common stock of these issuers.)
(b) Non-income producing securities.
(c) Restricted/fair valued securities.
(d) Interest accrued at current rate of prime + 2%.
(e) Interest accrued at current rate of prime + 4.5%.
(f) Interest accrued at current rate of LIBOR 1 month + 0.1%.
(g) Inverse floaters-coupon rate moves inversely to a designated index, such as
LIBOR or COFI, typically at a multiple of the changes of the relevant index
rate.
(h) Structured note--may be repaid in the form of $25,000,000 Kmart Corp. trade
claims in the event that Kmart Corp. files or is filed under Chapter 7 or 11
of the Bankruptcy Code prior to January 22, 1997.
* Issuer in default.
The accompanying notes are an integral part of the financial statements.
20
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Third Avenue Value Fund, Inc.
Statement of Assets and Liabilities
April 30, 1996
(Unaudited)
Assets:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $332,310,885) $411,196,282
Affiliated issuers (identified cost of $34,052,234) 43,402,831
----------
Total investments (identified cost of $366,363,119) 454,599,113
Cash and cash equivalents (Note 1) 5,127,267
Receivable for fund shares sold 2,374,928
Dividends and interest receivable 1,201,901
Receivable for securities sold 459,262
Other assets 32,702
----------
Total assets 463,795,173
----------
Liabilities:
Payable for securities purchased 1,928,819
Deferred fees (Note 1) 1,621,805
Payable for fund shares redeemed 581,179
Payable to investment adviser 343,261
Accounts payable and accrued expenses 228,900
Payable to affiliates (Note 3) 21,560
Commitments (Note 6)
----------
Total liabilities 4,725,524
----------
Net assets $459,069,649
==========
Summary of net assets:
Common stock, $ 0.001 par value, authorized 200,000,000 shares,
outstanding 19,841,246 shares $ 19,841
Additional paid in capital 364,835,099
Accumulated undistributed net investment income 3,303,256
Accumulated undistributed net realized gains from
investment transactions 2,675,459
Net unrealized appreciation of investments 88,235,994
----------
Net assets applicable to outstanding capital shares $459,069,649
==========
Net asset value, offering and redemption price per share $23.14
=====
The accompanying notes are an integral part of the financial statements.
21
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Third Avenue Value Fund, Inc.
Statement of Operations
For the Six Months Ended April 30, 1996
(Unaudited)
Investment income:
Interest-unaffiliated issuers $ 5,334,727
Dividends-unaffiliated issuers 1,300,194
Dividends-affiliated issuers 287,209
Other income 295,487
---------
Total investment income 7,217,617
Expenses:
Investment advisory fees (Note 3) 1,664,633
Administration (Note 3) 161,293
Transfer agent fees 150,038
Reports to shareholders 109,053
Registration and filing fees 64,281
Accounting services 42,313
Directors' fees and expenses 39,313
Miscellaneous expenses 36,355
Custodian fees (Note 4) 35,508
Auditing and tax consulting fees 28,448
Legal fees 26,452
Insurance expenses 20,114
Service fees (Note 4) 4,172
---------
Total operating expenses 2,381,973
---------
Net investment income 4,835,644
---------
Realized and unrealized gains on investments:
Net realized gains on investments-affiliated issuers 3,347,021
Net realized gains on investments-unaffiliated issuers 1,267,211
Net change in unrealized appreciation on investments 26,978,688
---------
Net realized and unrealized gains on investments 31,592,920
---------
Net increase in net assets resulting from operations $36,428,564
=========
The accompanying notes are an integral part of the financial statements.
22
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Third Avenue Value Fund, Inc.
Statement of Changes in Net Assets
For the
Six Months For the
Ended Year
April 30, 1996 Ended
(Unaudited) October 31, 1995
------------- -------------
Operations:
Net investment income $ 4,835,644 $ 5,315,994
Net realized gains (losses) on investments--
affiliated issuers 3,347,021 (1,838,180)
Net realized gains on investments--
unaffiliated issuers 1,267,211 3,953,960
Net change in unrealized appreciation
on investments 26,978,688 41,324,327
---------- ----------
Net increase in net assets resulting
from operations 36,428,564 48,756,101
---------- ----------
Distributions:
Dividends to shareholders from net investment
income (6,118,869) (2,643,291 )
Distributions to shareholders from net
realized gains on investments (2,245,595) (1,518,034)
---------- ----------
(8,364,464) (4,161,325)
---------- ----------
Capital share transactions:
Proceeds from sale of shares 144,794,329 112,183,260
Net asset value of shares issued in
reinvestment of dividends and distributions 7,089,926 3,493,053
Cost of shares redeemed (33,601,071) (34,741,140)
---------- ----------
Net increase in net assets resulting from
capital share transactions 118,283,184 80,935,173
---------- ----------
Net increase in net assets 146,347,284 125,529,949
Net assets at beginning of period 312,722,365 187,192,416
---------- ----------
Net assets at end of period
(including undistributed net investment income
of $3,303,256 and $4,586,481 respectively) $459,069,649 $312,722,365
========== ==========
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
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Third Avenue Value Fund, Inc.
Notes to Financial Statements
April 30, 1996
(Unaudited)
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization:
Third Avenue Value Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end, non-diversified
management investment company. Investment operations commenced on November 1,
1990.
Accounting policies:
The policies described below are followed consistently by the Fund in the
preparation of its financial statements in conformity with generally accepted
accounting principles.
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. Non-NASDAQ 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.
The Fund may invest up to 15% of its total assets in securities which are not
readily marketable, including those which are restricted as to disposition
under securities law ("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 Directors of the Fund, although actual evaluations may be made by
personnel acting under procedures established by the Board. Such securities
had a fair value of $59,366,609 or 12.93%
24
<PAGE>
[logo]
Notes to Financial Statements (continued)
of net assets, at April 30, 1996. Among the factors considered by the Board
of Directors in determining fair value are the type of security, the
financial condition of the issuer, the Fund's cost at the date of purchase,
the 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.
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.
Distributions to shareholders:
Dividends from net investment income to shareholders and distributions from
realized gains on sales of securities are recorded on the ex-dividend date.
Federal income taxes:
The Fund has complied and intends to continue to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies.
Therefore, no federal income tax provision is required.
Cash and cash equivalents:
The Fund has defined cash and cash equivalents as cash in interest bearing
and non-interest bearing accounts.
Deferred fees:
The Fund has received fees of $950,625 from Heller Financial, Inc. and
$966,667 from Combined Investors, LLC. These fees are being deferred and
recorded as income on a straight line basis over the life of the respective
instruments.
25
<PAGE>
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Notes to Financial Statements (continued)
2. SECURITIES TRANSACTIONS
Purchases and sales:
The aggregate cost of purchases from unaffiliated and affiliated issuers (as
defined in the Investment Company Act of 1940, ownership of 5% or more of the
outstanding common stock of the issuer) for the period ended April 30, 1996,
was $97,103,411 and $4,918,904 respectively. The aggregate proceeds from
sales and conversions of investments of unaffiliated and affiliated issuers
for the period ended April 30, 1996, was $22,073,650 and $13,646,851,
respectively.
3. INVESTMENT ADVISORY SERVICES AND DISTRIBUTION AGREEMENT
The Fund has an Investment Advisory Agreement with EQSF Advisers, Inc. (the
"Adviser") for investment advice and certain management functions. The terms
of the Investment Advisory Agreement provide for a monthly fee of 1/2 of .90%
(an annual fee rate of .90%) of the total average daily net assets of the
Fund, payable each month. Additionally, under the terms of the Investment
Advisory Agreement, the Adviser pays certain expenses on behalf of the Fund
which are reimbursable by the Fund, which include salaries of non-officer
employees, rent and other miscellaneous expenses. Amounts reimbursed with
respect to non-officer salaries and rent are included under the caption
Administration. At April 30, 1996, the Fund had a payable of $21,560 to
affiliates for reimbursement of expenses paid by affiliates.
Whenever, in any fiscal year, the total cost to the Fund of normal operating
expenses chargeable to its income account, including the investment advisory
fee and the amounts reimbursable to the Adviser for the administration of the
Fund, but excluding interest and taxes, exceeds 2 1/2% of the first
$30,000,000 of the average daily net assets of the Fund for the fiscal year,
plus 2% of the next $70,000,000, plus 1 1/2% of the remaining balance of the
average daily net assets of the Fund, the Adviser is obligated under the
Investment Advisory Agreement to reimburse the Fund in an amount equal to
that excess. No expense reimbursement was required for the period ended April
30, 1996.
26
<PAGE>
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Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS
Brokerage commissions:
Martin J. Whitman, the Chairman and a director of the Fund, 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 Sr. Debt Corp., a dealer in the trading of bank debt and other
private claims. For the period ended April 30, 1996, the Fund incurred total
brokerage commission of $297,991 of which approximately $220,446 was earned
by M.J. Whitman, Inc. and $70,250 was earned by M.J. Whitman Sr. Debt Corp.
Investment securities:
At April 30, 1996, the Fund owned 803,669 shares of Danielson Holding Corp.
("DHC"), representing 5.23% of its outstanding common stock. Martin J.
Whitman is the Chairman and a director of DHC.
At April 30, 1996, the Fund owned 288,438 shares of Progressions Health
Systems, Inc., representing 5.79% of its outstanding common stock.
At April 30, 1996, the Fund, along with a group of affiliated investment
vehicles, owned 1,498,380 shares of Piper Jaffray Companies Inc.,
representing 8.53% of its outstanding common stock.
At April 30, 1996, the Fund, along with an affiliated company, owned 209,999
shares of Ryan, Beck & Co., Inc., representing 6.45% of its outstanding
common stock.
At April 30, 1996 the Fund owned 369,600 shares of Stewart Information
Services Corp., representing 5.54% of its outstanding common stock.
27
<PAGE>
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Notes to Financial Statements (continued)
At April 30, 1996 the Fund owned 615,000 shares of The First American
Financial Corp., representing 5.37% of its outstanding common stock.
At April 30, 1996, the Fund along with an affiliated company, owned 213,450
shares of Gish Biomedical, Inc., representing 6.85% of its outstanding
common stock.
At April 30, 1996, the Fund owned 300,000 shares of Interphase Corp.,
representing 6.38% of its outstanding common stock.
At April 30, 1996, the Fund owned 143,000 shares of Mountbatten, Inc.,
representing 5.66% of its outstanding common stock.
Custodian:
Pursuant to a custody agreement, effective December 1, 1993, Danielson Trust
Company ("DTC"), a wholly owned subsidiary of DHC, became the custodian for
the Fund. For these services, DTC was paid fees of $35,508 for the period
ended April 30, 1996, of which $13,250 was payable to DTC at April 30, 1996.
Service fees:
The Fund entered into an administration agreement with Charles Schwab & Co.,
Inc. ("Schwab") on January 1, 1996. The terms of the Agreement provide for
the Fund to pay Schwab a monthly fee of 1/12 of .10% (an annual fee rate of
.10% ) of average daily net assets invested in the Fund by Schwab customers
after September 29, 1995. In exchange for this fee, Schwab renders to such
customers various administrative services, which the Fund would otherwise be
obligated to supply directly. For these services, Schwab was paid fees of
$4,172 for the period ended April 30, 1996.
28
<PAGE>
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Notes to Financial Statements (continued)
5. CAPITAL SHARE TRANSACTIONS
Transactions in capital stock were as follows:
For the
Six Months Ended For the
April 30, 1996 Year Ended
(Unaudited) October 31, 1995
------------- -------------
Increase in Fund shares:
Shares outstanding at beginning of period 14,524,055 10,396,658
Shares sold 6,502,596 5,699,436
Shares reinvested from dividends and
distributions 325,226 205,837
Shares redeemed (1,510,631) (1,777,876)
--------- ---------
Net increase in Fund shares 5,317,191 4,127,397
--------- ---------
Shares outstanding at end of period 19,841,246 14,524,055
========= =========
6. COMMITMENTS
The Fund has committed a $5,000,000 capital investment to Head Insurance
Investors L.P. of which $500,000 has been funded as of April 30, 1996.
29
<PAGE>
[logo]
Third Avenue Value Fund, Inc.
Financial Highlights
Selected data (for a share outstanding throughout each period) and ratios are as
follows:
<TABLE>
<CAPTION>
For the
Six Months
Ended Years Ended October 31,
April 30, 1996 ------------------------------
(Unaudited) 1995 1994 1993 1992 1991
--------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $21.53 $18.01 $17.92 $13.57 $12.80 $10.00
----- ----- ----- ----- ----- -----
Income from Investment Operations:
Net investment income .26 .38 .29 .18 .19 .15
Net gain on securities
(both realized and unrealized) 1.91 3.53 .16 4.77 .64 4.65
----- ----- ----- ----- ----- -----
Total from Investment Operations 2.17 3.91 .45 4.95 .83 4.80
----- ----- ----- ----- ----- -----
Less Distributions:
Dividends from net investment
income (.41) (.25) (.22) (.24) (.02) (.15)
Distributions from realized gains (.15) (.14) (.14) (.36) (.04) (1.85)
----- ----- ----- ----- ----- -----
Total Distributions (.56) (.39) (.36) (.60) (.06) (2.00)
----- ----- ----- ----- ----- -----
Net Asset Value, End of Period $23.14 $21.53 $18.01 $17.92 $13.57 $12.80
===== ===== ===== ===== ===== =====
Total Return (not including
sales load) 10.21% 22.31% 2.56% 37.36% 6.50% 49.16%
Ratios/Supplemental Data:
Net Assets, End of Period
(in thousands) $459,070 $312,722 $187,192 $118,958 $31,387 $17,641
Ratio of Expenses to
Average Net Assets 1.29%* 1.25% 1.16% 1.42% 2.32% 2.50%
Ratio of Net Income to
Average Net Assets 2.62%* 2.24% 1.85% 1.45% 1.71% 1.71%
Portfolio Turnover Rate 12% 15% 5% 17% 31% 67%
Average Commission Rate Paid .02
* Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
Board of Directors
Phyllis W. Beck
Tibor Fabian
Gerald Hellerman
Marvin Moser
Donald Rappaport
Myron M. Sheinfeld
Martin Shubik
Martin J. Whitman
Officers
Martin J. Whitman
Chairman, Chief Executive Officer, President
Michael Carney
Chief Financial Officer, Treasurer
Allison Cutler, Assistant Treasurer
Jill Kopin, Secretary
Transfer Agent
Fund/Plan Services, Inc.
P.O. Box 874
Conshohocken, PA 19428-0874
(610) 834-3500
(800) 443-1021 (toll-free)
Custodian
Danielson Trust Co.
525 B Street
San Diego, CA 92101-4492
Investment Adviser
EQSF Advisers, Inc.
767 Third Avenue
New York, NY 10017-2023
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
[GRAPHIC]
767 Third Avenue
New York, NY 10017
Phone (212) 888-6685
Toll Free (800) 443-1021
