THIRD AVENUE VALUE FUND
ANNUAL REPORT
October 31, 1996
<PAGE>
Board of Directors
Phyllis W. Beck
Tibor Fabian
Gerald Hellerman
Marvin Moser
Donald Rappaport
Myron M. Sheinfeld
Martin Shubik
Charles Walden
Martin J. Whitman
Officers
Martin J. Whitman
Chairman, Chief Executive Officer, President
David Barse
Chief Operating Officer, Executive Vice President
Michael Carney
Chief Financial Officer, Treasurer
Kerri Weltz
Assistant Treasurer
Stuart Merzer
Secretary
Transfer Agent
FPS Services, Inc.
P.O. Box 61503
King of Prussia, PA 19406-0903
(610) 239-4500
(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
767 Third Avenue
New York, NY 10017-2023
Phone (212) 888-6685
Toll Free (800) 443-1021
Fax (212) 888-6757
www.mjwhitman.com
<PAGE>
Dear Fellow Shareholders:
At October 31, 1996, the audited net asset value attributable to the 23,364,688
common shares outstanding of the Third Avenue Value Fund, Inc. ("TAVF" or the
"Fund") was $24.26 per share. This compares with an unaudited net asset value of
$22.53 per share at July 31, 1996, and a net asset value of $20.97 at October
31, 1995, as adjusted for subsequent distributions. At December 10, 1996, the
unaudited net asset value was $26.29 per share.
QUARTERLY ACTIVITY
During the fourth quarter of fiscal 1996, the Fund established new postions
in 7 issues, increased its holdings of 12 issues, eliminated holdings of 3
issues, and received pay-downs of principal on 2 holdings of secured
indebtedness.
<TABLE>
<S> <C>
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
$4,530,821 The Money Store Home Equity Trust due
1/15/07 (Asset Backed Security Rated AAA)
$7,615,000 The Money Store Home Equity Trust due
1/15/16 (Asset Backed Security Rated AAA)
$2,635,100 Olympic Automobile Receivables Trust due 6/15/02 (Asset Backed Security Rated AAA)
200,000 shares Applied Materials, Inc. Common Stock
("Applied Materials Common")
50,000 shares Fischer Imaging Corp. Common Stock ("Fischer Common")
200,000 shares KLA Instruments Corp. Common
Stock ("KLA Common")
169,200 shares Tencor Instruments Common Stock
("Tencor Common")
INCREASES IN EXISTING POSITIONS
89,978 shares ACMAT Corp. Class A Common Stock ("ACMAT Common")
16,000 shares American Physicians Service Group, Inc.
Common Stock ("APSG Common")
60,000 shares Carver Bancorp, Inc. Common
Stock ("Carver Common")
66,000 shares Electro Scientific Industries, Inc. Common
Stock ("ESIO Common")
425,000 shares Electroglas, Inc. Common Stock
("Electroglas Common")
361,100 shares FSI International, Inc. Common Stock
("FSI Common")
$2,636,000 Head Insurance Investors L.P.
("Head Investors")
72,000 shares Liberty Financial Companies, Inc.
Common Stock ("Liberty Common")
200,000 shares Silicon Valley Group, Inc. Common
Stock ("SVGI Common")
13,900 shares Tecumseh Products Co. Class B
Common Stock ("Tecumseh Common")
88,700 shares Veeco Instruments, Inc. Common Stock
("Veeco Common")
142,700 shares Vertex Communications Corp. Common
Stock ("Vertex Common")
<PAGE>
POSITIONS ELIMINATED
190,000 shares NetFRAME Systems Inc. Common Stock
("NetFRAME Common")
122,500 shares Tricord Systems, Inc. Common Stock
("Tricord Common")
138,200 shares United Coasts Corp. Common Stock
("United Coasts Common Stock")
POSITIONS REDUCED
$1,300,613 Combined Investors, L.L.C.
("Combined Notes")
$ 441,844 Eljer Industries, Inc. Bank Debt
("Eljer Bank Debt")
</TABLE>
For most of fiscal 1996, the Fund had approximately 30% of its net assets
invested in credit instruments which had little or no credit risk, i.e., cash
equivalents consisting mostly of treasury bills, as well as U.S. government
agency guaranteed inverse floaters which had been acquired in late 1994 as a
means of locking in an above-average yield to maturity. These investments serve
two purposes: first, to provide a cash reserve, and second, to lock in
reasonably good yields to maturity, say between 5% and 10%. While these
instruments carry no credit risk, they do carry interest rate risk, market risk
and, above all, opportunity cost risk, in that equity investing might have
proved to be a more rewarding alternative. In holding these issues, TAVF incurs
little risk that there will be a permanent impairment of capital. The Fund,
however, is very much at risk in that, at any time, any of these holdings with a
maturity of over one year could have an unrealized market loss. Just as with all
its other investments, TAVF is rather completely concentrated on the avoidance
of permanent impairment of capital. We worry hardly at all about unrealized
market losses.
The Asset Backed Securities Rated AAA provide the Fund with a yield to maturity
of about 6.3%, or some 120 basis points more than the treasury bills these
instruments replaced. The Asset Backed Securities Rated AAA achieved AAA ratings
because they are unconditionally guaranteed by either MBIA Inc. or Financial
Security Assurance Holdings Ltd., two companies whose common stocks are held in
the Fund's portfolio. Having a AAA rating created out of financial insurance
rather than by the characteristics of the security itself is known as a
synthetic AAA, to distinguish such debt obligations from natural AAAs.
Generally, better yields are obtainable from acquiring synthetic AAAs than from
acquiring natural AAAs. In my opinion, though, synthetic AAAs are better quality
instruments than natural AAAs, albeit any AAA seems to be without credit risk.
Outside of investments in the common stocks of exceptionally well-financed
semiconductor equipment manufacturers - Applied Materials, KLA, Tencor, ESIO,
Electroglas, FSI, SVGI and Veeco - the Fund was relatively inactive during the
fourth quarter of fiscal 1996. United Coasts was merged into a subsidiary of its
parent, ACMAT. As a consequence of the merger, TAVF exchanged its holdings of
United Coasts Common for additional shares of ACMAT Common. Positions in APSG
Common, Carver Common, Liberty Common, Tecumseh Common, and Vertex Common were
increased through open market purchases. Fischer Imaging Corp. seems to be a
promising medical devices company, albeit it faces tough competition. Fischer
Common seemed to have been selling at an unusually depressed price at the time
TAVF purchased shares.
Insofar as it is feasible, the Fund is managed on a basis designed to minimize
income tax burdens on shareholders. During the fourth quarter, long-term capital
losses were realized by the sales of NetFRAME Common and Tricord Common, two
companies whose operating performances have been disappointing and whose
financial positions are now less strong than they were when the Fund acquired
its initial positions. As a result of these tax planning measures, net realized
capital gains for 1996 ought to amount to less than 15 cents per TAVF share.
During the fourth quarter, the Fund aggressively expanded its holdings of the
common stocks of semiconductor equipment manufacturers. TAVF now holds 11
different issues, each of which represents an interest in a company which is
extremely well-financed. Based on cost, TAVF has invested over $54 million in
these issues, equal to almost 10% of net assets at October 31, with net assets
valued at market. Most of these common stocks were selling at less than 10 times
earnings for the 12 months ended June 30, 1996, and at less than a 50% premium
over tangible book value. In terms of operations, the eleven cover some aspect
of each phase involved in the manufacture of the simplest to the most complex
semiconductors. At October 31, these common stocks, valued at market, accounted
for about 11% of the Fund's net asset value. But there has since been a raging
bull market in these issues (which I never predicted and which took me by
surprise); at November 29, these issues had a market value of $79.5 million and
accounted for almost 13% of Fund assets.
The highly cyclical semiconductor equipment industry is entering a down cycle
which might last anywhere from two quarters to three years, or maybe even
longer. However, the underlying growth trends for the industry, say, over the
next three to ten years, seem to be spectacular. Not only is a "digital
revolution" underway which ought to result in an exploding demand for
semiconductors, but also technological innovations ought to make it necessary
for chip manufacturers to reequip existing factories even if they do not build
new ones.
The semiconductor equipment industry in the 1990s reminds me a lot of the
automotive equipment suppliers and machine tool manufacturers in the 1940s and
1950s, when the well-capitalized and well-entrenched companies faced an outlook
where very high long-term growth was likely to be tempered by periodic cyclical
downturns. The common stocks of auto suppliers then sold in stock markets at the
same modest price:earnings ratios versus peak earnings as existed at October 31
for semiconductor supplier common stocks.
TAVF has focused on the equipment industry rather than chip manufacturing,
itself, as the vehicle of choice to participate in the "digital revolution". For
this there are two reasons. First, the common stocks of semiconductor equipment
manufacturers seem much more modestly priced based on relevant financial
statistics. Second, the mortality rate for individual companies in the overall
semiconductor industry might be large, especially since technological
innovations are bound to continue to be rapid, expensive, and require loads of
managerial and engineering-scientific talent. And here, I suspect that the
mortality rate is likely to be higher among chip manufacturers than among
equipment suppliers. Having said this, I know unfortunately that not all 11
common stocks in the Fund's portfolio will turn out to be winners. TAVF is bound
to find itself with a few NetFRAMEs and Tricords within this industry group.
Yet, I think most of the issues held by the Fund ought to do okay, a few ought
to be huge winners, and, overall, the odds favor having very good long-term
results from TAVF's portfolio of semiconductor equipment supplier common stocks.
There is also a good argument to be made that growing semiconductor equipment
manufacturers very much understate earnings compared with ordinary manufacturers
involved in capital intensive industries, such as the aforementioned automobile
suppliers. As compared to expenditures for Research, Development and Engineering
(RDE), semiconductor equipment manufacturers have quite modest capital
expenditures for Property, Plant and Equipment (PPE). PPE expenditures are
capitalized for accounting purposes and then depreciated via charges against
periodic earnings over the estimated useful life of these fixed assets. On the
other hand, RDE expenditures for semiconductor equipment manufacturers are all
expensed by contemporaneous charges to the income account; none of which are
capitalized, at least among the companies whose common stocks TAVF acquired in
1996. From a non-accounting, economic point of view, it seems to me that RDE
expenditures by entrenched, growing semiconductor manufacturers are quite
similar to capital expenditures for other manufacturers, e.g., auto suppliers,
steel producers or aluminum fabricators. The purpose of both types of
expenditures are to give a company resources it can use to create future cash
flows or earnings.
It is probably coincidence, but it seems as if TAVF, at least once a year, makes
concentrated investments in a depressed area. This year, the group consists of
semiconductor equipment common stocks. In 1995, it was Kmart debt instruments;
in 1994, it was Inverse Floaters; and in 1993, it was financial insurance
company common stocks. So far, so good, but there certainly are no guarantees.
The TAVF analysis of semiconductor equipment companies at the end of October did
not differ materially from how the group appears to have been analyzed by the
research departments of various broker/dealers, including Alex. Brown and Lehman
Brothers. We all seemed to agree that the issues are safe and cheap based on
high quality present financial positions and excellent long-term outlooks. We
agreed also that the industry is entering a depressed period of indeterminate
length. None of these research departments, though, were recommending the common
stocks TAVF was buying. The differences seemed to revolve around what factors
each believes ought to be weighted as important. The Fund, for example, is
focused on strong financial positions, a factor all but ignored by research
departments. The research departments are focused on the immediate earnings
outlook, a factor all but ignored by the Fund insofar as we continue to think
the issuers will remain enough in the black so that they do not dissipate strong
financial positions during the downturn.
The essential difference between TAVF and the research departments was that the
Fund was trying to do good enough on a long-term basis; the Fund has undertaken
no stock market, as distinct from corporate, analysis; and the Fund was not
trying to buy these common stocks at, or near, bottom prices. TAVF had no idea
of where the stock market bottom might have been for these common stock issues.
In contrast, each brokerage firm was deeply concerned with near-term downside
risk as measured solely by the prices at which they thought these semiconductor
equipment common stocks might sell. Purely and simply, they seemed most unlikely
to recommend the purchase of semiconductor equipment common stocks, regardless
of price, until they saw evidence of an industry turn-around. This reminds me
much of the Kmart experience last year where, notwithstanding the obvious money
making potential in Kmart obligations either as performing loans or as
participants in a Chapter 11 reorganization, institutions were loathe to buy
because if Kmart filed for Chapter 11 relief, it was believed that the bonds
would be available at materially lower prices. This type of security analysis,
where one tries to estimate what market prices will be in the short-run rather
than trying to determine underlying corporate values, seems to me to be
emphasizing the hole rather than the doughnut. TAVF intends to stay focused on
the doughnut.
For shareholders seeking long-term appreciation with some margin of safety, the
TAVF approach seems more appropriate, especially for those saving for retirement
or a young child's education. Long-term holdings of semiconductor equipment
common stocks, acquired at late 1996 prices, ought to be right up their alley.
On the other hand, for those striving to maximize near-term market performance
consistently, the broker/dealer approach seems to make sense.
CORPORATE VALUATION AND TAVF
Unlike the broker/dealer research departments discussed above, as well as
virtually all financial literature published by academics and the Graham & Dodd
school of fundamental analysis, TAVF, in its analysis, tends to give short
shrift to immediate outlooks for stock prices, and completely ignores stock
market, as distinct from corporate, factors in making investment decisions. The
stock market factors ignored encompass all technical-chartist considerations
(indeed any study of historic securities prices): accounting earnings, dividend
policy, short run outlooks, and macro factors such as stock market indexes,
Gross Domestic Product, Unemployment, Housing Starts, Book to Bill ratios, etc.
The Fund is not alone in the way it analyzes. As a matter of fact, TAVF seems to
look at situations the way the most successful control investors, e.g., Warren
Buffett, Ted Forstmann, Carl Icahn, Ron Perelman and Richard Rainwater, do.
These people are not burdened with the excess baggage of trying to forecast, but
not influence, future market prices. A minority of other mutual funds, with a
fundamentalist buy and hold strategy, also seem to be much like TAVF, including
Gabelli, Lindner Fund, Mutual Shares and Tweedy Browne. Perhaps we long-term
fundamentalists concentrating on underlying corporate values are really the
mainstream, although we seem to be only a tiny minority among mutual funds.
To those of us who concentrate on corporate value, stock market prices do not
determine business value. Rather, such prices are something activists take
advantage of to create values for themselves. Not only is corporate value
different from market price, but it ought to be because the emphasis tends to be
on different factors, and insofar as the same factors are considered, they are
weighted quite differently. As a matter of fact, for activists, the differences
between market prices and underlying corporate values gives rise to what is
probably the most significant long-term arbitrage extant in the financial
community. Sometimes, market prices for common stocks are ultra-high compared
with corporate values. At other times, market prices for common stocks are low
to ultra-low compared with the corporate values existing for reasonably
well-financed (or financeable) companies.
When common stock prices are ultra high compared to corporate values, common
stocks are issued to the public in IPOs and in connection with mergers and
acquisitions. When common stock prices are low to ultra-low, companies go
private in Leveraged Buy-Outs (LBOs) or plain going-privates, or are acquired in
hostile take-overs and in mergers and acquisitions where the consideration paid
can range from cash to the acquiring company's common stock. The TAVF long-term
strategy, as a passive investor in common stocks, is to be a long-term
beneficiary of the arbitrage bound to exist when market prices for common stocks
are well below underlying business values. For example, if our analysis of the
semiconductor equipment industry is close to right, many issues ought to become
takeover candidates in the years ahead.
I've read a lot of literature purporting to describe the principles of corporate
value. Everything I've read seems to be either misleading or incomplete. Most
materials are misleading because they analyze the prices at which they believe a
common stock ought to sell in markets populated by Outside Passive Minority
Investors (OPMIs) rather than by reference to underlying values that might exist
within the corporation. All materials I've read seem incomplete, too, in that
each school is looking for the one "magic" factor that measures value. For
academics, that factor seems to be discounted cash flow. For Graham & Dodd, that
factor seems to be earning power. Part of the problem encountered by academics
and Graham & Dodd is that they seem to analyze almost any company as a strict
going concern which will remain in the same industry it always has been in,
conducting pretty much the same operations as it always has. Against that
background, it makes sense to state that values will be determined by future
flows from operations, whether those flows are in the form of free cash or
earning power.
The TAVF view, however, is that very few companies are strict going concerns.
Rather, besides creating value from day to day operations, they also will create
value by engaging in transactional activities such as mergers and acquisitions,
accessing capital markets, selling assets in bulk, refinancing and liquidating.
Merely examining flows omits too many important, non-flow, activities which
create value. For the Fund, there is no one "magic" factor that creates value.
Corporate value can be created in four ways, three of which are internal and one
of which is external:
Internal Value Creation
1) FREE CASH FLOW AVAILABLE FOR WEALTH CREATION BY EXPANDING ASSETS, MAKING
PAYMENTS TO CREDITORS, AND/OR DISTRIBUTING CASH TO SHAREHOLDERS. Very few
companies probably enjoy free cash flow from a going concern point of view.
While it is true that for any investment to make sense for a company, the cash
values created out of the investment have to exceed the cash costs of the
investment, including the cost of capital, this net cash generation tends not to
exist for the going concern. For example, almost any finance company that is
expanding its receivables portfolio will have cash negative operations and the
finance company will have to get operating cash from external sources. However,
any individual receivable in which the finance company has invested is likely to
create interest and fee income in excess of interest costs, bad loan charges,
operating expenses and income taxes.
The principal securities held by the Fund where the issuers benefit from having
free cash flows are those involved in money management, an area where there are
no needs to invest in receivables, inventory, fixed assets or intangible assets
and where overhead seems quite controllable, except maybe for marketing expense.
The common stocks of these companies, including companies managing life
insurance products, valued at market, account for close to 15% of Fund assets,
our largest single industry category.
or
2) EARNINGS WHICH ARE DEFINED AS FLOWS WHICH CREATE CORPORATE WEALTH WHILE
CONSUMING CASH. For the vast majority of going concerns in industrial economies,
and for all industrial economies in the aggregate, earnings seem to be far more
commonplace than are cash flows. Since earnings require the consumption of cash,
earnings in general cannot have any independent value unless combined with
access to capital markets. Most capital markets are creditor markets, but
frequently, ability to access capital markets depends on an ability to also
access equity markets in order to expand the capital base.
The majority of securities held in the TAVF portfolio are earnings-driven plays,
starting with the Kmart and Eljer Industries debt securities and going down
through the semiconductor equipment manufacturers. While the semiconductor
equipment manufacturers which prosper will probably not need to access capital
markets for some time to come, those which create wealth seem bound to consume
cash in the process, especially since expenditures for research and development
have to be so huge. Also, many semiconductor equipment manufacturers are
probably going to want to finance acquisitions.
and/or
3) AS AN ALTERNATIVE, OR SUPPLEMENT, TO THE TWO FLOWS, CORPORATE VALUE EXISTS
INSOFAR AS CORPORATIONS OWN, OR CONTROL, SEPARABLE AND SALABLE ASSETS (OR
LIABILITIES WHOSE PRESENT VALUE IS MUCH BELOW BOOK CARRYING VALUE) WHICH CAN BE
DISPOSED OF, OR USED AS A SOURCE OF OUTSIDE FINANCING, WITHOUT INTERFERING WITH,
OR UNECONOMICALLY DIMINISHING, FREE CASH FLOW OR EARNINGS.
TAVF dedicates a large portion of its equity portfolio to companies owning
separable and salable assets and where the Fund could acquire its positions at
discount prices compared with perceived workout values. Such common stocks held
by the Fund include the entire portfolio of real estate equities, the common
stocks of the broker/dealers which have a presence in money management, Capital
Southwest Common and St. Joe Corp. Common. TAVF will always be spending much
time and effort on these types of companies, largely because these businesses
are so much easier to analyze and value compared with those where one has to
estimate future flows, whether cash or earnings, and apply to those future flows
an appropriate capitalization rate.
and
EXTERNAL VALUE CREATION
4) CORPORATIONS CAN, AND DO, CREATE VALUE BY ACCESSING CAPITAL MARKETS AT
PRICES, AND ON TERMS, THAT GIVE THE CORPORATION A TREMENDOUS BARGAIN. The use of
proceeds from such access may be either for expansion of an existing asset base,
creating a new asset base, refinancing-restructuring of the liability side of
the balance sheet, acquisition of other corporations, or even making massive
distributions to shareholders, which is what occurs as a result of LBO
transactions. One way that corporations, and their promoters, take advantage of
the super pricing that might be available is to sell a new issue of common stock
in an IPO. Many of the semiconductor equipment common stocks TAVF owns had
public offerings in recent years at 3 to 5 times the prices the Fund paid to
establish its position.
TAVF keeps dipping a toe into private placements at prices related to promoters'
prices, where the game plan is to have an IPO several years hence. The Fund has
done okay, not great, in these types of investments. The return on LaSalle Re
Holdings common stock has been good. Sen-Tech common stock has been
disappointing. I have high hopes for our investment in Head Insurance Investors.
Our best investment in this area, by far, has been in the common stock of
Capital Southwest, a business development company. Bill Thomas, who runs Capital
Southwest, is as sound a venture capitalist as I've ever come across. Capital
Southwest has the long-term track record to prove it.
1996 PERFORMANCE
I think TAVF performed satisfactorily in 1996, especially since the Fund
operated for the whole year with cash equivalent reserves of around 25% of net
assets, while other credit instruments without credit risk accounted for another
5% of net assets. TAVF shares appreciated by almost 16% in 1996. However, many
other mutual funds had as good or better performance than the Fund. The Fund
would have invested much more heavily in "safe and cheap" assets having promise
of higher returns than cash equivalents if it could have found them. Those who
think the sole measure of management ought to involve maximizing total return
consistently would be unhappy with any fund that did not correctly predict the
market. (For example, Jeff Vinik may have been eased out of Magellan Fund
because of large bond positions held in a bull market period, albeit Magellan's
portfolio probably was less conservative than TAVF's.) Be fully invested for
bull markets. Hold a lot more cash than 25% of net assets for bear markets. I
think these "outperform the market consistently folks" are simply short-term
speculators, very few of whom focus on investment, as distinct from market risk.
TAVF would have been relatively fully invested in instruments other than credit
instruments without credit risk in 1996 if it could have identified enough
securities which were "safe and cheap". For the Fund, "safe" in common stock
investing refers to companies which enjoy super-strong financial positions.
"Safe" in credit investing involves owning corporate debt securities which will
be in a senior position, preferably secured, in the event the issuer experiences
a money default and has to reorganize or liquidate. "Cheap" in common stock
investing refers to acquiring securities at prices which appear to be no more
than 50% of what we believe would be the workout for the common if the business
were to be a private business or a takeover candidate. "Cheap" in credit
investing, where some credit risk is implicit in the investment, involves owning
a security where the estimated yield to maturity is at least 500 basis points
more than can be obtained from a comparable credit, regardless of whether the
enhanced yield to maturity is realized because the obligation continues to be a
performing loan or the obligation works out in reorganization or liquidation.
Because the Fund could not find enough "safe and cheap" issues, TAVF was not
fully invested. Not being fully invested in 1996 meant that 1996 total return
performance was less than it otherwise would have been. Criticizing management
for not being fully invested in this context seems akin to telling a home owner
who paid a premium to insure his house against fire last year, that the
homeowner wasted his money paying insurance premiums because his house never did
burn down.
There is a lot more to intelligent investing than maximizing total return
consistently, or predicting market prices.
1996 DISTRIBUTIONS
On December 13, 1996, TAVF declared a dividend from the Fund's net investment
income through the period ending December 31, 1996 in the amount of
approximately $0.562 per Fund share. TAVF also declared distributions of
approximately $0.064, representing short-term capital gains through the period
ended October 31, 1996; and approximately $0.084 per share, representing
long-term capital gains through the period ended October 31, 1996. These
distributions are payable January 6, 1997 to Fund shareholders of record on
December 30, 1996. The precise amount of each distribution will be determined
based on the number of total Fund shares outstanding on the close of business on
the record date, December 30, 1996. The distributions are payable in cash or,
for those shareholders who have elected the reinvestment option, in additional
Fund shares at the Fund's net asset value on December 31, 1996, the "ex" date,
or valuation date, for reinvestment.
I will write you again when the quarterly report for the period to end
January 31, 1997 is published. Best wishes for a happy and prosperous new year.
Sincerely yours,
/s/ Martin J. Whitman
Martin J. Whitman
Chairman of the Board
<PAGE>
<TABLE>
<CAPTION>
Third Avenue Value Fund, Inc.
Portfolio of Investments (continued)
at October 31, 1996
Principal Value % of
Amount ($) Issues (Note 1) Net Assets
================================================================================================================
<S> <C> <C> <C> <C>
Asset Backed Securities--2.62%
2,635,100 Olympic Automobile Receivables
Trust Series 1995-E CTFS,
Subordinated Bond 5.95%
due 6/15/02 $2,628,923
4,530,821 The Money Store Home Equity Trust
Series 1992-AA, 6.95%
due 1/15/07 4,561,970
7,615,000 The Money Store Home Equity Trust
Series 1995-BA3, 6.65% due 1/15/16 7,648,316
---------
TOTAL ASSET BACKED SECURITIES
(Cost $14,862,508) 14,839,209 2.62%
========== ====
================================================================================================================
Bank Debt - 1.92%
Oil 1,889,887 Cimarron Petroleum Corp.(c)(d) 1,909,112 0.34%
Plumbing Fixtures 9,238,238 Eljer Industries, Inc.(c)(e) 8,961,091 1.58%
--------- ----
TOTAL BANK DEBT
(Cost $10,367,830) 10,870,203
==========
================================================================================================================
Corporate Bonds - 4.42%
Membership Sports & 1,422,000 USTrails Inc., Senior Subordinated
Recreation Clubs Pay-In-Kind Notes 12%, 7/15/03(c) 1,080,720 0.19%
Retail 3,350,000 Kmart Corp., 8.61%, 4/10/97 3,324,875
800,000 Kmart Corp., 8.56%, 4/21/97 794,000
850,000 Kmart Corp., 8.54%, 5/08/97 843,625
1,400,000 Kmart Corp., 9.55%, 6/30/98 1,361,500
8,000,000 Kmart Corp., 7.77%, 7/02/02 7,120,000
1,000,000 Kmart Corp., 8.125%, 12/01/06 907,500
3,000,000 Kmart Corp., 8.375%, 7/01/22 2,415,000
9,400,000 Kmart Corp., 7.95%, 2/01/23 7,191,000
---------
23,957,500 4.23%
---------- ----
TOTAL CORPORATE BONDS
(Cost $20,567,172) 25,038,220
==========
The accompanying notes are an integral part of
the financial statements.
<PAGE>
Principal Value % of
Amount ($) Issues (Note 1) Net Assets
================================================================================================================
Government Agency Bonds--3.00%
2,889,650 Federal Home Loan Mortgage Corp.
Collateralized Mortgage Obligation,
Series 1635 K, Inverse Floater
6.29801% due 12/15/08 (g) $ 2,010,619
5,000,000 Federal Home Loan Mortgage Corp.
Collateralized Mortgage Obligation,
Series 1518 G, Inverse Floater
3.81% due 5/15/23 (g) 2,208,700
2,058,631 Federal National Mortgage
Association Collateralized
Mortgage Obligation, Series
1993-129 S, Inverse Floater
5.14711% due 8/25/08 (g) 1,322,403
6,600,000 Federal National Mortgage
Association Collateralized
Mortgage Obligation, Series
1993-229 SB, Inverse Floater
5.48046% due 12/25/08 (g) 4,113,252
300,000 Federal National Mortgage
Association Collateralized
Mortgage Obligation, Series
1993-221 SG, Inverse Floater
3.48727% due 12/25/08 (g) 177,345
3,000,000 Federal National Mortgage
Association Collateralized
Mortgage Obligation, Series
1994-13 SM, Inverse Floater
7.99393% due 2/25/09 (g) 2,170,080
2,683,270 Federal National Mortgage
Association Collateralized
Mortgage Obligation, Series
1994-13 SK, Inverse Floater
7.30501% due 2/25/09 (g) 1,786,360
6,191,950 Federal National Mortgage
Association Collateralized
Mortgage Obligation, Series
1993-210 SA, Inverse Floater
1.105% due 11/25/23 (g) 2,419,381
1,696,925 Federal National Mortgage
Association Collateralized
Mortgage Obligation, Series
1994-72 SB, Inverse Floater
3.13125% due 4/25/24 (g) 803,986
----------
TOTAL GOVERNMENT AGENCY BONDS
(Cost $13,999,472) 17,012,126 3.00%
========== ====
The accompanying notes are an integral part of
the financial statements.
<PAGE>
Principal Value % of
Amount ($) Issues (Note 1) Net Assets
================================================================================================================
STRUCTURED NOTES-4.47%
Finance Companies 21,750,000 Heller Financial Inc.-Medium
Term Note, 1/22/97 (c) (f) (h) $21,750,000 3.84%
Real Estate 3,563,320 Combined Investors, L.L.C. (c) 3,563,320 0.63%
--------- ----
TOTAL STRUCTURED NOTES
(Cost $25,116,302) 25,313,320
==========
Shares
or Units
================================================================================================================
Common Stocks, Limited Partnership Units and Warrants--62.36%
Annuities & Mutual Fund 272,000 Liberty Financial Companies, Inc. 9,554,000
Management & Sales 300,000 SunAmerica Inc. 11,250,000
100,000 The John Nuveen Company Class A 2,775,000
----------
23,579,000 4.16%
========== ====
Apparel Manufacturers 150,000 Kleinert's, Inc. (b) 2,718,750 0.48%
---------
Building Products 44,000 Central Sprinkler Corp. (b) 781,000
& Related 125,000 Cummins Engine Co., Inc. 5,203,125
50,000 H.B. Fuller Co. 2,087,500
33,200 Tecumseh Products Co. Class A 1,867,500
98,600 Tecumseh Products Co. Class B 5,275,100
----------
15,214,225 2.68%
========== ====
Business Development
Companies 43,200 Capital Southwest Corp. 3,045,600 0.54%
---------
Cogeneration Services &
Small Power Producers 176,900 Destec Energy, Inc. (b) 2,653,500 0.47%
---------
Small Power Producers
Computer & Software 100,000 Digital Equipment Corp. (b) 2,950,000
100,000 Novell, Inc. (b) 925,000
12,103 Silicon Graphics, Inc. (b) 223,905
-------
4,098,905 0.72%
========= ====
Depository Institutions 53,000 Astoria Financial Corp. 1,874,875
218,500 Carver Bancorp, Inc. (a) (b) 1,720,688
The accompanying notes are an integral part of
the financial statements.
<PAGE>
Shares Value % of
or Units Issues (Note 1) Net Assets
================================================================================================================
Common Stocks, Limited Partnership Units and Warrants (continued)
Depository Institutions 62,500 First Colorado Bancorp, Inc. $ 976,562
(continued) 149,227 Glendale Federal Bank 2,742,046
53,480 Glendale Federal Bank Warrants (b) 454,580
10,000 Letchworth Independent
Bancshares Corp. 297,500
10,000 Letchworth Independent
Bancshares Corp. Warrants (b) 77,500
34,783 People's Heritage Financial
Group, Inc. 800,009
80,000 Security Capital Corp. (b) 5,280,000
----------
14,223,760 2.51%
========== ====
Financial Insurance 100,000 AMBAC Inc. 6,250,000
244,100 Enhance Financial Services Corp. 8,146,838
725,000 Financial Security Assurance
Holdings Ltd. 20,300,000
120,000 MBIA Inc. 10,635,000
----------
45,331,838 8.00%
========== ====
Food Manufacturers 300,000 J & J Snack Foods Corp. (b) 3,300,000
& Purveyors 95,000 Premark International, Inc. 1,983,125
172,200 Sbarro, Inc. 4,541,775
100,000 Weis Markets, Inc. 3,062,500
----------
12,887,400 2.27%
========== ====
Forest Products 54,400 St. Joe Corp. 3,644,800 0.64%
Holding Companies 50,000 Aristotle Corp. (b) 178,125
21,400 White River Corp. (b) 1,241,200
----------
1,419,325 0.25%
========= ====
Insurance Holding 189,978 ACMAT Corp. Class A (a) (b) 2,612,198
Companies 803,669 Danielson Holding Corp. (a)(b)(c) 4,219,262
The accompanying notes are an integral part of
the financial statements.
<PAGE>
Shares Value % of
or Units Issues (Note 1) Net Assets
================================================================================================================
Common Stocks, Limited Partnership Units and Warrants (continued)
Insurance Holding 50,000 Fund American Enterprises
Companies (continued) Holdings, Inc. (b) $4,481,250
5,490 Sen-Tech Int'l Holdings, Inc.(b)(c) 1,749,718
----------
13,062,428 2.30%
========== ====
Life Insurance 138,000 ReliaStar Financial Corp. 7,314,000
107,600 Security-Connecticut Corp. 3,443,200
----------
10,757,200 1.90%
========== ====
Manufactured Housing 89,000 Liberty Homes, Inc. Class A 1,123,625
40,000 Liberty Homes, Inc. Class B 530,000
10,800 Palm Harbor Homes, Inc. (b) 303,750
----------
1,957,375 0.35%
========= ====
Medical Supplies 81,400 Acuson Corp. (b) 1,719,575
& Services 342,300 Datascope Corp. (b) 5,819,100
50,000 Fischer Imaging Corp. (b) 381,250
288,438 Progressions Health Systems,Inc.(a)(b) 14,422
90,750 St. Jude Medical, Inc. (b) 3,584,625
----------
11,518,972 2.03%
========== ====
Membership Sports & 237,267 USTrails Inc. (b)(i) 244,682 0.04%
Recreation Clubs
Mortgage Insurance 76,400 CMAC Investment Corp. 5,281,150 0.93%
Motor Vehicles & 50,000 Ford Motor Co. 1,562,500 0.28%
Cars' Bodies
Real Estate 31,000 Consolidated-Tomoka Land Co. 527,000
117,600 Forest City Enterprises, Inc.
Class A 5,821,200
2,500 Forest City Enterprises, Inc.
Class B 122,500
10,000 Royal Palm Beach Colony,
Limited Partnership Units (b) 9,375
----------
6,480,075 1.14%
========= ====
The accompanying notes are an integral part of
the financial statements.
<PAGE>
Shares Value % of
or Units Issues (Note 1) Net Assets
================================================================================================================
Common Stocks, Limited Partnership Units and Warrants (continued)
Real Estate 480,336 Koger Equity, Inc. (b) $7,505,250
Investment Trusts 5,100 Public Storage Properties XV, Inc. 99,450
16,300 Public Storage Properties XVI, Inc. 309,700
5,200 Public Storage Properties XVII, Inc. 100,100
15,000 Public Storage Properties XVIII, Inc. 286,875
----------
8,301,375 1.47%
========= ====
Reinsurance Companies 85,917 LaSalle Re Holdings Limited (c) 2,480,853 0.44%
Security Brokers, 118,100 Alex. Brown Inc. 6,702,175
Dealers & 111,800 Jefferies Group, Inc. 3,996,850
Flotation Companies 335,000 Legg Mason Inc. 10,803,750
462,100 Piper Jaffray Companies Inc. (a) 5,371,913
525,000 Raymond James Financial, Inc. 12,796,875
161,941 Ryan, Beck & Co., Inc. (a) (c) 890,676
----------
40,562,239 7.16%
========== ====
Semiconductor 25,000 AG Associates, Inc. (b) 125,000
Equipment 200,000 Applied Materials, Inc. (b) 5,287,500
Manufacturers 555,700 Electro Scientific Industries,
Inc.(a)(b) 11,391,850
1,050,000 Electroglas, Inc.(a)(b) 13,781,250
561,100 FSI International, Inc. (b) 5,821,412
200,000 KLA Instruments Corp. (b) 4,850,000
150,000 Photronics, Inc. (b) 4,050,000
300,000 Silicon Valley Group, Inc. (b) 4,987,500
169,200 Tencor Instruments (b) 3,193,650
218,700 Veeco Instruments, Inc. (b) 2,679,075
131,250 Zygo Corp. (b) 4,659,375
----------
60,826,612 10.73%
========== =====
Title Insurance 445,800 Stewart Information Services
Corp. (a) 9,584,700
615,000 The First American Financial
Corp. (a) 23,139,375
----------
32,724,075 5.77%
========== ====
The accompanying notes are an integral part of
the financial statements.
<PAGE>
Shares Value % of
or Units Issues (Note 1) Net Assets
================================================================================================================
Common Stocks, Limited Partnership Units and Warrants (continued)
Venture Capital 87,000 AFC Cable Systems, Inc. (b) $1,544,250
100,000 American Physicians Service
Group, Inc. (b) 593,750
127,000 Analogic Corp. 3,460,750
119,200 Emerging Markets Infrastructure
Fund, Inc. 1,251,600
163,500 Evans & Sutherland Computer
Corp. (b) 3,433,500
109,000 Gish Biomedical, Inc. (b) 722,125
140,600 H & Q Life Sciences Investors (b) 1,968,400
154,800 Integrated Systems, Inc. (b) 4,179,600
300,000 Interphase Corp. (a) (b) 3,975,000
293,000 Mountbatten, Inc. (a) (b) 2,398,937
200,000 Sequoia Systems, Inc. (b) 500,000
301,900 Vertex Communications Corp. (a) (b) 4,905,875
----------
28,933,787 5.10%
========== ====
TOTAL COMMON STOCKS,
LIMITED PARTNERSHIP UNITS
AND WARRANTS
(Cost $255,320,542) 353,510,426
===========
================================================================================================================
Preferred Stock - 0.17%
Depository Institutions 20,000 Glendale Federal Bank Convertible,
Non-Cumulative, 8 3/4%, Series E 967,500 0.17%
------- ----
TOTAL PREFERRED STOCK (Cost $500,000) 967,500
=======
Investment
Amount($)
================================================================================================================
Other Investments - 0.55%
Insurance Holding 3,136,000 Head Insurance Investors L.P.(c) 3,136,000 0.55%
---------
Companies
TOTAL OTHER INVESTMENTS
(Cost $3,136,000) 3,136,000
=========
The accompanying notes are an integral part of
the financial statements.
<PAGE>
Principal Value % of
Amount ($) Issues (Note 1) Net Assets
================================================================================================================
U.S. Treasury Bills--23.04%
31,500,000 U.S. Treasury Bill 4.73%, 11/7/96 $ 31,475,167
1,877,000 U.S. Treasury Bill 4.85%, 11/14/96(j) 1,873,716
627,000 U.S. Treasury Bill 4.85%, 11/14/96(j) 625,903
37,000,000 U.S. Treasury Bill 4.74%, 11/21/96 36,902,567
32,000,000 U.S. Treasury Bill 4.86%, 11/29/96 31,879,040
28,000,000 U.S. Treasury Bill 4.91%, 12/5/96 27,870,158
----------
TOTAL U. S. TREASURY BILLS
(Cost $130,626,551) 130,626,551 23.04%
=========== =====
TOTAL INVESTMENT PORTFOLIO-102.55%
(Cost $474,496,377) 581,313,555
-----------
LIABILITIES NET OF CASH AND
OTHER ASSETS--(2.55%) (14,466,214)
------------
NET ASSETS--100.00%
(Applicable to 23,364,688
shares outstanding)
$566,847,341
==========
<FN>
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 (see Note 1).
(d)Interest accrued at current rate of prime + 2%.
(e)Interest accrued at current rate of prime + 5%.
(f)Interest accrued at current rate of LIBOR 1 month + 0.1%.
(g)Inverse floater coupon rate moves inversely to a designated index, such as
LIBOR or COFI, typically at a multiple of the changes in the relevant index
rate.
(h)Structured note--may be repaid in the form of $25,000,000 face value Kmart
Corp. trade claims in the event that Kmart Corp. files or is forced into
Chapter 7 or 11 of the Bankruptcy Code prior to January 22, 1997. The
ultimate value of such trade claims would be determined by the bankruptcy
proceedings.
(i)130,095 shares restricted/fair valued (see Note 1).
(j)Securities segregated for future Fund commitments (see Note 6).
</FN>
</TABLE>
The accompanying notes are an integral part of
the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Third Avenue Value Fund, Inc.
Statement of Assets and Liabilities
October 31, 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value (Notes 1 and 4) :
Unaffiliated issuers (identified cost of $402,227,665) $497,307,409
Affiliated issuers (identified cost of $72,268,712) 84,006,146
----------
Total investments (identified cost of $474,496,377) 581,313,555
===========
Cash and cash equivalents (Note 1) 1,617,463
Receivable for fund shares sold 1,262,980
Dividends and Interest receivable 1,107,271
Other assets 12,330
----------
Total assets 585,313,599
===========
- ----------------------------------------------------------------------------------------------------------------
Liabilities:
Payable for securities purchased 16,539,145
Deferred fees (Note 1) 731,571
Payable for fund shares redeemed 511,971
Payable to investment adviser 427,311
Accounts payable and accrued expenses 232,831
Payable to affiliates (Note 3) 23,429
Commitments (Note 6) --
----------
Total liabilities 18,466,258
----------
Net assets $566,847,341
============
- ----------------------------------------------------------------------------------------------------------------
Summary of net assets:
Common stock, $ 0.001 par value, authorized
200,000,000 shares, 23,364,688 outstanding shares $ 23,365
Additional paid in capital 447,598,572
Accumulated undistributed net investment income 10,389,192
Accumulated undistributed net realized gains from
investment transactions 2,019,034
Net unrealized appreciation of investments 106,817,178
----------
Net assets applicable to outstanding capital shares $566,847,341
==========
Net asset value, offering and redemption price per share $24.26
=====
</TABLE>
The accompanying notes are an integral part of
the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Third Avenue Value Fund, Inc.
Statement of Operations
For the Year Ended October 31, 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Investment income:
Interest-unaffiliated issuers $12,671,945
Dividends-unaffiliated issuers 2,760,662
Dividends-affiliated issuers 646,474
Fee Income 1,036,437
---------
Total investment income 17,115,518
----------
- ----------------------------------------------------------------------------------------------------------------
Expenses:
Investment advisory fees (Note 3) 3,976,741
Transfer agent fees 303,145
Administration (Note 3) 265,775
Reports to shareholders 189,751
Registration and filing fees 107,719
Accounting services 92,701
Custodian fees (Note 4) 74,835
Directors' fees and expenses 65,058
Service fees 57,037
Miscellaneous expenses 56,661
Legal fees 55,564
Auditing and tax consulting fees 49,149
Insurance expenses 40,486
---------
Total operating expenses 5,334,622
---------
Net investment income 11,780,896
----------
- ----------------------------------------------------------------------------------------------------------------
Realized and unrealized gains on investments:
Net realized gains on investments - unaffiliated issuers 734,777
Net realized gains on investments - affiliated issuers 3,347,022
Net change in unrealized appreciation on investments 45,559,872
----------
Net realized and unrealized gains on investments 49,641,671
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $61,422,567
=========
</TABLE>
The accompanying notes are an integral part of
the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Third Avenue Value Fund, Inc.
Statement of Changes in Net Assets
For the Year Ended For the Year Ended
October 31, 1996 October 31, 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operations:
Net investment income $ 11,780,896 $ 5,315,994
Net realized gains on investments-
unaffiliated issuers 734,777 3,953,960
Net realized gains (losses) on investments-
affiliated issuers 3,347,022 (1,838,180)
Net change in unrealized appreciation on investments 45,559,872 41,324,327
---------- ----------
Net increase in net assets resulting from operations 61,422,567 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 273,608,965 112,183,260
Net asset value of shares issued in reinvestment of
dividends and distributions 7,089,926 3,493,053
Cost of shares redeemed (79,632,018) (34,741,140)
---------- ----------
Net increase in net assets resulting from capital
share transactions 201,066,873 80,935,173
----------- ----------
Net increase in net assets 254,124,976 125,529,949
Net assets at beginning of year 312,722,365 187,192,416
----------- -----------
Net assets at end of year
(including undistributed net investment
income of $10,389,192 and $4,586,481 respectively) $566,847,341 $312,722,365
============ ============
</TABLE>
The accompanying notes are an integral part of
the financial statements.
<PAGE>
Third Avenue Value Fund, Inc.
Notes to Financial Statements
October 31, 1996
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. The
investment objective of the Fund is to seek long-term capital appreciation. The
Fund seeks to attain its objective by following a value investing philosophy
that seeks to acquire common stocks at a substantial discount to the Adviser's
estimate of the issuing company's private value, preferred stocks and debt
instruments providing strong covenant protection and above-average current
yields or yields to maturity.
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.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
these 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. Over
the counter 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
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 Directors of the Fund, although actual evaluations may be made by personnel
acting under procedures established by the Board. Such securities had a total
fair value of $49,874,913 or 8.80% of net assets, at October 31, 1996. Among the
factors considered by the Board of Directors in determining fair value are the
type of security, trading in unrestricted securities of the same issuer, the
financial condition of the issuer, the Fund's cost at the date of purchase, 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 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 generally accepted accounting
principles. 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 a reclassification. For the year ended
October 31, 1996, such reclassifications resulted in a decrease to the Fund's
accumulated net realized gains and additional paid in capital accounts of
$123,993 and $16,691, respectively, and an offsetting increase to accumulated
undistributed net investment income of $140,684.
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 $725,000
from Combined Investors, LLC in connection with the Fund's investments in these
instruments. These fees are being deferred and recorded as income over the life
of the respective instruments.
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 year ended October 31, 1996, was
$158,262,877 and $41,765,879, respectively. The aggregate proceeds from sales
and conversions of investments of unaffiliated and affiliated issuers for the
year ended October 31, 1996, were $42,274,035 and $5,209,877, respectively.
At October 31, 1996, cost for federal income tax purposes amounted to
$476,162,465. Accordingly, the net unrealized appreciation based on cost for
federal income tax purposes of $105,151,090 was comprised of gross unrealized
appreciation and depreciation of $109,834,997 and $4,683,907, 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 Advisory
Agreement provides for a monthly fee, to be paid to the Adviser, of 1/12 of .90%
(an annual fee rate of .90%) of the total average daily net assets of the Fund
during the 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, including 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 October 31,
1996, the Fund had a payable of $23,429 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 year ended October 31, 1996.
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 Senior
Debt Corp., a dealer in the trading of bank debt and other private claims. For
the year ended October 31, 1996, the Fund incurred total brokerage commissions
of $447,855 of which approximately $329,168 was earned by M.J. Whitman, Inc. and
$70,250 was earned by M.J. Whitman Senior Debt Corp. At October 31, 1996, the
Fund's payable for securities purchased included unsettled trades with M.J.
Whitman, Inc. of $14,872,100.
INVESTMENT SECURITIES:
At October 31, 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 October 31, 1996, the Fund, along with a group of affiliated investment
vehicles, owned 1,461,400 shares of Piper Jaffray Companies Inc., representing
8.38% of its outstanding common stock.
At October 31, 1996, the Fund, along with an affiliated company, owned
209,999 shares of Ryan, Beck & Co., Inc., representing 6.42% of its outstanding
common stock.
At October 31, 1996 the Fund owned 445,800 shares of Stewart Information
Services Corp., representing 6.67% of its outstanding common stock.
At October 31, 1996 the Fund owned 615,000 shares of The First American
Financial Corp., representing 5.37% of its outstanding common stock.
At October 31, 1996, the Fund owned 300,000 shares of Interphase Corp.,
representing 6.40% of its outstanding common stock.
At October 31, 1996, the Fund owned 293,000 shares of Mountbatten, Inc.,
representing 11.58% of its outstanding common stock.
At October 31, 1996, the Fund owned 189,978 shares of ACMAT Corp. Class A,
representing 5.18% of its outstanding common stock.
At October 31, 1996, the Fund owned 218,500 shares of Carver Bancorp, Inc.,
representing 9.44% of its outstanding common stock.
At October 31, 1996, the Fund owned 1,050,000 shares of Electroglas, Inc.,
representing 5.85% of its outstanding common stock.
At October 31, 1996, the Fund owned 555,700 shares of Electro Scientific
Industries, Inc., representing 6.42% of its outstanding common stock.
At October 31, 1996, the Fund owned 301,900 shares of Vertex Communication
Corp., representing 6.81% of its outstanding common stock.
Custodian
Pursuant to a custody agreement, Danielson Trust Company ("DTC"), a wholly owned
subsidiary of DHC, acts as custodian for the Fund. For these services, DTC was
paid fees of $74,835 for the year ended October 31, 1996.
<PAGE>
5. CAPITAL SHARE TRANSACTIONS
<TABLE>
<CAPTION>
Transactions in capital stock were as follows:
For the For the
Year Ended Year Ended
October 31, 1996 October 31, 1995
---------------- ----------------
<S> <C> <C>
Increase in Fund shares:
Shares outstanding at beginning of year 14,524,055 10,396,658
Shares sold 12,005,739 5,699,436
Shares reinvested from dividends and
distributions 325,226 205,837
Shares redeemed (3,490,332) (1,777,876)
--------- ---------
Net increase in Fund shares 8,840,633 4,127,397
--------- ---------
Shares outstanding at end of year 23,364,688 14,524,055
========= =========
</TABLE>
6. COMMITMENTS
The Fund has committed a $5,000,000 capital investment to Head Insurance
Investors L.P. of which $3,136,000 has been funded as of October 31, 1996. The
Fund's outstanding commitment to its investment in Combined Investors, L.L.C.
was $625,000 as of October 31, 1996. Securities valued at $2,499,619 have been
segregated to meet the requirements of these commitments. These commitments may
be payable on demand by the investee company.
7. RISKS RELATING TO CERTAIN INVESTMENTS
High Yield Debt:
The Fund currently invests in high yield lower grade debt. The market values of
these higher yielding debt securities tend to be more sensitive to economic
conditions and individual corporate developments than do higher rated
securities.
Loans and Other Direct Debt Instruments:
The Fund invests in loans and other direct debt instruments owed by a corporate
borrower to another party. The loans represent amounts owed to lenders or
lending syndicates (loans and loan participations) or to other parties. Direct
debt instruments may involve a risk of loss in case of default or insolvency of
the borrower and may offer less legal protection to the Fund in the event of
fraud or misrepresentation. In addition, loan participations involve a risk of
insolvency of the lending bank or other financial intermediary. The markets in
loans are not regulated by federal securities laws or the SEC.
8. SUBSEQUENT EVENT
On December 13, 1996, the Fund's shareholders approved and adopted an agreement
to reorganize the Fund from a Maryland corporation to a Delaware business trust
("Third Avenue Trust" or the "Trust"). Third Avenue Value Fund will become one
series in the Third Avenue Trust and it is the intention of the Board of
Directors of the Trust to offer additional separate series of shares.
<PAGE>
Third Avenue Value Fund, Inc.
Financial Highlights
<TABLE>
<CAPTION>
SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT
EACH YEAR) AND RATIOS ARE AS FOLLOWS:
Years Ended October 31,
-------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $21.53 $18.01 $17.92 $13.57 $12.80
----- ----- ----- ----- -----
Income from Investment Operations:
Net investment income .53 .38 .29 .18 .19
Net gain on securities (both realized
and unrealized) 2.76 3.53 .16 4.77 .64
----- ----- ----- ----- -----
Total from Investment Operations 3.29 3.91 .45 4.95 .83
----- ----- ----- ----- -----
Less Distributions:
Dividends from net investment income (.41) (.25) (.22) (.24) (.02)
Distributions from realized gains (.15) (.14) (.14) (.36) (.04)
----- ----- ----- ----- -----
Total Distributions (.56) (.39) (.36) (.60) (.06)
----- ----- ----- ----- -----
Net Asset Value, End of Year $24.26 $21.53 $18.01 $17.92 $13.57
===== ===== ===== ===== =====
Total Return 15.55% 22.31% 2.56% 37.36% 6.50%
Ratios/Supplemental Data:
Net Assets, End of Year (in thousands) $566,847 $312,722 $187,192 $118,958 $31,387
Ratio of Expenses to Average
Net Assets 1.21% 1.25% 1.16% 1.42% 2.32%
Ratio of Net Income to Average
Net Assets 2.67% 2.24% 1.85% 1.45% 1.71%
Portfolio Turnover Rate 14% 15% 5% 17% 31%
Average Commission Rate Paid .0318 n/a n/a n/a n/a
</TABLE>
The accompanying notes are an integral part of
the financial statements.
<PAGE>
Report of Independent Accountants
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
THIRD AVENUE VALUE FUND, INC.
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 Value Fund, Inc. (the
"Fund") at October 31, 1996, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the period
then ended in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1996 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
December 11, 1996
Federal Tax Status of Dividends (unaudited)
The following information represents the tax status of dividends and
distributions paid by the Fund during the fiscal year ended October 31, 1996.
This information is presented to meet regulatory requirements and no current
action on your part is required.
Of the $0.56 per share dividend paid to you in cash or reinvested in your
account for the fiscal year ended October 31, 1996, $0.41 was derived from net
investment income and $0.06 from short-term capital gains and $0.09 from
long-term capital gains. 43.45% of the income distributed qualifies for the
Corporate Dividends Received Deduction.
