<PAGE>
August 27, 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 the Third Avenue Value Fund, Inc. (the "Fund"), an open-end
investment company registered under the Investment Company Act of 1940, as
amended (the "Act"), and pursuant to Rule 30b-2 of the Act, enclosed herewith
and filed electronically via EDGAR, is a copy of the Fund's Third Quarter Report
dated July 31, 1996 and mailed to shareholders on August 26, 1996.
Sincerely,
/s/ Jill Kopin
Jill Kopin
Fund Administrator
<PAGE>
[LOGO]
THIRD QUARTER REPORT
(Unaudited)
July 31, 1996
<PAGE>
Dear Fellow Shareholders:
At July 31, 1996, the unaudited net asset value attributable to the 21,876,447
common shares outstanding of the Third Avenue Value Fund, Inc. ("TAVF", or the
"Fund") was $22.53 per share. This compares with an unaudited net asset value of
$23.14 per share at April 30, 1996, and an unaudited net asset value of $20.42
per share at July 31, 1995, as adjusted for subsequent distributions. At August
19, 1996, the unaudited net asset value was $23.15 per share.
Quarterly Activity
During the third quarter of fiscal 1996, the Fund established new positions in 7
issues, increased its holdings of 23 issues, eliminated holdings of 6 issues,
and reduced its positions in 3 issues.
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
$1,422,372 USTrails Inc. Sr. Sub PIK Notes, 12% due
7/15/03 ("New USTrails Notes")
25,000 shares AG Associates, Inc. Common Stock
("AG Common")
100,000 shares The John Nuveen Company Class A Common Stock
("Nuveen Common")
200,000 shares Liberty Financial Companies, Inc. Common
Stock ("Liberty Common")
95,000 shares Premark International, Inc. Common Stock
("Premark Common")
12,103 shares Silicon Graphics, Inc. Common Stock
("SGI Common")
100,000 shares Silicon Valley Group, Inc. Common Stock
("SVGI Common")
INCREASES IN EXISTING POSITIONS
$7,888,875 U.S. Government Agency Inverse Floaters
("Inverse Floaters")
22,500 shares American Physicians Service Group, Inc.
Common Stock ("APSG Common")
27,000 shares Analogic Corp. Common Stock
("Analogic Common")
1
<PAGE>
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
26,500 shares Astoria Financial Corp. Common Stock
("Astoria Common")
44,500 shares Carver Federal Savings Bank Common Stock
("Carver Common")
105,000 shares Datascope Corp. Common Stock
("Datascope Common")
439,700 shares Electro Scientific Industries, Inc.
Common Stock ("Electro Scientific Common")
305,000 shares Electroglas, Inc. Common Stock
("Electroglas Common")
55,500 shares Emerging Markets Infrastructure Fund, Inc.
Common Stock ("EMIF Common")
38,500 shares Evans & Sutherland Computer Corp.
Common Stock ("Evans & Sutherland Common")
112,200 shares Financial Security Assurance Holdings Ltd.
Common Stock ("FSA Common")
100,000 shares FSI International, Inc. Common Stock
("FSI Common")
60,600 shares H & Q Life Sciences Investors Common Stock
("H & Q Common")
119,900 shares J & J Snack Foods Corp. Common Stock
("J & J Common")
112,400 shares Legg Mason Inc. Common Stock
("Legg Mason Common")
150,000 shares Mountbatten, Inc. Common Stock
("Mountbatten Common")
100,000 shares Piper Jaffray Companies Inc. Common Stock
("Piper Common")
100,000 shares Sbarro, Inc. Common Stock ("Sbarro Common")
2
<PAGE>
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
76,200 shares Stewart Information Services Corp.
Common Stock ("Stewart Common")
67,900 shares Tecumseh Products Co. Class B Common Stock
("Tecumseh Common")
130,095 shares USTrails Inc. Common Stock
("USTrails Common")
105,000 shares Veeco Instruments, Inc. Common Stock
("Veeco Common")
50,600 shares Vertex Communications Corp. Common Stock
("Vertex Common")
POSITIONS ELIMINATED
$958,997 Olympia & York Maiden Lane Finance Corp.,
Secured Notes 10.375%, 12/31/95
("O & Y Notes")
$2,891,000 USTrails Inc., Secured Notes 12%,
7/15/98 ("Old USTrails Notes")
12,103 shares Cray Research, Inc. Common Stock
("Cray Common")
115,200 shares Perini Corp. Common Stock
("Perini Common")
269,600 shares PharmChem Laboratories, Inc. Common Stock
("PharmChem Common")
100,000 shares Telco Systems, Inc. Common Stock
("Telco Common")
Positions Reduced
$4,312,942 Eljer Industries, Inc. Bank Debt
("Eljer Bank Debt")
$5,539,651 Combined Investors, LLC
("Grossman's Units")
95,000 shares Digital Equipment Corp. Common Stock
("DEC Common")
3
<PAGE>
In terms of dollars spent, TAVF increased its presence materially during the
last quarter in two industries: money managers involved with Registered
Investment Companies ("RICs") and Registered Investment Advisers ("RIAs") and
suppliers to semiconductor manufacturers. Money management company equities
acquired encompassed Legg Mason Common, Liberty Common, Nuveen Common and Piper
Common. The securities of semiconductor equipment suppliers which were purchased
during the quarter encompassed AG Common, Electro Scientific Common, Electroglas
Common, FSI Common, SVGI Common and Veeco Common.
Other securities acquired during the quarter included Inverse Floaters, acquired
at prices where the yield to maturity from cash flows guaranteed by U.S.
Government Agencies ought not to be less than 6% or 7% on a reasonable worst
case basis and probably well into double-digits on a best case basis. Also
purchased were Analogic Common, APSG Common, Astoria Common, Carver Common,
Datascope Common, EMIF Common, Evans & Sutherland Common, FSA Common, H&Q
Common, J&J Common, Mountbatten Common, Premark Common, Sbarro Common, Stewart
Common, Tecumseh Common and Vertex Common. Each of these issues met comfortably
the Fund's principal criteria for common stock investments; extremely strong
financial positions and prices representing a substantial discount from what we
believe the companies would be worth as private companies or as takeovers.
The Fund's positions in New USTrails Notes and USTrails Common were acquired in
exchange for Old USTrails Notes. SGI Common was acquired and Cray Common was
eliminated as a result of the merger of Cray Research, Inc. into Silicon
Graphics, Inc.
During the quarter, TAVF closed out several of its mistakes: positions in O&Y
Notes, Perini Common, PharmChem Common and Telco Common were eliminated. O&Y
Notes were a particular disappointment in that our initial analysis of this debt
instrument, secured by a first mortgage on a downtown New York office building,
bottomed on the view that the largest tenant of the building, Home Holdings,
Inc. ("HHI") was credit-worthy. HHI proved not to be credit-worthy. In addition,
the Fund sold almost half its position in DEC Common. The DEC Common sold were
higher cost shares on which the Fund could realize a capital loss for income tax
purposes. As in prior years, it is expected enough tax planning will be done for
1996 so that the Fund's net realized capital gains for income tax puposes, will
be quite small- a boon especially for high net worth investors holding TAVF
common shares.
4
<PAGE>
The reductions in principal amounts of Eljer Bank Debt and Grossman's Units
represent a pre-payment and the fulfillment of a contractual obligation,
respectively, in connection with performing loans.
EVERY SECURITY IN WHICH TAVF INVESTS HAS SOMETHING WRONG
While TAVF ignores completely market risk, i.e., the prices at which a security
might sell in the market, the Fund focuses very much on investment risk, i.e.,
what might happen to the business in which TAVF has invested. Indeed, we
probably spend more time and effort worrying about potential long-term
investment downsides at the time the Fund makes a commitment, than we spend time
analyzing upside potentials for the particular investment. And there is no
investment that the Fund makes where we don't see conceivable investment risks
over and above the ever-present investment risks arising out of the facts that
we can't foresee everything, and we almost always have knowledge gaps about any
particular investment.
Thus, for example, when we were acquiring real estate equities in the early
1990's, we worried that one consequence of the growth of cyberspace might be a
permanent reduction in demand for office space and shopping center space. We
worry, too, about our portfolio of well-capitalized community banks in that
those institutions that are not taken over by larger depository institutions
might be run over by them; and certainly we are concerned about our current
investments in Alex. Brown Common and Piper Common, both of which have been
important participants in the recent boom in Initial Public Offerings ("IPOs")
where speculative excesses seem to have run riot.
Given such worries, the Fund guards against investment risk in two ways. First,
when it acquires equities, the businesses almost always have impeccable staying
power arising out of having very high quality balance sheets; and in the case of
credit instruments, these securities almost always have extremely strong
protective covenants. Second, TAVF tries to acquire securities at prices that
represent substantial discounts from fundamental long-term values. Together, the
two criteria ought to spell "safe and cheap." It is not that the future for any
issuer, or industry, will not hold a lot of surprises. Rather, TAVF tries to
hold a portfolio where the vast majority of these future surprises will be
pleasant surprises rather than unpleasant surprises.
Money management, as an investment, has a lot wrong with it. The business is
excruciatingly competitive in all respects other than an absence of price
competition for RIC management fees; the talent level of most portfolio managers
leaves a lot to be desired and, in many instances (see the John Nuveen proxy
statement, for example) management compensation clearly appears to be excessive.
Yet, I don't know of an industry where, for the companies in the industry with
persistent revenues, higher quality income is generated than is the case for
managers of RICs and RIAs. The fee income is all generated in cash. There are no
credit risks, no requirements for material investments in physical assets of any
sort, and well-run operations tend to have minimal overhead cost structures.
5
<PAGE>
Further, I think the money management industry seems to have fairly reasonable,
long-term growth prospects, due, in large part, to what, at first blush, might
seem to be an oxymoron, i.e., reasonably intelligent regulation. Historically,
the American investing public seems always to have been ripped off by Wall
Street, whether it was in the lack of protections for creditors holding
defaulted loans before the 1930's, phony tax shelters in real estate or oil and
gas in the 1970's and 1980's, penny stocks, trading schemes, or customers' men
churning accounts. To this day, nothing happens in the financial community that
does not entail huge transaction costs, whether for individual investors or
corporate clients. RIC shareholders, too, may be subject to relatively large
transaction costs, but they are just never going to get so large that they will
constitute a rip-off. Relatively speaking, RIC shareholders, it seems to me, are
going to continue to get the equivalent of an even-break. Investment Company law
and regulation, among other things, puts a cap on management fees, effectively
prevents fraud and defalcations, and in regard to portfolio management, requires
diversification, controls dealing with affiliates and strictly limits
borrowings. Given that background, the American public ought to continue to want
to invest in mutual funds of all types.
The genius of the regulation of RICs is only half covered by the many
substantive protections given investors under the Investment Company Act of
1940, as amended. The other half of the equation arises out of the fact that the
promoters, i.e., the money managers, can obtain such generous financial rewards
without ripping off RIC stockholders. If the Forbes 400 listing of the richest
people measured the quality of net worth, and not just the quantity of net
worth, I'll bet that the 400 list would contain many more money managers than it
now does, and a lot fewer highly-leveraged individuals involved with real
estate, oil and gas, retailing and similar activities. TAVF is going to continue
to maintain a large portion of its assets in the money management industry,
provided the Fund can continue to acquire common stocks at prices which appear
to represent substantial discounts from the prices at which control of the
businesses could be sold. Money management issues held by TAVF encompass Nuveen
Common, Liberty Common, SunAmerica Common, Alex. Brown Common, Legg Mason
Common, Piper Common and Raymond James Common, as well as, to some extent,
Reliastar Common and Security-Connecticut Common.
6
<PAGE>
Equipment suppliers to semiconductor manufacturers are fraught with problems.
Demand has fallen and at least for the next several quarters, year-to-year sales
and earnings comparisons should be weak for most issuers. Competition is
intense. Product innovation is a key element for future success, and it seems
obvious that several of the companies in which the Fund is investing will turn
out to have been unable to compete effectively. A real problem in August 1996 is
that it is impossible for us (and we suspect for most others as well) to
identify likely winners and losers. If two-thirds of our equipment suppliers
portfolio turn out to be winners, performance overall might be spectactular,
especially given an apparent tendency for there to be gross overpricing from
time to time in the stock market for high growth, high-tech issues compared
with, say, pricing for the common stocks of steel companies and finance
companies.
Long term, the growth in demand for semiconductors should be huge. At present,
about 40% of product is used in personal computers. Five years out, that
percentage ought to be markedly diminished as chips increasingly find their way
into ubiquitous uses, including credit cards, debit cards, vehicle
registrations, factory machinery, telephones, household appliances and
automobiles. Also technological improvements, larger wafer size, for example,
ought to increase the demand for manufacturing equipment. Finally, it is hard
for me to see how one, or more, of the companies we have selected will not
become an acquisition candidate as the industry consolidates.
The equipment suppliers whose common stocks TAVF acquired during the last
quarter seem to me to be so comfortably financed that each business will have
substantial staying power. In that sense, they are safe. Further, pricing of the
common stocks is such that the positions were acquired at prices that seem
cheap. Here are relevant statistics compared with TAVF's cost basis as of July
31, 1996, in each position in an equipment supplier:
TAVF Cost vs:
Common Per ------------------------
Share Share Cash Cash: Book
Issue Cost Per Share Total Liab Value Earnings* Sales*
- ------- ------- --------- -------- ------ -------- ------
AG $ 6.04 $ 2.12 91% 0.9x 5.2x 0.4x
Electroglas 15.19 6.81 380 1.6 6.7 1.4
Electro Scientific 20.05 4.28 210 1.5 8.7 1.1
FSI 12.61 3.65 141 1.3 9.5 1.1
SVGI 15.59 10.18 155 0.9 7.0 0.7
Veeco 12.63 3.01 95 1.6 9.1 0.8
* Latest 12 months.
7
<PAGE>
THE ART AND SCIENCE OF GOOD ENOUGH INVESTING
THE BUY SIDE
The TAVF analysis of the value of a common stock stops at the point where we
arrive at an opinion as to what we think a company is worth as a private
business or a takeover. In contrast, all other types of analysis of passive
investments of which we are aware, from Graham & Dodd fundamentalism to academic
finance, have as the goal of their analysis a determination of the price, or
prices, at which they believe the security will sell as it is traded on a stock
exchange or on NASDAQ. We do not try to predict stock or bond prices or stock or
bond market levels because we are unable to do so. Further, we think the same is
true for almost everybody else in the financial community.
Ignoring the prices at which a security might sell is the very essence of good
enough investing for a passive investor such as TAVF. We know enough about the
price mechanism prevailing in securities markets to conclude that, however low
we think prices can go for a security held in the portfolio, those prices can in
fact, go a lot lower. Provided that the business seems to have staying power,
and the security's price seems to represent a discount from private business
value, TAVF will average down as part of good enough investing. No attempt is
ever made, nor could it be made while ignoring stock market factors, to buy at,
or near, a bottom.
Control investors, from Warren Buffett to Richard Rainwater to Carl Icahn, are
very TAVF-like. They focus on underlying business values and do not clutter up
their analysis with stock market considerations such as forecasting a market
outlook, an interest rate outlook, predictions of macro factors such as Gross
Domestic Product or unemployment rates. Like the Fund, in company analysis they
worry little, or not at all, about near-term earnings trends, dividend rates,
sponsorship, industry identification, or price:earnings ratios. Rather, the
focus is on long-term outlooks and the ability to finance operations and
transactions.
In some other types of passive analyses, private business value is one component
of an overall analysis. This seems true of Graham & Dodd; but here, what a
business might be worth is only a very small consideration within the analytic
context. Major emphasis is on stock market factors such as reaching judgments
about the outlook for the general stock market and interest rates simply because
the goal of the analysis is to reach a judgment about where the common stock of
a going-concern will sell. Rarely will an analysis focus on viewing a business
as a takeover candidate.
8
<PAGE>
The vast majority of stock market analysis, though, involves considering a whole
host of other factors and ignoring completely any analysis of what a business is
worth. These other investment styles go under the names of momentum investing,
IPO investing, trading, technical-chartist approaches, and academic finance as
embodied in the Efficient Market Hypothesis ("EMH"). In EMH the world is turned
upside down. Here, private business value is determined by equating market
value, as determined by stock market prices, with private business value.
Bizarre!
Probably as good a single example I know of which demonstrates good enough
investing on the buy side is the TAVF experience in acquiring Kmart Debentures
at the end of 1995 at average prices around 74. The fundamental analysis was
that if Kmart filed for relief under Chapter 11 of the U.S. Bankruptcy Code, the
Kmart Debentures would work out at not less than 100. TAVF bought based on this
analysis. Many institutions to whom I spoke said, "Your analysis about the
workout value is probably correct, but if I wait until Kmart files in Chapter
11, I'll buy the Kmart Debentures a lot cheaper than 74."
Probably both TAVF and the other institutions were correct in their contrasting
approaches. 74 was a good enough price for the Fund as a buy and hold investor
operating without borrowed money. Institutions subject to margin calls had to
worry about where Kmart Debentures might sell; they had to have some opinion
about where a market bottom might be. So too, would money managers have to worry
about prices for Kmart Debentures if either their jobs depended on market
prices, or their training as analysts was not sufficient to allow them to make
judgments about what a realistic workout value for Kmart Debentures might be.
THE SELL SIDE
As a buy and hold investor, the Fund only infrequently sells securities out of
its portfolio. The triggers for a voluntary sale by TAVF in the open market are
that the initial analysis was faulty, business conditions change (especially a
portfolio company dissipates a previously strong financial position) or the
security becomes grossly overpriced.
I think there are a number of good reasons to justify this rather inactive, good
enough, approach to the sell side. First, corporate values are dynamic, ever
changing. If TAVF is investing in the right companies, fundamental values ought
to be increasing over time as the businesses retain the fruits of past corporate
prosperity, both in terms of increased financial capabilities and increased
operational strengths.
Second, the analytical techniques used by TAVF seem a lot better suited for
identifying attractive buys than they are for identifying appropriate sales.
I've had a lot of experience, so to speak, owning securities for five years
which I then sold, after the price had doubled, to a buyer in whose hands the
price tripled within the next six months. Now the Fund tries not to sell in the
first place.
9
<PAGE>
Third, how aggressive one ought to be as a seller depends in part on whether the
pool of funds being managed is of constant or decreasing size on the one hand,
or an expanding sized portfolio on the other hand. Pressures to sell tend to be
less when portfolio size is expanding simply because new funds are being made
available to create new positions or to add to old positions. Thus far, the Fund
has enjoyed a rather steady expansion in portfolio size.
Finally, in good enough investing there is a tendency to have a multiplicity of
investment objectives, rather than just one objective. Maximizers seek the best
possible, risk-adjusted, total return attained consistently. Good enough
investors, on the other hand, can find that an investment is quite satisfactory
if it provides either a minimum yield to maturity or a high level of total
return (Inverse Floaters, for example), a gradual increase in underlying value
whether or not such increments are reflected in market prices consistently
(financial insurance common stocks for example), or either an above-average
yield to maturity for a performing loan or profit from participating in a
Chapter 11 Reorganization involving defaulted loans (Kmart Debentures for
example).
Deep down, I'm not convinced that TAVF's relaxed, good enough, style of
investing is not also maximizing performance. Maximization exists where the
participant tries to earn as much as can reasonably be earned under the
circumstances. As for the Fund's circumstances, we hopefully bring a lot to the
table in analyzing underlying business values. We bring nothing to the table in
trying to predict the prices at which securities will sell in trading markets.
Maximizing for us in the common stock arena ought to continue to mean trying to
acquire interests in companies with impeccable staying power at prices that
represent meaningful discounts from private business values or takeover values.
I will write you again when we publish the Annual Report for the year to end
October 31, 1996.
Sincerely yours,
/s/ Martin J. Whitman
Martin J. Whitman
Chairman of the Board
10
<PAGE>
Third Avenue Value Fund, Inc.
Portfolio of Investments (continued)
at July 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Principal % of
Amount ($) Issues Value Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
BANK DEBT--2.30%
<S> <C> <C> <C> <C>
Oil 1,889,887 Cimarron Petroleum Corp. (c) (d) $ 1,909,112 0.39%
----------
Plumbing Fixtures 9,680,083 Eljer Industries, Inc. (c) (e) 9,389,681 1.91%
----------
TOTAL BANK DEBT (Cost $10,381,999) 11,298,793
----------
- ------------------------------------------------------------------------------------------------------------------------------------
BONDS--4.91%
Membership Sports & 1,422,372 USTrails Inc., Senior Subordinated
Recreation Clubs Pay-In-Kind Notes 12%, 7/15/03 995,660 0.20%
----------
Retail 3,350,000 Kmart Corp., 8.61%, 4/10/97 3,303,938
800,000 Kmart Corp., 8.56%, 4/21/97 789,000
850,000 Kmart Corp., 8.54%, 5/08/97 838,312
1,400,000 Kmart Corp., 9.55%, 6/30/98 1,351,000
8,000,000 Kmart Corp., 7.77%, 7/02/02 6,980,000
1,000,000 Kmart Corp., 8.13%, 12/01/06 835,000
3,000,000 Kmart Corp., 8.38%, 7/01/22 2,205,000
9,400,000 Kmart Corp., 7.95%, 2/01/23 6,909,000
----------
23,211,250 4.71%
----------
TOTAL BONDS (Cost $20,518,198) 24,206,910
----------
- ------------------------------------------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY BONDS--3.00%
2,058,631 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1993-129 S, Inverse Floater
4.94526% due 8/25/08 (g) 1,146,246
2,889,650 Federal Home Loan Mortgage Corp.
Collateralized Mortgage Obligation,
Series 1635 K, Inverse Floater
6.35867% due 12/15/08 (g) 1,713,476
6,600,000 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1993-229 SB, Inverse Floater
5.52104% due 12/25/08 (g) 3,483,084
11
<PAGE>
Principal % of
Amount ($) Issues Value 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)$ 155,466
3,000,000 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1994-13 SM, Inverse Floater
8.05312% due 2/25/09 (g) 1,858,770
2,683,270 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1994-13 SK, Inverse Floater
7.35909% due 2/25/09 (g) 1,748,687
5,000,000 Federal Home Loan Mortgage Corp.
Collateralized Mortgage Obligation,
Series 1518 G, Inverse Floater
3.55% due 5/15/23 (g) 1,873,750
6,191,950 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1993-210 SA, Inverse Floater
1.105% due 11/25/23 (g) 2,127,306
1,696,925 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1994-72 SB, Inverse Floater
2.94375% due 4/25/24 (g) 665,771
----------
TOTAL GOVERNMENT AGENCY BONDS
(Cost $13,980,443) 14,772,556 3.00%
----------
- ------------------------------------------------------------------------------------------------------------------------------------
STRUCTURED NOTES--5.40%
Finance Companies 21,750,000 Heller Financial Inc.-Medium Term Note,
1/22/97 (c) (f) (h) 21,750,000 4.41%
----------
Real Estate 4,863,933 Combined Investors, LLC (c) 4,863,933 0.99%
----------
Total Structured Notes
(Cost $26,195,870) 26,613,933
----------
12
<PAGE>
Shares % of
or Units Issues Value Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND LIMITED PARTNERSHIP UNITS--58.45%
Annuities & 200,000 Liberty Financial Companies, Inc.$ 6,150,000
Mutual Fund 150,000 SunAmerica Inc. 9,112,500
Management & Sales 100,000 The John Nuveen Company Class A 2,612,500
----------
17,875,000 3.63%
----------
Apparel 150,000 Kleinert's, Inc. (b) 2,493,750 0.51%
Manufacturers ----------
Building Products 44,000 Central Sprinkler Corp. (b) 913,000
& Related 125,000 Cummins Engine Co., Inc. 4,671,875
50,000 H.B. Fuller Co. 1,737,500
33,200 Tecumseh Products Co. Class A 1,709,800
84,700 Tecumseh Products Co. Class B 4,129,125
----------
13,161,300 2.67%
----------
Business 43,200 Capital Southwest Corp. 3,002,400 0.61%
Development ----------
Companies
Cogeneration 176,900 Destec Energy, Inc. (b) 2,388,150 0.49%
Services & ----------
Small Power Producers
Computer & Software 100,000 Digital Equipment Corp. (b) 3,537,500
100,000 Novell, Inc. (b) 1,068,750
12,103 Silicon Graphics, Inc. (b) 284,420
----------
4,890,670 0.99%
----------
Depository 53,000 Astoria Financial Corp 1,417,750
Institutions 158,500 Carver Federal Savings Bank (a) (b) 1,307,625
62,500 First Colorado Bancorp, Inc. 859,375
149,227 Glendale Federal Bank 2,723,393
53,480 Glendale Federal Bank Warrants (b) 454,580
10,000 Letchworth Independent Bancshares Corp.297,500
13
<PAGE>
Shares % of
or Units Issues Value Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND LIMITED PARTNERSHIP UNITS (CONTINUED)
Depository 10,000 Letchworth Independent Bancshares Corp.
Institutions Warrants (b) $ 77,500
(continued) 34,783 People's Heritage Financial 686,964
Group,Inc.
80,000 Security Capital Corp. (b) 4,760,000
----------
12,584,687 2.55%
----------
Financial 100,000 AMBAC Inc. 4,775,000
Insurance 244,100 Enhance Financial Services Corp. 7,109,412
725,000 Financial Security Assurance
Holdings Ltd. 19,393,750
120,000 MBIA Inc. 9,075,000
----------
40,353,162 8.19%
----------
Food 300,000 J & J Snack Foods Corp. (b) 3,056,250
Manufacturers 95,000 Premark International, Inc. 1,710,000
& Purveyors 172,200 Sbarro, Inc. 3,982,125
100,000 Weis Markets, Inc. 3,087,500
----------
11,835,875 2.40%
----------
Forest Products 54,400 St. Joe Corp. 3,270,800 0.66%
----------
Holding Companies 50,000 Aristotle Corp. (b) 156,250
21,400 White River Corp. (b) 1,059,300
----------
1,215,550 0.25%
----------
Insurance Holding 100,000 ACMAT Corp. Class A (b) 1,206,250
Companies 803,669 Danielson Holding Corp. (a) (b) (c) 4,621,097
50,000 Fund American Enterprises
Holdings, Inc. (b) 4,143,750
5,490 Sen-Tech Int'l Holdings, Inc. (b) (c)1,749,718
138,200 United Coasts Corp. (b) 1,027,862
----------
12,748,677 2.59%
----------
14
<PAGE>
Shares % of
or Units Issues Value Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND LIMITED PARTNERSHIP UNITS (CONTINUED)
Life Insurance 138,000 ReliaStar Financial Corp. $ 5,778,750
107,600 Security-Connecticut Corp. 2,837,950
----------
8,616,700 1.75%
----------
Manufactured 89,000 Liberty Homes, Inc. Class A 1,168,125
Housing 40,000 Liberty Homes, Inc. Class B 530,000
8,640 Palm Harbor Homes, Inc. (b) 308,880
----------
2,007,005 0.41%
----------
Medical Supplies 81,400 Acuson Corp. (b) 1,078,550
& Services 342,300 Datascope Corp. (b) 5,904,675
288,438 Progressions Health
Systems, Inc. (a) (b) 25,959
90,750 St. Jude Medical, Inc. (b) 3,051,469
----------
10,060,653 2.04%
----------
Membership Sports 237,267 USTrails Inc. (a) (b) (i) 192,779 0.04%
& Recreation Clubs ----------
Mortgage Insurance 76,400 CMAC Investment Corp. 4,383,450 0.89%
----------
Motor Vehicles & 50,000 Ford Motor Co. 1,625,000 0.33%
Cars' Bodies ----------
Real Estate 31,000 Consolidated-Tomoka Land Co. 558,000
117,600 Forest City Enterprises, Inc. 4,953,900
Class A
2,500 Forest City Enterprises, Inc. 105,313
Class B
10,000 Royal Palm Beach Colony,
Limited Partnership Units (b) 6,562
----------
5,623,775 1.14%
----------
15
<PAGE>
Shares % of
or Units Issues Value Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND LIMITED PARTNERSHIP UNITS (CONTINUED)
Real Estate 480,336 Koger Equity, Inc. (b) $ 6,664,662
Investment 5,100 Public Storage Properties XV, Inc. 94,350
Trusts 16,300 Public Storage Properties XVI, Inc. 289,325
5,200 Public Storage Properties XVII, Inc. 93,600
15,000 Public Storage Properties XVIII, Inc. 268,125
----------
7,410,062 1.50%
----------
Reinsurance 85,917 LaSalle Re Holdings Limited (c) 1,922,393 0.39%
Companies ----------
Security Brokers, 118,100 Alex. Brown Inc. 5,521,175
Dealers & 111,800 Jefferies Group, Inc. 3,102,450
Flotation Companies 335,000 Legg Mason Inc. 9,547,500
462,100 Piper Jaffray Companies Inc. (a) 5,487,438
525,000 Raymond James Financial, Inc. 10,959,375
161,941 Ryan, Beck & Co., Inc. (a) (c) 1,032,377
----------
35,650,315 7.23%
----------
Semiconductor 25,000 AG Associates, Inc. (b) 128,125
Equipment 489,700 Electro Scientific Industries, Inc.
Manufacturers (a) (b) 8,080,050
625,000 Electroglas, Inc. (b) 7,890,625
200,000 FSI International, Inc. (b) 2,175,000
150,000 Photronics, Inc. (b) 3,712,500
100,000 Silicon Valley Group, Inc. (b) 1,643,750
130,000 Veeco Instruments, Inc. (b) 1,657,500
----------
25,287,550 5.13%
----------
Title Insurance 445,800 Stewart Information Services
Corp.(a) 9,083,175
615,000 The First American Financial
Corp.(a) 18,373,125
----------
27,456,300 5.57%
----------
16
<PAGE>
Shares % of
or Units Issues Value Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND LIMITED PARTNERSHIP UNITS (CONTINUED)
Venture Capital 87,000 AFC Cable Systems, Inc. (b) $ 1,392,000
84,000 American Physicians Service
Group, Inc. (b) 598,500
127,000 Analogic Corp. 3,619,500
119,200 Emerging Markets Infrastructure 1,206,900
Fund, Inc.
163,500 Evans & Sutherland Computer Corp.(b) 3,392,625
109,000 Gish Biomedical, Inc. (a) (b) 654,000
140,600 H & Q Life Sciences Investors (b) 1,915,675
154,800 Integrated Systems, Inc. (b) 4,760,100
300,000 Interphase Corp. (a) (b) 3,000,000
293,000 Mountbatten, Inc. (a) (b) 2,151,704
190,000 NetFRAME Systems Inc. (b) 570,000
200,000 Sequoia Systems, Inc. (b) 425,000
122,500 Tricord Systems, Inc. (b) 367,500
159,200 Vertex Communications Corp. (b) 2,962,601
131,250 Zygo Corp. (b) 4,987,500
----------
32,003,605 6.49%
----------
Total Common Stocks and
Limited Partnership Units
(Cost $223,814,099) 288,059,608
----------
- ------------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK--0.20%
Depository 20,000 Glendale Federal Bank Convertible,
Institutions Non-Cumulative, 8 3/4%, Series E 965,000 0.20%
----------
Total Preferred Stock
(Cost $500,000) 965,000
----------
Investment
Amount ($)
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS--0.10%
Insurance Holding 500,000 Head Insurance Investors LP (c) 500,000 0.10%
Companies ---------
Total Other Investments
(Cost $500,000) 500,000
---------
17
<PAGE>
Principal % of
Amount ($) Value Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY BILLS--26.13%
4,520,000 U.S. Treasury Bill 4.73%, 8/1/96 $ 4,520,000
4,500,000 U.S. Treasury Bill 5.05%, 8/1/96 4,500,000
1,506,000 U.S. Treasury Bill 4.73%, 8/1/96 1,506,000
37,500,000 U.S. Treasury Bill 4.85%, 8/8/96 37,464,635
29,000,000 U.S. Treasury Bill 4.56%, 8/15/96 28,948,573
21,000,000 U.S. Treasury Bill 4.90%, 8/22/96 20,939,975
31,000,000 U.S. Treasury Bill 4.80%, 8/29/96 30,884,267
----------
Total U. S. Treasury Bills 128,763,450 26.13%
(Cost $128,763,450) ----------
Total Investment Portfolio-- 495,180,250
100.49% ----------
(Cost $424,654,059)
Liabilities Net of Cash and
Other Assets--(0.49%) (2,391,179)
----------
NET ASSETS--100.00% $492,789,071
(Applicable to 21,876,447 ==========
shares outstanding)
NET ASSET VALUE PER SHARE $22.53
=====
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 in 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.
(i) 130,095 shares restricted.
</TABLE>
18
<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
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
[LOGO]
767 Third Avenue
New York, NY 10017
Phone (212) 888-6685
Toll Free (800) 443-1021
