FIRST QUARTER REPORT
Period Ending
March 31, 1996
1. Accounting Procedures:
Reliability & Conservatism
2. Consistency of Operating
Earnings Growth
3. Strength of Internal
Earnings Growth
4. Balance Sheet:
Working Capital
5. Balance Sheet:
Corporate Liquidity
6. Recognition:
Owner Diversification
7. Value: P/E Under 10
Letter to Our Shareholders
Dear Shareholder:
No need for you to wait until the end of the letter for an expression of our
gratitude. We do thank you for your confidence in our investment philosophy.
We are particularly thankful for the love, strength, and wisdom given by our
heavenly creator and caring shepherd. We are excited by the prospects
immediately ahead as interest rates are continuing their decline in the U.K.,
Netherlands, and France as well. The years ahead are a period of potentially
rewarding opportunities for our portfolio in these markets. Shorter term,
Z-Seven has begun to raise some cash after March 31 by cutting back holdings
which no longer meet all criteria and we are positioned well for the year of
1996.
1996 Three Month Results
As the year 1996 begins, the first quarter continues to provide satisfactory
returns, with a solid gain in our investment portfolio during the first three
months. The first quarter of 1996 brought an advance in our investment
portfolio of more than 9%. With nearly three-quarters of our portfolio
invested in European equities entering 1996, our gain for the first three
months may be easier to extend itself throughout the year than it may be for
domestic closed-end funds and open-end mutual funds.
First Quarter N.A.V.
After operating expenses, our Net Asset Value rose nearly 8.5% during the first
three months of 1996 from $17.48 to $18.95. This marks the seventh quarter in
a row (a record for us) of higher Net Asset Value and the twelfth quarter in
the past fourteen in which our N.A.V. has posted a gain. At this stage, it
appears that there is an excellent chance that our N.A.V. will be up in the
second quarter also.
Good News
In our first quarter report last year we had six stocks in our portfolio achieve
a 20% or more gain, which determines those investments of ours which are
discussed under our "Good News" section. In this year's quarter, the number of
investments which are up at least 20% for the first three months of 1996 is
eight, many of which rose considerably more. This is especially gratifying
inasmuch as we began the year with only 27 holdings in total, a much smaller
number than usual. Of these, most are among Z-Seven's largest one-third (nine
positions).
From largest to smallest they are as follows: Our largest investment entering
1996, Callaway Golf, was up 18% during the first three months of 1996 and this
does not yet qualify as a 20% gainer for this section, although at this writing
it certainly does and then some. Oddly enough, last year, Callaway was only in
the portfolio for nearly eleven months (but not the required twelve months)
and, due to this fact, even its 36% gain in 1995 (since first purchased) did not
qualify for this section. All in all, over a period of nearly 14 months,
Callaway shares have gained over 60%, yet these technicalities, thus far,
keep Callaway out of our "Good News" stocks.
On the other hand, our second biggest holding coming into 1996 was Swiss
pharmaceutical company Sandoz whose shares advanced 32% during the first
quarter of 1996, aided by stronger than expected earnings growth recently
announced as well as by favorable reaction to a decision to merge Sandoz with
fellow Swiss giant Ciba-Geigy to form the world's second largest
pharmaceuticals firm, surpassing Merck, and smaller only than Glaxo-Wellcome
PLC (the result of a British merger last year which also enriched Z-Seven
shareholders during last year's first three months). This 32% gain for Sandoz
comes on the heels of a 76% rise for all of 1995. Since first purchased about
four years ago, Sandoz has nearly quadrupled. Since our latest purchase of
nearly half of our entire Sandoz holding in 1993, these shares have nearly
tripled in about three years.
Z-Seven's third most important investment (in size order) entering 1996 was
Getronics NV. Like Sandoz, Getronics (a Dutch provider of technical services
and maintenance to the information processing and telecommunications
industries) was aided by a recently released earnings report showing stronger
growth for the year of 1995 than most had anticipated, along with acquisition
and strategic alliance discussions which could add further to long-term growth.
As a result, Getronics shares rose nearly 60% in the first three months of
this year alone. This gem has been in our portfolio for just over five years
and has already quadrupled.
Our fourth largest position going into 1996 was Astra, the Swedish
pharmaceuticals growth company which has, as its new U.S. partner, Merck.
Like Sandoz and Wellcome, Astra is on the cutting edge of technology,
pioneering new medicines, while American drug companies reduce their
research efforts to prop up short-term profits. Europe is becoming the leader
in new pharmaceutical compounds and Astra is a pioneer within Europe. It is
only up 17% for the first three months and thus does not qualify as "Good
News" yet. The shares have been in the portfolio less than two years and
have already more than doubled. Our fifth largest position entering 1996,
DayRunner, is a new holding which hadn't started out very well, but has since
rebounded - see "Mistakes and Disappointments" next after "Good News."
Lindt and Sprungli, the Swiss premium chocolates company, which was our
sixth largest investment entering the year, does in fact belong in our "Good
News" section (just barely) as it is already up 20% in just three months on a
better earnings report than was expected. Higher than expected earnings is the
common theme (as it often is) on our three "Good News" stocks thus far. Three
of our top six holdings (Lindt, Sandoz, and Getronics) are up 20% - 60% in the
opening three months of the year (including two of our largest three
investments), while 5 of 6 are up 17% or more. National Dentex, our seventh
biggest position going into 1996, consolidated its huge 1995 gain of 158% with
a correction of almost 11% during the first three months of 1996.
L'Oreal, our largest French investment and our eighth biggest overall going
into the year, also just qualifies (like Lindt and Sprungli) for our "Good
News" section with a 20% gain in the first three months of 1996 alone. The
strong Paris bourse is being fueled by lower interest rates, helping L'Oreal as
well as other publicly traded French shares. In six years, this investment
has multiplied seven-fold.
Shares have also climbed higher in the Netherlands, as lower interest rates are
helping here as well. Although not up 60% (like Getronics NV our third largest
position), shares of Atag NV (our ninth biggest entering 1996) are up a
significant 22% during the first three months of the year, rebounding after its
underperformance the prior year. While our next largest (TT Group PLC), one of
our newest British holdings, would qualify for the "Good News" section at this
writing, its gain for the first three months was only 18%. Likewise, Wassall
PLC which, like TT Group, is a British industrial conglomerate and also one
of our latest U.K. investments, had a good first quarter; still not good
enough to make our "Good News" standard of +20%, Wassall gained 17% during
the first three months of the year. Even our twelfth largest, Weetabix, does
not qualify for inclusion in our "Good News" section this year, up only 8% so
far in 1996.
This is the "Golden Dozen" (twelve largest) described individually in greater
detail in Z-Seven's latest Annual Report. Ten of these twelve had gains in the
first three months. The smallest three of these posted gains averaging 14%;
all twelve, as a group, were more than 16% higher; the largest nine contained
five stocks up 20% - 60%.
Just outside of our "Golden Dozen" coming into 1996 is our next (thirteenth)
biggest holding, LVMH. Like L'Oreal, a strong Paris bourse helped to lift
French luxury goods company LVMH Moet Hennessy Louis Vuitton to score a
25% gain for the first three months of 1996. Over the past nine quarters, LVMH
has returned 130% for us.
Our next largest outside our "Golden Dozen" is Airtours PLC, now our
fourteenth biggest position and once by far our number one investment. These
are difficult times for the British company which has managed its air vacation
package business very well over the years, but doesn't have the same ability to
leverage a gain in market share versus its competitors into profit growth, as
it did when it was considerably smaller. It has added a Scandinavian cruise
ship operation (the largest in Sweden) to its vacation (holiday in Britain)
business and is now taking on Carnival Cruise as a partner, issuing new
shares to Carnival; just under 30% of its shares are thus now held by
Carnival. The immediate result of this transaction has been to lift these
shares 26% during the first three months of the year and even more by now.
We've sold most of our Airtours in previous years at prices ranging from 9 to 12
times what we first paid when starting this investment, adjusted for a
3-for-1 scrip issue (4-for-1 split). The remainder of our Airtours shares
are now in excess of 13 times what we first began to buy them for a little
over 6 years ago.
Lloyd Thompson PLC is next (number fifteen). This new British investment,
made shortly before the year began, shares many similar characteristics with
Airtours of 6 years ago as they both were bought near the company's cash per
share, opportunities made available in small-cap thinly traded issues whose
industry groups were out of favor. Both have demonstrated resilience to
competitive pressures with consistently rising profits (although Airtours can
no longer make this claim) and strong cash-rich balance sheets. At this point,
however, Lloyd Thompson is not yet a "Good News" stock as its shares gained
only modestly during the first quarter (our first three full months of owning
the shares) atop a year-end rise during our first weeks after starting to buy
the shares.
As to our sixteenth and seventeenth largest, neither Seton (foot bandage
pioneer) nor Air London, broker and agent for executive private air travel,
make the 20% grade yet for 1996 to be included in "Good News." Seton was up
15% and Air London added even more to its 68% gain last year in just the first
three months alone as these shares are now up another 18% for the first quarter
of 1996.
Our next seven largest are actually quite small (ranging from about 1% of our
net assets to as small as around 1/30th of 1%). None were up or down even as
much as 10%, let alone 20%. Most were a little higher during the first three
months of 1996.
This leaves only our two tiniest holdings, the smallest being down less than
3%, and the other (Westfair Foods Ltd.) up 36% for the first three months. On
a common equity basis, Westfair shares are extremely undervalued, but fluctuate
widely depending upon litigation as to whether they are common or preferred
shares, as various courts have expressed different opinions on this matter.
All in all, we had eight investments which gained between 20% and 60% during
the first quarter of 1996, although many others gained nearly 20%. Even
without the diversity of different stocks we had a year ago, this compares well
with the six which qualified for our "Good News" section last year.
Mistakes and Disappointments
For purposes of objective responsibility, we employ the following criterion for
selecting these candidates of dubious distinction: they must have lost 20% or
more in their market prices thus far this year. Last year, for the full year of
1995, we had to look to two of our smallest holdings (each comprising just about
1% of our net asset value) in order to find ones that declined at least 20%.
This year, the only stock down 20% or more for the first three months has
already rebounded at this writing, recovering nearly two-thirds of its first
quarter drop and is now down less than 10%. DayRunner worried some investors
when one of its major customers (WalMart) had deliveries and orders temporarily
discontinued. Still it has a full new line of Warner Brothers and Disney
licensed character products set to take this office supply leader into higher-
end retail markets and, more importantly, Day Runner has already demonstrated
its superb management by achieving substantially higher profits even before its
sales volume levels recover. Down 25% for the first three months, this new
holding has a real shot at moving from "Mistakes and Disappointments" into our
"Good News" category before too long.
Outlook
While most people are convinced that U.S. interest rates are beginning to
climb, my leading indicator for interest rates suggests this may not be the
case. Sooner or later, logic dictates that normal cyclical influences will
make the majority correct. Until then, enjoy the ride. While share prices are
clearly overvalued, they are likely to become even more so as share prices lag
bond prices by an average of nine months. Despite the rosy near-term outlook,
and the prospect for another good quarter and possibly a third year (out of
four) of N.A.V. rising each quarter, we have begun to take some profits and now
have a 15% cash reserve.
We are using some of this cash to buy into a new investment in the U.K. meeting
all criteria. British shares are a considerably better value than their
American counterparts. Over the past 2 1/3 years, the Dow has gone up nearly
2,000 points while the F.T.S.E. 100 ("Footsie") has not even climbed 300
points. In early 1994, they were at approximately the same level. Having sold
many U.K. shares last year which no longer met our criteria, we are now in
newer London-traded holdings which offer better value and more consistent
earnings growth. This should aid future results.
While Swiss interest rates may not have any further room for decline,. in
Britain, France, the Netherlands, Sweden, Denmark, and Spain, our holdings may
well continue to benefit from monetary easing for some time to come.
In order to cover more territory in these promising European markets, I am
expanding the research team from one (yours truly) to three. I believe we will
all benefit from this added effort. Z-Seven shareholders will not foot this
bill - it's on me. By the way, I have more positive developments in mind which
I have been planning for a few years now and I hope to be ready to lay them out
for you in the second or third quarter reports. Until then .........
Sincerely,
Barry Ziskin May 31, 1996
P.S. Another milestone for Z-Seven shareholders has now been exceeded as
our N.A.V. (even after last year's $3.04 distribution) has just surpassed a new
record of $20.00 per share.
Z-SEVEN FUND, INC.
Schedule of Investments
March 31, 1996
(Unaudited)
- -------------------------------------------------------------
Percent (a) Common Stock Shares Value
7.51% Building materials & Supplies
Polypipe PLC 707,700 $ 1,966,698
UDO Holdings PLC 1,700 6,307
--------------
1,973,005
- -------------------------------------------------------------
14.51% Electronic Components & Service
Getronics NV 19,961 1,447,532
Zilog Inc. 70,000 2,362,500
--------------
3,810,032
- -------------------------------------------------------------
7.16% Financial Services
City of London PR
Group PLC 7,500 8,820
Lloyd Thompson
Group PLC 720,800 1,871,197
---------------
1,880,017
- -------------------------------------------------------------
8.03% Food, Confection, and Beverage
Carlsburg AS 4,100 233,155
Lindt & Sprungli AG 725 1,164,145
Weetabix Ltd. 17,550 710,126
----------------
2,107,426
- -------------------------------------------------------------
14.95% Health & Personal Care Products
AB Astra Class B 25,500 1,172,796
L'Oreal Ord.* 3,998 1,253,769
Sandoz AG* 1,278 1,498,790
----------------
3,925,355
- -------------------------------------------------------------
8.25% Luxury & Designer Products
Abbeycrest PLC 20,800 36,213
Callaway Golf Co. 50,100 1,340,175
LVMH Moet Hennessy
Louis Vuitton* 3,105 788,608
----------------
2,164,996
- -------------------------------------------------------------
5.73% Medical & Dental Supplies
National Dentex Corp.* 51,000 1,115,625
Seaton Health Care PLC 55,800 387,642
---------------
1,503,267
- ------------------------------------------------------------
17.96% Multi-Industry
Atag Holdings NV 15,598 1,225,550
TT Group PLC 441,300 2,132,803
Wassall PLC 280,100 1,355,684
----------------
4,714,037
- -------------------------------------------------------------
8.00% Printing & Business Services
Air London Intl. PLC 192,300 369,985
Day Runner Inc. 55,800 1,450,800
RCO Holdings PLC 93,300 279,247
----------------
2,100,032
- -------------------------------------------------------------
.093% Retailing
Essex Furniture 155,100 234,511
Westfair Foods Ltd. 360 9,280
----------------
243,791
- -------------------------------------------------------------
3.64% Travel
Airtours PLC 108,560 762,525
Autopistas C.E. SA 19,040 193,351
----------------
955,876
- -------------------------------------------------------------
3.74% Miscellaneous 244,800 983,117
- -------------------------------------------------------------
100.41% Total Common Stock 26,360,951
(Cost $20,193,987)
- -------------------------------------------------------------
- -0.41% Liabilities in excess of cash,
receivables and other assets ( 107,507)
- -------------------------------------------------------------
100.0 Net Assets
====== (equivalent to $18.95 per share based on
1,385,649 shares of capital stock outstanding)
$ 26,253,444
================
- -------------------------------------------------------------
* All or a portion of this stock was pledged as collateral
for the line of credit.
- -------------------------------------------------------------
Common Stocks by Country March 31, 1996
- -------------------------------------------------------------
- -------------------------------------------------------------
Percent Country Value
- -------------------------------------------------------------
42.13% United Kingdom $ 11,104,876
Western Europe
34.09% (non U.K.) (b) 8,986,975
23.78% United States 6,269,100
- ------- -----------------
100.00% $ 26,360,951
- -------------------------------------------------------------
(b) The Z-Seven Fund does not invest in Eastern European
companies.
