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Z
SEVEN
THIRD QUARTER REPORT
Period Ending
September 30, 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
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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.
Be sure to read about our new program for the reinvestment of dividends and
capital gains. Important information and deadlines are contained in the box
at the end of this letter.
1996 NINE MONTH INVESTMENT RESULTS
Over the first nine months, our investment portfolio advanced over 12%. The
first half brought solid gains to our investment portfolio. The third quarter
showed a slight decrease of less than 1%. This was caused by unexpected
announcements and reactions to a couple of positions in our portfolio. The
first is semi-conductor manufacturer Zilog. At the end of 1995, Zilog had a
backlog of orders that was more than double the number of the prior year.
Zilog showed a history of healthy profit growth and a debt free balance sheet.
We recognized the underlying value and added it to our portfolio in the first
quarter of this year. During the second quarter, the company began to tell
analysts that orders were slow and that third quarter results would be below
market expectations due to declining profit margins. As a result share prices
fell. We managed to spare ourselves only part of this rapid drop by selling
some of our shares early. Late in the third quarter, Zilog announced an
agreement with MSU Corporation to manufacture microchip sets for MSU's
InternetBox, which may be available as early as this Christmas. The
InternetBox is a device that is connected to a television and a telephone line
to provide low cost access to the internet.
Laboratory equipment supplier and water purification processor Protean, one of
our newest investments, also hurt us in the third quarter. The company issued
a warning that earnings' projections by some analysts would not be met in the
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short term. The reason given was a serious deterioration in the financial
performance of a water purification unit in Germany. The Protean board of
directors evaluated the situation and promptly replaced the manager of the
German division with the managing director from the successful UK-based unit,
who is also fluent in German. We believe the underlying strength of this
fundamentally sound investment will produce a turnaround in the future.
Without either of the above losses, the remaining twenty-nine holdings (out of
thirty) were up in total, and our investment portfolio would have increased,
as it has for the previous eight quarters.
FIRST HALF N.A.V.
Our Net Asset Value rose nearly 11% in the first half of 1996 from $17.48 to
$19.38.
THIRD QUARTER N.A.V.
After operating expenses, our Net Asset Value declined just over 1% during the
seventh, eighth, and ninth months of 1996 from $19.38 to $19.11. We had eight
quarters in a row with a higher Net Asset Value (now eight of the last nine).
Even with this slight decline, we have thirteen quarters in the past sixteen
in which our N.A.V. has posted a gain.
GOOD NEWS
Investments with increases of at least 20%, that have been in our portfolio
for twelve months, qualify to be discussed under our "Good News" section. In
the first nine months of 1995, we had ten investments that qualified. As of
this year we again have ten. Included among these are Z-Seven's three largest
positions going into 1996, which all posted substantial gains.
From largest to smallest they are as follows: Our largest investment entering
1996, CALLAWAY GOLF, made the grade officially in the second quarter. Callaway
is up over 50% in the first nine months of 1996. Last year, Callaway was in
the portfolio for less than eleven months (not the required twelve months)
and, due to this fact, its 36% gain in 1995 (since first purchased) did not
qualify for this section. All in all, over a period of nearly 20 months,
Callaway shares have
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more than doubled. Callaway has introduced the new Bobby Jones Series Putters
and aims to be the number one supplier of golf putters within the next
eighteen months.
Our second biggest holding coming into 1996 was Swiss pharmaceutical company
SANDOZ whose shares have advanced almost 43% during the first three quarters
of 1996, aided by favorable market reaction to a decision to merge Sandoz with
fellow Swiss company Ciba-Geigy to form pharmaceutical giant Novartis.
Novartis will be the second largest pharmaceutical company right after
Glaxo-Wellcome PLC (the result of the largest ever British merger just last
year which also enriched Z-Seven shareholders during last year's first three
months). Sandoz and Ciba-Geigy were originally chemical companies that
evolved into pharmaceutical entities. The chemical business was more
cyclical and less lucrative, so both companies have disposed of their chemical
divisions. Since first purchased over four years ago, Sandoz has more than
quadrupled.
Z-Seven's third most important investment (in size order) entering 1996 was
GETRONICS NV, the dominant Dutch provider of software and consulting services
to the information processing and telecommunications industries. Partly due
to the acquisition of a former rival, Getronics has shown impressive sales
growth. Operating profits improved 68% in the first half of 1996. Getronics
shares rose almost 134% in the first nine months of 1996. Our patience has
been richly rewarded as this gem has been in our portfolio for nearly six
years and has grown six-fold.
Our fourth largest position going into 1996, Astra, the Swedish
pharmaceuticals growth company, is up only about 4% for the first three
quarters of 1996. This does not qualify as "Good News" yet, but a strong start
to the new three month period which closes the year may help lift Astra shares
to a more significant advance for the full year. Our fifth largest position
entering 1996, DayRunner, is a new holding which hadn't started out very well,
but is beginning to rebound - see "Mistakes and Disappointments" next after
"Good News."
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LINDT AND SPR NGLI, the Swiss premium chocolates company, which was our sixth
largest investment entering the year, does in fact belong in our "Good News"
section as it is up almost 24% in the first nine months of 1996. National
Dentex, our seventh biggest position going into 1996, consolidated its huge
1995 gain of 158% with a correction of about 22% during the first nine months
of 1996. More on National Dentex can be found in the next section.
L'OR AL, our largest French investment and our eighth biggest overall going
into the year, has a strong 33% gain during the first nine months of 1996.
The Paris bourse is being fueled by lower interest rates, helping L'Or al as
well as other publicly traded French shares. In over six years, this
investment has multiplied about eight-fold.
Shares of Atag NV (our ninth biggest entering 1996) were up 21% during the
first half of the year, but slipped to a 9% increase by September 30th due to
a lower earnings outlook for the year. Since it has become a trend in recent
years for Atag to begin the year well only to disappoint later in the year, we
sold about 30% of our holding in the second quarter and the balance after
September 30th.
Our next largest and one of our newer British conglomerate holdings, TT Group
PLC, is up over 17% this year but does not qualify for the "Good News"
category at this time. Wassall PLC, also a British industrial conglomerate,
had a modest 6% increase in the first half of 1996. In the third quarter it
posted a gain of over 9%, which brings it to nearly a 16% gain so far for
1996. Our twelfth largest going into the year, Weetabix, lost 13% during the
opening half. The third quarter shows a further decline of 4%.
This is the "Golden Dozen" (twelve largest) described individually in greater
detail in Z-Seven's latest annual report. Nine of these twelve had gains in
the first nine months. All twelve, as a group, were up more than 20%, and
five were up 24%-134%.
Just outside of our "Golden Dozen" coming into 1996 is our next (thirteenth)
biggest holding, LVMH. Like L'Or al, a strong Paris bourse helped lift
French luxury goods company LVMH M et Hennessy Louis Vuitton to score a 20%
gain
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for the first six months of 1996. The gain in the first half was followed by
a correction that leaves LVMH up about 10% in the first nine months.
Our next largest outside our "Golden Dozen" is AIRTOURS PLC, entering the year
as 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. Still, excellent
management and an effort to raise margins may help Airtours to report pleasing
profits, as it often does, even in poor times. It has added a Scandinavian
cruise ship operation (the largest in Sweden) to its vacation (called holiday
in Britain) business and is now taking on Carnival Cruise as a partner,
issuing new Airtours shares to Carnival; just under 30% of its shares are thus
now held by Carnival Corp. The immediate result of this transaction has been
to lift these shares 39% during the first half of the year. 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). We have continued to reduce our holding. During the third
quarter we gained 18% and 65% year-to-date. The remainder of our Airtours
shares are now in excess of 17 times what we first began to buy them for
almost seven years ago.
The British international insurance broker, Lloyd Thompson PLC, that has been
in our portfolio since the end of last year, has grown its operating profits
in the face of very difficult market conditions. Through the nine months,
Lloyd Thompson's share price has gained about 3%. SETON HEALTHCARE PLC, the
foot bandage pioneer, and AIR LONDON PLC, the broker and agent for executive
private air travel, have exceeded the 20% mark in 1996, and need to be
included in "Good News" after reviewing the third quarter results. Seton is
up a respectable 33% thus far for the year and Air London had an excellent
quarter and is at a year-to-date increase of 57%.
After several years of solid growth in earnings and share price, RCO HOLDINGS
PLC has fallen upon hard times. In last year's Z-Seven annual report, RCO was
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in an unaccustomed position of being one of our two small "Mistakes and
Disappointments." At that time, I wrote "long-term minded managements and
debt-free balance sheets have a way of turning this year's 'Mistakes and
Disappointments' into next year's 'Good News.'" The company is diversifying
away from government cleaning contracts to a greater industrial client base.
Results year-to-date show a gain of 21%.
ABBEYCREST PLC is another example of a cash-rich, debt-free company that fell
upon hard times last year. This year, it was up 23% at the half-way point and
has stretched the gain to 25% after the third quarter.
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. As of this quarter,
besides Zilog and Protean (discussed earlier) which do not qualify for this
section because they are new holdings, three stocks have fallen into this
category. NATIONAL DENTEX CORPORATION, the leading U.S. dental lab, was down
15% from last quarter in anticipation of narrowing earnings growth during the
third quarter and now stands at a year-to-date decrease of almost 22%.
However, even this decline consolidates its unusually strong 1995 advance of
158%. This company has a good track record in buying smaller regional labs and
improving the performance of these acquisitions. In the short term, profit
margins usually dip as the company merges people and updates systems during
the turnaround process. Last year National Dentex acquired eight labs that
added over 20% to sales this year. We have confidence that their past history
will show good results for the future. This may be another case where
"Mistakes and Disappointments" turn into next year's "Good News."
DAYRUNNER worried some investors when one of its major customers (Wal-Mart)
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
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supply leader into higher-end retail markets. More importantly, DayRunner has
already demonstrated its superb management by achieving substantially higher
profits even before its sales grow again. Down 25% in price for the first
half year, it rebounded over 6% this quarter and almost pulled out of the
"Mistakes and Disappointments" category.
The largest year-to-date drop came from the second tiniest holding which
accounts for only a fraction of one percent of our Net Asset Value. WESTFAIR
FOODS was up 96% in the first half and was down 25% at the end of the third
quarter. This demonstrates the wild share price fluctuations, driven by
litigation expectations, that are a characteristic of this company. As of
this writing, the volatile share price has recovered and is up 67%
year-to-date.
OUTLOOK
Large capitalization stocks in the U.S. are in the midst of a vigorous rally
that we hope will be followed by small capitalization shares here and by
markets in Europe. My leading indicator for interest rates suggests that U.S.
interest rates may decline further. Share prices are clearly overvalued and
are likely to become even more so as share prices lag bond prices by an
average of nine months. Despite a temporary setback this quarter, we have
reason to believe the fourth quarter may return to a rising N.A.V. position
and finish the year strongly.
British interest rates have risen unexpectedly since the end of the third
quarter, when over one-third of the portfolio was invested in United Kingdom
stocks. The recent rise to over 4000 in the FTSE 100 Index has not been
supported by a new high in the broad market since its peak in May. These two
factors together made it necessary to gradually reduce and finally eliminate
UK positions that no longer meet the criteria. Regardless of macro
conditions, we are a bottoms-up value/growth fund. Therefore, since it is now
difficult to find quality companies selling under ten times earnings, we
continue to add UK companies to the portfolio and invest in existing British
holdings that meet our stringent investment criteria.
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Swiss, French, and Dutch interest rates have declined this quarter, and
Denmark and Spain have room to decline, so our holdings may well continue to
benefit from monetary easing in these countries. The majority of our
portfolio is still invested in European equities of companies that continue to
achieve consistent operating results. The outlook for the remainder of 1996
and into 1997 is quite favorable.
As mentioned in previous reports and in keeping with my own sincere
application of both letter and spirit of our heavenly creator's commandments,
I will not allow myself to "harvest" any financial reward (salary, profit,
etc.) for the twelve month period to end November 30, 1997. All advisory
fees, including bonuses (or penalties) paid during this year, less expenses
(no salary for me), will be disbursed one-third to the shareholders of the
Z-Seven Fund, another one-third to its staff, and the final one-third to
charity. I plan for the disbursements to be repeated every seventh year.
Sincerely,
Barry Ziskin November 5, 1996
______________________________________________________________________________
Exciting news for our shareholders! The DIVIDEND AND CAPITAL GAINS
DISTRIBUTION REINVESTMENT PROGRAM will be in effect for this year's
distributions. This is a new program and you may not receive the necessary
program materials in a timely manner. If you need to request this information
and you have physical possession of the share certificates (holder of record),
please contact ChaseMellon Shareholder Services, our Transfer Agent, at (800)
851-9677. If your shares are held for you by your broker (street name) please
call your broker. In order to participate in the plan for any 1996
distributions, shareholders must be enrolled BY DECEMBER 20, 1996.
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<TABLE>
<CAPTION>
Z-SEVEN FUND, INC.
SCHEDULE OF INVESTMENTS
at September 30, 1996
(Unaudited)
Percent (a) Common Stock Shares Value
<C> <S> <C> <C>
4.78% BUILDING MATERIALS & SUPPLIES
Polypipe PLC 413,200 $1,260,673
UDO Holdings PLC 1,700 5,374
________
1,266,047
9.09% ELECTRONIC COMPONENTS & SERVICE
Getronics NV 53,004 1,345,825
Zilog Inc. 55,400 1,059,525
________
2,405,350
4.57% FINANCIAL SERVICES
City of London PR Group PLC 7,500 9,390
Lloyd Thompson Group PLC 448,600 1,200,454
________
1,209,844
6.43% FOOD, CONFECTION, AND BEVERAGE
Carlsberg AS 4,100 248,780
Lindt & Spr ngli AG 512 849,250
Weetabix Ltd. 17,550 604,176
________
1,702,206
13.86% HEALTH & PERSONAL CARE PRODUCTS
AB Astra Class B 25,500 1,048,943
L'Or al Ord.* 4,075 1,382,024
Sandoz AG* 1,031 1,238,187
________
3,669,153
12.54% LUXURY & DESIGNER PRODUCTS
Abbeycrest PLC 20,800 44,907
Callaway Golf Co. 76,200 2,600,325
LVMH M et Hennessy
Louis Vuitton S.A.* 3,105 674,555
________
3,319,787
7.80% MEDICAL SERVICES & SUPPLIES
National Dentex Corporation* 51,000 975,375
Protean PLC 266,300 629,267
Seton Healthcare Group PLC 55,800 461,020
________
2,065,662
17.37% MULTI-INDUSTRY
Atag Holding NV 11,098 753,155
TT Group PLC 242,300 1,198,174
Tomkins PLC 311,500 1,350,041
Wassall PLC 264,100 1,297,523
________
4,598,892
</TABLE>
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<TABLE>
<CAPTION>
Percent (a) Common Stock Shares Value
<C> <S> <C> <C>
20.52% PRINTING & BUSINESS SERVICES
Air London Intl. PLC 192,300 505,557
Day Runner Inc. 96,300 2,648,250
RCO Holdings PLC 93,300 338,679
Fairway Group PLC 1,377,500 1,939,520
_________
5,432,006
0.85% RETAILING
Essex Furniture PLC 155,100 218,381
Westfair Foods Ltd. 360 6,888
_________
225,268
4.34% TRAVEL
Airtours PLC 96,560 910,368
Autopistas C.E. SA 19,992 239,044
_________
1,149,412
102.15% TOTAL COMMON STOCK 27,043,627
(Cost $21,999,061)
-2.15% LIABILITIES IN EXCESS OF CASH,
RECEIVABLES AND OTHER ASSETS (568,849)
100.00% NET ASSETS
(equivalent to $19.11 per share based on
1,385,649 shares of capital
stock outstanding) $26,474,778
============
<FN>
* All or a portion of this stock was pledged as collateral for the line of
credit.
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCKS BY COUNTRY Sept 30, 1996
Percent Country Value
<C> <S> <C> <C>
44.27% United Kingdom $11,973,502
28.77% Western Europe 7,779,762
(non U.K.) (b)
26.96% United States 7,290,363
__________
100.00% $27,043,627
===========
<FN>
(b) The Z-Seven Fund does not invest in Eastern European companies.
</TABLE>
