Z-SEVEN'S STATEMENT OF PURPOSE
Our investment discipline is what begins to separate the Z-Seven Fund from
other publicly traded investment companies (closed-end funds) and other
investment companies (mutual funds) as well as other publicly traded companies
(stocks). The cover is designed to highlight the principles behind a discipline
that has weathered the ups and downs of economies, stock markets, industry
trends, as well as countless predictable factors because it is based upon common
sense solutions diligently applied from lessons learned by the making of
mistakes and the dedication not to repeat these errors not just for one year,
three years, or five years but by the founder of Z-Seven, Barry Ziskin,
throughout the sixteen-year history of Z-Seven. In fact, Mr. Ziskin began
utilizing this current discipline early in his Wall Street career long before
the idea of beginning a closed-end fund. HIS CRITERIA FOR SELECTING
HIGH-QUALITY, UNDERVALUED GROWTH STOCKS HAVE STOOD THE TEST OF TIME OVER A SPAN
OF MORE THAN 25 YEARS.
As you read further into the Annual Report, it will quickly become obvious,
for those who do not already know to expect it, that a discussion of our poorer
performing stocks is a regular feature; for it is through the lessons learned by
mistakes that we continue to evolve as better investors. Our "Criteria for
Stock Selection" section once again promises to bring the theoretical to life
through real and meaningful examples in our portfolio of investments, and is
followed by an in-depth look at our "Selling Discipline."
The application of discipline, intended to reduce risk, while searching for
rare and profitable investment opportunities, is our stated purpose. How we
state this purpose through the information provided in the Annual Report reveals
yet another purpose: to share with you not only our growth but also our
thoughts, concerns, and lessons learned in the hopes of making us all better
investors.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
LETTER TO OUR SHAREHOLDERS. . . . . . . . . . . . . . . . . 3
1999 Portfolio Investment Results . . . . . . . . . . . . . 7
1999 Fourth Quarter Net Asset Value . . . . . . . . . . . . 8
1999 Dividend Distribution. . . . . . . . . . . . . . . . . 8
Retained Capital Gains. . . . . . . . . . . . . . . . . . . 8
1999 Share Repurchases. . . . . . . . . . . . . . . . . . . 8
2000 Outlook. . . . . . . . . . . . . . . . . . . . . . . . 10
THIS YEAR'S BEST QUESTION . . . . . . . . . . . . . . . . . 12
STOCK PURCHASE CRITERIA AND SELL DISCIPLINE . . . . . . . . 15
Accounting Procedures: Reliability and Conservatism . . . . 15
Consistency of Operating Earnings Growth. . . . . . . . . . 18
Strength of Internal Earnings Growth. . . . . . . . . . . . 20
Balance Sheet: Working Capital . . . . . . . . . . . . . . 24
Balance Sheet: Corporate Liquidity . . . . . . . . . . . . 24
Price/Earnings Multiple and Owner Diversification . . . . . 25
Sell Discipline: Based Upon the Same Common Sense Criteria
as for Stock Selection. . . . . . . . . . . . . . . . . . . 28
A NEW LOOK. . . . . . . . . . . . . . . . . . . . . . . . . 32
The Strongest Seven (formerly "Good News"). . . . . . . . . 32
The Weakest Seven (formerly "Mistakes and Disappointments") 34
PERFORMANCE AND FINANCIAL INFORMATION . . . . . . . . . . . 38
PAST PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . 39
SPECIAL FEATURE OF THE FUND . . . . . . . . . . . . . . . . 42
INVESTMENT OBJECTIVES AND POLICIES. . . . . . . . . . . . . 43
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . 45
FINANCIAL REVIEW. . . . . . . . . . . . . . . . . . . . . . 46
</TABLE>
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<TABLE>
<CAPTION>
LETTER TO OUR SHAREHOLDERS
THE YEAR IN REVIEW
- - Our Z-Seven Fund closed 1999 on the NASDAQ at $7.69. The total investment
return for our share price, which assumes reinvestment of distributions, had a
fairly flat year with a decline of about 3%. Historically, our share price,
including distributions, has generated the following net returns:
Cumulative Annually Compounded
----------- --------------------
<S> <C> <C>
5-year. 69% 11%
10-year 130% 9%
15-year 275% 9%
- ------- ----------- --------------------
</TABLE>
- - Z-Seven's net asset value was $7.57 at year-end. Assuming the same
reinvestment of distributions, it also had a flat year, dipping approximately 2%
in 1999.
- - In a year when the majority of stocks listed on the Nasdaq and U.S.
Exchanges were down in price, we believe our flat 1999 represents a significant
achievement. At times, how well one is able to withstand difficult markets
may be of greater importance than how much money can be made, particularly for a
small-cap and micro-cap growth fund like Z-Seven.
- - While our long-term outlook remains positive, an upturn in interest rates
in 1999 and poor broad market conditions are serious current concerns that may
take time to resolve. In the meantime, we are taking precautions to protect our
investors from current market risks. Our substantial liquidity also positions
us well for better value opportunities in quality growth companies when they
become available.
- - In accordance with our selling discipline, negative monetary conditions
and broad market divergent behavior (vs. popular market indices) prompt the sale
of those stocks no longer meeting all of our purchase criteria. This helps us
to weed out those stocks that now have greater risk, according to our criteria,
than they did when originally purchased. First, we sold our investments in
those companies which have run into earnings problems, causing them to no longer
meet our "Consistency of Earnings Growth" criterion. By year-end, all
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of these (with three small exceptions totaling approximately 1% of our net
assets) were sold completely.
- - The year of 1999 was not particularly forgiving to most earnings
disappointments and nearly all of these final sales were at a loss. The profits
on selling our highest P/E multiple stocks, while holding the bargains among our
superbly managed growth companies for the long-term, were able to be postponed
until January, 2000.
We begin the year 2000 with a streamlined portfolio of superb growth
companies. We continued our sell program during the first week of the new year,
eliminating at substantial profits those stocks that are no longer undervalued.
Both monetary and broad market conditions have confirmed risk factors which may
lead to general market decline. This may especially pressure the prices of those
higher P/E multiple stocks, as is common during periods when P/E's are
declining.
Three of our sales were domestic stocks involved in mergers. AFC CABLE was
sold in 1999, and was technically the same company in name. A planned
merger, however, with Tyco International for an exchange of AFC shares had been
announced. We sold our shares prior to the exchange because of new information
regarding accounting irregularities at Tyco; but the Tyco merger exchange rate,
of course, was already directly affecting the share price of AFC. Still, our
AFC shares, which were first bought in 1998, earned Z-Seven a return of
approximately 36%.
During the first week of 2000, we also sold SOLECTRON and PLEXUS, which we
received in mergers with SMART MODULAR and SEAMED, respectively. These new
companies met the same quality criteria as the acquired companies we first
invested in, including our most important requirement of reliability and
conservatism in accounting procedures. Both Plexus and, to an even greater
extent, Solectron were sold because their P/E's became so excessively high that
no reasonable assumptions on future earnings growth could justify them. At
year-end, the value of our Solectron had increased more than 88%, and Plexus had
climbed over 54%. Consequently, the first week of the new year netted us
substantial profits from these two companies.
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For the same reason as Solectron and Plexus, we also sold ORACLE, the
largest provider of database software for internet use. That's right - an
internet stock in Z-Seven's portfolio. Before you get too concerned, however,
I'll point out that Oracle has a proven history of growing their earnings every
year, although not necessarily every quarter. We were fortunate to have bought
them in October 1998, when technology shares were cheap and Oracle was
particularly undervalued by market concerns over a poor quarter earlier in the
year. After adjusting for a 3-for-2 split, the company's price was nearly 7
times what we first paid for it by the end of 1999. We have since sold our
shares and realized these gains.
The common denominator between Oracle, Solectron, and Plexus, other then
their ultra-high P/E multiples, is that they are high-technology stocks. This
is also true for a fourth domestic holding, AVT CORP. (formerly known as Applied
Voice Technology) that was sold in 2000. In this case, we would have sold these
shares even if they did not rise to an excessive P/E multiple because the
C.E.O., Dick La Porte, who successfully guided this company through its many
years of growth recently announced his plans to step down. This announcement
came with no successor named, or even a plan for succession, to demonstrate
continuity of top management. We first purchased AVT shares in mid-1998 at a
price that more than doubled by the end of 1999.
With so many changes in our portfolio, you may be wondering if there are
any tech stocks left? Absolutely! Half of our 12 largest investments at year-end
consisted of tech stocks. Four of these stocks (having sold Oracle and Plexus)
remain today among our biggest holdings: TECHNITROL and SYNOPSIS in the U.S.,
and SANDERSON and ROXBORO in Great Britain are high-tech stocks. Sanderson
Group Plc, however, knows it has an excellent information technology service
business and is buying out the public shareholders, taking the company private.
We may well invest even more heavily in technology stocks, depending upon which
companies are available at the bargain prices we require.
Two other significant removals from our 1999 portfolio were long-term
Holdings across the Atlantic. These were L'OREAL, the French haircare and
cosmetics giant, and ASTRAZENECA, the result of this past year's continued
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consolidation among major global pharmaceutical companies. Astra was our
original investment, a Swedish firm that merged with Zeneca (one of Britain's
major drug companies behind Glaxo-Wellcome and Smithkline Beecham).
L'Oreal was first purchased about a decade ago. When the voting shares were
about 14 times earnings, we first bought non-voting common shares for about half
the price and received a 4-for-5 exchange into voting nearly four years later.
This adjusted our original P/E from around 7 times to 9 times estimated
earnings. We trimmed our L'Oreal shares at the time of the exchange in 1993,
and again during the past couple of years, to make room for additional
investment opportunities still available at bargain prices. Our remaining
shares were valued year-end at a price more than 16 times our cost, and the
final sale of this now ultra-high P/E stock, even though it is not "high-tech,"
was made at a substantial profit.
Astra (now AstraZeneca) was held for nearly 6 years, and was also trimmed
over the past couple of years to make room for better bargains. Our final sale
of this now ultra-high P/E stock was at a price equivalent to over triple what
we first paid. Both L'Oreal and Astra are now much larger than they used to
be and are currently growing their earnings at much slower rates. While they
are, no doubt, two of the best quality big companies, stocks with lower P/E's
and higher growth rates will give us better long-term rates of return with less
vulnerability than overvalued P/E's when these monies are eventually reinvested.
We are maintaining and updating an active shopping list of investment candidates
that may well be the portfolio of tomorrow for Z-Seven. One thing is certain:
when the buying opportunities do arise, we have the liquidity to capitalize on
the opportunities.
WHY DON'T WE JUST INVEST THAT MONEY NOW? A combination of record high
valuations on many companies, including excellent growth companies, a tight
credit policy by the Federal Reserve Board, Bank of England, and the European
Community's new central bank, increasing inflationary pressures, and poorly
performing broad markets diverging from the new highs of popular, market-cap
weighted indices makes equity investing unusually risky. As night follows day,
I believe sobriety will return to share prices and result in an abundance of
value greater than any we
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have witnessed in quite a number of years. Even our investments in the
quality value growth companies remaining in our portfolio are protected from a
decline in the general market through S&P500 put options.
With the excellent value companies that remain in our portfolio, and a
"truckload" of cash (32% at year-end) waiting to position ourselves in still
other promising investments at bargain prices, our long-term outlook, in my
opinion, has never been brighter. Our current conservatism will mean that the
returns we receive on existing and additional holdings will not have to first
build our net asset value back up before putting us over the top. By locking in
our peak market net asset value, substantial growth in the next rising market
will be over and above current levels, with no need to play "catch up."
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1999 PORTFOLIO INVESTMENT RESULTS
Z-Seven's investment portfolio dipped 2% in 1999 (before expenses). While
this makes for a disappointing comparison with the S&P 500 and Russell 2000 for
the year-end, it is worthnoting that the gain in the more comparable Russell
2000 is not what it appears. Like many other indices (including the S&P 500 and
NASDAQ), the Russell 2000 is heavily weighted by the biggest and most popular
stocks. Removing the relative handful of billion dollar plus market stocks from
the Russell 2000 illustrates that, without these large-cap stocks, this index,
which is thought of as being small capitalization in nature, actually declined
more than 6%. Removing stocks with a capitalization of more than $500 million
from the Russell 2000 gives you a decline of more than 9%. This is quite a
notable difference when comparing to a portfolio like Z-Seven wherein over 88%
of our domestic stocks began 1999 with less than $1 billion in market cap, and
about 2/3 were less than $500 million. Below is a look at our total portfolio
return (before expenses) over the years:
<TABLE>
<CAPTION>
Cumulative Annually Compounded
----------- --------------------
<S> <C> <C>
5-year. 101% 15%
10-year 206% 12%
15-year 584% 14%
- ------- ----------- --------------------
</TABLE>
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================================================================================
1999 FOURTH QUARTER NET ASSET VALUE
Our net asset value increased 3% during the fourth quarter to $7.57, after
a distribution of approximately $.05 per share in December.
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1999 DIVIDEND DISTRIBUTION
Undistributed short-term gains and dividend income remained from November
and December of 1998. Consequently, the Fund paid a remainder distribution on
December 30, 1999 of $0.0499 per share.
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RETAINED CAPITAL GAINS
Shareholders are allowed to increase the tax-cost basis of their shares by the
net amount between retained gains and taxes paid. For an original shareholder,
the initial purchase cost of $15 would be adjusted to $5 after stock splits in
1986 and 1997. This cost would then be added to the total of $4.06 per share in
tax cost write-up (see chart below) to allow you a $9.06 tax-cost basis on
your Z-Seven shares purchased in 1984 at $15. Please consult your tax adviser
with respect to your individual investment in Z-Seven.
The following is a history of retained capital gains and the related taxes
paid by the Fund on a per-share basis (adjusted to reflect the two-for-one stock
split in December 1997 and the three-for-two stock split in April 1986):
<TABLE>
<CAPTION>
Retained Z-Seven's Tax Cost
Years Capital Gains Tax Payments Write-up
- ----------------------- -------------- ------------- ---------
<S> <C> <C> <C>
1984-85 $ 0 $ 0 $ 0
1986 .83 .22 .61
1987 1.06 .34 .72
1988 1.55 .53 1.02
1989 .27 .09 .18
1990-92 0 0 0
1993 .64 .23 .41
1994 .07 .03 .04
1995-96 0 0 0
1997 1.30 .45 .85
1998 .35 .12 .23
1999 0 0 0
---------
Total Tax Cost Write-up $ 4.06
</TABLE>
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1999 SHARE REPURCHASES
Partially responsible for the strong long-term performance in our share
price is the fact that we repurchase our own shares when they sell at a
discount. This practice tends to create a floor for our share price just under
our net asset value.
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During 1999, we repurchased 223,500 shares on the open market. These
repurchases are made when the price is below net asset value, in accordance with
Rule 10b-18 of the Exchange Act of 1934 and Rule 23c-1 of the Investment Company
Act of 1940. Buying in this way insures that the net asset value is not
diluted. To the contrary, these purchases (at small discounts) benefit our net
asset value to some extent.
The problems of selling at large discounts have long plagued the closed-end
fund industry, but most funds choose not to do this because it decreases the
advisor's fee by shrinking the pool of capital. We feel that REPURCHASING IS
ANOTHER EXAMPLE OF Z-SEVEN PLACING THE INTEREST OF OUR SHAREHOLDERS FIRST, by
reducing advisory fees and maximizing shareholder value.
NEXT, READ ABOUT OUR OUTLOOK FOR THE YEAR 2000.
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2000 OUTLOOK
In our 1998 annual report, we stated "Lower interest rates should point the
way to an excellent 1999 for New York, NASDAQ, London, Copenhagen, Zurich,
Paris, Stockholm, Madrid, Toronto, and Winnipeg markets. At the current time,
every market we are investing in enjoys the benefits of lower interest rates."
Then why, when interest rates did turn up during the year, did the stock market
finish 1999 so strongly? For one answer, I would like to again refer to last
year's annual report. We stated, "How long can this go on? Of course, no one
really knows for certain. It is constructive in gaining perspective to realize
that a stock market historically continues to climb for a period of months,
sometimes years, after interest rates have already hit bottom."
So, where are we now? It appears that we are in that phase usually found
at or near major market tops when share price indices are still climbing to new
highs, but most stocks are not participating. In addition, the Fed and The Bank
of England are pursuing tight money policies. Whether it's the year 2000 or
2001, stock market history would strongly suggest a bear market will follow
these conditions. While even an over-inflated, narrowly-driven market could
buck the odds for a while, for just how long may depend upon how hard the Fed
will lean on it. In addition to higher interest rates, the Fed may seek an
increase in the margin rate for stock investors and/or day traders.
We have greatly streamlined our investments which, with very few
exceptions, are now in companies that are continuing to generate earnings growth
and positioning themselves to increase profits further into the future. Strong
balance sheets are enabling managements to take advantage of opportunities
during challenging economic times. Even before selling our ultra-high P/E
stocks during the first week of the new year, OUR PORTFOLIO IS DEMONSTRATING
EXCELLENT VALUE, WITH A P/E OF 7 TIMES ESTIMATED EARNINGS AT YEAR-END. This
is less than 5 times after deducting cash per share (see Price Earnings Multiple
Criterion, page 25). These factors, combined with the fact that we have
protected our portfolio
during a time of unusually high risk, and have the cash to take advantage of
opportunities coming to the long-term, value-oriented investor, lay a solid
foundation for growth
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potential in our investments, not for 2000 alone, but for many years to come.
While my personal involvement is demonstrated through my share ownership
and through my willingness to be compensated on the basis of my performance, my
greatest incentive and blessing comes through the investments in Z-Seven by my
family, my friends, and your families. You provide invaluable inspiration to
me. I would like to thank all those who have demonstrated confidence in my
growth/value discipline.
Our wonderful directors, Rochelle, Jeff, Maria, and Al, with their caring
support and hard work, each brought significant improvements to our Fund and
made it even stronger.
Sincerely,
Barry Ziskin February 6, 2000
P.S. This report is dedicated to my daughter Ariana, who turns fifteen today.
This report is also dedicated to my son Jacob, who will soon turn 3, and to the
memory of my late father, my most valuable mentor.
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THIS YEAR'S BEST QUESTION
This year, it is the question not just from one investor, but on many a
shareholder's mind, "SO, BARRY, WHEN ARE YOU GOING TO START TO MAKE US SOME
MONEY AGAIN?"
While we would all like to think of ourselves as patient, long-term
oriented investors, many people often read investment newsletters which boast of
exceptional growth in the prices of their stock picks, and hear how major market
indices like the NASDAQ composite have soared to record heights. One cannot
help wonder, "Have I been left behind?"
Sometimes it seems as though "everyone else" is making money and this
notion seems quite unfair. This is precisely how nearly all investors feel
today, whether they are Z-Seven shareholders or not, and exactly why this is
such a timely and excellent question.
It is simple, even tempting, to get caught up in all the hoopla and
excitement of, what I believe to be, a special moment in stock market history.
Whether it's gold and oil after the 70's, the Japanese stock market at the end
of the 80's, or the market in the U.S. right now, there are times when it seems
as though easy money is being given away. I know I am not the first to say
this, but there is no such thing as a free lunch!
I prefer the evidence of many economic and stock market cycles of a
consistent and repetitive nature that can verify a cause and effect. In this
respect, it is common sense that a tighter monetary policy of higher interest
rates restricts business, makes bonds and short-term money market instruments
competitive with stocks, and directly influences supply and demand.
In 1999, transactions that added companies to the marketplace proceeded
at a feverish pace. These Initial Public Offerings (I.P.O.'s) soared almost
90% in the most recent year to a record of approximately $69 billion. Are the
underwriters doing us investors favors with these hot I.P.O.'s out of the
goodness of their hearts? Unless it makes economic sense to do so, and is
justified in taking our money in exchange for shares of companies without
earnings and, in some cases, without any real business, these transactions would
not be nearly as popular among issuers as they indeed are in the current
frenzied environment. Higher interest rates makes the decision between taking
on debt or issuing shares to the public that much simpler.
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The potential, at this point, for a substantial market decline is
exceptionally great, not only because of rising interest rates and P/E
multiples, but also because nearly all stocks are being ignored by this
extraordinarily narrow market advance. Indeed, 1999 saw nearly 2 out of every 3
stocks on the New York Stock Exchange actually decline in price. This is very
similar to the narrow "Nifty Fifty" market of 1972 before the worst bear market
of the last sixty years (1973-1974).
Just as spring follows winter, the eventual abundance of value to be found
at the bottom of a bear market is the genesis from which a healthy, sustainable
advance in small-capitalization shares can occur. We look forward to such an
occurrence with anticipation and excitement, and with peace of mind in knowing
that we will not have to first climb out of a hole thanks to our protective
measures. This should be true even if the bear market is so brief (like the
1987 crash and more recent declines) that the earnings growth of our investments
are not given enough time to compensate for declining P/E multiples. (See
"Strength of Internal Earnings Growth" criterion on page 20).
If we were not protected, a 1987 style decline could first set us back some
30-50%, as it did to most stock prices at that time. While this would likely be
followed by one of our best years ever, as is usually the case after a
substantial stock market decline, that excellent year or two could be wasted in
only getting us back to where we were before the decline. Actual progress and
growth is so much better!
As an example, if a portfolio were to quickly lose 33% of its market value,
it would take an exceptionally strong year of 50% growth just to break even. In
a worst case scenario, if we were to lose 50%, we would then need to double in
order to recoup. This would likely take at least a couple of years, and
possibly several years.
So, back to the question. "When?" No one can predict the exact timing and
circumstance of the next market bottom until after it has been reached. A
number of signals should then mark the turn in the road and our opportunity to
invest in a larger number of excellent growth companies at bargain-basement
prices.
Will it be days, weeks, or months away? Again, no one knows at this time,
but our portfolio has current protection from losses, and we look forward
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to taking advantage of a future bottom in the market to reinvest. The
ultimate result is geared toward making Z-Seven an unusually profitable
investment vehicle for this next decade and beyond.
NEXT, READ ABOUT OUR UNIQUE STOCK PURCHASE CRITERIA.
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STOCK PURCHASE CRITERIA AND SELL DISCIPLINE
Among the features which set the Z-Seven Fund apart are its carefully
developed and closely followed seven criteria for stock selection, and its
strict sell discipline. The seven criteria were developed by Barry Ziskin to
reduce risk in the stock selection process. Thousands of publicly held
companies throughout the developed world are analyzed yearly. To provide
meaningful examples, we use our biggest investments to illustrate our criteria.
This way, we provide new information on our largest positions and, at the same
time, bring our criteria to life.
ACCOUNTING PROCEDURES: RELIABILITY AND CONSERVATISM
"Companies must not defer operating expenses or prematurely realize
revenues and must have an auditor's report on financial statements that is
unqualified in all material respects."
Without the credibility of conservatively reported earnings and balance
sheet information, the other criteria would be meaningless. For this reason, we
take the time and effort to make the stock selection process as valid as
possible through manual analysis. The average investor can determine the
difference between conservatively reported profits for income-tax purposes vs.
profits reported to shareholders (book income) by reviewing the income-tax
footnote of an annual report (SEE BOX BELOW).
Tax actually paid is called "current tax." The extra tax, which would have
been paid if the company paid taxes using the same accounting practices as used
in reporting earnings to the public, is called "deferred tax." Adding the
"deferred tax" to the "current tax" gives us the total income tax we see
reported to shareholders.
<TABLE>
<CAPTION>
<S> <C> <C>
EXAMPLE: CURRENT TAX $30 MILLION
DEFERRED TAX 10 MILLION
-----------
TOTAL TAX $40 MILLION
</TABLE>
This company actually paid only $30 million of the $40 million of the tax
it reported on its income statement.
In our analysis, we adjust earnings downward to reflect the more conserva
tively reported figures. Deferred taxes usually are the result of "temporary
differences." Different depreciation methods are used by most companies for tax
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purposes vs. financial reporting. The "accelerated" method used for tax
purposes, will show a higher depreciation expense in the earlier years and,
therefore, lower earnings. For financial reporting purposes, a straight-line
basis is used, resulting in a lower depreciation expense and a higher net
income.
Watch out for differences other than depreciation in recognizing income and
expenses that cause deferred taxes to increase consistently year after year.
Becoming familiar with the companies' individual accounting practices and their
impact on your existing holdings, as well as your prospective investments, is
well worth the time involved in learning and applying good common sense to
protect your financial assets.
In some European countries, such as France and Switzerland, the
"Pro-visions" note to the "Group Consolidated Balance Sheet" is the only source
of deferred-tax information. In Italy and Germany, only a handful of public
companies make this disclosure which tells how conservatively earnings are being
reported. If this vital data is not available, we simply do not invest in that
company.
While 1999 financial statements are not yet available to review for the
1990s, during the 1980s the earnings reported to the shareholders by the average
S&P 500 company were 23% higher than earnings reported to the IRS!
One of Z-Seven's latest investments is in a thinly-traded, small-cap
British company whose identity we will keep, for the moment, a mystery. These
shares were difficult to purchase in 1999, and would still probably be so if we
needed to add to our holding. Add to our holding? Yes, even though "Company S"
is now our largest position, we would utilize any combination of a better buying
opportunity in its shares and/or a general market opportunity to become fully
invested in what appears to be an excellent investment.
One of the reasons we have invested in "Company S" is that earnings have
consistently been reported to the public that are even more conservatively
stated than the minimum figure they must report to Inland Revenue (the British
version of the I.R.S.). In six of the most recent seven years, including fiscal
1999 which was just reported, "Company S" reported even less to the public than
they
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reported for taxes. The only year in which higher than tax earnings have
been reported showed a difference of less than 1/3 of 1 percent.
************
MORE ABOUT "COMPANY S"
In the past, we have adopted generic names for new investments so thinly
traded that we did not want to invite competition in purchasing more of them.
During 1999, we have begun to build a new position in a tiny London-traded
company that made a pre-tax profit of just under 18 million (more than double
the 8 million earned the year prior) in its latest reported year.
The first name masking the identity of a stock was taken after the Brand-X
concept and called "Company X." Company X was Brent-Walker Plc, a major British
holding which began in 1986. About 80% of our Brent-Walker position was sold in
1988 at nearly seven times its cost from just two years earlier.
"Company Y" was the next name, and it was adopted for Boston Acoustics
in 1989. Once our largest investment, most of our Boston Acoustics shares
were sold in 1992 at about 5 times what we first paid for the stock.
"Company Z" came right after "Company Y" in 1989 and was Airtours Plc, our
most profitable holding ever. Most of our shares were sold a little over three
years after their purchase, for nine times their original cost. The balance of
our Airtours shares were gradually eliminated during the remainder of our 7-year
holding at prices that were approximately 26 times what we first paid for them.
Nine years ago we began to go in reverse in our alphabetical monikers, and
nicknamed International Speedway "Company W" and Intertrans "Company V." Most
of International Speedway shares were sold four years later for nearly triple
what was paid for them; Intertrans doubled for us.
The two most recent mystery stocks, "Company U" and "Company T," were
respectively National Dentex, which we still own, and Weetabix, Ltd., in which
we are no longer invested.
Our current holding of National Dentex has increased 76% for us. We
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previously sold most of our shares at much higher prices (some nearly
triple what was paid for them) and may enlarge this holding in the future, if
given the opportunity. Weetabix shares no longer met all of our purchase
criteria and are no longer in our portfolio, having more than doubled in
approximately four years.
Following in the footsteps of Companies "T" through "Z", "Company S" is
getting off to an excellent start. It closed 1999 as our biggest holding, with
a 60% return on our investment. The share price has continued to make progress
in the first few weeks of the new year, and has now more than doubled since we
first purchased.
************
CONSISTENCY OF OPERATING EARNINGS GROWTH
"At least 10% growth in adjusted pre-tax income in each of the six most
recent years."
As we search for the best managed companies, WE LOOK FOR COMPANIES THAT
HAVE PREDICTABLE EARNINGS GROWTH regardless of changes in the economy, or
their particular industry or product area. We only invest in those companies
that do well in both prosperous and difficult times.
With all the publicity about the economic expansion in the U.S. entering a
record tenth straight year, did you know that the S&P 500 Index has suffered
four years of down earnings over the latest decade of reported earnings
(1988-1998). By contrast, the companies in our portfolio have averaged less
than a single down year during the same period. We believe the consistent
strength of corporate earnings growth within our portfolio gives us the
potential for good long-term results.
When we say "growth in adjusted pre-tax income," we mean operating growth
after adjusting for non-operating items, such as interest and investment income,
foreign currency movements, reserves, and other non-recurring extraordinary
items. We also adjust for tax accounting to put each year on comparable and
conservative footing.
We do not adjust for interest expense, which is a cost of doing business,
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whether for financing inventories or long-term interest on mortgage and
public debt (bonds). Management needs to be held accountable for adding debt,
along with its costs and risks.
Many companies appear to have consistent growth due to their planned timing
of significant accounting events that have nothing to do with the true operating
picture. The extra work we put into the analysis is worth the effort to find
companies that are, in fact, the best managed.
SANDERSON GROUP, PLC is technically our third largest common stock holding
at year-end; unfortunately, we can no longer look forward to growing with this
company that we first invested in once before during the early '90s. In 1999,
after Sanderson re-qualified by putting together another 6 years of double-digit
growth in adjusted pre-tax income, we bought its shares again, and once again it
has been profitable for us.
This time, the management of this successful information technology service
company has had enough of its consistent profit growth and promising outlook
ignored by investors and has decided to take the company private in a
management buy-out. So, while Sanderson appears in our portfolio at year
end, it is more like a receivable at this point, and not an investment that we
will have the opportunity to grow with in the future. This is truly a shame, as
it is the rare company that meets this difficult criterion of consistent
operating earnings growth once, then meets it again with six strong years after
a flat year.
So, should we give another example, since Sanderson is being tendered? I
think so. Like Sanderson, our ninth largest common stock holding, ROXBORO GROUP
PLC, is a British company that has compiled a straight-up record of consistent
growth. This most recent year, however, has been exceptionally challenging for
British manufacturers in dealing with recessionary influences and the squeeze on
competitiveness and profit margins brought about by the surge in the Pound
Sterling, particularly against the Euro. Roxboro, a developer of proprietary
electronic controls for industrial and aerospace applications, did therefore
suffer a set back in interim profits when compared with superior results a year
earlier.
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More recently, however, the company has announced that second-half profits
are growing above last year's figures. While we won't know how all this will
sort out until full-year results are announced in March, it is wonderful to see
that Roxboro, once, again, enjoys the wind at its back and appears poised to
advance further in 2000. As far back as our information takes us, Roxboro has
never reported a down year: quite an achievement among British manufacturers.
STRENGTH OF INTERNAL EARNINGS GROWTH
"Adjusted pre-tax income, exclusive of acquisitions and divestitures, must
have grown at an annually compounded rate of at least 20% for the most recent
six-year period."
Over a six-year period a company must triple its operating profits to
qualify as an investment.
The criterion for "Accounting Procedures" assures that we have credible
reported figures. Our criterion of "Consistency of Operating Earnings Growth"
identifies companies with predictable earnings growth regardless of the state
of the economy, industry, or product cycle. The criterion "Strength of Internal
Earnings Growth" further reduces risk by seeking companies that meet all the
criteria, including showing growth at a pace tripling their profits over a
six-year period.
Many brokers strive to sell "emerging growth" companies (internet-related
and others) based on future earnings expectations, rather than historical
results. This substantially increases the investment risk. The losses many
investors have suffered at various times in these "emerging growth stocks" bring
back painful memories for experienced investors. The new "internet" crowd is
likely to eventually learn their lessons as well.
Growth does not necessarily mean increased risk. Quality growth companies
can be profitable investments during bull as well as bear markets.
HOW CAN THERE BE RISK IN CONSISTENT AND SLOW GROWTH? Even if a company
meets all the other criteria for quality and value, slow growth is a risk factor
that needs to be addressed by the successful investor. The following chart
examines two stocks, the average S&P
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500 company ("Company Y") and the average Z-Seven Fund holding ("Company
Z"). This is a hypothetical example for illustrative purposes only, and should
not be considered a representative of past or future performance.
SEE EXAMPLE ON FOLLOWING PAGE.
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"HOW STRONG GROWTH REDUCES RISK"
Both stocks are bought at a price of $18 (six times current year earnings of $3
a share).
COMPANY Y
This stock meets all of our criteria except earnings only grow at an
average rate of 5%, annually compounded, just as the S&P 500 has from 1988 to
1998. This Company does not move cyclically like the S&P 500, and therefore we
will project two consecutive years of earnings growth. It does not hype its
earnings the way the average S&P 500 company does, so we will not have to adjust
them.
COMPANY Z
This stock meets all of our criteria with no exceptions. EARNINGS GROWTH
AVERAGES 23% ANNUALLY COMPOUNDED, the ten-year average (1988-1998) for the
current Z-Seven portfolio. Since it meets all of our criteria, Company Z not
only has much stronger growth; it also has consistent growth and conservatively
reported earnings. We will also project two straight years of earnings growth
in this example.
YEAR ONE OF A TWO-YEAR BEAR MARKET:
Company Y's earnings grow from $3.00 to $3.15 a share and the P/E ratio
drops from 6 to 5.
Company Z's earnings grow from $3.00 to $3.69 a share and the P/E ratio
still drops from 6 to 5 despite the strong growth.
YEAR TWO OF A TWO-YEAR BEAR MARKET:
Company Y's earnings only grow from $3.15 to $3.31 per share. Its P/E
ratio falls further from 5 to 4 times earnings. This multiplies to a share price
of only $13.24 ($3.31 x 4) at the end of the second year.
A 26% LOSS IN A TWO-YEAR INVESTMENT ($13.24 down from $18) is suffered even
though the stock was bought at an undervalued price (six times earnings), the
accounting was conservative, and earnings grew consistently. The biggest risk
factor in Company Y shares is that earnings growth at the S&P rate of 5% a year
is just too slow!
Meanwhile, Company Z's earnings grow from $3.69 to $4.54 per share. Its
P/E ratio will probably hold up better. Still, we will assume that this
worst-case scenario bear market shows no mercy, driving even Company Z's P/E
ratio from 5 to 4 times earnings. This results in a share price of $18.16
($4.54 x 4).
Capital preservation ($18.16 vs. an $18 starting price two years earlier)
in Company Z shares, in this worst-case scenario bear market, is the result of
reducing risk through value, quality, and 23%, annually compounded, earnings
growth!
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One of the finest demonstrations of the internal growth criterion is
ORACLE, by far the largest domestic investment (in market cap) and our sixth
largest holding. Since 1988, Oracle, the dominant giant in database software
has experienced a compounded growth rate of more than 32%, absolutely amazing
for a company its size. In four of the last six years, the company had pre-tax
profit increase of at least 40%, including a 49% growth rate in 1999.
Even an outstanding company like Oracle can be too well regarded, as its
price has soared this past year. We sold our holding during the first week of
the new year after three key insiders filed to sell over $120 million of their
shares; no doubt because the share price has gotten way out of hand. Usually,
good long-term growth rates have their best opportunity to help us, not so much
in a hot high-tech market like Oracle's, but by compounding over several years.
It may, therefore, be best to view this criterion through our longest-term
holding among the largest stocks. Our seventh biggest investment is JARDINE
LLOYD THOMPSON GROUP, PLC, which has now been in our portfolio a little
more than five years. Jardine Lloyd Thompson acts as a wholesale broker,
packaging, but not underwriting, specialty insurance for customers such as the
major retail insurance brokers. Up until recently, slow business and margin
squeezes have made it unusually difficult for insurance brokers. During this
tough environment over the past several years, this company has proven itself as
being a consistent and strong earnings growth vehicle. Growing their profits at
a better than 28% rate during the 1988-1998 decade, growth has not slowed at all
in recent years. While tripling is required over a six-year period for this
criterion, this company has nearly tripled its adjusted pre-tax earnings in the
most recent four years alone. At this juncture, it appears that these
achievements may get easier as the insurance industry has greatly consolidated
and rates appear to be firming. Not only does Jardine's future appear
excellent; but, in contrast to the stratospheric P/E of Oracle, the shares are
quite the bargain at less than 3 times earnings, after stripping away their cash
(less debt) from their market capitalization.
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BALANCE SHEET: WORKING CAPITAL
"One of these three conditions must be met: a) 2:1 or better current ratio, b)
1:1 or better quick asset ratio, or c) working capital in excess of market
valuation (total shares outstanding times current market price)."
"Current ratio" means current assets divided by current liabilities.
"Quick asset ratio" means current assets, excluding inventories, divided by
current liabilities. "Working capital" means current assets less current
liabilities.
For a retailer or wholesale distributor, the current ratio is the best
measure of working capital since their businesses have high inventory
requirements. For a service company, there are no inventories; thus the quick
asset ratio should be used. Because different types of businesses have varying
needs, we use alternative balance sheet criteria. Still, do not confuse this
flexibility with a lack of discipline since most companies do not meet any of
our alternative requirements.
TECHNITROL, INC., our fourth largest investment and most important domestic
holding, has such a strong balance sheet that it meets both ratios, where
it only needs to meet one, with a current ratio of 2.4 and a quick asset ratio
of 1.7. This is even after financing certain major acquisitions and share
repurchase programs during the last few years.
BALANCE SHEET: CORPORATE LIQUIDITY
"Long-term debt must be less than either: a) working capital, b) cash and
cash equivalents, or c) latest twelve months' cash flow. 'Cash flow' means net
income plus depreciation, amortization, i.e., the difference between revenues
and all cash expenses (including taxes)."
The average S&P 500 company has massive debt (both long-term and
short-term) totaling nearly twelve times its working capital.
While some companies in our portfolio have no debt at all, the total debt
including short-term debt (not part of this criterion) of the average Z-Seven
stock is easily less than twice its working capital.
RATHBONE BROTHERS PLC, our second largest holding, is a growing investment
manager based in Britain that has practically no debt and is sitting on a
growing
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cash pile. As of their most recent balance sheet, Rathbone's working
capital, all liquid since this service business has no inventories, multiplies
their minuscule debt 91 fold. Amazing as that sounds, Rathbone's cash and
equivalents is a whopping 403 times what little debt they owe.
PRICE/EARNINGS MULTIPLE AND OWNER DIVERSIFICATION
"Shares must sell for less than 10 times our estimated earnings per share
for the current fiscal year."
"Less than 10% of outstanding shares must be held by investment companies
other than Z-Seven."
The "Price/Earnings Multiple and Ownership Diversification" criteria are
discussed together because greater institutional buying results in a higher
price/earnings multiple, while the opposite is true when institutions sell.
Institutional ownership data is now more available than it had been in the past.
The "Price/Earnings Multiple" criterion is the more relevant of the two
requirements. The following examples will therefore focus only on value, using
the price/earnings ratio. In periods of general undervaluation in the
marketplace, a greater number of stocks meet all seven criteria since more
stocks sell for under ten times earnings. The opposite has held true during a
period of general overvaluation.
When we looked for value this year, where did we find it? This year, most
of the value we found was in the United States and Great Britain in small-cap
shares. On the other extreme, large-capitalization stocks are clearly
overvalued in today's market, not by this criterion alone, but through nearly
any measure in historical perspective.
As examples of our "Price/Earnings Multiple" (value: price/earnings under
ten) criterion, we are using two of our domestic investments.
Z-Seven's second largest domestic holding is SYNOPSIS, INC. This company
has consistently under-reported earnings to the public (vs. tax reporting) by an
average of approximately 30% in most recent years. After adjusting for this
under-reporting, and taking into account most recent growth rates and new
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innovative products ("systems on a chip" technology) currently being
brought to market, Synopsis may be able to generate earnings (tax-basis
adjusted) that could approach $6 per share in the coming year. That's just 11
times earnings, at a year-end price of nearly $67, for a high tech company on
the cutting edge. Wait it gets better! Synopsis has only $0.29 per share in
total debt and a whopping $10.77 in cash, a net of $10.48. A little over $56 a
share is being paid for this company after deducting net cash of $10.48 from
$67. This gives us a P/E multiple just a little over 9 times potential
earnings. Compare that with any other quality high tech growth companies
serving the computer market - Oracle, Cisco, Microsoft, etc.!
For our other domestic comparison, STRATTEC SECURITY, our third largest
position after selling Oracle, was trading a little over $32 at year-end. That
is about six times our projected earnings of greater than $5.00 per share for
the coming year. They are unrecognized and considered potentially cyclical
because they manufacture ignition lock and security devices for original
equipment for automotive manufacturing. Still, Gentex, another excellent
company, which serves the same auto market, trades at a P/E multiple triple
that of Strattec.
There is plenty of value in Z-Seven's portfolio besides Synopsis and
Strattec. According to our earnings estimates, Z-Seven's average price/earnings
ratio is just 5 times our estimate of 2000 earnings.
By sharp contrast, the S&P 500 companies (index at year-end 1999 was
1469.25) had a P/E ratio of twenty-six times the $56.22 "Tops Down" estimate
of 2000 earnings made by the Institutional Brokers Estimate System (I/B/E/S).
THE CURRENT PRICE/EARNINGS MULTIPLE OF 5 FOR Z-SEVEN'S PORTFOLIO OFFERS
OUTSTANDING VALUE AT A 78% DISCOUNT to the S&P 500 price/earnings multiple
of 26.
Over the last ten years, Z-Seven's companies have increased their earnings
at a 23% rate, annually compounded, which is in excess of four times the 5%
growth rate for S&P 500 earnings.
WHAT ABOUT Z-SEVEN'S PREMIUM TO NET ASSET VALUE? At year-end, buying
Z-Seven shares meant paying a premium
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of 1 % over net asset value. This is a relatively small premium compared
to our average, and particularly to our unusually high premium two years
earlier. Taking our portfolio companies' conservative tax-adjusted earnings and
net cash adjusted price/earnings multiples in consideration, (and doing likewise
for the S&P 500 companies), means that paying a 1 % premium on Z-Seven's net
asset value can be a bargain! Especially IF YOU HAVE TO PAY OVER SEVEN TIMES
the S&P 500 companies' book value (net asset value) to buy the S&P 500, which
means paying a premium of 601%.
Not only do we have a buying discipline, but also a selling discipline.
Please see next page.
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SELL DISCIPLINE: BASED UPON THE SAME COMMON SENSE CRITERIA AS
FOR STOCK SELECTION
Investors often comment that portfolio managers and analysts have many
reasons for purchasing shares in a company and never deal with the terms of
selling. Not being disciplined in when to sell can be even more dangerous than
leaving buy decisions to chance and emotion.
Our stock selection criteria are designed to minimize investment mistakes
by not repeating them. This is a concept that has been the guiding principle
for Barry Ziskin as a money manager.
There are seven events that will cause us to IMMEDIATELY REDUCE OR
ELIMINATE shares from our portfolio:
1. ANY BREACH OF OUR "ACCOUNTING PROCEDURES" CRITERION. Once the company
begins to hype their reported figures, or stops disclosing enough information to
make a determination as to how conservatively earnings are reported, it has
removed the most important foundation upon which reasonable analysis can be
built. We rarely find this rule breached, as most companies which have once
met this most important criterion continue to do so.
While other criteria may cease to be met without having to sell the entire
holding, the "Accounting Procedures: Reliability and Conservatism" criterion is
the foundation upon which the quality, growth, and value characteristics we seek
are based.
2. THE BREACH OF OUR "CONSISTENCY OF OPERATING EARNINGS GROWTH" CRITERION
WILL ALSO RESULT IN IMMEDIATE ELIMINATION OF OUR HOLDING unless we see good
reason to expect this breach, whether realized or anticipated, to be minor or
short-term in nature. We look for early warning signs so that, if necessary, we
may try to sell the shares before the bad news is out, and the price drops.
A long-term change in our companies' profitability and growth happens
infrequently; so, like our first rule for immediate elimination, we rarely need
to implement it. More often than not, if one of our companies is slowed down by
a recession, or simply has unusually high profits to compare against, it
represents a temporary flattening out or "blip" in an otherwise excellent
long-term
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growth record. These companies tend to quickly return to their successful
performance. Therefore, it is our desire to maintain smaller positions in these
companies.
We still take immediate and prudent risk-reduction action even in these
cases. In those markets still benefiting from lower interest rates, we reduce
most of our exposure by cutting back these investments to just one third of our
targeted position size for stocks that continue to meet all the purchase
criteria.
Why do we not just sell them immediately and reinvest all of the
proceeds into those stocks that continue to meet all of the criteria? Most
often, alarm bells do not ring! We, of course, look for warnings: substantial
unloading of shares by key officers; disconcerting conversations with management
and others in its industry; new inexperienced operating management replacing
successful key people; as well as a multitude of other signs. Unfortunately,
by the time we are aware that there will be an interruption in a company's
growth pattern, the market price of its shares and the lack of buyers in some
thinly traded issues does not offer the seller a real opportunity. In many
instances, the stock is at a bargain price due to an overreaction by the market.
This most often occurs in bear markets and during recessions, when panic runs
rampant.
3. THE BREACHING OF OUR "CONSISTENCY OF OPERATING EARNINGS GROWTH"
CRITERION CAN RESULT IN ELIMINATION OF THE POSITION IN ITS ENTIRETY WHEN THE
COMPANY'S MANAGEMENT LOSES CREDIBILITY. The position will be sold when
reported results are significantly worse than we were led to believe. We can
make no reasonable determination of long-term growth potential if we are
misinformed by the company in the short-term. Following this rule has saved us
money several times over the years, and continued to in 1999.
4. THE BREACHING OF OUR "BALANCE SHEET: WORKING CAPITAL" CRITERION WILL
RESULT IN THE ELIMINATION OF THE INVESTMENT IN THAT COMPANY IF NEGATIVE WORKING
CAPITAL IS REPORTED. This rule, while it is important, has very rarely been
implemented. A nominal (non-deficit) breach in our working capital criterion due
to the seasonal nature of
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some businesses, or temporary shifts between short-term and long-term debt,
is not a serious worry, as long as our other criteria are met. Still, the
nominal breach requires the immediate reduction of our exposure to risk by
selling the position to one half of the targeted size for stocks that meet all
our other criteria.
5. RESTRICTIVE MONETARY POLICIES AND EARLY WARNING SIGNS TO FUTURE STOCK
PRICES PROVIDED BY DIVERGENT TRENDS IN MAJOR STOCK MARKET INDICES VS. INDIVIDUAL
STOCKS (THE BROAD MARKET) REQUIRES US TO ELIMINATE HOLDINGS WHICH HAVE EVEN A
SLIGHT INTERRUPTION IN ANNUAL OPERATING EARNINGS GROWTH CONSISTENCY.
As we explained under "Sell Discipline" criterion #2, an inconsistency in
operating earnings growth results in a reduction to a one-third position. The
remaining position will be completely sold, if both monetary policies and
divergent market trends are negative. It would take these companies six years
to requalify regardless of their ability to resume continuous growth in
operating profits.
6. WHEN NEGATIVE MONETARY AND DIVERGENT TREND SIGNALS PERSIST, WE ELIMI
NATE ALL REMAINING INVESTMENTS THAT NO LONGER MEET THE PURCHASE REQUIREMENTS.
ALL THOSE CONTINUING TO MEET ALL PURCHASE CRITERIA REMAIN IN OUR PORTFOLIO AS
VALUABLE LONG-TERM INVESTMENTS REGARDLESS OF GENERAL ECONOMIC AND STOCK MARKET
FACTORS.
This selling discipline is particularly relevant at this time. Normally,
companies that are well above our buying price, but still continue to show
consistent operating earnings growth, are reduced to one-half positions.
However, in the current environment of credit tightening with higher interest
rates and the negative divergent market trends continuing to exist, we eliminate
those holdings that no longer meet all our purchase criteria.
7. SOMETIMES WE HAVE NO CHOICE! IN THE EVENT OF A TAKEOVER OR
GOING-PRIVATE TRANSACTION, OUR DESIRED LONG-TERM HOLDING PERIOD FOR WELL-MANAGED
COMPANIES, WHICH CONTINUE TO MEET ALL OF OUR CRITERIA, IS CUT SHORT.
The high quality growth companies in Z-Seven's portfolio are attractive for
potential acquisitions. The companies that meet our stringent criteria for
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consistency and magnitude of earnings growth, working capital, corporate
liquidity, and accounting procedures, are the very best publicly owned
businesses we can find. When the shares of some of these companies are trading
at less than ten times current year earnings, potential acquirers may also take
notice. In addition, these values may stimulate insiders to take over the
company in a management buy-out.
While the acquiring company always pays the exiting shareholder a higher
price than current market (to make us believe we are getting a good deal), there
is every motivation on their part to buy our shares for less than they are
really worth. In the case of going-private transactions, if the insiders
already control the votes, they can practically "steal" their own company
because the control block prevents any competition in bidding.
During the past year, AFC Cable was to be merged into Tyco International.
Because of Tyco's accounting and management continuity concerns, AFC shares were
sold in 1999, prior to the merger.
On the other hand, we stayed with the Astra/Zeneca merger until the first
week of the new year. We then sold our entire holding, in accordance with
our selling discipline #6, when negative monetary conditions in the U.K. and
Sweden, and a higher P/E for the company, existed.
Likewise, we retained the Plexus shares we received through their
acquisition of SeaMed while they were near our value requirement. Plexus is
an excellent company that meets our other criteria; however, after a substantial
increase in market price, we sold Plexus during the first week of 2000. The
combination of SeaMed/Plexus gained 56% during 1999. Similar to this merger,
Solectron acquired one of our holdings, Smart Modular, during 1999. Solectron,
like Plexus, meets our quality and growth criteria, but was already trading up
in the stratosphere. It was sold at the beginning of 2000, therefore, in
accordance with our selling discipline #6, after advancing in 1999 nearly 75%.
Next, see a new look for our "Good News" and "Mistakes and Disappointments"
section.
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A NEW LOOK
For those of you looking for the "Good News" and "Mistakes and
Disappointments" section of the Report you have found it.
In this section, we will discuss our Strongest Seven, the portfolio's top
seven gainers in percent return, ranked from the largest investment holding to
the smallest. This will be followed by a discussion of the seven lowest
performing stocks, our Weakest Seven, in the same order. In keeping with our
commitment to long-term analysis, we will continue to include only holdings that
have been in the portfolio for the entire year.
================================================================================
THE STRONGEST SEVEN
The year of 1999 brought with it many extremes in over and under
valuations, and also in huge wins and losses. Before beginning with the year's
best (in order of investment size), I would like to take my hat off to the fine
start our largest holding, Company "S," has made this year. While it doesn't
quite meet the full-year requirement of this section, the share price increase
for "Company S" from our initial purchase price was higher than four of our
Strongest Seven; but "Company S" was purchased in mid-February of 1999, so it
Just missed being a feature in this section. (For more on "Company S," please
see page 17). In fact, all twelve of our largest holdings in the portfolio
had a positive 1999. You can find detailed information on these companies
on page 38.
1. RATHBONE BROS.
---------------------
Moving along to our next biggest investment, Rathbone Brothers, Plc, a
British holding, also scored a big gain in 1999. In less than three years,
shares of this U.K. investment manager have about tripled. For the year of
1999, Rathbone shares rose over 70% in a U.K. market that, unlike our own, was
kind to small-cap shares of companies that were continuing to achieve good
earnings growth. In fact, you won't find a single London-traded investment
among our Seven Weakest. Six of those seven are domestic small caps and micro
caps.
2. ORACLE CORP.
-------------------
Oracle not only made the Strongest Seven, but this rare large-cap in our mostly
small-cap portfolio was our best performing stock for the year. Its share
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price almost quadrupled during 1999! Including the gain from late in the prior
year, Oracle shares rose to about 7 times what we paid for them in 1998's fourth
quarter. In accordance with our selling discipline #6, Oracle was sold in the
first week of the new year due to the risk of its ultra-high P/E.
3. PLEXUS
-------------
This holding started out in our portfolio as shares of SeaMed, a micro-cap
medical device testing company. We happily exchanged these shares in a merger
with Plexus, an even better company, whose stock price was just barely out of
our value requirement. The combination rose 56% this year, which is actually
the smallest gain among our Strongest Seven. With Plexus's share price and P/E
beginning to rise to overvalued extremes, we sold our holding during the first
week of the new year.
4. AVT CORP.
-------------
Our next largest holding among this group of performers, AVT Corp., rose
62% this year. The high-tech craze that took Oracle into the stratosphere sent
others, like AVT and Pelxus, shooting for the moon as well. We're more
comfortable with good value and AVT was sold during the first week of the
new year in accordance with our selling discipline #6. As discussed in detail
on page 30 of this report, this selling discipline is designed to reduce risk
at a time, such as this, when both interest rates are on the rise and the broad
market negatively diverges each time one of the popular indices makes a new
high.
5. KRONOS, INC.
----------------
Kronos is another beneficiary of both good earnings and the craze in
high-tech investing. At mid-year, Kronos, the world's #1 provider of solutions
for labor management (time-keeping systems and software), was Z-Seven's largest
domestic holding. By year-end, after a trim to reduce risk as its price rose,
we still held enough shares to make it our portfolio's fourteenth largest
holding. During 1999, Kronos more than doubled. By the last week of January,
2000, it was time to turn in the last of our Kronos shares, as it is now also
overvalued.
6. SOLECTRON
-------------
Solectron (previously Smart Modular) is another stock sold in the first week of
the new year in accordance with selling discipline #7 (see page 30). Like
Plexus, we were happy to exchange
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shares for Solectron, which is an excellent company. However, it trades
for an astronomical P/E, similar to Oracle, and therefore was sold in its
entirety under the current high risk environment as described in selling
discipline #6 (see page 30). The combination of the Smart Modular shares we
began 1999 with and the Solectron shares, which we received very close to
year-end, gained approximately 75% during the year. This gain was mostly
comprised of the premium to market paid for Smart Modular by Solectron.
7. WESTFAIR FOODS
------------------
By far, our smallest holding among the Strongest Seven is Westfair Foods.
This company has suddenly been tendered by fellow-Canadian parent company Loblaw
at 300 Canadian dollars, nearly ten times what they had previously claimed its
value to be in court, when pressed by minority shareholders, that these "Class
A" shares were actually preferred shares. A recent sale of nearly $1 billion
worth of real estate within the Loblaw company may be deemed a liquidation
attempt, to which the courts have left the door open for a much higher price to
ultimately be paid. If successful in our collective efforts as minority
shareholders, 300 Canadian dollars per share may seem to be a pittance. The
market appears to agree, as Westfair's year-end price of 300 Canadian dollars,
with a 1999 gain of 140%, has now been raised with to an even higher bid.
================================================================================
THE WEAKEST SEVEN
The following stocks have the dubious distinction of being our least
performing for 1999. Again, we will be discussing them in order of size within
our portfolio.
1. BALLANTYNE OF OMAHA
-----------------------
While Ballantyne of Omaha is the Fund's most important of our weakest
stocks, it is one of thousands of micro-cap (under $100 million) stocks
forgotten during the year of 1999, when only big names received investors'
attention. Ballantyne, the leading manufacturer of cinematic projection
systems, increased production early in the year following a huge new order from
Regal Cinemas, the #1 theatre chain in the U.S. Regal, however, has evidently
expanded too rapidly, and ran into difficulty with its creditors during the
year. This caused
34
<PAGE>
delays and cut-backs on its orders to Ballantyne. Consequently, even after
a strong first half, Ballantyne disappointed those few investors who even know
about this obscure public company with lower third quarter earnings. Although
earnings were still up for the nine-months, one poor quarter is all Wall Street
focused on. As a result, Ballantyne shares dropped about 38% in the year of
1999.
A year earlier, it was one other poor quarter that gave us a wonderful
bargain opportunity in this stock. We did not add to our holding this time,
however, since the outlook for full-year growth was questionable. It is quite
possible that Ballantyne, and/or some of our other weakest stocks in 1999, may
not even be public companies by the end of the new year. Ballantyne has
recently disclosed discussions and considerations aimed at the possibilities of
a takeover of the company or going private. This would hopefully occur at a
handsome premium to their current depressed market price.
2. POMEROY COMPUTER
--------------------
Pomeroy Computer, which markets, installs, and services computers for mainly
small businesses, had no down quarters in earnings; but that certainly was
not true for Pomeroy's share price. As in the case of Ballantyne, Pomeroy's
unpopular shares were a welcomed buying opportunity in 1998. This lack of favor,
however, did not aid us in 1999 during which the shares declined 41%. In its
latest quarterly report, earnings grew by about 20% on a similar rise in sales.
If not for a higher income tax rate in 1999, growth would have been around 30%
in earnings. So, although the market has ignored Pomeroy's achievements and
worried about the possibility of a profit margin squeeze, business and margins
continue to improve. These growth rates have not slowed a bit, as they
represent an acceleration in rates of increase from the year's first half. The
stock is a terrific bargain and, as such, we may add to our Pomeroy investment
in 2000.
3. NCI BUILDING
----------------
NCI Building, on an October fiscal year, has actually already reported
final -figures for 1999. As in the case of Pomeroy, the company shows nothing
but continuing growth in earnings and an impressive pickup in profit margins in
the latest quarter. NCI earnings growth accelerated to a 22% rate in the latest
35
<PAGE>
quarter. Still, that is small consolation for one of North America's
leading integrated manufacturers of metal products for the non-residential
building industry, as the company's shares declined 34% in 1999, making it the
stock least down among our seven. Looking towards the future, NCI's CEO
commented in December, "We are optimistic about extending our record of progress
in fiscal 2000, and expect the year-to-year increase to accelerate from the
results achieved in the second half of fiscal '99."
4. AUTOPISTAS
--------------
Autopistas, our lone Spanish investment, often trades in line with bonds
because of their sluggish growth and big dividend payments. The prior few years
were quite kind to long-term interest rates in Spain, especially upon the
merging of the European Union. During 1999, however, higher European long-term
interest rates put pressure on Autopistas share price, bringing a decline of
nearly 36% for the year, along with flat earnings. If earnings growth does not
restart, we may say goodbye to this stock.
5. GROW BIZ INTERNATIONAL
--------------------------
6. DAY RUNNER
-----------------
7. TARRANT APPAREL
----------------------
Grow Biz, Day Runner, and Tarrant Apparel are so small within our
portfolio, accounting for around 1% combined of Z-Seven's net assets, that they
are being discussed together. While we sold a little Grow Biz during 1999,
after the proposed management buyout fell apart, the share price is mostly too
depressed after an exceptionally poor year in one of its retail divisions. We
will hopefully be given better selling opportunities in the future, after the
company disposes of its losing operation. This should help it to rebound from
its over 69% price drop in 1999.
Day Runner, similarly appears to want to be taken over or go private. The
company has made announcements that it is pursuing a possible transaction.
After having reduced our holding nearly a third at much higher prices during
1999, our hope is a good premium may be paid if such a transaction takes place.
This would be good news after its 73% share price decline in 1999.
Tarrant Apparel is a small remnant of our original holding, as nearly 70%
of our shares were sold a year earlier, while the stock nearly doubled what we
paid
36
<PAGE>
for them just months earlier. Earnings disappointments have taken their
toll on all three of these stocks, with the Tarrant price down nearly 76% during
1999. What intrigues me into sticking with the little bit of Tarrant we own is
that the three top company executives are collectively buying in excess of $20
million of Tarrant shares personally. A hopeful sign for Tarrant's future?
FOR INFORMATION ON OUR LARGEST HOLDINGS, SEE THE TABLE ON THE NEXT PAGE.
37
<PAGE>
PERFORMANCE AND FINANCIAL INFORMATION
For performance, earnings growth, and balance sheet statistics on our
twelve largest investments (comprising 55% of our common stock market value), we
have put together the following table for your convenience:
<TABLE>
<CAPTION>
EARNINGS GROWTH Current Balance Sheet
(1988 - 1998)(a) Total Debt
# of Annually (long- and short-term)
Down Compounded as % of SHARE PRICE
Years Earnings Working Year End Year End %
for Earnings Growth Rate Capital 1998 1999 Change
------------ ----------- ---------------------- ------------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
1. "Company S" 2 + 30% 7% New Investment (f)
2. Rathbone Brothers Plc 0 + 26% 1% 5.40(g) 9.20(g) 70%
3. Sanderson Group Plc 0 + 14% 1% New Investment (f)
4. Technitrol, Inc. 3 + 19% 39% 31.88 44.50 +40%
5. Synopsys, Inc. 0 + 91% 3% 54.25 66.75 +23%
6. Oracle Corporation 1 + 32% 14% 28.75 112.06 +290%
7. Jardine Lloyd Thompson 0 + 28% 9% 1.93(g) 2.46(g) +27%
8. Strattec Security 1(b) + 26%(b) NO DEBT! 30 32.38 +8%
9. Roxboro Group Plc 0(c) + 30%(c) 318% 2.30(g) 2.54(g) +10%
10. VT Holding 0 + 72% 117% 210(h) 280(h) +33%
11. Plexus 2(d) + 29%(d) 1% 28.13 44 +56%
12. Barratt Development 2 + 4% 6% 2.33(g) 2.82(g) +21%
Z-Seven Weighted Average 1 (e) + 23% 122% -2%
(Total Portfolio)
S&P 500 Stock Index 4 + 5% 1,146% 1,229.23 1469.25 + 20%
<FN>
(a) Companies which have fiscal years already reported for 1999 have been updated to 1989-1999
information.
(b) 1991 was first reported year.
(c) 1990 was first reported year.
(d) Result of merger with SeaMed in 1999. 1992 was SeaMed's first reported year.
(e) Weighted average is 0.78.
(f) Made in early 1999. "Company S" share price is up 81% from the date of our first purchase.
Sanderson Group share price is up 27% from the date of our first purchase.
(g) Prices in British pound sterling per share.
(h) Prices in DKK.
</TABLE>
38
<PAGE>
PAST PERFORMANCE
The following is an historical look at our portfolio's performance, year by
year, through the 1990s. Portfolio returns are calculated after deducting
commissions, but do not reflect expenses charged at the Fund level. Returns on
an investment in the Fund will vary from these returns based on the market value
of the Fund's shares.
PERFORMANCE IN 1998
The year of 1998 was quite a roller coaster for stocks. The ride went up
in the beginning, and by mid-April our portfolio had already gained 17%. The
big drop came in late July and throughout August, wherein nothing was spared.
The Russell 2000 Index of secondary stocks declined 38% from its peak in the
spring, while our portfolio suffered a 33% drop from the spring high through the
bottom on October 8, 1998. Thanks to the recovery of stock markets in which we
were invested, although still hindered by secondary shares being out of favor,
Z-Seven's investment portfolio finished the year with a positive return of 9%.
While it may not appear that significant, this advance in a year that saw the
Russell 2000 Index down by nearly 4% seems noteworthy to us.
PERFORMANCE IN 1997
During the year, the Fund reduced exposure to troublesome monetary and
broad market conditions in the U.K. by eliminating many British holdings that no
longer met the criteria. Most of the new investments made in 1997 were domestic
small caps, and gave us a well-diversified portfolio. Z-Seven's fourteenth year
closed with a 21% annual return on our investment portfolio in a market that
greatly favored blue-chip stocks and bonds.
PERFORMANCE IN 1996
This year was a landmark period for U.S. and European markets, with record
highs and a volatile environment for specific stock sectors. While the mature
bull market of this year saw prices driven by expectations, our approach focused
on long-term growth investing designed to avoid chasing after the latest market
trends. Z-Seven's thirteenth year closed with an 18% annual return on our
investment portfolio, which was dominated by U.K. and Western European stocks.
39
<PAGE>
PERFORMANCE IN 1995
Our 1995 portfolio was primarily invested in the U.K. and Western Europe,
and increased each and every quarter along with our net asset value. Out of 98
World Equity Funds, Z-Seven was ranked #1 by Lipper Analytical Services for that
year (as reported in January 1, 1996 Barron's), despite holding substantial cash
reserves as U.K. interest rates were rising for a large portion of 1995. Our
Fund's twelfth year closed with better than 32% growth in our investment
portfolio.
PERFORMANCE IN 1994
We started 1994 with nearly 22% in domestic holdings, and by the close held
only 2% in the U.S. We accomplished the feat of not losing money during that
year, while most comparable funds were not nearly so fortunate. All in all,
Z-Seven's eleventh year closed with better than 1% growth in our investment
portfolio.
PERFORMANCE IN 1993
Europe battled against a recession in 1993 with low interest rates. This
created a positive environment for the European markets, which represented
nearly 80% of Z-Seven's holdings. Our investment portfolio and per share net
asset value grew for all four quarters of 1993. Our Fund's tenth year closed
with 19% growth in our investment portfolio.
PERFORMANCE IN 1992
In 1992, European secondary issues, which made up nearly 80% of our
portfolio, suffered a severe blow when Denmark voted against the Maastricht
Treaty (designed to stabilize economic and political relationships in the
European community). This caused a five-month decline in the market prices of
most European investments in our portfolio. Our ninth year as a public company
was our least productive, with a more than 12% loss in our portfolio.
PERFORMANCE IN 1991
The year of 1991 brought wonderful news to our portfolio. About two thirds of
our investments were invested in the U.K. Z-Seven Fund was the performance
leader for that year among all closed-end and open-end
40
<PAGE>
funds invested primarily in Europe. Our eighth year as a public company
was our most productive, with a 54% gain in our portfolio.
PERFORMANCE IN 1990
While we were excited with the returns in 1991, it was the defensive performance
in the bear-market year of 1990 that we are most pleased with. By the end of
1990, our search for exceptional value gave us a portfolio invested 67% in the
U.K. and Western Europe, and 28% in the U.S. In a very difficult year for
markets around the world, the Fund was able to minimize portfolio losses to just
over 5%. Relative to other closed-end funds invested primarily in Europe,
Z-Seven was the performance leader at year-end, based on market value.
41
<PAGE>
SPECIAL FEATURE OF THE FUND
BONUS/PENALTY PERFORMANCE INCENTIVE
Z-Seven's net asset value performance (after expenses) must exceed the S&P
500 by ten percentage points (as an example: 15% for Z-Seven vs. 5% for the S&P
500) for the Advisor to earn a minimum quarterly bonus of one quarter of one
percent.
This unique bonus/penalty arrangement between Z-Seven Fund and its Advisor
is not just theoretical. It is one resulting in actual payments to or by
Z-Seven Fund's Advisor. For example, in 1999, domestic small-cap and micro-cap
stocks underperformed, and were undervalued, compared to U.S. blue-chip stocks.
Though it might have been more appropriate to compare Z-Seven Fund's performance
to a small-cap index more like the Fund's portfolio, it was instead compared to
the S&P 500, as per the arrangement. This comparison resulted in the Advisor
paying penalties to the Fund in excess of $500,000. The performance arrangement
compares Z-Seven's net asset value (even after all ordinary expenses) vs. an
expense-free S&P 500 Index for the latest 12-month period.
<TABLE>
<CAPTION>
Special bonus/penalty incentive:
<S> <C>
Trailing 12 months Quarterly
Percentage Point Difference Bonus/Penalty
- --------------------------- --------------
0 to 9.9 0%
10 to 14.9 1/4%
15 to 19.9 3/8%
20 to 24.9 1/2%
25 to 29.9 5/8%
30 to 34.9 3/4%
35 to 39.9 7/8%
40 to 44.9 1%
45 to 49.9 1 1/8%
50 to 54.9 1 1/4%
55 to 59.9 1 3/8%
60 to 64.9 1 1/2%
65 to 69.9 1 5/8%
70 to 74.9 1 3/4%
75 to 79.9 1 7/8%
80 to 84.9 2%
85 to 89.9 2 1/8%
90 to 94.9 2 1/4%
95 to 99.9 2 3/8%
100 or more 2 1/2%
- -------------------------------------------
</TABLE>
42
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is long-term capital appreciation
through investment in quality growth companies whose shares are undervalued.
FOREIGN SECURITIES
The Fund may invest up to 100% of its total asset value in securities of
foreign issuers. ONLY DEVELOPED MARKETS, NOT EMERGING MARKETS, ARE CONSIDERED
SAFE FOR OUR GLOBAL DIVERSIFICATION. As a result, in our own Western
Hemisphere, we invest in the U.S. and Canada only (not in Latin America). In
Europe, we invest only in Western and Northern nations, not in Eastern
countries. In the Pacific, we have only invested in Japan and Australia. We do
not invest in Africa or Asia (other than Japan).
OPTIONS ON STOCK INDEX FUTURES
The Fund may consider from time to time the purchase and sale of call and
put options on stock index futures traded on U.S. or foreign stock exchanges as
an alternative method of hedging market fluctuations. Purchases and sales of
options will also be made to close out open option positions. The Fund's
Board of Directors has approved these special investment techniques as an
alternative means of protecting the portfolio when, in the Advisor's opinion,
such hedging transactions may reduce risk in anticipation of adverse price
movements. Due to the risk factors stated in selling discipline #6, we have
reduced risk in the portfolio by selling stocks no longer meeting our criteria.
In order to protect the bargains that remain in the portfolio from general
market decline, we have hedged this risk by holding put options on the S&P 500,
which is considered among one of the more liquidly traded options.
FOREIGN CURRENCY CONTRACTS
THE FUND CURRENTLY ENGAGES IN HEDGING AS A MEANS OF RISK PROTECTION AGAINST
LOSSES DUE TO ADVERSE CURRENCY FLUCTUATIONS. To this extent, the Fund engages
in transactions using forward currency exchange contracts. Since there is no
initial payment or any cash payments on daily mark-to-markets using foreign
currency contracts, this hedging method gives the Fund the ability to invest all
of its
43
<PAGE>
assets in common stocks, including assets that were previously unavailable when
hedging with put options.
FORWARD LOOKING STATEMENTS
When used in this annual report and in future filings by the Fund with the
Securities and Exchange Commission, in the Fund's press releases and in oral
statements made with the approval of an authorized officer of the Fund the words
or phrases, "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify forward looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995. All assumptions, anticipations,
expectations and forecasts contained herein are forward looking statements that
involve risks and uncertainties. Management of the Fund cautions readers not to
place undue reliance on any such forward looking statements, which speak only as
of the date made, and should be read in conjunction with other publicly
available Fund information.
Management of the Fund will not undertake, and specifically declines, any
obligations to release publicly the result of any revisions which may be made to
any forward looking statements to reflect the occurrence of anticipated or
unanticipated events.
44
<PAGE>
GENERAL INFORMATION
THE FUND
Z-Seven Fund, Inc. is a non-diversified, closed-end management investment
company whose shares trade on the Nasdaq National Market System and on the
Pacific Exchange.
The Fund is managed by TOP Fund Management, Inc., (the Advisor), whose
president is Mr. Barry Ziskin.
SHAREHOLDER INFORMATION
Net asset value and market price information about the Fund shares are
published each Monday in Barron's and The Wall Street Journal. For a current
quote of the stock price, shareholders can contact any brokerage house, or
contact the Fund directly for prices and latest net asset value.
Very often shares can be bought or sold for a more advantageous price on
either (but not both) of the markets. Be sure to get quotes on both the ZSEV
(Nasdaq) and ZSE (Pacific) before you place your order.
REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS
A dividend and capital gains reinvestment program is available to pro
vide shareholders with automatic reinvestment of their dividend income and
capital gains distributions in additional shares of the Fund's common stock.
Shareholders who wish to participate in the program and have physical possession
of their share certificates (holders of record) should contact Norwest Bank
Minnesota, Shareowner Services, our Transfer Agent, at (800) 468-9716.
Shareholders who do not have physical possession of their share certificates
(street name) should call their broker or custodian.
Deemed distributions of taxes we pay on long-term capital gains are not part of
this plan.
SHARE REPURCHASES
Notice is hereby given, in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that the Fund may purchase, at market prices,
from time to time, shares of its common stock in the open market.
Please, see "Share Repurchases" on page 8 of the Letter to Our
Shareholders.
45
<PAGE>
<TABLE>
<CAPTION>
Z-Seven Fund, Inc.
SCHEDULE OF INVESTMENTS
at December 31, 1999
- ------------------------------------------ ----------- -----------
Investment Securities Shares Value
- ------------------------------------------ ----------- -----------
Common Stocks (a)
- ------------------------------------------
<S> <C> <C>
APPAREL & ACCESSORIES - 1.7%
Abbeycrest Plc 10,000 $ 19,492
Quiksilver, Inc. (b) 15,150 234,825
Tarrant Apparel Group (b) 5,100 49,087
-----------
303,404
-----------
AUTOMOTIVE TRANSPORTATION - 3.1%
Autopistas C.E. SA 10,227 99,283
Strattec Security Corporation (b) 13,600 440,300
-----------
539,583
-----------
BUILDING & MATERIALS - 4.6%
Barratt Developments Plc 80,000 364,928
Hughes Supply 12,200 263,063
NCI Building Systems, Inc. (b) 9,400 173,900
-----------
801,891
-----------
COMPUTER & RELATED - 19.2%
AVT Corporation (b) 7,200 338,400
Cybex Computer Products
Corporation (b) 6,200 251,100
Insight Enterprises, Inc. (b) 6,187 251,347
Kronos, Inc. (b) 5,550 333,000
Oracle Corporation (b) 4,500 504,281
Pomeroy Computer
Resources, Inc. (b) 19,900 263,675
Sanderson Group Plc 165,500 591,646
Solectron (b) (d) 3,213 305,637
Synopsys, Inc. (b) 7,900 527,325
-----------
3,366,411
- ------------------------------------------ ----------- -----------
Investment Securities Shares Value
- ------------------------------------------ ----------- -----------
Common Stocks (a)
- ------------------------------------------ ----------- -----------
ELECTRICAL & ELECTRONICS - 9.1%
LSI Industries, Inc. 11,600 $ 250,850
Plexus 8,600 378,400
Roxboro Group Plc 100,500 412,110
Technitrol, Inc. 12,600 560,700
-----------
1,602,060
-----------
FINANCIAL SERVICES - 6.5%
Jardine Lloyd Thompson Group Plc 125,600 498,783
Rathbone Brothers Plc 43,000 639,922
-----------
1,138,705
-----------
FOOD & BEVERAGE - 1.0%
Lindt & Spr ngli AG 46 109,923
Westfair Foods 360 74,792
-----------
184,715
-----------
HEALTH & PERSONAL CARE - 5.2%
AstraZeneca Plc (c) 5,340 226,019
L'Or al 325 260,416
National Dentex Corporation (b) 17,100 286,425
Novartis AG 99 145,555
-----------
918,415
-----------
LEISURE - 2.7%
Anchor Gaming (b) 4,200 182,437
Ballantyne of Omaha, Inc. (b) 50,505 290,404
472,841
-----------
See accompanying notes to financial statements.
46
<PAGE>
Z-Seven Fund, Inc.
SCHEDULE OF INVESTMENTS
at December 31, 1999 Continued
- ------------------------------------------ ----------- -----------
Investment Securities Shares Value
- ------------------------------------------ ----------- -----------
Common Stocks (a)
- ------------------------------------------ ----------- -----------
MULTI-INDUSTRY - 3.4%
Day Runner, Inc. (b) 16,800 $ 65,626
Tomkins Plc 40,966 133,197
VT Holding A/S (Cl B) 10,565 400,070
-----------
598,893
RETAIL - 2.1%
Grow Biz International, Inc. (b) 21,700 86,800
The Men's Wearhouse, Inc. (b) 9,900 290,812
-----------
377,612
MISCELLANEOUS - 4.5% 53,500 785,364
- ------------------------------------------ ----------- -----------
TOTAL COMMON STOCKS - 63.1%
- ------------------------------------------
(Cost $8,290,393) $11,089,894
- ------------------------------------------ ----------- -----------
- ------------------------------------------ ----------- -----------
Options Contracts
- ------------------------------------------ -----------
S & P 500 PUTS - 5.2%
expires 2/17/00 (Cost $911,160) 72 907,200
- ------------------------------------------ ----------- -----------
Short Term Investments
- ------------------------------------------ ----------- -----------
U.S. TREASURY BILLS - 5.7% 994,514
matures 2/10/00, par 1,000,000
- ------------------------------------------ ----------- -----------
- ------------------------------------------ ----------- -----------
TOTAL INVESTMENT IN SECURITIES - 74.0%
(Cost $10,196,067) $12,991,608
- ------------------------------------------ ----------- -----------
CASH, RECEIVABLES, AND OTHER ASSETS
LESS LIABILITIES - 26.0% 4,577,257
- ------------------------------------------ ----------- -----------
NET ASSETS - 100.0%
(Equivalent to $7.57 per share based
on 2,321,531 shares of capital stock
outstanding) $17,568,865
========================================== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------
COMMON STOCKS BY COUNTRY
- -------------------------------------
Percent Country Value
- -------------------------------------
<C> <S> <C>
57.1% United States $6,328,394
31.1 United Kingdom 3,445,441
3.6 Denmark 400,070
2.3 Switzerland 255,479
2.3 France 260,416
2.0 Sweden 226,019
0.9 Spain 99,283
0.7 Canada 74,792
- -------------------------------------
100.0% $11,089,894
=====================================
</TABLE>
(a) Percentages are based on net assets of $17,568,865.
(b) Non-income producing investment.
(c) Formerly Astra AB.
(d) Formerly Smart Modular.
(e) Aggregate cost for federal income tax purposes was the same as for book
purposes $10,196,067 at December 31, 1999. Net unrealized appreciation
for all securities was $2,795,541. This consisted of aggregate gross
unrealized appreciation of $3,692,199 of securities with an excess of
fair value over tax cost and aggregate gross unrealized depreciation of
$896,658 of securities with an excess of tax cost over fair value.
See accompanying notes to financial statements.
47
<PAGE>
Z-Seven Fund, Inc.
STATEMENT OF ASSETS AND LIABILITIES
at December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments in securities, at value
(identified cost $10,196,067) $12,991,608
Cash 5,016,629
Receivables
Dividends and interest 59,587
Securities sold 1,102,686
Due from investment advisor 59,144
Other assets 9,854
------------
Total assets 19,239,508
------------
LIABILITIES
Payables
Securities purchased 1,559,520
Treasury stock payable 44,250
Other 66,873
------------
Total liabilities 1,670,643
------------
NET ASSETS $17,568,865
============
NET ASSETS REPRESENTED BY
Capital stock, $1.00 par value:
7,700,000 shares authorized,
3,268,858 shares issued $ 3,268,858
Additional paid-in capital 21,027,503
Treasury stock, 947,327 shares, at cost (7,704,282)
------------
16,592,079
Accumulated net realized loss on
investments, options and currency
Transactions (2,109,483)
Net unrealized appreciation on
investments, options and currency 2,860,472
translations
Undistributed net investment income 225,797
------------
NET ASSETS (EQUIVALENT TO $7.57 PER
SHARE BASED ON 2,321,531 SHARES OF
CAPITAL STOCK OUTSTANDING) $17,568,865
============
Z-Seven Fund, Inc.
STATEMENT OF OPERATIONS
Year Ended December 31, 1999
INVESTMENT INCOME
Dividends, net of nonreclaimable
foreign taxes of $18,427 $ 175,117
Interest 132,374
------------
Total investment income 307,491
------------
EXPENSES
Investment advisory base fee 228,530
Performance penalty (501,445)
Compensation and benefits 118,336
Transfer agent fees 10,122
Professional fees 74,780
Custodian fees 37,000
Printing and postage 19,371
Office and miscellaneous expenses 35,926
Insurance expense 1,276
Directors' fees and expenses 14,940
Dues and filing fees 14,416
Shareholder relations & communications 14,852
Loan commitment fees 5,000
Rent expense 17,027
------------
Total expenses 90,131
Expenses reduced through offset
arrangements (8,437)
------------
Net expenses 81,694
------------
Net investment income 225,797
------------
REALIZED & UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments, options
and currency transactions (2,137,360)
Change in unrealized appreciation of
investments, options and currency
translations 1,369,734
------------
Net loss on investments, options,
and currency transactions (767,626)
------------
Net decrease in net assets
from operations ($541,829)
============
</TABLE>
See accompanying notes to financial statements.
48
<PAGE>
Z-Seven Fund, Inc.
STATEMENT OF CHANGES IN NET ASSETS
Year Ended December 31, 1999
and December 31, 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
NET ASSETS,
Beginning of Year $19,854,868 $20,161,112
------------ ------------
OPERATIONS
Net investment income (loss) 225,797 (35,905)
Net realized gain (loss) on
investments, options and
currency transactions (2,137,360) 994,747
Change in unrealized
appreciation of invest-
-ments, options and currency
translations 1,369,734 146,341
------------ ------------
Net increase (decrease) in
net assets from operations (541,829) 1,105,183
------------ ------------
DIVIDENDS AND DISTRIBUTIONS
From net investment income 0 (146,606)
From net realized gain on
investments, options and
currency transactions (117,518) (300,388)
------------ ------------
Decrease in net assets from
dividends and distributions (117,518) (446,994)
------------ ------------
SHARE TRANSACTIONS
Treasury stock purchases (1,626,656) (980,119)
Reinvested dividends and
Distributions 0 15,686
------------ ------------
Decrease in net assets from
share transactions (1,626,656) (964,433)
------------ ------------
Net decrease in net assets (2,286,003) (306,244)
------------ ------------
NET ASSETS,
End of Year (including
undistributed net investment
income of $225,797 and
$0, respectively) $17,568,865 $19,854,868
============ ============
</TABLE>
Z-Seven Fund, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Z-Seven Fund, Inc. (the Fund) is registered under the Investment Company
Act of 1940, as amended, as a non-diversified, closed-end management investment
company incorporated under the laws of Maryland on July 29, 1983, and became a
publicly traded company on December 29, 1983.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
SECURITY VALUATION - Securities traded on national securities exchanges,
other than the London Stock Exchange, are valued at the last sale price or, in
the absence of any sale, at the closing bid price on such exchanges or over the
counter, except VT Holding A/S which is valued at the midpoint between the bid
and the ask. Securities traded on the London Stock Exchange are valued at the
mid-close price. If no quotations are available, the fair value of securities
is determined in good faith by the Board of Directors. Temporary investments in
short-term money market securities are valued at market based on quoted
third-party prices. Quotations of foreign securities in foreign currency are
converted to U.S. dollar equivalents at the date of valuation.
FEDERAL INCOME TAXES - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies. The Fund intends to distribute substantially all of its net
investment taxable income, if any, annually.
See accompanying notes to financial statements.
49
<PAGE>
DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions of net capital
gains to shareholders are recorded on the ex-dividend date.
Investment income and capital gain distributions are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments of income and gains on foreign denominated assets and liabilities
held by the Fund, timing differences, and differing characterizations of
distributions made by the Fund. Due to the differing treatment for tax purposes
of certain income and capital gain items, as of December 31, 1999, the Fund has
reclassified $23,395 from paid in capital to accumulated capital gains.
SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME - Securities
transactions are accounted for on the trade date and dividend income is recorded
on the ex-dividend date. Realized gains and losses from securities transactions
are determined on the basis of identified cost for book and tax purposes.
FOREIGN CURRENCY TRANSLATION - The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investment securities, assets, and liabilities at the
closing daily rate of exchange, and
(ii) purchases and sales of investment securities and dividend income at the
rate of exchange prevailing on the respective dates of such transactions.
Investment companies generally do not isolate that portion of the results
of operations that arises as a result of changes in exchange rates from the
portion that arises from changes in market prices of investments during the
period. When foreign securities are purchased or sold, the Fund acquires
forward exchange contracts as of the trade date for the amount of purchase or
proceeds, and no exchange gains or losses are thus realized on these
transactions. Foreign dividends are shown net of foreign exchange gains or
losses, which arise when currency gains or losses are realized between the
ex-dividend and payment dates on dividends.
FORWARD CURRENCY CONTRACTS - As foreign securities are purchased, the Fund
enters into forward currency exchange contracts in order to hedge against
foreign currency exchange rate risks. The market value of the contract
fluctuates with changes in currency exchange rates. The contract is
marked-to-market daily and the change in market value is recorded by the Fund as
an unrealized gain or loss. As foreign securities are sold, a portion of the
contract is closed and the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. Realized gains and losses from contract
transactions are included as a component of net realized gains (losses) on
investments, options and currency transactions in the Statement of Operations.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires the Fund's management to
50
<PAGE>
make estimates and assumptions that affect the reported amounts of assets,
liabilities, and contingent liabilities at the date of the financial statements
and the reported amounts of income and expenses during the reporting period.
Actual results could differ from these estimates.
NOTE 2 - TREASURY STOCK TRANSACTIONS
From January 1, 1997 through December 31, 1999, the Board of Directors
authorized the following purchases of the Fund's capital shares on the open
market:
Average
Year Number of Cost Discount
Shares Per Share
- ----- -------------- -----------------------------
1999 223,500 $1,626,656 $ 0.16
- ---- ------- ---------- ------
1998 127,500 $ 980,119 $ 0.10
In 1996, the Fund established a distribution reinvestment plan (DRIP) to
allow shareholders to reinvest their distributions in shares of the Fund. When
the Fund is selling at a premium, distributions will be reinvested at the
greater of net asset value or 95% of the market price. When the Fund is selling
at a discount, distributions will be reinvested at market price. On December 30,
1999, the distribution date, the Fund was selling at a discount. Distributions
to shareholders participating in the DRIP were used to repurchase shares on the
open market. As such, no shares were issued from treasury stock.
In 1992, the Fund reissued all of its existing treasury stock in addition
to newly issued stock in a private placement of shares to Agape Co., S.A. in
exchange for securities which were generally the same as those contained in the
Fund's portfolio. A total of 698,210 unregistered Fund shares were issued to
Agape in the transaction at a slight premium to net asset value. The federal
income tax basis of the securities received by the Fund in this transaction was
equivalent to the market value of those securities on the date of the
transaction. The Fund is obligated to register these shares for sale in the
open market upon Agape's request. Previous negotiations for the repurchase of
these shares by the Fund have been discontinued.
NOTE 3 - PURCHASES AND SALES OF SECURITIES
The cost of purchases and proceeds from sales of investment securities
(excluding short-term money market securities) during the year ended December
31, 1999, were:
Common Stocks Treasury Bills
-------------------- --------------------
Purchases $ 8,897,896 $ 5,427,347
Sales $13,109,557 $ 4,498,750
NOTE 4 - FOREIGN CURRENCY CONTRACTS
At December 31, 1999, the Fund had contracts, maturing on February 18,
2000, and August 18, 2000, to sell 1.9 million Swiss francs, 1.9 million British
pounds, respectively. These contracts were marked-to-market on December 31,
1999 to a value of $4.4 million, resulting in net unrealized gains of $64,931.
These unrealized gains are included as a component of receivables from
securities sold in the Statement of Assets and Liabilities.
NOTE 5 - OPTIONS TRANSACTIONS
The Fund may from time to time purchase and sell call and put options on
stock indexes which are traded on national securities exchanges as a method of
51
<PAGE>
hedging market fluctuations. The Fund may liquidate the call and put option
purchased or sold by effecting a closing sale transaction (rather than
exercising the option). This is accomplished by purchasing or selling an option
of the same series as the option previously purchased or sold. There is no
guarantee that the closing sale transaction can be effected. The Fund will
realize a profit from a closing transaction if the price at which the
transaction is effected is greater than the premium paid to purchase the option.
The Fund will realize a loss from a closing transaction if the price is less
than the premium paid.
An option may be closed out only on an exchange which provides a market for
options on the same index and in the same series. Although the Fund will
generally purchase or sell only those options for which there appears to be an
active market, there is no assurance that a liquid market on the exchange will
exist for any particular option, or at any particular time. In such event, it
might not be possible to execute closing transactions in particular options,
with the result that the Fund would have to exercise its options in order to
realize any profit.
The cost of option contracts purchased, and the proceeds from option
contracts sold during the year ended December 31, 1999 which are included in the
total purchases and proceeds of sales in Note 3 were $6,669,840 and $4,968,798,
respectively.
NOTE 6 - LEASE COMMITMENTS
The Fund is obligated under a three-year operating lease for its Mesa,
Arizona corporate office, which expires on June 30, 2001. Minimum lease
payments due are as follows:
Year ended December 31:
2000 $ 24,081
2001 12,041
---------
Total minimum lease payments $ 35,806
=========
Rent expense for the year ended December 31, 1999 was $17,027. See Note
13.
NOTE 7 - INVESTMENT ADVISORY FEES AND PERFORMANCE BONUS/PENALTIES
TOP Fund Management is the Fund's investment advisor (the "Advisor").
Under an agreement between the Fund and the Advisor, the latter supervises the
investments of the Fund and pays certain expenses related to employees
principally engaged as directors, officers, or employees of the Advisor. The
agreement provides for base management fees equal to .3125% per quarter
(equivalent to 1.25% per annum) of the average daily net assets of the Fund.
For the year ended December 31, 1999, the base management fees aggregated
$228,530.
In addition to the base management fees, the Advisor will receive a bonus
for extraordinary performance or pay a penalty for underperformance. The
bonus/penalty performance arrangement uses the S&P Index of 500 Composite Stocks
("S&P 500 Index") as a measure of performance against which the Fund's net asset
value's performance will be measured. The bonus/penalty is payable at the end
of each calendar quarter and will not exceed 2.5% of the average daily net
assets in the calendar quarter. The performance penalty can exceed the base
management fees. Furthermore, the bonus/penalty arrangement will not become
52
<PAGE>
operative unless the performance of the Advisor exceeds, either positively or
negatively, the S&P 500 Index percentage change during the same period of time
by more than 10%. For the year ended December 31, 1999, the performance penalty
aggregated $501,445.
The agreement also provides that if the Fund's expenses on an annual basis
(including the base management fees, but excluding any bonus or penalty
payments, taxes, interest, brokerage commission, and certain litigation
expenses) exceed 3.5% of the average daily net assets up to $20,000,000 plus
1.5% of the average daily net assets in excess of $20,000,000, the Advisor shall
reimburse the Fund for any such excess up to the aggregate amount of the basic
advisory fee. For the year ended December 31, 1999, an expense reimbursement
was not required.
NOTE 8 - DISTRIBUTIONS TO SHAREHOLDERS
On September 14, 1999, the Board of Directors declared a $0.05 per share
remainder distribution. This represents undistributed net investment income and
short-term capital gains for 1998. These distributions were paid on December
30, 1999, to shareholders of record on December 21, 1999. The Fund intends to
distribute short-term capital gains and net investment income for 1999 on or
before December 31, 2000.
NOTE 9 - FEDERAL INCOME TAX INFORMATION
For federal income tax purposes, the Fund generated a net capital loss
carryforward of $1,149,307 during the year ended December 31, 1999, which is
scheduled to expire on December 31, 2007. The carryover will be used to offset
any future net capital gains and no capital gain distributions will be made
until the capital loss carryforward has been fully utilized or expires.
NOTE 10 - RELATED PARTIES
Directors of the Fund who are not officers or otherwise affiliated with the
Advisor are paid $500 per meeting plus out-of-pocket expenses.
At December 31, 1999, Barry Ziskin, an officer and director of the Fund,
owned 599,628 shares of the Fund's capital stock. He is also an officer and
director of the Advisor.
NOTE 11 - LINE OF CREDIT
The Fund has a $1,000,000 line of credit with its custodian bank which is
secured by the assets of the Fund. Borrowings against the line are charged
interest at a rate of prime plus 1/2%. There were no amounts outstanding
against the line during the twelve months ended December 31, 1999. The line of
credit expires August 7, 2000.
The purpose of the line is to enable the Advisor flexibility in selling
shares of portfolio investments at such time and price as is consistent with the
investment discipline employed and is in the best interest of the shareholders.
If the full amount of the line had been utilized, it would have represented less
than 6% of the net assets of the Fund at December 31, 1999.
53
<PAGE>
NOTE 12 - EXPENSE OFFSET ARRANGEMENT
Through an arrangement with Standard & Poor's Securities ("S&P"),
commissions paid to S&P earn soft dollar credits. The Advisor may direct S&P to
use the credits to pay certain Fund expenses. For the year ended December 31,
1999, the Advisor applied $8,437 of these soft dollar credits towards the
payment of office and miscellaneous expenses of the Fund.
NOTE 13 - EXPENSE ALLOCATION
The Board reviews on an annual basis any expenses the Fund shares with the
Advisor and its affiliates. The Board has approved allocating shared expenses
and employment compensation for Fund employees who are not regular employees of
the Advisor or its affiliates based generally on the ratio of assets under
management between the Fund and the Advisor's affiliates, subject to annual
review by the Board and a maximum allocation of any particular expense to the
Fund of 75%.
54
<PAGE>
Z-SEVEN'S FINANCIAL HIGHLIGHTS ARE NEXT.
55
<PAGE>
Z-Seven Fund, Inc.
FINANCIAL HIGHLIGHTS
The following represents selected data for a share outstanding throughout the
year. All share and per share data has been adjusted to reflect the two-for-one
stock split in December 1997, and the three-for-two stock split in April 1986.
Financial Highlights include fifteen years of information.
<TABLE>
<CAPTION>
For the year ended December 31, 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 7.80 $ 7.55 $ 8.20 $ 8.74
-------- -------- --------- --------
Net investment income (loss) .10 -0- 0.11 (0.06)
Net realized and unrealized gains (losses) on investments
and currency transactions before income taxes (.28) 0.55 1.05 1.01
-------- -------- --------- --------
Total increase (decrease) from investment operations (.18) 0.55 1.16 0.95
Distributions to shareholders from net investment income -0- (0.06) (0.05) (0.03)
Distributions to shareholders from net capital gains (.05) (0.12) (1.38) (1.46)
Income taxes on capital gains paid on behalf of
shareholders -0- (0.12) (0.45) -0-
Capital contribution -0- -0- 0.07 -0-
-------- -------- --------- --------
Net increase (decrease) in net asset value (0.23) .25 (0.65) (0.54)
-------- -------- --------- --------
Net asset value, end of year $ 7.57 $ 7.80 $ 7.55 $ 8.20
======== ======== ========= ========
Per share market value, end of year $ 7.69 $ 8.00 $ 11.00 $ 10.25
Total investment return (a) (3.2%) (24.5%) 34.0%(d) 8.9%
Ratio of expenses before performance bonus/penalty to
average net assets (c) 3.2% 3.8% 3.0% 3.2%
Ratio of expenses to average net assets (c) 0.5% 1.5% 1.0% 3.0%
Ratio of net investment income (loss) to average
net assets 1.2% (0.2%) 1.1% (0.6%)
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate 59.6% 73.1% 111.3% 66.4%
- ---------------------------------------------------------------------------------------------------
Number of shares outstanding, end of year (in 000's) 2,322 2,545 2,671 2,785
Net assets, end of year (in 000's) 17,569 19,855 20,161 22,841
- ---------------------------------------------------------------------------------------------------
<FN>
(a) Based on market price per share with dividends, distributions, and deemed distributions
reinvested at lower of net asset value or closing market price on the distribution date.
(b) Calculations based on weighted average number of shares outstanding of 2,588,376 for the
year.
(c) Ratios reflect expenses gross of expense offset arrangement for the years ended December 31, 1995
through December 31, 1999.
(d) Total investment return without the capital contribution would have been 33.2%.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992(b) 1991 1990 1989 1988 1987 1986 1985
- ------------------------------------------------------------------------------------------------------------
8.32 $ 8.50 $ 7.56 $ 8.83 $ 6.08 $ 6.62 $ 7.16 $ 7.61 $ 8.04 $ 5.94 $ 4.33
- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
0.06 (0.08) 0.06 0.02 (0.09) 0.08 0.23 0.01 (0.07) (0.18) (0.08)
1.88 (0.07) 1.11 (1.29) 2.84 (0.56) (0.40) 0.07 (0.02) 2.50 1.69
- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
1.94 (0.15) 1.17 (1.27) 2.75 (0.48) (0.17) 0.08 (0.09) 2.32 1.61
(0.44) -0- -0- -0- -0- (0.06) (0.23) -0- -0- -0- -0-
(1.08) -0- -0- -0- -0- -0- -0- -0- -0- -0- -0-
-0- (0.03) (0.23) -0- -0- -0- (0.14) (0.53) (0.34) (0.22) -0-
-0- -0- -0- -0- -0- -0- -0- -0- -0- -0- -0-
- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
0.42 (0.18) 0.94 (1.27) 2.75 (0.54) (0.54) (0.45) (0.43) 2.10 1.61
- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
8.74 $ 8.32 $ 8.50 $ 7.56 $ 8.83 $ 6.08 $ 6.62 $ 7.16 $ 7.61 $ 8.04 $ 5.94
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
11.13 $ 8.25 $ 9.13 $ 8.50 $ 10.75 $ 6.38 $ 6.50 $ 8.32 $ 7.63 $ 10.07 $ 5.00
58.3% (9.3%) 10.2% (20.9%) 68.6% 1.9% (20.2%) 17.0% (20.8%) 106.6% 7.1%
2.9% 2.7% 2.9% 3.5% 3.4% 3.6% 3.5% 3.5% 3.0% 2.7% 3.5%
2.0% 3.0% 2.1% 2.4% 4.3% 2.6% 1.2% 2.7% 3.2% 4.4% 3.5%
0.9% (0.8%) 0.7% 0.2% (1.1%) 1.4% 3.3% 0% (0.7%) (2.3%) (1.6%)
- ------------------------------------------------------------------------------------------------------------
36.1% 17.5% 42.1% 17.9% 44.1% 42.8% 87.3% 4.7% 23.3% 30.6% 24.2%
- ------------------------------------------------------------------------------------------------------------
2,771 3,032 3,188 3,269 2,571 2,592 2,751 2,942 2,997 3,008 3,097
24,220 25,241 27,097 24,714 22,687 15,756 18,231 21,083 22,827 24,210 18,417
- ------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
Report of Independent Auditors
To the Board of Directors and Shareholders of Z-Seven Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
Z-Seven Fund, Inc., including the schedule of investments as of December 31,
1999, and the related statement of operations for the year then ended, and
statement of changes in net assets for each of the years in the two-year period
then ended, and financial highlights for each of the years in the five-year
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The accompanying financial highlights of Z-Seven Fund, Inc. for each of
the years in the six-year period ended December 31, 1994, and for each of the
years in the four-year period ended December 31, 1988, were audited by other
auditors whose reports thereon dated January 30, 1995, and February 3, 1989,
expressed unqualified opinions on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1999, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights for 1995
through 1999 referred to above, present fairly, in all material respects, the
financial position of Z-Seven Fund, Inc. as of December 31, 1999, and the
results of its operations, its changes in net assets and financial highlights
for each of the periods indicated above, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
- ------------------
Phoenix, Arizona
February 4, 2000
58
<PAGE>
RESULTS OF VOTING (UNAUDITED)
Pursuant to the proxy statement mailed to shareholders in conjunction with
the annual meeting of shareholders held on December 20, 1999, three proposals to
be voted upon at the meeting were presented. Those proposals included:
Proposal 1: Election of Directors. All Directors were nominees to the
Board of Directors at this meeting. The Directors elected will hold office
until the next annual meeting of shareholders or until his or her successor is
duly elected and qualified.
Withheld/
Nominee For Against
---------------- ----------- ----------
M. De Los Santos 2,251,541 38,658
A. Feldman 2,252,542 37,657
J. Shuster 2,250,540 39,659
B. Ziskin 2,251,916 38,283
R. Ziskin 2,252,542 37,657
Proposal 2: Approval of selection of KPMG LLP as independent auditors to
report on the financial statements of the Fund for the year ended December 31,
1999.
For Against Abstain
----------- --------- ---------
2,299,927 3,522 1,001
Proposal 3: Approval of the Investment Advisory Agreement between the Fund
and TOP Fund Management, Inc.
For Against Abstain
----------- --------- ---------
2,255,721 20,366 28,363
YEAR 2000 (UNAUDITED)
The concern over the "Year 2000" (Y2K) issue resulted from computer programs
being written using two digits rather than four digits to identify a year in the
date field. Throughout the world there was concern that this issue could cause
computer systems to fail or create erroneous results at the Year 2000.
In 1999, management of the Fund took various steps to mitigate the potential
impact of a Y2K problem. In general, these actions were designed to identify,
assess, and design an action plan to mitigate the risks that the Fund might have
encountered relative to the Y2K problem. The minimal costs incurred to achieve
Y2K readiness were borne by management of the Fund.
Following the end of 1999 and subsequently to date, the Fund has experienced no
problems relative to the Y2K issue that had an impact on the Funds net assets or
results of operations.
59
<PAGE>
BOARD OF DIRECTORS
Barry Ziskin
President:
Z-Seven Fund, Inc.
TOP Fund Management, Inc.
Ziskin Asset Management, Inc.
Albert Feldman
Retired, San Francisco Advertiser, Inc.
Dr. Jeffrey Shuster
DDS PC
Private Practice
Rochelle Ziskin
Assistant Professor
University of Missouri
Maria De Los Santos
Controller, DDC-I, Inc.
INVESTMENT ADVISOR
TOP Fund Management, Inc.
OFFICERS
Barry Ziskin, President & Treasurer
Barbara Perleberg, Secretary
CUSTODIAN
Chase Manhattan Bank
New York, NY
TRANSFER AGENT
Norwest Bank Minnesota, N.A.
Shareowner Services
161 N. Concord Exchange Street
South St. Paul, MN 55075
(800) 468-9716
INDEPENDENT AUDITORS
KPMG LLP
Phoenix, AZ
GENERAL COUNSEL
Kilpatrick Stockton LLP
Atlanta, GA
STOCK LISTINGS
Nasdaq National Market System
Symbol: ZSEV
Pacific Exchange
Symbol: ZSE
CORPORATE OFFICE
1819 S. Dobson Road
Suite 109
Mesa, AZ 85202
(480) 897-6214
Fax (480) 345-9227
<PAGE>
