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- --------------------------------------------------------------------------------
WEITZ SERIES FUND, INC.
HICKORY PORTFOLIO
QUARTERLY
REPORT
DECEMBER 31, 1996
ONE PACIFIC PLACE, SUITE 600
1125 SOUTH 103 STREET
OMAHA, NEBRASKA 68124-6008
402-391-1980
800-232-4161
402-391-2125 FAX
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WEITZ SERIES FUND, INC. -- HICKORY PORTFOLIO
PERFORMANCE SINCE INCEPTION
The following table summarizes performance information for the fund as compared
to the S&P 500 over the periods indicated. The table also sets forth average
annual total return data for the fund for the one year period ended December 31,
1996, and for the period since inception, calculated in accordance with SEC
standardized formulas.
<TABLE>
<CAPTION>
DIFFERENCE
PERIOD ENDED HICKORY FUND S&P 500 HICKORY FUND-S&P 500
- ------------------------------------ ------------- ------------ ------------------------
<S> <C> <C> <C>
Dec. 31, 1996 35.4% 22.9% 12.5%
Dec. 31, 1995 40.5 37.5 3.0
Dec. 31, 1994 -17.3 1.3 -18.6
Dec. 31, 1993 (9 months) 20.3 5.5 14.8
Since Inception (April 1, 1993)
Cumulative 89.1 80.6 8.5
Compound Annual
Average Return 18.5 17.0 1.5
</TABLE>
The portfolio's average annual total return for the one year period ending
December 31, 1996, and for the period since inception (April 1, 1993) was 35.4%
and 18.5%, respectively. The returns assume redemption at the end of each period
and reinvestment of dividends.
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The graph below shows the growth in value of an initial $100,000 investment in
Hickory, assuming the reinvestment of all capital gain distributions and
dividends, compared to the growth in value of $100,000 invested in the S&P 500,
also assuming dividend reinvestment. Hickory's performance numbers are
calculated after deducting all fees and expenses.
12/31/96
Hickory Portfolio
Comparison of Change in Value of $100,000
Investment in Hickory Portfolio & S&P 500
<TABLE>
<CAPTION>
HICKORY S&P 500
----------- -----------
<S> <C> <C>
VALUE OF VALUE OF
PERIOD $100,000 $100,000
- ---------- ----------- -----------
03/31/93 $100,000 $100,000
04/30/93 $91,621 $97,583
05/31/93 $95,999 $100,184
06/30/93 $96,609 $100,476
07/31/93 $99,489 $100,071
08/31/93 $107,204 $103,859
09/30/93 $108,002 $103,062
10/31/93 $115,026 $105,192
11/30/93 $111,438 $104,193
12/31/93 $120,267 $105,452
01/31/94 $118,421 $109,034
02/28/94 $116,476 $106,076
03/31/94 $110,109 $101,457
04/30/94 $109,060 $102,759
05/31/94 $110,065 $104,440
06/30/94 $104,789 $101,881
07/31/94 $104,153 $105,224
08/31/94 $110,360 $109,530
09/30/94 $109,189 $106,855
10/31/94 $107,787 $109,247
11/30/94 $101,810 $105,272
12/31/94 $99,476 $106,830
01/31/95 $99,870 $109,599
02/28/95 $103,994 $113,865
03/31/95 $105,513 $117,219
04/30/95 $105,229 $120,668
05/31/95 $111,054 $125,480
06/30/95 $118,331 $128,392
07/31/95 $124,859 $132,647
08/31/95 $133,445 $132,978
09/30/95 $139,110 $138,586
10/31/95 $133,237 $138,091
11/30/95 $137,345 $144,146
12/31/95 $139,728 $146,922
01/31/96 $146,980 $151,917
02/29/96 $148,848 $153,328
03/31/96 $148,334 $154,805
04/30/96 $151,650 $157,084
05/31/96 $159,513 $161,128
06/30/96 $163,383 $161,741
07/31/96 $150,145 $154,599
08/31/96 $160,466 $157,864
09/30/96 $168,758 $166,741
10/31/96 $171,426 $171,337
11/30/96 $179,661 $184,276
12/31/96 $189,125 $180,625
</TABLE>
This information represents past performance of the portfolio and is not
indicative of future performance. The investment return and principal value of
an investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than the original cost. The index used for comparison
purposes is the S&P 500 Index which consists of 500 companies. The index is
unmanaged and widely recognized as representative of the equity market in
general. Investment expenses are not deducted from the S&P 500 Index. Additional
information is available from Wallace R. Weitz & Co. at the address listed on
the front cover.
2
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WEITZ SERIES FUND, INC. -- HICKORY PORTFOLIO
DECEMBER 31, 1996 - QUARTERLY REPORT
January 8, 1997
Dear Fellow Shareholder:
We ended 1996 on a very strong note, gaining 12.1% during the last three
months of 1996 to finish the year with a total return of 35.4%. Over the same
periods, the S&P 500 had total returns of 8.3% and 22.9%, respectively.
According to Lipper, the average growth fund had a total return of 19.2% during
1996.
REVIEW AND OUTLOOK
The last two years have been extraordinary, both for Hickory and for U.S.
stocks in general. Not only have returns (both for us and for the overall
market) been wildly above any reasonable guess of long-term stock returns, but
we have experienced this windfall during a time when many rational observers
have been quite concerned about the possibility of a bear market in stock
prices. I have been telling you of my own concerns about the stock market for
more than a year. Nevertheless, since the beginning of 1995, Hickory's total
return is greater than 90% and the S&P 500's total return is almost 70%. I
believe that a situation like this deserves more than the usual amount of
reflection.
To start, I think it is important to remember that we are only talking
about two years. If I may use one of the most over-used sports analogies,
investing is like a marathon, not a sprint. I am focusing on maximizing
Hickory's long term returns and I allow the portfolio to be quite different from
the stock market overall. Therefore, we should always expect time periods when
Hickory will do better than the broad averages and time periods when Hickory
will do worse. Again, I urge you to remember our results in 1994 (-17%). All
that really matters is how we do over the long run. Thus far, I am reasonably
satisfied with Hickory's cumulative return of 18.5% since inception, given the
overall stock market environment.
I believe the events of 1995 and 1996 are a perfect illustration of why
market timing is so difficult. When I heard smart people suggest in 1995 that
now was the time to get out of the stock market because the risk of a bear
market was high, I tended to agree that risks were high, but I disagreed about
what action to take. My preferred course was to continue to invest in stocks,
but only in those stocks that met my criteria of growing value, priced at a
discount. Thus far, events have supported my strategy. Since we are running a
marathon, it is still not clear who will win the race, because we might still
experience a major stock market decline that
3
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could hurt our portfolio more than others. The prices of all stocks, even stocks
with growing value priced at a discount, may be depressed for a period of time.
Nevertheless, for now it looks like we have a strategy that is succeeding. It
will be my job as portfolio manager to continue to attempt to make our strategy
successful over the years to come.
How did Hickory do so well over the last two years? Did I take
unreasonable risks to generate our returns? I think the best way to answer these
questions is to look at the actions I took. First, I clearly have been willing
to concentrate our investments in those stocks that I believe are most
attractive. When I am right, these investments can be large contributors. When I
am wrong, our results will suffer. Over each of the last two years, the three
largest positive contributors to Hickory's results have been Imperial Credit,
Countrywide Credit, and Redwood Trust. The securities of these three companies
have also been among our largest positions throughout this period. I think it
would be instructive to review the investment case for these three stocks as of
early 1995, and look at what has happened since.
At the end of 1994, Imperial Credit sold for $8.50 per share. Earnings in
1994 were $0.85 per share, down from $1.79 the year before. The very highest
published earnings estimate for the company for 1996 was $2.00 per share. No
one, including myself, really believed a number that high. Wall Street viewed
the company as participating in a difficult commodity business (mortgage
banking) with uncertain earnings prospects. I saw the company as very reasonably
priced relative to depressed earnings and the possibility of better days ahead.
Since then, several very good things have happened. The company has refocused
itself on higher return specialty lending businesses. Actual earnings this year
are higher than anyone hoped. Adjusting for stock dividends and splits, it now
looks like Imperial will earn almost $3.00 per share in 1996. Again adjusting
for splits, the stock now trades for more than $60 per share.
Countrywide Credit began 1995 selling for just under $13 per share. The
company was close to completing a difficult fiscal year in which it would earn
$0.95 per share, down from $1.94 the previous year. Wall Street's view of
Countrywide was very similar to its view of Imperial: mortgage banking is a
commodity business, earnings are depressed, and who knows when earnings will
recover. I viewed Countrywide as being in some ways superior to Imperial. As one
of the largest and most sophisticated mortgage banks, I felt it had a cost
advantage, which is very important in a commodity business. I also felt that
Countrywide's mix of businesses would balance each other and cushion earnings
somewhat in difficult environments. At the time, published earnings estimates
were $2.00 per share for what is now the current fiscal year. I was hoping for
more. With one quarter to go in the current fiscal year, it now looks like
earnings this fiscal year will be about $2.40 per share. The stock ended 1996
trading at about $28.50 per share. Compared to my expectations, Countrywide's
earnings performance has been somewhat disappointing. Nevertheless, because the
market now gives Countrywide a more reasonable valuation of roughly 10 times
next year's earnings, the stock has done quite well.
4
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The Redwood Trust story is a little different. At the beginning of 1995,
Redwood was still a private company. We owned units which each effectively
consisted of one share of common stock and a warrant to buy another share of
common stock at $15 per share. The units were priced at $15 per share. We hoped
that Redwood would go public during 1995, pay a dividend of $2.00 during 1996,
and grow the dividend by maybe 10 percent per year thereafter. Because the
company was small and private, Wall Street didn't really have an opinion. I felt
that Redwood had a very good business plan that, if executed properly, would
allow the company to earn above average returns over many years without taking
unreasonable risks. My greatest concerns were whether management would prove to
be as capable as I thought they were, and whether other companies would begin to
copy Redwood's strategy, which would eventually close Redwood's window of
opportunity. During the ensuing two years, Redwood did become a public company,
management has executed the business strategy, and competition has yet to arise.
The dividend in 1996 was $1.67, slightly lower than we had hoped, but this was
only because management has been pursuing a faster growth strategy that has
sacrificed short-term earnings in exchange for significantly higher dividends in
years to come. The common stock ended the year at just over $37 per share, and
the warrants last traded at just over $21 per warrant, so the original $15 units
are worth $58.
The investment themes for all three of these companies were roughly
similar. The full earnings power was not being realized at the time of purchase.
However, the stocks were then selling for quite reasonable multiples of current
earnings or book value. Because valuations were already low, further downside
seemed limited. However, if everything worked, each stock had the potential to
be quite rewarding. In these three cases, events have been somewhat better than
I expected and the stocks have been very, very kind to us.
Before you jump to the erroneous conclusion that things always work out as
I expect, I want to point out some significant investments which have been
disappointing. The worst offenders recently have been the cable and cellular
stocks, which were particularly disappointing during 1996. In the case of
cellular, the business performance has been, I think, just fine. New customers
continue to sign on, operating cash flow is rising rapidly, and free cash flow
is developing as expected. In the case of cable, there have been some operating
shortfalls, particularly with Telecommunications, Inc. (TCI), which reported
worse than expected third quarter results. However, the biggest problem with
both groups has been the perception of investors, who have been concerned about
future competition and have shown growing skepticism that companies which
generate cash flow but no earnings will ever create positive returns for
shareholders. I continue to believe that while the risks of competition are
real, these risks are more than priced into the stocks. I also believe that
sooner or later, investors will realize that significant value is now being
created, and will continue to be created, and that higher prices for cellular
and cable stocks are justified.
While I am obviously not happy with my stocks that have yet to work, there
are two important positives about this situation. First, it is somewhat
encouraging to realize that Hickory has had good results even when some of my
stock picks haven't worked. Second, I have been taking advantage of the
diverging valuations among our holdings to reduce our
5
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positions in some stocks that are no longer quite as cheap, and to add to our
holdings in those that have become particularly attractive. For example, we no
longer own Imperial Credit because at current prices I feel the potential for
further appreciation is not sufficient to outweigh the risks. I have sold
roughly half of our shares of Countrywide Credit. I still think the stock is
attractive, but relative to other opportunities I felt it didn't deserve to be
as large a position as it once was. In their place, I have added to our holdings
of cellular and cable stocks, particularly Centennial Cellular, Comcast, Liberty
Media, and TCI.
Finally, Redwood Trust has grown to be our largest holding, and despite
its rise, I have not yet sold any of our shares. I continue to believe that its
long-term future is very good, and while it is certainly not as undiscovered as
it was two years ago, I don't think Wall Street has fully discounted its future
prospects.
Because I have been able to reshuffle our portfolio, I remain quite
comfortable with Hickory's holdings, despite the last two years. As usual I have
no idea when the stock market will reward our patience, and certainly don't
expect the next two years to be as profitable as the last two years. I continue
to believe that a major stock market correction is coming. However, I hope that
this letter has helped you to understand why I think investing in growing value,
priced at a discount is the best strategy for long term investors, even when the
stock market environment is not to our liking.
As usual, I welcome your questions. Thanks for your continuing support.
Sincerely,
/s/ Richard F. Lawson
---------------------
Richard F. Lawson
Portfolio Manager
6
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SCHEDULE OF INVESTMENTS
7
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WEITZ SERIES FUND, INC. -- HICKORY PORTFOLIO
SCHEDULE OF INVESTMENTS IN SECURITIES
DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES
OR UNITS COST VALUE
- ----------- ------------- --------------
<C> <S> <C> <C>
COMMON STOCKS -- 91.8%
BANKING -- 2.6%
1,000 Wells Fargo & Co. $ 88,506 $ 269,750
------------- --------------
CABLE TELEVISION -- 16.8%
22,000 Adelphia Communications Corp. CL A* 163,625 126,500
8,000 Comcast Corporation CL A 116,400 141,000
25,500 Comcast Corporation Special CL A 389,160 454,219
4,000 TCI Satellite Entertainment CL A* 50,722 39,500
40,000 Tele-Communications, Inc. CL A* 532,290 522,500
15,000 Tele-Communications Liberty Media CL A* 383,444 428,437
------------- --------------
1,635,641 1,712,156
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CONSUMER PRODUCTS AND SERVICES -- 4.8%
37,000 American Classic Voyages Co.* 288,125 485,625
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DIVERSIFIED INDUSTRIES -- 1.0%
1,500 Lynch Corp.* 112,560 105,750
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FINANCIAL SERVICES -- 8.9%
12,000 Capital One Financial Corp. 272,571 433,500
8,000 First USA, Inc. 180,345 277,000
15,000 HealthCare Financial Partners, Inc.* 187,500 191,250
------------- --------------
640,416 901,750
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HEALTH CARE -- 4.2%
11,000 Seafield Capital Corp. 389,850 426,250
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MEDIA/OTHER -- 11.0%
15,000 Katz Media Group, Inc.* 169,500 168,750
45,000 Valassis Communications, Inc.* 646,913 950,625
------------- --------------
816,413 1,119,375
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MORTGAGE BANKING -- 9.0%
17,000 Countrywide Credit Industries, Inc. 259,020 486,625
30,305 Resource Bancshares Mtg. Grp., Inc. 320,743 431,846
------------- --------------
579,763 918,471
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</TABLE>
8
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WEITZ SERIES FUND, INC. -- HICKORY PORTFOLIO
SCHEDULE OF INVESTMENTS IN SECURITIES, CONTINUED
<TABLE>
<CAPTION>
SHARES
OR UNITS COST VALUE
- ----------- ------------- --------------
<C> <S> <C> <C>
REAL ESTATE AND CONSTRUCTION -- 4.2%
6,000 Forest City Enterprises, Inc. CL A $ 197,678 $ 363,000
4,000 NHP, Inc.* 53,500 62,000
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251,178 425,000
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REAL ESTATE INVESTMENT TRUSTS -- 13.0%
27,372 Redwood Trust, Inc. 441,517 1,019,607
20,000 NovaStar Financial Inc.** 300,000 300,000
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741,517 1,319,607
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TELECOMMUNICATIONS SERVICES -- 16.3%
16,000 360 Communication Co.* 370,140 370,000
15,000 Cellular Communications of Puerto Rico, Inc.* 362,276 296,250
70,000 Centennial Cellular Corp. CL A* 882,814 848,750
5,000 CommNet Cellular, Inc.* 133,125 139,375
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1,748,355 1,654,375
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Total Common Stocks 7,292,324 9,338,109
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WARRANTS -- 4.9%
23,500 Redwood Trust, Inc., Expiring 12/31/97 92,548 502,313
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<CAPTION>
FACE AMOUNT
- -----------
<C> <S> <C> <C>
SHORT-TERM SECURITIES -- 5.2%
$525,194 Norwest U.S. Government Money Market Fund 525,194 525,194
------------- --------------
Total Investments in Securities $ 7,910,066 10,365,616
------------- --------------
------------- --------------
Other Liabilities in Excess of Other Assets -- (1.9%) (194,390)
--------------
Total Net Assets -- 100% $ 10,171,226
--------------
--------------
Net Asset Value Per Share $ 18.800
--------------
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</TABLE>
*Non-income producing
**This restricted security, exempt from registration under the Securities Act of
1933, was purchased in a private placement and, unless registered under the Act
or exempted from registration, may only be sold to qualified institutional
investors or certain accredited investors.
9
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WEITZ SERIES FUND, INC.
BOARD OF DIRECTORS
John W. Hancock
Richard D. Holland
Thomas R. Pansing, Jr.
Delmer L. Toebben
Wallace R. Weitz
OFFICERS
Wallace R. Weitz, President
Mary K. Beerling, Vice-President & Secretary
Linda L. Lawson, Vice-President
Richard F. Lawson, Vice-President
INVESTMENT ADVISER
Wallace R. Weitz & Company
DISTRIBUTOR
Weitz Securities, Inc.
CUSTODIAN
Norwest Bank Nebraska, N.A.
TRANSFER AGENT AND DIVIDEND PAYING AGENT
Wallace R. Weitz & Company
This report has been prepared for the information of shareholders of Weitz
Series Fund, Inc. -- Hickory Portfolio. For more detailed information about the
Fund, its investment objectives, management, fees and expenses, please see a
current prospectus. This report is not authorized for distribution to
prospective investors unless preceded or accompanied by a current prospectus.
