-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M9MR+e/O10vTAWnaemeTv1XJ3+Rzcu5HBDSFu0aSVHGfLiEkIQsAaaTbnJVfTnqK IrLfemVzJMlwtmNVy7/DmQ== 0000950130-00-000967.txt : 20000302 0000950130-00-000967.hdr.sgml : 20000302 ACCESSION NUMBER: 0000950130-00-000967 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZWEIG TOTAL RETURN FUND INC CENTRAL INDEX KEY: 0000836412 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133474242 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-05620 FILM NUMBER: 558065 BUSINESS ADDRESS: STREET 1: 900 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2125100360 MAIL ADDRESS: STREET 1: 5 HANOVER SQUARE CITY: NEW YORK STATE: NY ZIP: 10004 N-30D 1 THE ZWEIG TOTAL RETURN FUND, INC. February 2, 2000 Dear Shareholder: For the year ended December 31, 1999, the total return on net asset value of The Zweig Total Return Fund was 3.9%, including $0.82 in reinvested distribu- tions. During the fourth quarter of 1999, the Fund's net asset value gained 4.1%, including $0.19 in reinvested distributions. Investors should note that past performance is not indicative of future results. Consistent with our policy of seeking to minimize risk while earning reason- able returns, our overall average exposure during 1999 was approximately 59%. To put our performance in perspective, it is important to note that 1999 was the worst calendar year for bonds since the 1920's. At the beginning of the year, the 30-year Treasury bond was yielding 5.10%; it ended the year at 6.48%. Although we cut back our exposure dramatically throughout the year, ending with a duration of 2.2 years (duration is a measure of the sensitivity of a bond or bond portfolio to changes in interest rates), the damage done early in the year was difficult to fully overcome. Furthermore, bonds in every category had a terrible year. Given the fact that we have a bias for value as far as equities are concerned, I am not really unhappy about our overall return. Many value managers with previous great records had negative returns last year. I have never seen a stock market go off on two different tracks as it did last year. We saw technology stocks go positively bonkers, while 61% of the NYSE stocks, more than 50% of the S&P 500, and 50% of the OTC stocks were down. These results can be attributed largely to the so-called new economy. With the technological advances--particularly in the Internet and everything sur- rounding it like cable, wireless, telecommunications, and media--certain com- panies have benefited greatly. The problem is that many of these companies have no earnings and probably will have none in the near future. Others such as America Online have earnings, but their multiples are extremely high. This makes them tough to buy if you use any value yardstick. Nevertheless, we do own AOL, Microsoft, Dell, Cisco, and others in this field and have benefited by their performance. We stepped up to the plate on these issues--and that took a lot of doing for value managers such as ourselves. I thought it was important to do so, and we may even increase our percentage in this direction. At the same time, we have to be conservative. While I do recognize changes in the economy--it truly is different this time--I cannot ignore history which shows that in the long run you can achieve superior returns with less risk by buying stocks at more reasonable prices. DISTRIBUTION DECLARED In accordance with our policy of distributing 10% of our net asset value per year, which equals 0.83% per month (10% divided by 12 months), the Fund declared on January 3, 2000 a distribution of $0.07 per share payable on January 10, 2000 to shareholders of record on December 31, 1999. The amount of a distribution depends on the exact net asset value at the time of declaration. For the January distribution, 0.83% of the Fund's net asset value was equivalent to $0.07 per share. Including this distribution, the Fund's total payout since its inception is now $10.04. Of the $0.82 taxable in 1999, $0.285 is ordinary income, $0.127 is long-term capital gains, and $0.408 is return of capital. (The return of capital is a tax-free return of capital and, therefore, should not be reported as income.) MARKET OUTLOOK Our bond exposure at year-end was 22% compared with 24% at the close of the third quarter. If we were fully invested, we would be at 62.5% in bonds and 37.5% in stocks. Consequently, at 22% in bonds we are at about 35% of a full position (22% / 62.5%). Right now we are very cautious on the bond market and have significantly re- duced our holdings. We see rising commodity prices, wage cost pressure, a hot economy, and a Federal Reserve that has already tightened four times, all neg- ative factors for bonds. However, flexibility is the key. If our indicators turn around and our bond model turns positive, we would be buyers of bonds at the lower prices. Our equity exposure at year-end was 25% compared with 24% at the close of the third quarter. At this figure we are at about 67% of a full position (25% / 37.5%). As I indicated earlier, the stock markets are now tracking two different economies--the new Internet-driven high technology model and the old one that still accounts for most economic activity. They sometimes seem to be going in two different directions. This disparity can continue for some time but ultimately the Internet will encompass the way virtually every company does business. The switch to the Internet economy will bring many dislocations. Middlemen and wholesalers will see their whole industries threatened because it will be a lot easier to match up producers and buyers. This will allow for more compe- tition and eventually bring prices down. Some companies will benefit tremen- dously, and others will be put out of business. It will be a wrenching change, resembling what happened a hundred years ago when the wagon and buggy companies became obsolete with the advent of the automobile. Companies have to adapt and that is what is going on right now. Another major change transforming the nation's corporate landscape is the great merger superwave that shows no sign of cresting. Generally speaking, I think this phenomenon is having a favorable impact. A lot depends on the na- ture of the deal. If a big cash premium is paid by the acquiring company, the acquired company's stock normally would go up. However, as with the America Online merger with Time Warner, more deals are being done with stock trans- fers. In these cases, it is not clear whether stock prices will rise or fall. One common goal that seems to be driving mergers is greater efficiencies in business. If the combining corporate cultures can work together cohesively, a lot of deadwood can be cleaned out; profits tend to go up with the cost savings. With the economy so strong, the people laid off generally land on their feet and some even get better jobs elsewhere. I believe the merger trend is accelerating and will also continue in a big way in Europe. The changing economy is a big factor in current market volatility which, in- cidentally, is not as great as it has been at certain times in the past. Vola- tility in the early days of the twentieth century and in the late '20s and early '30s was much greater than it is today. Part of the reason for the re- cent increased turnover is lower commission costs. When commissions were fixed it was prohibitive to do heavy trading. Now transaction costs are much lower and one can trade directly. Individuals, who now have more sources of information, can just get on a computer to buy and sell stocks. With trading easier, faster, and more effi- cient, there naturally is greater turnover. Although some analysts equate the current 2 volatility primarily to speculation that often occurs at market tops, I think it largely reflects the changed economy and is neither bullish nor bearish. Day traders are having a significant impact on market volatility and day-to- day price movements, but all this will pass some day. When the markets go bad, it will exacerbate the decline. There have been momentum followers for eons. Buying strength and selling weakness is not all that new. Most of the margin traders historically have traded on momentum. Computerized day trading does make the market more volatile but doesn't change the fundamentals. Citing the day trading and the volatility, some analysts claim that this is the most speculative market since 1929. These same analysts have been saying that for the last three or four years. To my way of thinking, the market is speculative in some ways and not in others. It certainly doesn't look too speculative for the previously mentioned 61% of the NYSE stocks that went south last year. I believe the quality of the companies that have highlighted this boom is far better than some of the junk we saw in 1961, 1968, or even 1929. The quality and growth of earnings is also far superior to that of 1972--the days of the so-called nifty-fifty growth stocks. Is this the most speculative market? Probably not. Is there a certain level of speculation? Absolutely. One trend that cannot go on forever is the widening disparity between some stock prices and company earnings. From 1990 to the present, the S&P 500 showed a compound annual growth of about 15% while net operating earnings had a compound annual growth of about 6.7%. Obviously there has to be a more posi- tive relationship between the changes in stock prices and company earnings. Meanwhile, earnings right now are projected to be very strong for 2000. I have heard estimates from the low range of 8% to 10% to as high as 20%. A lot of the expansion in price/earnings differentials is a result of the new economy. If you look at the composition of the S&P 500, the big weightings go to companies like Microsoft, AOL, Yahoo, and Dell that weren't even in the S&P a while back. Of course, their P/E's are very high but so are their growth rates. Based on their weightings, technology stocks make up roughly 30% of the S&P 500 from perhaps 10% several years ago. If you strip out these companies, the P/E ratios in the S&P are pretty normal. Also, the performance of the non- technology stocks should be far more in line than what we see on the surface. That's because we have this extraordinary growth in our economy. All in all, P/E ratios are probably more rational than what the pessimists are thinking. Even though we are enjoying the longest economic expansion in our country's history, it doesn't mean that the business cycle has been permanently tamed. There will always be ups and downs, but business cycles in the future will not resemble those of the past. We were an agricultural economy 200 years ago. Then we were agriculture plus heavy industry like railroads, steel mills, and chemicals. Those industries were extremely volatile, with agriculture depend- ing on the weather while capital intensive industries had big fixed costs and inventories subject to market influences. Now the U.S. economy is much more service-oriented, which means little or no inventories, less investment and fixed capital and probably fewer cycles. Our new economy is far more diversified than it has ever been, and the volatility of the gross national product should continue to stay low. From time to time there will be recessions, but they will not necessarily occur as frequently or as regularly as in the past. It is possible that we can maintain prosperity for a much longer period. It is also possible that we could screw it up and do something like raise taxes or interest rates too high and kill off the boom. Summing up, the fact that interest rates are up about 200 basis points on long bonds is a major negative for the stock market. Other 3 negatives include the speculative elements, the valuations that on the surface seem high, and our below normal sentiment indicators. The positives include the really strong earnings that are expected to con- tinue and the technology-based new economy that is increasing productivity, cutting costs, and keeping inflation under control. I see the negatives and positives as sort of a trade-off. The true picture probably lies somewhere in the middle. Consequently, at this writing I'm on the fence and my market stance is neutral. PORTFOLIO COMPOSITION In accordance with our investment policy guidelines, all of our bonds are U.S. Government obligations. As mentioned previously, the average duration of the bond portion of our portfolio (sensitivity to interest rates) was 2.2 years at year-end. This compared with 2.6 years at the close of the third quarter. Since these bonds are liquid, they give us the flexibility to adjust swiftly to changing market conditions. At year-end our leading industry sectors included technology, telecommunications, financial services, printing and publishing, and retail trade and services. In the above listing, technology and telecommunications gained as a result of appreciation. We added to our holdings in printing and publishing, which also appreciated in value, and trimmed our position in manufacturing, which had appeared among our top groups as of September 30. Our leading individual positions at year-end included EMC, Nokia, Wal-Mart, Grupo Televisa, Morgan Stanley Dean Witter, Tribune Co., General Electric, Amgen, Cisco, and Georgia-Pacific. All of the above were previously in our portfolio, which saw significant appreciation during the fourth quarter in Nokia, Wal-Mart, Grupo Televisa, Morgan Stanley Dean Witter, General Electric, and Georgia-Pacific. We sold out our positions in CNF Transportation and UniCom, and trimmed our holdings in General Motors, Telephone & Data Systems, and Dell. Sincerely, /s/ Martin E. Zweig, Ph.D. Martin E. Zweig, Ph.D. Chairman 4 THE ZWEIG TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS December 31, 1999
Number of Value Shares (Note 3) --------- ---------- Common Stocks 24.73% Automotive 1.16% Borg-Warner Automotive, Inc. ........................ 35,600 $1,441,800 Delphi Automotive Systems Corp. ..................... 120,000 1,890,000 Ford Motor Co. ...................................... 31,400 1,677,938 General Motors Corp. ................................ 45,600 3,314,550 ---------- 8,324,288 ---------- Biotechnology 0.55% Amgen, Inc. ......................................... 65,200(a) 3,916,075 ---------- Building & Forest Products 1.45% Cemex S.A. de CV, ADR................................ 60,000(a) 1,672,500 D.R. Horton, Inc. ................................... 89,900 1,241,744 Georgia-Pacific Group................................ 75,000 3,806,250 Kaufman & Broad Home Corp. .......................... 70,900 1,714,894 Sherwin-Williams Co. ................................ 92,600 1,944,600 ---------- 10,379,988 ---------- Commercial Services 0.43% Manpower, Inc. ...................................... 82,500 3,104,063 ---------- Consumer Products 1.19% Adolph Coors Co., Class B............................ 26,400 1,386,000 Dial Corp. .......................................... 48,000 1,167,000 PepsiCo, Inc. ....................................... 75,000 2,643,750 Procter & Gamble Co. ................................ 30,000 3,286,875 ---------- 8,483,625 ---------- Electronics -- Electrical 0.55% General Electric Co. ................................ 25,500 3,946,125 ---------- Engineering & Machinery 0.35% Ingersoll-Rand Co. .................................. 30,000 1,651,875 McDermott International, Inc. ....................... 90,000 815,625 ---------- 2,467,500 ---------- Financial Services 2.49% Allstate Corp. ...................................... 72,700 1,744,800 Bear Stearns & Co., Inc. ............................ 77,401 3,308,893 Countrywide Credit Industries, Inc. ................. 90,000 2,272,500 H & R Block, Inc. ................................... 62,600 2,738,750 Lehman Brothers Holdings, Inc. ...................... 30,000 2,540,625 Morgan Stanley Dean Witter & Co. .................... 28,500 4,068,375 Sovereign Bancorp, Inc. ............................. 150,000 1,117,969 ---------- 17,791,912 ----------
See notes to financial statements 5
Number of Value Shares (Note 3) --------- ---------- Health Care 0.53% Elan Corp. Plc, ADR.................................... 75,000(a) $2,212,500 United HealthCare Corp. ............................... 30,000 1,593,750 ---------- 3,806,250 ---------- Investment Companies 0.96% Asia Tigers Fund, Inc. ................................ 30,000 305,625 Central European Equity Fund, Inc. .................... 29,100 420,131 Emerging Markets Infrastructure Fund, Inc. ............ 57,284 644,445 Emerging Markets Telecommunications Fund, Inc. ........ 28,600 461,175 France Growth Fund, Inc. .............................. 24,200 370,563 Gabelli Global Multimedia Trust, Inc. ................. 40,700 763,125 INVESCO Global Health Sciences Fund, Inc. ............. 55,100 812,725 Mexico Fund, Inc. ..................................... 68,900 1,197,137 Morgan Stanley Dean Witter Asia Pacific Fund, Inc. .... 30,000 354,375 Morgan Stanley Dean Witter Emerging Markets Fund, Inc. ................................................. 50,400 822,150 Royce Value Trust, Inc. ............................... 54,160 707,465 ---------- 6,858,916 ---------- Leisure Time 0.70% Brunswick Corp. ....................................... 63,700 1,417,325 Hasbro, Inc. .......................................... 90,000 1,715,625 Marriot International, Inc., Class A................... 60,000 1,893,750 ---------- 5,026,700 ---------- Manufacturing 0.83% Crown Cork & Seal Co., Inc. ........................... 75,000 1,678,125 Johnson Controls, Inc. ................................ 33,800 1,922,375 Whirlpool Corp. ....................................... 35,700 2,322,731 ---------- 5,923,231 ---------- Media 2.42% Comcast Corp., Class A................................. 57,000 2,882,062 Grupo Televisa S.A., GDR............................... 60,000 4,095,000 Knight-Ridder, Inc. ................................... 59,700 3,552,150 The New York Times Co., Class A........................ 55,100 2,706,787 Tribune Co. ........................................... 73,500 4,047,094 ---------- 17,283,093 ---------- Oil & Oil Services 0.94% Amerada Hess Corp. .................................... 45,000 2,553,750 Apache Corp. .......................................... 45,000 1,662,187 Kerr-McGee Corp. ...................................... 40,200 2,492,400 ---------- 6,708,337 ---------- Railroads 0.38% USFreightways Corp. ................................... 56,900 2,724,087 ----------
See notes to financial statements 6
Number of Value Shares (Note 3) --------- ----------- Retailing 1.63% Best Buy Inc. ....................................... 31,300(a) $1,570,869 Home Depot, Inc. .................................... 44,700 3,064,744 Ross Stores, Inc. ................................... 75,000 1,345,312 TJX Cos., Inc. ................. . .................. 75,000 1,532,812 Wal-Mart Stores, Inc. ............................... 59,500 4,112,938 ----------- 11,626,675 ----------- Steel & Heavy Machinery 0.14% Worthington Industries, Inc. ........................ 60,000 993,750 ----------- Technology 3.31% America Online, Inc. ................................ 45,000(a) 3,394,687 Applied Materials, Inc. ............................. 26,900(a) 3,407,894 Cisco Systems, Inc. ................................. 36,300(a) 3,888,637 Dell Computer Corp. ................................. 55,400(a) 2,825,400 EMC Corp. ........................................... 40,500(a) 4,424,625 Intel Corp. ......................................... 33,100 2,724,544 Microsoft Corp. ..................................... 25,500(a) 2,977,125 ----------- 23,642,912 ----------- Telecommunications 3.36% AT&T Corp. .......................................... 60,000 3,045,000 CenturyTel, Inc. .................................... 45,100 2,136,613 Lucent Technologies, Inc. ........................... 41,500 3,104,719 MCI WorldCom, Inc. .................................. 38,550(a) 2,045,559 Nokia Corp., ADR..................................... 22,100 4,199,000 Tele Norte Leste Participacoes S.A., ADR............. 101,000 2,575,500 Telefonos de Mexico S.A., Class L, ADR............... 31,300 3,521,250 Telephone & Data Systems, Inc. ...................... 27,000 3,402,000 ----------- 24,029,641 ----------- Textile & Apparel Manufacturer 0.60% Liz Claiborne, Inc. ................................. 58,000 2,182,250 Shaw Industries, Inc. ............................... 135,000 2,084,063 ----------- 4,266,313 ----------- Utilities--Electric 0.76% Energy East Corp. ................................... 102,600 2,135,362 GPU, Inc. ........................................... 52,500 1,571,719 Reliant Energy, Inc. ................................ 75,000 1,715,625 ----------- 5,422,706 ----------- Total Common Stock (Cost $138,386,674)......................................... 176,726,187 -----------
See notes to financial statements 7
Principal Value Amount (Note 3) ----------- ------------ United States Government Obligations 21.80% FHLMC, 5.125%,10/15/08......................... $38,100,000 $ 33,358,379 United States Treasury Notes, 6.25%, 8/31/00... 13,500,000 13,533,750 United States Treasury Bonds, 10.75%, 5/15/03.. 15,000,000 16,931,250 United States Treasury Notes, 7.50%, 2/15/05... 16,300,000 17,008,039 United States Treasury Notes, 6.50%, 5/15/05... 7,600,000 7,604,750 United States Treasury Notes, 6.125%, 8/15/07.. 38,300,000 37,342,500 United States Treasury Bonds, 8.75%, 8/15/20... 14,800,000 17,935,750 United States Treasury Bonds, 5.25%, 2/15/29... 14,600,000 12,081,500 ------------ Total United States Government Obligations (Cost $163,356,735)..................................... 155,795,918 ------------ Short-Term Investments 53.10% AT&T Co., 6.01%, 1/10/00....................... 25,000,000 24,958,263 Coca-Cola Enterprises, Inc., 6.40%, 1/05/00.... 24,900,000 24,877,866 DuPont & Co., 5.48%, 1/19/00................... 25,000,000 24,927,694 Ford Motor Credit Corp., 6.35%, 1/04/00........ 25,000,000 24,982,361 General Electric Capital Corp., 6.50%, 1/13/00. 30,000,000 29,929,582 GMAC Corp., 6.22%, 1/07/00..................... 25,000,000 24,969,764 Goldman Sachs Group L.P., 6.50%, 1/11/00....... 30,000,000 29,940,782 Marsh & McLennan Co., 6.48%, 1/14/00........... 30,000,000 29,924,400 Merrill Lynch & Co., 5.60%, 1/20/00............ 30,000,000 29,906,666 Toyota Motor Credit Co., 5.30%, 2/01/00........ 31,400,000 31,252,071 UBS Financial Corp., 4.50%, 1/03/00............ 29,000,000 28,989,125 Warner-Lambert Corp., 5.05%, 1/26/00........... 25,000,000 24,908,819 Washington Post Co., 6.45%, 1/12/00............ 25,000,000 24,946,249 WW Grainger Inc., 6.70%, 1/06/00............... 25,000,000 24,972,083 ------------ Total Short-Term Investments (Cost $379,548,621)......... 379,485,725 ------------ Total Investments (Cost $681,292,030) -- 99.63%.......... 712,007,830 Other assets less liabilities -- 0.37%................... 2,629,375 ------------ Net Assets -- 100.00%.................................... $ 714,637,205 ============ - -------- (a) Non-income producing security. For Federal income tax purposes, the tax basis of investments owned at December 31, 1999 was $681,292,030 and net unrealized appreciation of investments consisted of: Gross unrealized appreciation............................ $ 47,510,950 Gross unrealized depreciation............................ (16,795,150) ------------ Net unrealized appreciation.............................. $ 30,715,800 ============
See notes to financial statements 8 THE ZWEIG TOTAL RETURN FUND, INC. STATEMENT OF ASSETS AND LIABILITIES December 31, 1999 ASSETS Investments, at value (identified cost $681,292,030)..............$712,007,830 Cash............................................................. 1,201,694 Dividends and interest receivable................................ 3,290,116 Prepaid expenses................................................. 16,117 ------------ Total Assets................................................... 716,515,757 ------------ LIABILITIES Accrued advisory fees (Note 5)................................... 422,254 Accrued administration fees (Note 5)............................. 78,419 Payable for treasury shares...................................... 1,035,456 Other accrued expenses........................................... 342,423 ------------ Total Liabilities.............................................. 1,878,552 ------------ NET ASSETS......................................................... $714,637,205 ============ NET ASSET VALUE, PER SHARE ($714,637,205/90,600,166 shares outstanding--Note 6)............. $ 7.89 ============ Net Assets consist of Capital paid-in.................................................. $677,605,067 Undistributed net investment income.............................. 2,181,018 Undistributed net realized gain on investments................... 4,135,320 Net unrealized appreciation on investments....................... 30,715,800 ------------ $714,637,205 ============
See notes to financial statements. 9 THE ZWEIG TOTAL RETURN FUND, INC. STATEMENT OF OPERATIONS For the Year Ended December 31, 1999 Investment Income Income Interest..................................................... $ 29,051,100 Dividends.................................................... 3,844,068 ------------ Total Income............................................... 32,895,168 ------------ Expenses Investment advisory fees (Note 5)............................ 5,106,046 Administrative fees (Note 5)................................. 948,305 Printing and postage expenses................................ 294,854 Transfer agent fees.......................................... 274,889 Directors' fees and expenses (Note 5)........................ 95,616 Custodian fees............................................... 87,837 Professional fees (Note 5)................................... 85,151 Miscellaneous................................................ 195,773 ------------ Total Expenses............................................. 7,088,471 ------------ Net Investment Income.................................... 25,806,697 ------------ Net Realized and Unrealized Gains (Losses) Net realized gains (losses) on Investments.................................................. 11,808,409 Securities sold short........................................ (37,999) Futures...................................................... (242,025) ------------ Net realized gain........................................ 11,528,385 Decrease in unrealized appreciation on investments and securities sold short......................................... (13,198,825) ------------ Net realized and unrealized loss on investments, securities sold short and futures...................................... (1,670,440) ------------ Net increase in net assets resulting from operations......... $ 24,136,257 ------------
See notes to financial statements. 10 THE ZWEIG TOTAL RETURN FUND, INC. STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31 -------------------------- 1999 1998 ------------ ------------ Increase (Decrease) in Net Assets Operations Net investment income.............................. $ 25,806,697 $ 28,065,284 Net realized gains on investments, securities sold short and futures................................. 11,528,385 38,942,638 Decrease in unrealized appreciation of investments and securities sold short......................... (13,198,825) (6,323,813) ------------ ------------ Net increase in net assets resulting from operations...................................... 24,136,257 60,684,109 ------------ ------------ Dividends and distributions to shareholders from Net investment income.............................. (25,806,697) (28,065,284) Net realized gains on investments, securities sold short and futures................................. (11,528,385) (38,942,638) Capital paid-in.................................... (36,881,045) (4,307,372) ------------ ------------ Total dividends and distributions to shareholders.................................... (74,216,127) (71,315,294) ------------ ------------ Capital share transactions Net asset value of shares issued to shareholders in reinvestment of dividends from net investment income and distributions from net realized gains and capital paid-in............................... 10,534,625 14,272,507 Net proceeds from the sale of shares during rights offering.......................................... -- 76,437,671 Shares repurchased and retired, 460,000 shares..... (3,029,597) -- ------------ ------------ Net increase in net assets derived from capital share transactions................................ 7,505,028 90,710,178 ------------ ------------ Net increase (decrease) in net assets.............. (42,574,842) 80,078,993 Net Assets Beginning of year.................................... 757,212,047 677,133,054 ------------ ------------ End of year (including undistributed net investment income of $2,181,018 and $0, respectively).......... $714,637,205 $757,212,047 ============ ============
See notes to financial statements. 11 THE ZWEIG TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1999 NOTE 1 -- Acquisition On March 1, 1999, Phoenix Investment Partners, Ltd. ("Phoenix"), completed the acquisition of Zweig Total Return Advisors, Inc. (the "ZTR Adviser"), the Fund's investment adviser, Zweig/Glaser Advisers, the Fund's administrator ("Administrator") and Zweig Securities Corp. (currently PXP Securities Corp.), an affiliated broker-dealer registered under the Securities Exchange Act of 1934. As a result of the acquisition, effective January 1, 2000, Zweig/Glaser Advisers, LLC (the "Adviser") succeeds ZTR Adviser, as the Fund's investment adviser. In order to continue to have access to the advisory and consulting services of Dr. Martin E. Zweig and his associates, the Adviser entered into a sub-advisory servicing agreement with Zweig Consulting, LLC. As of October 31, 1999, the Administrator assigned the rights and obligations under the Administration Agreement dated March 1, 1999, between the Fund and the Administrator to Phoenix Equity Planning Corp. ("PEPCO") under the same terms as the previous Administration Agreement. Effective October 31, 1999, PEPCO sub-contracted the Fund's mutual fund accounting to The Bank of New York. PEPCO is an affiliate of the Adviser and the Fund. NOTE 2 -- Organization The Zweig Total Return Fund, Inc. (the "Fund") is a closed-end, diversified management investment company registered under the Investment Company Act of 1940 (the "Act"). The Fund was incorporated under the laws of the State of Maryland on July 21, 1988. NOTE 3 -- Significant Accounting Policies The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The policies are in conformity with generally accepted accounting principles. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Portfolio Valuation Portfolio securities that are traded only on stock exchanges are valued at the last sale price. Securities traded in the over-the-counter market which are National Market System securities are valued at the last sale price. Other over-the-counter securities are valued at the most recently quoted bid price provided by the principal market makers. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market, as determined by the Adviser. Debt securities may be valued on the basis of prices provided by an independent pricing service, when such prices are believed by the Adviser to reflect the fair market value of such securities. Short-term investments having a remaining maturity of 60 days or less when purchased are valued at amortized cost (which approximates market value). Futures contracts traded on commodities exchanges are valued at their closing settlement price on such exchange. Securities for which market quotations are not readily available,(of which there were none at December 31, 1999) and other assets, if any, are valued at fair value as determined under procedures approved by the Board of Directors of the Fund. 12 B. Security Transactions and Investment Income Security transactions are recorded on trade date. Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Realized gains and losses on sales of investments are determined on the identified cost basis for financial reporting and tax purposes. C. Futures Contracts Initial margin deposits made upon entering into futures contracts are recorded as assets. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by marking the contract to market on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments are made or received and recognized as assets or liabilities, depending upon whether unrealized gains or losses are incurred. When a contract is closed, the Fund realizes a gain or loss equal to the difference between the proceeds from (or cost of ) the closing transaction and the Fund's basis in the contract. There are several risks in connection with the use of futures contracts as a hedging device. The change in value of futures contracts primarily corresponds with the value of their underlying instruments, which may not correlate with the change in value of the hedged investments. Therefore, anticipated gains may not result and anticipated losses may not be offset. In addition, as no secondary market exists for futures contracts, there is no assurance that there will be an active market at any particular time. D. Short Sales A short sale is a transaction in which the Fund sells a security it does not own in anticipation of a decline in market price. To sell a security short, the Fund must borrow the security. The Fund's obligation to replace the security borrowed and sold short will be fully collateralized at all times by the proceeds from the short sale retained by the broker and by cash and securities deposited in a segregated account with the Fund's custodian. If the price of the security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security, the Fund will incur a loss, and if the price declines during the period, the Fund will realize a gain. Any realized gain will be decreased, and any incurred loss increased,by the amount of transaction costs. Dividends or interest the Fund pays in connection with such short sales are recorded as expenses. In addition to the short sales described above, the Fund may make short sales "against the box". A short sale "against the box" is a short sale whereby at the time of the short sale, the Fund owns or has the immediate and unconditional right, at no added cost, to obtain the identical security. E. Federal Income Tax The Fund has elected to qualify and intends to remain qualified, as long as management's view is that it is in the best interests of the shareholders, as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended. The principal tax benefits of qualifying as a regulated investment company as compared to an ordinary taxable corporation, are that a regulated investment company, is not itself subject to Federal income tax on ordinary investment income and net capital gains that are currently distributed (or deemed distributed) to its shareholders and that the tax character of long-term capital gains recognized by a regulated investment company flows through to its shareholders who receive distributions of such gains. F. Dividends and Distributions to Shareholders Dividends and distributions to shareholders are recorded on the ex-dividend date. In the event that amounts distributed are in excess of accumulated net investment income and net realized gains on 13 investments (as determined for financial statement purposes), such amounts would be reported as a distribution from paid-in capital during the fiscal year in which such a distribution is made. Income dividends 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 timing differences and differing characterization of distributions made by the Fund as a whole. During the year ended December 31, 1999, the Fund reclassified $2,181,018 and $4,135,320 to undistributed net investment income and undistributed net realized gain on investments, respectively, from capital paid-in. NOTE 4 -- Portfolio Transactions During the year ended December 31, 1999, purchases and sales transactions, excluding short-term investments and futures contracts were:
United States Government Common and Agency Stocks Obligations ------------ ------------- Purchases ........................................ $244,923,935 $528,038,507 ============ ============ Sales ............................................ $377,927,231 $741,298,735 ============ ============ Purchases to cover short sales ................... $ 428,724 ============
NOTE 5 -- Investment Advisory Fees and Other Transactions with Affiliates a) Investment Advisory Fee: The Investment Advisory Agreement (the "Agreement") between the Adviser and the Fund provides that, subject to the direction of the Board of Directors of the Fund and the applicable provisions of the Act, the Adviser is responsible for the actual management of the Fund's portfolio. The responsibility for making decisions to buy, sell or hold a particular investment rests with the Adviser, subject to review by the Board of Directors and the applicable provisions of the Act. For the services provided by the Adviser under the Agreement, the Fund pays the Adviser a monthly fee equal, on an annual basis, to 0.70% of the Fund's average daily net assets. During the year ended December 31, 1999, the Fund accrued advisory fees of $5,106,046. b) Administration Fee: Phoenix Equity Planning Corp. serves as the Fund's Administrator pursuant to an Administration Agreement with the Fund. Under the same terms as the previous Agreement, the Administrator generally assists in all aspects of the Fund's operations, other than providing investment advice, subject to the overall authority of the Fund's Board of Directors. The Administrator determines the Fund's net asset value daily, prepares such figures for publication on a weekly basis, maintains certain of the Fund's books and records that are not maintained by the Investment Adviser, custodian or transfer agent, assists in the preparation of financial information for the Fund's income tax returns, proxy statements, quarterly and annual shareholder reports, and responds to shareholder inquiries. Under the terms of the Agreement, the Fund pays the Administrator a monthly fee equal, on an annual basis, to 0.13% of the Fund's average daily net assets. During the year ended December 31, 1999, the Fund accrued administration fees of $948,305. c) Directors' Fee: The Fund pays each Director who is not an interested person of the Fund or the Adviser a fee of $10,000 per year plus $1,500 per Directors' or committee meeting attended, together 14 with the out-of-pocket costs relating to attendance at such meetings. Any Director of the Fund who is an interested person of the Fund or the Adviser receive no remuneration from the Fund. d) Legal Fee: The Fund accrued legal fees of $28,152 during the year ended December 31, 1999, for the services of Rosenman & Colin LLP, of which Robert E. Smith, a former Director of the Fund, is counsel. e) Brokerage Commission: During the year ended December 31, 1999, the Fund paid PXP Securities Corp. brokerage commissions of $85,853 in connection with portfolio transactions effected through them. In addition, PXP Securities Corp. charged $38,213 in commissions for transactions effected on behalf of the participants in the Fund's Automatic Reinvestment and Cash Purchase Plan. NOTE 6 -- Capital Stock and Reinvestment Plan At December 31, 1999, the Fund had one class of common stock, par value $.001 per share, of which 500,000,000 shares are authorized and 90,600,166 shares are outstanding. Registered shareholders may elect to receive all distributions in cash paid by check mailed directly to the shareholder by EquiServe as dividend paying agent. Pursuant to the Automatic Reinvestment and Cash Purchase Plan (the "Plan"), shareholders not making such election will have all such amounts automatically reinvested by EquiServe, as the Plan agent in whole or fractional shares of the Fund, as the case may be. For the years ended December 31, 1999 and December 31, 1998, 829,627 and 1,666,475 shares, respectively, were issued pursuant to the Plan. On December 7, 1999, the Fund's Board of Directors authorized the repurchase and retirement of up to $20,000,000 of its shares for the purpose of enhancing shareholder value. For the year ended December 31, 1999, 460,000 shares were repurchased and retired at a cost of $3,029,597 representing 0.6% of the 91,060,166 shares outstanding at December 10, 1999. This includes $18,630 in commissions paid to PXP Securities Corp. The weighted average discount of market price to net asset value of shares repurchased over the period of December 10, 1999 to December 31, 1999 was 16.4%. On January 3, 2000, the Fund declared a distribution of $0.07 per share to shareholders of record on December 31, 1999. This distribution has an ex- dividend date of January 5, 2000 and is payable on January 10, 2000. 15 NOTE 7 -- Financial Highlights Selected data for a share outstanding throughout each year:
Year Ended December 31 ------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Per Share Data: Net asset value, beginning of year ................... $ 8.43 $ 8.61 $ 8.29 $ 8.63 $ 8.11 -------- -------- -------- -------- -------- Income From Investment Oper- ations: Net investment income ...... 0.28 0.33 0.36 0.36 0.39 Net realized and unrealized gains(losses).............. (0.01) 0.39 0.80 0.14 0.97 -------- -------- -------- -------- -------- Total from investment opera- tions ..................... 0.27 0.72 1.16 0.50 1.36 -------- -------- -------- -------- -------- Anti-dilutive effect of share repurchase program... 0.01 -- -- -- -- -------- -------- -------- -------- -------- Dividends and Distributions: Dividends from net invest- ment income ............... (0.28) (0.33) (0.36) (0.36) (0.39) Distributions from net real- ized gains ................ (0.13) (0.46) (0.48) (0.24) (0.45) Distributions from capital paid-in ................... (0.41) (0.05) -- (0.24) -- -------- -------- -------- -------- -------- Total Dividends and Distri- butions ................... (0.82) (0.84) (0.84) (0.84) (0.84) -------- -------- -------- -------- -------- Effect on net asset value as a result of rights offering* ................. -- (0.06) -- -- -- -------- -------- -------- -------- -------- Net asset value, end of year .................... $ 7.89 $ 8.43 $ 8.61 $ 8.29 $ 8.63 ======== ======== ======== ======== ======== Market value, end of year** .................. $ 6.50 $ 8.88 $ 9.44 $ 8.00 $ 8.63 ======== ======== ======== ======== ======== Total investment return*** . (18.72)% 4.49% 30.22% 2.62% 19.19% ======== ======== ======== ======== ======== Ratios/Supplemental Data: Net assets, end of year (in thousands) ................ $714,637 $757,212 $677,133 $638,768 $647,523 Ratio of expenses to average net assets ................ 0.97% 0.97% 1.04% 1.03% 1.10% Ratio of net investment in- come to average net assets ........................... 3.50% 3.88% 4.30% 4.31% 4.59% Portfolio turnover rate .... 172.3% 87.9% 104.7% 147.2% 179.8%
- -------- * Shares were sold at a 5% discount from the average market price. ** Closing Price -- New York Stock Exchange. *** Total investment return is calculated assuming a purchase of common stock on the opening of the first business day and a sale on the closing of the last business day of each period reported. Dividends and distributions, if any, are assumed for the purposes of this calculation, to be reinvested at prices obtained under the Fund's Distribution Reinvestment and Cash Purchase Plan. Generally, total investment return based on net asset value will be higher than total investment return based on market value in periods where there is an increase in the discount or a decrease in the premium of the market value to the net assets from the beginning to the end of such years. Conversely, total investment return based on net asset value will be lower than total investment return based on market value in periods where there is a decrease in the discount or an increase in the premium of the market value to the net asset value from the beginning to end of such periods. 16 Report of Independent Accountants To the Board of Directors and Shareholders of The Zweig Total Return Fund, Inc.: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of The Zweig Total Return Fund, Inc. (the "Fund") at December 31, 1999, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 1999 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP New York, New York February 4, 2000 17 THE ZWEIG TOTAL RETURN FUND, INC. YEAR END RESULTS
Total Return on Net Asset Net Asset NYSE Premium Value Value Share Price (Discount) ------------ --------- ----------- ---------- Year ended 12/31/1999 .......... 3.9% $7.89 $ 6.5000 (17.6%) Year ended 12/31/1998 .......... 8.8% 8.43 8.8750 5.3% Year ended 12/31/1997 .......... 14.6% 8.61 9.4375 9.6% Year ended 12/31/1996 .......... 6.3% 8.29 8.0000 (3.5%) Year ended 12/31/1995 .......... 17.7% 8.63 8.6250 (0.1%) Year ended 12/31/1994 .......... (1.9%) 8.11 8.0000 (1.4%) Year ended 12/31/1993 .......... 10.7% 9.11 10.7500 18.0% Year ended 12/31/1992 .......... 2.1% 9.06 10.0000 10.4% Year ended 12/31/1991 .......... 20.1% 9.79 10.6250 8.5% Year ended 12/31/1990 .......... 4.2% 9.02 8.6250 (4.4%) Year ended 12/31/1989 .......... 14.9% 9.59 9.7500 1.7% Inception 9/30/88 - 12/31/88 ... 1.1% 9.24 9.1250 (1.2%)
- ------------------------------------------------------------------------------- 1-800-272-2700 Zweig Shareholder Relations: For general information and literature 1-800-272-2700 The Zweig Total Return Fund Hot Line: For updates on net asset value, share price, major industry groups and other key information REINVESTMENT PLAN Many of you have questions about our reinvestment plan. We urge shareholders who want to take advantage of this plan and whose shares are held in "Street Name," to consult your broker as soon as possible to determine if you must change registration into your own name to participate. ---------------- Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940 that the Fund may from time to time purchase its shares of common stock in the open market when Fund shares are trading at a discount from their net asset value. 18 OFFICERS AND DIRECTORS Martin E. Zweig, Ph.D. Chairman of the Board and President Jeffrey Lazar Executive Vice President and Treasurer Christopher M. Capano Vice President Charles H. Brunie Director Elliot S. Jaffe Director Alden C. Olson, Ph.D. Director James B. Rogers, Jr. Director Anthony M. Santomero, Ph.D. Director Investment Adviser Zweig/Glaser Advisers LLC 900 Third Avenue New York, NY 10022 Fund Administrator Phoenix Equity Planning Corp. 100 Bright Meadow Boulevard PO Box 2200 Enfield, CT 06083-2200 Custodian The Bank of New York One Wall Street New York, NY 10286 Transfer Agent State Street Bank & Trust Co. c/o EquiServe PO Box 8040 Boston, MA 02266 Legal Counsel Rosenman & Colin LLP 575 Madison Avenue New York, NY 10022 Independent Accountants PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, NY 10036 - -------------------------------------------------------------------------------- This report is transmitted to the shareholders of The Zweig Total Return Fund, Inc. for their information. This is not a prospectus, circular or repre- sentation intended for use in the purchase of shares of the Fund or any securi- ties mentioned in this report. PXP 1336________________________________________________________3206 ANN (12/99) -----END PRIVACY-ENHANCED MESSAGE-----