-----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, OOzk4T9InZ5Jy+h7+lIAr70WJKaX70G7pNxqxddSIOTQcB+8yboXEhTDb636ChuK JS56FfuoajG/uJw5NydJYQ== 0000950168-99-000530.txt : 19990225 0000950168-99-000530.hdr.sgml : 19990225 ACCESSION NUMBER: 0000950168-99-000530 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990224 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: 99548907 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 ZWEIG TOTAL RETURN FUND - N-30D [Photograph appears here of Martin E. Zweig, Ph.D.] February 1, 1999 Dear Shareholder: For the year ended December 31, 1998, The Zweig Total Return Fund's net asset value increased 8.8%, including $0.84 in reinvested distributions. During the fourth quarter of 1998, the Fund's net asset value gained 4.3% including $0.24 in reinvested distributions. Consistent with our policy of seeking to minimize risk while earning superior returns over complete market cycles, our average exposure during 1998 was approximately 86%. I would like to put our performance in perspective. Since we are a value-oriented fund, most of our stocks have very low price/earnings ratios. Historical evidence attests to the rewards of such an approach. However last year was a notable exception. Low P/E's did far worse than high P/E's and the numbers were almost unbelievable. As a result, value managers dramatically underperformed the S&P 500. The market capitalization of an S&P 500 stock was also a factor in its performance. For example, the fifty largest stocks increased by 36.4% for the year while the fifty smallest actually declined by 0.5%. On an unweighted basis, taking equal positions in all the S&P 500 stocks, the index was up only 7.3%. I have never seen a year like this. If a shareholder had invested $10,000 (1,000 shares) at the Fund's Initial Public Offering in September 1988, these holdings, including reinvested distributions, would have appreciated to $24,593 (2,771 shares) at December 31, 1998. If a shareholder had invested $10,000 (1,000 shares) at the Fund's Initial Public Offering in September 1988, these holdings, including reinvested distributions, would have appreciated to $24,593 (2,771 shares) at December 31, 1998. 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) on December 14, 1998, the Fund declared a distribution of $0.07 per share payable on January 11, 1999 to shareholders of record on December 31, 1998. 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 payout since its inception comes to $9.22. Of the $0.84 taxable in 1998, $0.44 is ordinary income, $0.28 is long-term capital gains, and $0.12 is return of capital. (The return of capital distribution is a tax-free return of capital and therefore should not be reported as income.) MARKET OUTLOOK Our bond exposure at year-end was 53% compared with 57% on September 30. If we were fully invested, we would be at 62.5% in bonds and 37.5% for stocks. Consequently, at 53% in bonds we were at about 85% of a full position (53%/62.5%). After a sluggish first quarter, government bonds rallied sharply as equity markets around the world experienced a spate of volatility. The turbulence was caused by a series of financial crises in Asia, Russia, and Latin America, which prompted several flights to quality. The move from stocks to safer investments benefited U.S. Treasuries in particular. Bond prices continued to rise after the Federal Reserve's three consecutive interest rate cuts in the fall (bond prices rise when interest rates fall). But the cuts were a mixed blessing. They helped avert a credit crunch and created strong conditions for equities, yet they encouraged many investors to sell low-yielding government bonds for riskier investments such as corporate stocks and bonds. Despite the difficulties in the fourth quarter, we believe that conditions are still positive for bonds to offer meaningful gains. Central banks around the world have adopted easy money policies, inflation is low, and commodity prices have fallen to extreme lows. As a result, we ended the year with a long duration (sensitivity to interest rates) of about 6.1 years. Our equity exposure at year end was 37% compared with 26% at the end of the third quarter. At this figure, we were close to 100% of a full position (37%/37.5%). At this writing I think the economy is reasonably strong and that earnings will be decent. I am not worried about the possibility of softer earnings. In fact, the market usually does pretty well when earnings are down moderately or up slightly. We may run the risk of higher interest rates if the economy and earnings show strong gains but we are not there yet. I see Brazil as a possible trouble spot. The market rebounded after the initial devaluation but we are not out of the woods yet. The Brazil risks are twofold. First, that things may get so bad that they will default on their debts. While they might stretch out their payments, I don't believe they will default as Russia did. The second problem with Brazil is that they may cause competitive devaluations in the rest of Latin America. This could lead to competitive devaluations in Asia, including China, which would be a negative for the market. At this moment I do not believe China will devalue, but if they do it will be months down the road. Recently we have seen a shift in investor concerns from inflation to deflation but I think this worry is misplaced. For one thing, mild deflation has been very bullish for stock prices. I would define mild deflation as anywhere from zero to minus 3%. With prices at these levels, the Dow has produced an average annual return of 26.7% since 1918. It is only extreme deflation that is bad. When consumer prices have gone down 3% a year or more, the Dow has dropped at an annual average rate of 13.3%. Mild deflation is even more bullish than mild inflation. However, extreme deflation is poison and extreme inflation is not very good either. The market doesn't like things too hot or too cold. It likes things nice and in between. The frenzy in Internet stocks concerns me because a great deal of speculation is going on by a public that has no conception of the volatility and the risks involved. Today there are more than fifty Internet stocks. I doubt that five of them will survive ten years from now. That is what happened with the automobile industry in the early part of this century. It was the same with the electronics industry in the late 50's and early 60's and with the computer business ten, twenty, or thirty years ago. We don't know who the survivors will be on the Internet. They may not even be the companies that exist today. If you tried to pick the winners in the computer business twenty to twenty-five years ago, you would have lost out. The present leaders -- Microsoft, Intel, Dell, and Cisco -- did not even exist back then. You could have bought Burroughs, Control Data, or Sperry Rand and done very poorly. We do know that the Internet will be a very big thing but I don't know whether it will be economically profitable for a lot of companies. I see the level of speculation on the Internet as waving a red flag for the market. However, should the Internet market collapse, it may not drag down the entire market. We saw a collapse of biotech stocks in 1992 and the market was relatively unaffected. So I just don't know how a big drop in Internet stocks would impact the overall market. Summing up, the current market positives include the fact that the Federal Reserve is on the side of the bulls. They have loosened three times in the fourth quarter. Inflation is low and, as indicated previously, even mild deflation would not be bad. The negatives include possible repercussions from Brazil's actions and a 2 devaluation by China of its currency. Actually, I think the bigger threat would be if the economy picks up too much steam and profits get too strong, leading to the Fed tightening later in the year. I am keeping a watchful eye on valuation. With the P/E ratio for the S&P 500 climbing from 27.71 in 1997 to 35.27 in 1998, the market is not cheap by any stretch of the imagination. That means that there is not a big shock absorber in the market. So if something goes wrong, I don't think the value people will be buying on a 10% dip. It would take a lot more than that. Meanwhile, our monetary indicators are somewhat positive, reflecting the Fed's recent moves. Our sentiment indicators are mixed. The long-term ones are fairly decent but the short-term ones are rather overly optimistic. I am not thrilled about my indicators but, overall, they are currently moderately bullish. Obviously, this could change. A month down the road these indicators could be totally different. PORTFOLIO COMPOSITION In line with our investment policy guidelines, all of our bonds are U.S. Government obligations. As indicated earlier, the average duration of the bond portion of our portfolio was 6.1 years at the close of 1998, compared with 6.5 years at the end of the third quarter. Since these bonds are liquid, they give us the flexibility to adjust swiftly to changing market conditions. Implementing my basic allocation strategy, most of our equities continue to be bought and sold on the basis of a proprietary computer-driven model that is weighted toward a value approach with secondary emphasis on growth. This policy was instituted at the beginning of 1995. There was very little change in the composition of our leading industry groups during the fourth quarter. At year-end this listing included financial services, utilities, technology, telecommunications, manufacturing, and oil & oil services. Among the above sectors, financial services, technology, telecommunications, and manufacturing gained in value as a result of increased exposure and a favorable fourth quarter. Utilities lost ground because of a poor showing relative to the other groups. Oil & oil services were adversely affected by declining prices and weak market performance. Some of our largest individual holdings include Dell, Daimler Chrysler, Ford, Microsoft, Maytag, Burlington Northern, Home Depot, McKesson, MCI Worldcom, and AT&T. New to our portfolio are Maytag, the dominant washing machine equipment manufacturer; Home Depot, the giant retail building products company, and McKesson, a major wholesale distributor of pharmaceutical supplies. We added to our holdings in MCI Worldcom. All of the above, including AT&T, performed extremely well in the fourth quarter. Among our other large individual holdings, Reynolds Metals, GPU, PG&E, Energy East, and Whirlpool all increased in value but were outperformed by others in our current top positions. Among our other large individual holdings, Reynolds Metals, GPU, PG&E, Energy East, and Whirlpool all increased in value but were outperformed by others in our current top positions. ZWEIG TOTAL RETURN ADVISORS TO BE ACQUIRED BY PHOENIX As I am sure you are aware, a number of well-known organizations in the financial services industry have recently combined to build stronger companies. With that in mind, I am pleased to report that Zweig Total Return Advisors, the investment advisor for the Zweig Total Return Fund, has agreed to be acquired by Phoenix Investment Partners, Ltd., a large diversified financial services organization listed on the New York Stock Exchange. The transaction, which is subject to shareholder approval, is expected to close later in the first quarter of 1999. I will remain as chairman and president of the Fund and will continue to provide asset allocation services. I have no plans to retire -- and each portfolio manager will remain in place. Sincerely, /s/ Martin E. Zweig Martin E. Zweig, Ph.D. Chairman 3 - -------------------------------------------------------------------------------- Shareholder Question: I bought the Zweig Total Return Fund (ZTR) when it first came out in 1988 for $10.00. Over 10 years later, at the end of December, 1998, the Fund is only trading for $8.875. It seems that the Fund lost money. Am I missing something? - --------------------------------------------------------------------------------
1988 1988-1998 - --------------- -------------------------------------------- $10.00=value of plus $9.21 paid then $9.21 bought 1 share at on one share an additional inception from 1988-1998 1.7713 shares as a result of ZTR of the 10% through the payout policy distribution reinvestment plan 1998 - -------------------------------------------------------------------------------- 1 share purchased at inception plus 1.7713 shares received as a result of reinvesting $9.21 in more shares of ZTR = 2.7713 shares held at the end of 1998. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Performance Calculation Based on the closing price of The Sweig Total Return Fund on the New York Stock Exchange on December 31, 1998: Shareholder owns 2.7713 shares Closing Price on NYSE was $8.875 Shareholder's account value is $24.60 (2.7713 x $8.875) Shareholder's account value at inception was $10.00 (1 x $10.00) $24.60 Ending value -10.00 Beginning value ------------------------ $14.60 Increase in Value Total Return = 146% ($14.60/$10.00 x 100) - ----------------------------------------------------------------------------------- Shareholders receiving distributions in cash would have a return of 80.9% $9.21 (distribution)+$8.875 (NYSE price 12/31/98)=$18.085-$10.00=$8.085/$10.00x100. This return does not include any return you may have earned from investing the cash elsewhere. - -----------------------------------------------------------------------------------
CONCLUSION: Performance cannot be measured by looking only at the beginning and ending stock price. Calculations above reflect adjustment for participation in the Primary Subscription of the Rights Offering (May, 1998) 4 THE ZWEIG TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS December 31, 1998
Number of Value Shares (Note 1) ---------------- ------------- COMMON STOCKS 36.72% AEROSPACE & DEFENSE 0.51% B.F.Goodrich & Co. .................. 42,200 $1,513,925 Northrop Corp. ...................... 32,100 2,347,313 ---------- 3,861,238 ---------- AIRLINES 0.75% AMR Corp. ........................... 63,300(a) 3,758,438 SouthWest Airlines Co. .............. 84,400 1,893,725 ---------- 5,652,163 ---------- APPAREL MANUFACTURER 0.57% V.F. Corp. .......................... 37,600 1,762,500 Warnaco Group, Inc. ................. 100,700 2,542,675 ---------- 4,305,175 ---------- AUTOMOTIVE 1.57% Daimler Chrysler AG ................. 66,215 6,360,777 Ford Motor Co. ...................... 94,700 5,557,706 ---------- 11,918,483 ---------- BIOTECHNOLOGY 0.36% Amgen, Inc. ......................... 26,400 2,760,450 ---------- CHEMICALS 0.51% IMC Global, Inc. .................... 136,100 2,909,138 Millennium Chemicals, Inc. .......... 35,100 697,613 Wellman, Inc. ....................... 27,600 281,174 ---------- 3,887,925 ---------- CONSUMER DURABLES 1.30% Cooper Tire & Rubber Co. ............ 70,800 1,446,975 Maytag Corp. ........................ 79,100 4,923,975 Whirlpool Corp. ..................... 63,400 3,510,775 ---------- 9,881,725 ---------- CONSUMER PRODUCTS 0.41% Fortune Brands, Inc. ................ 51,900 1,641,337 Premark International, Inc. ......... 42,100 1,457,713 ---------- 3,099,050 ---------- CONTAINERS & PACKAGING 0.05% Sea Containers Ltd., Class A ........ 12,100 362,244 ---------- ELECTRONICS 0.61% Avnet, Inc. ......................... 32,200 1,948,100 General Motors Corp., Class H ....... 67,400 2,674,938 ---------- 4,623,038 ---------- ENGINEERING & CONSTRUCTION 0.33% Fluor Corp. ......................... 58,600 2,494,163 ---------- FINANCIAL SERVICES 5.40% A.G. Edwards & Sons, Inc. ........... 47,200 1,758,200 Allstate Corp. ...................... 61,000 2,356,125 Astoria Financial Corp. ............. 56,300 2,575,725 BankAmerica Corp. ................... 46,800 2,813,850
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Number of Value Shares (Note 1) ---------- ------------- FINANCIAL SERVICES -- (Continued) Bear Stearns & Co., Inc. ............................. 44,682 $1,669,990 CIGNA Corp. .......................................... 44,700 3,455,869 Charter One Financial, Inc. .......................... 46,084 1,278,831 Conseco, Inc. ........................................ 74,800 2,286,075 Countrywide Credit Industries, Inc. .................. 50,500 2,534,469 GATX Corp. ........................................... 26,600 1,007,475 J. P. Morgan & Co., Inc. ............................. 12,800 1,344,800 Loews Corp. .......................................... 37,800 3,713,850 Morgan Stanley, Dean Witter, Discover & Co. .......... 37,500 2,662,500 Old Republic International Corp. ..................... 57,750 1,299,375 Orion Capital Corp. .................................. 25,400 1,011,238 PaineWebber Group, Inc. .............................. 77,800 3,005,025 PIMCO Advisors L.P. .................................. 13,800 429,525 Provident Companies, Inc. ............................ 43,600 1,809,400 Quinenco S.A., ADR ................................... 24,700 197,600 Reliance Group Holdings, Inc. ........................ 65,700 845,886 Reliastar Financial Corp. ............................ 20,900 964,013 Ryder Systems, Inc. .................................. 57,400 1,492,400 Selective Insurance Group, Inc. ...................... 19,600 394,450 ---------- 40,906,671 ---------- FOOD & BEVERAGE 0.36% Adolph Coors Co., Class B ............................ 47,800 2,697,713 ---------- HOME BUILDERS & MATERIALS 0.43% Fleetwood Enterprises, Inc. .......................... 44,300 1,539,425 Kaufman & Broad Home Corp. ........................... 29,500 848,125 Lafarge Corp. ........................................ 20,800 842,400 ---------- 3,229,950 ---------- INDUSTRIAL SERVICES 0.13% Ogden Corp. .......................................... 38,400 962,400 ---------- INVESTMENT COMPANIES 1.04% Blackrock 2001 Term Trust, Inc. ...................... 29,000 261,000 Blackrock Strategic Term Trust, Inc. ................. 29,000 266,438 Central European Equity Fund, Inc. ................... 18,600 247,613 Emerging Markets Infrastructure Fund, Inc. ........... 94,200 682,950 Emerging Markets Telecommunications Fund, Inc. ....... 30,800 275,275 France Growth Fund, Inc. ............................. 25,700 350,163 Gabelli Equity Trust, Inc. ........................... 44,100 509,904 Gabelli Global Multimedia Trust Fund, Inc. ........... 51,700 565,469 Italy Fund, Inc. ..................................... 16,100 241,500 Mexico Fund, Inc. .................................... 74,400 832,350 Morgan Stanley Emerging Markets Fund, Inc. ........... 51,400 417,625 Morgan Stanley India Investment Fund, Inc. ........... 28,300 191,025 Portugal Fund, Inc. .................................. 23,900 373,438 Royce Value Trust, Inc. .............................. 70,160 964,700 Scudder New Europe Fund, Inc. ........................ 43,600 768,450 Swiss Helvetia Fund, Inc. ............................ 56,800 908,800 ---------- 7,856,700 ---------- LEISURE 0.56% Brunswick Corp. ...................................... 24,400 603,900 Royal Caribbean Cruises Ltd. ......................... 97,400 3,603,800 ---------- 4,207,700 ----------
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Number of Value Shares (Note 1) ---------- ------------- MANUFACTURING 2.18% Aeroquip-Vickers, Inc. .................. 42,400 $1,269,350 Borg-Warner Automotive, Inc. ............ 25,600 1,428,800 Cummins Engine Company, Inc. ............ 51,900 1,842,450 Dana Corp. .............................. 82,700 3,380,363 Dexter Corp. ............................ 14,900 468,418 Herman Miller, Inc. ..................... 34,400 924,500 Johnson Controls, Inc. .................. 26,000 1,534,000 Kennametal, Inc. ........................ 40,600 862,750 Milacron, Inc. .......................... 31,000 596,750 PACCAR, Inc. ............................ 16,400 674,450 Timken Co. .............................. 83,600 1,577,950 Trinity Industries, Inc. ................ 50,400 1,940,400 ---------- 16,500,181 ---------- METALS & MINING 1.28% AK Steel Holding Corp. .................. 79,200 1,861,200 Alcan Aluminum Ltd. ..................... 65,200 1,764,475 British Steel Plc, ADR .................. 55,800 816,075 Reynolds Metals Co. ..................... 67,000 3,530,063 USX-U.S. Steel Group .................... 73,600 1,692,800 ---------- 9,664,613 ---------- OIL & OIL SERVICES 2.11% Ashland, Inc. ........................... 58,500 2,829,938 Equitable Resources, Inc. ............... 22,100 643,663 Occidental Petroleum Corp. .............. 40,900 690,188 PennzEnergy Co. ......................... 51,200 835,200 Pennzoil-Quaker State Co. ............... 51,200 758,400 Santa Fe International Corp. ............ 78,600 1,149,525 Sunoco, Inc. ............................ 57,200 2,062,775 Tidewater, Inc. ......................... 48,700 1,129,231 Transocean Offshore, Inc. ............... 34,600 927,713 USX-Marathon Group ...................... 63,400 1,909,925 YPF Sociedad Anonima, ADR ............... 108,100 3,020,042 ---------- 15,956,600 ---------- PAPER & FOREST PRODUCTS 0.58% Bowater, Inc. ........................... 79,400 3,290,138 Mead Corp. .............................. 38,500 1,128,531 ---------- 4,418,669 ---------- PHARMACEUTICALS 0.95% McKesson Corp. .......................... 52,100 4,119,156 Warner Lambert Co. ...................... 41,100 3,090,205 ---------- 7,209,361 ---------- REAL ESTATE INVESTMENT TRUSTS 0.37% Camden Property Trust ................... 18,500 481,000 Crescent Real Estate Equities Co. ....... 42,700 982,100 FelCor Lodging Trust .................... 25,600 590,400 New Plan Excel Realty Trust, Inc. ....... 15,240 338,137 Reckson Associates Realty Corp. ......... 18,900 419,344 ---------- 2,810,981 ----------
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Number of Value Shares (Note 1) ---------------- ------------- RESTAURANTS 0.19% Bob Evans Farms, Inc. ........................... 19,900 $ 518,644 Wendy's International, Inc. ..................... 41,900 913,944 ---------- 1,432,588 ---------- RETAIL TRADE & SERVICES 1.27% Home Depot, Inc. ................................ 69,900 4,277,006 Pier 1 Imports, Inc. ............................ 44,800 434,000 Ross Stores, Inc. ............................... 17,000 669,375 Saks, Inc. ...................................... 28,200 890,063 Supervalu, Inc. ................................. 119,400 3,343,200 ---------- 9,613,644 ---------- TECHNOLOGY 3.55% Applied Materials, Inc. ......................... 36,900(a) 1,575,169 Cisco Systems, Inc. ............................. 33,600(a) 3,118,500 Compaq Computer Corp. ........................... 80,402 3,371,859 Dell Computer Corp. ............................. 97,500(a) 7,135,781 EMC Corp. ....................................... 41,400(a) 3,519,000 Intel Corp. ..................................... 26,200 3,106,338 Microsoft Corp. ................................. 36,300(a) 5,034,356 ---------- 26,861,003 ---------- TELECOMMUNICATIONS 3.10% AT&T Corp. ...................................... 51,200 3,852,800 BCE, Inc. ....................................... 21,900 830,830 L.M. Ericsson Telephone Co. ..................... 67,500 1,615,781 Lucent Technologies Co. ......................... 34,500 3,795,000 MCI Worldcom, Inc. .............................. 54,000 3,874,500 Telebras Holders, S.A., ADR ..................... 41,600 3,023,800 Telefonica DE Argentina, S.A., ADR .............. 52,300 1,461,131 Telefonica de Espana S.A., ADR .................. 18,654 2,525,285 Telefonos de Mexico S.A., ADR ................... 51,800 2,522,013 ---------- 23,501,140 ---------- TEXTILES 0.40% Interface, Inc. ................................. 57,600 534,603 Shaw Industries, Inc. ........................... 103,000 2,497,750 ---------- 3,032,353 ---------- TOBACCO 0.06% Universal Corp. ................................. 13,000 456,625 ---------- TRANSPORTATION 1.96% Airborne Freight Corp. .......................... 58,500 2,109,656 Burlington Northern Santa Fe Corp. .............. 140,900 4,755,375 Canadian Pacific Ltd. ........................... 99,600 1,879,950 CNF Transportation, Inc. ........................ 76,500 2,873,531 FDX Corp. ....................................... 22,980 2,045,220 USFreightways Corp. ............................. 42,100 1,226,163 ---------- 14,889,895 ---------- UTILITES -- ELECTRIC & NATURAL GAS 3.83% CMS Energy Corp. ................................ 43,800 2,121,563 Central & South West Corp. ...................... 56,100 1,539,244 Consolidated Edison Co. of New York, Inc. ....... 26,100 1,380,038 DTE Energy Co. .................................. 51,200 2,195,200 Edison International ............................ 102,900 2,868,338 Energy East Corp. ............................... 55,300 3,124,450
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Number of Value Shares (Note 1) ---------- -------------- UTILITIES -- ELECTRIC & NATURAL GAS -- (CONTINUED) GPU, Inc. ........................................ 83,000 $ 3,667,560 PECO Energy Co. .................................. 81,400 3,388,275 PG&E Corp. ....................................... 98,300 3,096,450 Pinnacle West Capital Corp. ...................... 11,400 483,075 Public Service Co. of New Mexico ................. 30,100 615,169 UniCom Corp. ..................................... 92,200 3,555,463 UtiliCorp United, Inc. ........................... 25,800 946,538 ----------- 28,981,363 ----------- Total Common Stocks (Cost $242,988,383)......... 278,035,804 -----------
Principal Amount -------------------- UNITED STATES GOVERNMENT OBLIGATIONS 53.09% United States Treasury Notes, 6.25%, 8/31/2000 ......... $ 13,500,000 13,845,938 United States Treasury Notes, 10.75%, 5/15/2003 ........ 15,000,000 18,515,625 Unites States Treasury Notes, 7.50%, 2/15/2005 ......... 16,300,000 18,663,500 United States Treasury Notes, 6.50%, 5/15/2005 ......... 7,600,000 8,331,500 United States Treasury Notes, 7.00%, 7/15/2006 ......... 70,000,000 79,734,410 United States Treasury Notes, 6.50%, 10/15/2006 ........ 30,100,000|pS(b) 33,420,421 United States Treasury Notes, 6.625%, 5/15/2007 ........ 102,500,000 115,312,500 United States Treasury Notes, 6.125%, 8/15/2007 ........ 42,300,000 46,239,187 United States Treasury Bonds, 8.125%, 8/15/2021 ........ 13,000,000 17,598,750 United States Treasury Bonds, 7.50%, 11/15/2024 ........ 1,200,000 1,556,250 United States Treasury Bonds, 6.50%, 11/15/2026 ........ 300,000 349,219 United States Treasury Bonds, 6.375%, 8/15/2027 ........ 42,100,000 48,428,177 ----------- Total United States Government Obligations (Cost $393,227,898)................................... 401,995,477 ----------- SHORT-TERM INVESTMENTS 9.13% Ford Motor Credit Corp., 5.655%, 1/7/99 ................ 21,200,000 21,180,002 GMAC Corp., 5.52%, 1/6/99 .............................. 20,000,000 19,984,634 Goldman Sachs Corp., 5.20%, 1/4/99 ..................... 28,000,000 27,987,865 ----------- Total Short-Term Investments (Cost $69,152,501) ....... 69,152,501 ----------- Total Investments (Cost $705,368,782)--98.94% ......... 749,183,782 Other assets less liabilities -- 1.06% ................ 8,028,265 ----------- Net Assets -- 100.00% ................................. $757,212,047 ============
Number of Shares ---------- SECURITIES SOLD SHORT (Note 1D) W.E.B.S. Index Fund, Inc. -- Mexico Series (Proceeds $390,725)...................... 28,400 $ 291,100 ============
- ---------- (a) Non-income producing security. (b) Used as collateral on short sales For Federal income tax purposes, the tax basis of investments owned at December 31, 1998 was $705,381,039 and net unrealized appreciation on investments consisted of: Gross unrealized appreciation ......... $ 66,375,536 Gross unrealized depreciation ......... (22,572,793) ------------- Net unrealized appreciation ........... $ 43,802,743 =============
See notes to financial statements 9 THE ZWEIG TOTAL RETURN FUND, INC. STATEMENT OF ASSETS AND LIABILITIES December 31,1998 ASSETS Investments, at value (identified cost $705,368,782).......... $ 749,183,782 Cash ......................................................... 684,712 Deposit with broker for securities sold short ................ 390,725 Dividends and interest receivable ............................ 7,862,738 Prepaid expenses ............................................. 44,772 ------------- Total Assets .............................................. 758,166,729 ------------- LIABILITIES Accrued advisory fees (Note 3) ............................... 445,249 Accrued administration fees (Note 3) ......................... 2,684 Other accrued expenses ....................................... 215,649 Securities sold short, at value (proceeds $390,725)........... 291,100 ------------- Total Liabilities ......................................... 954,682 ------------- NET ASSETS ...................................................... $ 757,212,047 ============= NET ASSET VALUE, PER SHARE ($757,212,047/89,770,539 shares outstanding--Note 4).......... $ 8.43 ============= Net Assets consist of: Capital paid-in .............................................. $ 713,297,422 Net unrealized appreciation on investments ................... 43,815,000 Net unrealized appreciation on securities sold short ......... 99,625 ------------- $ 757,212,047 =============
See notes to financial statements. 10 THE ZWEIG TOTAL RETURN FUND, INC. STATEMENT OF OPERATIONS For the Year Ended December 31, 1998 Investment Income Income Dividends ................................................................. $ 5,865,640 Interest .................................................................. 29,241,415 ----------- Total Income ........................................................... 35,107,055 ----------- Expenses Investment advisory fees (Note 3) ......................................... 5,058,943 Administration fees (Note 3) .............................................. 939,518 Transfer agent fees ....................................................... 274,890 Printing and postage expenses ............................................. 294,854 Professional fees (Note 3) ................................................ 85,152 Custodian fees ............................................................ 88,077 Directors' fees and expenses (Note 3) ..................................... 97,538 Miscellaneous ............................................................. 202,799 ----------- Total Expenses ......................................................... 7,041,771 ----------- Net Investment Income ............................................... 28,065,284 ----------- Realized and Unrealized Gains (Losses) Net realized gains on Investments ............................................................... 37,050,141 Securities sold short ..................................................... 371,891 Futures ................................................................... 1,520,606 ----------- Net realized gains .................................................. 38,942,638 Decrease in unrealized appreciation on investments and securities sold short . (6,323,813) ----------- Net realized and unrealized gains on investments, securities sold short and futures ................................................................. 32,618,825 ----------- Net increase in net assets resulting from operations ...................... $60,684,109 ===========
See notes to financial statements 11 THE ZWEIG TOTAL RETURN FUND, INC. STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31 ----------------------------------- 1998 1997 ---------------- ---------------- Increase (Decrease) in Net Assets Operations Net investment income .......................................... $ 28,065,284 $ 28,096,287 Net realized gains on investments, securities sold short and futures ................................................... 38,942,638 37,204,875 Increase (decrease) in unrealized appreciation on investments and securities sold short ......................... (6,323,813) 24,851,047 ------------ ------------ Net increase in net assets resulting from operations ........ 60,684,109 90,152,209 ------------ ------------ Dividends and distributions to shareholders from Net investment income .......................................... (28,065,284) (28,076,250) Net realized gains on investments, securities sold short and futures ................................................... (38,942,638) (37,204,875) Capital paid-in ................................................ (4,307,372) -- ------------ ------------ Total dividends and distributions to shareholders ........... (71,315,294) (65,281,125) ------------ ------------ 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 ....................................................... 14,272,507 13,494,402 Net proceeds from the sale of shares during rights offering..... 76,437,671 -- ------------ ------------ Net increase in net assets derived from capital share transactions .................................................. 90,710,178 13,494,402 ------------ ------------ Net increase in net assets ..................................... 80,078,993 38,365,486 ------------ ------------ Net Assets Beginning of year ................................................. 677,133,054 638,767,568 ------------ ------------ End of year ....................................................... $757,212,047 $677,133,054 ============ ============
See notes to financial statements 12 THE ZWEIG TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1998 NOTE 1 -- Significant Accounting Policies 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. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. 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 Investment Adviser. Debt securities may be valued on the basis of prices provided by an independent pricing service, when such prices are believed by the Investment 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, 1998) and other assets, if any, are valued at fair value as determined under procedures approved by the Board of Directors of the Fund. 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 the contract is closed, the Fund records a realized 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 13 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 descibed 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 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, 1998, the Fund reclassified $64,863 from accumulated net realized losses to capital paid-in. 14 NOTE 2 -- Portfolio Transactions During the year ended December 31, 1998, the Fund entered into purchase and sale transactions, excluding short-term investments and futures transactions, as follows:
United States Government Common and Agency Stocks Obligations --------------- -------------- Purchases .............................. $196,062,888 $402,529,820 ============ ============ Sales .................................. $177,966,895 $368,838,093 ============ ============ Short sales ............................ $ 390,725 ============ Purchases to cover short sales ......... $ 756,794 ============
NOTE 3 -- Investment Advisory Fees and Other Transactions with Affiliates a) Investment Advisory Fee: The Investment Advisory Agreement (the "Agreement") between the Investment Adviser, Zweig Total Return Advisors, Inc., 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 Investment 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 Investment Adviser, subject to review by the Board of Directors and the applicable provisions of the Act. For the services provided by the Investment Adviser under the Agreement, the Fund pays the Investment Adviser a monthly fee equal, on an annual basis, to 0.70 of 1% of the Fund's average daily net assets. During the year ended December 31, 1998, the Fund accrued advisory fees of $5,058,943. b) Administration Fee: Zweig/Glaser Advisers serves as the Fund's Administrator pursuant to an Administration Agreement with the Fund. Under such 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, 1998, the Fund accrued administration fees of $939,518. c) Directors' Fee: The Fund pays each Director who is not an interested person of the Fund or the Investment Adviser a fee of $10,000 per year plus $1,500 per Directors' or committee meeting attended, together with the out-of-pocket costs relating to attendance at such meetings. The Directors of the Fund who are interested persons of the Fund or the Investment Adviser receive no remuneration from the Fund. d) Legal Fee: The Fund paid legal fees of $25,363 during the year ended December 31, 1998, for the services of Rosenman & Colin LLP, of which Robert E. Smith, a Director of the Fund, is counsel. In addition, the Fund paid legal fees of $52,227 for the services of Rosenman & Colin LLP in connection with its rights offering. e) Brokerage Commission: During the year ended December 31, 1998, the Fund paid Zweig Securities Corp. Inc. brokerage commissions of $50,859 in connection with portfolio transactions effected 15 through them. In addition, Zweig Securities Corp. charged $22,385 in commissions for transactions effected on behalf of the participants in the Fund's Automatic Reinvestment and Cash Purchase Plan. Pursuant to an Acquisition Agreement dated December 15, 1998, the Investment Adviser and the Administrator have agreed to be acquired by Phoenix Investment Partners, Ltd. ("Phoenix"), a large financial services organization listed on the New York Stock Exchange (the "Acquisition"). Since completion of the Acquisition would provide for the automatic termination of the current Investment Advisory Agreement, a new investment advisory agreement (the "Advisory Agreement") has been proposed between the Fund and Zweig Total Return Advisors, Inc. The Advisory Agreement has been approved by the Board of Directors (the "Board") and has been submitted to shareholders for approval. Except for the effective dates, the Advisory Agreement is on the same terms as the current Investment Advisory Agreement. In addition, in order for the Fund to continue to avail itself of the services of Dr. Martin E. Zweig and his associates, a new sub-advisory servicing agreement with Zweig Consulting LLC has been approved by the Board and submitted to the shareholders for approval. It is anticipated that the Acquisition will be completed in the first quarter of 1999. Certain directors and officers of the Fund are also directors and/or officers of the Investment Adviser and the Administrator. NOTE 4 -- Capital Stock and Reinvestment Plan At December 31, 1998, the Fund had one class of common stock, par value $.001 per share, of which 500,000,000 shares are authorized and 89,770,539 shares are outstanding. Registered shareholders may elect to receive all distributions in cash paid by check mailed directly to the shareholder by State Street Bank & Trust Co. 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 State Street, as the Plan agent in whole or fractional shares of the Fund, as the case may be. For the years ended December 31, 1998 and December 31, 1997, 1,666,475 and 1,590,261 shares, respectively, were issued pursuant to the Plan. In a rights offering ending May 8, 1998, shareholders exercised rights to purchase 9,481,588 shares of common stock at an offering price of $8.42 per share for proceeds, net of expenses, of $76,437,671. On December 14, 1998, the Fund declared a distribution of $0.07 per share to shareholders of record on December 31, 1998. This distribution has an ex-dividend date of January 6, 1999 and is payable on January 11, 1999. 16 NOTE 5 -- Financial Highlights Selected data for a share outstanding throughout each year:
Year Ended December 31 ---------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------------- -------------- ------------ ------------- ------------- Per Share Data: Net asset value, beginning of year .............. $ 8.61 $ 8.29 $ 8.63 $ 8.11 $ 9.11 ------- -------- ------- -------- -------- Income From Investment Operations: Net investment income ........................... 0.33 0.36 0.36 0.39 0.29 Net realized and unrealized gains(losses) 0.39 0.80 0.14 0.97 ( 0.43) ------- -------- ------- -------- -------- Total from investment operations ................ 0.72 1.16 0.50 1.36 ( 0.14) ------- -------- ------- -------- -------- Dividends and Distributions: Dividends from net investment income ............ (0.33) ( 0.36) ( 0.36) ( 0.39) ( 0.29) Distributions from net realized gains ........... (0.46) ( 0.48) ( 0.24) ( 0.45) -- Distributions from capital paid-in .............. (0.05) -- ( 0.24) -- ( 0.57) --------- --------- -------- -------- -------- Total Dividends and Distributions ............... (0.84) ( 0.84) ( 0.84) ( 0.84) ( 0.86) --------- --------- -------- -------- -------- Effect on net asset value as a result of rights offering* .............................. (0.06) -- -- -- -- --------- --------- -------- -------- -------- Net asset value, end of year .................. $ 8.43 $ 8.61 $ 8.29 $ 8.63 $ 8.11 ========= ========= ======== ======== ======== Market value, end of year** ................... $ 8.8750 $ 9.4375 $ 8.00 $ 8.625 $ 8.00 ========= ========= ======== ======== ======== Total investment return ......................... 4.49% 30.22% 2.62% 19.19% (17.08)% ========= ========= ======== ======== ======== Ratios/Supplemental Data: Net assets, end of year (in thousands) ................................ $ 757,212 $ 677,133 $638,768 $647,523 $591,659 Ratio of expenses to average net assets ......... 0.97% 1.04% 1.03% 1.10% 1.12% Ratio of net investment income to average net assets ............................ 3.88% 4.30% 4.31% 4.59% 3.35% Portfolio turnover rate ......................... 87.9% 104.7% 147.2% 179.8% 281.0%
- ---------- * Shares were sold at a 5% discount from the average market price. ** Closing Price -- New York Stock Exchange. 17 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors 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, 1998, 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 generally accepted accounting principles. 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 generally accepted auditing standards 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, 1998 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP New York, New York February 1, 1999 18 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 12/31/1998 ................ 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 (212) 486-3122 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. YEAR 2000 PREPAREDNESS Because computer programs were designed using only two fields to indicate the year, at midnight December 31, 1999, computers will be unable to recognize that January 1 is the year 2000. The major systems that would impact the Fund with respect to the year 2000 are those of the transfer agent and custodian. The Fund has been advised in writing by both the transfer agent and the custodian that they are working to fix, and expect to have fixed in time, all of the issues relating to the year 2000. Management of the Fund will continue to monitor the progress of the transfer agent and the custodian in solving the year 2000 problem. However, no assurance can be given that their systems will be fixed on time, or what the magnitude of the problems would be if such systems are not fixed. 19 OFFICERS AND DIRECTORS Martin E. Zweig, Ph.D. Chairman of the Board and President Jeffrey Lazar Director, Vice President and Treasurer Stuart B. Panish Vice President & Secretary Christopher M. Capano Assistant Vice President Charles H. Brunie Director Annemarie Gilly Director Eugene J. Glaser Director Elliot S. Jaffe Director Alden C. Olson, Ph.D. Director James B. Rogers, Jr. Director Anthony M. Santomero, Ph.D. Director Robert E. Smith Director Investment Adviser Zweig Total Return Advisors, Inc. 900 Third Avenue New York, New York 10022 Fund Administrator Zweig/Glaser Advisers 900 Third Avenue New York, New York 10022 Custodian The Bank of New York One Wall Street New York, New York 10286 Transfer Agent State Street Bank & Trust Co. 225 Franklin Street Boston, MA 02110 Legal Counsel Rosenman & Colin LLP 575 Madison Avenue New York, New York 10022 Independent Accountants PricewaterhouseCoopers LLP 1177Avenue 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 representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report. ZTR984 3206-ANN(12/98) [Zweig Total Return Fund logo appears here] THE ZWEIG TOTAL RETURN FUND, INC. ANNUAL REPORT ----------------------------------------------- December 31, 1998 -----END PRIVACY-ENHANCED MESSAGE-----