-----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, J7H6aqm7l4jeq8hLGe6mAkgiptJRVFPBg7bQXm60FCZoa7qGxvPn5O8JzvHfx6/r Sewmzx0igaOjaHDJ8QegMA== 0000950168-99-000531.txt : 19990225 0000950168-99-000531.hdr.sgml : 19990225 ACCESSION NUMBER: 0000950168-99-000531 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: 99548937 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 FUND N-30D [PHOTO APPEARS HERE] February 1, 1999 Dear Shareholder: The Zweig Fund's net asset value increased 6.6% for the year ended December 31,1998, including $1.22 in reinvested distributions. During the same period, the Standard & Poor's 500 Index gained 28.6% and the Dow Jones Industrial Average rose 18.1%, both with dividends reinvested. In the fourth quarter of 1998 the Fund's net asset value, including a $0.27 distribution, was up 13.6%. During the same period, the S&P's 500 Index returned 21.3%. Consistent with our risk-averse strategy, the Fund's average equity exposure for 1998 was approximately 83%. 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. For the twelve full years of operations ended December 31, 1998, The Zweig Fund showed a total return on net asset value of 327.8% (12.9% on a compounded annualized basis) including reinvested distributions. Our average equity exposure for the twelve years was approximately 60%. If a shareholder had invested $10,000 (1,000 shares) at the time of the Fund's initial public offering in October of 1986, these holdings, including reinvested distributions, would have appreciated to $35,789 (3,310 shares) as of December 31, 1998. DISTRIBUTION DECLARED On December 14, 1998, the Fund declared a distribution of $0.29 per share payable on January 11, 1999 to shareholders of record on December 31, 1998. Including the fourth-quarter payout, our total distribution to shareholders for tax purposes in 1998 was $1.20. This brings our total payout since the Fund's inception to $13.76. Of the $1.20 taxable in 1998, $0.45 is ordinary income and $0.75 is long-term capital gains. MARKET OUTLOOK 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 some of 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. As far as the rest of Asia is concerned, South Korea is doing a bit better and Japan is coming to grips with some of its problems. I don't know whether or when Japan will turn the corner but we have lived with a weak Japan for nearly a decade and the markets have survived. The recent drops in prices of oil, natural gas, and commodities have put pressure on the economies of emerging countries but are a positive factor for U.S. markets. We import a lot of their goods such as garments, textiles, smaller electronics, steel, and even cars -- and this has kept a lid on overall inflation. We produce much more sophisticated goods -- high technology, airplanes, movies and other entertainment, medicinal products, and financial and other services. Here we have a big edge on the rest of the world and this has been a driving force in our economy. As long as we enjoy this competitive advantage, I don't have a great concern about the record levels of our trade deficits. Clearly some U.S. industries might be suffering but the overall U.S. economy has probably benefited from the excess supplies around the world. Of course, too much of a good thing is not a good thing. If supply becomes overwhelming and prices collapse, it would eventually hurt us. But so far the impact on the U.S. ranges from modest inflation to mild deflation. 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 those 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 at 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. It is very easy to enter the Internet business and there will be a tremendous amount of competition. There are too many fly-by-night companies that are trying to take advantage of the situation with Initial Public Offerings -- and they are not the place to be. Some of the companies might do well but it will be like picking a needle in a haystack. None of them are cheap. I see the level of speculation 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 in 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 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 devaluation by China of its currency. Actually, I think the bigger threat would be if the economy picks up too much steam and 2 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 there is not a big shock absorber under 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 Following a policy instituted at the beginning of 1995, the majority of our stocks are acquired or sold on the basis of a proprietary computer-driven model that is weighted toward a value approach with secondary emphasis on growth. Various criteria are used to evaluate and rank the most liquid stocks with the highest dividend yields. 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 and 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 fourth quarter relative to the other groups. Oil and oil services were adversely affected by declining prices and weak market performance. Some of our largest individual holdings include Dell, Microsoft, Daimler Chrysler, Ford, Home Depot, Energy East, PECO, AT&T, Lucent Technologies, and MCI Worldcom. New to our portfolio are Home Depot, the giant retail building products company, and Lucent Technologies, a major producer of telecommunications equipment. We previously held MCI Worldcom and added to our position. Daimler Chrysler increased in value following the big auto company merger. All of the above performed extremely well in the fourth quarter. Among other large individual holdings, we trimmed our position slightly in the USX-Marathon Group. Reynolds Metals, GPU, and Edison International all increased in value but were displaced by better performers in our current top positions. ZWEIG 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 Advisors, the investment advisor to The Zweig Fund, Inc., 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 Jeff Lazar, the portfolio manager, will remain in place. Sincerely, /s/ Martin E. Zweig Martin E. Zweig, Ph.D. Chairman 3 [FLOW CHART APPEARS BELOW WITH THE FOLLOWING INFORMATION:] SHAREHOLDER QUESTION: I BOUGHT THE FUND WHEN IT FIRST CAME OUT IN 1986 FOR $10.00. OVER 12 YEARS LATER, AT THE END OF DECEMBER, 1998, THE FUND IS ONLY TRADING FOR $10.8125. THE INCREASE OF $0.8125 IS EQUAL TO A RETURN OF 8.1%? AM I MISSING SOMETHING?
1986 PLUS 1988-1998 1998 ---- ---- --------- ---- $10.00=VALUE OF $13.63 PAID THEN $13.63 BOUGHT 1 SHARE PURCHASED AT 1 SHARE AT ON ONE SHARE AN ADDITIONAL INCEPTION PLUS 2.311 INCEPTION FROM 1986- 2.311 SHARES OF SHARES RECEIVED AS A 1998 AS A THE ZWEIG FUND RESULT OF REINVESTING RESULT OF THE THROUGH THE $13.63 IN MORE SHARES 10% PAYOUT DISTRIBUTION OF THE ZWEIG FUND= POLICY REINVESTMENT 3.311 SHARES HELD AT PLAN THE END OF 1998.
PERFORMANCE CALCULATION BASED ON THE CLOSING PRICE OF THE ZWEIG FUND ON THE NEW YORK STOCK EXCHANGE ON DECEMBER 31, 1998: SHAREHOLDER OWNS 3.311 SHARES CLOSING PRICE ON NYSE WAS $10.8125 SHAREHOLDER'S ACCOUNT VALUE IS $35.80 (3.311 X $10.8125) SHAREHOLDER'S ACCOUNT VALUE AT INCEPTION WAS $10.00 (1 X $10.00) $35.80 ENDING VALUE - -10.00 BEGINNING VALUE - ------------------------ $25.80 INCREASE IN VALUE TOTAL RETURN = 258% ($25.80/$10.00 X 100) SHAREHOLDERS RECEIVING DISTRUBTIONS IN CASH WOULD HAVE A RETURN OF 144.4%. $13.63 (DISTRIBUTION)+$10.8125 (NYSE PRICE 12/31/98)=$24.4425-$10.00= $14.4425/$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 FUND, INC. SCHEDULE OF INVESTMENTS December 31, 1998
NUMBER OF VALUE SHARES (NOTE 1) ----------- --------------- COMMON STOCKS 89.14% AEROSPACE & DEFENSE 1.26% B.F. Goodrich & Co .................. 93,700 $ 3,361,488 Northrop Corp ....................... 78,700 5,754,937 ------------ 9,116,425 ------------ AIRLINES 1.42% AMR Corp. ........................... 102,400 6,080,000 SouthWest Airlines Co. .............. 186,100 4,175,619 ------------ 10,255,619 ------------ APPAREL MANUFACTURER 1.18% V.F. Corp. .......................... 89,700 4,204,688 Warnaco Group, Inc. ................. 172,900 4,365,725 ------------ 8,570,413 ------------ AUTOMOTIVE 3.12% Daimler Chrysler AG ................. 117,467 11,284,173 Ford Motor Co. ...................... 191,800 11,256,263 ------------ 22,540,436 ------------ BIOTECHNOLOGY 0.87% Amgen, Inc. ......................... 60,000 6,273,750 ------------ CHEMICALS 1.02% IMC Global, Inc. .................... 226,900 4,849,988 Millennium Chemicals, Inc. .......... 97,700 1,941,787 Wellman, Inc. ....................... 58,600 596,988 ------------ 7,388,763 ------------ CONSUMER DURABLES 2.59% Cooper Tire & Rubber Co. ............ 157,800 3,225,037 Maytag Corp. ........................ 129,200 8,042,700 Whirlpool Corp. ..................... 134,300 7,436,863 ------------ 18,704,600 ------------ CONSUMER PRODUCTS 1.00% Fortune Brands, Inc. ................ 125,300 3,962,613 Premark International, Inc. ......... 95,000 3,289,375 ------------ 7,251,988 ------------ CONTAINERS & PACKAGING 0.10% Sea Containers Ltd., Class A ........ 25,200 754,425 ------------ ELECTRONICS 1.51% Avnet, Inc. ......................... 79,700 4,821,850 General Motors Corp., Class H ....... 154,100 6,115,844 ------------ 10,937,694 ------------ ENGINEERING & CONSTRUCTION 0.77% Fluor Corp. ......................... 131,100 5,579,944 ------------ FINANCIAL SERVICES 14.00% A.G. Edwards, Inc. .................. 105,600 3,933,600 Allstate Corp. ...................... 186,100 7,188,113 Astoria Financial Corp. ............. 134,100 6,135,075 BankAmerica Corp. ................... 134,300 8,074,788
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NUMBER OF VALUE SHARES (NOTE 1) ---------- -------------- FINANCIAL SERVICES -- (Continued) Bear Stearns & Co., Inc. ............................. 117,361 $ 4,386,367 CIGNA Corp. .......................................... 94,100 7,275,105 Charter One Financial, Inc. .......................... 80,503 2,233,957 Conseco, Inc. ........................................ 184,900 5,651,006 Countrywide Credit Industries, Inc. .................. 130,400 6,544,450 GATX Corp. ........................................... 82,600 3,128,475 J. P. Morgan & Co., Inc. ............................. 29,000 3,046,813 Loews Corp. .......................................... 84,200 8,272,650 Morgan Stanley, Dean Witter, Discover & Co. .......... 93,800 6,659,800 Old Republic International Corp. ..................... 149,250 3,358,125 Orion Capital Corp. .................................. 58,000 2,309,125 PaineWebber Group Inc. ............................... 181,200 6,998,850 PIMCO Advisors L.P. .................................. 35,200 1,095,600 Provident Companies, Inc. ............................ 115,300 4,784,950 Quinenco S.A., ADR ................................... 61,500 492,000 Reliance Group Holdings, Inc. ........................ 136,500 1,757,438 Reliastar Financial Corp. ............................ 67,200 3,099,600 Ryder Systems, Inc. .................................. 150,800 3,920,800 Selective Insurance Group, Inc. ...................... 48,000 966,000 ----------- 101,312,687 ----------- FOOD & BEVERAGE 0.81% Adolph Coors Co., Class B ............................ 104,200 5,880,788 ----------- HOME BUILDERS & MATERIALS 1.16% Fleetwood Enterprises, Inc. .......................... 89,500 3,110,125 Kaufman & Broad Home Corp. ........................... 98,600 2,834,750 Lafarge Corp. ........................................ 60,400 2,446,200 ----------- 8,391,075 ----------- INDUSTRIAL SERVICES 0.26% Ogden Corp. .......................................... 75,800 1,899,738 ----------- INVESTMENT COMPANIES 2.44% Blackrock 2001 Term Trust, Inc. ...................... 52,600 473,400 Blackrock Strategic Term Trust, Inc. ................. 52,600 483,263 Central European Equity Fund, Inc. ................... 46,400 617,700 Emerging Markets Infrastructure Fund, Inc. ........... 199,600 1,447,100 Emerging Markets Telecommunications Fund, Inc. ....... 76,800 686,400 France Growth Fund, Inc. ............................. 64,500 878,812 Gabelli Equity Trust, Inc. ........................... 106,000 1,225,625 Gabelli Global Multimedia Trust Fund, Inc. ........... 99,700 1,090,469 Italy Fund, Inc. ..................................... 29,700 445,500 Mexico Fund, Inc. .................................... 173,900 1,945,506 Morgan Stanley Emerging Markets Fund, Inc. ........... 121,900 990,437 Morgan Stanley India Investment Fund, Inc. ........... 70,600 476,550 Portugal Fund, Inc. .................................. 56,300 879,688 Royce Value Trust, Inc. .............................. 144,155 1,982,131 Scudder New Europe Fund, Inc. ........................ 133,400 2,351,174 Swiss Helvetia Fund, Inc. ............................ 107,200 1,715,200 ----------- 17,688,955 ----------- LEISURE 1.28% Brunswick Corp. ...................................... 79,500 1,967,625 Royal Caribbean Cruises Ltd. ......................... 196,900 7,285,300 ----------- 9,252,925 -----------
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NUMBER OF VALUE SHARES (NOTE 1) ---------- ------------- MANUFACTURING 5.88% Aeroquip-Vickers, Inc. .................. 95,900 $2,871,006 Borg-Warner Automotive, Inc. ............ 82,600 4,610,112 Cummins Engine Company, Inc. ............ 110,400 3,919,200 Dana Corp. .............................. 190,600 7,790,775 Dexter Corp. ............................ 36,700 1,153,756 Herman Miller, Inc. ..................... 155,200 4,171,000 Johnson Controls, Inc. .................. 55,800 3,292,200 Kennametal, Inc. ........................ 89,700 1,906,125 Milacron, Inc. .......................... 87,600 1,686,300 PACCAR, Inc. ............................ 67,800 2,788,275 Timken Co. .............................. 184,400 3,480,550 Trinity Industries, Inc. ................ 125,800 4,843,300 ---------- 42,512,599 ---------- METALS & MINING 2.97% AK Steel Holdings Corp. ................. 167,000 3,924,500 Alcan Aluminum Ltd. ..................... 135,300 3,661,556 British Steel Plc, ADR. ................. 116,400 1,702,350 Reynolds Metals Co. ..................... 158,200 8,335,163 USX-U.S. Steel Group. ................... 169,300 3,893,900 ---------- 21,517,469 ---------- OIL & OIL SERVICES 5.28% Ashland, Inc. ........................... 122,300 5,916,262 Equitable Resources, Inc. ............... 44,300 1,290,238 Occidental Petroleum Corp. .............. 104,100 1,756,688 PennzEnergy Co. ......................... 124,600 2,032,538 Pennzoil-Quaker State Co. ............... 124,600 1,845,638 Santa Fe International Corp. ............ 173,100 2,531,587 Sunoco, Inc. ............................ 158,100 5,701,480 Tidewater, Inc. ......................... 113,000 2,620,188 Transocean Offshore, Inc. ............... 87,200 2,338,050 USX-Marathon Group. ..................... 166,900 5,027,863 YPF Sociedad Anonima, ADR. .............. 255,900 7,149,206 ---------- 38,209,738 ---------- PAPER & FOREST PRODUCTS 1.47% Bowater, Inc. ........................... 187,800 7,781,963 Mead Corp. .............................. 96,800 2,837,450 ---------- 10,619,413 ---------- PHARMACEUTICALS 1.96% McKesson Corp. .......................... 94,700 7,487,218 Warner Lambert Co. ...................... 88,600 6,661,613 ---------- 14,148,831 ---------- REAL ESTATE INVESTMENT TRUSTS 0.98% Camden Property Trust ................... 46,000 1,196,000 Crescent Real Estate Equities Co. ....... 108,200 2,488,600 Felcor Lodging Trust .................... 64,700 1,492,144 New Plan Excel Realty Trust, Inc. ....... 38,040 844,013 Reckson Associates Realty Corp. ......... 47,600 1,056,124 ---------- 7,076,881 ----------
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NUMBER OF VALUE SHARES (NOTE 1) ------------------ ------------- RESTAURANTS 0.49% Bob Evans Farms, Inc. ........................... 49,500 $1,290,094 Wendy's International, Inc. ..................... 104,500 2,279,406 ---------- 3,569,500 ---------- RETAIL TRADE & SERVICES 3.27% Home Depot, Inc. ................................ 163,800 10,022,513 Pier 1 Imports, Inc. ............................ 113,100 1,095,656 Ross Stores, Inc. ............................... 74,600 2,937,375 Saks, Inc. ...................................... 71,100 2,244,094 Supervalu, Inc. ................................. 263,300 7,372,400 ---------- 23,672,038 ---------- TECHNOLOGY 8.40% Applied Materials, Inc. ......................... 77,900(a) 3,325,356 Cisco Systems, Inc. ............................. 64,400 5,977,125 Compaq Computer Corp. ........................... 187,626 7,868,565 Dell Computer Corp. ............................. 225,700(a) 16,518,419 EMC Corp. ....................................... 100,500 8,542,500 Intel Corp. ..................................... 59,800 7,090,038 Microsoft Corp. ................................. 82,400(a) 11,427,850 ---------- 60,749,853 ---------- TELECOMMUNICATIONS 7.98% AT&T Corp. ...................................... 129,300 9,729,825 BCE, Inc. ....................................... 64,700 2,454,556 L.M. Ericsson Telephone Co. ..................... 158,100 3,784,519 Lucent Technologies Co. ......................... 87,400 9,614,000 MCI Worldcom, Inc. .............................. 121,800 8,739,150 Telebras Holders, S.A., ADR ..................... 106,000 7,704,874 Telefonica De Argentina S.A., ADR ............... 148,200 4,140,338 Telefonica de Espana S.A., ADR. ................. 47,436 6,421,649 Telefonos de Mexico S.A., ADR. .................. 105,600 5,141,400 ---------- 57,730,311 ---------- TEXTILES 1.01% Interface, Inc. ................................. 120,200 1,115,612 Shaw Industries, Inc. ........................... 254,000 6,159,500 ---------- 7,275,112 ---------- TOBACCO 0.16% Universal Corp. ................................. 32,300 1,134,538 ---------- TRANSPORTATION 4.57% Airborne Freight Corp. .......................... 122,900 4,432,081 Burlington Northern Santa Fe Corp. .............. 258,300 8,717,625 Canadian Pacific Ltd. ........................... 185,600 3,503,200 CNF Transportation, Inc. ........................ 195,400 7,339,713 FDX Corp. ....................................... 62,640 5,574,960 USFreightways Corp. ............................. 118,900 3,462,962 ---------- 33,030,541 ---------- UTILITIES -- ELECTRIC & NATURAL GAS 9.93% CMS Energy Corp. ................................ 91,100 4,412,656 Central & South West Corp. ...................... 120,700 3,311,706 Consolidated Edison Co. of New York, Inc. ....... 60,100 3,177,788 DTE Energy Co. .................................. 112,000 4,802,000 Edison International ............................ 278,500 7,763,187 Energy East Corp. ............................... 174,900 9,881,850
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NUMBER OF VALUE SHARES (NOTE 1) ---------- -------------- UTILITIES -- ELECTRIC & NATURAL GAS -- (Continued) GPU, Inc. ..................................... 187,700 $ 8,293,993 PECO Energy Co. ............................... 233,800 9,731,924 PG&E Corp. .................................... 208,300 6,561,450 Pinnacle West Capital Corp. ................... 32,900 1,394,138 Public Service Co. of New Mexico .............. 73,500 1,502,156 UniCom Corp. .................................. 226,300 8,726,694 UtiliCorp United, Inc. ........................ 63,000 2,311,313 ----------- 71,870,855 ----------- TOTAL COMMON STOCKS (Cost $559,506,036) ................ 644,917,904 -----------
PRINCIPAL AMOUNT ------------------- UNITED STATES GOVERNMENT OBLIGATIONS 6.73% United States Treasury Notes, 10.75%, 5/15/2003 ....... $4,000,000 4,937,500 United States Treasury Notes, 6.875%, 5/15/2006 ....... 7,500,000 8,479,688 United States Treasury Notes, 6.50%, 10/15/2006 ....... 8,100,000|pS(b) 8,993,535 United States Treasury Notes, 6.62%, 5/15/2007 ........ 12,600,000 14,175,000 United States Treasury Notes, 6.125%, 8/15/2007 ....... 5,200,000 5,684,250 United States Treasury Bonds, 7.50%, 11/15/2024 ....... 600,000 778,125 United States Treasury Bonds, 6.50%, 11/15/2026 ....... 600,000 698,438 United States Treasury Bonds, 6.375%, 8/15/2027 ....... 4,300,000 4,946,346 ---------- TOTAL UNITED STATES GOVERNMENT OBLIGATIONS (Cost $46,750,375) .................................................... 48,692,882 ---------- SHORT-TERM INVESTMENTS 3.73% Goldman Sachs Corp., 5.20%, 1/4/99 .................... 17,000,000 16,992,632 Xerox Credit Corp., 5.30%, 1/7/99 ..................... 10,000,000 9,991,164 ---------- TOTAL SHORT-TERM INVESTMENTS (Cost $26,983,796) ......................... 26,983,796 ---------- TOTAL INVESTMENTS (Cost $633,240,207) - 99.60%........................... 720,594,582 Other assets less liabilities - 0.40% ................................... 2,926,548 ----------- NET ASSETS - 100.00% .................................................... $723,521,130 ============ NUMBER OF SHARES ---------- SECURITIES SOLD SHORT (NOTE 1D) W.E.B.S. INDEX FUND, INC. - MEXICO SERIES (PROCEEDS $985,054) .................................. 71,600 $ 733,900 ============
- ---------- (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 $633,486,171 and net unrealized appreciation on investments consisted of: Gross unrealized appreciation ......... $136,382,032 Gross unrealized depreciation ......... (49,273,621) ------------ Net unrealized appreciation ........... $87,108,411 ============
See notes to financial statements 9 THE ZWEIG FUND, INC. STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1998 ASSETS Investments, at value (identified cost $633,240,207)........................ $ 720,594,582 Cash ....................................................................... 552,035 Deposit with broker for securities sold short .............................. 985,054 Dividends and interest receivable .......................................... 2,794,580 Prepaid expenses ........................................................... 42,911 ------------- Total Assets ............................................................ 724,969,162 ------------- LIABILITIES Accrued advisory fees (Note 3) ............................................. 506,590 Accrued administration fees (Note 3) ....................................... 2,538 Other accrued expenses ..................................................... 205,004 Securities sold short, at value (proceeds $985,054)......................... 733,900 ------------- Total Liabilities ....................................................... 1,448,032 ------------- NET ASSETS .................................................................... $ 723,521,130 ============= NET ASSET VALUE, PER SHARE ($723,521,130/60,135,617 shares outstanding--Note 4)........................ $ 12.03 ============= NET ASSETS CONSIST OF Capital paid-in ............................................................ $ 618,446,376 Undistributed net investment income ........................................ 2,405,423 Undistributed net realized gains on investments, securities sold short and futures ................................................................... 15,063,802 Net unrealized appreciation on investments ................................. 87,354,375 Net unrealized appreciation on securities sold short ....................... 251,154 ------------- $ 723,521,130 =============
See notes to financial statements 10 THE ZWEIG FUND, INC. STATEMENT OF OPERATIONS For the Year Ended December 31, 1998 INVESTMENT INCOME Income Dividends ................................................................. $ 13,983,589 Interest .................................................................. 7,041,994 ------------- Total Income ........................................................... 21,025,583 ------------- Expenses Investment advisory fees (Note 3) ......................................... 5,900,275 Administration fees (Note 3) .............................................. 902,395 Transfer agent fees ....................................................... 344,129 Printing and postage expenses ............................................. 232,323 Professional fees (Note 3) ................................................ 82,894 Custodian fees ............................................................ 81,798 Directors' fees and expenses (Note 3) ..................................... 94,757 Miscellaneous ............................................................. 170,357 ------------- Total Expenses ......................................................... 7,808,928 ------------- Net Investment Income ............................................... 13,216,655 ------------- NET REALIZED AND UNREALIZED GAINS (LOSSES) Net realized gains on Investments ............................................................... 54,621,891 Securities sold short ..................................................... 1,426,248 Futures ................................................................... 2,010,264 ------------- Net realized gains .................................................. 58,058,403 Decrease in unrealized appreciation on investments and securities sold short . (31,996,047) ------------- Net realized and unrealized gains on investments, securities sold short and futures .................................................................. 26,062,356 ------------- Net increase in net assets resulting from operations ...................... $ 39,279,011 =============
See notes to financial statements 11 THE ZWEIG 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 ............................................... $ 13,216,655 $ 18,023,151 Net realized gains on investments, securities sold short and futures ........................................................... 58,058,403 43,769,049 Increase (decrease) in unrealized appreciation on investments and securities sold short ............................. (31,996,047) 61,835,402 ------------ ------------ Net increase in net assets resulting from operations ............. 39,279,011 123,627,602 ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM Net investment income ............................................... (20,309,033) (16,029,830) Net realized gains on investments, securities sold short and futures ........................................................... (48,234,897) (46,130,976) ------------ ------------ Total dividends and distributions to shareholders ................ (68,543,930) (62,160,806) ------------ ------------ 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 ............................. 15,249,865 15,818,485 Net proceeds from the sale of shares during rights offering ......... 71,170,393 -- ------------ ------------ Net increase in net assets derived from capital share transactions ...................................................... 86,420,258 15,818,485 ------------ ------------ Net increase in net assets .......................................... 57,155,339 77,285,281 NET ASSETS Beginning of year .................................................... 666,365,791 589,080,510 ------------ ------------ End of year (including undistributed net investment income of $2,405,423 and 9,497,801, respectively).............................. $723,521,130 $666,365,791 ============ ============
See notes to financial statements. 12 THE ZWEIG FUND, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1998 NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES The Zweig 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 June 18, 1986. 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 principals 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. SECURITIES TRANSACTIONS AND INVESTMENT INCOME Security transactions are recorded on trade date. Dividend income and distributions to shareholders are 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 futures 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 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 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 TAXES 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. 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 .............................. $429,479,329 $44,889,531 ============ =========== Sales .................................. $371,700,357 $49,030,222 ============ =========== Short sales ............................ $ 985,054 ============ Purchases to cover short sales ......... $ 14,341,048 ============
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 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 14 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 0.85% of the Fund's average daily net assets. During the year ended December 31, 1998, the Fund accrued advisory fees of $5,900,275. B) ADMINISTRATIVE 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 $902,395. 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 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 $26,315 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 $52,915 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. brokerage commissions of $132,397 in connection with portfolio transactions effected through them. In addition, Zweig Securities Corp. charged $27,401 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 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. 15 NOTE 4 -- CAPITAL STOCK AND REINVESTMENT PLAN At December 31, 1998, the Fund had one class of common stock, par value $0.10 per share, of which 100,000,000 shares are authorized and 60,135,617 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, 1,262,934 and 1,322,870 shares, respectively, were issued pursuant to the Plan. In a rights offering ending May 8, 1998, shareholders exercised rights to purchase 6,107,124 shares of common stock at an offering price of $12.15 per share for proceeds, net of expenses, of $71,170,393. On December 14, 1998, the Fund declared a distribution of $0.29 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. 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 ................ $ 12.63 $ 11.45 $ 11.06 $ 10.33 $ 11.68 ------- ------- -------- ---------- -------- INCOME FROM INVESTMENT OPERATIONS Net investment income ............................. 0.23 0.35 0.34 0.39 0.24 Net realized and unrealized gains(losses) ......... 0.55 2.03 1.15 1.41 ( 0.45) ------- ------- -------- ---------- -------- Total from investment operations .................. 0.78 2.38 1.49 1.80 ( 0.21) ------- ------- -------- ---------- -------- Dividends and Distributions: Dividends from net investment income .............. ( 0.35) ( 0.31) ( 0.30) ( 0.51) ( 0.03) Distributions from net realized gains ............. ( 0.87) ( 0.89) ( 0.80) ( 0.56 |pS) ( 1.11) -------- ------- -------- ----------- -------- Total Dividends and Distributions ................. ( 1.22) ( 1.20) ( 1.10) ( 1.07) ( 1.14) -------- ------- -------- ----------- -------- Effect on net asset value as a result of rights offering* ....................................... ( 0.16) -- -- -- -- -------- ------- -------- ----------- -------- Net asset value, end of year ................... $ 12.03 $ 12.63 $ 11.45 $ 11.06 $ 10.33 ======== ======= ======== =========== ======== Market value, end of year** .................... $ 10.8125 $ 13.25 $ 10.875 $ 11.25 $ 10.375 ========= ======= ======== =========== ======== Total investment return ........................... ( 8.68) % 34.76% 6.92 % 19.83|pS% (16.95) % ========= ======= ======== =========== ======== RATIOS/SUPPLEMENTAL DATA Net assets, end of year (in thousands) ............ $723,521 $666,366 $589,081 $ 547,886 $492,004 Ratio of expenses to average net assets ........... 1.12 % 1.16% 1.18 % 1.22|pS% 1.25 % Ratio of net investment income to average net assets .......................................... 1.90 % 2.88% 3.12 % 3.62|pS% 2.24 % Portfolio turnover rate ........................... 68.7 % 93.0 % 137.2 % 160.2 % 257.0 %
- ---------- * Shares were sold at a 5% discount from the average market price. ** Closing Price -- New York Stock Exchange. 16 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of The Zweig 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 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 17 THE ZWEIG FUND, INC. YEAR END RESULTS
Total Return on Net Asset Net Asset NYSE Premium Value Value Share Price (Discount) -------------- ----------- ------------- ----------- Year ended 12/31/1998 ................ 6.6% $ 12.03 $ 10.8125 (10.1%) Year ended 12/31/1997 ................ 22.0% 12.63 13.2500 4.9% Year ended 12/31/1996 ................ 14.5% 11.45 10.8750 ( 5.0%) Year ended 12/31/1995 ................ 18.3% 11.06 11.2500 1.7% Year ended 12/31/1994 ................ (2.7%) 10.33 10.3750 0.4% Year ended 12/31/1993 ................ 13.3% 11.68 13.7500 17.7% Year ended 12/31/1992 ................ 0.4% 11.36 13.0000 14.4% Year ended 12/31/1991 ................ 30.1% 12.40 13.7500 10.9% Year ended 12/31/1990 ................ 1.9% 10.48 11.0000 5.0% Year ended 12/31/1989 ................ 22.3% 11.43 12.3750 8.3% Year ended 12/31/1988 ................ 17.9% 10.35 10.3750 0.2% Year ended 12/31/1987 ................ 14.7% 9.73 9.0000 ( 7.5%) Inception 10/2/86 - 12/31/86 ......... (0.4%) 9.31 9.1250 ( 2.0%)
- -------------------------------------------------------------------------------- KEY INFORMATION 1-800-272-2700 ZWEIG SHAREHOLDER Relations: For general information and literature (212) 644-2188 THE ZWEIG 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 of 10% or more 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. 18 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 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 York10022 INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, NY 10036 - -------------------------------------------------------------------------------- This report is transmitted to the shareholders of The Zweig 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. ZF984 4902-ANN 12/98 [ZWEIG FUND LOGO APPEARS HERE] ANNUAL REPORT ----------------------------------------------- December 31, 1998 -----END PRIVACY-ENHANCED MESSAGE-----