UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-05620
The Zweig Total Return Fund, Inc.
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(Exact name of registrant as specified in charter)
900 Third Ave
New York, NY 10022
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(Address of principal executive offices) (Zip code)
Kevin J. Carr, Esq.
Chief Legal Officer and Secretary for John H. Beers, Esq.
Registrant Vice President and Secretary
Phoenix Life Insurance Company Phoenix Life Insurance Company
One American Row One American Row
Hartford, CT 06103-2899 Hartford, CT 06103-2899
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(Name and address of agent for service)
Registrant's telephone number, including area code: 800-272-2700
Date of fiscal year end: December 31
Date of reporting period: December 31, 2005
Form N-CSR is to be used by management investment companies to file reports
with the Commission not later than 10 days after the transmission to
stockholders of any report that is required to be transmitted to stockholders
under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1).
The Commission may use the information provided on Form N-CSR in its
regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. Section 3507.
Item 1. Reports to Stockholders.
The Report to Shareholders is attached herewith.
OFFICERS AND DIRECTORS
Daniel T. Geraci
Director, Chief Executive Officer and President
Carlton Neel
Executive Vice President
David Dickerson
Senior Vice President
Marc Baltuch
Chief Compliance Officer and Vice President
Moshe Luchins
Vice President
Kevin J. Carr
Chief Legal Officer and Secretary
Nancy Curtiss
Treasurer
Charles H. Brunie
Director
Wendy Luscombe
Director
Alden C. Olson, Ph.D.
Director
James B. Rogers, Jr.
Director
R. Keith Walton
Director
Investment Adviser
Phoenix/Zweig Advisers LLC
900 Third Avenue
New York, NY 10022
Fund Administrator
Phoenix Equity Planning Corporation
One American Row
Hartford, CT 06102
Custodian
State Street Bank and Trust Company
P.O. Box 5501
Boston, MA 02206-5501
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
125 High Street
Boston, MA 02110
Legal Counsel
Katten Muchin Rosenman LLP
575 Madison Avenue
New York, NY 10022
Transfer Agent
Computershare Trust Company, NA
P.O. Box 43010
Providence, RI 02940-3010
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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.
PXP4133 Q4-05
Annual Report
Zweig
The Zweig Total
Return Fund, Inc.
December 31, 2005
[GRAPHIC]
February 6, 2006
Dear Fellow ZTR Shareholder:
For the quarter ended December 31, 2005, The Zweig Total Return Fund's net
asset value increased 2.37%, including $0.131 per share in reinvested
distributions. The Fund's overall exposure to the bond and equity markets for
the quarter was approximately 91%.
For the year ended December 31, 2005, the Fund's net asset value increased
4.45%, including reinvested distributions. The Fund's overall exposure to the
bond and equity markets for the year was approximately 89%.
As previously announced, the Fund's distribution for the quarter ended
December 31, 2005 was $0.044 per share, payable January 10, 2006 to
shareholders of record on December 30, 2005.
Thank you for your continued investment in The Zweig Total Return Fund. For
more current information on performance and holdings, please visit the
Individual Investors section of our Web site, PhoenixFunds.com.
Sincerely,
/s/ Daniel T. Geraci
Daniel T. Geraci
Director, Chief Executive Officer and President
The Zweig Total Return Fund, Inc.
MARKET OVERVIEW AND OUTLOOK
The Fund's bond exposure on December 31, 2005 was 59%, with average duration
(a measure of interest rate sensitivity) of 5.3 years. This compares with our
bond exposure of 61%, with average duration of 4.7 years, on September 30,
2005. If we were fully invested, 62.5% of our portfolio would be in bonds and
37.5% in stocks. Consequently, with 59% in bonds, we are at about 94% of a full
position (59%/62.5%).
Although the Federal Reserve (the "Fed") tightened the federal funds rate by
200 basis points from 2.25% at the beginning of the year to 4.25% by the end,
the benchmark 10-year Treasury note backed up only slightly from 4.21%, to end
the year at 4.39%. The front end of the yield curve of shorter-dated
maturities, which are more sensitive to the Fed's moves, did not fare as well.
However, including the amount of coupon payments, overall bonds did provide a
modest positive return on the year, with the Lehman Government Bond Index
gaining 2.65% for the year. We are pleased to report that the bond portion of
our portfolio beat the index, with a return of 3.18% for the year.
While the relatively unchanged yield in the 10-year Treasury note would seem
to imply that there was not much bond market activity, that was not the case.
The bond market whipped back and forth several times in 2005, with yields
ranging from a low of just under 3.5% to a high of nearly 4.7%. The volatility
in bonds was due to global political uncertainties, sharply higher oil prices,
and the corresponding debate over whether that would be inflationary or slow
the economy, as well as uncertainty about how aggressive the Fed would be on
monetary policy changes. (A fuller discussion about the Fed's policy and its
implications appears in the equity portion of the report which follows.)
Oil prices, and the prices of many commodities, soared during the year,
which many economists view as inflationary. However, there are
some who feel that many price shocks as they are called, become
self-correcting, and actually slow the economy. For example, if consumers pay
50% more at the pump for gasoline, they ultimately cut back on driving and
spend less on discretionary items. The net result is that the economy actually
slows, with higher gas prices offset by lower prices for other goods. The jury
is still out on that question, and the bond market has yet to make up its mind
as well.
Global uncertainties are usually a "good" thing for government bonds which
are generally viewed as a safe haven relative to corporate bonds and stocks.
With the ongoing war in Iraq, the dispute about Iran's nuclear weapons program,
and the mid-term elections, political uncertainties are likely to continue.
As of this writing, we are slightly cautious on the bond market, with our
model reading a four out of 10, with 10 the most bullish. Sentiment remains
bearish, which, as contrarians, keeps us somewhat positive on the bond market.
The tape action is a slight negative and the yield curve, as of this writing,
is already nearly inverted. However, as always, we remain flexible and will
follow the dictates of our discipline and our models.
Our exposure to U.S. common stocks was 29% on December 31, 2005, compared
with 31% on September 30, 2005. At 29%, we are at about 77% of a full position
(29%/37.5%).
The domestic stock markets ended 2005 with a whimper, with the Dow Jones
Industrial Average/SM/ virtually unchanged from a year ago. It was the smallest
annual change since 1926 but it still left the Dow in negative territory for
the year for the first time since 2002. The other major U.S. markets did
somewhat better with the S&P 500(R) Index gaining 3% and the NASDAQ
Composite(R) Index inching up just 1.4%. While the U.S. markets were biding
their time, the overseas exchanges surged ahead. In Japan, the Nikkei-225 Index
soared 40.2%, its best score since 1986. In Europe, the stock markets in
Germany, France, Switzerland, and the Netherlands each climbed more than 20%
while Britain's rose 16.7% and Italy's 15.5%. Russia's trade index shot up a
sensational 61.8%.
Perhaps a major reason for the disparity and results between the U.S. and
world markets was the Federal Reserve's actions. As widely expected, the Fed
raised its short-term interest rate from 4% to 4.25% in December. It was the
thirteenth consecutive quarter-point hike since July 2004 when the rate stood
at 1%, a 46-year low. Yet this time around, the Fed no longer called its rate
policy "accommodative" and left out its familiar refrain that it would raise
rates at a "measured pace." It added, however, that some further increases are
"likely to be needed."
A measure of clarification came in early January when the Fed indicated that
it was close to ending its series of rate increases, saying "The number of
additional firming steps probably would not be large." Although the Fed also
said future decisions will be based on economic data, investors took a bullish
view and the Dow jumped 1.2% on the day of the news and launched a New Year's
rally that lifted the index above 11,000 for the first time since 2001.
We don't think the Fed itself knows if there is light at the end of the
interest rate tunnel. With Ben Bernanke replacing Alan Greenspan as Fed
Chairman on February 1, we think the Fed will be a little more hawkish at the
beginning, favoring interest rate increases, at least in its statements. In any
event, we believe we will see one or two more hikes. After that, the Fed may be
more inclined to look at the inflation numbers and react.
Interest rates also made market news when the yield curve inverted briefly.
That happens when long-term interest rates fall below short-term interest
rates. At the year-end, the two-year Treasury note yielded about 4.4%, which
was higher than the 4.39% of the 10-year Treasury note. It was the first such
occurrence in five years. Financial history buffs contend that such an event is
a harbinger of a recession.
2
Although much has been written about the relationship between the two-year
note and the 10-year, we think it is more important to compare the 3-month
yield to the 10- year yield. Right now they are about even. Historically, over
the past 52 years when short rates have been 95% or more of the long rate (more
would represent an inverted curve), the S&P has gone down approximately 11% on
an annualized basis. When the short rate has been 95% or less than the long
rate (less would be kind of a normal yield curve), the market has gone up
almost 12%. This time the curve has inverted because the short rate has gone up
while the long rate has been fairly flat. That seems a more neutral yield
curve. However, if bond yields rise toward 5%, we'd start to get concerned.
While the inverted yield curve was a new twist, the U.S. trade deficit was
an old story. It widened by $3 billion in October to $68.9 billion and is on
track to top last year's record of $618 billion. The growing gap is causing
some analysts to reduce their estimates of the country's economic growth. In
our view, it is hard to pinpoint the impact of the trade gap on the economy or
the stock market. It seems to have become a way of life for us. Interestingly,
there may be a positive side. Foreigners have excess dollars because they are
exporting more to the U.S. than they are buying from us. Some of these
countries, including Japan and China, are using their dollars to buy our
Treasuries, keeping yields down. This actually is good for our economy because
if bond yields are okay, it helps keep the housing sector from falling apart.
The long-running housing boom, which some analysts now call a bubble, has
been a strong underpinning for the economy. It is showing contradictory trends.
The U.S. Labor Department reported that new housing starts increased 5.3% in
November to an annual rate of 2.2 million and 17.5% above the same month last
year. Meanwhile the U.S. Commerce Department reported that sales of newly built
homes fell 11% in November from October, the largest decline since 1994.
It seems that the housing market is cooling down but the problem is not
universal. It depends on location. In hotspots such as Boston, New York,
Washington, South Florida, California, Nevada, and a few other regions, the
market has been red hot or even white hot. For example, there has been a lot of
speculation in south Florida where there is overbuilding and condo flipping has
become a widespread pastime. But in other areas such as Texas and much of the
Midwest, there has been no boom to speak of and prices seem normal. We'd be
mainly concerned about those regions where there is a huge amount of
speculation and prices have gone up 30% or 40% a year.
As far as the U.S. overall economy is concerned, the economic signals are
mixed. The gross domestic product grew 4.1% in the third quarter, the fastest
pace since early 2004, according to the Commerce Department. The agency also
reported that productivity spurted 4.7% in the quarter, the fastest rate in two
years. However the Institute for Supply Management reported that its
manufacturing index fell to 54.2 in December from 58.1 in November, the biggest
drop since July of 2002. Despite the clouds on the horizon, the Conference
Board reported that its Consumer Confidence Index climbed to 103.6 in December
from 98.3 in November.
We think the economy is fairly strong but is slowing somewhat. Short-term
rates and high energy prices are having a dampening effect on the margin but we
don't see any signs of recession. Although the previously cited yield curve
inversion has correctly forecast some recessions in the past, it is by no means
a sure thing. Sometimes the curve inverts and you don't get a recession. As
mentioned, we don't believe this inversion is significant unless long-term
rates also go up.
Some currency analysts had expected the U.S. dollar would weaken to redress
the trade imbalance. Instead the dollar ended the year 14.6% stronger against
the euro and 15.2% stronger against the yen, hitting a two-year high in
3
both cases. Despite intensive testing, we just can't find any relationship
between the value of the dollar and the stock market. Sometimes a strong dollar
is bullish and sometimes it is bearish. The same holds true for a weak dollar.
However, the value of the dollar does impact international companies. If they
earn euros or yen, a strong dollar dilutes their profits and a weak dollar
enhances their offshore earnings.
Although the stock market last year was as thin as it was flat, the volume
of options trading increased at a record rate for the thirteenth time in
fourteen years, according to the Options Clearing Corporation. In the U.S.,
over 1.5 billion options were traded, an increase of 27% from last year. We
don't think the increase in options activity tells you much except that there
are more hedge funds around. Hedge funds are more likely to use options than
individual investors or even traditional institutional investors. The market is
affected if option trades are excessively bullish or bearish. Of course, when
they get too one-sided, often they are wrong.
While initial public offerings (IPOs) grew strongly overseas, they declined
in number and dollar volume in the U.S., according to Thomson Financial.
Domestic deals in 2005 dropped to 215 IPOs with a dollar volume of $36.1
billion from 257 deals and a dollar volume of $45 billion in 2004. Although the
U.S. was the only major world power to show a decline in both IPOs and the
dollar value, the activity here was not exactly slow. It is just that the
domestic market was not as hot as foreign markets. One doesn't normally see a
hot IPO market unless the market itself is strong.
We recently saw a significant increase in industrial capital spending. In
the third quarter, companies in the S&P 500 Index boosted their capital
expenditures by 24% over the 2004 period, according to Thomson Financial.
Capital spending had declined on an annual basis between the third quarter of
2001 and the fourth quarter of 2003. Since then, there has been an average gain
of 9% each quarter.
The current surge follows the recession we had in the early part of the
decade when capital spending was cut back tremendously, especially in
information technology. That is an area where capital spending is extremely
strong. As far as the stock market is concerned there is a paradox here. When
you're in the depths of a recession, it is usually a good time to buy stock. On
the flip side, if you're in an economic boom and capital spending is too
intense, that is probably a good time to sell. We are not saying we are in an
economic boom but if capital spending gets out of sight, it is probably more of
a negative than a positive.
Standard & Poor's estimates that the earnings of the companies in its S&P
500 Index last year increased 13.3% over 2004. The fourth quarter year-to-year
gain was estimated at 13.6%. These are pretty good numbers -- even when
adjusted for inflation. With inflation up about 2%, we are talking about
earnings being up over 11%. Such earnings would not be surprising early in a
business recovery. However, we are about four years into a recovery and these
are really strong profits. You typically will not see earnings grow at such a
rate in the long run.
Strong earnings boosted many companies to sharply increase their dividends
and stock buybacks last year. Standard & Poor's also reported that firms in the
S&P 500 Index paid a record $202 billion in dividends last year, up 11% from
2004. Buybacks came to $315 billion up 60% from the previous peak of $197
billion in 2004. Combined dividends and stock buybacks were up 37% for the year.
These figures reflect a huge amount of corporate cash. Aside from
corporations, there is substantial excess cash in the hands of leverage buyout
firms and some hedge funds that participate in such ventures. They have
hundreds of billions of dollars to put into play. Whether this cash hoard is
used to increase dividends, expand buyouts, or buy other companies, it is the
most bullish factor in the stock market right now.
4
As far as valuations are concerned, S&P 500 companies ended 2005 trading at
19.1 times earnings over the past year. There was very little change from the
18.6 times earnings at the end of the third quarter and 20.5 at the start of
the year. While not totally off the charts, these figures do not look cheap to
us. That won't happen until the market gets down to 10 times earnings or less.
Financial advisors continue to be very optimistic about the direction of the
stock market. Investors Intelligence reported that its year-end poll of
financial advisors showed 64% bulls and 20.8% bears. At the end of the third
quarter, the bulls numbered 53.2% and the bears were at 26.6%. This compares
with 62.9% bulls and 19.6% bears at the start of last year. While we don't know
if the current optimism level is off the wall, it is pretty high.
Looking ahead, there is one slight possible negative for the market relating
to the presidential election cycle. Statistically, the post-election year and
the mid-term year, which we are now in, have not been great years. Based on
historical performance, the next pre-election year (2007) and election year
(2008) would turn out to be better years according to this cycle.
While we are not strongly supportive of this particular thesis, data going
back to 1949 indicates a significant market bottom occurs about every four
years. Our last bottom was in 2002, and it's possible we may experience the
next bottom in 2006. However, we are far from convinced that this will be the
case. At this writing, we would call our investment posture for equities either
high neutral or slightly positive.
Sincerely,
[GRAPHIC]
Martin E. Zweig, Ph.D.
President
Zweig Consulting LLC
PORTFOLIO COMPOSITION
In accordance with our Fund's investment policy guidelines, all of our bonds
are U.S. Government and agency obligations. These bonds are highly liquid and
provide the flexibility to respond quickly to changing market conditions.
Our top equity sectors as of December 31, 2005, included financials,
information technology, health care, consumer staples, and industrials. While
there were changes in allocation amounts, all of these sectors appeared in our
previous quarterly report. During the fourth quarter, we added to our positions
in financials and information technology and trimmed our holdings in
industrials and materials.
As of December 31, 2005, our leading individual positions included Allstate,
Bank of America, Bristol-Myers Squibb, Dow Chemical, Huntington Bancshares,
Kimberly Clark, Merck, NASDAQ 100 Trust, Nokia, and Wachovia. Although there
were no changes in shares held, Kimberly Clark, Merck, Nokia, and Wachovia are
new to this listing. We trimmed our holdings in ConocoPhillips, National City,
PNC Financial Services, and Wells Fargo, which are no longer on our list of top
positions.
Sincerely,
[SIGNATURE]
/s/ Carlton Neel
Carlton Neel
Executive Vice President
Phoenix/Zweig Advisers LLC
The preceding information is the opinion of the portfolio management. Past
performance is no guarantee of future results, and there is no guarantee that
market forcasts will be realized.
For definitions of indexes cited and certain investment terms used in this
report see the glossary on page 6.
5
Glossary
American Depositary Receipt (ADR): Represents shares of foreign companies
traded in U.S. dollars on U.S. exchanges that are held by a bank or a trust.
Foreign companies use ADRs in order to make it easier for Americans to buy
their shares.
Benchmark Index for The Zweig Total Return Fund: A composite index consisting
of 62.5% Lehman Brothers Government Bond Index and 37.5% S&P 500(R) Index.
Conference Board's Consumer Confidence Index: A monthly measure of consumer
confidence based on a representative sample of 5,000 U.S. households surveyed.
Dow Jones Industrial Average/SM/: A price-weighted average of 30 blue chip
stocks. The index is calculated on a total return basis with dividends
reinvested.
Duration: A measure of a fixed income fund's sensitivity to interest rate
changes. For example, if a fund's duration is 5 years, a 1% increase in
interest rates would result in a 5% decline in the fund's price. Similarly, a
1% decline in interest rates would result in a 5% gain in the fund's price.
Federal funds rate: The interest rate charged on overnight loans of reserves by
one financial institution to another in the United States. The federal funds
rate is the most sensitive indicator of the direction of interest rates since
it is set daily by the market.
Federal Reserve (the "Fed"): The central bank of the United States, responsible
for controlling the money supply, interest rates and credit with the goal of
keeping the U.S. economy and currency stable. Governed by a seven-member board,
the system includes 12 regional Federal Reserve Banks, 25 branches and all
national and state banks that are part of the system.
Gross domestic product (GDP): An important measure of the United States'
economic performance, GDP is the total market value of all final goods and
services produced in the U.S. during any quarter or year.
Initial public offering (IPO): A company's first sale of stock to the public.
Institute for Supply Management (ISM) Report on Business(R): An economic
forecast, released monthly, that measures U.S. manufacturing conditions and is
arrived at by surveying 300 purchasing professionals in the manufacturing
sector representing 20 industries in all 50 states.
Investors Intelligence Survey: A weekly survey published by Chartcraft, an
investment services company, of the current sentiment of approximately 150
market newsletter writers. Participants are classified into three categories:
bullish, bearish or waiting for a correction.
Lehman Brothers Government Bond Index: Measures U.S. Treasury and Agency
securities with a remaining maturity of one year or more. The index is
calculated on a total return basis.
NASDAQ Composite(R) Index: A market capitalization-weighted index of all issues
listed in the NASDAQ (National Association Of Securities Dealers Automated
Quotation System) Stock Market, except for closed-end funds, convertible
debentures, exchange traded funds, preferred stocks, rights, warrants, units
and other derivative securities. The index is calculated on a total return
basis with dividends reinvested.
6
Glossary (continued)
Nikkei 225 Index: Index of 225 leading stocks traded on the Tokyo Stock
Exchange. It is similar to the Dow Jones Industrial Average (DJIA) because it
is composed of representative blue chip companies.
Options Clearing Corporation (OCC): The largest clearing organization in the
world for options, founded in 1973.
S&P 500(R) Index: A free-float market capitalization-weighted index of 500 of
the largest U.S. companies. The index is calculated on a total return basis
with dividends reinvested.
Yield curve: A line chart that shows interest rates at a specific point in time
for securities of equivalent quality but with different maturities. A "normal
or positive" yield curve indicates that short-term securities have a lower
interest rate than long-term securities; an "inverted or negative" yield curve
indicates short-term rates are exceeding long-term rates; and a "flat yield
curve" means short- and long-term rates are about the same.
Indexes cited are unmanaged and not available for direct investment; therefore
their performance does not reflect the expenses associated with the active
management of an actual portfolio.
7
[CHART]
THE ZWEIG TOTAL RETURN FUND, INC.
Sector Weightings 12/31/05
(as a percentage of total investments
plus securities sold short)
U.S. Government Securities 54%
Financials 9%
Information Technology 6%
Agency Non-Mortgage Backed Securities 5%
Health Care 5%
Consumer Staples 4%
Industrials 3%
Other 14%
8
THE ZWEIG TOTAL RETURN FUND, INC.
Ten Largest Holdings at December 31, 2005 (as a percentage of net assets)/(g)/
1. U.S. Treasury Note 3.50%, 11/15/06.. 8.1% 6. FNMA 3.15%, 5/28/08................ 5.2%
2. U.S. Treasury Note 3%, 2/15/08...... 7.5% 7. U.S. Treasury Bond 7.50%, 11/15/16. 5.1%
3. U.S. Treasury Bond 8.75%, 5/15/17... 6.2% 8. U.S. Treasury Bond 8.875%, 2/15/19. 4.4%
4. U.S. Treasury Bond 9.25%, 2/15/16... 5.7% 9. U.S. Treasury Bond 6.125%, 11/15/27 4.3%
5. U.S. Treasury Inflation Indexed Note
1.625%, 1/15/15....................... 5.5% 10. U.S. Treasury Note 4%, 11/15/12.... 3.7%
SCHEDULE OF INVESTMENTS AND SECURITIES SOLD SHORT
December 31, 2005
Par
(000's) Value
------- ------------
INVESTMENTS
U.S. GOVERNMENT SECURITIES 53.39%
U.S. TREASURY BONDS -- 28.52%
U.S. Treasury Bond 6.125%, 11/15/27/(d)/.......... $17,500 $ 21,117,582
U.S. Treasury Bond 6.375%, 8/15/27................ 11,500 14,246,074
U.S. Treasury Bond 7.50%, 11/15/16................ 20,000 25,121,880
U.S. Treasury Bond 8.75%, 5/15/17................. 22,000 30,210,466
U.S. Treasury Bond 8.875%, 2/15/19................ 15,000 21,330,465
U.S. Treasury Bond 9.25%, 2/15/16................. 20,000 27,716,400
------------
139,742,867
------------
U.S. TREASURY NOTES -- 24.87%
U.S. Treasury Inflation Indexed Note 1.625%,
1/15/15/(f)/.................................... 27,000 27,132,852
U.S. Treasury Note 3%, 2/15/08.................... 38,000 36,929,768
U.S. Treasury Note 3.50%, 11/15/06................ 40,000 39,685,920
U.S. Treasury Note 4%, 11/15/12................... 18,500 18,101,824
------------
121,850,364
------------
Total U.S. Government Securities (Identified Cost
$261,218,332).................................... 261,593,231
------------
AGENCY NON-MORTGAGE BACKED SECURITIES 5.23%
FNMA 3.15%, 5/28/08............................... 26,570 25,625,171
------------
Total Agency Non-Mortgage Backed
Securities (Identified Cost $26,633,529)......... 25,625,171
------------
See notes to financial statements
9
Number of
Shares Value
--------- -----------
DOMESTIC COMMON STOCKS 30.38%
CONSUMER DISCRETIONARY -- 1.97%
Comcast Corp. Class A/(b)/.................... 44,000 $ 1,142,240
McDonald's Corp............................... 92,000 3,102,240
NIKE, Inc. Class B............................ 30,000 2,603,700
Omnicom Group, Inc............................ 12,000 1,021,560
Viacom, Inc. Class B.......................... 54,000 1,760,400
-----------
9,630,140
-----------
CONSUMER STAPLES -- 3.71%
Archer Daniels Midland Co..................... 124,000 3,057,840
Costco Wholesale Corp......................... 57,000 2,819,790
Kimberly-Clark Corp........................... 64,000 3,817,600
PepsiCo, Inc.................................. 57,000 3,367,560
Procter & Gamble Co........................... 64,000 3,704,320
Ralcorp Holdings, Inc......................... 36,000 1,436,760
-----------
18,203,870
-----------
ENERGY -- 2.53%
Burlington Resources, Inc..................... 31,000 2,672,200
ConocoPhillps................................. 49,000 2,850,820
Halliburton Co................................ 42,000 2,602,320
Occidental Petroleum Corp..................... 38,000 3,035,440
Valero Energy Corp............................ 24,400 1,259,040
-----------
12,419,820
-----------
FINANCIALS -- 8.40%
Allstate Corp................................. 83,000 4,487,810
Bank of America Corp./(d)/.................... 100,000 4,615,000
Goldman Sachs Group, Inc...................... 21,000 2,681,910
Huntington Bancshares, Inc.................... 186,000 4,417,500
Merrill Lynch & Co., Inc...................... 43,000 2,912,390
Morgan Stanley................................ 66,000 3,744,840
National City Corp............................ 95,000 3,189,150
New York Community Bancorp, Inc............... 209,000 3,452,680
PNC Financial Services Group, Inc............. 60,000 3,709,800
Wachovia Corp................................. 80,000 4,228,800
Wells Fargo & Co.............................. 59,000 3,706,970
-----------
41,146,850
-----------
HEALTH CARE -- 4.44%
Amgen, Inc./(b)/.............................. 34,000 2,681,240
Bard (C.R.), Inc.............................. 25,000 1,648,000
Bristol-Myers Squibb Co....................... 192,000 4,412,160
Gilead Sciences, Inc./(b)/.................... 51,000 2,684,130
See notes to financial statements
10
Number of
Shares Value
--------- ------------
HEALTH CARE (CONTINUED)
Merck & Co., Inc................................. 140,000 $ 4,453,400
Pfizer, Inc...................................... 135,000 3,148,200
UnitedHealth Group, Inc.......................... 44,000 2,734,160
------------
21,761,290
------------
INDUSTRIALS -- 3.35%
AMR Corp. /(b)/.................................. 114,000 2,534,220
Boeing Co. (The)................................. 41,000 2,879,840
Continental Airlines, Inc. Class B/(b)/.......... 144,000 3,067,200
General Electric Co.............................. 90,000 3,154,500
L-3 Communication Holdings, Inc./(d)/............ 21,000 1,561,350
Norfolk Southern Corp............................ 72,000 3,227,760
------------
16,424,870
------------
INFORMATION TECHNOLOGY -- 4.75%
Cisco Systems, Inc./(b)/......................... 118,000 2,020,160
Dell, Inc./(b)/.................................. 73,000 2,189,270
EMC Corp./(b)/................................... 190,000 2,587,800
Hewlett-Packard Co............................... 103,000 2,948,890
Intel Corp....................................... 126,000 3,144,960
International Business Machines Corp............. 32,000 2,630,400
Microsoft Corp................................... 108,000 2,824,200
QUALCOMM, Inc.................................... 58,000 2,498,640
VeriSign, Inc./(b)/.............................. 111,000 2,433,120
------------
23,277,440
------------
MATERIALS -- 1.23%
Dow Chemical Co./(d)/............................ 96,000 4,206,720
Freeport-McMoRan Copper & Gold, Inc. Class B..... 34,000 1,829,200
------------
6,035,920
------------
Total Domestic Common Stocks (Identified Cost
$130,266,262)..................................... 148,900,200
------------
FOREIGN COMMON STOCKS/(c)/ 3.70%
CONSUMER DISCRETIONARY -- 1.02%
Honda Motor Co. Ltd. ADR (Japan)/(d)/............ 80,000 2,317,600
Sony Corp. ADR (Japan)........................... 66,000 2,692,800
------------
5,010,400
------------
FINANCIALS -- 0.71%
Deutsche Bank AG (Germany)....................... 36,000 3,487,320
------------
HEALTH CARE -- 0.58%
Sanofi-Aventis ADR (France)...................... 64,000 2,809,600
------------
See notes to financial statements
11
Number of
Shares Value
--------- ------------
INFORMATION TECHNOLOGY -- 1.39%
Amdocs Ltd. (United States)/(b)/................. 97,000 $ 2,667,500
Nokia OYJ ADR (Finland).......................... 227,000 4,154,100
------------
6,821,600
------------
Total Foreign Common Stocks (Identified Cost
$15,392,123)...................................... 18,128,920
------------
EXCHANGE TRADED FUNDS 1.63%
iShares MSCI Japan Index Fund.................... 240,000 3,244,800
NASDAQ-100 Shares................................ 117,000 4,729,140
------------
Total Exchange Traded Funds (Identified Cost
$7,250,585)....................................... 7,973,940
------------
Total Long Term Investments -- 94.33% (Identified
Cost $440,760,831)................................ 462,221,462
------------
Par
(000's)
---------
SHORT-TERM INVESTMENTS 5.08%
COMMERCIAL PAPER/(e)/ -- 5.08%
BMW US Capital Corp. 4.10%, 1/3/06............... $ 10,000 9,997,722
Estee Lauder 4.12%, 1/3/06....................... 4,900 4,898,879
Rabobank USA 4.13%, 1/3/06....................... 10,000 9,997,708
------------
Total Commercial Paper (Identified Cost $24,894,309) 24,894,309
------------
Total Short-Term Investments (Identified Cost
$24,894,309)...................................... 24,894,309
------------
Total Investments (Identified Cost $465,655,140) --
99.41%............................................ 487,115,771/(a)/
Securities Sold Short (Proceeds $11,159,598) --
(2.95)%........................................... (14,447,010)
Other Assets Less Liabilities -- 3.54%.............. 17,357,963
------------
Net Assets -- 100.00%............................... $490,026,724
============
--------
(a) Federal Tax information: Net unrealized appreciation of investment
securities is comprised of gross appreciation of $28,932,584 and gross
depreciation of $10,660,873 for federal income tax purposes. At December
31, 2005, the aggregate cost of securities for federal income tax purposes
was $468,844,060.
(b) Non-income producing.
(c) Foreign common stocks are determined based on the country in which the
security is issued. The country of risk is determined based on criteria in
Note 2F "Foreign security country determination" in the Notes to Financial
Statements.
(d) Position, or a portion thereof, has been segregated to collateralize
securities sold short.
(e) The rate shown is the discount rate.
(f) Principal amount is adjusted daily pursuant to the change in the Consumer
Price Index.
(g) Table excludes short-term investments.
See notes to financial statements
12
Number of
Shares Value
--------- -----------
SECURITIES SOLD SHORT
DOMESTIC COMMON STOCKS 1.75%
CONSUMER DISCRETIONARY -- 0.95%
Wendy's International, Inc................... 84,000 $ 4,641,840
MATERIALS -- 0.80%
Nucor Corp................................... 58,000 3,869,760
-----------
Total Domestic Common Stocks (Proceeds $5,717,701) 8,511,600
-----------
EXCHANGE TRADED FUNDS 1.20%
iShares Russell 2000 Index Fund.............. 89,000 5,935,410
-----------
Total Exchange Traded Funds (Proceeds $5,441,897) 5,935,410
-----------
Total Securities Sold Short (Proceeds $11,159,598) $14,447,010/(h)/
===========
--------
(h) Federal Tax information: Net unrealized depreciation of securities sold
short is comprised of gross appreciation of $0 and gross depreciation of
$3,287,412 for federal income tax purposes. At December 31, 2005, the
aggregate proceeds of securities sold short for federal income tax
purposes was ($11,159,598).
See notes to financial statements
13
THE ZWEIG TOTAL RETURN FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2005
ASSETS
Investments, at value (Identified cost $465,655,140)..... $487,115,771
Cash..................................................... 17,152
Deposits with broker for securities sold short........... 14,573,230
Interest receivable...................................... 3,096,861
Dividends receivable..................................... 275,245
Prepaid expenses......................................... 74,260
Tax reclaims receivable.................................. 4,700
------------
Total Assets......................................... 505,157,219
------------
LIABILITIES
Securities sold short, at value (Proceeds $11,159,598)... 14,447,010
Accrued advisory fees (Note 4)........................... 290,951
Accrued administration fees (Note 4)..................... 54,034
Accrued directors fees................................... 39,000
Dividends on short sales................................. 37,700
Other accrued expenses................................... 261,800
------------
Total Liabilities.................................... 15,130,495
------------
NET ASSETS $490,026,724
============
NET ASSET VALUE PER SHARE
($490,026,724 / 92,891,488 shares outstanding -- Note 6). $ 5.28
============
Net Assets Consist of:
Capital paid-in.......................................... $498,685,054
Undistributed net investment income...................... 1,093,308
Accumulated net realized loss on investments............. (27,924,857)
Net unrealized appreciation on investments............... 21,460,631
Net unrealized depreciation on securities sold short..... (3,287,412)
------------
Net Assets $490,026,724
============
See notes to financial statements
14
THE ZWEIG TOTAL RETURN FUND, INC.
STATEMENT OF OPERATIONS
Year Ended December 31, 2005
INVESTMENT INCOME
Income
Interest.................................................................. $12,894,980
Dividends (net of foreign withholding taxes of $30,397)................... 3,560,565
-----------
Total Investment Income............................................ 16,455,545
-----------
Expenses
Investment advisory fees.................................................. 3,511,302
Administrative fees....................................................... 652,099
Transfer agent fees....................................................... 237,625
Printing and postage fees................................................. 272,146
Professional fees......................................................... 168,846
Directors' fees and expenses.............................................. 130,785
Registration fees......................................................... 88,816
Custodian fees............................................................ 58,338
Miscellaneous............................................................. 211,028
-----------
Expenses prior to dividends on short sales............................. 5,330,985
Dividends on short sales.................................................. 207,336
-----------
Total Expenses..................................................... 5,538,321
Less custodian fees paid indirectly....................................... (467)
-----------
Net Expenses....................................................... 5,537,854
-----------
Net Investment Income (loss).................................... 10,917,691
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:
Investments............................................................... 16,773,412
Short sales............................................................... (541,012)
Options................................................................... (252,262)
Foreign currency transactions............................................. 25
Net change in unrealized appreciation (depreciation) on:
Investments............................................................... (6,250,524)
Short sales............................................................... (2,466,185)
Foreign currency translation.............................................. (279)
-----------
Net realized and unrealized gain (loss)................................ 7,263,175
-----------
Net increase (decrease) in net assets resulting from operations........ $18,180,866
===========
See notes to financial statements
15
THE ZWEIG TOTAL RETURN FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income (loss)................................... $ 10,917,691 $ 11,106,848
Net realized gain (loss)....................................... 15,980,163 12,190,022
Net change in unrealized appreciation (depreciation)........... (8,716,988) 4,985,380
------------ ------------
Net increase (decrease) in net assets resulting from
operations................................................ 18,180,866 28,282,250
------------ ------------
Dividends and distributions to shareholders from
Net investment income.......................................... (14,086,185) (13,079,252)
Net realized short-term gains.................................. (13,822,268) (8,607,364)
Tax return of capital.......................................... (22,346,347) (10,182,121)
------------ ------------
Total dividends and distributions to shareholders........... (50,254,800) (31,868,737)
------------ ------------
Net increase (decrease) in net assets....................... (32,073,934) (3,586,487)
NET ASSETS
Beginning of period................................................ 522,100,658 525,687,145
------------ ------------
End of period (including undistributed net investment
income of $1,093,308 and $1,811,178, respectively)............... $490,026,724 $522,100,658
============ ============
See notes to financial statements
16
THE ZWEIG TOTAL RETURN FUND, INC.
FINANCIAL HIGHLIGHTS
(Selected data for a share outstanding throughout each year)
Year Ended December 31,
---------------------------------------------------
2005 2004 2003 2002 2001/(3)/
-------- -------- -------- -------- --------
Per Share Data
Net asset value, beginning of period................................. $ 5.62 $ 5.70 $ 5.81 $ 6.63 $ 7.48
-------- -------- -------- -------- --------
Income from Investment Operations
Net investment income (loss)/(4)/................................. 0.12 0.12 0.09 0.15 0.18
Net realized and unrealized gains (losses)........................ 0.08 0.18 0.27 (0.35) (0.32)
-------- -------- -------- -------- --------
Total from investment operations..................................... 0.20 0.30 0.36 (0.20) (0.14)
-------- -------- -------- -------- --------
Anti-dilutive effect of share repurchase program..................... -- -- -- -- --
-------- -------- -------- -------- --------
Dividends and Distributions
Dividends from net investment income.............................. (0.15) (0.14) (0.12) (0.17) (0.22)
Distributions from net realized gains............................. (0.15) (0.09) -- -- --
Tax return of capital............................................. (0.24) (0.11) (0.35) (0.45) (0.49)
Dilutive effect of common stock distributions..................... -- (0.04) -- -- --
-------- -------- -------- -------- --------
Total dividends and distributions................................. (0.54) (0.38) (0.47) (0.62) (0.71)
-------- -------- -------- -------- --------
Change in net asset value......................................... (0.34) (0.08) (0.11) (0.82) (0.85)
-------- -------- -------- -------- --------
Net asset value, end of period.................................... $ 5.28 $ 5.62 $ 5.70 $ 5.81 $ 6.63
======== ======== ======== ======== ========
Market value, end of period/(1)/.................................. $ 4.70 $ 5.35 $ 5.01 $ 5.49 $ 7.05
======== ======== ======== ======== ========
Total investment return/(2)/......................................... (2.54)% 14.89% (0.40)% (14.06)% 18.73%
======== ======== ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of period (in thousands)............................. $490,027 $522,101 $525,687 $532,763 $601,655
Ratio of expenses to average net assets (excluding dividends on short
sales).............................................................. 1.06% 1.28% 1.03% 0.99% 1.04%
Ratio of expenses to average net assets (including dividends on short
sales).............................................................. 1.10% 1.31% 1.06% 0.99% 1.04%
Ratio of net investment income to average net assets................. 2.18% 2.13% 1.66% 2.37% 2.51%
Portfolio turnover rate.............................................. 74.6% 75.8% 94.1% 90.8% 86.3%
--------
(1)Closing Price -- New York Stock Exchange.
(2)Total investment return is calculated assuming a purchase of a share of the
Fund's common stock at the opening NYSE share price on the first business
day and a sale at the closing NYSE share price on the last business day of
each period reported. Dividends and distributions, if any, are assumed for
the purpose of this calculation, to be reinvested at prices obtained under
the Fund's Automatic Reinvestment and Cash Purchase Plan. Generally, total
investment return based on net asset value will be higher than total
investment return based on market value in periods where there is an
increase in the discount or a decrease in the premium of the market value to
the net assets from the beginning to the end of such years. Conversely,
total investment return based on net asset value will be lower than total
investment return based on market value in periods where there is a decrease
in the discount or an increase in the premium of the market value to the net
asset value from the beginning to the end of such periods.
(3)As required, effective January 1, 2001, the Fund adopted the provision of
AICPA Audit and Accounting Guide for Investment Companies and began
amortizing premium on debt securities. The effect of the change for the year
ended December 31, 2001 is shown below.
Decrease net investment income....................... $(0.02)
Increase net realized and unrealized gains and losses $ 0.02
Decrease ratio of net investment income.............. (0.23)%
(4)Computed using average shares outstanding.
See notes to financial statements
17
THE ZWEIG TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
NOTE 1 -- ORGANIZATION
The Zweig Total Return Fund, Inc. (the "Fund") is a closed-end, diversified
management investment company registered under the Investment Company Act of
1940 (the "Act"). The Fund was incorporated under the laws of the State of
Maryland on July 21, 1988. The Fund's objective is to seek the highest total
return, consisting of capital appreciation and current income, consistent with
the preservation of capital.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of increases and decreases in
net assets from operations during the reporting period. Actual results could
differ from those estimates.
A. Security Valuation:
Equity securities are valued at the official closing price (typically last
sale) on the exchange on which the securities are primarily traded, or if no
closing price is available, at the last bid price.
Debt securities are valued on the basis of broker quotations or valuations
provided by a pricing service, which utilizes information with respect to
recent sales, market transactions in comparable securities, quotations from
dealers, and various relationships between securities in determining value.
As required, some securities and other assets may be valued at fair value as
determined in good faith by or under the direction of the Directors.
Certain foreign common stocks may be fair valued in cases where closing
prices are not readily available or are deemed not reflective of readily
available market prices. For example, significant events (such as movement in
the U.S. securities market, or other regional and local developments) may occur
between the time that foreign markets close (where the security is principally
traded) and the time that the Fund calculates its net asset value (generally,
the close of the NYSE) that may impact the value of securities traded in these
foreign markets. In these cases, information from an external vendor may be
utilized to adjust closing market prices of certain foreign common stocks to
reflect their fair value. Because the frequency of significant events is not
predictable, fair valuation of certain foreign common stocks may occur on a
frequent basis.
Short-term investments having a remaining maturity of 60 days or less are
valued at amortized cost, which approximates market.
18
B. Security Transactions and Related Income:
Security transactions are recorded on the trade date. Dividend income is
recorded on the ex-dividend date, or in the case of certain foreign securities,
as soon as the Fund is notified. Interest income is recorded on the accrual
basis. The Fund amortizes premiums and accretes discounts using the effective
interest method. Realized gains and losses are determined on the identified
cost basis.
C. Income Taxes:
It is the policy of the Fund to comply with the requirements of the Internal
Revenue Code and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes or excise taxes
has been made.
The Fund may be subject to foreign taxes on income, gains on investments or
currency repatriation, a portion of which may be recoverable. The Fund will
accrue such taxes and recoveries as applicable based upon current
interpretations of the tax rules and regulations that exist in the markets in
which they invest.
D. Dividends and Distributions to Shareholders:
Distributions are recorded by the Fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with income tax
regulations which may differ from accounting principles generally accepted in
the United States of America. These differences may include the treatment of
non-taxable dividends, market premium and discount, non-deductible expenses,
expiring capital loss carryovers, foreign currency gain or loss, operating
losses and losses deferred due to wash sales. Permanent book and tax basis
differences relating to shareholder distributions will result in
reclassifications to capital paid in on shares of beneficial interest. As of
December 31, 2005, the Fund increased undistributed net investment income by
$2,450,624, decreased the accumulated net realized loss by $11,728,393 and
decreased capital paid in on shares of beneficial interest by $14,179,017.
The components of distributable earnings on a tax basis (excluding
unrealized appreciation (depreciation) which is disclosed in the Schedule of
Investments and Securities Sold Short) consist of undistributed ordinary income
of $0 and undistributed long-term capital gains of $0.
The Fund has $27,780,456 of capital loss carryovers, $23,005,530 expiring in
2010 and $4,774,926 expiring in 2011 which may be used to offset future capital
gains. For the period ended December 31, 2005, the Fund utilized losses
deferred in prior years of $13,730,924. The Fund may not realize the benefit of
these losses to the extent it does not realize gains on investments prior to
the expiration of the capital loss carryovers.
In addition, under certain conditions, the Fund may lose the benefit of
these losses to the extent that distributions to shareholders exceed required
distribution amounts as defined under the Internal Revenue Code. Shareholders
may also pay additional taxes on these excess distributions.
E. Foreign Currency Translation:
Foreign securities and other assets and liabilities are valued using the
foreign currency exchange rate effective at the end of the reporting period.
Cost of investments is translated at the currency exchange rate effective at
the trade date. The gain or loss resulting from a change in currency exchange
19
rates between the trade and settlement dates of a portfolio transaction is
treated as a gain or loss on foreign currency. Likewise, the gain or loss
resulting from a change in currency exchange rates between the date income is
accrued and paid is treated as a gain or loss on foreign currency. The Fund
does not isolate that portion of the results of operations arising from changes
in exchange rates and that portion arising from changes in the market prices of
securities.
F. Foreign Security Country Determination:
A combination of the following criteria is used to assign the countries of
risk listed in the Schedule of Investments and Securities Sold Short: country
of incorporation, actual building address, primary exchange on which the
security is traded and country in which the greatest percentage of company
revenue is generated.
G. Options:
The Fund may write covered options or purchase options contracts for the
purpose of hedging against changes in the market value of the underlying
securities or foreign currencies.
The Fund will realize a gain or loss upon the expiration or closing of the
option transaction. Gains and losses on written options are reported separately
in the Statement of Operations. When a written option is exercised, the
proceeds on sales or amounts paid are adjusted by the amount of premium
received. Options written are reported as a liability in the Statement of
Assets and Liabilities and subsequently marked-to-market to reflect the current
value of the option. The risk associated with written options is that the
change in value of options contracts may not correspond to the change in value
of the hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, or if a liquid secondary market does not
exist for the contracts.
The Fund may purchase options, which are included in the Fund's Schedule of
Investments and Securities Sold Short and subsequently marked-to-market to
reflect the current value of the option.
When a purchased option is exercised, the cost of the security is adjusted
by the amount of premium paid. The risk associated with purchased options is
limited to the premium paid.
Transactions in written options for the period ended December 31, 2005 were
as follows:
Number of Premiums
Contracts Received
--------- --------
Option contracts outstanding at December 31, 2004.... -- $ --
Option contracts written............................. 321 57,773
Option contracts sold................................ -- --
Option contracts exercised........................... (120) (51,240)
Option contracts expired............................. (201) (6,533)
---- --------
Option contracts outstanding as of December 31, 2005. -- --
==== ========
H. 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 pro-
20
ceeds 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 realize a loss, and
if the price declines during the period, the Fund will realize a gain. Any
realized gain will be decreased, and any realized loss increased, by the amount
of transaction costs. On ex-dividend date, dividends on short sales are
recorded as an expense to the Fund. At December 31, 2005, the value of
securities sold short amounted to $14,447,010 against which collateral of
$26,222,378 was held. The collateral includes the deposits with the broker for
securities held short and the value of the segregated investments held long, as
shown in the Schedule of Investments and Securities Sold Short. Short selling
used in the management of the Fund may accelerate the velocity of potential
losses if the prices of securities sold short appreciate quickly. Stocks
purchased may decline in value at the same time stocks sold short may
appreciate in value, thereby increasing potential losses.
NOTE 3 -- PURCHASES AND SALES OF SECURITIES:
Purchases and sales of securities (excluding U.S. Government and agency
securities, options, and short-term securities) for the period ended
December 31, 2005, were as follows:
Purchases...................... $81,266,682
Sales.......................... 88,961,671
Short sales.................... 14,123,260
Purchases to cover short sales. 8,943,777
Purchases and sales of long-term U.S. Government and agency securities for
the period ended December 31, 2005, were as follows:
Purchases..................... $268,083,323
Sales......................... 245,387,034
NOTE 4 -- INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
a) Investment Advisory Fee: The Investment Advisory Agreement (the
"Agreement") between Phoenix/Zweig Advisers LLC (the "Adviser"), the Fund's
investment adviser, and the Fund provides that, subject to the direction of the
Board of Directors of the Fund and the applicable provisions of the Act, the
Adviser is responsible for the actual management of the Fund's portfolio.
Phoenix/Zweig Advisers LLC is a wholly-owned subsidiary of Phoenix Investment
Partners, Ltd. ("PXP"). PXP is an indirect, wholly-owned subsidiary of The
Phoenix Companies, Inc. ("PNX"). The responsibility for making decisions to
buy, sell or hold a particular investment rests, with the Adviser, subject to
review by the Board of Directors and the applicable provisions of the Act. For
the services provided by the Adviser under the Agreement, the Fund pays the
Adviser a monthly fee equal, on an annual basis to 0.70% of the Fund's average
daily net assets. During the period ended December 31, 2005, the Fund incurred
advisory fees of $3,511,302.
Zweig Consulting LLC (the "Sub-Adviser"), which serves as the Sub-Adviser
for the Fund, performs certain asset allocation research and analysis and
provides such advice to the Adviser. Effective March 2, 2004, the Sub-Adviser
assumed an expanded role in reviewing the Fund's investment portfolio
21
and collaborating in the security selection process with the Adviser's
portfolio management team. The Sub-Adviser's fees are paid by the Adviser.
b) Administration Fee: Phoenix Equity Planning Corporation ("PEPCO"), an
indirect wholly owned subsidiary of PNX serves as the Fund's Administrator (the
"Administrator") pursuant to an Administration Agreement. The Administrator
receives a fee for financial reporting, tax services, and oversight of the
subagent's performance at a rate of 0.13% of the Fund's average daily net
assets. During the period ended December 31, 2005, the Fund incurred
Administration fees of $652,099. Effective March 1, 2006, the Administration
fee will be reduced to a rate of 0.065% of the Fund's average daily net assets.
c) Directors Fee: The Fund pays each Director who is not an interested
person of the Fund or the Adviser a fee of $10,000 per year plus $1,500 per
Directors' or committee meeting attended, together with the out-of-pocket costs
relating to attendance at such meetings. Any Director of the Fund who is an
interested person of the Fund or the Adviser receives no remuneration from the
Fund.
NOTE 5 -- INDEMNIFICATIONS
Under the Fund's organizational documents, its directors and officers are
indemnified against certain liabilities arising out of the performance of their
duties to the Fund. In addition, the Fund enters into contracts that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts and expects the risk of loss to be remote.
NOTE 6 -- CAPITAL STOCK AND REINVESTMENT PLAN
At December 31, 2005, the Fund had one class of common stock, par value
$.001 per share, of which 500,000,000 shares are authorized and 92,891,488
shares are outstanding.
Registered shareholders may elect to have all distributions paid by check
mailed directly to the shareholder by Computershare 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 Computershare, as the Plan agent, in whole or fractional shares
of the Fund, as the case may be. During the year ended December 31, 2005, and
the year ended December 31, 2004, there were no shares issued pursuant to the
Plan.
On December 19, 2005, the Fund announced a distribution of $0.044 per share
to shareholders of record on December 30, 2005. This distribution has an
ex-dividend date of January 4, 2006, and is payable on January 10, 2006.
NOTE 7 -- CREDIT RISK AND ASSET CONCENTRATIONS
In countries with limited or developing markets, investments may present
greater risks than in more developed markets and the prices of such investments
may be volatile. The consequences of political, social or economic changes in
these markets may have disruptive effects on the market prices of these
investments and the income they generate, as well as the Fund's ability to
repatriate such amounts.
The Fund may invest a high percentage of its assets in specific sectors of
the market in its pursuit of a greater investment return. Fluctuations in these
sectors of concentration may have a greater impact on the Fund, positive or
negative, than if the Fund did not concentrate its investments in such sectors.
22
NOTE 8 -- THE ZWEIG TOTAL RETURN FUND YEAR END RESULTS
Total Return
on Net Asset Net Asset NYSE Premium
Value Value Share Price (Discount)
------------ --------- ----------- ----------
Year ended 12/31/2005........... 4.5% $5.28 $ 4.7000 (11.0%)
Year ended 12/31/2004........... 6.1% 5.62 5.3500 (4.8%)
Year ended 12/31/2003........... 7.1% 5.70 5.0100 (12.1%)
Year ended 12/31/2002........... (3.3%) 5.81 5.4900 (5.5%)
Year ended 12/31/2001........... (1.9%) 6.63 7.0500 6.3%
Year ended 12/31/2000........... 5.7% 7.48 6.5700 (12.2%)
Year ended 12/31/1999........... 3.9% 7.89 6.5000 (17.6%)
Year ended 12/31/1998........... 8.8% 8.43 8.8750 5.3%
Year ended 12/31/1997........... 14.6% 8.61 9.4375 9.6%
Year ended 12/31/1996........... 6.3% 8.29 8.0000 (3.5%)
Year ended 12/31/1995........... 17.7% 8.63 8.6250 (0.1%)
Year ended 12/31/1994........... (1.9%) 8.11 8.0000 (1.4%)
Year ended 12/31/1993........... 10.7% 9.11 10.7500 18.0%
Year ended 12/31/1992........... 2.1% 9.06 10.0000 10.4%
Year ended 12/31/1991........... 20.1% 9.79 10.6250 8.5%
Year ended 12/31/1990........... 4.2% 9.02 8.6250 (4.4%)
Year ended 12/31/1989........... 14.9% 9.59 9.7500 1.7%
Inception 9/30/1988-12/31/1988.. 1.1% 9.24 9.1250 (1.2%)
CERTIFICATION (Unaudited)
In accordance with the requirements of the Sarbanes-Oxley Act, the Fund's
CEO (the President of the Fund) and CFO (the Treasurer of the Fund) have filed
the required "Section 302" certifications with the SEC on Form N-CSR.
In accordance with Section 303A of the NYSE listed company manual, the CEO
certification has been filed with the NYSE.
TAX INFORMATION (Unaudited)
For the fiscal year ended December 31, 2005, for federal income tax
purposes, 13.1% of the ordinary income dividends earned by the Fund qualify for
the dividends received deduction for corporate shareholders.
For the fiscal year ended December 31, 2005, the Fund hereby designates
13.5%, or the maximum amount allowable, of its ordinary income dividends to
qualify for the lower tax rates applicable to individual shareholders.
The actual percentage for the calendar year will be designated in the
year-end tax statements.
23
[LOGO] PRICEWATERHOUSECOOPERS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of The Zweig Total Return Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments and securities sold short, 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, 2005 and the
results of its operations, the changes in its net assets and its financial
highlights for the periods indicated, in conformity with accounting principles
generally accepted in the United States of America. 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 the standards of the
Public Company Accounting Oversight Board (United States). Those standards
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, 2005 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCooper LLP
Boston, Massachusetts
February 16, 2006
24
SUPPLEMENTARY PROXY INFORMATION
The Annual Meeting of Shareholders of The Zweig Total Return Fund, Inc. was
held on May 10, 2005. The meeting was held for the purpose of electing two (2)
nominees to the Board of Directors.
The results of the above matters were as follows:
Votes Votes
Directors Votes For Against Withheld Abstentions
--------- ---------- ------- --------- -----------
Wendy Luscombe. 81,411,916 N/A 4,985,904 N/A
R. Keith Walton 81,334,330 N/A 5,063,490 N/A
Based on the foregoing, Wendy Luscombe and R. Keith Walton were re-elected
as Directors. The Fund's other Directors who continue in office are Charles H.
Brunie, Daniel T. Geraci, Alden C. Olson, Ph.D. and James B. Rogers, Jr.
25
FUND MANAGEMENT
Information pertaining to the Directors and officers of the Fund as of
December 31, 2005 is set forth below. The address of each individual, unless
otherwise noted, is c/o Phoenix/Zweig Advisers LLC, 900 Third Avenue, New York,
NY 10022.
DISINTERESTED DIRECTORS
Number of
Portfolios
in Fund
Term of Office Complex
Name, Address, and and Length of Overseen by Principal Occupation(s)
Date of Birth Time Served Director During Past 5 Years and Other Directorships Held
------------------ ----------------- ----------- -------------------------------------------------------
Charles H. Brunie... Term: Until 2006. 2 Director of The Zweig Fund, Inc. (since 1998);
Brunie Associates Served since: Chairman, Brunie Associates (investments) (since
600 Third Avenue, 1988. April 2001); Chairman, Oppenheimer Capital (1969 to
17th Floor 2000), Chairman (1980-1990); Chairman Emeritus,
New York, NY 10016 Manhattan Institute (since 1990). Trustee, Milton and
DOB: 7/17/30 Rose D. Friedman Foundation for Vouchers (since
1999). Trustee, Hudson Institute (since 2002). Trustee,
American Spectator (since 2002). Chartered Financial
Analyst (since 1969).
Wendy Luscombe...... Term: Until 2008. 2 Director of The Zweig Fund, Inc. (since 2002);
480 Churchtown Road Served since: Principal, WKL Associates, Inc. (real estate
Craryville, NY 12521 2002. investment management) (since 1994). Fellow, Royal
DOB: 10/29/51 Institution of Chartered Surveyors. Member,
Chartered Institute of Arbitrators. Director,
Endeavour Real Estate Securities, Ltd. REIT Mutual
Fund (since 2000). Director, PXRE, Corp.
(reinsurance) (since 1994). Member and Chairman of
Management Oversight Committee, Deutsche Bank
Real Estate Opportunities Fund (since 2003), Trustee,
Acadia Realty Trust (since 2006).
Alden C. Olson...... Term: Until 2007. 2 Director of The Zweig Fund, Inc. (since 1996);
2711 Ramparte Path Served since: currently retired. Chartered Financial Analyst (since
Holt, MI 48842 1996. 1964). Professor of Financial Management,
DOB: 5/10/28 Investments at Michigan State University
(1959 to 1990).
James B. Rogers, Jr. Term: Until 2006. 2 Director of The Zweig Fund, Inc. (since 1986); Private
352 Riverside Drive Served since: investor (since 1980). Chairman, Beeland Interests,
New York, NY 10025 1988. Inc. (investments and media) (since 1980). Author of
DOB: 10/19/42 "Investment Biker: On the Road with Jim Rogers"
(1994). "Adventure Capitalist" (2003) and "Hot
Commodities" (2004). Director, Emerging Markets
Brewery Fund (1993-2002). Director, Levco Series
Trust (since 1996).
26
DISINTERESTED DIRECTORS
Number of
Portfolios
in Fund
Term of Office Complex
Name, Address, and and Length of Overseen by Principal Occupation(s)
Date of Birth Time Served Director During Past 5 Years and Other Directorships Held
------------------ ----------------- ----------- ---------------------------------------------------------
R. Keith Walton..... Term: Until 2008. 2 Director of the Zweig Fund, Inc. (since 2004). Executive
15 Claremont Avenue Served since: Vice President (since 2004), Secretary (since 1996) of
New York, NY 10027 2004. the University at Columbia University. Director (since
DOB: 9/28/64 2002), Chair, Nominating Committee (since 2002),
Member, Executive Committee (since 2002), Chair,
Audit Committee (since 2003), Apollo Theater
Foundation, Inc. Director, Orchestra of St. Luke's (since
2000). Member, Steering Committee, Association for a
Better New York (since 2001). Trustee, The Trinity
School, NYC (since 2003). Nominating and Governance
Committee Board of Directors (since 2004), Member
(since 1997), Nominations and Governance Committee
(since 2004), Council on Foreign Relations. Member,
Advisory Board, North General Hospital (since 2002).
Member, NY Advisory Board, Enterprise Foundation
(since 1999). Member, The American Law Institute
(since 1999). Member, Council for the United States and
Italy (since 1999). The Riverside Church Finance
Committee Chair (2001-2005).
INTERESTED DIRECTOR
Term of Office, Number of
Length of Portfolios
Time Served in Fund
and Complex
Name, Address, and Position(s) Overseen by Principal Occupation(s)
Date of Birth with Fund Director During Past 5 Years and Other Directorships Held
------------------ ----------------- ----------- ---------------------------------------------------------
Daniel T. Geraci.... Term: Until 2007. 2 Director, Chief Executive Officer and President of the
10 Stonemeadow Drive Served since: Zweig Fund, Inc. (since 2004). Executive Vice
Westwood, MA 02090 2004. President, Asset Management, The Phoenix Companies,
DOB: 6/12/57 Director, Chief Inc. (wealth management) (since 2003). President and
Executive Chief Executive Officer, Phoenix Investment Partners,
Officer and Ltd. (since 2003). President certain Funds within the
President Phoenix Fund Complex (since December 2004).
President and Chief Executive Officer of North
American investment operations, Pioneer Investment
Management USA, Inc. (2001-2003). President of Private
Wealth Management Group (2000-2001), Executive Vice
President of Distribution and Marketing for Fidelity
Investments Institutional Services (Boston) (1998-2000),
Executive Vice President of Distribution and Marketing
for Fidelity Canada (1996-1998), Fidelity Investments.
27
OFFICERS WHO ARE NOT DIRECTORS
Position with
the Fund and
Name, Address and Length of Principal Occupation(s)
Date of Birth Time Served During Past 5 Years and Other Directorships Held
----------------- ---------------- --------------------------------------------------------
Carlton Neel...... Executive Vice Executive Vice President of The Zweig Fund, Inc. (since
900 Third Avenue President 2003); Senior Vice President and Portfolio Manager,
New York, NY 10022 since: 2003. Phoenix/Zweig Advisers LLC (since 2003). Managing
DOB: 12/19/67 Director and Co-Founder, Shelter Rock Capital
Partners, LP (2002-2003). Senior Vice President and
Portfolio Manager, Phoenix/Zweig Advisers LLC (1995-
2002). Vice President, JP Morgan & Co. (1990-1995).
David Dickerson... Senior Vice Senior Vice President of The Zweig Fund, Inc. (since
900 Third Avenue President 2003); Senior Vice President and Portfolio Manager,
New York, NY 10022 since: 2003. Phoenix/Zweig Advisers LLC (since 2003). Managing
DOB: 12/27/67 Director and Co-Founder, Shelter Rock Capital
Partners, LP (2002-2003). Vice President and Portfolio
Manager, Phoenix/Zweig Advisers LLC (1993-2002).
Marc Baltuch...... Chief Chief Compliance Officer and Vice President of The
900 Third Avenue Compliance Zweig Fund, Inc. (since 2004). President and Director of
New York, NY 10022 Officer and Vice Watermark Securities, Inc. (since 1991). Secretary of
DOB: 9/23/45 President Phoenix-Zweig Trust (1989-2003). Secretary of Phoenix-
since: 2004. Euclid Market Neutral Fund (1998-2002). Assistant
Secretary of Gotham Advisors, Inc. (since 1990). Chief
Compliance Officer of the Zweig Companies (since
1989) and of the Phoenix Funds Complex (since 2004).
Moshe Luchins..... Vice President Vice President of The Zweig Fund, Inc. (since 2004).
900 Third Avenue since: 2004. Associate Counsel of the Zweig Companies
New York, NY 10022 (since 1996).
DOB: 12/22/71
Nancy Curtiss..... Treasurer Treasurer of The Zweig Fund, Inc. (since 2003); Vice
56 Prospect Street since: 2003. President, Operations (since 2003); Vice President,
Hartford, CT 06115 Fund Accounting (1994-2003) and Treasurer (1996-
DOB: 11/24/52 2003), Phoenix Equity Planning Corporation. Treasurer,
multiple funds in Phoenix Fund Complex (since 1994).
Kevin J. Carr..... Chief Legal Chief Legal Officer and Secretary of The Zweig Total
One American Row Officer and Return Fund, Inc. (since 2005). Vice President and
Hartford, CT 06102 Secretary Counsel, Phoenix Life Insurance Company (since 2005).
DOB: 8/3/54 since: 2005. Vice President, Counsel, Chief Legal Officer and
Secretary, certain Funds within Phoenix Fund Complex
(since 2005). Compliance Officer of Investments and
Counsel, Travelers Life and Annuity Company (January
2005-May 2005). Assistant General Counsel, The
Hartford Financial Services Group (1999-2005).
28
KEY INFORMATION
Zweig Shareholder Relations: 1-800-272-2700
For general information and literature, as well as 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.
REPURCHASE OF SECURITIES
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.
PROXY VOTING INFORMATION (FORM N-PX)
The Adviser and Sub-Adviser vote proxies relating to portfolio securities in
accordance with procedures that have been approved by the Fund's Board of
Directors. You may obtain a description of these procedures, along with
information regarding how the Fund voted proxies during the most recent
12-month period ended June 30, 2005, free of charge, by calling toll-free
1-800-243-1574. This information is also available through the Securities and
Exchange Commission's website at http://www.sec.gov.
FORM N-Q INFORMATION
The Fund files a complete schedule of portfolio holdings with the Securities
and Exchange Commission (the "SEC") for the first and third quarters of each
fiscal year on Form N-Q. Form N-Q is available on the SEC's website at
http://www.sec.gov. Form N-Q may be reviewed and copied at the SEC's Public
Reference Room. Information on the operation of the SEC's Public Reference Room
can be obtained by calling toll-free 1-800-SEC-0330.
29
Item 2. Code of Ethics.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party.
(c) There have been no amendments, during the period covered by this report,
to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party, and that relates to any element of the code
of ethics described in Item 2(b) of the instructions for completion of
Form N-CSR.
(d) The registrant has not granted any waivers, during the period covered by
this report, including an implicit waiver, from a provision of the code
of ethics that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer or controller,
or persons performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, that
relates to one or more of the items set forth in paragraph (b) of the
instructions for completion of this Item.
Item 3. Audit Committee Financial Expert.
The registrant does not have an audit committee financial expert at this time
because none of the registrant's board of directors meets the technical
definition of such an expert in form N-CSR. The audit committee of the board is
in compliance with applicable rules of the listing requirements for closed-end
fund audit committees, including the requirement that all members of the audit
committee be "financially literate" and that at least one member of the audit
committee have "accounting or related financial management expertise", as
determined by the board."
Item 4. Principal Accountant Fees and Services.
Audit Fees
(a) The aggregate fees billed for each of the last two fiscal years for
professional services rendered by the principal accountant for the audit
of the registrant's annual financial statements or services that are
normally provided by the accountant in connection with statutory and
regulatory filings or engagements for those fiscal years are $32,000 for
2005 and $38,000 for 2004.
Audit-Related Fees
(b) The aggregate fees billed in each of the last two fiscal years for
assurance and related services by the principal accountant that are
reasonably related to the performance of the audit of the registrant's
financial statements and are not reported under paragraph (a) of this
Item are $1,000 for 2005 and $0 for 2004. This represents the review of
the semi-annual report.
Tax Fees
(c) The aggregate fees billed in each of the last two fiscal years for
professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning are $6,350 for 2005 and $7,450
for 2004.
"Tax Fees" are those primarily associated with review of the Trust's tax
provision and qualification as a regulated investment company (RIC) in
connection with audits of the Trust's financial statement, review of
year-end distributions by the Fund to avoid excise tax for the Trust,
periodic discussion with management on tax issues affecting the Trust,
and reviewing and signing the Fund's federal income and excise tax
returns.
All Other Fees
(d) The aggregate fees billed in each of the last two fiscal years for
products and services provided by the principal accountant, other than
the services reported in paragraphs (a) through (c) of this Item are $0
for 2005 and $0 for 2004.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
The Zweig Total Return Fund, Inc. (the "Fund") Board has adopted
policies and procedures with regard to the pre-approval of services
provided by PwC. The Audit Committee pre-approves: (i) all audit and
non-audit services to be rendered to the Fund by PwC; and (ii) all
non-audit services to be rendered to the Fund financial reporting of the
Fund provided by PwC to the Adviser or any affiliate thereof that
provides ongoing services to the Fund (collectively, "Covered
Services"). The Audit Committee has adopted pre-approval procedures
authorizing a member of the Audit Committee to pre-approve from time to
time, on behalf of the Audit Committee, all Covered Services to be
provided by PwC which are not otherwise pre-approved at a meeting of the
Audit committee, provided that such delegate reports to the full Audit
Committee at its next meeting. The pre-approval procedures do not
include delegation of the Audit committee's responsibilities to
management. Pre-approval has not been waived with respect to any of the
services described above since the date on which the Audit Committee
adopted its current pre-approval procedures.
(e)(2) The percentage of services described in each of paragraphs (b) through
(d) of this Item that were approved by the audit committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows:
(b)100% for 2005; 100% for 2004
(c)100% for 2005; 100% for 2004
(d)Not applicable for 2005; not applicable for 2004.
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees was
less than fifty percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by,
or under common control with the adviser that provides ongoing services
to the registrant for each of the last two fiscal years of the
registrant was $892,561 for 2005 and $1,877,791.
(h) The registrant's audit committee of the board of directors has
considered whether the provision of non-audit services that were
rendered to the registrant's investment adviser (not including any
sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser), and any
entity controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant that
were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
Item 5. Audit Committee of Listed registrants.
The registrant has a separately designated audit committee consisting of all
the independent directors of the registrant. The members of the audit committee
are: Audit Committee Members are: Charles H. Brunie, Wendy Luscombe, Prof.
Alden C. Olson, James B. Rogers and R. Keith Walton.
Item 6. Schedule of Investments.
Schedule of Investments in securities of unaffiliated issuers as of the close
of the reporting period is included as part of the report to shareholders filed
under Item 1 of this form.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
The Proxy Voting Policies are attached herewith.
THE ZWEIG FUND, INC
THE ZWEIG TOTAL RETURN FUND, INC
STATEMENT OF POLICY WITH RESPECT TO PROXY VOTING
I. Definitions. As used in this Statement of Policy, the following terms shall
have the meanings ascribed below:
A. "Adviser" refers to Phoenix/Zweig Advisers LLC.
B. "Corporate Governance Matters" refers to changes involving the corporate
ownership or structure of an issuer whose securities are within a
Portfolio Holding, including changes in the state of incorporation,
changes in capital structure, including increases and decreases of
capital and preferred stock issuance, mergers and other corporate
restructurings, and anti-takeover provisions such as staggered boards,
poison pills, and supermajority voting provisions.
C. "Delegate" refers to the Adviser or Subadviser to whom responsibility
has been delegated to vote proxies for the applicable Portfolio Holding,
including any qualified, independent organization engaged by the Adviser
to vote proxies on behalf of such delegated entity.
D. "Fund" shall individually and collectively mean and refer to The Zweig
Fund, Inc. and The Zweig Total Return Fund, Inc., and each of them.
E. "Management Matters" refers to stock option plans and other management
compensation issues.
F. "Portfolio Holding" refers to any company or entity whose securities is
held within the investment portfolio(s) of one or more of the Fund as of
the date a proxy is solicited.
G. "Proxy Contests" refer to any meeting of shareholders of an issuer for
which there are at least two sets of proxy statements and proxy cards,
one solicited by management and the others by a dissident or group of
dissidents.
H. "Social Issues" refers to social and environmental issues.
I. "Takeover" refers to "hostile" or "friendly" efforts to effect radical
change in the voting control of the board of directors of a company.
II. General Policy. It is the intention of the Fund to exercise stock ownership
rights in Portfolio Holdings in a manner that is reasonably anticipated to
further the best economic interests of shareholders of the Fund.
Accordingly, the Fund or its Delegate(s) shall endeavor to analyze and vote
all proxies that are considered likely to have financial implications, and,
where appropriate, to participate in corporate governance, shareholder
proposals, management communications and legal proceedings. The Fund and
its Delegate(s) must also identify potential or actual conflicts of
interests in voting proxies and address any such conflict of interest in
accordance with this Statement of Policy.
III. Factors to consider when voting.
A. A Delegate may abstain from voting when it concludes that the effect on
shareholders' economic interests or the value of the Portfolio Holding
is indeterminable or insignificant.
B In analyzing anti-takeover measures, the Delegate shall vote on a
case-by-case basis taking into consideration such factors as overall
long-term financial performance of the target company relative to its
industry competition. Key measures which shall be considered include,
without limitation, five-year annual compound growth rates for sales,
operating income, net income, and total shareholder returns (share price
appreciation plus dividends). Other financial indicators that will be
considered include margin analysis, cash flow, and debit levels.
C. In analyzing contested elections, the Delegate shall vote on a
case-by-case basis taking into consideration such factors as the
qualifications of all director nominees. The Delegate shall also
consider the independence and attendance record of board and key
committee members. A review of the corporate governance profile shall be
completed highlighting entrenchment devices that may reduce
accountability.
D. In analyzing corporate governance matters, the Delegate shall vote on a
case-by-case basis taking into consideration such factors as tax and
economic benefits associated with amending an issuer's state of
incorporation, dilution or improved accountability associated with
changes in capital structure, management proposals to require a
supermajority shareholder vote to amend charters and bylaws and bundled
or "conditioned" proxy proposals.
E. In analyzing executive compensation proposals and management matters,
the Adviser shall vote on a case-by-case basis taking into consideration
such factors as executive pay and spending on perquisites, particularly
in conjunction with sub-par performance and employee layoffs.
F. In analyzing proxy contests for control, the Delegate shall vote on a
case-by-case basis taking into consideration such factors as long-term
financial performance of the target company relative to its industry;
management's track record; background to the proxy contest;
qualifications of director nominees (both slates); evaluation of what
each side is offering shareholders as well as the likelihood that the
proposed objectives and goals can be met; and stock ownership positions.
G. A Delegate shall generally vote against shareholder social matters
proposals.
IV. Delegation.
A. In the absence of a specific direction to the contrary from the Board of
Trustees of the Fund, the Adviser will be responsible for voting proxies
for all Portfolio Holdings in accordance with this Statement of Policy,
or for delegating such responsibility as described below.
B. The Adviser delegated with authority to vote proxies for Portfolio
Holdings shall be deemed to assume a duty of care to safeguard the best
interests of the Fund and its shareholders. No Delegate shall accept
direction or inappropriate influence from any other client, director or
employee of any affiliated company and shall not cast any vote
inconsistent with this Statement of Policy without obtaining the prior
approval of the Fund or its duly authorized representative(s).
C. With regard to each Series for which there is a duly appointed
Subadviser acting pursuant to an investment advisory agreement
satisfying the requirements of Section 15(a) of the Investment Company
Act of 1940, as amended, and the rules thereunder, the Subadviser may,
pursuant to delegated authority from the Adviser, vote proxies for
Portfolio Holdings with regard to the Series or portion of the assets
thereof for which the Subadviser is responsible. In such case, the
Subadviser shall vote proxies for the Portfolio Holdings in accordance
with Sections II, III and V of this Statement of Policy, provided,
however, that the Subadviser may vote proxies in accordance with its own
proxy voting policy/procedures ("Subadviser Procedures") if the
following two conditions are satisfied: (1) the Adviser must have
approved the Subadviser Procedures based upon the Adviser's
determination that the Subadviser Procedures are reasonably designed to
further the best economic interests of the affected Fund shareholders,
and (2) the Subadviser Procedures are reviewed and approved annually by
the Board of Trustees. The Subadviser will promptly notify the Adviser
of any material changes to the Subadviser Procedures. The Adviser will
periodically review the votes by the Subadviser for consistency with
this Statement of Policy.
V. Conflicts of Interest
A. The Fund and its Delegate(s) seek to avoid actual or perceived conflicts
of interest in the voting of proxies for Portfolio Holdings between the
interests of Fund shareholders, on one hand, and those of the Adviser,
Delegate, principal underwriter, or any affiliated person of the Fund,
on the other hand. The Board of Trustees may take into account a wide
array of factors in determining whether such a conflict exists, whether
such conflict is material in nature, and how to properly address or
resolve the same.
B. While each conflict situation varies based on the particular facts
presented and the requirements of governing law, the Board of Trustees
or its delegate(s) may take the following actions, among others,
or otherwise give weight to the following factors, in addressing
material conflicts of interest in voting (or directing Delegates to
vote) proxies pertaining to Portfolio Holdings: (i) rely on the
recommendations of an established, independent third party with
qualifications to vote proxies such as Institutional Shareholder
Services; (ii) vote pursuant to the recommendation of the proposing
Delegate; (iii) abstaining; or (iv) where two or more Delegates provide
conflicting requests, vote shares in proportion to the assets under
management of the each proposing Delegate.
C. The Adviser shall promptly notify the President of the Fund once any
actual or potential conflict of interest exists and their
recommendations for protecting the best interests of Fund's
shareholders. No Adviser shall waive any conflict of interest or vote
any conflicted proxies without the prior written approval of the Board
of Trustees or the President of the Fund pursuant to section D of this
Article.
D. In the event that a determination, authorization or waiver under this
Statement of Policy is requested at a time other than a regularly
scheduled meeting of the Board of Trustees, the President of the Fund
shall be empowered with the power and responsibility to interpret and
apply this Statement of Policy and provide a report of his or her
determinations at the next following meeting of the Board of Trustees.
VI. Miscellaneous.
A. A copy of the current Statement of Policy with Respect to Proxy Voting
and the voting records for the Fund reconciling proxies with Portfolio
Holdings and recording proxy voting guideline compliance and
justification, shall be kept in an easily accessible place and available
upon request.
B. The Adviser shall present a report of any material deviations from this
Statement of Policy at every regularly scheduled meeting of the Board of
Trustees and shall provide such other reports as the Board of Trustees
may request from time to time. The Adviser shall provide to the Fund or
any shareholder a record of its effectuation of proxy voting pursuant to
this Statement of Policy at such times and in such format or medium as
the Fund shall reasonably request. The Adviser shall be solely
responsible for complying with the disclosure and reporting requirements
under applicable laws and regulations, including, without limitation,
Rule 206(4)-6 under the Investment Advisers Act of 1940. The Adviser
shall gather, collate and present information relating to the its proxy
voting activities of those of each Delegate in such format and medium as
the Fund shall determine from time to time in order for the Fund to
discharge its disclosure and reporting obligations pursuant to Rule
30b1-4 under the Investment Company Act of 1940, as amended.
C. The Adviser shall pay all costs associated with proxy voting for
Portfolio Holdings pursuant to this Statement of Policy and assisting
the Fund in providing public notice of the manner in which such proxies
were voted.
D. The Adviser may delegate its responsibilities hereunder to a proxy
committee established from time to time by the Adviser, as the case may
be. In performing its duties hereunder, the Adviser, or any duly
authorized committee, may engage the services of a research and/or
voting adviser or agent, the cost of which shall be borne by such entity.
This Statement of Policy shall be presented to the Board of Trustees
annually for their amendment and/or approval.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
(a)(1) Identification of Portfolio Manager(s) or Management Team Members and
Description of Role of Portfolio Manager(s) or Management Team Members
Following are the names, titles and length of service of the person or
persons employed by or associated with the registrant or an investment
adviser of the registrant who are primarily responsible for the
day-to-day management of the registrant's portfolio ("Portfolio
Manager") and each Portfolio Manager's business experience during the
past 5 years as of March 8, 2006: Carlton Neel and David Dickerson have
served as Co-Portfolio Managers of The Zweig Total Return Fund, Inc., a
closed-end fund managed by Phoenix/Zweig Advisers LLC (the "Fund") since
April 1, 2003. Mr. Neel and Mr. Dickerson are Senior Vice Presidents of
Phoenix/Zweig Advisers LLC ("PZA") and Euclid Advisors, LLC, a
subsidiary of PZA. Mr. Neel and Mr. Dickerson were previously employed
by PZA and managed the Phoenix Market Neutral Fund from April 2000
through June 2002. Since April 1, 2003, they have served as Portfolio
Managers for The Zweig Fund, Inc., a closed-end fund managed by PZA, and
as Portfolio Managers for the Phoenix Small-Cap Value Fund and Phoenix
Market Neutral Fund, two funds also managed by PZA. For the period from
July 2002 until returning to PZA on April 1, 2003, Mr. Neel and
Mr. Dickerson co-founded and managed a hedge fund based on the same
market neutral strategy used previously while managing certain of the
funds which they manage.
Mr. Neel previously served as Senior Portfolio Manager for a number of
the former Phoenix-Zweig mutual funds from 1995 until July 2002. Prior
to joining the Zweig Companies, he was a Vice President with J.P.
Morgan & Co.
Mr. Dickerson began his investment career at the Zweig Companies in 1993.
(a)(2) Other Accounts Managed by Portfolio Manager(s) or Management Team Member
and Potential Conflicts of Interest
Other Accounts Managed by Portfolio Manager(s) or Management Team Member
The following information is provided as of the fiscal year ended
December 31, 2005.
Mr. Neel and Mr. Dickerson are responsible for the day-to-day management
of other portfolios of other accounts, namely The Zweig Fund, Inc.,
Phoenix Small-Cap Value Fund and Phoenix Market Neutral Fund. For both
Mr. Neel and Mr. Dickerson, the following are tables which provide the
number of other accounts managed within the Type of Accounts and the
Total Assets for each Type of Account. Also provided for each Type of
Account is the number of accounts and the total assets in the accounts
with respect to which the advisory fee is based on the performance of
the account.
Number of Total Assets in
Accounts where Accounts where
Name of Portfolio Total Number of Advisory Fee is Advisory Fee is
Manager or Team Accounts Based on Based on
Member Type of Accounts Managed Total Assets Performance Performance
------------------- ----------------------------- --------------- ------------ --------------- ---------------
David Dickerson Registered
Investment Companies: 3 $1.1 billion None None
Other Pooled Investment
Vehicles: None None None None
Other Accounts: None None None None
Number of Total Assets in
Accounts where Accounts where
Name of Portfolio Total Number of Advisory Fee is Advisory Fee is
Manager or Team Accounts Based on Based on
Member Type of Accounts Managed Total Assets Performance Performance
------------------- ----------------------------- --------------- ------------ --------------- ---------------
Carlton Neel Registered Investment
Companies: 3 $1.1 billion None None
Other Pooled Investment
Vehicles: None None None None
Other Accounts: None None None None
Potential Conflicts of Interest
There may be certain inherent conflicts of interest that arise in
connection with the Mr. Neel's and Mr. Dickerson's management of each
Fund's investments and the investments of any other accounts he manages.
Such conflicts could arise from the aggregation of orders for all
accounts managed by a particular portfolio manager, the allocation of
purchases across all such accounts, the allocation of IPOs and any soft
dollar arrangements that the Adviser may have in place that could
benefit the Funds and/or such other accounts. The Board of
Trustees/Directors has adopted on behalf of the Funds policies and
procedures designed to address any such conflicts of interest to ensure
that all transactions are executed in the best interest of the Funds'
shareholders. The Advisers and Subadviser are required to certify their
compliance with these procedures to the Board of Trustees on a quarterly
basis. There have been no material compliance issues with respect to any
of these policies and procedures during the Funds' most recent fiscal
year ended December 31, 2005. Additionally, there are no material
conflicts of interest between the investment strategy of a Fund and the
investment strategy of other accounts managed by Mr. Neel and
Mr. Dickerson since portfolio managers generally manage funds and other
accounts having similar investment strategies.
(a)(3) Compensation Structure of Portfolio Manager(s) or Management Team Members
For the most recently completed fiscal year ended December 31, 2005,
following is a description of Mr. Neel's and Mr. Dickerson's
compensation structure as portfolio managers of PZA.
Phoenix Investment Partners, Ltd. and its affiliated investment
management firms (collectively, "PXP"), believe that the firm's
compensation program is adequate and competitive to attract and retain
high-caliber investment professionals. Investment professionals at PXP
receive a competitive base salary (fixed compensation), an incentive
bonus opportunity and a benefits package. Managing Directors and
portfolio investment professionals who supervise and manage others also
participate in a management incentive program reflecting their personal
contribution and team performance. Highly compensated individuals can
also take advantage of a long-term Incentive Compensation program to
defer their compensation and reduce tax implications.
The bonus package for portfolio managers is based upon how well the
individual manager meets or exceeds assigned goals and subjective
assessment of contribution to the team effort. Their incentive bonus
also reflects a performance component for achieving and/or exceeding
performance competitive with peers managing similar strategies. Such
component is further adjusted to reward investment personnel for
managing within the stated framework and for not taking unnecessary
risks. This ensures that investment personnel will remain focused on
managing and acquiring securities that correspond to a fund's mandate
and risk profile. It also avoids the temptation for portfolio managers
to take on more risk and unnecessary exposure to chase performance for
personal gain.
Finally, Portfolio Managers and investment professionals may also
receive The Phoenix Companies, Inc. ("PNX") stock options and/or be
granted PNX restricted stock at the direction of the parent's Board of
Directors.
Following is a more detailed description of the compensation structure
of the Fund's portfolio managers.
Base Salary. Each Portfolio Manager is paid a fixed base salary, which
is determined by PXP and is designed to be competitive in light of the
individual's experience and responsibilities. PXP management uses
compensation survey results of investment industry compensation
conducted by an independent third party in evaluating competitive market
compensation for its investment management professionals. Compensation
is not based on the value of assets held in the Fund's portfolio.
Incentive Bonus. Generally, the current Performance Incentive Plan for
portfolio managers at PXP is made up of three components:
(1) Seventy percent of the target incentive is based on achieving
investment area investment goals and individual performance. The
Investment Incentive pool will be established based on actual pre-tax
investment performance compared with specific peer group or index
measures established at the beginning of each calendar year.
Performance of the funds managed is measured over one, three and
five-year periods against specified benchmarks and/or peer groups for
each fund managed. Performance of the PNX general account and growth
of revenue, if applicable to a particular portfolio manager, is
measured on a one-year basis. Generally, individual manager's
participation is based on the performance of each fund/account
managed as weighted roughly by total assets in each of those
funds/accounts.
(2) Fifteen percent of the target incentive is based on the profitability
of the investment management division with which the portfolio
manager is associated. This component of the plan is paid in
restricted stock units of The Phoenix Companies, Inc., which vest
over three years.
(3) Fifteen percent of the target incentive is based on the portfolio
manager's investment area's competencies and on individual
performance. This pool is funded based on The Phoenix Companies,
Inc.'s return on equity.
The Performance Incentive Plan applicable to some portfolio managers may
vary from the description above. For instance, plans applicable to
certain portfolio managers (I) may specify different percentages of
target incentive that is based on investment goals and individual
performance and on The Phoenix Companies, Inc. return on equity,
(ii) may not contain the component that is based on the profitability of
the management division with which the portfolio manager is associated,
or (iii) may contain a guarantee payout percentage of certain portions
of the Performance Incentive Plan.
Long-Term Incentive Bonus. Certain portfolio managers are eligible for a
long-term incentive plan that is paid in restricted stock units of The
Phoenix Companies, Inc. which vest over three years. Awards under this
plan are contingent upon PNX achieving its cash return on equity
objective, generally over a three-year period. Target award
opportunities for eligible participants are determined by PNX's
Compensation Committee.
Other Benefits. Portfolio managers are also eligible to participate in
broad-based plans offered generally to the firm's employees, including
broad-based retirement, 401(k), health and other employee benefit plans.
(a)(4) Disclosure of Securities Ownership
For the most recently completed fiscal year ended December 31, 2005,
beneficial ownership of shares of the Fund by Messrs. Dickerson and Neel
are as follows. Beneficial ownership was determined in accordance with
rule 16a-1(a)(2) under the Securities Exchange Act of 1934 (17 CFR
240.161-1(a)(2)).
Dollar ($)
Range of Fund
Name of Portfolio Shares
Manager or Beneficially
Team Member Owned
----------------- -------------------------
David Dickerson $10,001-$50,000
Carlton Neel $10,001-$50,000
(b) Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR
240.14a-101), or this Item.
Item 11. Controls and Procedures.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the "1940
Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days
of the filing date of the report that includes the disclosure required
by this paragraph, based on the evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act (17
CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b)There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d)) that occurred during the registrant's second fiscal
quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
Item 12. Exhibits.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached
hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached
hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) The Zweig Total Return Fund, Inc.
By (Signature and Title)* /s/ Daniel T. Geraci
-------------------------
Daniel T. Geraci, President
and Chief Executive Officer
(principal executive officer)
Date March 9, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Daniel T. Geraci
--------------------
Daniel T. Geraci, President
and Chief Executive Officer
(principal executive officer)
Date March 9, 2006
By (Signature and Title)* /s/ Nancy G. Curtiss
--------------------
Nancy G. Curtiss, Treasurer
(principal financial officer)
Date March 9, 2006
--------
* Print the name and title of each signing officer under his or her signature.