January 25, 2001
[PHOTO OF MARTIN E. ZWEIG]
Dear Shareholder:
For the year ended December 31, 2000, the net asset value for The Zweig
Total Return Fund, Inc. increased 5.7%, including $0.74 in reinvested
distributions.
During the fourth quarter of 2000, the Fund's net asset value gained 1.0%,
including $0.18 in reinvested distributions.
Consistent with our policy of seeking to minimize risk while earning
reasonable returns, our average exposure during 2000 was approximately 74%.
DISTRIBUTION DECLARED
In accordance with our policy of distributing 10% of our net asset value per
year, which equals 0.83% per month (10% divided by 12 months), on January 2,
2001, the Fund announced a distribution of $0.06 per share payable on January
10, 2001 to shareholders of record as of December 29, 2000. The amount of a
distribution depends on the exact net asset value at the time of declaration.
For the January distribution, 0.83% of the Fund's net asset value was
equivalent to $0.06 per share. Including this distribution, the Fund's payout
since its inception is now $10.77.
Of the $0.73 taxable in 2000, $0.32 is ordinary income, $0.23 is long-term
capital gains, and $0.18 is return of capital. (The return of capital
distribution is a tax-free return of capital and, therefore, should not be
reported as income.)
MARKET OUTLOOK
Our bond exposure on December 31, 2000, was 61% compared with 46% at the
close of the third quarter. If we had been fully invested, we would have been
62.5% invested in bonds and 37.5% in stocks. Consequently, at 61%, we are at
approximately 98% of a full position (61%/62.5%).
Last year was a banner year for government bond prices, with yields dropping
to their lowest levels in nearly two years. Bond prices move in the opposite
direction from yields. After a slow start early in the year when there was
concern about the Federal Reserve raising interest rates, the bond market
rallied as it became apparent that the economy was slowing.
Factors that gave Treasury securities their best year in returns since 1995
included the growing U.S. government surplus, which caused a reduction in the
size and frequency of new government debt issues. Moreover, the government
began buying bonds back, reducing supply. Meanwhile, demand increased as many
investors sought safer havens than the stock market.
At the time of this writing, I am optimistic about the bond market.
Commodity prices remain soft, and there is little inflationary pressure
overall. Economic activity looks anemic, and the Fed surprised the market with
a 50-basis-point interest rate cut on January 3, 2001 and may cut further.
These are all positives for the bond market.
Our equity exposure on December 31, 2000, was 36% compared with 34% at the
close of the third quarter. At 36%, we are about 96% of full investment
(36%/37.5%).
Last year was dismal for the equity markets. The Nasdaq Composite/1/ plunged
39.3%, its worst year since its creation in 1971. The Dow Jones
Industrial Average/2/ fell 4.7%, its poorest calendar year since 1981. The S&P
500 Index/3/ lost 9.2%, its weakest showing since 1977. It sure was a
difficult year to make money.
There were lots of reasons for the market's bleak performance. For one
thing, the Federal Reserve was still tightening during the year. By midyear
they had done the sixth of several tightenings that began in 1999. And, as I
always say, "Don't fight the Fed."
Second, there was a bubble in the Internet stocks, especially in the "dot-
com" companies. That bubble, which burst in March, had the effect of pulling
down the Nasdaq Composite for the rest of the year. Because many of the larger
Nasdaq stocks were also represented in the S&P 500, that helped to pull down
that group. Even the Dow did not escape totally because it contained some
technology stocks, such as Microsoft, Intel, IBM, and Hewlett-Packard that
also appear in the other indices.
I also think there was too much optimism early in the year, too much
speculation in the market, and too much margin debt. To make matters worse, in
October there was a tremendous amount of mutual fund tax-selling. Many mutual
funds have fiscal years that end October 31 for excise tax purposes. When they
finally let up in November and December, it was the public's turn to sell for
tax reasons. This tax-selling continued right up to the end of the year and it
was something the markets could not overcome. Then there were the enormous
number of margin calls in the final months of the year that kept putting more
pressure on the markets, especially the Nasdaq.
The Fed's unexpected half-point cut in the Federal funds rate on January 3,
2001 sparked a sensational one-day rally, but the market quickly fizzled and
gave up most of its gains. The market
--------
1 The Nasdaq Composite measures technology-oriented stock total-return
performance.
2 The Dow Jones Industrial Average measures large-capitalization stock total-
return performance.
3 The S&P 500 Index measures broad stock market total-return performance. The
indices are unmanaged and not available for direct investment.
was surprised because the Fed cut rates between meetings. The Fed was
scheduled to meet at the end of January, and many people thought the Fed might
wait until then to act. The Fed had already signaled a downward bias in
December. But even those who thought the Fed might cut earlier did not think
it would happen so soon. Also, it was a 50-basis-point reduction, not 25, as
many had anticipated. That was more of a shock.
It was a terrific day. The Nasdaq Composite was down 1.7% that morning and
closed up 14.2%, about a 16% inter-day swing and the biggest up day
percentage-wise in the history of the Nasdaq. There was a record volume on the
exchanges. Part of the reason the market lost back a lot of ground is that
such a buying panic takes out everybody who wants to buy, and there are no
bids left under the market. Eventually prices came down but the lows held, at
least as of this writing, and the markets have been rallying again recently.
For the long term, it is bullish for the markets when the Fed changes course
and cuts sharply. Initial cuts by the Fed are pretty potent. Going back to
1950, the Dow Jones Industrial Average has gone up 11% in the following six
months and 19.8% in the year. That's far higher than the average gains the
market achieved over such periods.
I think we need more Fed cuts to get the next bull market rolling. We
already have excessive pessimism. A lot of people are sold out and there is a
fair amount of cash on the sidelines. That's the liquidity we need to get the
bull market going. It would also be helpful if inflation behaved. If inflation
starts to creep up, there would be no more Fed cuts. The Fed is the catalyst,
and I think we will see at least a few more cuts. A tax reduction could also
help. There's a good chance we will get some tax relief, but I have no idea
what form it will take and when Congress will get around to it.
In the recent long bull market we saw investors rushing to buy on the dips,
which helped the markets bounce back. There are still
2
a number of people who buy on dips--the day- traders, for example. However,
the sellers have overwhelmed them. The amounts of buying and selling are
always equal. But the pressure that comes from one side is not so equal. The
markets went down last year for many reasons that included worries about the
economy and earnings. Companies have reported poor earnings and the market
couldn't withstand that. I suspect that much of that has been discounted, and
the market will begin to overlook weaker earnings provided the Fed keeps
cutting.
At this time of year you keep reading about the so-called January effect
when small-cap stocks outperform big caps. This tends to be true because small
caps are generally dominated by the public. As I mentioned previously, the
public does a lot of tax-selling late in the year, and these stocks frequently
get tax bounces. That knowledge doesn't do you much good if you are managing a
big portfolio--all you can do is try to make a quick trade in small-cap
stocks. Incidentally, some people believe January is a bellwether month that
is predictive of the market's behavior over the rest of the year. The record
doesn't bear that out; it is just another stock market myth.
The S&P 500 is currently trading at about 24 times the companies' per share
earnings compared to an average of 16 since 1970. What's happened is that in
recent years many rapidly growing technology and biotech stocks with no
earnings or very low earnings were added to the listing. They have high
price/earnings ratios and have boosted the average ranking. But the median P/E
ratio is a lot lower. There may be some stocks that are overvalued, but there
are any number in the S&P that have normal or even below normal P/Es. It is
the handful of the tech stocks that have distorted the true picture.
Many economists warn that the risk of recession is high this year because
consumer spending and business investments are down, with the rising interest
rates and higher energy costs. Others say we are in a normal cyclical
slowdown. I think it could go either way. There are two reasons why we might
be facing a recession. One is that the purchasing managers' index dropped
under 44. The last nine times that happened we had eight recessions plus a
near miss in 1966 and 1977 when we had one down quarter. The other is that the
four-week average of initial unemployment claims has risen by more than
100,000. The five times that happened, we had recessions.
The flip side is that the sudden downturn late in the year was exacerbated
by people absorbed with the election count. They were not very comfortable
waiting for the final results. They were watching television and not shopping.
Secondly, we had a very cold winter coupled with high energy prices that
slowed the economy. Thirdly, I believe the consumer is liquid even though many
say the consumer is tapped out. If you look at installment debt relative to
liquid assets, such as cash equivalents and savings, the consumer still holds
a lot of money.
Our economy is very broadly diversified, much more so than it was years ago.
It is much more service-oriented and it will be harder to get a recession
going. We are definitely in some sort of slowdown, but I don't know whether it
will turn into a recession. I do believe that if the Fed keeps cutting, it
would truncate a recession or perhaps head one off before it fully develops.
Because the economy is slowing, dividends in the S&P 500 slipped 2.5% last
year from the 1999 level. It was the first dip since 1991 and the largest
decline since 1951. Including 2000, dividends have fallen in only six post-war
years. With earnings eroding in late 2000 and early 2001, some companies have
gotten into trouble and have had to pare their payouts. Others prefer to buy
back their own stock rather than pay dividends. However, history has shown
that when dividends are cut, it is not necessarily a bad time to buy stocks.
The Initial Public Offering market, which seems to have returned to earth,
was dominated early last year by technology and telecommunications. It now
features new issues
3
in health care, energy, and more traditional businesses. Wall Street will sell
whatever it can sell. If energy or some value stock sells, they will offer it.
I don't think anyone will come out with a "dot-com" stock and do well. The
implications are that we are going to see a change in industry groups, a
rotation. Since the stocks offered now might not be as sought after as those
selling like hotcakes a year or so back, there may be fewer new issues. If
that's true, it will be bullish for the market. We were choking on a heavy
supply of new issues early last year, and it didn't help the market at all. If
you can keep down that supply, it drains less money out of the market. I would
like to see the new-issue market cool for a while.
Mergers and acquisitions started strong in 2000 but slowed considerably
during the year. As far as the market is concerned, mergers where stock is
exchanged for stock have no impact because cash is not going in or out of the
market. Cash takeovers are another matter. They reduce the supply of stock,
which is very bullish for the market. There is no way to predict whether there
will be more cash takeovers or not, but I would like to see more of them.
Corporate profits for the first half of this year are expected to show their
first decline since 1998, but this is not necessarily a negative for the
market. The best market returns frequently occur in the middle of recessions.
For example, earnings were down and the market soared in the recession periods
of late 1970 and early 1971, late 1974 and the first half of 1975, the spring
of 1980, 1982, most of 1991, and the latter part of 1998. Surprisingly, the
market tends to do better when earnings are poor.
Summing up, the chief market positive is that the Fed has finally gotten
friendly to the markets. Second, tremendous pessimism has been built up on the
sidelines, and that's a big plus. I would like to see the Fed cut at the
minimum one more time. There are not too many negatives out there. I would not
worry too much about sagging earnings or a soft economy as long as the Fed does
the right thing and keeps cutting.
In view of the above and my favorable indicators, I am reasonably bullish
right now.
PORTFOLIO COMPOSITION
Conforming to our investment policy guidelines, all of our bonds are U.S.
government obligations. The portfolio's average duration (a measure of
sensitivity to interest rate changes) was 8.5 years as of December 31, 2000.
This compares with 5.3 years at the close of the third quarter. Since these
bonds are highly liquid, they provide the flexibility to respond quickly to
changing market conditions.
Although there were minor revisions in the percentages held, our leading
industry groups at year-end were unchanged from the listing as of September 30,
2000. They included technology, financial services, health care, energy and
telecommunications.
Among the various groups, technology was lower because of declining market
value, while financial services and health care, where we added to our
positions, showed relatively good market performance. Energy and
telecommunications were basically unchanged from the previous quarter.
As of December 31, 2000, our leading individual issues included General
Electric, Pfizer, Exxon Mobil, Merck, Citigroup, Wal-Mart, American
International Group, Tyco, Cisco, and Bristol Myers.
New to the above group are Merck, Wal-Mart, and Bristol Myers, each of which
benefited from increased purchases and good performance relative to the overall
market during the quarter.
Of the stocks listed among our leading holdings on September 30, 2000, Sun
Microsystems, EMC, and Microsoft declined in value.
Sincerely,
/s/ Martin E. Zweig, Ph.D.
Martin E. Zweig, Ph.D.
Chairman
4
THE ZWEIG TOTAL RETURN FUND, INC.
SCHEDULE OF INVESTMENTS
December 31, 2000
Number of Value
Shares (Note 3)
--------- ------------
Common Stocks 33.79%
Aerospace & Air Transport 0.56%
AMR Corp............................................ 45,000 $ 1,763,437
Boeing Co........................................... 30,100 1,986,600
------------
3,750,037
------------
Building & Forest Products 0.24%
Cemex S.A. de CV, ADR............................... 30,000 541,875
Georgia-Pacific Group............................... 30,000 933,750
Louisiana-Pacific Corp.............................. 15,000 151,875
------------
1,627,500
------------
Chemicals 0.43%
Air Products & Chemicals, Inc....................... 30,000 1,230,000
Dow Chemical Co..................................... 45,000 1,648,125
------------
2,878,125
------------
Commercial Services 0.23%
Modis Professional Services, Inc.................... 75,100(a) 309,787
Omnicom Group, Inc. ................................ 15,000 1,243,125
------------
1,552,912
------------
Consumer Products 1.21%
Coca-Cola Co........................................ 45,000 2,742,187
Kimberly-Clark Corp................................. 45,000 3,181,050
PepsiCo, Inc........................................ 45,000 2,230,312
------------
8,153,549
------------
Electronics -- Electrical 1.47%
Emerson Electric Co. ............................... 22,500 1,773,281
General Electric Co. ............................... 147,000 7,046,812
Solectron Corp...................................... 30,000(a) 1,017,000
------------
9,837,093
------------
Engineering & Machinery 0.40%
Ingersoll-Rand Co................................... 45,000 1,884,375
SPX Corp............................................ 7,500 811,406
------------
2,695,781
------------
See notes to financial statements
5
Number of Value
Shares (Note 3)
--------- ------------
Financial Services 5.56%
ACE Ltd............................................. 45,100 $ 1,913,931
Allstate Corp....................................... 58,200 2,535,337
American Express Co................................. 45,000 2,472,187
American International Group, Inc................... 45,000 4,435,312
Bank of America Corp................................ 45,000 2,064,375
Chase Manhattan Corp................................ 62,950 2,860,291
Citigroup, Inc...................................... 90,000 4,595,625
Fannie Mae.......................................... 15,000 1,301,250
Freddie Mac......................................... 49,500 3,409,312
Household International, Inc........................ 30,000 1,650,000
KeyCorp............................................. 30,000 840,000
Knight Trading Group, Inc........................... 45,000(a) 627,187
Lehman Brothers Holdings, Inc....................... 30,000 2,028,750
Marsh & McLennan Cos., Inc.......................... 15,000 1,755,000
Merrill Lynch & Co., Inc............................ 30,000 2,045,625
Washington Mutual, Inc.............................. 52,500 2,785,781
------------
37,319,963
------------
Health Care 4.49%
Amgen, Inc. ........................................ 34,600(a) 2,212,237
Bristol-Myers Squibb Co. ........................... 57,200 4,229,225
Cardinal Health, Inc. .............................. 7,500 747,187
Eli Lilly & Co. .................................... 22,500 2,093,906
Johnson & Johnson................................... 33,000 3,467,062
MedImmune, Inc. .................................... 22,700(a) 1,082,506
Merck & Co., Inc. .................................. 51,000 4,774,875
Pfizer, Inc. ....................................... 126,100 5,800,600
Schering-Plough Corp. .............................. 37,500 2,128,125
St. Jude Medical, Inc. ............................. 30,000 1,843,125
Wellpoint Health Networks, Inc. .................... 15,000(a) 1,728,750
------------
30,107,598
------------
Investment Companies 1.50%
Asia Tigers Fund, Inc. ............................. 30,000 200,625
Emerging Markets Telecommunications Fund, Inc. ..... 21,685 176,191
Gabelli Global Multimedia Trust, Inc. .............. 40,000 412,500
INVESCO Global Health Sciences Fund, Inc. .......... 28,300 493,481
iShares S&P 500 Index Fund.......................... 60,000 7,881,562
Korea Fund, Inc. ................................... 45,000 475,200
Morgan Stanley Dean Witter Emerging Markets Fund,
Inc. .............................................. 50,400 441,000
------------
10,080,559
------------
See notes to financial statements
6
Number of Value
Shares (Note 3)
--------- ------------
Manufacturing 0.66%
Tyco International Ltd. ............................ 79,500 $ 4,412,250
------------
Media 1.60%
Comcast Corp., Class A.............................. 57,800(a) 2,413,150
Grupo Televisa S.A., GDR............................ 30,000(a) 1,348,125
McGraw-Hill Cos., Inc. ............................. 22,500 1,319,062
New York Times Co., Class A......................... 28,200 1,129,762
News Corp. Ltd., .................................. 30,000 967,500
Viacom, Inc., Class B............................... 30,200(a) 1,411,850
Walt Disney Co. .................................... 75,000 2,170,313
------------
10,759,762
------------
Metals 0.22%
Alcoa, Inc. ........................................ 45,000 1,507,500
------------
Oil & Oil Services 2.94%
AES Corp. .......................................... 30,000(a) 1,661,250
Baker Hughes, Inc. ................................. 37,500 1,558,594
Chevron Corp. ...................................... 33,000 2,786,438
Enron Corp. ........................................ 45,100 3,748,938
EOG Resources, Inc. ................................ 30,100 1,646,094
Exxon Mobil Corp. .................................. 55,600 4,833,725
Talisman Energy, Inc. .............................. 30,000(a) 1,111,875
USX-Marathon Group.................................. 52,500 1,456,875
Williams Cos., Inc. ................................ 22,600 902,588
------------
19,706,377
------------
Restaurants 0.12%
Wendy's International, Inc ......................... 30,000 787,500
------------
Retailing 2.41%
Best Buy Co, Inc. .................................. 30,000(a) 886,875
CVS Corp. .......................................... 30,000 1,798,125
Home Depot, Inc. ................................... 59,800 2,732,113
Kroger Co. ......................................... 60,000 1,623,750
Lowe's Cos., Inc. .................................. 22,500 1,001,250
Target Corp. ....................................... 39,000 1,257,750
Wal-Mart Stores, Inc. .............................. 88,300 4,690,938
Walgreen Co. ....................................... 52,500 2,195,156
------------
16,185,957
------------
Technology 5.50%
America Online, Inc. ............................... 60,000(a) 2,088,000
Applied Materials, Inc. ............................ 29,700(a) 1,134,169
Atmel Corp. ........................................ 30,000(a) 348,750
Cisco Systems, Inc. ................................ 112,200(a) 4,291,650
See notes to financial statements
7
Number of Value
Shares (Note 3)
--------- ------------
Technology (Continued)
Citrix Systems, Inc. ............................... 15,000(a) $ 337,500
Compaq Computer Corp. .............................. 60,000 903,000
Corning, Inc. ...................................... 15,000 792,188
Cypress Semiconductor Corp. ........................ 30,000(a) 590,625
Dell Computer Corp. ................................ 44,000(a) 767,250
Electronic Data Systems Corp. ...................... 30,000 1,732,500
EMC Corp. .......................................... 48,500(a) 3,225,250
Intel Corp. ........................................ 118,200 3,553,388
Jabil Circuit, Inc. ................................ 22,600(a) 573,475
JDS Uniphase Corp. ................................. 15,000(a) 625,313
Lucent Technologies, Inc. .......................... 59,800 807,300
Microchip Technology, Inc. ......................... 22,500(a) 493,594
Microsoft Corp. .................................... 85,500(a) 3,708,563
Motorola, Inc. ..................................... 36,200 733,050
Network Appliance, Inc. ............................ 15,000(a) 962,813
Oracle Corp. ....................................... 112,700(a) 3,275,344
QUALCOMM, Inc. ..................................... 30,000(a) 2,465,625
Sun Microsystems, Inc. ............................. 90,000(a) 2,508,750
Teradyne, Inc. ..................................... 15,000(a) 558,750
USinternetworking, Inc. ............................ 29,950(a) 149,750
Yahoo!, Inc. ....................................... 8,800(a) 264,550
------------
36,891,147
------------
Telecommunications 3.15%
ADC Telecommunications, Inc. ....................... 45,000(a) 815,625
AT&T Corp. ......................................... 45,000 779,063
AT&T Wireless Group................................. 29,700(a) 514,181
BellSouth Corp. .................................... 45,000 1,842,188
CenturyTel, Inc. ................................... 45,100 1,612,325
General Motors Corp., Class H....................... 60,000 1,380,000
Nokia Corp., ADR.................................... 50,300 2,188,050
Nortel Networks Corp. .............................. 51,000 1,635,188
SBC Communications, Inc. ........................... 52,500 2,506,875
Tele Norte Leste Participacoes S.A., ADR............ 43,000 980,938
Telephone & Data Systems, Inc. ..................... 22,500 2,025,000
Tellabs, Inc. ...................................... 30,000(a) 1,695,000
Verizon Communications, Inc. ....................... 45,000 2,255,625
WorldCom, Inc. ..................................... 63,950(a) 899,297
------------
21,129,355
------------
Textile & Apparel Manufacturer 0.31%
NIKE, Inc., Class B................................. 37,500 2,092,969
------------
See notes to financial statements
8
Number of Value
Shares (Note 3)
----------- ------------
Utilities -- Electric & Gas 0.79%
Exelon Corp. ........................................... 45,000 $ 3,159,450
FPL Group, Inc. ........................................ 30,000 2,152,500
------------
5,311,950
------------
Total Common Stocks
(Cost $232,940,931).............................................. 226,787,884
------------
Unit Investment Trusts 1.76%
S&P 500 Depository Receipts (Cost $11,604,416).......... 90,000 11,806,875
------------
Principal
Amount
-----------
United States Government Obligations 61.36%
FHLMC, 6.875%, 1/15/05.................................. $70,500,000 73,431,601
FHLMC, 5.125%, 10/15/08................................. 38,100,000 36,104,551
FHLMC, 7.00%, 3/15/10................................... 42,000,000 45,019,842
United States Treasury Notes, 6.125%, 8/15/07........... 28,800,000 30,327,754
United States Treasury Notes, 6.50%, 2/15/10............ 34,000,000 37,222,010
United States Treasury Bonds, 10.75%, 5/15/03........... 15,000,000 16,842,195
United States Treasury Bonds, 7.25%, 8/15/22............ 30,500,000 36,774,978
United States Treasury Bonds, 6.00%, 2/15/26............ 32,100,000 33,832,309
United States Treasury Bonds, 6.50%, 11/15/26........... 24,000,000 26,963,592
United States Treasury Bonds, 6.125%, 8/15/29........... 30,300,000 33,008,093
United States Treasury Bonds, 6.25%, 5/15/30............ 37,800,000 42,211,978
------------
Total United States Government Obligations
(Cost $394,257,220).................................. 411,738,903
------------
Short-Term Investments 2.46%
UBS Financial Corp., 6.50%, 1/02/01 (Cost $16,497,021).. 16,500,000 16,497,021
------------
Total Investments (Cost $655,299,588) -- 99.37%................... 666,830,683
Other assets less liabilities -- 0.63%............................ 4,225,180
------------
Net Assets -- 100.00%............................................. $671,055,863
============
--------
(a) Non-income producing security.
For Federal income tax purposes, the tax basis of investments owned at
December 31, 2000 was $655,862,704 and net unrealized appreciation of
investments consisted of:
Gross unrealized appreciation.................................. $ 45,340,550
Gross unrealized depreciation.................................. (34,372,571)
------------
Net unrealized appreciation.................................... $ 10,967,979
============
See notes to financial statements
9
THE ZWEIG TOTAL RETURN FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2000
ASSETS
Investments, at value (identified cost $655,299,588)............. $666,830,683
Cash............................................................. 616,953
Dividends and interest receivable................................ 8,246,954
Prepaid expenses................................................. 16,573
------------
Total Assets................................................... 675,711,163
------------
LIABILITIES
Payable for investment securities purchased...................... 3,981,816
Accrued advisory fees (Note 5)................................... 396,203
Accrued administration fees (Note 5)............................. 73,580
Other accrued expenses........................................... 203,701
------------
Total Liabilities.............................................. 4,655,300
------------
NET ASSETS......................................................... $671,055,863
============
NET ASSET VALUE, PER SHARE
($671,055,863 / 89,732,966 shares outstanding--Note 6)........... $ 7.48
============
Net Assets consist of
Capital paid-in.................................................. $654,903,944
Undistributed net investment income.............................. 5,383,977
Accumulated net realized loss on investments..................... (763,153)
Net unrealized appreciation on investments....................... 11,531,095
------------
$671,055,863
============
See notes to financial statements
10
THE ZWEIG TOTAL RETURN FUND, INC.
STATEMENT OF OPERATIONS
For the Year Ended December 31, 2000
Investment Income
Income
Interest...................................................... $ 31,946,384
Dividends (net of foreign withholding taxes of $5,168)........ 1,719,587
------------
Total Income................................................ 33,665,971
------------
Expenses
Investment advisory fees (Note 5)............................. 4,817,041
Administrative fees (Note 5).................................. 894,593
Professional fees (Note 5).................................... 307,808
Transfer agent fees........................................... 257,854
Printing and postage expenses................................. 212,549
Custodian fees................................................ 86,671
Directors' fees and expenses (Note 5)......................... 76,136
Miscellaneous................................................. 216,669
------------
Total Expenses.............................................. 6,869,321
------------
Net Investment Income..................................... 26,796,650
------------
Net Realized and Unrealized Gains (Losses)
Net realized gain on investments................................ 21,769,821
Decrease in unrealized appreciation on investments.............. (19,184,705)
------------
Net realized and unrealized gain on investments............... 2,585,116
------------
Net increase in net assets resulting from operations.......... $ 29,381,766
============
See notes to financial statements
11
THE ZWEIG TOTAL RETURN FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended
December 31
--------------------------
2000 1999
------------ ------------
Increase (Decrease) in Net Assets
Operations
Net investment income........................... $ 26,796,650 $ 25,806,697
Net realized gains on investments............... 21,769,821 11,528,385
Decrease in unrealized appreciation of
investments.................................... (19,184,705) (13,198,825)
------------ ------------
Net increase in net assets resulting from
operations................................... 29,381,766 24,136,257
------------ ------------
Dividends and distributions to shareholders from
Net investment income........................... (27,554,649) (25,806,697)
Net realized gains on investments............... (22,507,300) (11,528,385)
Capital paid-in................................. (16,801,157) (36,881,045)
------------ ------------
Total dividends and distributions to
shareholders................................. (66,863,106) (74,216,127)
------------ ------------
Capital share transactions
Net asset value of shares issued to shareholders
in reinvestment of dividends from net
investment income and distributions from net
realized gains and capital paid-in............. -- 10,534,625
Shares repurchased and retired, 867,200 and
460,000 shares, respectively................... (6,100,002) (3,029,597)
------------ ------------
Net increase (decrease) in net assets derived
from capital share transactions................ (6,100,002) 7,505,028
------------ ------------
Net decrease in net assets...................... (43,581,342) (42,574,842)
Net Assets
Beginning of year................................. 714,637,205 757,212,047
------------ ------------
End of year (including undistributed net
investment income of $5,383,977 and $2,181,018,
respectively).................................... $671,055,863 $714,637,205
============ ============
See notes to financial statements
12
THE ZWEIG TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2000
NOTE 1 -- Acquisition
On March 1, 1999, Phoenix Investment Partners, Ltd. ("Phoenix"), completed
the acquisition of Zweig Total Return Advisors, Inc., the Fund's previous
investment adviser (currently Phoenix/Zweig Advisers LLC (the "Adviser")),
Zweig/Glaser Advisers, the Fund's previous Administrator and Zweig Securities
Corp. (currently PXP Securities Corp.), an affiliated broker-dealer registered
under the Securities Exchange Act of 1934.
In order to continue to have access to the advisory and consulting services
of Dr. Martin E. Zweig and his associates, the Adviser entered into a sub-
advisory servicing agreement with Zweig Consulting, LLC.
As of October 31, 1999, Zweig/Glaser Advisers assigned the rights and
obligations under the Administration Agreement dated March 1, 1999, between
the Fund and Zweig/Glaser Advisers to Phoenix Equity Planning Corp. ("PEPCO")
under the same terms as the previous Administration Agreement. Effective
October 31, 1999, PEPCO sub-contracted the Fund's mutual fund accounting to
The Bank of New York who also serves as the Fund's custodian. PEPCO is an
affiliate of the Adviser and the Fund.
NOTE 2 -- Organization
The Zweig Total Return Fund, Inc. (the "Fund") is a closed-end, diversified
management investment company registered under the Investment Company Act of
1940 (the "Act"). The Fund was incorporated under the laws of the State of
Maryland on July 21, 1988.
NOTE 3 -- Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A. Portfolio Valuation
Portfolio securities that are traded only on stock exchanges are valued at
the last sale price. Securities traded in the over-the-counter market which
are National Market System securities are valued at the last sale price. Other
over-the-counter securities are valued at the most recently quoted bid price
provided by the principal market makers. Portfolio securities which are traded
both in the over-the-counter market and on a stock exchange are valued
according to the broadest and most representative market, as determined by the
Adviser. Debt securities may be valued on the basis of prices provided by an
independent pricing service, when such prices are believed by the Adviser to
reflect the fair market value of such securities. Short-term investments
having a remaining maturity of 60 days or less when purchased are valued at
amortized cost (which approximates market value). Futures contracts traded on
commodities exchanges are valued at their closing settlement price on such
exchange. Securities for which market quotations are not readily available,
(of which there were none at December 31, 2000) and other assets, if any, are
valued at fair value as determined under procedures approved by the Board of
Directors of the Fund.
13
B. Security Transactions and Investment Income
Security transactions are recorded on trade date. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the accrual
basis.
In November 2000, a revised AICPA Audit and Accounting Guide, Audits of
Investment Companies, was issued, and is effective for fiscal years beginning
after December 15, 2000. The revised guide will require the Fund to amortize
premium and discount on all fixed income securities, and classify gains and
losses on asset-backed securities presently included in realized gains and
losses, as part of interest income. Upon initial adoption, the Fund will be
required to adjust the cost of its fixed-income securities by the cumulative
amount of amortization that would have been recognized had amortization been
in effect from the purchase date of each holding. Adopting these accounting
principles will not affect the Fund's net asset value, but will change the
classification of certain amounts between interest income and unrealized
gain/loss in the Statement of Operations. The Fund estimates that the initial
adjustment required upon adoption of premium amortization will decrease the
recorded cost of its investments (but not their market value) by approximately
$1,890,167. Additionally, had this principle been in effect during the year
ended December 31, 2000, the Fund estimates that net investment income would
have decreased by approximately $0.02 per share (0.28% of net assets), and
realized and unrealized gain per share would have increased by the same
amount.
Realized gains and losses on sales of investments are determined on the
identified cost basis for financial reporting and tax purposes.
C. Futures Contracts
Initial margin deposits made upon entering into futures contracts are
recorded as assets. During the period the futures contract is open, changes in
the value of the contract are recognized as unrealized gains or losses by
marking the contract to market on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets or liabilities, depending upon
whether unrealized gains or losses are incurred. When a contract is closed,
the Fund realizes a gain or loss equal to the difference between the proceeds
from (or cost of ) the closing transaction and the Fund's basis in the
contract. There are several risks in connection with the use of futures
contracts as a hedging device. The change in value of futures contracts
primarily corresponds with the value of their underlying instruments, which
may not correlate with the change in value of the hedged investments.
Therefore, anticipated gains may not result and anticipated losses may not be
offset. In addition, as no secondary market exists for futures contracts,
there is no assurance that there will be an active market at any particular
time.
D. Short Sales
A short sale is a transaction in which the Fund sells a security it does not
own in anticipation of a decline in market price. To sell a security short,
the Fund must borrow the security. The Fund's obligation to replace the
security borrowed and sold short will be fully collateralized at all times by
the proceeds from the short sale retained by the broker and by cash and
securities deposited in a segregated account with the Fund's custodian. If the
price of the security sold short increases between the time of the short sale
and the time the Fund replaces the borrowed security, the Fund will incur a
loss, and if the price declines during the period, the Fund will realize a
gain. Any realized gain will be decreased, and any incurred loss increased, by
the amount of transaction costs. Dividends or interest the Fund pays in
connection with such short sales are recorded as expenses. In addition to the
short sales described
14
above, the Fund may make short sales "against the box". A short sale "against
the box" is a short sale whereby at the time of the short sale, the Fund owns
or has the immediate and unconditional right, at no added cost, to obtain the
identical security.
E. Federal Income Tax
The Fund has elected to qualify and intends to remain qualified, as long as
management's view is that it is in the best interests of the shareholders, as
a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended. The principal tax benefits of qualifying as a
regulated investment company as compared to an ordinary taxable corporation,
are that a regulated investment company, is not itself subject to Federal
income tax on ordinary investment income and net capital gains that are
currently distributed (or deemed distributed) to its shareholders and that the
tax character of long-term capital gains recognized by a regulated investment
company flows through to its shareholders who receive distributions of such
gains.
F. Dividends and Distributions to Shareholders
Dividends and distributions to shareholders are recorded on the ex-dividend
date. In the event that amounts distributed are in excess of accumulated net
investment income and net realized gains on investments (as determined for
financial statement purposes), such amounts would be reported as a
distribution from paid-in capital during the fiscal year in which such a
distribution is made. Income dividends and capital gain distributions are
determined in accordance with income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to timing differences and differing
characterization of distributions made by the Fund as a whole. During the year
ended December 31, 2000, the Fund reclassified $3,960,958 and ($4,160,994) to
undistributed net investment income and undistributed net realized gain on
investments, respectively, from capital paid-in.
NOTE 4 -- Portfolio Transactions
During the year ended December 31, 2000, purchases and sales transactions,
excluding short-term investments were:
United States
Government
Common and Agency
Stocks Obligations
------------ -------------
Purchases ........................................ $305,271,000 $645,807,532
============ ============
Sales ............................................ $220,646,093 $415,338,922
============ ============
NOTE 5 -- Investment Advisory Fees and Other Transactions with Affiliates
a) Investment Advisory Fee: The Investment Advisory Agreement (the
"Agreement") between the Adviser and the Fund provides that, subject to the
direction of the Board of Directors of the Fund and the applicable provisions
of the Act, the Adviser is responsible for the actual management of the Fund's
portfolio. The responsibility for making decisions to buy, sell or hold a
particular investment rests with the Adviser, subject to review by the Board
of Directors and the applicable provisions of the Act. For the services
provided by the Adviser under the Agreement, the Fund pays the Adviser a
monthly fee equal, on an annual basis, to 0.70% of the Fund's average daily
net assets. During the year ended December 31, 2000, the Fund accrued advisory
fees of $4,817,041.
15
b) Administration Fee: Phoenix Equity Planning Corp. serves as the Fund's
Administrator pursuant to an Administration Agreement with the Fund. The
Administrator generally assists in all aspects of the Fund's operations, other
than providing investment advice, subject to the overall authority of the
Fund's Board of Directors. The Administrator determines the Fund's net asset
value daily, prepares such figures for publication on a weekly basis,
maintains certain of the Fund's books and records that are not maintained by
the Investment Adviser, custodian or transfer agent, assists in the
preparation of financial information for the Fund's income tax returns, proxy
statements, quarterly and annual shareholder reports, and responds to
shareholder inquiries. Under the terms of the Agreement, the Fund pays the
Administrator a monthly fee equal, on an annual basis, to 0.13% of the Fund's
average daily net assets. During the year ended December 31, 2000, the Fund
accrued administration fees of $894,593.
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.
d) Legal Fee: The Fund accrued legal fees of $236,034 during the year ended
December 31, 2000, for the services of Rosenman & Colin LLP, of which Robert
E. Smith, a former Director of the Fund, is counsel.
e) Brokerage Commission: During the year ended December 31, 2000, the Fund
paid PXP Securities Corp. brokerage commissions of $61,665 in connection with
portfolio transactions effected through them. In addition, PXP Securities
Corp. charged $98,218 in commissions for transactions effected on behalf of
the participants in the Fund's Automatic Reinvestment and Cash Purchase Plan.
NOTE 6 -- Capital Stock and Reinvestment Plan
At December 31, 2000, the Fund had one class of common stock, par value
$.001 per share, of which 500,000,000 shares are authorized and 89,732,966
shares are outstanding.
Registered shareholders may elect to receive all distributions in cash paid
by check mailed directly to the shareholder by EquiServe as dividend paying
agent. Pursuant to the Automatic Reinvestment and Cash Purchase Plan (the
"Plan"), shareholders not making such election will have all such amounts
automatically reinvested by EquiServe, as the Plan agent in whole or
fractional shares of the Fund, as the case may be. For the years ended
December 31, 2000 and December 31, 1999 there were 0 and 829,627 shares,
respectively, issued pursuant to the Plan.
On December 7, 1999, the Fund's Board of Directors authorized the repurchase
and retirement of up to $20,000,000 of its shares for the purpose of enhancing
shareholder value. For the years ended December 31, 2000 and December 31,
1999, 867,200 and 460,000 shares were repurchased and retired at a cost of
$6,100,002 and $3,029,597, respectively. This includes $39,024 and $18,630 in
commissions paid to PXP Securities Corp., respectively. The weighted average
discount of market price to net asset value of shares repurchased over the
periods of August 11, 2000 to September 22, 2000 and December 10, 1999 to
December 31, 1999 was 8.6% and 16.4%, respectively.
16
On December 11, 2000, the board of directors declared a distribution of the
greater of 0.83% of its net value on December 29, 2000 or all available net
investment income plus net short and long term gains.
On January 2, 2001, the Fund announced a distribution of $0.06 per share to
shareholders of record on December 29, 2000. This distribution has an ex-
dividend date of January 4, 2001 and is payable on January 10, 2001.
NOTE 7 -- Financial Highlights
Selected data for a share outstanding throughout each year:
Year Ended December 31
-------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Per Share Data
Net asset value, beginning
of year................... $ 7.89 $ 8.43 $ 8.61 $ 8.29 $ 8.63
-------- -------- -------- -------- --------
Income From Investment
Operations
Net investment income...... 0.30 0.28 0.33 0.36 0.36
Net realized and unrealized
gains (losses)............ 0.02 (0.01) 0.39 0.80 0.14
-------- -------- -------- -------- --------
Total from investment
operations................ 0.32 0.27 0.72 1.16 0.50
-------- -------- -------- -------- --------
Dividends and Distributions
Anti-dilutive effect of
share repurchase program.. 0.01 0.01 -- -- --
-------- -------- -------- -------- --------
Dividends from net
investment income......... (0.30) (0.28) (0.33) (0.36) (0.36)
Distributions from net
realized gains............ (0.25) (0.13) (0.46) (0.48) (0.24)
Distributions from capital
paid-in................... (0.19) (0.41) (0.05) -- (0.24)
-------- -------- -------- -------- --------
Total dividends and
distributions............. (0.74) (0.82) (0.84) (0.84) (0.84)
-------- -------- -------- -------- --------
Effect on net asset value
as a result of rights
offering*................. -- -- (0.06) -- --
-------- -------- -------- -------- --------
Net asset value, end of
year..................... $ 7.48 $ 7.89 $ 8.43 $ 8.61 $ 8.29
======== ======== ======== ======== ========
Market value, end of
year**................... $ 6.57 $ 6.50 $ 8.88 $ 9.44 $ 8.00
======== ======== ======== ======== ========
Total investment return***. 12.64% (18.72)% 4.49% 30.22% 2.62%
======== ======== ======== ======== ========
Ratios/Supplemental Data
Net assets, end of year (in
thousands)................ $671,056 $714,637 $757,212 $677,133 $638,768
Ratio of expenses to
average net assets........ 1.00% 0.97% 0.97% 1.04% 1.03%
Ratio of net investment
income to average net
assets.................... 3.87% 3.50% 3.88% 4.30% 4.31%
Portfolio turnover rate.... 121.6% 172.3% 87.9% 104.7% 147.2%
--------
* Shares were sold at a 5% discount from the average market price.
** Closing Price -- New York Stock Exchange.
*** Total investment return is calculated using market value assuming a
purchase of common stock on the opening of the first business day and a
sale on the closing of the last business day of each period reported.
Dividends and distributions, if any, are assumed for the purposes of this
calculation, to be reinvested at prices obtained under the Fund's
Distribution Reinvestment and Cash Purchase Plan. Generally, total
investment return based on net asset value will be higher than total
investment return based on market value in periods where there is an
increase in the discount or a decrease in the premium of the market value
to the net assets from the beginning to the end of such years. Conversely,
total investment return based on net asset value will be lower than total
investment return based on market value in periods where there is a
decrease in the discount or an increase in the premium of the market value
to the net asset value from the beginning to end of such periods.
17
Report of Independent Accountants
To the Board of Directors and Shareholders of
The Zweig Total Return Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of The Zweig Total
Return Fund, Inc. (the "Fund") at December 31, 2000, the result of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each
of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States 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 auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 15, 2001
TAX INFORMATION NOTICE
(UNAUDITED)
For the fiscal year ended December 31, 2000, the Fund distributed long-
term capital gain dividends in the amount of $20,483,611.
For federal income tax purposes, the percentage of the ordinary income
dividends paid by the Fund for the dividend received deduction for corporate
shareholders is 5.03%.
18
THE ZWEIG TOTAL RETURN FUND, INC.
YEAR END RESULTS
Total Return
on Net Asset Net Asset NYSE Premium
Value Value Share Price (Discount)
------------ --------- ----------- ----------
Year ended 12/31/2000............. 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 9/30/88-12/31/88........ 1.1% 9.24 9.1250 (1.2%)
-------------------------------------------------------------------------------
1-800-272-2700 Zweig Shareholder Relations:
For general information and literature
1-800-272-2700 The Zweig Total Return Fund Hot Line:
For updates on net asset value, share price, major industry
groups and other key information
REINVESTMENT PLAN
Many of you have questions
about our reinvestment plan. We
urge shareholders who want to
take advantage of this plan and
whose shares are held in "Street
Name," to consult your broker as
soon as possible to determine if
you must change registration
into your own name to
participate.
----------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may from time to time purchase its shares of
common stock in the open market when Fund shares are trading at a discount
from their net asset value.
19
OFFICERS AND DIRECTORS
Martin E. Zweig, Ph.D.
Chairman of the Board and President
Jeffrey Lazar
Executive Vice President and Treasurer
Nancy J. Engberg
Secretary
Christopher M. Capano
Vice President
Charles H. Brunie
Director
Elliot S. Jaffe
Director
Alden C. Olson, Ph.D.
Director
James B. Rogers, Jr.
Director
Investment Adviser
Phoenix/Zweig Advisers LLC
900 Third Avenue
New York, NY 10022
Fund Administrator
Phoenix Equity Planning Corp.
56 Prospect St.
P.O. Box 150480
Hartford, CT 06115-0480
Custodian
The Bank of New York
One Wall Street
New York, NY 10286
Transfer Agent
State Street Bank & Trust Co.
c/o EquiServe
PO Box 8040
Boston, MA 02266
Legal Counsel
Rosenman & Colin LLP
575 Madison Avenue
New York, NY 10022
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
--------------------------------------------------------------------------------
This report is transmitted to the shareholders of The Zweig Total Return
Fund, Inc. for their information. This is not a prospectus, circular or repre-
sentation intended for use in the purchase of shares of the Fund or any securi-
ties mentioned in this report.
PXP 1336 3206-ANN (12/00)
Annual Report
Zweig
The Zweig Total Return Fund, Inc.
December 31, 2000
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