-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RL4sfpo/FzB8dwwc5u6KM2N6aaGGYwr08hQLA1L6MFUzTH5r+YLAbMBaFt7JKB6f OjpopKMBA7g7vwtfaMOi+w== 0000950168-98-002613.txt : 19980813 0000950168-98-002613.hdr.sgml : 19980813 ACCESSION NUMBER: 0000950168-98-002613 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZWEIG TOTAL RETURN FUND INC CENTRAL INDEX KEY: 0000836412 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133474242 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-05620 FILM NUMBER: 98684007 BUSINESS ADDRESS: STREET 1: 900 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2125100360 MAIL ADDRESS: STREET 1: 5 HANOVER SQUARE CITY: NEW YORK STATE: NY ZIP: 10004 N-30D 1 ZWEIG TOTAL RETURN FUND N-30D August 1, 1998 Dear Shareholder: The Zweig Total Return Fund's net asset value during the three months ended June 30, 1998, increased 0.5%, including $0.21 per share in reinvested distributions. This performance assumes participation in the recent rights offering. For the six months ended June 30, 1998, the Fund's net asset value increased 5.1%, including $0.42 in reinvested distributions. Consistent with our policy of trying to minimize risk while earning reasonable returns, our average overall exposure during the first half of 1998 was approximately 85%. To put our performance in perspective, I would like to point out that the value-oriented stocks that we generally favor have lagged growth stocks by a wide margin. We do own some Dell, Microsoft and Intel but our portfolio is overwhelmingly biased toward low price/earning ratios, high dividends, low price-to-book levels, and market or better rates of growth. These stocks simply haven't worked out as well recently. However I have found that stocks with strong fundamentals and attractive valuations tend to outperform the market over long periods of time with less risk. And that's us. We will always seek to achieve reasonable results with minimum risk. DISTRIBUTION DECLARED In accordance with our policy of distributing 10% of our net asset value per year, which equals 0.83% per month (10% divided by 12 months), the Fund recently announced a distribution of $0.07 per share payable on August 26, 1998, to shareholders of record on August 13, 1998. The amount of the distribution depends on the exact net asset value at the time of declaration. For the August distribution, 0.83% of the Fund's net asset value was equivalent to $0.07 per share. Including this distribution, the Fund's payout since its inception is now $8.87 per share. MARKET OUTLOOK Our bond exposure currently is at 54% as compared with 44% at the end of the first quarter. If we were fully invested, our Fund would be at 62.5% in bonds and 37.5% in stocks. Consequently, at 54% in bonds, we are at about 86% of a full position (54%/62.5%), reflecting our bullish position. Bond prices, which ended the first quarter of the year relatively unchanged, surged in the second quarter. Consequently, yields fell sharply, ending the period at 5.6% (bond prices move in the opposite direction from yields). Bonds benefited from the global flight to quality -- money moving from stocks to bonds -- prompted by a rekindling of Asia's financial crisis, instability in Indonesia, and concerns about a possible currency devaluation in Russia. In addition, the yen slide worsened Japan's economic crisis and spurred more foreign buying of U.S. bonds, primarily Treasuries. The strength of the dollar and the slight weakening of the robust U.S. economy were also positive developments for bonds. A strong dollar encourages foreign investors seeking returns from a favorable exchange rate to buy U.S. bonds. A slowing economy is generally good for bonds because it decreases the likelihood that the Federal Reserve will raise interest rates (rising rates cause bond prices to fall). In response to the positive environment for bonds, we kept our duration sensitivity to changes in interest rates -- high at 6.0 years compared with 5.5 years at the end of the first quarter. We remain bullish on bonds, particularly because of falling commodity prices, a sustained demand for bonds, and continued volatility overseas. The current economic climate is also favorable for stocks. Our stock exposure currently is at 34%. At this figure, we are at about 91% of a full position (34%/37.5%). This is in line with my bullish position on stocks. Counting from October 1990, this is the third longest bull market on record, only months away from the previous record period that ended in 1929. Some market observers have expressed concern over this comparison. I don't think there is any significance about the length of either bull or bear markets. What does matter are economic conditions. If they can stay positive for an extended period of time, the markets can do the same or vice versa. In 1929 the ecomomy deteriorated drastically and that's what caused the crash. Many people get trapped into measuring the length of various markets and start worrying. I don't see any reason for concern on that basis. If there is one fly in the ointment, it is the fact that the tape action has been ragged with a lot of divergences. The blue chips have led the market and the growth stocks have done well but the cyclicals and the smaller stocks have fallen behind. This is exemplified in the performance difference in the year to date between the Russell 2000 Index of smaller stocks and the S&P 500. The Russell 2000 returned 4.9% vs. the S&P return of 17.7%. Interestingly, the same divergence held true within the S&P 500. The top 50 stocks returned 32.2% while the bottom 100 returned 0.3% through June 30. It has been a strange market. The number of new highs is much lower than it was several months ago while the breadth of the market -- the relationship between advances and declines -- has been mediocre at best. The advance/decline index topped out a few months ago. So we have seen the Dow, the S&P 500 and the NASDAQ Composite setting new peaks while many of the other averages languished. That's what we mean by negative divergences. While there is much understandable concern about the Asian effect on the U.S. economy, I think the impact so far is more positive than negative because it is taking the edge off inflation. Both the Consumer and Producer Price Indexes rose by only 0.1% in June. And Asia hasn't affected our basic economy yet. Overall earnings have slowed down but are still O.K. The offset is lower interest rates and lower inflation, which are good for stocks. While I am not a betting person, I would say the odds are perhaps three-to-one that we can work out of this all right. As for today's market, a source of strength is the huge inflow of cash into mutual funds. Stock funds took in $24 billion in June against $18.7 billion in May. The first-half inflow was $130.5 billion, topping last year's record pace of $105.5 billion. There have also been very large inflows into bond funds in recent months. With this immense cash flow pouring in day after day, mutual funds who want to be close to fully invested find it hard to hold cash. As a result, the cash position at mutual funds is down to about 3.9%, possibly the lowest since such records were kept over the last 44 years. We have the cash- to-assets ratio in our models and this is a negative indicator. However, it is partially offset by the continuing input of cash into the funds. We also keep a watchful eye on valuation. The price/earnings ratio of the S&P was recently reported at 27.3. That figure is based on earnings after write-offs. Operating earnings are something like 23, which is still very high. You are not going to get any argument from me that the market is not cheap. However, I think you could possibly justify the valuations if you consider that with lower inflation, P/E ratios tend to expand. Among my other indicators, I would rate sentiment as neutral or slightly below neutral. Some of the longer-term numbers are poor. The previously mentioned record low cash-to-assets ratios at mutual funds indicate a high level of investor confidence and possibly declining liquidity. Also, net new issues of stock have been too high and there have been fewer cash takeovers and fewer stock buybacks. However, the shorter-term sentiment numbers such as the put/call ratio are more positive. With low and falling inflation and lower interest rates, my monetary model is very bullish right now. Commodity prices everywhere have been coming down and moderate deflation has been good for stocks. The worry is that we get extreme deflation -- but I don't see that as a realistic prospect at present. Counting stocks and bonds, we are currently at about 88% invested. As long as our indicators remain positive and we see low levels of risk, we'll keep our exposure high enough to participate in the market's advance. As a defensive money manager, I will always be ready to reduce our exposure should my indicators reflect higher risk. 2 PORTFOLIO COMPOSITION Reflecting our investment policy guidelines, all of our bonds are U.S. Government obligations. As indicated earlier, the average duration of the bond portion of our portfolio is six years. Since these bonds are liquid, they give us the flexibility to adjust quickly to changing market conditions. To implement my basic allocation strategy, most of our equities continue to be bought and sold on the basis of a proprietary computer-driven model that is weighted toward a value approach with secondary emphasis on growth. There was little change in the composition of our leading industry groups during the second quarter. On June 30 these groups included financial services, utilities, oil and oil services, manufacturing, transportation, and telecommunications. All of the above listed groups occupied prominent positions at the end of the first quarter as well. Some of our largest individual holdings include Ford, Dell, NationsBank, Bear Stearns, Telefonica de Espana, Allstate, PaineWebber, Sun, A.G. Edwards, and Edison International. Of the above, Telefonica de Espana and Dell were in our portfolio previously and showed significant appreciation. The only new positions are NationsBank, which will merge with Bank America, and Allstate. We still own but have trimmed our holdings in General Motors, GPU, and Energy East. After a large run-up, Providian subsequently slipped in our rankings and we sold out that position. Sincerely, /s/ Martin E. Zweig, Ph.D. -------------------------- Martin E. Zweig, Ph.D. Chairman 3 THE ZWEIG TOTAL RETURN FUND, INC. SCHEDULE OF INVESTMENTS June 30, 1998 (Unaudited)
Number of Value Shares (Note 1) ----------- ------------- COMMON STOCKS 33.95% AEROSPACE & DEFENSE 0.41% B.F. Goodrich & Co. ........................... 39,000 $1,935,375 Lockheed Martin Corp. ......................... 11,200 1,185,800 ---------- 3,121,175 ---------- APPAREL MANUFACTURER 0.16% VF Corp. ...................................... 24,200 1,246,300 ---------- AUTOMOTIVE 1.71% Chrysler Corp. ................................ 58,100 3,275,388 Ford Motor Co. ................................ 105,800 6,242,200 General Motors Corp. .......................... 52,000 3,474,250 ---------- 12,991,838 ---------- CHEMICALS 0.60% Dow Chemical Corp. ............................ 26,500 2,562,218 Millennium Chemicals, Inc. .................... 35,100 1,189,013 Wellman, Inc. ................................. 35,600 807,675 ---------- 4,558,906 ---------- CONSTRUCTION & FARM EQUIPMENT 0.10% Deere & Co. ................................... 13,900 734,962 ---------- CONSUMER DURABLES 0.72% Cooper Tire & Rubber Co. ...................... 97,400 2,008,875 Whirlpool Corp. ............................... 50,600 3,478,750 ---------- 5,487,625 ---------- CONSUMER PRODUCTS 0.17% Fortune Brands, Inc. .......................... 34,000 1,306,875 ---------- CONTAINERS & PACKAGING 0.06% Sea Containers Ltd., Class A .................. 12,100 462,825 ---------- ELECTRONICS 0.65% Avnet, Inc. ................................... 32,200 1,760,938 General Motors Corp., Class H ................. 67,400 3,176,225 ---------- 4,937,163 ---------- ENGINEERING & CONSTRUCTION 0.33% Fluor Corp. ................................... 49,500 2,524,500 ---------- FINANCIAL SERVICES 6.25% A.G. Edwards, & Sons, Inc. .................... 82,600 3,525,988 Allstate Corp. ................................ 44,500 4,074,531 Bear, Stearns & Co., Inc. ..................... 82,282 4,679,788 Charter One Financial, Inc. ................... 47,090 1,586,344 Conseco Inc. .................................. 51,900 2,426,325 Countrywide Credit Industries, Inc. ........... 24,100 1,223,075 GATX Corp. .................................... 26,600 1,167,075 H.F. Ahmanson, & Co. .......................... 30,800 2,186,800 Hartford Financial Services Group, Inc. ....... 8,900 1,017,937 Horace Mann Education Corp. ................... 18,700 645,150
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Number of Value Shares (Note 1) ---------- ------------- FINANCIAL SERVICES -- (Continued) Loews Corp. .......................................... 22,700 $1,977,738 Morgan Stanley, Dean Witter, Discover & Co. .......... 23,500 2,147,312 NationsBank Corp. .................................... 61,900 4,735,350 Old Republic International Corp. ..................... 57,750 1,692,797 Orion Capital Corp. .................................. 25,400 1,419,225 PaineWebber Group, Inc. .............................. 95,000 4,073,125 PIMCO Advisors L.P. .................................. 13,800 470,925 Quinenco S.A., ADR ................................... 24,700 222,300 Reliance Group Holdings, Inc. ........................ 40,700 712,250 Reliastar Financial Corp. ............................ 20,900 1,003,200 Ryder Systems, Inc. .................................. 77,000 2,430,312 Selective Insurance Group, Inc. ...................... 19,600 439,162 St. Paul Companies, Inc. ............................. 52,600 2,212,488 Travelers, Inc. ...................................... 25,300 1,533,813 ---------- 47,603,010 ---------- FOOD & BEVERAGE 0.23% Adolph Coors Co., Class B ............................ 50,600 1,720,400 ---------- HOME BUILDERS & MATERIALS 0.35% Fleetwood Enterprises, Inc. .......................... 22,700 908,000 Kaufman & Broad Home Corp. ........................... 29,500 936,625 Lafarge Corp. ........................................ 20,800 817,700 ---------- 2,662,325 ---------- INDUSTRIAL SERVICES 0.14% Ogden Corp. .......................................... 38,400 1,063,200 ---------- INVESTMENT COMPANIES 1.38% Argentina Fund, Inc. ................................. 28,600 311,025 Blackrock 2001 Term Trust, Inc. ...................... 29,000 255,562 Blackrock Strategic Term Trust, Inc. ................. 29,000 253,750 Brazil Fund, Inc. .................................... 25,800 467,625 Central European Equity Fund ......................... 18,600 299,925 Chile Fund, Inc. ..................................... 24,600 333,637 Emerging Markets Infrastructure Fund, Inc. ........... 94,200 918,450 Emerging Markets Telecommunications Fund, Inc. ....... 30,800 385,000 Emerging Mexico Fund, Inc. ........................... 29,000 230,188 France Growth Fund, Inc. ............................. 12,800 192,800 G. T. Global Eastern Europe Fund ..................... 17,200 137,600 Gabelli Equity Trust, Inc. ........................... 44,100 518,175 Gabelli Global Multimedia Trust Fund, Inc. ........... 51,700 523,463 India Fund, Inc. ..................................... 19,200 122,400 Italy Fund, Inc. ..................................... 16,100 217,350 Mexico Equity Income Fund, Inc. ...................... 17,100 138,937 Mexico Fund, Inc. .................................... 74,400 1,088,100 Morgan Stanley Emerging Markets Fund, Inc. ........... 51,400 481,875 Morgan Stanley India Investment Fund, Inc. ........... 28,300 182,181 Portgugal Fund, Inc. ................................. 23,900 480,988 Royce Value Trust, Inc. .............................. 70,160 1,157,640 Scudder New Europe Fund, Inc. ........................ 43,600 915,600 Swiss Helvetia Fund, Inc. ............................ 28,400 908,800 ---------- 10,521,071 ---------- LEISURE 0.16% Brunswick Corp. ...................................... 48,900 1,210,275 ----------
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Number of Value Shares (Note 1) ---------- ------------- MANUFACTURING 2.27% Aeroquip-Vickers, Inc. ................... 27,100 $1,581,962 Borg-Warner Automotive, Inc. ............. 25,600 1,230,400 Cincinnati Milacron, Inc. ................ 24,600 598,088 Cummins Engine Company, Inc. ............. 51,900 2,659,875 Dexter Corp. ............................. 14,900 474,006 Herman Miller, Inc. ...................... 38,400 933,600 Johnson Controls, Inc. ................... 26,000 1,486,875 Kennametal, Inc. ......................... 31,600 1,319,300 PACCAR, Inc. ............................. 16,400 856,900 Parker-Hannifin Corp. .................... 39,600 1,509,750 Quanex Corp. ............................. 13,800 418,313 Timken Co. ............................... 76,300 2,350,994 Trinity Industries, Inc. ................. 44,600 1,850,900 ---------- 17,270,963 ---------- METALS & MINING 1.76% AK Steel Holding Corp. ................... 85,200 1,522,950 Alcan Aluminum Ltd. ...................... 71,200 1,966,900 ASARCO, Inc. ............................. 56,800 1,263,800 British Steel Plc, ADR ................... 80,700 1,835,925 Cleveland-Cliffs, Inc. ................... 6,400 343,200 Cyprus Amax Minerals Co. ................. 42,800 567,100 Reynolds Metals Co. ...................... 42,600 2,382,937 USX-U.S. Steel Group ..................... 107,400 3,544,200 ---------- 13,427,012 ---------- OIL & OIL SERVICES 3.26% Ashland, Inc. ............................ 67,600 3,489,850 Elf Aquitaine S.A., ADR .................. 42,500 3,017,500 Equitable Resources, Inc. ................ 27,700 844,850 Helmerich & Payne, Inc. .................. 22,800 507,300 Murphy Oil Corp. ......................... 22,500 1,140,469 Occidental Petroleum Corp. ............... 55,900 1,509,300 Pennzoil Co. ............................. 51,200 2,592,000 Sun Company, Inc. ........................ 104,300 4,048,144 Tidewater, Inc. .......................... 42,900 1,415,700 Transocean Offshore, Inc. ................ 9,000 400,500 USX-Marathon Group ....................... 75,500 2,590,594 YPF Sociedad Anonima, ADR ................ 108,100 3,249,756 ---------- 24,805,963 ---------- PAPER & FOREST PRODUCTS 0.98% Bowater, Inc. ............................ 66,600 3,146,850 Fort James Corp. ......................... 35,500 1,579,750 Georgia-Pacific Corp. .................... 25,600 1,508,800 Mead Corp. ............................... 38,500 1,222,375 ---------- 7,457,775 ---------- REAL ESTATE INVESTMENT TRUSTS 0.47% Camden Property Trust .................... 18,500 550,375 Crescent Real Estate Equities Inc. ....... 42,700 1,435,787 Excel Realty Trust, Inc. ................. 12,700 365,919 FelCor Suite Hotels Inc. ................. 25,600 803,200 Reckson Associates Realty Co. ............ 18,900 446,512 Reckson Services Industries, Inc. ........ 7,560 25,043 ---------- 3,626,836 ----------
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Number of Value Shares (Note 1) --------------- ------------- RESTAURANTS 0.18% Bob Evans Farms, Inc. ........................... 19,900 $ 421,631 Wendy's International, Inc. ..................... 41,900 984,650 ---------- 1,406,281 ---------- RETAIL TRADE & SERVICES 0.92% Dayton Hudson Corp. ............................. 46,600 2,260,100 Fingerhut Co., Inc. ............................. 24,600 811,800 Proffitts, Inc. ................................. 21,800 880,175 Ross Stores, Inc. ............................... 17,000 731,000 Supervalu, Inc. ................................. 52,100 2,311,938 ---------- 6,995,013 ---------- TECHNOLOGY 1.67% Applied Materials, Inc. ......................... 23,200(a) 684,400 Compaq Computer Corp. ........................... 20,102 570,394 Dell Computer Corp. ............................. 54,600(a) 5,067,563 Harris Corp. .................................... 32,800 1,465,750 Intel Corp. ..................................... 20,600 1,526,975 Microsoft Corp. ................................. 31,300(a) 3,392,137 ---------- 12,707,219 ---------- TELECOMMUNICATIONS 1.51% BCE, Inc. ....................................... 21,900 934,856 Telefonica Argentina S.A., ADR .................. 52,300 1,696,481 Telecomunicacoes Brasilerias S.A., ADR .......... 27,500 3,002,656 Telefonica de Espana S.A., ADR .................. 30,654 4,262,822 Telefonos de Mexico S.A., ADR ................... 33,800 1,624,513 ---------- 11,521,328 ---------- TEXTILES 0.17% Interface, Inc. ................................. 29,600 597,550 Shaw Industries, Inc. ........................... 41,400 729,675 ---------- 1,327,225 ---------- TOBACCO 0.36% RJR Nabisco Holdings Corp. ...................... 93,800 2,227,750 Universal Corp. ................................. 13,000 485,875 ---------- 2,713,625 ---------- TRANSPORTATION 1.61% Burlington Northern Santa Fe Corp. .............. 36,500 3,583,844 Canadian Pacific Ltd. ........................... 105,400 2,990,725 CNF Transportation, Inc. ........................ 46,200 1,963,500 FDX Corp. ....................................... 29,480 1,849,870 Laidlaw, Inc. ................................... 37,200 453,375 USFreightways Corp. ............................. 42,100 1,382,720 ---------- 12,224,034 ---------- UTILITIES--ELECTRIC & NATURAL GAS 5.37% CMS Energy Corp. ................................ 87,200 3,836,800 Columbia Gas System, Inc. ....................... 39,450 2,194,406 Consolidated Edison Co. of New York, Inc. ....... 32,600 1,501,638 DQE, Inc. ....................................... 37,250 1,341,000 DTE Energy Co. .................................. 46,100 1,861,287 Edison International, Inc. ...................... 128,200 3,789,913 Energy East Corp. ............................... 81,000 3,371,625 FPL Group, Inc. ................................. 37,200 2,343,600 FirstEnergy Co. ................................. 22,900 704,175
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Number of Value Shares (Note 1) ---------- -------------- UTILITIES--ELECTRIC & NATURAL GAS -- (Continued) GPU, Inc. ......................................... 93,900 $ 3,550,593 PECO Energy Co. ................................... 64,700 1,888,431 PG&E Corp. ........................................ 102,800 3,244,625 Pinnacle West Capital Corp. ....................... 57,400 2,583,000 PP&L Resources, Inc. .............................. 49,000 1,111,688 Public Service Co. of New Mexico .................. 41,600 943,800 Sierra Pacific Resources .......................... 9,300 337,706 Southern Co. ...................................... 81,700 2,262,068 Texas Utilities Co. ............................... 63,300 2,634,863 UtiliCorp United Inc. ............................. 36,200 1,364,288 ----------- 40,865,506 ----------- Total Common Stocks (Cost $216,350,407)......... 258,501,230 -----------
Principal Amount ------------------- UNITED STATES GOVERNMENT OBLIGATIONS 54.10% United States Treasury Bonds, 10.750%, 5/15/2003 ....... $ 15,000,000 18,281,250 United States Treasury Bonds, 7.25%, 8/15/2022 ......... 27,600,000 33,042,361 United States Treasury Bonds, 7.50%, 11/15/2024 ........ 10,200,000 12,654,375 United States Treasury Bonds, 6.375%, 8/15/2027 ........ 8,900,000 9,778,875 United States Treasury Notes, 6.25%, 8/31/2000 ......... 13,500,000 13,702,500 United States Treasury Notes, 7.50%, 2/15/2005 ......... 16,300,000 18,052,250 United States Treasury Notes, 6.50%, 5/15/2005 ......... 7,600,000 8,025,122 United States Treasury Notes, 6.875%, 5/15/2006 ........ 71,600,000 77,574,089 United States Treasury Notes, 6.50%, 10/15/2006 ........ 80,100,000(b) 85,106,250 United States Treasury Notes, 6.625%, 5/15/2007 ........ 85,300,000 91,697,500 United States Treasury Notes, 6.125%, 8/15/2007 ........ 42,300,000 44,044,875 ------------ Total United States Government Obligations (Cost $399,906,766)................................. 411,959,447 ------------ SHORT-TERM INVESTMENTS 9.04% Goldman Sachs Corp., 5.60%, 7/01/98 .................... 28,200,000 28,200,000 Merrill Lynch & Co., Inc., 5.55%, 7/01/98 .............. 27,600,000 27,600,000 Sara Lee Corp., 6.05%, 7/01/98 ......................... 13,000,000 13,000,000 ------------ Total Short-Term Investments (Cost $68,800,000)....... 68,800,000 ------------ Total Investments (Cost $685,057,173) - 97.09%........ $739,260,677 Other assets less liabilities - 2.91% ................ 22,184,410 ------------ Net Assets - 100.00% ................................. $761,445,087 ============
Number of Shares ---------- SECURITY SOLD SHORT (NOTE 1D) W.E.B.S. Index Fund, Inc. - Mexico Series (Proceeds $390,725)..................... 28,400 $351,450 ========
- ---------- (a) Non-income producing security. (b) Used as collateral on short sales. For Federal income tax purposes, the tax basis of investments owned at June 30, 1998 was $685,128,937 and net unrealized appreciation on investments consisted of: Gross unrealized appreciation ......... $ 65,341,245 Gross unrealized depreciation ......... (11,209,505) ------------- Net unrealized appreciation ........... $ 54,131,740 =============
See notes to financial statements. 8 THE ZWEIG TOTAL RETURN FUND, INC. STATEMENT OF ASSETS AND LIABILITIES June 30,1998 (Unaudited) ASSETS: Investments, at value (identified cost,$685,057,173) ................ $ 739,260,677 Cash ................................................................ 698,114 Receivable for investments sold ..................................... 18,259,709 Deposits with broker for security sold short ........................ 390,725 Dividends and interest receivable ................................... 6,099,765 Prepaid expenses .................................................... 17,909 Miscellaneous receivable ............................................ 12,958 ------------- Total Assets ...................................................... 764,739,857 ------------- LIABILITIES: Payable for investments purchased ................................... 2,078,123 Accrued advisory fees (Note 3) ...................................... 436,299 Accrued administration fees (Note 3) ................................ 2,707 Other accrued expenses .............................................. 426,191 Security sold short, at value (proceeds $390,725) ................... 351,450 ------------- Total Liabilities ................................................. 3,294,770 ------------- NET ASSETS ............................................................. $ 761,445,087 ============= NET ASSET VALUE, PER SHARE: ($761,445,087/ 88,904,410 shares outstanding--Note 4) ............... $ 8.56 ============= Net Assets consist of: Capital paid-in ..................................................... $ 707,202,308 Net unrealized appreciation on investments and security sold short .. 54,242,779 ------------- $ 761,445,087 =============
STATEMENT OF OPERATIONS For the six months ended June 30,1998 (Unaudited) Investment Income: Income: Dividends ................................................................ $ 3,227,266 Interest ................................................................. 13,953,419 ------------ Total Income ........................................................... 17,180,685 ------------ Expenses: Investment advisory fees (Note 3) ........................................ 2,439,299 Administration fees (Note 3) ............................................. 453,013 Transfer agent fees ...................................................... 190,050 Printing and postage expenses ............................................ 126,338 Professional fees (Note 3) ............................................... 38,372 Custodian fees ........................................................... 52,270 Directors' fees and expenses (Note 3) .................................... 37,829 Miscellaneous ............................................................ 92,023 ------------ Total Expenses ......................................................... 3,429,194 ------------ Net Investment Income ................................................ 13,751,491 ------------ Realized and Unrealized Gain on Investments: Net realized gain on investments (Note 2): Security transactions .................................................... 17,546,087 Short sales transactions ................................................. 371,891 Futures transactions ..................................................... (1,040,782) ------------ Net realized gain on investments ..................................... 16,877,196 Increase in unrealized appreciation on investments and securities sold short 4,004,341 Net realized and unrealized gain on investments .......................... 20,881,537 ------------ Net increase in net assets resulting from operations ..................... $ 34,633,028 ============
See notes to financial statements. 9 THE ZWEIG TOTAL RETURN FUND, INC. STATEMENT OF CHANGES IN NET ASSETS (Unaudited)
For the For the Six Months Ended Year Ended June 30, 1998 December 31,1997 ------------------ ----------------- Increase (Decrease) in Net Assets: Operations: Net investment income ............................. $ 13,751,491 $ 28,096,287 Net realized gain on investments .................. 16,877,196 37,204,875 Increase in unrealized appreciation on investments and securities sold short ....................... 4,004,341 24,851,047 ------------- ------------ Net increase in net assets resulting from operations ................................... 34,633,028 90,152,209 ------------- ------------ Dividends and distributions to shareholders from: Net investment income ............................. (13,751,491) (28,076,250) Net realized gains on investments ................. (16,812,333) (37,204,875) Capital paid-in ................................... (3,260,046) -- ------------- ------------ Total dividends and distributions to shareholders ................................. (33,823,870) (65,281,125) ------------- ------------ Capital share transactions: Net asset value of shares issued to shareholders in reinvestment of dividends from net investment income and distributions from net realized gains and capital paid-in ............................. 7,095,633 13,494,402 Net proceeds from the sale of shares during rights offering ........................................ 76,407,242 -- ------------- ------------ Net increase in net assets derived from capital share transactions .............................. 83,502,875 13,494,402 ------------- ------------ Net increase in net assets ........................ 84,312,033 38,365,486 Net Assets: Beginning of period .................................. 677,133,054 638,767,568 ------------- ------------ End of period ........................................ $ 761,445,087 $677,133,054 ============= ============
See notes to financial statements. 10 THE ZWEIG TOTAL RETURN FUND, INC. NOTES TO FINANCIAL STATEMENTS June 30, 1998 (Unaudited) NOTE 1 -- Significant Accounting Policies The Zweig Total Return Fund, Inc. (the "Fund") is a closed-end, diversified management investment company registered under the Investment Company Act of 1940 (the "Act"). The Fund was incorporated under the laws of the State of Maryland on July 21, 1988. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Portfolio Valuation Portfolio securities which are traded only on stock exchanges are valued at the last sale price. Securities traded in the over-the-counter market which are National Market System securities are valued at the last sale price. Other over-the-counter securities are valued at the most recently quoted bid price provided by the principal market makers. Portfolio securities which are traded both in the over-the-counter market and on a stock exchange are valued according to the broadest and most representative market, as determined by the Investment Adviser. Debt securities may be valued on the basis of prices provided by an independent pricing service, when such prices are believed by the Investment Adviser to reflect the fair market value of such securities. Short-term investments having a remaining maturity of 60 days or less when purchased are valued at amortized cost (which approximates market value). Futures which are 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 June 30, 1998) and other assets, if any, are valued at fair value as determined under procedures approved by the Board of Directors of the Fund. B. Security Transactions and Investment Income Security transactions are recorded on trade date. Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Realized gains and losses on sales of investments are determined on the identified cost basis for financial reporting and tax purposes. C. Futures Contracts Initial margin deposits made upon entering into futures contracts are as assets. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by marking the contract to market on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments are made or received and recognized as assets or liabilities, depending upon whether unrealized gains or losses are incurred. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of ) the closing transaction and the Fund's basis in the contract. There are several risks in connection with the use of futures contracts as a hedging device. The change in value of futures contracts primarily corresponds with the value of their underlying instruments, which may not correlate with 11 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 secured 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. In addition to the short sales descibed above, the Fund may make short sales "against the box". A short sale "against the box" is a short sale whereby at the time of the short sale, the Fund owns or has the immediate and unconditional right, at no added cost, to obtain the identical security. 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. E. Federal Income Tax The Fund has elected to qualify and intends to remain qualified as a "regulated investment company" under Subchapter M of the Internal Revenue code of 1986, as amended. The principal tax benefits of qualifying as a regulated investment company as compared to an ordinary taxable corporation, are that a regulated investment company is not itself subject to Federal income tax on ordinary investment income and net capital gains that are currently distributed (or deemed distributed) to its shareholders, and that the tax character of long-term capital gains recognized by a regulated investment company flows through to its shareholders who receive distributions of such gains. F. Dividends and Distributions to Shareholders Dividends and distributions to shareholders are recorded on the ex-dividend date. In the event that amounts distributed are in excess of accumulated net investment income and net realized gains on investments (as determined for financial statement purposes), such amounts would be reported as a distribution from paid-in capital during the fiscal year in which such a distribution is made. Income dividends and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to timing differences and differing characterization of distributions made by the Fund as a whole. NOTE 2 -- Portfolio Transactions During the six months ended June 30, 1998, the Fund entered into purchase and sale transactions, excluding short term instruments and futures transactions, as follows:
United States Government Common and Agency Stocks Obligations -------------- -------------- Cost of Purchases ........... $87,170,769 $193,729,148 =========== ============ Proceeds from Sales ......... $93,821,896 $135,269,655 =========== ============
12 NOTE 3 -- Investment Advisory Fees and Other Transactions with Affiliates a) Investment Advisory Fee: The Investment Advisory Agreement (the "Agreement") between the Investment Adviser, Zweig Total Return Advisors, Inc., and the Fund provides that, subject to the direction of the Board of Directors of the Fund and the applicable provisions of the Act, the Investment Adviser is responsible for the actual management of the Fund's portfolio. The responsibility for making decisions to buy, sell or hold a particular investment rests with the Investment Adviser, subject to review by the Board of Directors and the applicable provisions of the Act. For the services provided by the Investment Adviser under the Agreement, the Fund pays the Investment Adviser a monthly fee equal, on an annual basis, to 0.70 of 1% of the Fund's average daily net assets. During the six months ended June 30, 1998, the Fund accrued advisory fees of $2,439,299. b) Administration Fee: Zweig/Glaser Advisers serves as the Fund's Administrator pursuant to an Administration Agreement with the Fund. Under such Agreement, the Administrator generally assists in all aspects of the Fund's operations, other than providing investment advice, subject to the overall authority of the Fund's Board of Directors. The Administrator determines the Fund's net asset value daily, prepares such figures for publication on a weekly basis, maintains certain of the Fund's books and records that are not maintained by the Investment Adviser, custodian or transfer agent, assists in the preparation of financial information for the Fund's income tax returns, proxy statements, quarterly and annual shareholder reports, and responds to shareholder inquiries. Under the terms of the Agreement, the Fund pays the Administrator a monthly fee equal, on an annual basis, to 0.13% of the Fund's average daily net assets. For the six months ended June 30, 1998 the Fund accrued administration fees of $453,013. c) Directors' Fees: The Fund pays each Director who is not an interested person of the Fund or the Investment Adviser a fee of $10,000 per year plus $1,500 per Directors' or committee meeting attended, together with the out-of-pocket costs relating to attendance at such meetings. The Directors of the Fund who are interested persons of the Fund or the Investment Adviser receive no remuneration from the Fund. d) Legal Fees: The Fund accrued legal fees of $7,059 during the six months ended June 30, 1998, for the services of Rosenman & Colin LLP, of which Robert E. Smith, a Director of the Fund, is counsel. In addition, the Fund paid legal fees of $52,227 for the services of Rosenman & Colin LLP in connection with its rights offering. e) Brokerage Commissions: During the six months ended June 30, 1998, the Fund paid Zweig Securities Corp. Inc. brokerage commissions of $22,138 in connection with portfolio transactions effected through them. Certain directors and officers of the Fund are also directors and/or officers of the Invesment Adviser and the Administrator. NOTE 4 -- Capital Stock and Reinvestment Plan At June 30, 1998 the Fund had one class of common stock, par value $.001 per share, of which 500,000,000 shares are authorized and 88,904,410 shares are outstanding. Registered shareholders may elect to receive all distributions in cash paid by check mailed directly to the shareholder by State Street Bank & Trust Co. as dividend paying agent. Pursuant to the Automatic Reinvestment and Cash Purchase Plan (the "Plan"), shareholders not making such election will have all such amounts automatically reinvested by State Street, as the Plan agent in whole or fractional shares of the Fund, as the case may be. For the six months ended June 30, 1998 and for the year ended December 31, 1997, 801,838 and 1,590,261 shares, respectively, were issued pursuant to the Plan. 13 In a rights offering ending May 8, 1998, shareholders exercised rights to purhase 9,480,096 shares of common stock at an offering price of $8.42 per share for proceeds net of expenses of $76,407,242. NOTE 5 -- Financial Highlights Selected data for a share outstanding throughout each period:
Six Months Ended Year Ended December 31 June 30, --------------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 ------------- -------------- ------------ ------------- ------------- ------------- Per Share Data: Net asset value, begining of period ........................ $ 8.61 $ 8.29 $ 8.63 $ 8.11 $ 9.11 $ 9.06 ------- -------- ------- -------- -------- -------- Income From Investment Operations: Net investment income ........... 0.17 0.36 0.36 0.39 0.29 0.26 Net realized and unrealized gains(losses) on investments ................... 0.20 0.80 0.14 0.97 ( 0.43) 0.75 ------- -------- ------- -------- -------- -------- Total from investment operations .................... 0.37 1.16 0.50 1.36 ( 0.14) 1.01 ------- -------- ------- -------- -------- -------- Dividends and Distributions: Dividends from net investment income ............. (0.17) ( 0.36) ( 0.36) ( 0.39) ( 0.29) ( 0.26) Distributions from net realized gains on investments ................... (0.21) ( 0.48) ( 0.24) ( 0.45) -- ( 0.70) Distributions from capital paid-in ....................... (0.04) -- ( 0.24) -- ( 0.57) -- -------- --------- -------- -------- -------- -------- Total Dividends and Distributions ................. (0.42) ( 0.84) ( 0.84) ( 0.84) ( 0.86) ( 0.96) -------- --------- -------- -------- -------- -------- Net asset value, end of period ....................... $ 8.56 $ 8.61 $ 8.29 $ 8.63 $ 8.11 $ 9.11 ======== ========= ======== ======== ======== ======== Market value, end of period** ..................... $ 8.75 $ 9.4375 $ 8.00 $ 8.625 $ 8.00 $ 10.75 ======== ========= ======== ======== ======== ======== Total investment return ......... (2.04)% 30.22% 2.62% 19.19% (17.08)% (18.37)% ======== ========= ======== ======== ======== ======== Ratios/Supplemental Data: Net assets, end of period (in thousands) ................ $761,445 $ 677,133 $638,768 $647,523 $591,659 $648,516 Ratio of expenses to average net assets .................... 0.98%* 1.04% 1.03% 1.10% 1.12% 1.11% Ratio of net investment income to average net assets ........................ 3.95%* 4.30% 4.31% 4.59% 3.35% 2.85% Portfolio turnover rate ......... 39.0% 104.7% 147.2% 179.8% 281.0% 293.0%
- ---------- * Annualized. ** Closing Price -- New York Stock Exchange. 14 SUPPLEMENTARY PROXY INFORMATION The Annual Meeting of Shareholders of The Zweig Total Return Fund, Inc. was held on May 14,1998. The meeting was held for the purpose of reelecting Annemarie Gilly, Jeffrey Lazar, Alden C. Olson, Anthony M. Santomero and Martin E. Zweig as Directors: and to ratify Coopers & Lybrand L.L.P. as the Fund's independent certified public accountants for the year ending December 31,1998. The Fund's other Directors who continue in office are Charles H. Brunie, Elliot S. Jaffe, James B. Rogers, Jr. and Robert E. Smith. The results of the above matters were as follows:
Votes Votes Director/Auditor Votes For Against Withheld Abstensions - ----------------------------------- ------------ --------- ---------- ------------ Annemarie Gilly .................. 68,187,094 -- 791,240 -- Jeffrey Lazar .................... 68,283,093 -- 695,241 -- Alden C. Olson ................... 68,205,001 -- 673,333 -- Anthony M. Santomero ............. 68,273,248 -- 705,086 -- Martin E. Zweig .................. 68,326,041 -- 652,293 -- Coopers & Lybrand L.L.P. ......... 68,053,983 254,693 -- 699,658
- -------------------------------------------------------------------------------- 1-800-272-2700 Zweig Shareholder Relations: For general information and literature (212) 486-3122 The Zweig Total Return Fund Hot Line: For updates on net asset value, share price, major industry groups and other key information REINVESTMENT PLAN Many of you have questions about our reinvestment plan. We urge shareholders who want to take advantage of this plan and whose shares are held in "Street Name," to consult your broker as soon as possible to determine if you must change registration into your own name to participate. ---------------------------------- Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940 that the Fund may from time to time purchase its shares of common stock in the open market when Fund shares are trading at a discount from their net asset value. 15 OFFICERS AND DIRECTORS Martin E. Zweig, Ph.D. Chairman of the Board and President Jeffrey Lazar Director, Vice President and Treasurer Stuart B. Panish Vice President & Secretary Christopher M. Capano Assistant Vice President Charles H. Brunie Director Annemarie Gilly Director Elliot S. Jaffe Director Alden C. Olson, Ph.D. Director James B. Rogers, Jr. Director Anthony M. Santomero, Ph.D. Director Robert E. Smith Director Investment Adviser Zweig Total Return Advisors, Inc. 900 Third Avenue New York, New York 10022 Fund Administrator Zweig/Glaser Advisers 900 Third Avenue New York, New York 10022 Custodian The Bank of New York One Wall Street New York, New York 10286 Transfer Agent State Street Bank & Trust Co. 225 Franklin Street Boston, MA 02110 Legal Counsel Rosenman & Colin LLP 575 Madison Avenue New York, New York 10022 - -------------------------------------------------------------------------------- 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. ZTR982 3206-SEM(98) (The Zweig Total Return Fund, Inc. logo appears here) SEMI-ANNUAL REPORT ----------------------------------------------- June 30, 1998 -----END PRIVACY-ENHANCED MESSAGE-----