[LOGO]
THE ZWEIG FUND
ANNUAL REPORT
-----------------
December 31, 1997
<PAGE>
February 2, 1998
Dear Shareholder:
The Zweig Fund's net asset value increased 22.0% during the year ended
December 31, 1997, including $1.20 in reinvested distributions. For the same
period, the Standard & Poor's 500 Index gained 33.4%, the Dow Jones Industrial
Average rose 24.9%, and the NASDAQ Composite was up 21.6%, all with dividends
reinvested.
In the fourth quarter of 1997, the net asset value of the Fund, including a
$0.33 distribution, declined 0.8%. For the same period, the average U.S. stock
fund was down 1.5% and the Standard & Poor's 500 Index gained 2.9%.
Maintaining our portfolio's risk-averse style, the Fund's average exposure
for 1997 was approximately 71%.
Given the level of risk we took, I feel pretty good about our results. Most
stock mutual funds were fully invested last year and approximately 90% of them
did not beat the market.
For the eleven full years of operations ended December 31, 1997, the Fund
showed a total return on net asset value of 301.3% (13.5% on a compounded
annualized basis) including distributions. Our average equity exposure for the
eleven years was 58%.
================================================================================
DISTRIBUTION DECLARED
================================================================================
On January 2, 1998, the Fund announced a distribution of $0.31 per share,
payable on January 9, 1998, to shareholders of record on December 31, 1997.
Including this distribution, our total distribution to shareholders for tax
purposes in 1997 was $1.23. This brings our total payout since the Fund's
inception to $12.56.
Of the $1.23 taxable in 1997, $0.77 is ordinary income and $0.46 represents
long-term capital gains. Of the capital gains, 80.5% are taxable at the 28% rate
and 19.5% are taxable at the 20% rate.
================================================================================
MARKET OUTLOOK
================================================================================
The financial crisis in Southeast Asia has been a major factor in the stock
market in recent weeks. Everyone is nervous but nobody knows what the final
outcome will be. My reading is that the International Monetary Fund and various
governments will prescribe all sorts of medicines. From time to time, some
prescriptions will appear to be working and these periods should be good for the
market.
There is a chance that the Asian crisis will not be all that negative for
the U.S. For one thing, it is slowing the growth of our gross Domestic Product
and the rate of inflation. As long as earnings do not collapse, that will be a
positive. Clearly, if earnings tumble, that could cause a lot of problems.
I believe that the market has already discounted much of the potential
damage from Asia and that many people are overly pessimistic about the near term
at least. For the moment, I would rather be bullish but I am very flexible. If
the evidence worsens, I will deal with whatever develops.
Because of the Asian troubles, there is some concern about possible
deflation. To be sure,
1
<PAGE>
steep deflation on the order of 10% a year or so that occurred in the early
thirties would be bearish. But mild deflation has often been a harbinger of
bullish action for stocks. For example, during a six-month stretch of mild
deflation in 1924, the S&P gained 25%. During a 27-month span from 1926-28,
stocks rose 57%. During 1949-50, the market was up 33%. In another one-year
period in 1954-55, the S&P jumped 39%. During all these intervals, the Consumer
Price Index ranged from zero to -3% on a year-to-year basis. For comparison
purposes, the CPI is up 1.7% from a year ago and the more sensitive Producer
Price Index is actually down 1.4%.
The Asian uncertainties do not seem to have affected the public's love
affair with mutual funds, whose assets now top $4 trillion. Baby boomers are now
moving into middle age and saving more, a bullish factor for the funds. People
like mutual funds because the stock market has been up for the last 15 or 16
years. However, investors can be fickle and can change their minds. If we run
into negative situations because of a worsening Asian picture or other
unforeseen conditions, the money flow into mutual funds can be sharply cut back.
Meanwhile, the demographics are positive. I would expect the flow to hold up to
a fair degree.
Consumer confidence hit a record high in 1997. Normally, when it gets that
high, it is a negative for the stock market. Historically, consumer confidence
gets highest near the top of the business cycle. At such a point, the economy
usually gets overheated, inflation picks up steam, and the Fed tightens--but
that's not the case now. While there are good reasons for the high consumer
confidence, I would be more comfortable if it were a bit lower.
I would also be more comfortable if corporate profits stay positive. Wall
Street strategists have toned down their earnings estimates for the year to
something like plus 5% growth, down from the double-digit figures that we have
been enjoying. Of course there are skeptics who think the growth will be
negative this year. As I see it, the market will do reasonably well even if we
have low single-digit growth--say 2% or 3%--provided that inflation and interest
rates stay low.
For many years, people, myself included, have said that the markets are not
cheap. Measured in terms of a multiple of earnings per share, stock market
returns are close to a record high of 21.6 times estimated S&P earnings. In
evaluating this figure, it is important that lower inflation and lower interest
rates usually go hand in hand with higher price/earnings ratios. A dollar's
worth of earnings or a dollar's worth of growth are worth more when rates are
low. Am I nervous about P/E's being so high? Yes. I don't know whether the
rubber band is stretched too far. However, I believe that if we don't have
rampant deflation or negative earnings, the market is probably priced about
right. The market is not cheap but that doesn't mean that it can't go higher.
One thing I am not concerned about is market volatility. I do not think the
market was particularly volatile in 1997. It just seemed that way relative to
what we had been used to in the last few years. We have had years in the early
and mid-1990's when volatility was unusually low. Last year's volatility was
nothing like the period around 1974 and was significantly below that of the wild
1930's.
At this writing, my stock and bond models are bullish. Counting stocks and
bonds, we are about 92% invested. My monetary indicators are bullish because
interest rates have come down and bond yields are close to multi-year lows. The
economic yardsticks are positive because prices of many commodities have come
down, pointing to low inflation and low interest rates. With pessimism picking
up after the October break, my sentiment indicators are moderately positive. We
don't have extreme pessimism right now but, with enough nervousness out there, I
don't see the type of optimism generally associated with a market top.
2
<PAGE>
Overall, the indicators are bullish but, like everything else, they can
change. If conditions deteriorate, I will always be ready to reduce our exposure
to the market in line with my risk-averse strategy.
================================================================================
PORTFOLIO COMPOSITION
================================================================================
Implementing my basic allocation strategy, the majority of our stocks
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. Various criteria are used to evaluate and rank the most liquid stocks
with the highest dividend yields.
There was little change in the composition of our leading industry groups
during the fourth quarter. This listing still includes utilities and financial
services (both of which increased because of additional acquisitions and price
appreciation), oil and oil services, manufacturing, investment companies, and
automotive. The only new categories among our top holdings are
telecommunications (which replaced metals where we have trimmed our stakes) and
transportation.
Our largest individual positions include Ford, Travelers, Bear Stearns,
Sun, Telefonos de Mexico, General Public Utilities, RJR/Nabisco, Ahmanson,
USX-Marathon and General Motors.
New to the above listing are Travelers, General Public Utilities, Ahmanson
and General Motors. All were previously held but we have added to their
holdings.
During the quarter, we reduced our positions somewhat for USX-U.S. Steel,
Ashland, ARCO (Atlantic Richfield), and YPF but they remain in our portfolio.
One of the most frequently asked questions is the calculation of
performance on our Fund. An illustration appears on the next page.
Sincerely,
/s/ Martin E. Zweig
Martin E. Zweig, Ph.D.
Chairman
3
<PAGE>
================================================================================
I bought The Zweig Fund (ZF) when it first came out in 1986 for $10.00 per
share. Over 11 years later, at the end of December, 1997, the Fund was only
trading for $13.25. The increase of $3.25 is equal to a return of just 32 1/2%.
Am I missing something?
================================================================================
<TABLE>
<CAPTION>
- ----------------- ------------------------------------------- ----------------------
1986 1986-1997 1997
- ----------------- ------------------------------------------- ----------------------
<S> <C> <C>
$10.00=value of plus $12.25 paid $12.25 bought 1 share purchased at
1 share at on one share then an additional inception plus 1.958
inception from 1986- 1.958 shares of shares received as a
1997 as a re- ZF through result of reinvesting
sult of the the distribution $12.25 in more shares
10% payout reinvestment of ZF = 2.958 shares
policy plan held at the end of
1997.
- ----------------- ------------------------------------------- ----------------------
</TABLE>
- --------------------------------------------------------------------------------
Performance Calculation
Based on the closing price of The Zweig Fund on the New York Stock
Exchange on December 31, 1997:
Shareholder owns 2.958 shares
Closing Price on NYSE is $13.25
Shareholder's account value is $39.19 (2.958 x $13.25)
Shareholder's account value at inception was $10.00 (1 x $10.00)
$39.19 Ending value
-10.00 Beginning value
-----------------------
$29.19 Increase in Value
Total Return = 292% ($29.19/$10.00 x 100)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shareholders receiving distributions in cash would have a return of 155%.
$12.25(distributions) + $13.25 (NYSE price 12/31/97) = $25.50 - $10.00 =
$15.50/10x100.
This return does not include any return you may have earned from investing the
cash elsewhere.
- --------------------------------------------------------------------------------
Conclusion: Performance cannot be measured by looking only at the beginning and
ending stock price.
4
<PAGE>
THE ZWEIG FUND, INC.
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Number of Value
Shares (Note 1)
------------ ------------
<S> <C> <C> <C>
COMMON STOCKS 87.30%
AEROSPACE & DEFENSE 0.35%
Raytheon Co., Class A ................................................ 47,430 $ 2,338,892
------------
AUTOMOTIVE 4.54%
Chrysler Corp. ....................................................... 134,400 4,729,200
Ford Motor Co. ....................................................... 243,100 11,835,931
General Motors Corp. ................................................. 147,600 8,948,250
Volvo AB, ADR ........................................................ 175,100 4,727,700
------------
30,241,081
------------
CHEMICALS 2.92%
Albemarle Corp. ...................................................... 79,800 1,905,225
B.F. Goodrich Co. .................................................... 73,300 3,037,369
Dow Chemical Co. ..................................................... 68,100 6,912,150
Millennium Chemicals, Inc. ........................................... 87,700 2,066,431
Rohm and Haas Co. .................................................... 46,000 4,404,500
Wellman, Inc. ........................................................ 58,600 1,142,700
------------
19,468,375
------------
CONSUMER DURABLES 1.94%
Cooper Tire & Rubber Co. ............................................. 193,500 4,716,563
Goodyear Tire & Rubber Co. ........................................... 56,700(b) 3,607,537
Huffy Corp. .......................................................... 28,500 384,750
Whirlpool Corp. ...................................................... 77,000 4,235,000
------------
12,943,850
------------
CONTAINERS & PACKAGING 0.12%
Sea Containers Ltd., Class A ......................................... 25,200 806,400
------------
ELECTRONICS 0.88%
General Motors Corp., Class H ........................................ 67,600 2,496,975
Hitachi Ltd., ADR .................................................... 12,200 844,088
Philips Electronics N.V., ADR ........................................ 41,400 2,504,700
------------
5,845,763
------------
FINANCIAL SERVICES 11.29%
A.G. Edwards & Sons, Inc. ............................................ 184,650 7,339,837
Bear, Stearns & Co., Inc. ............................................ 231,736 11,007,460
Charter One Financial, Inc. .......................................... 41,185 2,599,803
Fremont General Corp. ................................................ 67,050 3,670,988
H. F. Ahmanson & Co. ................................................. 146,600 9,813,037
Lincoln National Corp. ............................................... 43,300 3,382,813
Old Republic International Corp. ..................................... 99,500 3,700,156
Orion Capital Corp. .................................................. 58,000 2,693,375
</TABLE>
5
<PAGE>
THE ZWEIG FUND, INC.
SCHEDULE OF INVESTMENTS--(Continued)
December 31, 1997
<TABLE>
<CAPTION>
Number of Value
Shares (Note 1)
------------ ------------
<S> <C> <C> <C>
FINANCIAL SERVICES--(Continued)
PaineWebber Group Inc. ............................................... 235,000 $ 8,122,188
PIMCO Advisors L.P., Class A ......................................... 47,600 1,436,925
Providian Corp. ...................................................... 176,200 7,962,038
Selective Insurance Group, Inc. ...................................... 48,000 1,296,000
St. Paul Bancorp Inc. ................................................ 26,700 700,875
Travelers Group Inc. ................................................. 213,229 11,487,712
------------
75,213,207
------------
FOOD & BEVERAGE 0.48%
Adolph Coors Co., Class B ............................................ 95,400 3,172,050
------------
HOME BUILDERS & MATERIALS 0.56%
Kaufman & Broad Home Corp. ........................................... 98,600 2,212,338
Lafarge Corp. ........................................................ 50,400 1,489,950
------------
3,702,288
------------
INDUSTRIAL SERVICES 1.26%
Browning-Ferris Industries Inc. ...................................... 175,000 6,475,000
Ogden Corp. .......................................................... 67,600 1,905,475
------------
8,380,475
------------
INVESTMENT COMPANIES 4.66%
Argentina Fund, Inc. ................................................. 49,100 641,369
Blackrock 2001 Term Trust, Inc. ...................................... 52,600 453,675
Blackrock Strategic Term Trust, Inc. ................................. 52,600 447,100
Brazil Fund, Inc. .................................................... 59,500 1,249,500
Central European Equity Fund, Inc. ................................... 46,400 849,700
Chile Fund, Inc. ..................................................... 61,400 1,093,687
Clemente Global Growth Fund, Inc. .................................... 23,400 220,838
Emerging Markets Infrastructure Fund, Inc. ........................... 158,200 1,858,850
Emerging Markets Telecommunications Fund, Inc. ....................... 61,500 822,562
Emerging Mexico Fund, Inc. ........................................... 36,200 384,625
G.T. Global Eastern Europe Fund ...................................... 43,100 544,138
Gabelli Equity Trust, Inc. ........................................... 89,800 1,049,538
Gabelli Global Multimedia Trust Fund, Inc. ........................... 99,700 872,375
India Fund, Inc. ..................................................... 48,100 354,737
Italy Fund, Inc. ..................................................... 29,700 319,275
Latin American Discovery Fund, Inc. .................................. 56,200 1,008,088
Mexico Equity & Income Fund, Inc. .................................... 21,500 229,781
Mexico Fund, Inc. .................................................... 173,900 3,575,818
Morgan Stanley Asia-Pacific Fund, Inc. ............................... 121,900 906,631
Morgan Stanley Emerging Markets Fund, Inc. ........................... 152,300 1,989,419
Morgan Stanley India Investment Fund, Inc. ........................... 40,000 335,000
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Number of Value
Shares (Note 1)
------------ ------------
<S> <C> <C> <C>
INVESTMENT COMPANIES--(Continued)
New Germany Fund, Inc. ............................................... 125,400 $ 1,692,900
Portugal Fund, Inc. .................................................. 38,200 604,038
Royce Value Trust, Inc. .............................................. 144,155 2,171,334
Southern Africa Fund, Inc. ........................................... 34,400 434,300
Spain Fund, Inc. ..................................................... 23,900 346,550
Swiss Helvetia Fund, Inc. ............................................ 77,000 2,112,688
Taiwan Fund, Inc. .................................................... 94,800 1,564,200
Templeton China World Fund, Inc. ..................................... 47,000 393,625
Templeton Dragon Fund, Inc. .......................................... 157,500 1,693,125
Tri-Continental Corp. ................................................ 30,700 819,306
------------
31,038,772
------------
LEISURE 0.79%
Brunswick Corp. ...................................................... 95,800 2,903,937
Royal Caribbean Cruises Ltd. ......................................... 44,300 2,361,744
------------
5,265,681
------------
LODGING 0.11%
Marcus Corp. ......................................................... 41,550 766,078
------------
MANUFACTURING 5.89%
Aeroquip-Vickers, Inc. ............................................... 57,300 2,811,281
Borg-Warner Automotive, Inc. ......................................... 52,700 2,740,400
Brown Group, Inc. .................................................... 59,000 785,437
Cummins Engine Company, Inc. ......................................... 110,400 6,520,500
Dexter Corp. ......................................................... 36,700 1,584,981
Excel Industries, Inc. ............................................... 38,500 695,406
Herman Miller, Inc. .................................................. 92,600 5,052,488
Johnson Controls, Inc. ............................................... 55,800 2,664,450
PACCAR, Inc. ......................................................... 77,800 4,084,500
Simpson Industries, Inc. ............................................. 43,000 505,250
Standard Products Co. ................................................ 46,300 1,186,438
Timken Co. ........................................................... 166,000 5,706,250
Trinity Industries, Inc. ............................................. 110,400 4,926,600
------------
39,263,981
------------
METALS & MINING 3.58%
AK Steel Holdings Corp. .............................................. 137,000 2,423,188
Alcan Aluminium Ltd. ................................................. 135,300 3,737,662
ASARCO, Inc. ......................................................... 105,100 2,358,181
Birmingham Steel Corp. ............................................... 59,100 930,825
British Steel Plc, ADR ............................................... 128,700 2,759,006
Cleveland-Cliffs, Inc. ............................................... 14,700 673,444
Cyprus Amax Minerals Co. ............................................. 87,000 1,337,625
Oregon Steel Mills, Inc. ............................................. 110,800 2,361,425
Quanex Corp. ......................................................... 17,700 497,813
USX-U.S. Steel Group ................................................. 216,700 6,771,875
------------
23,851,044
------------
</TABLE>
7
<PAGE>
THE ZWEIG FUND, INC.
SCHEDULE OF INVESTMENTS--(Continued)
December 31, 1997
<TABLE>
<CAPTION>
Number of Value
Shares (Note 1)
------------ ------------
<S> <C> <C> <C>
OIL & OIL SERVICES 13.08%
Ashland Inc. ......................................................... 141,500 $ 7,596,781
Atlantic Richfield Co. ............................................... 96,600 7,740,075
Elf Aquitaine S.A., ADR .............................................. 97,700 5,727,663
Equitable Resources, Inc. ............................................ 44,300 1,567,112
Helmerich & Payne, Inc. .............................................. 49,400 3,353,025
Mobil Corp. .......................................................... 53,700 3,876,469
Murphy Oil Corp. ..................................................... 64,700 3,505,931
Occidental Petroleum Corp. ........................................... 205,400 6,020,787
Pennzoil Co. ......................................................... 124,600(b) 8,324,838
Phillips Petroleum Co. ............................................... 61,400 2,985,575
Royal Dutch Petroleum Co., ADR ....................................... 135,200 7,326,150
Sun Company, Inc. .................................................... 260,300 10,948,869
USX-Marathon Group ................................................... 279,800 9,443,250
YPF Sociedad Anonima, ADR ............................................ 255,900 8,748,581
------------
87,165,106
------------
PAPER & FOREST PRODUCTS 2.31%
Bowater Inc. ......................................................... 126,300 5,612,456
Fort James Corp. ..................................................... 179,400 6,862,050
International Paper Co. .............................................. 54,700(b) 2,358,938
Pope & Talbot, Inc. .................................................. 35,200 530,200
------------
15,363,644
------------
RETAIL TRADE & SERVICES 2.35%
Dayton Hudson Corp. .................................................. 104,100 7,026,750
Ross Stores, Inc. .................................................... 74,600 2,713,575
Shopko Stores Inc. ................................................... 68,400 1,487,700
Supervalu Inc. ....................................................... 106,500 4,459,687
------------
15,687,712
------------
TECHNOLOGY 3.21%
Applied Materials Inc. ............................................... 41,600(a) 1,253,200
Dell Computer Corp. .................................................. 72,000(a)(b) 6,048,000
Digital Equipment Corp. .............................................. 57,600(a) 2,131,200
Harris Corp. ......................................................... 81,600 3,743,400
Intel Corp. .......................................................... 45,600 3,203,400
Microsoft Corp. ...................................................... 38,700(a) 5,001,975
------------
21,381,175
------------
TELECOMMUNICATIONS 4.65%
BCE Inc. ............................................................. 79,000 2,631,688
Comsat Corp. ......................................................... 174,400 4,229,200
Telecomunicacoes Brasileiras, S.A., ADR .............................. 47,900 5,577,356
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Number of Value
Shares (Note 1)
------------ ------------
<S> <C> <C> <C>
TELECOMMUNICATIONS--(Continued)
Telefonica de Espana, S.A., ADR ...................................... 90,500 $ 8,241,156
Telefonos de Mexico, S.A., ADR ....................................... 184,400(b) 10,337,925
------------
31,017,325
------------
TOBACCO 1.69%
RJR Nabisco Holdings Corp. ........................................... 264,600 9,922,500
Universal Corp. ...................................................... 32,300 1,328,338
------------
11,250,838
------------
TRANSPORTATION 5.04%
British Airways Plc, ADR ............................................. 18,600 1,742,588
Caliber Systems, Inc. ................................................ 168,300 8,194,106
Canadian Pacific Ltd. ................................................ 232,500 6,335,625
CNF Transportation, Inc. ............................................. 143,300 5,499,137
GATX Corp. ........................................................... 41,300 2,996,831
KLM Royal Dutch Airlines N.V., ADR ................................... 61,933 2,337,971
Rollins Truck Leasing Corp. .......................................... 52,300 934,863
Ryder System, Inc. ................................................... 168,500 5,518,375
------------
33,559,496
------------
UTILITIES-ELECTRIC & NATURAL GAS 15.60%
Allegheny Energy, Inc. ............................................... 64,700 2,102,750
American Electric Power Co., Inc. .................................... 59,800 3,087,175
Columbia Gas System, Inc. ............................................ 92,200 7,243,463
CMS Energy Corp. ..................................................... 167,200 7,367,250
DQE Inc. ............................................................. 85,950 3,018,993
DTE Energy Co. ....................................................... 99,100 3,437,531
Edison International ................................................. 294,500 8,006,719
FPL Group, Inc. ...................................................... 129,600 7,670,700
FirstEnergy Co. ...................................................... 99,700 2,891,300
GPU, Inc. ............................................................ 240,700 10,139,487
IPALCO Enterprises, Inc. ............................................. 16,200 679,388
New York State Electric & Gas Corp. .................................. 228,000 8,094,000
Pacific Enterprises .................................................. 61,300 2,306,412
PacifiCorp. .......................................................... 92,500 2,526,406
PECO Energy Co. ...................................................... 134,500 3,261,625
PG&E Corp. ........................................................... 199,100 6,060,106
Pinnacle West Capital Corp. .......................................... 166,900 7,072,388
PP&L Resources, Inc. ................................................. 143,400 3,432,637
Public Service Co. of New Mexico ..................................... 101,600 2,406,650
Sierra Pacific Resources ............................................. 59,800 2,242,500
Transcanada Pipelines Ltd. ........................................... 101,500 2,271,063
United Illuminating Co. .............................................. 29,300 1,345,969
UtiliCorp United Inc. ................................................ 88,100 3,419,381
Valero Energy Corp. .................................................. 124,500 3,913,969
------------
103,997,862
------------
Total Common Stocks (Cost $465,868,041) ........................................ 581,721,095
------------
</TABLE>
9
<PAGE>
THE ZWEIG FUND, INC.
SCHEDULE OF INVESTMENTS--(Concluded)
December 31, 1997
<TABLE>
<CAPTION>
Principal Value
Amount (Note 1)
------------ ------------
<S> <C> <C> <C>
UNITED STATES GOVERNMENT & AGENCY OBLIGATIONS 7.58%
Federal National Mortgage Association, 6.85%, 4/5/2004 ............... $ 2,765,000 $ 2,888,565
United States Treasury Bonds, 10.75%, 5/15/2003 ...................... 4,000,000 4,912,500
United States Treasury Bonds, 7.25%, 8/15/2022 ....................... 4,300,000 4,967,842
United States Treasury Bonds, 7.50%, 11/15/2024 ...................... 17,600,000 21,054,000
United States Treasury Notes, 6.875%, 5/15/2006 ...................... 7,500,000 8,029,687
United States Treasury Notes, 6.50%, 10/15/2006 ...................... 8,300,000 8,694,250
------------
Total United States Government & Agency Obligations
(Cost $48,135,718) ............................................................. 50,546,844
------------
SHORT-TERM INVESTMENTS 4.05%
Baker Hughes, Inc., 6.70%, 1/02/98 (cost $26,994,975) ................ 27,000,000 26,994,975
------------
Total Investments (Cost $540,998,734) - 98.93% ................................. $659,262,914
Other Assets less liabilities - 1.07% .......................................... 7,102,877
------------
Net Assets - 100.00% ........................................................... $666,365,791
============
<CAPTION>
Number of
Shares
------------
<S> <C> <C>
SECURITIES SOLD SHORT (NOTE 1D)
Goodyear Tire & Rubber Co. ........................................... 56,700(b) $ 3,607,537
International Paper Co. .............................................. 54,700(b) 2,358,938
Pennzoil Co. ......................................................... 46,400(b) 3,100,100
Telefonos de Mexico, S.A., ADR. ...................................... 59,800(b) 3,352,537
W.E.B.S. Index Fund, Inc. - Hong Kong Series ......................... 184,900 2,010,788
-----------
Total Securities Sold Short (Proceeds $15,767,296) ............................ $14,429,900
===========
</TABLE>
- ------------
(a) Non-income producing security.
(b) Short "against the box" or used as collateral on short sales.
For Federal income tax purposes, the tax basis of investments owned at
December 31, 1997 was $541,235,757 and net unrealized appreciation on
investments consisted of:
Gross unrealized appreciation ................. $128,071,973
Gross unrealized depreciation ................. (10,044,816)
------------
Net unrealized appreciation ................... $118,027,157
============
See notes to financial statements.
10
<PAGE>
THE ZWEIG FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31,1997
<TABLE>
<S> <C>
ASSETS:
Investments, at value (identified cost $540,998,734) ............... $659,262,914
Cash ............................................................... 1,159,922
Dividends and interest receivable .................................. 4,272,330
Deposits with broker for securities sold short ..................... 16,792,950
Prepaid expenses ................................................... 44,361
------------
Total Assets .................................................. 681,532,477
------------
LIABILITIES:
Accrued advisory fees (Note 3) ..................................... 471,253
Accrued administration fees (Note 3) ............................... 2,361
Other accrued expenses ............................................. 263,172
Securities sold short, at value (proceeds $15,767,296) ............. 14,429,900
------------
Total Liabilities ............................................. 15,166,686
------------
NET ASSETS ............................................................... $666,365,791
============
NET ASSET VALUE, PER SHARE:
($666,365,791/52,765,559 shares outstanding--Note 4) ..................... $ 12.63
============
Net Assets consist of:
Capital paid-in .................................................... $532,026,118
Undistributed net investment income ................................ 9,497,801
Undistributed net realized gain on investments ..................... 5,240,296
Net unrealized appreciation on investments and securities sold short 119,601,576
------------
$666,365,791
============
</TABLE>
See notes to financial statements.
11
<PAGE>
THE ZWEIG FUND, INC.
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<S> <C>
Investment Income:
Income:
Dividends .............................................................. $ 14,155,484
Interest ............................................................... 11,091,944
------------
Total Income ....................................................... 25,247,428
------------
Expenses:
Investment advisory fees (Note 3) ...................................... 5,312,237
Administration fees (Note 3) ........................................... 812,460
Transfer agent fees .................................................... 421,292
Printing and postage expenses .......................................... 284,097
Professional fees (Note 3) ............................................. 70,030
Custodian fees ......................................................... 108,770
Directors' fees and expenses (Note 3) .................................. 76,054
Miscellaneous .......................................................... 139,337
------------
Total Expenses ..................................................... 7,224,277
------------
Net Investment Income ............................................ 18,023,151
------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments (Note 2):
Security transactions .................................................. 39,417,996
Short sales transactions ............................................... 109,606
Futures transactions ................................................... 4,241,447
------------
Net realized gain on investments ................................... 43,769,049
Increase in unrealized appreciation on investments and securities sold short 61,835,402
------------
Net realized and unrealized gain on investments ........................ 105,604,451
------------
Net increase in net assets resulting from operations ................... $123,627,602
============
</TABLE>
See notes to financial statements.
12
<PAGE>
THE ZWEIG FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years
ended December 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations:
Net investment income .................................. $ 18,023,151 $ 17,352,662
Net realized gain on investments ....................... 43,769,049 39,254,840
Increase in unrealized appreciation on investments and
securities sold short ............................. 61,835,402 19,492,169
------------- -------------
Net increase in net assets resulting from operations 123,627,602 76,099,671
------------- -------------
Dividends and distributions to shareholders from:
Net investment income .................................. (16,029,830) (15,101,212)
Net realized gains on investments ...................... (46,130,976) (40,189,126)
------------- -------------
Total dividends and distributions to shareholders .. (62,160,806) (55,290,338)
------------- -------------
Capital share transactions:
Net asset value of shares issued to shareholders in
reinvestment of dividends from net investment
income and distributions from net realized gains .. 15,818,485 20,385,394
------------- -------------
Net increase in net assets ............................. 77,285,281 41,194,727
Net Assets:
Beginning of year ...................................... 589,080,510 547,885,783
------------- -------------
End of year (including undistributed net investment
income of $9,497,801 and $6,379,341, respectively) $ 666,365,791 $ 589,080,510
============= =============
</TABLE>
See notes to financial statements.
13
<PAGE>
THE ZWEIG FUND, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
NOTE 1--Significant Accounting Policies
The Zweig Fund, Inc. (the "Fund") is a closed-end, diversified management
investment company registered under the Investment Company Act of 1940 (the
"Act"). The Fund was incorporated under the laws of the State of Maryland on
June 18, 1986. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles. The preparation of financial statements in accordance with generally
accepted accounting 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 will be
valued at the last sale price. Securities traded in the over-the-counter market
which are National Market System securities will be valued at the last sale
price. Other over-the-counter securities will be valued at the most recently
quoted 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 December31, 1997) and other
assets, if any, are valued at fair value as determined under procedures approved
by the Board of Directors of the Fund.
B. Securities Transactions and Investment Income
Security transactions are recorded on trade date. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income is recorded on the accrual basis.
Realized gains and losses on sales of investments are determined on the
identified cost basis for financial reporting and tax purposes.
C. Futures Contracts
Initial margin deposits made upon entering into futures contracts are
recorded as assets. During the period the futures contract is open, changes in
the value of the contract are recognized as unrealized gains or losses by
marking the contract to market on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets or liabilities, depending upon whether
unrealized gains or losses are incurred. When a futures contract is closed, the
Fund realizes a gain or loss equal to the difference between the proceeds from
(or cost of) the closing transaction and the Fund's basis in the contract. There
are several
14
<PAGE>
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. In addition to the
short sales described above, the Fund may make short sales "against the box". A
short sale "against the box" is a short sale whereby at the time of the short
sale, the Fund owns or has the immediate and unconditional right, at no added
cost, to obtain the identical security. 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 Taxes
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. During the
year ended December 31, 1997, the Fund reclassified $793,497 from undistributed
net realized gains to undistributed net investment income, $331,642 from capital
paid-in to undistributed net investment income, and $69,619 from capital paid-in
to undistributed net realized gains.
NOTE 2--Portfolio Transactions
A. Purchases and Sales
During the year ended December 31, 1997, the Fund entered into purchase and
sale transactions, excluding short-term investments and futures transactions, as
follows:
United States
Government
Common and Agency
Stocks Obligations
------------ ------------
Cost of Purchases ............... $413,802,818 $108,962,211
============ ============
Proceeds from Sales ............. $331,754,911 $ 87,529,772
============ ============
15
<PAGE>
NOTE 3--Investment Advisory Fees and Other Transactions with Affiliates
a) Investment Advisory Fee: The Investment Advisory Agreement (the
"Advisory Agreement") between the Investment Adviser, Zweig Advisors Inc., and
the Fund provides that, subject to the direction of the Board of Directors of
the Fund and the applicable provisions of the Act, the Investment Adviser 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 Advisory Agreement, the Fund pays the Investment
Adviser a monthly fee equal, on an annual basis, to 0.85% of the Fund's average
daily net assets. During the year ended December 31, 1997, the Fund accrued
advisory fees of $5,312,237.
b) Administrative Fee: Zweig/Glaser Advisers serves as the Fund's
Administrator pursuant to an Administration Agreement with the Fund. Under such
Agreement, the Administrator generally assists in all aspects of the Fund's
operations, other than providing investment advice, subject to the overall
authority of the Fund's Board of Directors. The Administrator determines the
Fund's net asset value daily, prepares such figures for publication on a weekly
basis, maintains certain of the Fund's books and records that are not maintained
by the Investment Adviser, custodian or transfer agent, assists in the
preparation of financial information for the Fund's income tax returns, proxy
statements, quarterly and annual shareholder reports, and responds to
shareholder inquiries. Under the terms of the Agreement, the Fund pays the
Administrator a monthly fee equal, on an annual basis, to 0.13% of the Fund's
average daily net assets. During the year ended December 31, 1997, the Fund
accrued administration fees of $812,460.
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 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 incurred legal fees of $17,885 during the year
ended December 31, 1997, for the services of Rosenman & Colin LLP, of which
Robert E. Smith, a Director of the Fund, is a partner.
e) Brokerage Commissions: During the year ended December 31, 1997, the Fund
paid Zweig Securities Corp. brokerage commissions of $182,134 in connection with
portfolio transactions effected through them. In addition, Zweig Securities
Corp. charged $13,532 in commissions for transactions effected on behalf of the
participants in the Fund's Automatic Reinvestment and Cash Purchase Plan.
Certain directors and officers of the Fund are also directors and/or
officers of the Investment Adviser and the Administrator.
NOTE 4--Capital Stock and Reinvestment Plan
At December 31, 1997, the Fund had one class of common stock, par value
$0.10 per share, of which 100,000,000 shares are authorized and 52,765,559
shares are outstanding.
Registered shareholders may elect to receive all distributions in cash paid
by check mailed directly to the shareholder by State Street Bank & Trust Co. as
dividend paying agent. Pursuant to the Automatic Reinvestment and Cash Purchase
Plan (the "Plan") shareholders not making such election will have all such
amounts automatically reinvested by State Street, as the Plan agent in whole or
fractional shares of the Fund, as the case may be. For the years ended December
31, 1997 and December 31, 1996, 1,322,870 and 1,892,320 shares, respectively,
were issued pursuant to the Plan.
16
<PAGE>
On January 2, 1998 the Fund declared a distribution of $0.31 per share
(representing net realized gains and net investment income) to shareholders of
record December 31, 1997. This distribution has an ex-dividend date of January
5, 1998 and is payable January 9, 1998.
NOTE 5--Financial Highlights
Selected data for a share outstanding throughout each year:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Per Share Data:
Net asset value, beginning of year ... $ 11.45 $ 11.06 $ 10.33 $ 11.68 $ 11.36
------------- ------------- ------------- ------------- -------------
Income From Investment Operations:
Net investment income ................ 0.35 0.34 0.39 0.24 0.13
Net realized and unrealized
gains (losses) on investments ..... 2.03 1.15 1.41 (0.45) 1.41
------------- ------------- ------------- ------------- -------------
Total from investment operations ..... 2.38 1.49 1.80 (0.21) 1.54
------------- ------------- ------------- ------------- -------------
Dividends and Distributions:
Dividends from net investment income . (0.31) (0.30) (0.51) (0.03) (0.22)
Distributions from net realized gains
on investments .................... (0.89) (0.80) (0.56) (1.11) (1.00)
------------- ------------- ------------- ------------- -------------
Total Dividends and Distributions .... (1.20) (1.10) (1.07) (1.14) (1.22)
------------- ------------- ------------- ------------- -------------
Net asset value, end of year ......... $ 12.63 $ 11.45 $ 11.06 $ 10.33 $ 11.68
============= ============= ============= ============= =============
Market value, end of year* ........... $ 13.25 $ 10.875 $ 11.25 $ 10.375 $ 13.75
============= ============= ============= ============= =============
Total investment return .............. 34.76% 6.92% 19.83% (16.95)% 16.59%
============= ============= ============= ============= =============
Ratios/Supplemental Data:
Net assets, end of year (in thousands) $ 666,366 $ 589,081 $ 547,886 $ 492,004 $ 534,813
Ratio of expenses to average
net assets ........................ 1.16% 1.18% 1.22% 1.25% 1.23%
Ratio of net investment income to
average net assets ................ 2.88% 3.12% 3.62% 2.24% 1.18%
Portfolio turnover rate .............. 93.0% 137.2% 160.2% 257.0% 235.5%
Average commission rate per share
on portfolio transactions ......... $ 0.0589 $ 0.0591 $ 0.0606 N/A N/A
</TABLE>
- ------------
*Closing Price--New York Stock Exchange.
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
The Zweig Fund, Inc.
We have audited the accompanying statement of assets and liabilities of The
Zweig Fund, Inc., including the schedule of investments, as of December 31,
1997, and the related statement of operations for the year then ended, the
statement of changes in 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. These financial statements and financial highlights are the
responsibility of the management of the Fund. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
Zweig Fund, Inc. as of December 31, 1997, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
New York, New York
February 4, 1998
18
<PAGE>
THE ZWEIG FUND, INC.
YEAR END RESULTS
(Unaudited)
<TABLE>
<CAPTION>
Total Return on
Net Asset Net Asset NYSE Premium
Value Value Share Price (Discount)
--------------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Year Ended 12/31/97 22.0% $12.63 $13.2500 4.9%
Year Ended 12/31/96 14.5% 11.45 10.8750 (5.0%)
Year Ended 12/31/95 18.3% 11.06 11.2500 1.7%
Year Ended 12/31/94 (2.7%) 10.33 10.3750 0.4%
Year Ended 12/31/93 13.3% 11.68 13.7500 17.7%
Year Ended 12/31/92 0.4% 11.36 13.0000 14.4%
Year Ended 12/31/91 30.1% 12.40 13.7500 10.9%
Year Ended 12/31/90 1.9% 10.48 11.0000 5.0%
Year Ended 12/31/89 22.3% 11.43 12.3750 8.3%
Year Ended 12/31/88 17.9% 10.35 10.3750 0.2%
Year Ended 12/31/87 14.7% 9.73 9.0000 (7.5%)
Inception 10/2/86-12/31/86 (0.4%) 9.31 9.1250 (2.0%)
</TABLE>
================================================================================
KEY INFORMATION
1-800-272-2700 Zweig Shareholder
Relations:
For general information
and literature
(212) 644-2188 The Zweig Fund Hot Line:
For updates on net asset
value, share price, major
industry groups and other
key information
- --------------------------------------------------------------------------------
REINVESTMENT PLAN
Many of you have questions about our reinvestment plan. We urge
shareholders who want to take advantage of this plan and whose shares are held
in "Street Name," to consult your broker as soon as possible to determine if
you must change registration into your own name to participate.
- --------------------------------------------------------------------------------
----------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may from time to time purchase its shares of
common stock in the open market when Fund shares are trading at a discount of
10% or more from their net asset value.
19
<PAGE>
OFFICERS AND DIRECTORS
Martin E. Zweig, Ph.D.
Chairman of the Board and President
Jeffrey Lazar
Vice President and Treasurer
Stuart B. Panish
Vice President and Secretary
Christopher M. Capano
Assistant Vice President
Eugene J. Glaser
Director
Elliot S. Jaffe
Director
Alden C. Olson, Ph.D.
Director
James B. Rogers, Jr.
Director
Anthony M. Santomero, Ph.D.
Director
Robert E. Smith
Director
Investment Adviser
Zweig Advisors Inc.
900 Third Avenue
New York, New York 10022
Fund Administrator
Zweig/Glaser Advisers
900 Third Avenue
New York, New York 10022
Custodian
The Bank of New York
48 Wall Street
New York, New York 10015
Transfer Agent
State Street Bank & Trust Co.
225 Franklin Street
Boston, MA 02110
Legal Counsel
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Independent Accountants
Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York 10019
- --------------------------------------------------------------------------------
This report is transmitted to the shareholders of The Zweig Fund, Inc. for
their information. This is not a prospectus, circular or representation intended
for use in the purchase of shares of the Fund or any securities mentioned in
this report.
ZF974 4902-ANN-12/97
