[LOGO]
THE ZWEIG TOTAL RETURN FUND, INC.
ANNUAL REPORT
-----------------
December 31, 1997
<PAGE>
February 2, 1998
Dear Shareholder:
The Zweig Total Return Fund's net asset value increased 14.6% during the
year ended December 31, 1997, including $0.84 in reinvested distributions.
During the fourth quarter of 1997, the Fund's net asset value gained 1.4%,
including $0.24 in reinvested distributions.
Consistent with our policy of seeking to minimize risk while earning
superior returns over complete market cycles, our average exposure during 1997
was approximately 74%.
================================================================================
DISTRIBUTION DECLARED
================================================================================
In accordance with our policy of distributing 10% of our net asset value
per year, which equals 0.83% per month (10% divided by 12 months), the Fund
announced on January 2, 1998, a distribution of $0.07 per share payable on
January 9, 1998 to shareholders of record on December 31, 1997. The amount of a
distribution depends on the exact net asset value at the time of declaration.
For the January distribution, 0.83% of the Fund's net asset value was equivalent
to $0.07 per share. Including this distribution, the Fund's total distribution
to shareholders for tax purposes in 1997 was $0.84. This brings our total payout
since the Fund's inception to $8.38.
Of the $0.84 taxable in 1997, $0.58 is ordinary income and $0.26 represents
long-term capital gains. Of the capital gains, 45.7% are taxable at the 28% rate
and 54.3% are taxable at the 20% rate.
================================================================================
MARKET OUTLOOK
================================================================================
At this writing, our bond exposure is at 49% compared with 43% on October
16, 1997. If we were fully invested, our Fund would be at 62-1/2% for bonds and
37-1/2% for stocks. Consequently, at 49%, we are at 78% of a full position
(49%/62-1/2%). This represents our moderately bullish stance on bonds.
Responding to our positive view on bonds, we have increased our duration,
or sensitivity to interest rates, to 5.3 years from 5 years at the end of the
third quarter. This rate is higher than the average figure of 4.8 years at most
bond funds.
The turmoil in Southeast Asia has had a positive impact on the bond market
thus far. We have seen a so-called flight to quality, with many investors
switching to bonds in an attempt to protect their investments. This buying
resulted in the lowest yields for long-term bonds since January, 1996.
The Asian crisis has had another positive result for bonds. One of Asia's
problems is a huge overcapacity of manufacturing production. This is causing
companies there to speed up exports by cutting prices, thus spreading world-wide
disinflation. The economic slump in Asia will knock off a bit from our Gross
National Product, perhaps half a percent or so. But it will also lop off a bit
from our inflation rate, which is already low and falling. Lower inflation, of
course, is good for bonds.
Even if Asia's financial markets stabilize, their economies will remain
weak for quite some time. They will have a surplus of certain goods which they
will try to export, keeping further pressure on domestic prices. The worry here
is that lower import prices will slice domestic profit margins. That only holds
true for certain industries with wide Asian exposure.
1
<PAGE>
Our bond model is moderately bullish primarily because prices of so many
commodities are falling. The Consumer Price Index is up only 1.7% from a year
ago, the smallest increase in eleven years, while the more sensitive Producer
Price Index is actually down 1.4%.
The weakness in commodity prices is reflected in the various indices
compiled by the Commodity Research Bureau. Base metals like copper, nickel,
aluminum, lead, and zinc are all down. Oil and lumber are also lower. Softness
in commodity prices is a big plus for bonds.
Lower inflation is also a positive for stocks. Our equity position is
currently at 34%. At this figure, we are at 91% of a full position
(34%/37-1/2%). This is in line with my current bullish stock models.
For many years, people, myself included, have said that the markets are not
cheap. Measured in terms of a multiple of earnings per share, market returns are
close to a record high of 21.6 times estimated S&P earnings. In evaluating this
figure, it is important to note 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 inflation or
negative earnings, the market is probably priced about right. The market is not
cheap but that doesn't mean it can't go higher.
My monetary indicators are bullish because interest rates have come down
and bond yields are at multi-year lows. My economic yardsticks are basically
positive because prices of so many commodities have declined, pointing to low
inflation and low interest rates. With pessimism picking up after the break in
October, 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.
Overall, my indicators are bullish but, like all things, they could 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
================================================================================
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 5.3 years. Since these bonds are liquid, they give
us the flexibility to adjust quickly to changing market conditions.
Implementing my basic allocation strategy, the majority 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. 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, investment companies, manufacturing, and
metals.
Our top individual positions still include Ford, Bear Stearns, Sun, and
RJR/Nabisco. New to this listing because of increased purchases are General
Public Utilities, General Motors, Columbia Gas, CMS Energy, New York State
Electric & Gas, and Edison International.
Still prominent in our portfolio, but with somewhat smaller exposure, are
Ahmanson, Ashland, YPF, ARCO (Atlantic Richfield), Caliber Systems, and
USX-Marathon.
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
2
<PAGE>
================================================================================
I bought The Zweig Total Return Fund (ZTR) when it first came out in 1988 for
$10.00 per share. Over 9 years later, at the end of December, 1997, the Fund was
only trading for $9.4375. It seems that the Fund lost money. Am I missing
something?
================================================================================
<TABLE>
<CAPTION>
- ----------------- ------------------------------------------- ----------------------
1988 1988-1997 1997
- ----------------- ------------------------------------------- ----------------------
<S> <C> <C>
$10.00=value of plus $8.31 paid $8.31 bought 1 share purchased at
1 share at on one share then an additional inception plus 1.49
inception from 1988- 1.49 shares of shares received as a
1997 as a re- ZTR through result of reinvesting
sult of the the distribution $8.31 in more shares
10% payout reinvestment of ZTR = 2.49 shares
policy plan held at the end of
1997.
- ----------------- ------------------------------------------- ----------------------
- --------------------------------------------------------------------------------
Performance Calculation
Based on the closing price of The Zweig Total Return Fund on the
New York Stock Exchange on December 31, 1997:
Shareholder owns 2.49 shares
Closing Price on NYSE is $9.4375
Shareholder's account value is $23.50 (2.49 x $9.4375)
Shareholder's account value at inception was $10.00 (1 x $10.00)
$23.50 Ending value
-10.00 Beginning value
-----------------------
$13.50 Increase in Value
Total Return = 135% ($13.50/$10.00 x 100)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shareholders receiving distributions in cash would have a return of 77.5%.
$8.31(distributions) + $9.4375 (NYSE price 12/31/97) $17.75 - $10.00 =
$7.75/10.00x100.
This return does not include any return you may have earned from investing the
cash elsewhere.
- --------------------------------------------------------------------------------
</TABLE>
Conclusion: Performance cannot be measured by looking only at the beginning and
ending stock price.
3
<PAGE>
THE ZWEIG TOTAL RETURN FUND, INC.
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Number of Value
Shares (Note 1)
------------- -------------
<S> <C> <C> <C>
COMMON STOCKS 36.82%
AEROSPACE & DEFENSE 0.20%
Raytheon Co., Class A ................................................ 27,673 $ 1,364,625
-------------
AUTOMOTIVE 2.04%
Chrysler Corp. ....................................................... 62,800 2,209,775
Ford Motor Co. ....................................................... 112,800 5,491,950
General Motors Corp. ................................................. 71,500 4,334,687
Volvo AB, ADR ........................................................ 64,900 1,752,300
-------------
13,788,712
-------------
CHEMICALS 1.45%
Albemarle Corp. ...................................................... 36,300 866,663
B.F. Goodrich Co. .................................................... 34,100 1,413,018
Dow Chemical Co. ..................................................... 36,500 3,704,750
Millennium Chemicals, Inc. ........................................... 35,100 827,044
Rohm and Haas Co. .................................................... 24,100 2,307,575
Wellman, Inc. ........................................................ 35,600 694,200
-------------
9,813,250
-------------
CONSUMER DURABLES 0.79%
Cooper Tire & Rubber Co. ............................................. 97,400 2,374,125
Huffy Corp. .......................................................... 13,200 178,200
Whirlpool Corp. ...................................................... 50,600 2,783,000
-------------
5,335,325
-------------
CONTAINERS & PACKAGING 0.06%
Sea Containers Ltd., Class A ......................................... 12,100 387,200
-------------
ELECTRONICS 0.53%
General Motors Corp., Class H ........................................ 41,100 1,518,131
Hitachi Ltd., ADR .................................................... 5,000 345,938
Philips Electronics N.V., ADR ........................................ 28,000 1,694,000
-------------
3,558,069
-------------
FINANCIAL SERVICES 4.50%
A.G. Edwards & Sons, Inc. ............................................ 82,600 3,283,350
Bear, Stearns & Co., Inc. ............................................ 94,882 4,506,895
Charter One Financial, Inc. .......................................... 23,545 1,486,278
Fremont General Corp. ................................................ 29,500 1,615,125
H.F. Ahmanson & Co. .................................................. 54,600 3,654,788
Lincoln National Corp. ............................................... 21,900 1,710,937
Old Republic International Corp. ..................................... 38,500 1,431,719
Orion Capital Corp. .................................................. 25,400 1,179,512
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Number of Value
Shares (Note 1)
------------- -------------
<S> <C> <C> <C>
FINANCIAL SERVICES--(CONTINUED)
PaineWebber Group Inc. ............................................... 102,100 $ 3,528,831
PIMCO Advisors L.P., Class A ......................................... 18,600 561,488
Providian Corp. ...................................................... 80,600 3,642,112
Selective Insurance Group, Inc. ...................................... 19,600 529,200
St. Paul Bancorp Inc. ................................................ 12,100 317,625
Travelers Group Inc. ................................................. 56,300 3,033,163
-------------
30,481,023
-------------
FOOD & BEVERAGE 0.25%
Adolph Coors Co., Class B ............................................ 50,600 1,682,450
-------------
HOME BUILDERS & MATERIALS 0.19%
Kaufman & Broad Home Corp. ........................................... 29,500 661,906
Lafarge Corp. ........................................................ 20,800 614,900
-------------
1,276,806
-------------
INDUSTRIAL SERVICES 0.69%
Browning-Ferris Industries Inc. ...................................... 97,100 3,592,700
Ogden Corp. .......................................................... 38,400 1,082,400
-------------
4,675,100
-------------
INVESTMENT COMPANIES 2.06%
Argentina Fund, Inc. ................................................. 23,700 309,581
Blackrock 2001 Term Trust, Inc. ...................................... 29,000 250,125
Blackrock Strategic Term Trust, Inc. ................................. 29,000 246,500
Brazil Fund, Inc. .................................................... 25,800 541,800
Central European Equity Fund ......................................... 18,600 340,613
Chile Fund, Inc. ..................................................... 24,600 438,187
Clemente Global Growth Fund, Inc. .................................... 13,100 123,631
Emerging Markets Infrastructure Fund, Inc. ........................... 67,500 793,125
Emerging Markets Telecommunications Fund, Inc. ....................... 24,600 329,025
Emerging Mexico Fund, Inc. ........................................... 16,400 174,250
G. T. Global Eastern Europe Fund ..................................... 17,200 217,150
Gabelli Equity Trust, Inc. ........................................... 37,700 440,618
Gabelli Global Multimedia Trust Fund, Inc. ........................... 51,700 452,375
India Fund, Inc. ..................................................... 19,200 141,600
Italy Fund, Inc. ..................................................... 16,100 173,075
Latin American Discovery Fund ........................................ 22,600 405,388
Mexico Equity & Income Fund, Inc. .................................... 17,100 182,756
Mexico Fund, Inc. .................................................... 74,400 1,529,850
Morgan Stanley Asia-Pacific Fund, Inc. ............................... 49,400 367,412
Morgan Stanley Emerging Markets Fund, Inc. ........................... 64,300 839,919
Morgan Stanley India Investment Fund, Inc. ........................... 15,900 133,163
New Germany Fund, Inc. ............................................... 61,100 824,850
Portugal Fund, Inc. .................................................. 16,700 264,069
Royce Value Trust, Inc. .............................................. 70,160 1,056,785
</TABLE>
5
<PAGE>
THE ZWEIG TOTAL RETURN FUND, INC.
SCHEDULE OF INVESTMENTS--(Continued)
December 31, 1997
<TABLE>
<CAPTION>
Number of Value
Shares (Note 1)
------------- -------------
<S> <C> <C> <C>
INVESTMENT COMPANIES--(Continued)
Southern Africa Fund, Inc. ........................................... 14,900 $ 188,113
Spain Fund, Inc. ..................................................... 11,600 168,200
Swiss Helvetia Fund, Inc. ............................................ 40,800 1,119,450
Taiwan Fund, Inc. .................................................... 39,500 651,750
Templeton China World Fund, Inc. ..................................... 20,400 170,850
Templeton Dragon Fund, Inc. .......................................... 68,800 739,600
Tri-Continental Corp. ................................................ 12,400 330,925
-------------
13,944,735
-------------
LODGING 0.04%
Marcus Corp. ......................................................... 16,500 304,219
-------------
MANUFACTURING 2.27%
Aeroquip-Vickers, Inc. ............................................... 27,100 1,329,593
Borg-Warner Automotive, Inc. ......................................... 23,600 1,227,200
Brown Group, Inc. .................................................... 26,000 346,125
Cummins Engine Company, Inc. ......................................... 51,900 3,065,344
Dexter Corp. ......................................................... 14,900 643,494
Excel Industries, Inc. ............................................... 18,000 325,125
Herman Miller, Inc. .................................................. 19,200 1,047,600
Johnson Controls, Inc. ............................................... 26,000 1,241,500
PACCAR, Inc. ......................................................... 13,400 703,500
Simpson Industries, Inc. ............................................. 20,300 238,525
Standard Products Co. ................................................ 22,200 568,875
Timken Co. ........................................................... 76,300 2,622,813
Trinity Industries, Inc. ............................................. 44,600 1,990,275
-------------
15,349,969
-------------
METALS & MINING 2.50%
AK Steel Holding Corp. ............................................... 85,200 1,506,975
Alcan Aluminium Ltd. ................................................. 71,200 1,966,900
ASARCO, Inc. ......................................................... 95,500 2,142,781
Birmingham Steel Corp. ............................................... 25,000 393,750
British Steel Plc, ADR ............................................... 80,700 1,730,006
Cleveland-Cliffs, Inc. ............................................... 6,400 293,200
Cyprus Amax Minerals Co. ............................................. 92,800 1,426,800
Oregon Steel Mills, Inc. ............................................. 52,800 1,125,300
Phelps Dodge Corp. ................................................... 41,300 2,570,925
Quanex Corp. ......................................................... 13,800 388,125
USX-U.S. Steel Group ................................................. 107,400 3,356,250
-------------
16,901,012
-------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Number of Value
Shares (Note 1)
------------- -------------
<S> <C> <C> <C>
OIL & OIL SERVICES 5.09%
Ashland Inc. ......................................................... 67,600 $ 3,629,275
Atlantic Richfield Co. ............................................... 44,600 3,573,575
Elf Aquitaine S.A., ADR .............................................. 42,500 2,491,563
Equitable Resources, Inc. ............................................ 27,700 979,888
Helmerich & Payne, Inc. .............................................. 11,400 773,775
Mobil Corp. .......................................................... 28,900 2,086,218
Murphy Oil Corp. ..................................................... 34,000 1,842,375
Occidental Petroleum Corp. ........................................... 98,100 2,875,556
Pennzoil Co. ......................................................... 51,200 3,420,800
Phillips Petroleum Co. ............................................... 24,700 1,201,038
Sun Company, Inc. .................................................... 104,300 4,387,118
USX-Marathon Group ................................................... 104,700 3,533,625
YPF Sociedad Anonima, ADR ............................................ 108,100 3,695,669
-------------
34,490,475
-------------
PAPER & FOREST PRODUCTS 0.79%
Bowater Inc. ......................................................... 62,900 2,795,119
Fort James Corp. ..................................................... 61,400 2,348,550
Pope & Talbot, Inc. .................................................. 15,900 239,494
-------------
5,383,163
-------------
RETAIL TRADE & SERVICES 0.80%
Dayton Hudson Corp. .................................................. 28,800 1,944,000
Ross Stores, Inc. .................................................... 17,000 618,375
Shopko Stores Inc. ................................................... 30,700 667,725
Supervalu Inc. ....................................................... 52,100 2,181,687
-------------
5,411,787
-------------
TECHNOLOGY 1.42%
Applied Materials Inc. ............................................... 23,200(a) 698,900
Dell Computer Corp. .................................................. 30,800(a)(b) 2,587,200
Digital Equipment Corp. .............................................. 32,300(a) 1,195,100
Harris Corp. ......................................................... 32,800 1,504,700
Intel Corp. .......................................................... 20,600 1,447,150
Microsoft Corp. ...................................................... 16,900(a) 2,184,325
-------------
9,617,375
-------------
TELECOMMUNICATIONS 1.77%
BCE Inc. ............................................................. 26,800 892,775
Comsat Corp. ......................................................... 94,300 2,286,775
Telecomunicacoes Brasileiras, S.A., ADR. ............................. 22,300 2,596,556
Telefonica de Espana, S.A., ADR ...................................... 35,100 3,196,294
Telefonos de Mexico, S.A., ADR ....................................... 53,400 2,993,738
-------------
11,966,138
-------------
</TABLE>
7
<PAGE>
THE ZWEIG TOTAL RETURN FUND, INC.
SCHEDULE OF INVESTMENTS--(Continued)
December 31, 1997
<TABLE>
<CAPTION>
Number of Value
Shares (Note 1)
------------- -------------
<S> <C> <C> <C>
TOBACCO 0.72%
RJR Nabisco Holdings Corp. ........................................... 116,100 $ 4,353,750
Universal Corp. ...................................................... 13,000 534,625
-------------
4,888,375
-------------
TRANSPORTATION 2.09%
British Airways Plc, ADR ............................................. 8,100 758,869
Caliber Systems, Inc. ................................................ 63,100 3,072,181
Canadian Pacific Ltd. ................................................ 125,400 3,417,150
CNF Transportation, Inc. ............................................. 46,200 1,772,925
GATX Corp. ........................................................... 13,300 965,081
KLM Royal Dutch Airlines N.V., ADR ................................... 30,145 1,137,974
Rollins Truck Leasing Corp. .......................................... 21,000 375,375
Ryder System, Inc. ................................................... 82,000 2,685,500
-------------
14,185,055
-------------
UTILITIES--ELECTRIC & NATURAL GAS 6.57%
Allegheny Energy, Inc. ............................................... 25,900 841,750
American Electric Power Co., Inc. .................................... 31,400 1,621,025
CMS Energy Corp. ..................................................... 87,200 3,842,250
Columbia Gas System, Inc. ............................................ 50,300 3,951,694
DQE Inc. ............................................................. 37,250 1,308,406
DTE Energy Co. ....................................................... 46,100 1,599,093
Edison International ................................................. 140,200 3,811,688
FPL Group, Inc. ...................................................... 60,200 3,563,087
FirstEnergy Co. ...................................................... 28,800 835,200
GPU, Inc. ............................................................ 106,300 4,477,888
IPALCO Enterprises, Inc. ............................................. 6,600 276,787
New York State Electric & Gas Corp. .................................. 108,000 3,834,000
Pacific Enterprises .................................................. 34,800 1,309,350
PacifiCorp. .......................................................... 33,600 917,700
PECO Energy Co. ...................................................... 21,900 531,075
PG&E Corp. ........................................................... 96,800 2,946,350
Pinnacle West Capital Corp. .......................................... 57,400 2,432,325
PP&L Resources, Inc. ................................................. 36,600 876,113
Public Service Co. of New Mexico ..................................... 41,600 985,400
Sierra Pacific Resources ............................................. 9,300 348,750
Transcanada Pipelines Ltd. ........................................... 46,700 1,044,912
United Illuminating Co. .............................................. 6,500 298,594
UtiliCorp United Inc. ................................................ 36,200 1,405,013
Valero Energy Corp. .................................................. 45,800 1,439,838
-------------
44,498,288
-------------
Total Common Stocks ($212,906,716) ............................ 249,303,151
-------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Principal Value
Amount (Note 1)
----------- -------------
<S> <C> <C> <C>
UNITED STATES GOVERNMENT & AGENCY OBLIGATIONS 51.41%
Federal National Mortgage Association, 6.85%, 4/5/2004 ............... $10,385,000 $ 10,849,095
United States Treasury Bonds, 10.750%, 5/15/2003 ..................... 15,000,000 18,421,875
United States Treasury Bonds, 7.25%, 8/15/2022 ....................... 45,500,000 52,566,696
United States Treasury Bonds, 7.50%, 11/15/2024 ...................... 36,500,000 43,663,125
United States Treasury Notes, 6.25%, 8/31/2000 ....................... 13,500,000 13,681,400
United States Treasury Notes, 5.625%, 11/30/2000 ..................... 19,745,000 19,714,139
United States Treasury Notes, 7.50%, 2/15/2005 ....................... 16,300,000 17,914,710
United States Treasury Notes, 6.50%, 5/15/2005 ....................... 7,600,000 7,925,371
United States Treasury Notes, 6.875%, 5/15/2006 ...................... 71,600,000 76,656,750
United States Treasury Notes, 6.50%, 10/15/2006 ...................... 82,800,000 86,733,000
-------------
Total United States Government & Agency Obligations
(Cost $334,581,993) ........................................... 348,126,161
-------------
SHORT-TERM INVESTMENTS 10.78%
Baker Hughes, Inc., 6.70%, 1/02/98 ................................... 26,500,000 26,495,068
TRW, Inc., 6.60%, 1/02/98 ............................................ 21,500,000 21,496,058
Volkswagen of America Inc., 6.60%, 1/02/98 ........................... 25,000,000 24,995,417
-------------
Total Short-Term Investments (Cost $72,986,543) ............... 72,986,543
-------------
Total Investments (Cost $620,475,252) -99.01% ................. $ 670,415,855
Other Assets less liabilities - 0.99% ......................... 6,717,199
-------------
Net Assets - 100.00% .......................................... $ 677,133,054
=============
<CAPTION>
Number of
Shares
-----------
<S> <C> <C>
SECURITIES SOLD SHORT (NOTE 1D)
W.E.B.S. Index Fund, Inc. - Hong Kong Series
(Proceeds $1,128,685) ............................................. 76,400 $ 830,850
=============
</TABLE>
- ------------
(a) Non-income producing security.
(b) Used as collateral on short sales.
For Federal income tax purposes, the tax basis of investments owned at
December 31, 1997 was $620,547,016 and net unrealized appreciation on
investments consisted of:
Gross unrealized appreciation ................... $57,589,077
Gross unrealized depreciation ................... (7,720,238)
-----------
Net unrealized appreciation ..................... $49,868,839
===========
See notes to financial statements.
9
<PAGE>
THE ZWEIG TOTAL RETURN FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at value (identified cost $620,475,252) ............... $ 670,415,855
Cash ............................................................... 821,753
Dividends and interest receivable .................................. 6,155,074
Deposits with broker for securities sold short ..................... 1,193,557
Prepaid expenses ................................................... 44,772
-------------
Total Assets .................................................. 678,631,011
-------------
LIABILITIES:
Accrued advisory fees (Note 3) ..................................... 398,272
Accrued administration fees (Note 3) ............................... 2,402
Other accrued expenses ............................................. 266,433
Securities sold short, at value (proceeds $1,128,685) .............. 830,850
-------------
Total Liabilities ............................................. 1,497,957
-------------
NET ASSETS ............................................................... $ 677,133,054
=============
NET ASSET VALUE, PER SHARE:
($677,133,054/78,622,476 shares outstanding--Note 4) .................. $ 8.61
=============
Net Assets consist of:
Capital paid-in .................................................... $ 626,959,479
Accumulated net realized losses .................................... (64,863)
Net unrealized appreciation on investments and securities sold short 50,238,438
-------------
$ 677,133,054
=============
</TABLE>
See notes to financial statements.
10
<PAGE>
THE ZWEIG TOTAL RETURN FUND, INC.
STATEMENT OF OPERATIONS
For the Year ended December 31, 1997
<TABLE>
<S> <C>
Investment Income:
Income:
Dividends .............................................................. $ 6,227,857
Interest ............................................................... 28,630,008
-----------
Total Income ...................................................... 34,857,865
-----------
Expenses:
Investment advisory fees (Note 3) ...................................... 4,571,606
Administration fees (Note 3) ........................................... 849,013
Transfer agent fees .................................................... 482,331
Printing and postage expenses .......................................... 384,550
Professional fees (Note 3) ............................................. 99,306
Custodian fees ......................................................... 97,963
Directors' fees and expenses (Note 3) .................................. 76,404
Miscellaneous .......................................................... 200,405
-----------
Total Expenses .................................................... 6,761,578
-----------
Net Investment Income ......................................... 28,096,287
-----------
Realized and Unrealized Gain on Investments:
Net realized gain on investments (Note 2):
Security transactions .................................................. 34,508,803
Short sales transactions ............................................... 72,199
Futures transactions ................................................... 2,623,873
-----------
Net realized gain on investments .............................. 37,204,875
Increase in unrealized appreciation on investments and securities sold short 24,851,047
-----------
Net realized and unrealized gain on investments ........................ 62,055,922
-----------
Net increase in net assets resulting from operations ................... $90,152,209
===========
</TABLE>
See notes to financial statements.
11
<PAGE>
THE ZWEIG TOTAL RETURN 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 ....................................... $ 28,096,287 $ 27,214,555
Net realized gain on investments ............................ 37,204,875 18,362,961
Increase (decrease) in unrealized appreciation on investments
and securities sold short .............................. 24,851,047 (6,902,204)
------------- -------------
Net increase in net assets resulting from operations ... 90,152,209 38,675,312
------------- -------------
Dividends and distributions to shareholders from:
Net investment income ....................................... (28,076,250) (27,214,555)
Net realized gains on investments ........................... (37,204,875) (18,739,823)
Capital paid-in ............................................. -- (17,854,497)
------------- -------------
Total dividends and distributions to shareholders ...... (65,281,125) (63,808,875)
------------- -------------
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 .................................... 13,494,402 16,377,716
------------- -------------
Net increase (decrease) in net assets ........................... 38,365,486 (8,755,847)
Net Assets:
Beginning of year ............................................... 638,767,568 647,523,415
------------- -------------
End of year ..................................................... $ 677,133,054 $ 638,767,568
============= =============
</TABLE>
See notes to financial statements.
12
<PAGE>
THE ZWEIG TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 December 31, 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. 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
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 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 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.
13
<PAGE>
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 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.
During the year ended December 31, 1997, the Fund reclassified $84,900 from
undistributed net realized gains to capital paid-in and $20,037 from
undistributed net investment income to undistributed net realized gains.
NOTE 2--Portfolio Transactions
During the year ended December 31, 1997, 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 ............... $191,637,696 $444,225,648
============ ============
Proceeds from Sales ............. $160,919,530 $341,801,914
============ ============
14
<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 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 Advisory Agreement, the
Fund pays the Investment Adviser a monthly fee equal, on an annual basis, to
0.70% of the Fund's average daily net assets. During the year ended December 31,
1997, the Fund accrued advisory fees of $4,571,606.
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 year ended December 31, 1997, the Fund accrued
administration fees of $849,013.
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 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 $16,161 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 $80,824 in connection with
portfolio transactions effected through them. In addition, Zweig Securities
Corp. charged $6,529 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
$.001 per share, of which 500,000,000 shares are authorized and 78,622,476
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
15
<PAGE>
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, 1,590,261 and 1,979,527
shares, respectively, were issued pursuant to the Plan.
On January 2, 1998 the Fund declared a distribution of $0.07 per share 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 .. $ 8.29 $ 8.63 $ 8.11 $ 9.11 $ 9.06
------------- ------------- ------------- ------------- -------------
Income From Investment Operations:
Net investment income ............... 0.36 0.36 0.39 0.29 0.26
Net realized and unrealized
gains (losses) on investments .... 0.80 0.14 0.97 (0.43) 0.75
------------- ------------- ------------- ------------- -------------
Total from investment operations .... 1.16 0.50 1.36 (0.14) 1.01
------------- ------------- ------------- ------------- -------------
Dividends and Distributions:
Dividends from net investment income (0.36) (0.36) (0.39) (0.29) (0.26)
Distributions from net realized gains
on investments ................... (0.48) (0.24) (0.45) -- (0.70)
Distributions from capital paid-in .. -- (0.24) -- (0.57) --
------------- ------------- ------------- ------------- -------------
Total Dividends and Distributions ... (0.84) (0.84) (0.84) (0.86) (0.96)
------------- ------------- ------------- ------------- -------------
Net asset value, end of year .. $ 8.61 $ 8.29 $ 8.63 $ 8.11 $ 9.11
============= ============= ============= ============= =============
Market value, end of year* .... $ 9.4375 $ 8.00 $ 8.625 $ 8.00 $ 10.75
============= ============= ============= ============= =============
Total investment return ............. 30.22% 2.62% 19.19% (17.08)% 18.37%
============= ============= ============= ============= =============
Ratios/Supplemental Data:
Net assets, end of year
(in thousands) ................... $ 677,133 $ 638,768 $ 647,523 $ 591,659 $ 648,516
Ratio of expenses to average
net assets ....................... 1.04% 1.03% 1.10% 1.12% 1.11%
Ratio of net investment income to
average net assets ............... 4.30% 4.31% 4.59% 3.35% 2.85%
Portfolio turnover rate ............. 104.7% 147.2% 179.8% 281.0% 293.0%
Average commission rate per share on
portfolio transactions ........... $ 0.0587 $ 0.0591 $ 0.0606 N/A N/A
</TABLE>
- ------------
*Closing Price -- New York Stock Exchange.
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
The Zweig Total Return Fund, Inc.
We have audited the accompanying statement of assets and liabilities of The
Zweig Total Return 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 Total Return 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
17
<PAGE>
THE ZWEIG TOTAL RETURN 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 14.6% $8.61 $9.4375 9.6%
Year Ended 12/31/96 6.3% 8.29 8.0000 (3.5%)
Year Ended 12/31/95 17.7% 8.63 8.6250 (0.1%)
Year Ended 12/31/94 (1.9%) 8.11 8.0000 (1.4%)
Year Ended 12/31/93 10.7% 9.11 10.7500 18.0%
Year Ended 12/31/92 2.1% 9.06 10.0000 10.4%
Year Ended 12/31/91 20.1% 9.79 10.6250 8.5%
Year Ended 12/31/90 4.2% 9.02 8.6250 (4.4%)
Year Ended 12/31/89 14.9% 9.59 9.7500 1.7%
Inception 9/30/88-12/31/88 1.1% 9.24 9.1250 (1.2%)
</TABLE>
================================================================================
KEY INFORMATION
1-800-272-2700 Zweig Shareholder
Relations:
For general information
and literature
(212) 486-3122 The Zweig Total Return
Fund Hot Line:
For updated on net asset
value, share price, major
industry groups and other
key information
- --------------------------------------------------------------------------------
REINVESTMENT PLAN
Many of you have questions about our reinvestment plan. If you want to take
advantage of this plan and your shares are held in "Street Name," we urge you to
consult your broker as soon as possible to determine if you must change
registration to 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.
18
<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
Charles H. Brunie
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
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 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.
ZTR974 3206-ANN-12/97
