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