August 1, 2001
[PHOTO OF MARTIN E. ZWEIG]
Dear Shareholder:
The Zweig Total Return Fund, Inc.'s net asset value for the three months
ended June 30, 2001, increased 1.0%, including $0.18 per share in reinvested
distributions.
For the six months ended June 30, 2001, the Fund's net asset value decreased
3.2%, including $0.36 in reinvested distributions.
The Fund's average overall exposure during the first half of 2001 was
approximately 86%.
Our results so far this year are certainly not what we would like. Although
many of our equity holdings improved in line with our bullish indicators, two
industry groups--technology in the first quarter and energy in the second--
showed unanticipated weakness. However, we believe these areas warrant our
continued support: technology because of its historically strong performance
after multiple aggressive Fed easings, and energy because of its positive
fundamentals.
DISTRIBUTION DECLARED
In accordance with our policy of distributing 10% of net asset value per
year, which equals 0.83% per month (10% divided by 12 months), the Fund
recently announced a distribution of $0.06 per share payable on August 27,
2001 to shareholders of record on August 13, 2001. The amount of a
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 $0.06 per share. Including this distribution, the Fund's total
payout since its inception is now $11.19 per share.
MARKET OUTLOOK
On June 30 our bond exposure was 57% versus 61% at the end of the first
quarter. If we were fully invested, we would be at 62.5% in bonds and 37.5% in
stocks. Consequently, at 57% we are at approximately 91% of a full position
(57% / 62.5%).
The Federal Reserve continued its aggressive rate cuts in the second
quarter, lowering the Fed funds rate from 5.00% to 3.75% in three stages.
Since the bond market had largely expected the Fed actions, there were no
surprises on pricing. The front end of the government bond yield curve was
basically unchanged during the quarter with yields on the two-year note
starting and ending at just under 4.20%. Since shorter dated bonds tend to
trade more in line with the Fed moves, the lackluster performance of these
notes was in line with expectations.
Continued strong consumer confidence and signs of improving economic data
served to weaken the long end of the Treasury bond market. As a result, many
market participants thought it prudent to sell their longer dated bonds.
Consequently, the yield on the 30-year Treasury bond shot up from 5.44% to
5.75%.
Reflecting lower commodity prices and more recent less favorable economic
news, our bond model was moderately positive at the end of the quarter.
In line with our bullish stock indicators, our equity exposure at the end of
the quarter was 39%, slightly above our normal top benchmark figure of 37.5%.
Despite gains in the second quarter, the first half was not a happy one for
the stock market. The Dow Jones Industrial Average/1/ dipped 2.6%, the Nasdaq
Composite/2/ dropped 12.6%, and the S&P 500 Index/3/ declined 6.7%. Although
these figures are disappointing, I think the market bottomed at the end of
March and the beginning of April. It is difficult to turn around a bear
market, but I believe we are doing it. As of this writing, the market is up
fairly nicely from those lows.
We have seen six Fed cuts this year. In the past, after five cuts the S&P
500 had gained an average of 28.1% a year later. There is a much smaller
historical sample after six cuts, but, as I recall, the market then was up
almost as much, or about 26% or 27%. Monetary policy takes awhile before it
begins to impact the economy. It has been slow going so far, but I think the
economy will begin turning up during the next six months.
We have been reading a lot about the so-called summer doldrums affecting the
market, but I don't put much stock in that phenomenon. Volume does tend to
lessen in the summer because of vacations and the July 4 and Labor Day
holidays. However, the market is not always dull in the summer. I remember the
summer of 1984 when things were very quiet until the market shot through the
roof in early August for three straight days. In 1982 we had the big bear
market bottom in August. I have seen all sorts of summer market fireworks in
both directions.
The Fed believes we are in a new economy because of the enhanced
productivity due to technology and thus can avoid a recession despite the
recent gloomy economic and employment statistics. I am not in complete
agreement with that thesis. Our economy certainly is new because we are always
advancing. Some industries fall by the wayside, others deteriorate, and new
ones are built up. In the early 20th century, the economy largely depended on
two notoriously cyclical industries--farming and heavy manufacturing. These
areas now are much less important. We are much more diversified, with the
service industry perhaps the dominant factor in the overall economy. This is a
plus because there is less volatility in this sector. I'm not so sure about
the Fed's emphasis on the expanded role of productivity because that is a
factor that is so hard to measure. At any rate, we do know that productivity
declines in recessions.
--------
1 The Dow Jones Industrial Average measures large-capitalization stock total-
return performance.
2 The Nasdaq Composite measures technology-oriented stock total-return
performance.
3 The S&P 500 Index measures broad stock market total-return performance. The
indices are unmanaged and not available for direct investment.
There is a theory going around that the strong dollar -- which recently hit
a new high --tends to be bad for the economy. That is simply not true.
Sometimes a strong dollar is bullish; sometimes it is bearish. We have tested
the dollar to death and do not find its strength statistically significant.
The alarmists warn that the gross national product, prices, and inflation will
all be lower if the dollar is too strong. Well, there have been only two cases
in the last 50 years when the dollar was this strong. In both cases, the
economy was strong, and inflation actually upticked. I think that there are a
lot of factors that are more important to the economy than just the currency.
The current strength of the dollar is related to our trade imbalance. The
U.S. trade gap in goods and services totaled $127.2 billion in the first four
months of this year against $116.8 billion in the same period last year.
However, I have never seen why this is a problem. We are so successful in this
country that we can afford to buy lots of goods and services from abroad. If
people think this is a bad thing, they should consider the situation of Japan.
They run a massive trade surplus and their economy has been in the doldrums
for a decade. Incidentally, foreigners are huge investors in U.S. stocks,
bonds, real estate, and businesses--and this inflow does not show up in the
trade figures.
Business expenditures on capital equipment and services reportedly fell at a
20% annual rate in the second quarter to the slowest pace in
2
nearly a decade, but I do not find this worrisome. As I see it, the biggest
danger with capital spending is when it gets excessive, as it did in the year
2000. Capital spending last year rose over 13%. We have had 11 years in the
last 51 when capital spending climbed at least 13%. In those years the S&P
average declined 2.8%. Sure enough, the S&P was also down last year.
Conversely, there have been six years in the last 51 when capital spending was
actually negative year to year, which is a possibility this year. I almost
hope that happens because in the six years that it occurred, the S&P was up
every time, with an average annual gain of 27%.
When capital spending gets excessive, it creates inflationary pressures.
Interest rates go up, and the Fed starts to tighten. The market, being a
discounting mechanism, then goes down. When business conditions are weak, as
they are now, and capital spending is low, inflationary pressures are
minimized and the Fed tends to cut, as it has six times this year. That's when
the market looks ahead, and at some point, capital spending picks up.
Concern has been voiced about the fact that earnings in the S&P 500 are
estimated to have fallen 17.2% in the second quarter from a year ago--the
worst drop since the third quarter of 1991 when they declined 17.9%. I do not
consider this a problem for the market. Historically, when earnings have been
negative for the S&P, the market has gone up at an annualized rate of 15.8%.
Ironically, when earnings have grown by at least 10% a year, which we'll call
high, the market has risen at only a 3.8% rate. We are probably in a
recession, or at least an earnings recession. It is in most periods when
earnings are poor that markets tend to bottom and the best advances follow.
That's what happened in the recession period of 1990-1991 as well as in 1974
and 1982 when earnings were terrible.
Stockholders added $17.2 billion more to stock funds than they took out in
May. This followed a net inflow of $19.2 billion in April. Figures for both
months indicate a big turnaround from March when we had net redemptions almost
as large. It was actually a bullish sign when investors panicked in March and
sold heavily. When that happens, markets tend to bottom. We have had 12 cases
in the last 50 years when investors hit the panic button, and we had monthly
net redemptions. One year later the market was up every time, with an average
gain of 20.4%. In six of those 12 instances, the redemptions only lasted one
month, as was true this time.
This year we have seen redemptions in March and strong net sales in April
and May. In the six prior cases of the 12 where we saw this reversal, the
market actually went up 27% in the year following. I am glad the positive
inflows have returned. However, I don't want them to get excessive and reach
the boiling point as they did early last year. It's not good for the market if
we get excessive speculation.
Foreign portfolio investors are also getting into the act. They bought, on
net, a record amount of our stocks and bonds in the first quarter, while our
net acquisitions of foreign investments were negligible. That's not
necessarily a market positive. Foreigners tend to be wrong on our markets.
When their buying gets too high, it is generally a poor indicator. When they
panic and sell, it is usually a good sign. I don't like to see them buying
excessively.
An early sign that the economy might be turning is the latest report by the
National Association of Purchasing Managers. It reported that its index of
manufacturing rose to 44.7% in June from 42.1% in May and hit a seven-month
high. In the last 50 years, there have been 10 other cases when the number has
been below 44%, which is a low number, and then reversed upward by at least
three points. In every single case, the S&P was higher one year later, and the
average gain was 20.8%. When NAPM (as it is called) gets down as low as it has
been, it means that the economy is very weak. Usually, but not necessarily, it
signifies a recession. I consider it a very good sign for the market when the
NAPM figures improve.
3
In the first half of this year, about $377 billion in merger deals were
announced in the U.S., the slowest six months since 1997. It's not great for
the investment bankers, but I prefer a market where merger activity is
moderate. It got pretty extensive during the boom years and was
just one more sign of speculation. The big proposed merger between General
Electric and Honeywell was shot down by the Europeans and may put a damper on
international mergers. It should not have any impact on the domestic ones. By
the way, I love to see cash takeovers, which reduce the supply of stock. When
two companies merge in a stock deal, it doesn't do anything for the market one
way or another.
There were only 471 initial public offerings (IPOs) recorded in the first
half of this year, the lowest for any six-month period in nearly 20 years. In
1999 and 2000 we had an orgy of IPOs. The prices of many of these, mostly in
technology, were later crushed. That's why it is nearly impossible to do an
IPO in technology today. The IPOs that we are seeing now are mostly from long-
established industries, which I think is healthy. There just are not as many
of them because underwriters find it hard to find companies that people are
willing to buy. I think the low number of IPOs is a positive factor because it
means that a lot of the speculative excesses have been wrung out of the
market. When IPOs are light, the market is usually in the bottoming stage.
Summing up, most of our indicators are positive. I mentioned heavy foreign
buying as a negative. Valuation could be a moderate problem. However, our
monetary indicators are very positive. We have had six Fed rate cuts, a decent
drop in interest rates, and, I should add, the Fed has allowed the money
supply to grow. Historically, whenever the Fed has cut aggressively and
increased the money supply, it has managed to turn the market upward in
several months. I believe that will happen here.
Also, we have had a lot of pessimism in the market, illustrated, in part, by
the fewer IPOs. We also had that panic for awhile with redemptions of mutual
funds. There have been any number of signs of increasing pessimism so that I
think the market is okay. I believe we're going to see a pretty decent
advance. It probably will not be like the 1980s or 1990s when the
market went up forever, but I think it will do well for the next six to 12
months. It's been rough for the past couple of months, and I'm sort of sitting
here waiting for the pot to boil. But I do think the market bottomed at the
beginning of April, but it's just taking its own sweet time. At the time of
this writing, our posture is bullish, and we are approximately 97% invested.
PORTFOLIO COMPOSITION
In accordance with our investment policy guidelines, all of our bonds are
U.S. government obligations. The portfolio's average duration (a measure of
sensitivity to interest rate changes) was 7.6 years on June 30, 2001. This
compares with 7.8 years on March 31, 2001. Since these bonds are highly
liquid, they provide the flexibility to respond quickly to changing market
conditions.
Our leading industry groups on June 30 consisted of technology, financial
services, health care, energy, telecommunications, and retailing. Except for
minor shifts in percentages held, this listing is basically unchanged from the
close of the first quarter. We increased our position in technology, which
also benefited from appreciation, and trimmed our holdings in retailing and
energy.
Microsoft was our largest individual position. Other prominent holdings
included General Electric, Citigroup, Exxon Mobil, Pfizer, Tyco, AOL Time
Warner, Wal-Mart, IBM, and Intel.
Sincerely,
/s/ Martin E. Zweig, Ph.D.
Martin E. Zweig, Ph.D.
Chairman
4
THE ZWEIG TOTAL RETURN FUND, INC.
SCHEDULE OF INVESTMENTS
June 30, 2001
(Unaudited)
Number of Value
Shares (Note 3)
--------- -----------
Common Stocks 38.28%
Aerospace & Air Transport 0.58%
Boeing Co............................................ 31,900 $ 1,773,640
United Technologies Corp. ........................... 24,500 1,794,870
-----------
3,568,510
-----------
Automotive 0.17%
General Motors Corp. ................................ 16,000 1,029,600
-----------
Building & Forest Products 0.55%
Cemex S.A. de CV, ADR................................ 34,556 915,734
International Paper Co. ............................. 39,700 1,417,290
Weyerhaeuser Co. .................................... 19,200 1,055,424
-----------
3,388,448
-----------
Chemicals 0.57%
Air Products & Chemicals, Inc. ...................... 19,200 878,400
Dow Chemical Co. .................................... 46,000 1,529,500
Praxair, Inc. ....................................... 24,400 1,146,800
-----------
3,554,700
-----------
Commercial Services 0.31%
Modis Professional Services, Inc. ................... 30,100(a) 207,690
Omnicom Group, Inc. ................................. 20,000 1,720,000
-----------
1,927,690
-----------
Consumer Products 1.18%
Anheuser-Busch Cos., Inc. ........................... 40,000 1,648,000
Coca-Cola Co. ....................................... 16,000 720,000
Leggett & Platt, Inc. ............................... 33,000 726,990
PepsiCo, Inc. ....................................... 49,000 2,165,800
Procter & Gamble Co. ................................ 32,000 2,041,600
-----------
7,302,390
-----------
Electronics -- Electrical 1.63%
Celestica, Inc. ..................................... 16,000(a) 824,000
Flextronics International Ltd. ...................... 16,000(a) 417,760
General Electric Co. ................................ 162,000 7,897,500
Jabil Circuit, Inc. ................................. 32,000(a) 987,520
-----------
10,126,780
-----------
See notes to financial statements
5
Number of Value
Shares (Note 3)
--------- -----------
Engineering & Machinery 0.33%
Ingersoll-Rand Co.................................... 23,700 $ 976,440
SPX Corp............................................. 8,500 1,064,030
-----------
2,040,470
-----------
Financial Services 7.50%
ACE Ltd. ............................................ 33,100 1,293,879
Allstate Corp. ...................................... 57,900 2,547,021
American International Group, Inc. .................. 46,000 3,956,000
Bank of America Corp. ............................... 53,800 3,229,614
Capital One Financial Corp. ......................... 16,000 960,000
Citigroup, Inc. ..................................... 111,400 5,886,376
Fannie Mae........................................... 38,300 3,261,245
Fifth Third Bancorp.................................. 32,000 1,921,600
FleetBoston Financial Corp. ......................... 30,000 1,183,500
Freddie Mac.......................................... 53,500 3,745,000
H & R Block, Inc. ................................... 40,000 2,582,000
Household International, Inc. ....................... 40,000 2,668,000
J.P. Morgan Chase & Co. ............................. 31,450 1,402,670
Lehman Brothers Holdings, Inc. ...................... 33,000 2,565,750
Merrill Lynch & Co., Inc. ........................... 24,000 1,422,000
Morgan Stanley Dean Witter & Co. .................... 31,500 2,023,245
SouthTrust Corp. .................................... 64,400 1,674,400
Washington Mutual, Inc. ............................. 71,850 2,697,967
Wells Fargo & Co. ................................... 32,000 1,485,760
-----------
46,506,027
-----------
Health Care 4.82%
Amgen, Inc. ......................................... 32,000(a) 1,941,760
Baxter International, Inc. .......................... 34,000 1,666,000
Becton, Dickinson & Co. ............................. 40,000 1,431,600
Bristol-Myers Squibb Co. ............................ 47,800 2,499,940
Cardinal Health, Inc. ............................... 30,000 2,070,000
Johnson & Johnson.................................... 78,000 3,900,000
MedImmune, Inc. ..................................... 27,700(a) 1,307,440
Merck & Co., Inc. ................................... 44,500 2,843,995
Pfizer, Inc. ........................................ 127,200 5,094,360
Pharmacia Corp. ..................................... 33,000 1,516,350
St. Jude Medical, Inc. .............................. 33,000 1,980,000
Tenet Healthcare Corp. .............................. 31,700(a) 1,635,403
UnitedHealth Group, Inc. ............................ 32,000 1,976,000
-----------
29,862,848
-----------
Investment Companies 0.90%
Nasdaq-100 Index..................................... 90,000 4,108,500
Semiconductor Holders Trust.......................... 31,000 1,495,750
-----------
5,604,250
-----------
See notes to financial statements
6
Number of Value
Shares (Note 3)
--------- -----------
Manufacturing 0.86%
Tyco International Ltd. .............................. 98,000 $ 5,341,000
-----------
Media 2.04%
Comcast Corp., Class A................................ 54,500(a) 2,365,300
Gemstar-TV Guide International, Inc. ................. 39,000(a) 1,716,000
Grupo Televisa S.A., GDR.............................. 33,000(a) 1,320,330
McGraw-Hill Cos., Inc. ............................... 32,300 2,136,645
New York Times Co., Class A........................... 25,300 1,062,600
News Corp. Ltd. ...................................... 30,000 1,114,500
Viacom, Inc., Class B................................. 30,500(a) 1,578,375
Walt Disney Co. ...................................... 47,500 1,372,275
-----------
12,666,025
-----------
Metals 0.20%
Alcoa, Inc. .......................................... 31,900 1,256,860
-----------
Oil & Oil Services 3.08%
Anadarko Petroleum Corp. ............................. 32,000 1,728,960
BJ Services Co. ...................................... 48,000(a) 1,362,240
Chevron Corp. ........................................ 30,000 2,715,000
El Paso Corp. ........................................ 32,000 1,681,280
Enron Corp. .......................................... 30,100 1,474,900
Exxon Mobil Corp. .................................... 62,100 5,424,435
Santa Fe International Corp. ......................... 24,600 713,400
Talisman Energy, Inc. ................................ 35,200(a) 1,340,768
Transocean Sedco Forex, Inc. ......................... 17,000 701,250
USX-Marathon Group.................................... 65,000 1,918,150
-----------
19,060,383
-----------
Railroads 0.15%
Canadian Pacific Ltd. ................................ 24,000 930,000
-----------
Restaurants 0.14%
Wendy's International, Inc. .......................... 33,000 842,820
-----------
Retailing 2.26%
CVS Corp. ............................................ 24,000 926,400
Home Depot, Inc. ..................................... 59,800 2,783,690
Lowe's Cos., Inc. .................................... 33,000 2,394,150
Safeway, Inc. ........................................ 40,500(a) 1,944,000
Target Corp. ......................................... 33,000 1,141,800
Wal-Mart Stores, Inc. ................................ 99,300 4,845,840
-----------
14,035,880
-----------
Technology 7.55%
AOL Time Warner, Inc. ................................ 99,100(a) 5,252,300
Applied Materials, Inc. .............................. 29,800(a) 1,463,180
Atmel Corp. .......................................... 49,000(a) 661,010
See notes to financial statements
7
Number of Value
Shares (Note 3)
--------- -----------
Technology (Continued)
Cisco Systems, Inc. ................................. 129,700(a) $ 2,360,540
Corning, Inc. ....................................... 17,000 284,070
Cypress Semiconductor Corp. ......................... 33,000(a) 787,050
Dell Computer Corp. ................................. 87,100(a) 2,260,245
Electronic Data Systems Corp. ....................... 31,900 1,993,750
EMC Corp. ........................................... 50,000(a) 1,452,500
First Data Corp. .................................... 39,000 2,505,750
Fiserv, Inc. ........................................ 16,000(a) 1,023,680
Intel Corp. ......................................... 141,400 4,135,950
International Business Machines Corp. ............... 38,400 4,339,200
JDS Uniphase Corp. .................................. 17,000(a) 216,750
Lucent Technologies, Inc. ........................... 62,800 389,360
Microchip Technology, Inc. .......................... 24,500(a) 839,125
Microsoft Corp. ..................................... 119,500(a) 8,675,700
Motorola, Inc. ...................................... 32,200 533,232
Network Appliance, Inc. ............................. 17,000(a) 232,900
Oracle Corp. ........................................ 122,700(a) 2,331,300
QUALCOMM, Inc. ...................................... 24,500(a) 1,432,760
Siebel Systems, Inc. ................................ 39,800(a) 1,866,620
Sun Microsystems, Inc. .............................. 98,000(a) 1,540,560
USinternetworking, Inc. ............................. 29,950(a) 35,940
Yahoo!, Inc. ........................................ 8,800(a) 175,912
-----------
46,789,384
-----------
Telecommunications 2.85%
ADC Telecommunications, Inc. ........................ 57,500(a) 379,500
Amdocs Ltd. ......................................... 32,000(a) 1,723,200
AT&T Corp. .......................................... 98,000 2,156,000
AT&T Wireless Group.................................. 41,200(a) 673,620
General Motors Corp., Class H........................ 65,000 1,316,250
Nokia Corp., ADR..................................... 70,000 1,542,800
Nortel Networks Corp. ............................... 65,000 590,850
SBC Communications, Inc. ............................ 57,500 2,303,450
Tele Norte Leste Participacoes S.A., ADR............. 43,000 656,180
Telephone & Data Systems, Inc. ...................... 15,900 1,729,125
TyCom Ltd. .......................................... 22,500(a) 387,000
Verizon Communications, Inc. ........................ 57,500 3,076,250
WorldCom, Inc.--WorldCom Group....................... 73,950(a) 1,106,292
-----------
17,640,517
-----------
See notes to financial statements
8
Number of Value
Shares (Note 3)
----------- ------------
Utilities -- Electric & Gas 0.61%
Calpine Corp. ....................................... 43,400(a) $ 1,640,520
Exelon Corp. ........................................ 33,000 2,115,960
------------
3,756,480
------------
Total Common Stocks
(Cost $259,314,943)........................................... 237,231,062
------------
Unit Investment Trusts 0.75%
S&P MidCap 400 Depositary Receipts (Cost $4,636,335). 49,000 4,648,140
------------
Principal
Amount
-----------
United States Government Obligations 56.70%
FHLMC, 6.875%, 1/15/05............................... $70,500,000 74,151,830
FHLMC, 5.125%, 10/15/08.............................. 38,100,000 36,352,048
FHLMC, 7.00%, 3/15/10................................ 42,000,000 44,485,854
United States Treasury Notes, 6.00%, 8/15/09......... 21,900,000 22,781,366
United States Treasury Bonds, 10.75%, 5/15/03........ 15,000,000 16,716,315
United States Treasury Bonds, 8.125%, 5/15/21........ 33,700,000 42,358,608
United States Treasury Bonds, 6.875%, 8/15/25........ 40,500,000 45,494,987
United States Treasury Bonds, 5.25%, 11/15/28........ 40,000,000 36,585,840
United States Treasury Bonds, 5.375%, 2/15/31........ 34,200,000 32,431,244
------------
Total United States Government Obligations
(Cost $348,859,276)............................... 351,358,092
------------
Short-Term Investments 3.23%
UBS Financial Corp., 4.14%, 7/02/01
(Cost $19,997,700).................................. 20,000,000 19,997,700
------------
Total Investments (Cost $632,808,254) -- 98.96%................ 613,234,994
Other assets less liabilities -- 1.04%......................... 6,435,941
------------
Net Assets -- 100.00%.......................................... $619,670,935
============
--------
(a)Non-income producing security.
For Federal income tax purposes, the tax basis of investments owned at June
30, 2001 was $633,691,643 and net unrealized depreciation of investments
consisted of:
Gross unrealized appreciation................................. $ 22,647,962
Gross unrealized depreciation................................. (43,104,611)
------------
Net unrealized depreciation................................... $(20,456,649)
============
See notes to financial statements
9
THE ZWEIG TOTAL RETURN FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2001
(Unaudited)
ASSETS
Investments, at value (identified cost $632,808,254)............. $613,234,994
Cash............................................................. 74,175
Dividends and interest receivable................................ 6,701,735
Receivable for investment securities sold........................ 857,625
Prepaid expenses................................................. 66,658
------------
Total Assets................................................... 620,935,187
------------
LIABILITIES
Payable for investment securities purchased...................... 723,840
Accrued advisory fees (Note 4)................................... 360,385
Accrued administration fees (Note 4)............................. 66,929
Other accrued expenses........................................... 113,098
------------
Total Liabilities.............................................. 1,264,252
------------
NET ASSETS......................................................... $619,670,935
============
NET ASSET VALUE, PER SHARE
($619,670,935 / 90,075,830 shares outstanding--Note 5)........... $6.88
============
Net Assets consist of
Capital paid-in.................................................. $657,292,550
Distribution in excess of net investment income.................. (19,267,064)
Accumulated net realized gain on investments..................... 1,218,709
Net unrealized depreciation on investments....................... (19,573,260)
------------
$619,670,935
============
See notes to financial statements
10
THE ZWEIG TOTAL RETURN FUND, INC.
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2001
(Unaudited)
Investment Income
Income
Interest..................................................... $ 9,756,290
Dividends (net of foreign withholding taxes of $4,027)....... 1,145,603
------------
Total Income............................................... 10,901,893
------------
Expenses
Investment advisory fees (Note 4)............................ 2,231,409
Administrative fees (Note 4)................................. 414,404
Printing and postage expenses................................ 153,670
Professional fees (Note 4)................................... 142,152
Transfer agent fees.......................................... 126,564
Custodian fees............................................... 42,412
Directors' fees and expenses (Note 4)........................ 38,715
Miscellaneous................................................ 78,619
------------
Total Expenses............................................. 3,227,945
------------
Net Investment Income.................................... 7,673,948
------------
Net Realized and Unrealized Gains (Losses)
Net realized gain on investments............................... 1,981,862
Decrease in unrealized appreciation on investments............. (31,104,355)
------------
Net realized and unrealized loss on investments.............. (29,122,493)
------------
Net decrease in net assets resulting from operations......... $(21,448,545)
============
See notes to financial statements
11
THE ZWEIG TOTAL RETURN FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Six
Months Ended
June 30, For the Year
2001 Ended
(Unaudited) December 31, 2000
------------ -----------------
Increase (Decrease) in Net Assets
Operations
Net investment income...................... $ 7,673,948 $ 26,796,650
Net realized gains on investments.......... 1,981,862 21,769,821
Decrease in unrealized appreciation of
investments............................... (31,104,355) (19,184,705)
------------ ------------
Net increase (decrease) in net assets
resulting from operations............... (21,448,545) 29,381,766
------------ ------------
Dividends and distributions to shareholders
from
Net investment income...................... (7,673,948) (27,554,649)
Net realized gains on investments.......... -- (22,507,300)
Capital paid-in............................ (24,651,041) (16,801,157)
------------ ------------
Total dividends and distributions to
shareholders............................ (32,324,989) (66,863,106)
------------ ------------
Capital share transactions
Net asset value of shares issued to
shareholders in reinvestment of dividends
resulting in issuance of common stock..... 2,388,606 --
Shares repurchased and retired, 0 and
867,200 shares, respectively.............. -- (6,100,002)
------------ ------------
Net increase (decrease) in net assets
derived from capital share transactions... 2,388,606 (6,100,002)
------------ ------------
Net decrease in net assets................. (51,384,928) (43,581,342)
Net Assets
Beginning of period.......................... 671,055,863 714,637,205
------------ ------------
End of period (including undistributed net
investment income of $5,383,977 at December
31, 2000)................................... $619,670,935 $671,055,863
============ ============
See notes to financial statements
12
THE ZWEIG TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2001
(Unaudited)
NOTE 1 -- Organization
The Zweig Total Return Fund, Inc. (the "Fund") is a closed-end, diversified
management investment company registered under the Investment Company Act of
1940 (the "Act"). The Fund was incorporated under the laws of the State of
Maryland on July 21, 1988.
NOTE 2 -- Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A. Portfolio Valuation
Portfolio securities that are traded only on stock exchanges are valued at
the last sale price. Securities traded in the over-the-counter market which
are National Market System securities are valued at the last sale price. Other
over-the-counter securities are valued at the most recently quoted bid price
provided by the principal market makers. Portfolio securities which are traded
both in the over-the-counter market and on a stock exchange are valued
according to the broadest and most representative market, as determined by the
Adviser. Debt securities may be valued on the basis of prices provided by an
independent pricing service, when such prices are believed by the Adviser to
reflect the fair market value of such securities. Short-term investments
having a remaining maturity of 60 days or less when purchased are valued at
amortized cost (which approximates market value). Futures contracts traded on
commodities exchanges are valued at their closing settlement price on such
exchange. Securities for which market quotations are not readily available,
(of which there were none at June 30, 2001) 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.
In November 2000, a revised AICPA Audit and Accounting Guide, Audits of
Investment Companies, was issued, and is effective for fiscal years beginning
after December 15, 2000. The revised guide requires the Fund to amortize
premium and discount on all fixed income securities, and classify gains and
losses on asset-backed securities presently included in realized gains and
losses, as part of interest income.
Realized gains and losses on sales of investments are determined on the
identified cost basis for financial reporting and tax purposes.
13
C. Futures Contracts
Initial margin deposits made upon entering into futures contracts are
recorded as assets. During the period the futures contract is open, changes in
the value of the contract are recognized as unrealized gains or losses by
marking the contract to market on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets or liabilities, depending upon
whether unrealized gains or losses are incurred. When a contract is closed,
the Fund realizes a gain or loss equal to the difference between the proceeds
from (or cost of) the closing transaction and the Fund's basis in the
contract. There are several risks in connection with the use of futures
contracts as a hedging device. The change in value of futures contracts
primarily corresponds with the value of their underlying instruments, which
may not correlate with the change in value of the hedged investments.
Therefore, anticipated gains may not result and anticipated losses may not be
offset. In addition, as no secondary market exists for futures contracts,
there is no assurance that there will be an active market at any particular
time.
D. Short Sales
A short sale is a transaction in which the Fund sells a security it does not
own in anticipation of a decline in market price. To sell a security short,
the Fund must borrow the security. The Fund's obligation to replace the
security borrowed and sold short will be fully collateralized at all times by
the proceeds from the short sale retained by the broker and by cash and
securities deposited in a segregated account with the Fund's custodian. If the
price of the security sold short increases between the time of the short sale
and the time the Fund replaces the borrowed security, the Fund will incur a
loss, and if the price declines during the period, the Fund will realize a
gain. Any realized gain will be decreased, and any incurred loss increased, by
the amount of transaction costs. Dividends or interest the Fund pays in
connection with such short sales are recorded as expenses. In addition to the
short sales described above, the Fund may make short sales "against the box".
A short sale "against the box" is a short sale whereby at the time of the
short sale, the Fund owns or has the immediate and unconditional right, at no
added cost, to obtain the identical security.
E. Federal Income Tax
The Fund has elected to qualify and intends to remain qualified, as long as
management's view is that it is in the best interests of the shareholders, as
a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended. The principal tax benefits of qualifying as a
regulated investment company as compared to an ordinary taxable corporation,
are that a regulated investment company, is not itself subject to Federal
income tax on ordinary investment income and net capital gains that are
currently distributed (or deemed distributed) to its shareholders and that the
tax character of long-term capital gains recognized by a regulated investment
company flows through to its shareholders who receive distributions of such
gains.
F. Dividends and Distributions to Shareholders
Dividends and distributions to shareholders are recorded on the ex-dividend
date. In the event that amounts distributed are in excess of accumulated net
investment income and net realized gains on investments (as determined for
financial statement purposes), such amounts would be reported as a
distribution from paid-in capital during the fiscal year in which such a
distribution is made. Income dividends and capital gain distributions are
determined in accordance with income tax regulations which may differ from
accounting principles generally accepted in the United States. These
differences are primarily due to timing differences and differing
characterization of distributions made by the Fund as a whole.
14
NOTE 3 -- Portfolio Transactions
During the six months ended June 30, 2001, purchases and sales transactions,
excluding short-term investments were:
United States
Government
Common and Agency
Stocks Obligations
------------ -------------
Purchases ........................................ $129,508,989 $241,747,828
============ ============
Sales ............................................ $102,021,394 $294,857,312
============ ============
NOTE 4 -- Investment Advisory Fees and Other Transactions with Affiliates
a) Investment Advisory Fee: The Investment Advisory Agreement (the
"Agreement") between Phoenix/Zweig Advisers LLC (the "Adviser") the Fund's
investment adviser and the Fund provides that, subject to the direction of the
Board of Directors of the Fund and the applicable provisions of the Act, the
Adviser is responsible for the actual management of the Fund's portfolio. The
responsibility for making decisions to buy, sell or hold a particular
investment rests with the Adviser, subject to review by the Board of Directors
and the applicable provisions of the Act. For the services provided by the
Adviser under the Agreement, the Fund pays the Adviser a monthly fee equal, on
an annual basis, to 0.70% of the Fund's average daily net assets. During the
six months ended June 30, 2001, the Fund accrued advisory fees of $2,231,409.
b) Administration Fee: Phoenix Equity Planning Corporation serves as the
Fund's Administrator (the "Administrator") pursuant to an Administration
Agreement with the Fund. The Administrator generally assists in all aspects of
the Fund's operations, other than providing investment advice, subject to the
overall authority of the Fund's Board of Directors. The Administrator
determines the Fund's net asset value daily, prepares such figures for
publication on a weekly basis, maintains certain of the Fund's books and
records that are not maintained by the Adviser, custodian or transfer agent,
assists in the preparation of financial information for the Fund's income tax
returns, proxy statements, quarterly and annual shareholder reports, and
responds to shareholder inquiries. Under the terms of the Agreement, the Fund
pays the Administrator a monthly fee equal, on an annual basis, to 0.13% of
the Fund's average daily net assets. During the six months ended June 30,
2001, the Fund accrued administration fees of $414,404.
c) Directors' Fee: The Fund pays each Director who is not an interested
person of the Fund or the Adviser a fee of $10,000 per year plus $1,500 per
Directors' or committee meeting attended, together with the out-of-pocket
costs relating to attendance at such meetings. Any Director of the Fund who is
an interested person of the Fund or the Adviser receives no remuneration from
the Fund.
d) Brokerage Commission: During the six months ended June 30, 2001, the Fund
paid PXP Securities Corp. brokerage commissions of $22,568 in connection with
portfolio transactions effected through them. In addition, PXP Securities
Corp. charged $16,901 in commissions for transactions effected on behalf of
the participants in the Fund's Automatic Reinvestment and Cash Purchase Plan.
NOTE 5 -- Capital Stock and Reinvestment Plan
At June 30, 2001, the Fund had one class of common stock, par value $.001
per share, of which 500,000,000 shares are authorized and 90,075,830 shares
are outstanding.
15
Registered shareholders may elect to receive all distributions in cash paid
by check mailed directly to the shareholder by EquiServe as dividend paying
agent. Pursuant to the Automatic Reinvestment and Cash Purchase Plan (the
"Plan"), shareholders not making such election will have all such amounts
automatically reinvested by EquiServe, as the Plan agent in whole or
fractional shares of the Fund, as the case may be. For the six months ended
June 30, 2001 and the year ended December 31, 2000, there were 342,864 and 0
shares, respectively, issued pursuant to the Plan.
On December 7, 1999, the Fund's Board of Directors authorized the repurchase
and retirement of up to $20,000,000 of its shares for the purpose of enhancing
shareholder value. For the six months ended June 30, 2001 and the year ended
December 31, 2000, 0 and 867,200 shares were repurchased and retired at a cost
of $0 and $6,100,002 respectively. This includes $0 and $39,024 in commissions
paid to PXP Securities Corp. respectively. The weighted average discount of
market price to net asset value of shares repurchased over the period of
August 11, 2000 to September 22, 2000 was 8.6%.
On August 1, 2001, the Fund announced a distribution of $0.06 per share to
shareholders of record on August 13, 2001. This distribution has an ex-
dividend date of August 9, 2001 and is payable on August 27, 2001.
16
NOTE 6 -- Financial Highlights
Selected data for a share outstanding throughout each period:
Six Months
Ended Year Ended December 31
June 30, 2001 -------------------------------------------------
(Unaudited) 2000 1999 1998 1997 1996
------------- -------- -------- -------- -------- --------
Per Share Data
Net asset value,
beginning of period.... $ 7.48 $ 7.89 $ 8.43 $ 8.61 $ 8.29 $ 8.63
-------- -------- -------- -------- -------- --------
Income From Investment
Operations
Net investment income... 0.09 0.30 0.28 0.33 0.36 0.36
Net realized and
unrealized gains
(losses)............... (0.33) 0.02 (0.01) 0.39 0.80 0.14
-------- -------- -------- -------- -------- --------
Total from investment
operations............. (0.24) 0.32 0.27 0.72 1.16 0.50
-------- -------- -------- -------- -------- --------
Dividends and
Distributions
Anti-dilutive effect of
share repurchase
program................ -- 0.01 0.01 -- -- --
-------- -------- -------- -------- -------- --------
Dividends from net
investment income...... (0.09) (0.30) (0.28) (0.33) (0.36) (0.36)
Distributions from net
realized gains......... -- (0.25) (0.13) (0.46) (0.48) (0.24)
Distributions from
capital paid-in........ (0.27) (0.19) (0.41) (0.05) -- (0.24)
-------- -------- -------- -------- -------- --------
Total dividends and
distributions.......... (0.36) (0.74) (0.82) (0.84) (0.84) (0.84)
-------- -------- -------- -------- -------- --------
Effect on net asset
value as a result of
rights offering*....... -- -- -- (0.06) -- --
-------- -------- -------- -------- -------- --------
Net asset value, end of
period................ $ 6.88 $ 7.48 $ 7.89 $ 8.43 $ 8.61 $ 8.29
======== ======== ======== ======== ======== ========
Market value, end of
period**.............. $ 7.30 $ 6.57 $ 6.50 $ 8.88 $ 9.44 $ 8.00
======== ======== ======== ======== ======== ========
Total investment
return***.............. 15.89% 12.64% (18.72)% 4.49% 30.22% 2.62%
======== ======== ======== ======== ======== ========
Ratios/Supplemental Data
Net assets, end of
period (in thousands).. $619,671 $671,056 $714,637 $757,212 $677,133 $638,768
Ratio of expenses to
average net assets..... 1.01%**** 1.00% 0.97% 0.97% 1.04% 1.03%
Ratio of net investment
income to average net
assets................. 2.53%**** 3.87% 3.50% 3.88% 4.30% 4.31%
Portfolio turnover rate. 68.1% 121.6% 172.3% 87.9% 104.7% 147.2%
--------
* Shares were sold at a 5% discount from the average market price.
** Closing Price -- New York Stock Exchange.
*** Total investment return is calculated assuming a purchase of common stock
on the opening of the first business day and a sale on the closing of the
last business day of each period reported. Dividends and distributions, if
any, are assumed for the purposes of this calculation, to be reinvested at
prices obtained under the Fund's Distribution Reinvestment and Cash
Purchase Plan. Generally, total investment return based on net asset value
will be higher than total investment return based on market value in
periods where there is an increase in the discount or a decrease in the
premium of the market value to the net assets from the beginning to the
end of such years. Conversely, total investment return based on net asset
value will be lower than total investment return based on market value in
periods where there is a decrease in the discount or an increase in the
premium of the market value to the net asset value from the beginning to
end of such periods.
**** Annualized.
17
SUPPLEMENTARY PROXY INFORMATION
The Annual Meeting of Shareholders of The Zweig Total Return Fund, Inc. was
held on May 8, 2001. The meeting was held for the purpose of electing Wendy
Luscombe, Alden C. Olson, and Martin E. Zweig as directors and to vote on a
proposal to convert the Fund to an open-end investment company. The Fund's
other Directors who continue in office are Charles H. Brunie, Elliot S. Jaffe
and James B. Rogers, Jr.
The results of the above matters were as follows:
Votes Votes
Directors Votes For Against Withheld Abstentions
--------- ---------- ---------- --------- ------------------
Wendy Luscombe............... 78,904,587 N/A 1,396,585 N/A
Alden C. Olson............... 78,931,860 N/A 1,369,312 N/A
Martin E. Zweig.............. 79,113,356 N/A 1,187,816 N/A
Proposal to convert to an open-end investment company:
Votes Votes Abstentions/Broker
Votes For Against Withheld Non-Votes
---------- ---------- --------- ------------------
7,424,205 36,594,468 -- 36,464,499
-------------------------------------------------------------------------------
KEY INFORMATION
1-800-272-2700 Zweig Shareholder Relations:
For general information and literature
1-800-272-2700 The Zweig Total Return Fund Hot Line:
For updates on net asset value, share price, major industry
groups and other key information
REINVESTMENT PLAN
Many of you have questions
about our reinvestment plan. We
urge shareholders who want to
take advantage of this plan and
whose shares are held in "Street
Name," to consult your broker as
soon as possible to determine if
you must change registration
into your own name to
participate.
----------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may from time to time purchase its shares of
common stock in the open market when Fund shares are trading at a discount
from their net asset value.
18
OFFICERS AND DIRECTORS
Martin E. Zweig, Ph.D.
Chairman of the Board and President
Jeffrey Lazar
Executive Vice President and Treasurer
Nancy J. Engberg
Secretary
Christopher M. Capano
Vice President
Charles H. Brunie
Director
Elliot S. Jaffe
Director
Wendy Luscombe
Director
Alden C. Olson, Ph.D.
Director
James B. Rogers, Jr.
Director
Investment Adviser
Phoenix/Zweig Advisers LLC
900 Third Avenue
New York, NY 10022
Fund Administrator
Phoenix Equity Planning Corporation
56 Prospect St.
P.O. Box 150480
Hartford, CT 06115-0480
Custodian
The Bank of New York
One Wall Street
New York, NY 10286
Transfer Agent
State Street Bank & Trust Co.
c/o EquiServe
PO Box 43010
Providence, RI 02940-3010
Legal Counsel
Rosenman & Colin LLP
575 Madison Avenue
New York, NY 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 repre-
sentation intended for use in the purchase of shares of the Fund or any securi-
ties mentioned in this report.
PXP 1376 3206-SEM (06/01)
Semiannual Report
[LOGO OF ZWEIG]
The Zweig Total Return Fund, Inc.
June 30, 2001
[LOGO OF PHOENIX INVESTMENT PARTNERS]