UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-05620
The Zweig Total Return Fund, Inc.
(Exact name of registrant as specified in charter)
101 Munson Street
Greenfield, MA 01301-9683
(Address of principal executive offices) (Zip code)
Kevin J. Carr, Esq.
Vice President, Chief Legal Officer, Counsel and Secretary for Registrant
100 Pearl Street
Hartford, CT 06103-4506
(Name and address of agent for service)
Registrant’s telephone number, including area code: 800-272-2700
Date of fiscal year end: December 31
Date of reporting period: June 30, 2012
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
| Item 1. | Reports to Stockholders. |
The Report to Shareholders is attached herewith.
OFFICERS AND DIRECTORS
George R. Aylward, President, Chairman and Chief Executive Officer
Charles H. Brunie, Director
Wendy Luscombe, Director
Alden C. Olson, Ph.D., Director
James B. Rogers, Jr., Director
R. Keith Walton, Director
Carlton Neel, Executive Vice President
David Dickerson, Senior Vice President
Kevin J. Carr, Vice President, Chief Legal Officer and Secretary
W. Patrick Bradley, Vice President, Treasurer and Chief Financial Officer
Jacqueline Porter, Vice President and Assistant Treasurer
Nancy Engberg, Chief Compliance Officer and Vice President
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.
Q2-12
The Zweig Total Return Fund, Inc.
Semiannual Report
June 30, 2012
FUND DISTRIBUTIONS AND MANAGED DISTRIBUTION PLAN
The Fund has a Managed Distribution Plan to pay 7% (prior to the April dividend declaration, this rate was 10%) of the Fund’s net asset value on an annualized basis. Distributions may represent earnings from net investment income, realized capital gains, or, if necessary, return of capital. The board believes that regular monthly, fixed cash payouts will enhance shareholder value and serve the long-term interests of shareholders. You should not draw any conclusions about the Fund’s investment performance from the amount of the distributions or from the terms of the Fund’s Managed Distribution Plan.
The Fund estimates that it has distributed more than its income and net realized capital gains in the fiscal year to date; therefore, a portion of your distributions may be a return of capital. A return of capital may occur, for example, when some or all of the money that you invested in the Fund is paid back to you. A return of capital distribution does not necessarily reflect the Fund’s investment performance and should not be confused with “yield” or “income.”
The amounts and sources of distributions reported in Section 19(a) notices of the 1940 Act are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Fund’s investment experience during the remainder of its fiscal year and may be subject to changes based on tax regulations. The Fund will send shareholders a Form 1099-DIV for the calendar year that will tell you how to report distributions for federal income tax purposes.
The Board may amend, suspend or terminate the Managed Distribution Plan at any time, without prior notice to shareholders if it deems such action to be in the best interest of the Fund and its shareholders.
Information on the Zweig funds is available at www.Virtus.com. Section 19(a) notices are posted on the website at:.
http://www.virtus.com/products/closed/details.aspx?type=individual&fundid=ZTR
August 1, 2012
For information regarding the indexes cited, and key investment terms used in this report see page 8.
2
August 1, 2012
| (1) | Return excludes reinvested dividends. |
For information regarding the indexes cited, and key investment terms used in this report see page 8.
3
For information regarding the indexes cited, and key investment terms used in this report see page 8.
4
For information regarding the indexes cited, and key investment terms used in this report see page 8.
5
For information regarding the indexes cited, and key investment terms used in this report see page 8.
6
7
8
Indexes cited are unmanaged and not available for direct investment; therefore their performance does not reflect the expenses associated with the active management of an actual portfolio.
9
THE ZWEIG TOTAL RETURN FUND, INC.
SCHEDULE OF INVESTMENTS
June 30, 2012
(Unaudited)
($ reported in thousands)
| Par | Value | |||||||||||
| INVESTMENTS |
||||||||||||
| U.S. GOVERNMENT SECURITIES |
25.1% | |||||||||||
| U.S. Treasury Inflation Indexed Note |
||||||||||||
| 1.625%, 1/15/15(3) |
|
$ | 28,000 | $ | 35,857 | |||||||
| 2.000%, 1/15/16(3) |
|
25,000 | 32,075 | |||||||||
| 2.375%, 1/15/17(3) |
|
31,000 | 40,832 | |||||||||
| U.S. Treasury Note 4.000%, 11/15/12 |
|
18,500 | 18,762 | |||||||||
|
|
|
|||||||||||
| Total U.S. Government Securities |
|
127,526 | ||||||||||
|
|
|
|||||||||||
| FOREIGN GOVERNMENT SECURITIES |
5.1% | |||||||||||
| Commonwealth of Australia |
|
|||||||||||
| 5.500%, 12/15/13 |
|
11,000 | 11,746 | |||||||||
| 6.500%, 5/15/13 |
|
5,000 | 5,277 | |||||||||
| Kingdom of Norway Series 470 6.500%, 5/15/13 |
|
50,000 | (4) | 8,761 | ||||||||
|
|
|
|||||||||||
| Total Foreign Government Securities |
|
25,784 | ||||||||||
|
|
|
|||||||||||
| CORPORATE BONDS |
2.1% | |||||||||||
| INDUSTRIALS — 2.1% |
||||||||||||
| CSX Corp. 6.250%, 3/15/18 |
|
4,000 | 4,817 | |||||||||
| Ingersoll-Rand Global Holding Co., Ltd. 6.875%, 8/15/18 |
|
4,814 | 5,866 | |||||||||
|
|
|
|||||||||||
| Total Corporate Bonds |
|
10,683 | ||||||||||
|
|
|
|||||||||||
| Number of Shares |
||||||||||||
| COMMON STOCKS |
48.1% | |||||||||||
| CONSUMER DISCRETIONARY — 5.0% |
||||||||||||
| Amazon.com, Inc.(2) |
|
9,600 | 2,192 | |||||||||
| AutoZone, Inc.(2) |
|
8,200 | 3,011 | |||||||||
| Comcast Corp. Class A(6) |
|
162,000 | 5,179 | |||||||||
| Leggett & Platt, Inc. |
|
90,000 | 1,902 | |||||||||
| Lululemon Athletica, Inc.(2) |
|
42,000 | 2,504 | |||||||||
| McDonald’s Corp. |
|
54,000 | 4,781 | |||||||||
| Papa John’s International, Inc.(2) |
|
18,000 | 856 | |||||||||
See notes to financial statements
10
| Number of Shares |
Value | |||||||||
| CONSUMER DISCRETIONARY (CONTINUED) |
||||||||||
| Yum! Brands, Inc. |
76,000 | $ | 4,896 | |||||||
|
|
|
|||||||||
| 25,321 | ||||||||||
|
|
|
|||||||||
| CONSUMER STAPLES — 5.6% |
||||||||||
| Altria Group, Inc.(6) |
250,000 | 8,637 | ||||||||
| Heinz (H.J.) Co. |
85,000 | 4,622 | ||||||||
| Kimberly-Clark Corp. |
49,000 | 4,105 | ||||||||
| PepsiCo, Inc. |
89,000 | 6,289 | ||||||||
| Procter & Gamble Co. (The) |
75,000 | 4,594 | ||||||||
|
|
|
|||||||||
| 28,247 | ||||||||||
|
|
|
|||||||||
| ENERGY — 4.2% |
||||||||||
| Chevron Corp. |
42,000 | 4,431 | ||||||||
| ConocoPhillips |
64,000 | 3,576 | ||||||||
| Continental Resources, Inc.(2) |
37,000 | 2,465 | ||||||||
| Petroleo Brasileiro S.A. ADR |
59,000 | 1,107 | ||||||||
| Total SA Sponsored ADR |
36,000 | 1,618 | ||||||||
| Whiting Petroleum Corp.(2) (6) |
28,000 | 1,151 | ||||||||
| Williams Cos., Inc. (The) |
202,000 | 5,822 | ||||||||
| WPX Energy, Inc.(2) |
75,000 | 1,214 | ||||||||
|
|
|
|||||||||
| 21,384 | ||||||||||
|
|
|
|||||||||
| FINANCIALS — 5.8% |
||||||||||
| BB&T Corp. |
154,000 | 4,751 | ||||||||
| Goldman Sachs Group, Inc. (The) |
22,000 | 2,109 | ||||||||
| HCP, Inc. |
94,000 | 4,150 | ||||||||
| JPMorgan Chase & Co. |
198,000 | 7,074 | ||||||||
| Lincoln National Corp.(6) |
183,000 | 4,002 | ||||||||
| New York Community Bancorp, Inc. |
152,000 | 1,905 | ||||||||
| U.S. Bancorp |
174,000 | 5,596 | ||||||||
|
|
|
|||||||||
| 29,587 | ||||||||||
|
|
|
|||||||||
| HEALTH CARE — 7.1% |
||||||||||
| Abbott Laboratories |
101,000 | 6,511 | ||||||||
| Biogen Idec, Inc.(2) |
22,000 | 3,176 | ||||||||
| Bristol-Myers Squibb Co. |
161,000 | 5,788 | ||||||||
| Eli Lilly & Co. |
133,000 | 5,707 | ||||||||
| Express Scripts Holding Co.(2) (6) |
44,000 | 2,457 | ||||||||
| Gilead Sciences, Inc.(2) |
60,000 | 3,077 | ||||||||
| Johnson & Johnson |
68,000 | 4,594 | ||||||||
| UnitedHealth Group, Inc. |
77,000 | 4,505 | ||||||||
|
|
|
|||||||||
| 35,815 | ||||||||||
|
|
|
|||||||||
See notes to financial statements
11
| Number of Shares |
Value | |||||||||
| INDUSTRIALS — 3.9% |
||||||||||
| Alaska Air Group, Inc.(2) |
82,000 | $ | 2,944 | |||||||
| Cummins, Inc. |
38,000 | 3,682 | ||||||||
| Deere & Co.(6) |
33,000 | 2,669 | ||||||||
| Lockheed Martin Corp. |
47,000 | 4,093 | ||||||||
| Union Pacific Corp. |
35,000 | 4,176 | ||||||||
| United Continental Holdings, Inc.(2) |
80,000 | 1,946 | ||||||||
|
|
|
|||||||||
| 19,510 | ||||||||||
|
|
|
|||||||||
| INFORMATION TECHNOLOGY — 8.2% |
||||||||||
| Apple, Inc.(2) |
10,400 | 6,074 | ||||||||
| Citrix Systems, Inc.(2) |
35,000 | 2,938 | ||||||||
| Intel Corp. |
263,000 | 7,009 | ||||||||
| International Business Machines Corp. |
32,000 | 6,259 | ||||||||
| MasterCard, Inc. Class A |
8,200 | 3,527 | ||||||||
| Paychex, Inc. |
129,000 | 4,052 | ||||||||
| QUALCOMM, Inc. |
108,000 | 6,013 | ||||||||
| VeriSign, Inc.(2) (6) |
57,000 | 2,483 | ||||||||
| Visa, Inc. Class A |
27,000 | 3,338 | ||||||||
|
|
|
|||||||||
| 41,693 | ||||||||||
|
|
|
|||||||||
| MATERIALS — 3.6% |
||||||||||
| CF Industries Holdings, Inc. |
10,000 | 1,937 | ||||||||
| Cliffs Natural Resources, Inc. |
35,000 | 1,725 | ||||||||
| Du Pont (E.I.) de Nemours & Co. |
115,000 | 5,816 | ||||||||
| Freeport-McMoRan Copper & Gold, Inc. |
87,000 | 2,964 | ||||||||
| MeadWestvaco Corp. |
86,000 | 2,473 | ||||||||
| Monsanto Co.(6) |
42,000 | 3,477 | ||||||||
|
|
|
|||||||||
| 18,392 | ||||||||||
|
|
|
|||||||||
| TELECOMMUNICATION SERVICES — 3.1% |
||||||||||
| AT&T, Inc. |
132,000 | 4,707 | ||||||||
| CenturyLink, Inc. |
98,000 | 3,870 | ||||||||
| Verizon Communications, Inc. |
165,000 | 7,333 | ||||||||
|
|
|
|||||||||
| 15,910 | ||||||||||
|
|
|
|||||||||
| UTILITIES — 1.6% |
||||||||||
| Duke Energy Corp. |
175,000 | 4,035 | ||||||||
| FirstEnergy Corp. |
83,000 | 4,083 | ||||||||
|
|
|
|||||||||
| 8,118 | ||||||||||
|
|
|
|||||||||
| Total Common Stocks |
|
243,977 | ||||||||
|
|
|
|||||||||
See notes to financial statements
12
| Number of Shares |
Value | |||||||||||
| EXCHANGE-TRADED FUNDS |
0.7% | |||||||||||
| Templeton Dragon Fund, Inc. |
|
131,000 | $ | 3,471 | ||||||||
|
|
|
|||||||||||
| Total Exchange-Traded Funds |
|
3,471 | ||||||||||
|
|
|
|||||||||||
| Total Long Term Investments — 81.1% |
|
411,441 | ||||||||||
|
|
|
|||||||||||
| SHORT-TERM INVESTMENTS |
18.5% | |||||||||||
| MONEY MARKET MUTUAL FUNDS — 8.3% |
||||||||||||
| Dreyfus Cash Management Fund — Institutional Shares |
|
41,919,288 | 41,919 | |||||||||
|
|
|
|||||||||||
| 41,919 | ||||||||||||
|
|
|
|||||||||||
| Par | ||||||||||||
| U.S. TREASURY BILLS(5) — 10.2% |
||||||||||||
| U.S. Treasury Bill |
||||||||||||
| 0.160%, 7/26/12 |
|
$ | 10,000 | 10,000 | ||||||||
| 0.090%, 11/15/12 |
|
42,000 | 41,981 | |||||||||
|
|
|
|||||||||||
| 51,981 | ||||||||||||
|
|
|
|||||||||||
| Total Short-Term Investments |
|
93,900 | ||||||||||
|
|
|
|||||||||||
| Contracts | ||||||||||||
| PURCHASED OPTIONS |
0.1% | |||||||||||
| CALL OPTIONS — 0.1% |
||||||||||||
| Ebay, Inc. expiring 7/21/12 strike price $38 |
|
1,410 | 621 | |||||||||
| U.S. Steel Corp. expiring 7/21/12 strike price $30 |
|
2,250 | 2 | |||||||||
|
|
|
|||||||||||
| Total Purchased Options |
|
623 | ||||||||||
|
|
|
|||||||||||
| Total Investments, Before Written Options — 99.7% |
|
505,964 | ||||||||||
|
|
|
|||||||||||
| WRITTEN OPTIONS |
(0.1 | )% | ||||||||||
| CALL OPTIONS — (0.1)% |
||||||||||||
| Altria Group, Inc. expiring 9/22/12 strike price $34 |
400 | (46 | ) | |||||||||
| Comcast Corp. Class A expiring 8/18/12 strike price $31 |
270 | (42 | ) | |||||||||
| Deere & Co. expiring 9/22/12 strike price $77.50 |
55 | (30 | ) | |||||||||
| Ebay, Inc. expiring 7/21/12 strike price $43 |
2,110 | (179 | ) | |||||||||
| Express Scripts Holding Co. expiring 8/18/12 strike price $55 |
90 | (21 | ) | |||||||||
| Lincoln National Corp. expiring 8/18/12 strike price $22 |
380 | (39 | ) | |||||||||
| Monsanto Co. expiring 8/18/12 strike price $80 |
80 | (34 | ) | |||||||||
| VeriSign, Inc. expiring 9/22/12 strike price $44 |
115 | (23 | ) | |||||||||
| Whiting Petroleum Corp. expiring 8/18/12 strike price $40 |
55 | (15 | ) | |||||||||
|
|
|
|||||||||||
| (429 | ) | |||||||||||
|
|
|
|||||||||||
See notes to financial statements
13
| Contracts | Value | |||||||||
| PUT OPTIONS — (0.0)% |
||||||||||
| Ebay, Inc. expiring 7/21/12 strike price $36 |
2,110 | $ | (30 | ) | ||||||
|
|
|
|||||||||
| Total Written Options (Premiums Received $545) |
|
(459 | ) | |||||||
|
|
|
|||||||||
| Total Investments (Identified Cost $460,142) — 99.6% |
|
505,505 | (1) | |||||||
| Other assets and liabilities, net — 0.4% |
|
2,198 | ||||||||
|
|
|
|||||||||
| Net Assets — 100.0% |
|
$ | 507,703 | |||||||
|
|
|
|||||||||
| (1) | Federal Income Tax Information : For tax information at June 30, 2012, see Note 11 Federal Income Tax Information in the Notes to Financial Statements. |
| (2) | Non-income producing. |
| (3) | Principal amount is adjusted daily pursuant to the change in the Consumer Price Index. |
| (4) | Par value represents Norwegian Krone (reported in thousands). |
| (5) | The rate shown is the discount rate. |
| (6) | All or a portion segregated as collateral for written options. |
| Country Weightings† |
||||
| United States |
93 | % | ||
| Australia |
3 | % | ||
| Norway |
2 | % | ||
| Canada |
1 | % | ||
| China |
1 | % | ||
|
|
|
|||
| Total |
100 | % | ||
|
|
|
| † | % of total investments as of June 30, 2012 |
The following table provides a summary of inputs used to value the Fund’s net assets as of June 30, 2012 (See Security Valuation Note 2A in the Notes to Financial Statements.):
| Total Value at June 30, 2012 |
Level
1 Quoted Prices |
Level 2 Significant Observable Inputs |
||||||||||
| Debt Securities: |
||||||||||||
| U.S. Government Securities (includes short-term investments) |
$ | 179,507 | $ | — | $ | 179,507 | ||||||
| Foreign Government Securities |
25,784 | — | 25,784 | |||||||||
| Corporate Bonds |
10,683 | — | 10,683 | |||||||||
| Equity Securities: |
||||||||||||
| Common Stocks |
243,977 | 243,977 | — | |||||||||
| Exchange-Traded Funds |
3,471 | 3,471 | — | |||||||||
| Short-Term Investments |
41,919 | 41,919 | — | |||||||||
| Other Financial Instruments: |
||||||||||||
| Purchased Options |
623 | 623 | — | |||||||||
| Written Options |
(459 | ) | (459 | ) | — | |||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 505,505 | $ | 289,531 | $ | 215,974 | ||||||
|
|
|
|
|
|
|
|||||||
There are no Level 3 (significant unobservable input) priced securities.
See notes to financial statements
14
THE ZWEIG TOTAL RETURN FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2012
(Unaudited)
(Reported in thousands except per share amounts)
| ASSETS |
||||
| Investment at value before written options (Identified cost $460,687) |
$ | 505,964 | ||
| Cash held with prime broker |
810 | |||
| Receivables: |
||||
| Dividends and interest |
1,695 | |||
| Prepaid expenses |
136 | |||
|
|
|
|||
| Total Assets |
508,605 | |||
|
|
|
|||
| LIABILITIES |
||||
| Cash overdraft |
17 | |||
| Payables |
||||
| Written options outstanding, at value (Premiums received $545) |
459 | |||
| Investment advisory fee |
230 | |||
| Administration fee |
27 | |||
| Transfer agent fees and expenses |
13 | |||
| Professional fees |
71 | |||
| Other accrued expenses |
85 | |||
|
|
|
|||
| Total Liabilities |
902 | |||
|
|
|
|||
| NET ASSETS |
$ | 507,703 | ||
|
|
|
|||
| CAPITAL |
||||
| Capital paid in on shares of beneficial interest |
$ | 476,377 | ||
| Accumulated undistributed net investment income (loss) |
(16,438 | ) | ||
| Accumulated undistributed net realized gain (loss) |
2,387 | |||
| Net unrealized appreciation (depreciation) on investments |
45,377 | |||
|
|
|
|||
| Net Assets |
$ | 507,703 | ||
|
|
|
|||
| NET ASSET VALUE PER SHARE |
||||
| (Net assets/shares outstanding) Shares outstanding – 35,918,138 |
$ | 14.13 | ||
|
|
|
See notes to financial statements
15
THE ZWEIG TOTAL RETURN FUND, INC.
STATEMENT OF OPERATIONS
Six-Months Ended June 30, 2012
(Unaudited)
($ reported in thousands)
| INVESTMENT INCOME |
||||
| Interest |
$ | 4,343 | ||
| Dividends (net of foreign taxes withheld of $15) |
3,080 | |||
|
|
|
|||
| Total investment income |
7,423 | |||
|
|
|
|||
| Expenses: |
||||
| Investment advisory fees |
1,806 | |||
| Administration fees |
168 | |||
| Transfer agent fees and expenses |
70 | |||
| Custodian fees |
7 | |||
| Printing fees and expenses |
256 | |||
| Professional fees |
221 | |||
| Directors’ fees |
91 | |||
| Miscellaneous |
113 | |||
|
|
|
|||
| Expenses before interest expense |
2,732 | |||
| Prime broker interest expense |
1 | |||
|
|
|
|||
| Total expenses |
2,733 | |||
| Less expenses reimbursed by investment advisor |
(361 | ) | ||
|
|
|
|||
| Net expenses |
2,372 | |||
|
|
|
|||
| Net investment income |
5,051 | |||
|
|
|
|||
| NET REALIZED AND UNREALIZED GAIN (LOSSES) |
||||
| Net realized gain (loss) on: |
||||
| Investments |
7,750 | |||
| Written options |
(3,413 | ) | ||
| Foreign currency transactions |
(47 | ) | ||
| Net change in unrealized appreciation (depreciation) on: |
||||
| Investments |
8,064 | |||
| Written options |
54 | |||
| Foreign currency translations |
36 | |||
|
|
|
|||
| Net realized and unrealized gain (loss) |
12,444 | |||
|
|
|
|||
| Net increase (decrease) in net assets resulting from operations |
$ | 17,495 | ||
|
|
|
See notes to financial statements
16
THE ZWEIG TOTAL RETURN FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
($ reported in thousands)
| Six Months Ended June 30, 2012 (Unaudited) |
For the Year Ended December 31, 2011 |
|||||||
| INCREASE (DECREASE) IN NET ASSETS |
||||||||
| Operations |
||||||||
| Net investment income |
$ | 5,051 | $ | 9,123 | ||||
| Net realized gain (loss) |
4,290 | 6,976 | ||||||
| Net change in unrealized appreciation (depreciation) |
8,154 | (3,821 | ) | |||||
|
|
|
|
|
|||||
| Net increase in net assets resulting from operations |
17,495 | 12,278 | ||||||
|
|
|
|
|
|||||
| Dividends and distributions to shareholders from |
||||||||
| Net investment income |
(22,177 | )(1) | (8,870 | ) | ||||
| Net realized short-term gains |
— | (3,965 | ) | |||||
| Net realized long-term gains |
— | (2,281 | ) | |||||
| Tax return of capital |
|
— |
|
(38,378 | ) | |||
|
|
|
|
|
|||||
| Total dividends and distributions to shareholders |
(22,177 | ) | (53,494 | ) | ||||
|
|
|
|
|
|||||
| Capital share transactions |
||||||||
| Net proceeds from the sale of shares during rights offering (net of expenses of $644) |
(103 | )(2) | 97,989 | |||||
| Common Shares repurchased |
(1,320 | ) | — | |||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets derived from capital share transactions |
|
(1,423
|
)
|
97,989 | ||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets |
(6,105 | ) | 56,773 | |||||
| NET ASSETS |
||||||||
| Beginning of period |
513,808 | 457,035 | ||||||
|
|
|
|
|
|||||
| End of period |
$ |
507,703 |
|
$ | 513,808 | |||
|
|
|
|
|
|||||
| Accumulated undistributed net investment income (loss) at end of period |
$ | (16,438 | ) | $ | 687 | |||
| Other Information: |
||||||||
| Capital share transactions were as follows:(3) |
||||||||
| Common Shares outstanding at beginning of period |
36,023,686 | 28,648,686 | ||||||
| Common Shares repurchased |
(105,548 | ) | — | |||||
| Shares issued during rights offering |
— | 7,375,000 | ||||||
|
|
|
|
|
|||||
| Common Shares outstanding at end of period |
35,918,138 | 36,023,686 | ||||||
|
|
|
|
|
|||||
| (1) | Please note that the tax status of our distributions is determined at the end of the taxable year. However, based on interim data as of June 30, 2012, we estimate 24% of the distributions will represent net investment income, 19% will represent long-term gain distributions and 57% will represent return of capital. Also refer to the inside front cover for the Managed Distribution Plan. |
| (2) | Adjustment to bring costs estimated in connection with rights offering to actual. |
| (3) | Share amounts for the year ended December 31, 2011 and the semi-annual period ended June 30, 2012 have been adjusted to reflect the 1-for-4 reverse stock split that occurred effective the start of trading on the NYSE on June 27, 2012. See Notes 7 and 8 in the Notes to Financial Statements. |
See notes to financial statements
17
THE ZWEIG TOTAL RETURN FUND, INC.
FINANCIAL HIGHLIGHTS
(Selected data for a share outstanding throughout each period)
Per share data, including the proportionate impact to market price, has been restated to reflect the effects of a 1-for-4 reverse stock split effective as of the start of trading on the NYSE on June 27, 2012.
| For the Six Months Ended June 30, 2012 (Unaudited) |
Year Ended December 31, | |||||||||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||||
| Per Share Data |
||||||||||||||||||||||||
| Net asset value, beginning of period |
$ | 14.28 | $ | 15.96 | $ | 16.52 | $ | 16.00 | $ | 19.88 | $ | 20.44 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Income From Investment Operations |
||||||||||||||||||||||||
| Net investment income (loss)(3) |
0.14 | 0.24 | 0.20 | 0.20 | 0.28 | 0.48 | ||||||||||||||||||
| Net realized and unrealized gains (losses) |
0.33 | 0.16 | 0.84 | 1.92 | (2.32 | ) | 1.04 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total from investment operations |
0.47 | 0.40 | 1.04 | 2.12 | (2.04 | ) | 1.52 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Dividends and Distributions |
||||||||||||||||||||||||
| Dividends from net investment income |
(0.62 | )(10) | (0.24 | ) | (0.20 | ) | (0.24 | ) | (0.40 | ) | (0.56 | ) | ||||||||||||
| Distributions from net realized gains |
— | (0.20 | ) | (0.32 | ) | (0.04 | ) | (0.24 | ) | (0.60 | ) | |||||||||||||
| Tax return of capital |
— | (1.08 | ) | (1.08 | ) | (1.32 | ) | (1.20 | ) | (0.84 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total dividends and distributions |
(0.62 | ) | (1.52 | ) | (1.60 | ) | (1.60 | ) | (1.84 | ) | (2.00 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Dilutive effect on net asset value as a result of rights offering |
— | (8) | (0.56 | )(11) | — | — | — | (8) | (0.08 | )(6) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net asset value, end of period(13) |
$ | 14.13 | $ | 14.28 | $ | 15.96 | $ | 16.52 | $ | 16.00 | $ | 19.88 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Market value, end of period(1)(13) |
$ | 12.29 | $ | 12.12 | $ | 14.24 | $ | 15.64 | $ | 13.48 | $ | 18.12 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total investment return(2) |
6.45 | %(5) | (4.65 | )%(12) | 1.04 | % | 29.74 | % | (16.90 | )% | (14.99 | )%(7) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total return on net asset value(9) |
3.88 | %(5) | 4.46 | % | 7.21 | % | 15.46 | % | (10.09 | )% | 7.93 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Ratios/Supplemental Data |
||||||||||||||||||||||||
| Net assets, end of period (in thousands) |
$ | 507,703 | $ | 513,808 | $ | 457,035 | $ | 473,217 | $ | 458,767 | $ | 569,656 | ||||||||||||
| Ratio of expenses to average net assets (excluding dividends and interest expense on short sales after expense waivers) |
0.92 | %(4) | 0.88 | % | 1.10 | % | 1.14 | % | 1.03 | % | 0.96 | % | ||||||||||||
| Ratio of expenses to average net assets (including dividends and interest expense on short sales and after expense waivers) |
0.92 | %(4) | 0.88 | % | 1.10 | % | 1.14 | % | 1.03 | % | 0.96 | % | ||||||||||||
| Ratio of expenses to average net assets (including dividends and interest expense on short sales before expense waivers) |
1.06 | %(4) | 0.97 | % | 1.10 | % | 1.14 | % | 1.03 | % | 0.96 | % | ||||||||||||
| Ratio of net investment income to average net assets |
1.96 | %(4) | 1.71 | % | 1.19 | % | 1.38 | % | 1.66 | % | 2.46 | % | ||||||||||||
| Portfolio turnover rate |
33 | %(5) | 46 | % | 25 | % | 35 | % | 61 | % | 36 | % | ||||||||||||
| (1) | Closing Price — New York Stock Exchange. |
| (2) | Total investment return is calculated assuming a purchase of a share of the Fund’s common stock at the opening NYSE share price on the first business day and a sale at the closing NYSE share price on the last business day of each period reported. |
See notes to financial statements
18
| Dividends and distributions, if any, are assumed for the purpose of this calculation, to be reinvested at prices obtained under the Fund’s Automatic 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 the end of such periods. |
| (3) | Computed using average shares outstanding |
| (4) | Annualized |
| (5) | Not Annualized |
| (6) | Shares were sold at a 5% discount from a 5 day average market price from 5/14/07 to 5/18/07. |
| (7) | Total investment return includes the dilutive effect of the 2007 rights offering. Without this effect, the total investment return would have been (13.82)%. |
| (8) | Amount is less than $0.005. |
| (9) | NAV Return is calculated using the opening Net Asset Value price of the Fund’s common stock on the first business day and the closing Net Asset Value price of the Fund’s common stock on the last business day of each period reported. Dividends and distributions, if any, are assumed for the purpose of this calculation, to be reinvested at prices obtained under the Fund’s Automatic Reinvestment and Cash Purchase Plan. |
| (10) | Please note that the tax status of the distributions is determined at the end of the taxable year. |
| (11) | Shares were sold at a 5% discount from a 5 day average market price from 1/3/11 to 1/7/11. |
| (12) | Total investment return includes the dilutive effect of the 2011 rights offering. Without this effect, the total investment return would have been (2.59)%. |
| (13) | The Fund had a 1:4 reverse stock split with ex-dividend date of June 27, 2012. Prior year net asset values and per share amounts have been restated to reflect the impact of the reverse stock split. (See Notes to Financial Statements). The net asset value and market price reported at the original dates prior to the reverse stock split were as follows: |
| For the Years Ended December 31, |
2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
| Net Asset Value (prior to reverse stock split) |
$ | 3.57 | $ | 3.99 | $ | 4.13 | $ | 4.00 | $ | 4.97 | ||||||||||
| Market Price (prior to reverse stock split) |
$ | 3.03 | $ | 3.56 | $ | 3.91 | $ | 3.37 | $ | 4.53 | ||||||||||
See notes to financial statements
19
THE ZWEIG TOTAL RETURN FUND, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2012
(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. The Fund’s investment objective is to seek total return, consisting of capital appreciation and income.
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 conformity with accounting principals generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates and those differences could be significant.
A. Security Valuation:
Security valuation procedures for the Fund, which include, nightly price variance, as well as back-testing such as bi-weekly unchanged price, monthly secondary source and transaction analysis, have been approved by the Board of Directors. All internally fair valued securities are approved by a valuation committee appointed by the Board. The valuation committee is comprised of the treasurer, assistant treasurer, secretary and chief compliance officer for the Fund. All internally fair valued securities, referred to below, are updated daily and reviewed in detail by the valuation committee monthly unless changes occur within the period. The valuation committee reviews the validity of the model inputs and any changes to the model. Internal fair valuations are ratified by the Board of Directors at least quarterly.
The Fund utilizes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.
| • | Level 1 — quoted prices in active markets for identical securities |
| • | Level 2 — prices determined using other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) |
| • | Level 3 — prices determined using significant unobservable inputs (including the valuation committee’s own assumptions in determining the fair value of investments) |
20
A description of the valuation techniques applied to the Fund’s major categories of assets and liabilities measured at fair value on a recurring basis is as follows:
Equity securities are valued at the official closing price (typically last sale) on the exchange on which the securities are primarily traded, or if no closing price is available, at the last bid price and are categorized as Level 1 in the hierarchy. Restricted equity securities and private placements that are not widely traded, are illiquid or are internally fair valued by the valuation committee, are generally categorized as Level 3 in the hierarchy.
Certain foreign securities may be fair valued in cases where closing prices are not readily available or are deemed not reflective of readily available market prices. For example, significant events (such as movement in the U.S. securities market, or other regional and local developments) may occur between the time that foreign markets close (where the security is principally traded) and the time that the Fund calculates its net asset value (generally, the close of the NYSE) that may impact the value of securities traded in these foreign markets. In such cases the Fund fair values foreign securities using an external pricing service which considers the correlation of the trading patterns of the foreign security to the intraday trading in the U.S. markets for investments such as American Depositary Receipts, financial futures, exchange-traded funds, and certain indexes as well as prices for similar securities. Such fair valuations are categorized as Level 2 in the hierarchy. Because the frequency of significant events is not predictable, fair valuation of certain foreign common stocks may occur on a frequent basis.
Debt securities, including restricted securities, are valued based on evaluated quotations received from independent pricing services or from dealers who make markets in such securities. For most bond types, the pricing service utilizes matrix pricing which considers yield or price of bonds of comparable quality, coupon, maturity, current cash flows, type, and current day trade information, as well as dealer supplied prices. These valuations are generally categorized as Level 2 in the hierarchy. Structured debt instruments such as mortgage-backed and asset-backed securities may also incorporate collateral analysis and utilize cash flow models for valuation and are generally categorized as Level 2 in the hierarchy. Pricing services do not provide pricing for all securities and therefore dealer supplied prices are utilized representing indicative bids based on pricing models used by market makers in the security and are generally categorized as Level 2 in the hierarchy. Debt securities that are not widely traded, are illiquid, or are internally fair valued by the valuation committee are generally categorized as Level 3 in the hierarchy.
Listed derivatives, such as options, that are actively traded are valued based on quoted prices from the exchange and are categorized as Level 1 in the hierarchy. Over the counter (OTC) derivative contracts, which include forward currency contracts and equity linked instruments are valued based on inputs observed from actively quoted markets and are categorized as Level 2 in the hierarchy.
Investments in open-end mutual funds are valued at their closing net asset value determined as of the close of business of the New York Stock Exchange (generally 4:00 p.m. Eastern time) each business day and are categorized as Level 1 in the hierarchy.
Short-term notes having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market and are generally categorized as Level 2 in the hierarchy.
21
A summary of the inputs used to value the Fund’s major categories of assets and liabilities, which primarily include investments of the Fund, by each major security type is disclosed at the end of the Schedule of Investments for the Fund. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
B. Security Transactions and Investment Income:
Security transactions are recorded on the trade date. Realized gains and losses from sales of securities are determined on the identified cost basis. Dividend income is recognized on the ex-dividend date, or in the case of certain foreign securities, as soon as the Fund is notified. Interest income is recorded on the accrual basis. The Fund amortizes premiums and accretes discounts using the effective interest method.
C. Income Taxes:
The Fund is treated as a separate taxable entity. It is the Fund’s intention to comply with the requirements of Subchapter M of the Internal Revenue Code and to distribute substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes or excise taxes has been made.
The Fund may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. The Fund will accrue such taxes and recoveries as applicable based upon current interpretations of the tax rules and regulations that exist in the markets in which it invests.
The Fund has adopted the authoritative guidance on accounting for and disclosure of uncertainty in tax positions, which requires the Fund to determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Fund has determined that there was no effect on the financial statements from the adoption of this authoritative guidance. As of June 30, 2012, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are from the year 2008 forward (with limited exceptions).
D. Dividends and Distributions to Shareholders:
Distributions are recorded by the Fund on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences may include the treatment of non-taxable dividends, market premium and discount, non-deductible expenses, expiring capital loss carryovers, foreign currency gain or loss, operating losses and losses deferred due to wash sales. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to capital paid in on shares of beneficial interest.
The Fund has a Managed Distribution Plan to pay 7 percent of the Fund’s net asset value (“NAV”) on an annualized basis. Distributions may represent earnings from net investment income, realized capital gains, or, if necessary, return of capital. Shareholders should not draw any conclusions about the Fund’s investment performance from the terms of the Fund’s Managed Distribution Plan.
E. Foreign Currency Translation:
Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at the foreign currency exchange rate effective at the end of the reporting
22
period. Cost of investments is translated at the currency exchange rate effective at the trade date. Cost of investments is translated at the currency exchange rate effective at the trade date. The gain or loss resulting from a change in currency exchange rates between the trade and settlement date of a portfolio transaction is treated as a gain or loss on foreign currency. Likewise, the gain or loss resulting from a change in currency exchange rates between the date income is accrued and paid is treated as a gain or loss on foreign currency. The Fund does not isolate that portion of the results of operations arising from changes in foreign exchange rates on investments from the fluctuations arising from changes in the market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.
F. Derivative Financial Instruments:
Disclosures on derivatives instruments and hedging activities are intended to improve financial reporting for derivative instruments by enhanced disclosure that enables the investors to understand how and why a fund uses derivatives, how derivatives are accounted for, and how derivative instruments affect a fund’s results of operations and financial position. Summarized below is a specific type of derivative instrument used by the Fund.
Options Contracts
An options contract provides the purchaser with the right, but not the obligation, to buy (call option) or sell (put option) a financial instrument at an agreed upon price. The Fund may purchase or write listed covered and uncovered put and call options on portfolio securities for hedging purposes or to facilitate the rapid implementation of investment strategies if the Fund anticipates a significant market or market sector advance. The Fund is subject to equity price risk in the normal course of pursuing its investment objectives. The Fund may use options contracts to hedge against changes in the values of equities or for yield enhancement.
When the Fund purchases an option, it pays a premium and an amount equal to that premium is recorded as an asset. When the Fund writes an option, it receives a premium and an amount equal to that premium is recorded as a liability. The asset or liability is adjusted daily to reflect the current market value of the option. Holdings of the Fund designated to cover outstanding written options are noted in the Schedules of Investments. Purchased options are reported as an asset within “Investment securities at value before written options” on the Statement of Assets and Liabilities. Options written are reported as a liability within “Written options outstanding at value”. Changes in value of the purchased option is included in unrealized appreciation/(depreciation) on investments on the Statement of Investments. Changes in value of written options is included in unrealized appreciation/(depreciation) on written options.
If an option expires unexercised, the Portfolio realizes a gain or loss to the extent of the premium received or paid. If an option is exercised, the premium received or paid is recorded as an adjustment to the proceeds from the sale or the cost basis of the purchase. The difference between the premium and the amount received or paid on effecting a closing purchase or sale transaction is also treated as a realized gain or loss. Gain or loss on purchased options is included in net realized gain/(loss) on investment transactions on the Statement of Operations. Gain or loss on written options is presented separately as net realized gain/(loss) on written options transactions.
The risk in writing call options is that the Fund gives up the opportunity for profit if the market price of the security increases and the option is exercised. The risk in writing put options is that the Fund may incur a loss if the market price of the security decreases and the option is exercised. The risk
23
in buying options is that the Fund pays a premium whether or not the option is exercised. The use of such instruments may involve certain additional risks as a result of unanticipated movements in the market. Writers (sellers) of options are subject to unlimited risk of loss, as the seller will be obligated to deliver or take delivery of the security at a predetermined price which may, upon exercise of the option, be significantly different from the then-market value.
NOTE 3 — INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
($ reported in thousands unless otherwise noted)
Zweig Advisers LLC, an indirect wholly-owned subsidiary of Virtus Investment Partners, Inc. (“Virtus”), is the adviser to the Fund.
a) Investment Advisory Fee: The Investment Advisory Agreement (the “Agreement”) between the 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 of 0.70% of the Fund’s average daily managed assets. During the period ended June 30, 2012, the Fund incurred advisory fees of $1,806.
Effective May 10, 2011, the Adviser has voluntarily agreed to waive 20% of the advisory fee until further notice.
Prior to March 1, 2012, Zweig Consulting LLC served as the Sub-Adviser to the Fund. Prior to March 1, 2012 through current, Zweig Consulting LLC serves as a consultant to the Adviser. Fees to Zweig Consulting LLC are paid by the Adviser.
b) Administration Fee: VP Distributors, Inc., an indirect wholly-owned subsidiary of Virtus, serves as the Fund’s Administrator (the “Administrator”) pursuant to an Administration Agreement. During the period ended June 30, 2012, the Fund incurred Administration fees of $168.
c) Directors Fee ($ not reported in thousands):
During the period the Fund paid each Director who is not an interested person of the Fund or the Adviser, a fee of $11,000 per year plus $1,500 per Director for each committee meeting attended, together with the out-of-pocket costs relating to attendance at such meetings. The co-lead Directors are paid an additional $10,000 retainer each per year in lieu of compensation for executive committee meetings. The Audit Committee chairperson is paid an additional fee of $5,000 per year. Any Director of the Fund who is an interested person of the Fund or the Adviser receives no remuneration from the Fund.
NOTE 4 — PURCHASES AND SALES OF SECURITIES:
($ reported in thousands)
Purchases and sales of securities (excluding U.S. Government and agency securities and short-term investments) for the period ended June 30, 2012, were as follows:
| Purchases |
$ | 117,549 | ||
| Sales |
117,491 |
24
Purchases and sales of long-term U.S. Government and agency securities for the period ended June 30, 2012, were as follows:
| Purchases |
$ | 19,534 | ||
| Sales |
20,025 |
NOTE 5 — DERIVATIVE TRANSACTIONS
($ reported in thousands)
The Fund invested in derivative instruments during the reporting period through the form of purchased and written options. The primary type of risk associated with these derivative instruments are equity risk. The Fund invests in uncovered options contracts to gain exposure to securities not held in the portfolio, and to realize a greater return than investing in the underlying security alone.
For additional information on the options in which the Fund was invested during the reporting period, refer to the Schedule of Investments and Note 2F.
Written options transactions, during the six-months ended June 30, 2012, were as follows:
| Call options |
# of contracts |
Premium Rec’d |
||||||
| Options outstanding at beginning of year |
3,000 | $ | 249 | |||||
| Written options |
39,800 | 6,440 | ||||||
| Options repurchased |
(39,245 | ) | (6,337 | ) | ||||
|
|
|
|
|
|||||
| Options outstanding at June 30, 2012 |
3,555 | $ | 352 | |||||
|
|
|
|
|
|||||
| Put options |
# of contracts |
Premium Paid |
||||||
| Options outstanding at beginning of year |
3,000 | $ | 273 | |||||
| Written options |
38,921 | 4,720 | ||||||
| Options repurchased |
(39,046 | ) | (4,679 | ) | ||||
| Options expired |
(765 | ) | (121 | ) | ||||
|
|
|
|
|
|||||
| Options outstanding at June 30, 2012 |
2,110 | $ | 193 | |||||
|
|
|
|
|
|||||
The average daily cost of purchased options during the six-months ended June 30, 2012 was $2,405. The average daily premiums received on written options during the year was $(1,429).
Purchased options, as presented in the Statement of Assets and Liabilities, is located under “Investment securities at value before written options” at a fair value of $623. Written options as of June 30, 2012 are located under “Written options outstanding at value” at a fair value of $459.
For the six-months ended June 30, 2012, unrealized gains/(losses) related to purchased and written options are disclosed in the “Net unrealized appreciation (depreciation) on investments” on the Statement of Assets and Liabilities in the amount of $(464).
For the six-months ended June 30, 2012, changes in the value of purchased options is included in “Net change in unrealized appreciation (depreciation) on investments” in the Statement of Operations in
25
the amount of $(565). Written options are included in “Net change in unrealized appreciation/(depreciation) on written options” in the amount of $54. Realized gains/loss related to purchased options are disclosed in the “Net realized gain (loss) on investments” in the amount of $2,479. Gains and losses associated with written options are disclosed in the “Net realized gain (loss) on written options” in the amount of $(3,413).
NOTE 6 — INDEMNIFICATIONS
Under the Fund’s organizational documents and related agreements, its directors and officers are indemnified against certain liabilities arising out of the performance of their duties to the Fund. In addition, the Fund enters into contracts that contain a variety of indemnifications. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these arrangements.
NOTE 7 — CAPITAL STOCK AND REINVESTMENT PLAN
At June 30, 2012, the Fund had one class of common stock, par value $0.001 per share, of which 500,000,000 shares are authorized and 35,918,138 shares are outstanding.
Registered shareholders may elect to have all distributions paid by check mailed directly to the shareholder by Computershare 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 Computershare, as the Plan agent, in whole or fractional shares of the Fund, as the case may be. During the periods ended June 30, 2012 and December 31, 2011, there were no shares issued pursuant to the Plan.
Pursuant to the Board approved stock repurchase program, the Fund may repurchase up to 5% of its outstanding shares in the open market at a discount to NAV through March 31, 2015. The Fund started its buyback of shares on April 11, 2012. From the period of April 11, 2012 through June 30, 2012, the Fund repurchased 105,548 shares at an average price of $12.40. The average weekly discount during this period was 13.13%. There are 1,695,636 shares remaining that are authorized to be purchased under the repurchase plan in the future.
In a non-transferable rights offering ended January 7, 2011, shareholders exercised rights to purchase 7,375,000 shares of common stock at an offering price of $13.36 per share for proceeds, net of expenses of $97,989,000. Shares and per share amounts have been restated to reflect the affects of the 1-for-4 reverse stock split.
On July 2, 2012, the Fund announced a distribution of $0.082 per share to shareholders of record on July 12, 2012. This distribution has an ex-dividend date of July 10, 2012, and is payable on July 19, 2012. Please see inside front cover for more information on the Fund’s distributions.
NOTE 8 — REVERSE STOCK SPLIT
Prior to the opening of trading on the NYSE on June 27, 2012, the Fund implemented a 1 for 4 reverse stock split. The Fund’s shares are trading on a split-adjusted basis under a new CUSIP number (989837208). The net effect of the Fund’s reverse stock split was to decrease the number of the Fund’s outstanding common shares and increase the net asset value per common share by a proportionate amount. While the number of the Fund’s outstanding common shares declined, neither the Fund’s holdings nor the total value of shareholders’ investments were affected. Immediately after the reverse stock split, each common shareholder held the same percentage of the Fund’s outstanding common shares
26
that he or she held immediately prior to the reverse stock split, subject to adjustments for fractional shares resulting from the split. Capital share activity referenced on the Statement of Changes in Net Assets, and per share data, including the proportionate impact to market price, in the Financial Highlights table have been restated to reflect the reverse stock split.
NOTE 9 — CREDIT RISK AND ASSET CONCENTRATIONS
In countries with limited or developing markets, investments may present greater risks than in more developed markets and the prices of such investments may be volatile. The consequences of political, social or economic changes in these markets may have disruptive effects on the market prices of these investments and the income they generate, as well as the Fund’s ability to repatriate such amounts.
The Fund may invest a high percentage of its assets in specific sectors of the market in its pursuit of a greater investment return. Fluctuations in these sectors of concentration may have a greater impact on the Fund, positive or negative, than if the Fund did not concentrate its investments in such sectors.
At June 30, 2012, the Fund held 36% of its total investments in U.S. Government securities (includes 10% of U.S. Treasury Bills which are Short-term investments).
NOTE 10 — REGULATORY EXAMS
Federal and state regulatory authorities from time to time make inquiries and conduct examinations regarding compliance by Virtus and its subsidiaries (collectively “the Company”) with securities and other laws and regulations affecting their registered products.
There are currently no such matters which the Company believes will be material to these financial statements.
NOTE 11 — FEDERAL INCOME TAX INFORMATION
($ reported in thousands)
At June 30, 2012, federal tax cost and aggregate gross unrealized appreciation (depreciation) of securities held by the Fund were as follows:
| Federal Tax Cost |
Unrealized Appreciation |
Unrealized Depreciation |
Net Unrealized Appreciation (Depreciation) |
|||||||||||||
| Investments |
$ | 462,660 | $ | 47,455 | $ | (4,151 | ) | $ | 43,304 | |||||||
| Written Options |
(545 | ) | 168 | (82 | ) | 86 | ||||||||||
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized for tax years beginning after December 22, 2010 may be carried forward indefinitely, and their character is retained as short-term and/or long-term losses. Previously, net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
NOTE 12 — SUBSEQUENT EVENT EVALUATIONS
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued, and has determined that there are no subsequent events that require recognition or disclosure in these financial statements.
27
BOARD CONSIDERATION AND APPROVAL OF
INVESTMENT ADVISORY AGREEMENT
Pursuant to Section 15(c) of the Investment Company Act of 1940, as amended (the “1940 Act”), the Board of Directors (the “Board”) of The Zweig Total Return Fund, Inc. (the “Fund”), including a majority of the Directors who have no direct or indirect interest in the investment advisory agreement and are not “interested persons” of the Fund, as defined in the 1940 Act (the “Independent Directors”), are required to annually review and approve the terms of the Fund’s investment advisory agreement (the “Advisory Agreement”) with Zweig Advisers LLC (the “Adviser”). In this regard, the Board reviewed and approved during the most recent six month period covered by this report the Advisory Agreement, as proposed to be amended to calculate the management fee based on “managed assets,” which include all assets attributable to borrowing, rather than “net assets”.
More specifically, at a meeting held on February 6, 2012, the Board, including the Independent Directors, considered the factors and reached the conclusions described below relating to the selection of the Adviser and consideration of approval of the Advisory Agreement.
1. Nature, Extent and Quality of Services. The Independent Directors considered the nature, extent and quality of the services performed by the Adviser, including portfolio management, supervision of Fund operations and compliance and regulatory filings and disclosures to shareholders, general oversight of other service providers, review of Fund legal issues, assisting the Directors in that capacity and other services. The Independent Directors concluded that the services are extensive in nature and that the Adviser delivered an acceptable level of service.
2. Investment Performance of the Fund and Adviser. The Independent Directors considered the investment performance for the Fund over various periods of time as compared to its Lipper, Inc. performance group and performance universe, and concluded that the Adviser was delivering acceptable performance results consistent with the long-term investment strategies being pursued by the Fund. The Independent Directors also considered the performance of the portfolios of other Virtus equity mutual funds now being managed by the Fund’s portfolio managers and found that performance to be consistent with the performance being achieved by the Fund’s equity portfolio.
3. Costs of Services and Profits Realized by the Adviser.
(a) Costs of Services to Funds: Fees and Expenses. The Independent Directors considered the Fund’s management fee rate and expense ratio relative to the Fund’s Lipper, Inc. expense group, including the anticipated effect on the net assets of the proposed change in the advisory fee should the Fund engage in borrowing. The Independent Directors concluded that those fees are acceptable based upon the qualifications, experience, reputation and performance of the Adviser. The Independent Directors also concluded that the expense ratio of the Fund was within an acceptable range relative to its Lipper, Inc. expense group.
(b) Profitability and Costs of Services to Adviser. The Independent Directors considered the Adviser’s overall profitability and costs. The Independent Directors also considered whether the amount of profit is a fair entrepreneurial profit. The Independent Directors concluded that the Adviser’s profitability was at an acceptable level in light of the quality of the services being provided to the Fund.
28
4. Extent of Economies of Scale as Fund Grows. The Independent Directors considered whether there have been economies of scale with respect to the management of the Fund and whether the Fund has appropriately benefited from any economies of scale. The Independent Directors noted that economies of scale may develop for certain funds as their assets increase and their fund-level expenses decline as a percentage of assets, but that closed-end funds such as the Fund typically do not have the ability to substantially increase their asset base as do open-end funds. The Independent Directors concluded that the Fund has appropriately benefited from any economies of scale.
5. Whether Fee Levels Reflect Economies of Scale. The Independent Directors also considered whether the management fee rate is reasonable in relation to the asset size of the Fund and any economies of scale that may exist, and concluded that, given the Fund’s closed-end structure, it was. At the same time, the Directors agreed that it would be appropriate to monitor this issue in the event that the assets of the Fund were to increase substantially via a rights offering or some other means.
6. Other Relevant Considerations.
(a) Adviser Personnel and Methods. The Independent Directors considered the size, education and experience of the Adviser’s staff, its fundamental research capabilities and approach to recruiting, training and retaining portfolio managers and other research and management personnel, and concluded that in each of these areas it was structured in such a way to support the level of services being provided to the Fund.
(b) Other Benefits to the Adviser. The Independent Directors also considered the character and amount of other incidental benefits received by the Adviser and its affiliates from their association with the Fund. The Independent Directors concluded that potential “fall-out” benefits that they may receive, such as greater name recognition or increased ability to obtain research or brokerage services, appear to be reasonable, and may in some cases benefit the Fund.
(c) Asset Allocation Services. The Independent Directors considered that the Board decided not to renew the Servicing Agreement between the Adviser and Zweig Consulting, the Fund’s subadviser, under which Zweig Consulting provided certain research and analysis to the Adviser and determined the asset allocations to equities, fixed income securities and cash. The Independent Directors considered that the Adviser would be assuming responsibility for asset allocation decisions, and that additional resources of the Adviser are expected to be called upon to support both that function and various investment strategies that the Adviser intends to employ, depending upon market conditions, to seek to enhance the current yield of the Fund. The Independent Directors further noted that the Adviser expected to enter into a research and consulting agreement with respect to the Fund under which Zweig Consulting would provide general market analysis and other research services to the Adviser, but not asset allocation advice.
Conclusions
In considering the Advisory Agreement, as proposed to be amended, the Independent Directors did not identify any factor as all-important or all-controlling and instead considered these factors collectively in light of the Fund’s surrounding circumstances. Based on this review, it was the judgment of the Independent Directors that re-approval of the Advisory Agreement, as proposed to be amended, was in the best interests of the Fund and its shareholders. As a part of their decision-making process, the In-
29
dependent Directors noted their belief that a long-term relationship with a capable, conscientious adviser is in the best interests of the Fund. The Independent Directors considered, generally, that shareholders invested in a Fund knowing that the Adviser managed that Fund and knowing the Adviser’s investment management fee schedule. As such, the Independent Directors considered, in particular, whether the Adviser managed the Fund in accordance with its investment objectives and policies as disclosed to shareholders, and concluded that the Fund was so managed.
Upon conclusion of their review and discussion, the Independent Directors unanimously agreed to recommend the continuation of the Advisory Agreement and to submit for shareholder approval an amendment to the Advisory Agreement to change the basis of compensation from “net assets” to “managed assets.” The Independent Directors noted their belief that the Adviser’s compensation should continue to accurately reflect the full size and scope of the Fund’s portfolio and therefore recommended approval by shareholders of the amendment to the Advisory Agreement that provides compensation to the Adviser for the effort and resources necessary to manage leveraged assets in the event the Adviser were to implement leverage.
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SUPPLEMENTARY PROXY INFORMATION
The Annual Meeting of Shareholders of The Zweig Total Return Fund, Inc. was held on May 15, 2012, and reconvened on June 12, 2012, June 29, 2012 and July 6, 2012 (the “Meeting”). The Meeting was held for purposes of electing two (2) nominees to the Board of Directors and consideration of a number of other proposals as enumerated below.
The results were as follows:
| Election Directors |
Votes For | Votes Withheld | ||||||
| Charles H. Brunie |
86,630,663 | 22,906,660 | ||||||
| James B. Rogers, Jr. |
86,715,593 | 22,821,730 | ||||||
| Votes For | Votes Against | Abstentions | ||||||||||
| Revise investment objective |
78,136,690 | 20,967,312 | 1,826,830 | |||||||||
| Reclassify investment objective as non-fundamental |
72,840,396 | 26,179,260 | 1,911,176 | |||||||||
| Amend fundamental investment restriction regarding diversification |
77,843,702 | 21,037,936 | 2,049,195 | |||||||||
| Amend fundamental investment restriction regarding issuance of senior securities |
77,553,785 | 21,405,122 | 1,971,926 | |||||||||
| Amend fundamental investment restriction regarding investing in commodities |
76,914,685 | 22,098,063 | 1,918,085 | |||||||||
| Eliminate fundamental investment restriction regarding purchasing securities on margin |
76,478,341 | 22,512,434 | 1,940,057 | |||||||||
| Eliminate the fundamental investment restriction regarding short sales |
76,879,087 | 22,048,463 | 2,003,282 | |||||||||
| Eliminate the fundamental investment restriction regarding purchasing “restricted” securities |
77,159,306 | 21,696,928 | 2,074,599 | |||||||||
| Amend the investment advisory agreement between the Fund and Zweig Advisers LLC (the “Adviser”) to permit the Adviser to receive a fee based on all “managed assets” of the Fund rather than “net assets” |
72,440,371 | 26,473,700 | 2,016,761 | |||||||||
Based on the foregoing, Charles H. Brunie and James B. Rogers, Jr., were re-elected as Directors. The Fund’s other Directors who continue in office are George R. Aylward, Wendy Luscombe, Alden C. Olson, and R. Keith Walton. Additionally, each of the remaining proposals passed.
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KEY INFORMATION
Zweig Shareholder Relations: 1-800-272-2700
For general information and literature, as well as 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.
REPURCHASE OF SECURITIES
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.
PROXY VOTING INFORMATION (FORM N-PX)
The Adviser votes proxies relating to portfolio securities in accordance with procedures that have been approved by the Fund’s Board of Directors. You may obtain a description of these procedures, along with information regarding how the Fund voted proxies during the most recent 12-month period ended June 30, 2011, free of charge, by calling toll-free 1-800-272-2700. This information is also available through the Securities and Exchange Commission’s website at http://www.sec.gov.
FORM N-Q INFORMATION
The Fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission (the “SEC”) for the first and third quarters of each fiscal year on Form N-Q. Form N-Q is available on the SEC’s website at http://www.sec.gov. Form N-Q may be reviewed and copied at the SEC’s Public Reference Room. Information on the operation of the SEC’s Public Reference Room can be obtained by calling toll-free 1-800-SEC-0330.
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CERTIFICATION (Unaudited)
In accordance with the requirements of the Sarbanes-Oxley Act, the Fund’s CEO (the President of the Fund) and CFO (the Treasurer of the Fund) have filed the required “Section 302” certifications with the SEC on Form N-CSR.
In accordance with Section 303A of the NYSE listed company manual, the CEO certification has been filed with the NYSE.
33
| Item 2. | Code of Ethics. |
Not applicable.
| Item 3. | Audit Committee Financial Expert. |
Not applicable.
| Item 4. | Principal Accountant Fees and Services. |
Not applicable.
| Item 5. | Audit Committee of Listed registrants. |
Not applicable.
| Item 6. | Investments. |
| (a) | Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. |
| (b) | Not applicable. |
| Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
Not applicable.
| Item 8. | Portfolio Managers of Closed-End Management Investment Companies. |
There has been no change, as of the date of this filing, in any of the portfolio managers identified in response to paragraph (a)(1) of this Item in the registrant’s most recently filed annual report on Form N-CSR.
| Item 9. | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. |
REGISTRANT PURCHASES OF EQUITY SECURITIES*
| Period |
(a) Total Number of Shares (or Units) Purchased |
(b) Average Price Paid per Share (or Unit) |
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
| 4/11/12 – 4/30/12 |
56,735 | $ | 12.56 | 56,735 | 1,744,450 | |||||||||||
| 5/1/12 – 5/31/12 |
35,689 | $ | 12.34 | 35,689 | 1,708,761 | |||||||||||
| 6/1/12 – 6/30/12 |
13,125 | $ | 12.10 | 13,125 | 1,695,636 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
105,549 | $ | 12.43 | 105,549 | 1,695,636 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| * | All numbers were adjusted to reflect the reverse 1 for 4 stock split |
| a. | 3/13/12 is the date the plan was announced |
| b. | 1,801,184 is the amount of shares approved |
| c. | Expiration date: 3/31/15 |
| d. | None |
| e. | None |
| Item 10. | Submission of Matters to a Vote of Security Holders. |
There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant’s board of trustees, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item. In addition, there are no newly identified portfolio managers as of the date of this filing.
| Item 11. | Controls and Procedures. |
| (a) | The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). |
| (b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant’s second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| Item 12. | Exhibits. |
| (a)(1) | Not applicable. | |
| (a)(2) | Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. | |
| (a)(3) | Not applicable. | |
| (b) | Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. | |
| (c) | A copy of the Registrant’s notice to shareholders pursuant to Rule 19(a) under the 1940 Act which accompanied distributions paid during the period ended June 30, 2012 pursuant to the Registrant’s Managed Distribution Plan are filed herewith as required by the terms of the Registrant’s exemptive order issued on November 17, 2008. | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| (Registrant) | The Zweig Total Return Fund, Inc. | |||||
| By (Signature and Title)* | /s/ George R. Aylward |
|||||
| George R. Aylward, President | ||||||
| (principal executive officer) | ||||||
| Date | 09/06/12 | |||||
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By (Signature and Title)* | /s/ George R. Aylward |
|||||
| George R. Aylward, President (principal executive officer) |
||||||
| Date | 09/06/12 | |||||
| By (Signature and Title)* | /s/ W. Patrick Bradley |
|||||
| W. Patrick Bradley, Vice President, Chief Financial Officer and Treasurer (principal financial officer) |
||||||
| Date | 09/06/12 | |||||
| * | Print the name and title of each signing officer under his or her signature. |