===
ZENIX
Income
Fund Inc.
===
[GRAPHIC/LOGO]
Annual Report
March 31, 1997
<PAGE>
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Zenix Income Fund Inc.
Dear Shareholder:
We are pleased to provide you with the annual report for the Zenix Income
Fund Inc. for the year ended March 31, 1997. Over the past twelve months, the
Fund paid income dividends on common shares totaling $0.72 per share. The table
below shows the annualized distribution rates and twelve month total returns for
the Fund based on its March 31, 1997 net asset value (NAV) per share and New
York Stock Exchange (NYSE) closing price.
<TABLE>
<CAPTION>
Price Annualized Twelve-Month
Per Share Distribution Rate* Total Return
--------- ----------------- ------------
<S> <C> <C> <C>
$6.45 (NAV) 11.35% 14.04%
$7.25 (NYSE) 10.10% 15.55%
</TABLE>
In comparison, the average total return on NAV was 12.27% for closed-end
high yield bond funds during the same time period according to Lipper Analytical
Services, Inc., an independent fund tracking organization. In addition, over the
past twelve months, the Zenix Income Fund generally outperformed other domestic
bond markets, far exceeding the -1.00% to 6.00% average total returns on
intermediate- and long-term U.S. Treasuries, government agency securities and
investment grade corporate bonds. In our opinion, the Fund's strong performance
during the reporting period was the result of a combination of prudent issue
selection as well as the Fund's use of leverage.
- ----------
* This distribution rate assumes monthly dividends at the current rate of
$0.061 per share for the twelve months.
1
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<PAGE>
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Market and Economic Overview
After a rather difficult three quarters in 1996, the fixed income markets
began to rally in the fourth quarter of 1996, with strong performance gains by
investment grade bonds and U.S. Treasury bonds. An apparent slowdown in U.S.
economic growth over the fourth quarter of 1996, combined with favorable
inflation data, helped to bolster the domestic fixed income markets. The bond
market rally was also fueled by the Federal Reserve Board's ("Fed") decision to
remain on the sidelines and not raise interest rates. However, since early
December, renewed inflation fears caused interest rates to rise. In retrospect,
fourth quarter economic growth was relatively strong, but the overall rate of
inflation remained well behaved.
In the first quarter of 1997 the U.S. economy has remained strong with only
a modest upturn in inflation. However, Fed Chairman Alan Greenspan began voicing
concern over continued strong economic growth in the first quarter and the
potential for higher inflation if the economy were to further strengthen in the
first quarter of 1997. Consequently, the Fed raised short-term interest rates by
a modest 0.25% in March to slow down economic growth and prevent any increase in
inflationary pressures over the upcoming months. In our opinion, the Fed
Chairman's public comments and subsequent actions have caused a widespread
sell-off in both the equity and bond markets that began earlier this year.
Despite the Fed's concerns over potentially higher inflation, many government
reports have indicated that inflation has remained well contained during the
first three months of 1997.
Over the past year, the high yield bond market has generally outperformed
the more interest-rate sensitive, longer-maturity Treasury and investment grade
bond markets. Specifically, the better quality issues (BB/Ba and B/B rated)
turned in the strongest performance since these issues tend to be less
vulnerable to a market volatility than lower quality issues. In addition, over
the past few weeks the equity market has begun to weaken at a rate faster than
the bond markets. Since the lower-quality high-yield issues tend to trade more
closely with the stock market, we expect further underperformance versus the
better quality issues, especially if the equity market continues to trade down.
In fact, in recent weeks, the equity market has experienced greater volatility.
However, because of the Fund's relatively conservative investment philosophy, we
tend to avoid the lower-quality high-yield issues and that has helped its
relative performance.
2
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<PAGE>
- --------------------------------------------------------------------------------
As we have stated, the Fund's total performance over the past twelve months
has generally been much better than other types of domestic bond markets. During
1996, many investors, who had become dissatisfied with the modest returns and
extreme price swings in the U.S. Treasury market, began investing more money
into the high yield bond market. In fact, during 1996 alone, over $15 billion
flowed into open-end high-yield bond mutual funds, with another $4 billion
invested during the first quarter of 1997. At the same time, greater numbers of
institutional investors such as insurance companies and municipal and corporate
pension fund managers have invested more of their assets in the high yield bond
market, particularly the better quality issues.
Given the relatively strong performance of the high yield bond market
compared to U.S. Treasuries during 1996, high yield bond premiums were roughly
100 basis points (one basis point is one-one hundredth of a percent) tighter
than they were at the beginning of 1996. In our opinion, this narrowing of
yields reflects a strong demand for high yield bonds and investor expectations
of a strong economy. In retrospect, the high yield bond market had become
overvalued in light of the Federal Reserve's decision to raise interest rates in
March. In simple terms, the economy and financial markets, which were relatively
benign, have become more hostile for the financial assets and as a result, the
high yield bond market has begun to underperform the U.S. Treasuries and
investment grade corporate bonds. We would not be surprised to see yield spreads
widen back to their historical averages, especially if the Fed raises short-term
interest rates further.
We expect increased market volatility to continue over the near term. While
we believe the Fed will probably raise short-term interest rates further in the
coming months, we still expect the economy to grow moderately over the near
future with no serious threat of either an increase in inflation or an economic
recession. We remain convinced the Fed can successfully engineer an economic
slowdown and effectively keep inflation under control. Nevertheless, issue
selectivity has become even more important when seeking investment ideas given
the fact the high yield bond market is fully valued and the uncertainty over the
future direction of the U.S. economy and Fed monetary policy.
3
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<PAGE>
- --------------------------------------------------------------------------------
Portfolio Strategy
While our near-term outlook for the high yield bond market is cautious, we
remain optimistic about the market's total return prospects in the second half
of 1997. We anticipate a gradual decline in interest rates as economic activity
moderates and inflation remains subdued. In a moderately growing economy,
stronger high yield companies should outperform. These companies tend to be in
industries that continue to benefit from new technology.
We have found many attractive growth opportunities in the
telecommunications, media, cable TV and oil and natural gas industries, and the
Fund is overweighted in these areas. Some of the issues that we continue to
favor include Time Warner Inc. (entertainment and media), Brooks Fiber
(alternate local telecommunications provider), Teleport Communications Group
(telecommunications), and Parker Drilling Company (international contract
drilling). All of these companies continue to generate improving results either
through increased market share, improved internal cost controls, or a
combination of both.
We still firmly believe that over a full ten-year economic cycle the
better-quality high-yield issues offer superior risk-adjusted returns and lower
default risk relative to lower-quality issues. Considering the trend toward
greater industry competition and little pricing power in most sectors of the
domestic economy, we believe our prudent approach to high yield bond investing
should generate consistently positive returns in 1997. We therefore will
continue to avoid areas of the economy that are experiencing weak growth trends
as well as heavy industry competition. In addition, we will continue to place
more emphasis on higher quality issues and avoid or eliminate the weaker,
lower-tier issues. During the past year, we sold our investments in Harvard
Industries, Inc. (automotive components), Moblemedia (telecommunications),
Metrocall, Inc. (telecommunications), and Mobile Telecommunications Technologies
Corp. (wireless messaging), because of their deteriorating results.
Given the shift in Fed policy, we have raised cash reserves in the Fund's
portfolio to a 7% to 10% level to be better positioned for potential investment
opportunities. Moreover, because of concerns over increased market volatility,
we have kept the Fund's average weighted maturity below eight years. We believe
this maturity range should help to limit the Fund's net asset value volatility
if interest rates move higher.
4
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<PAGE>
- --------------------------------------------------------------------------------
Outlook
In our opinion, the U.S. economy should grow solidly at least through the
first half of 1997. Given our expectations for continued economic growth with
greater interest rate volatility, our outlook on the bond market as a whole is
somewhat more cautious. As investors attempt to sort out the confusion over
economic growth, inflation and Federal Reserve monetary policy, we expect higher
volatility with respect to intermediate- and long-term interest rates over the
first half of 1997. However, we believe the Fund is well positioned to weather
this expected market uncertainty.
In closing, thank you for investing in the Zenix Income Fund. We look
forward to continuing to help you achieve your investment goals. If you have any
questions about your investment in the Fund, please call First Data Investor
Services Group, Inc. at (800) 331-1710.
Sincerely,
/s/ Heath B. McLendon /s/ John C. Bianchi
Heath B. McLendon John C. Bianchi, CFA
Chairman Vice President and
Investment Officer
April 15, 1997
5
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<PAGE>
<TABLE>
<CAPTION>
[LOGO] Schedule of Investments
March 31, 1997
===============================================================================================
Face
Amount Ratings Security Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES -- 90.0%
Aerospace/Defense -- 1.5%
$2,000,000 BB Airplanes Pass Through Trust, Corporate Collateralized
Mortgage Obligation, 10.875% due 3/15/19 ................... $ 2,201,980
------------
Banking -- 2.5%
3,375,000 B First Nationwide Parent Holdings Ltd.,
Sr. Exchange Note, 12.500% due 4/15/03 ..................... 3,695,625
------------
Beverage, Food & Tobacco -- 1.9%
2,735,000 B Consolidated Cigar Corp., Sr. Sub. Notes,
10.500% due 3/1/03 ......................................... 2,875,169
------------
Broadcasting/Cable -- 16.4%
750,000 B- All American Communications, Inc., Sr. Sub. Notes,
Series B, 10.875% due 10/15/01 ............................. 750,937
2,100,000 B- Allbritton Communications Co., Sr. Sub. Debentures,
11.500% due 8/15/04 ........................................ 2,236,500
2,600,000 NR Australis Media Ltd., Sr. Sub. Discount Notes,
step bond to yield 13.590% due 5/15/03+++ .................. 1,586,000
Cablevision Systems Corp., Sr. Sub. Debentures:
2,000,000 B 10.750% due 4/1/04 ......................................... 2,060,000
1,150,000 B 9.875% due 2/15/13 ........................................ 1,128,437
2,200,000 B- Comcast UK Cable, Debentures, step bond to yield
11.156% due 11/15/07 ....................................... 1,501,500
Globo Comunicacoes, Notes:
500,000 BB- Series A, 9.875% due 12/20/04+ ............................. 503,125
500,000 BB- Series B, 10.500% due 12/20/06+ ............................ 507,500
2,000,000 B Marcus Cable Operating Co., Sr. Debentures,
11.875% due 10/1/05 ........................................ 2,112,500
Rogers Cablesystems of America, Inc., Sr. Sub. Debentures:
1,000,000 BB+ 10.000% due 12/1/07 ........................................ 1,048,750
2,100,000 BB- 11.000% due 12/1/15 ........................................ 2,244,375
800,000 BB+ Sr. Secured Second Priority Debentures,
9.650% due 1/15/14++ .................................... 564,603
1,950,000 BB- Rogers Communications, Inc., Sr. Debentures,
10.875% due 4/15/04 ........................................ 2,035,312
950,000 B- SFX Broadcasting, Inc., Sr. Sub. Notes, Series B,
10.750% due 5/15/06 ........................................ 1,002,250
1,850,000 B+ Telewest Communications PLC, Sr. Discount Debentures,
step bond to yield 10.994% due 10/1/07 ..................... 1,239,500
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
[LOGO] Schedule of Investments (continued)
March 31, 1997
===============================================================================================
Face
Amount Ratings Security Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Broadcasting/Cable -- 16.4% (continued)
$ 950,000 B TV Azteca SA, Guaranteed Sr. Notes, Series B,
10.500% due 2/15/07+ ....................................... $ 933,375
2,150,000 B- UIH Australia, Inc., Sr. Discount Notes, Series B, step bond
to yield 14.000% due 5/15/06 ............................... 1,099,188
1,000,000 BB+ Videotron Group Ltd., Sr. Notes, 10.625% due 2/15/05 .......... 1,102,500
900,000 B- Wireless One Inc., Sr. Discount Notes,
13.000% due 10/15/03 ....................................... 547,875
500,000 B Young Broadcasting Corp., Sr. Sub. Notes,
11.750% due 11/15/04 ....................................... 541,250
------------
24,745,477
------------
Building and Construction -- 0.4%
500,000 BB- American Standard, Inc., Sr. Sub. Debentures,
11.375% due 5/15/04 ........................................ 527,500
------------
Chemicals -- 3.8%
1,000,000 B NL Industries, Inc., Sr. Secured Notes,
11.750% due 10/15/03 ....................................... 1,055,000
1,250,000 BB Pt. Polysindo Eka Perkasa, Guaranteed Sr. Notes,
13.000% due 6/15/01 ........................................ 1,410,937
2,000,000 B+ Terra Industries, Inc., Sr. Notes, Series B,
10.500% due 6/15/05 ........................................ 2,150,000
1,000,000 B Texas Petrochemicals Corp., Sr. Sub. Notes,
11.125% due 7/1/06 ......................................... 1,050,000
------------
5,665,937
------------
Consumer Durables Goods/Home Furnishings -- 0.2%
325,000 B+ TAG-Heuer International, Sr. Sub. Notes,
12.000% due 12/15/05 ....................................... 368,063
------------
Diversified Manufacturing -- 1.0%
1,500,000 B Unifrax Investment Corp., Sr. Notes,
10.500% due 11/1/03 ........................................ 1,530,000
------------
Electric Utilities -- 1.5%
1,000,000 B+ Calpine Corp., Sr. Notes, 10.500% due 5/15/06 ................. 1,072,500
1,070,978 BB- Midland CogenerationVenture Limited Partnership,
Midland Funding, Sr. Secured Lease Obligation Bond,
Series C, 10.330% due 7/23/02 .............................. 1,137,913
------------
2,210,413
------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
<TABLE>
<CAPTION>
[LOGO] Schedule of Investments (continued)
March 31, 1997
===============================================================================================
Face
Amount Ratings Security Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electronics-Computers -- 3.9%
$ 150,000 BB- Advanced Micro Devices Inc., Sr. Notes,
11.000% due 8/1/03 ......................................... $ 164,625
1,000,000 B Celestica International, Inc., Guaranteed Sr. Sub. Notes,
10.500% due 12/31/06+ ...................................... 1,076,250
1,000,000 B Fairchild Semiconductor Inc., Sr. Sub. Notes,
10.125% due 3/15/07+ ....................................... 1,002,500
2,000,000 B- Graphic Controls Corp., Sr. Sub. Notes,
12.000% due 9/15/05 ........................................ 2,200,000
1,400,000 B+ Unisys Corp., Sr. Notes, Series B, 12.000% due 4/15/03 ........ 1,492,750
------------
5,936,125
------------
Finance -- 3.6%
1,500,000 B Amresco Inc., Sr. Sub. Notes,
10.000% due 3/15/04 ........................................ 1,500,000
900,000 B+ Imperial Credit Industries Inc., Sr. Notes,
9.875% due 1/15/07+ ........................................ 893,250
2,750,000 B+ Ocwen Financial Corp., Notes,
11.875% due 10/1/03 ........................................ 3,052,500
------------
5,445,750
------------
Foods -- 2.9%
2,500,000 BB- TLC Beatrice International Holdings, Inc.,
Sr. Secured Notes, 11.500% due 10/1/05 ..................... 2,681,250
1,500,000 B- Van De Kamp, Inc., Sr. Sub. Notes, 12.000% due 9/15/05 ........ 1,653,750
------------
4,335,000
------------
Grocery/Convenience Stores -- 0.7%
1,000,000 B- Pathmark Stores, Inc., Sub. Debentures,
12.625% due 6/15/02 ........................................ 1,038,750
------------
Healthcare/Drugs/Hospital Supplies -- 1.8%
900,000 B Magellan Health Services, Inc., Sr. Sub. Notes,
11.250% due 4/15/04 ........................................ 995,625
Tenet Healthcare Corp.:
750,000 BB Sr. Notes, 8.000% due 1/15/05 .............................. 742,500
1,000,000 B+ Sr. Sub. Notes, 8.625% due 1/15/07 ......................... 998,750
------------
2,736,875
------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
<TABLE>
<CAPTION>
[LOGO] Schedule of Investments (continued)
March 31, 1997
===============================================================================================
Face
Amount Ratings Security Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hotel, Casinos and Gaming -- 4.1%
$1,500,000 B Aztar Corp., Sr. Sub. Notes, 13.750% due 10/1/04 .............. $ 1,695,000
2,000,000 B- Courtyard By Marriott II, Sr. Secured Notes, Series B,
10.750% due 2/1/08 ......................................... 2,110,000
1,500,000 BB Grand Casinos Inc., Guaranteed 1st Mortgage Note,
10.125% due 12/1/03 ........................................ 1,485,000
620,000 BB+ Mohegan Tribal Gaming Authority, Sr. Secured Notes,
13.500% due 11/15/02 ....................................... 816,075
------------
6,106,075
------------
Machinery -- 2.1%
1,000,000 B- Alvey Systems, Inc., Sr. Sub. Notes, 11.375% due 1/31/03 ...... 1,038,750
1,975,000 B- Terex Corp., Sr. Secured Notes, 13.250% due 5/15/02 ........... 2,160,156
------------
3,198,906
------------
Metals/Mining -- 5.7%
1,000,000 B- Commonwealth Aluminum Corp., Sr. Sub. Notes,
10.750% due 10/1/06 ........................................ 1,040,000
500,000 BB- Echo Bay Mines Inc., Jr. Sub. Notes, 11.000% due 4/1/27 ....... 502,500
600,000 B Envirosource Inc., Sr. Notes, 9.750% due 6/15/03 .............. 577,500
2,400,000 B- Haynes International, Inc., Sr. Sub. Notes,
11.625% due 9/1/04 ......................................... 2,583,000
1,075,000 CCC+Kaiser Aluminum and Chemical Corp., Sr. Sub. Notes,
12.750% due 2/1/03 ......................................... 1,161,000
1,800,000 B Russell Metals, Inc., Sr. Notes, 10.250% due 6/15/00 .......... 1,809,000
800,000 BB- UCAR Global Enterprises, Inc., Sr. Sub. Notes,
12.000% due 1/15/05 ........................................ 906,000
------------
8,579,000
------------
Oil and Natural Gas -- 7.1%
1,775,000 B+ Clark R & M Holdings Inc., Sr. Notes, zero coupon due 2/15/00 . 1,297,969
1,700,000 B+ Dawson Production Services Inc., Sr. Notes,
9.375% due 2/1/07 .......................................... 1,691,500
350,000 B Forcenergy Inc., Sr. Sub. Notes, 8.500% due 2/15/07+ .......... 327,250
1,500,000 BB- Global Marine, Inc., Sr. Secured Notes,
12.750% due 12/15/99 ....................................... 1,590,000
1,500,000 B- Kelley Oil & Gas Corp., Sr. Notes, Series B,
10.375% due 10/15/06 ....................................... 1,537,500
1,500,000 B+ Parker Drilling Co., Sr. Notes, Series B, 9.750% due 11/15/06 . 1,522,500
1,675,000 BB-Santa Fe Energy Resources, Inc., Sr. Sub. Debentures,
11.000% due 5/15/04 ........................................ 1,819,469
800,000 B United Meridian Corp., Sr. Sub. Notes,
10.375% due 10/15/05 ....................................... 866,000
------------
10,652,188
------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
<TABLE>
<CAPTION>
[LOGO] Schedule of Investments (continued)
March 31, 1997
===============================================================================================
Face
Amount Ratings Security Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Packaging/Containers -- 1.0%
$2,000,000 B- Ivex Holdings Corp., Sr. Sub. Debentures,
step bond to yield 12.910% due 3/15/05 ..................... $ 1,590,000
------------
Paper/Forest Products and Printing -- 8.6%
1,300,000 B- American Pad & Paper Co., Sr. Sub. Notes, Series B,
13.000% due 11/15/05 ....................................... 1,514,500
1,775,000 B+ Asia Pulp & Paper Ltd., Guaranteed Preferred Notes
Series A, 12.000% due 12/29/49+ ............................ 1,712,875
1,500,000 B Goss Graphic Systems Inc., Sr. Sub. Notes,
12.000% due 10/15/06 ....................................... 1,575,000
2,000,000 BB Indah Kiat International Finance Co., Guaranteed
Secured Notes, 11.875% due 6/15/02 ......................... 2,175,000
3,275,000 B+ S.D. Warren Co., Sr. Sub. Notes, Series B,
12.000% due 12/15/04 ....................................... 3,627,063
2,050,000 BB Tjiwi Kimia International, Guaranteed Sr. Notes,
13.250% due 8/1/01 ......................................... 2,331,875
------------
12,936,313
------------
Pollution Control -- 0.7%
1,000,000 B+ Allied Waste North America Inc., Sr. Sub. Notes,
10.250% due 12/1/06+ ....................................... 1,037,500
------------
Real Estate -- 1.8%
2,500,000 BB- Trizec Finance Ltd., Sr. Notes, 10.875% due 10/15/05 .......... 2,731,250
------------
Retail -- 0.6%
900,000 B+ Barnes and Noble, Inc., Sr. Sub. Notes, Series B,
11.875% due 1/15/03 ........................................ 976,500
------------
Telecommunications -- 14.1%
2,950,000 NR Clearnet Communications, Inc., step bond to yield
14.052% due 12/15/05 ....................................... 1,917,500
1,750,000 NR Colt Telecommunications Group PLC, Sr. Discount Notes,
step bond to yield 12.000% due 12/15/06 .................... 1,089,375
600,000 NR Dobson Communications Corp., Sr. Notes,
11.750% due 4/15/07+ ....................................... 589,500
750,000 B+ Fonorola, Inc., Sr. Notes, 12.500% due 8/15/02 ................ 830,625
1,000,000 B Globalstar LP Corp., Sr. Notes,
11.375% due 2/15/04+ ....................................... 997,500
2,825,000 NR Intelcom Group USA, Inc., Sr. Discount Notes,
step bond to yield 12.500% due 5/1/06+ ..................... 1,783,281
3,625,000 B- Intermedia Communications, Sr. Discount Notes,
step bond to yield 12.423% due 5/15/06 ..................... 2,329,063
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
<TABLE>
<CAPTION>
[LOGO] Schedule of Investments (continued)
March 31, 1997
===============================================================================================
Face
Amount Ratings Security Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telecommunications -- 14.1% (continued)
$1,800,000 NR McCaw International Ltd., Sr. Discount Notes,
step bond to yield 13.000% due 4/15/07+ .................... $ 864,000
2,000,000 B McLeod Inc., Sr. Discount Notes,
step bond to yield 10.452% due 3/1/07+ ..................... 1,105,000
625,000 BB Multicanal SA Notes, 10.500% due 2/1/07+ ...................... 625,000
4,175,000 CCC-Nextel Communications, Inc., Sr. Discount Notes,
step bond to yield 12.511% due 8/15/04 ..................... 2,849,437
2,000,000 NR Nextlink Communications, Sr. Discount Notes,
12.500% due 4/15/06 ........................................ 2,005,000
1,550,000 NR Pagemart, Inc., Sr. Discount Notes, step bond to yield
11.602% due 11/1/03+ ....................................... 1,249,688
1,300,000 NR RSL Communications Ltd., Sr. Notes,
12.250% due 11/15/06+ ...................................... 1,303,250
2,500,000 B Teleport Communications, Inc., Sr. Discount Notes,
step bond to yield 11.416% due 7/1/07 ...................... 1,693,750
------------
21,231,969
------------
Transportation -- 2.1%
2,805,000 BB- Sea Containers Limited, Sr. Sub. Debentures,
12.500% due 12/1/04 ........................................ 3,085,500
------------
TOTAL CORPORATE BONDS AND NOTES
(Cost-- $131,552,358) ...................................... 135,437,865
------------
<CAPTION>
Shares Security Value
- -----------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS -- 4.0%
Broadcasting -- 3.7%
<S> <C> <C>
5,128 Time Warner Inc., Series K, Exchange 0.000% + ................. 5,589,520
------------
Healthcare -- 0.3%
44,560 Avatex Corp., Series A, Payment-in-kind, Exchange $4.200 ...... 362,050
------------
Publishing -- 0.0%
298 K-III Communications Corp., Series B, Exchange $11.625 ........ 32,570
------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost -- $7,020,331) .......................................... 5,984,140
------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
<TABLE>
<CAPTION>
[LOGO] Schedule of Investments (continued)
March 31, 1997
===============================================================================================
Shares Security Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
WARRANTS -- 0.0%
9,735 Clearnet Communications, Inc., Expires 9/15/05 ................ $ 51,109
5,400 Degeorge Financial Corp., Expires 4/1/97 ...................... 54
7,130 Pagemart, Inc., Expires 12/31/03+ ............................. 19,608
------------
TOTAL WARRANTS
(Cost-- $54,954) ........................................... 70,771
------------
<CAPTION>
Face
Amount Security Value
- -----------------------------------------------------------------------------------------------
PREFERRED STOCKS -- 1.0%
Banking -- 0.3%
<S> <C> <C>
$20,100 California Federal Preferred Capital Corp. .................... 497,475
------------
Healthcare -- 0.7%
10,000 Fresensius Medical Care Capital Trust ......................... 1,010,000
------------
TOTAL PREFERRED STOCKS
(Cost-- $1,502,500) ........................................... 1,507,475
------------
REPURCHASE AGREEMENTS -- 5.0%
7,547,000 Goldman Sachs & Co., 6.444% due 4/1/97; Proceeds at
maturity -- $7,548,351; (Fully collateralized by U.S. Treasury
Notes, 4.750% due 10/31/98; Market value -- $7,701,750)
(Cost -- $7,547,000) .......................................... 7,547,000
------------
TOTAL INVESTMENTS -- 100%
(Cost-- $147,677,143** ) ...................................... $150,547,251
============
</TABLE>
+ Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
++ Represents local currency.
+++ Security issued with attached warrants.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 13 for definitions of ratings.
See Notes to Financial Statements.
12
<PAGE>
[LOGO] Bond Ratings
================================================================================
All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's"),
except those identified by an asterisk (*) are rated by Moody's Investors
Service, Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's -- Rating from "BBB" to "CCC" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standings within the major
rating categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances, are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB -- Bonds rated "BB" have less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments.
B -- Bonds rated "B" have a greater vulnerability to default but
currently have the capacity to meet interest and principal payments.
Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal.
The "B" rating category is also used for debt, subordinated to senior
debt, that is assigned an actual or implied "BB" or "BB-" rating.
CCC -- Bonds rated "CCC" have a currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment
of principal. In the event of adverse business, financial, or
economic conditions, it is not likely to have the capacity to pay
interest and repay principal. The "CCC" rating category is also used
for debt, subordinated to senior debt, that is assigned an actual or
implied "B" or "B-" rating.
Moody's -- Numerical modifiers 1, 2 and 3 may be applied to each generic rating
from "Baa" to "B," where 1 is the highest and 3 the lowest ranking within its
generic category.
Baa -- Bonds that are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds that are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad time over
the future. Uncertainty of position characterizes bonds in this
class.
B -- Bonds that are rated "B" generally lack characteristics of
desirable investments. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long period
of time may be small.
13
<PAGE>
<TABLE>
<CAPTION>
[LOGO] Statement of Assets and Liabilities
March 31, 1997
================================================================================
<S> <C> <C>
ASSETS:
Investments, at value (Cost-- $147,677,143) ..... $150,547,251
Cash ............................................ 211
Receivable for securities sold .................. 1,800,063
Interest receivable ............................. 3,633,576
------------
Total Assets .................................... 155,981,101
------------
LIABILITIES:
Bank loan (Note 7) .............................. 30,000,000
Interest payable ................................ 78,992
Investment advisory fees payable ................ 83,207
Administration fees payable ..................... 32,759
Accrued expenses ................................ 110,065
------------
Total Liabilities ............................... 30,305,023
------------
Total Net Assets .................................. $125,676,078
============
NET ASSETS:
Par value of capital shares ..................... $ 147,416
Capital paid in excess of par value ............. 123,749,821
7.00% Cumulative Preferred Stock (Note 6) ....... 30,000,000
Undistributed net investment income ............. 911,910
Accumulated net realized loss from
security transactions ......................... (32,003,177)
Net unrealized appreciation on investments ...... 2,870,108
------------
Total Net Assets .................................. $125,676,078
============
Per Share
---------
NET ASSET VALUE, COMPRISED OF:
7.00% Cumulative Preferred Stock redemption value . $ 1,000.00 $ 30,000,000
Cumulative undeclared dividends on 7.00%
Preferred Stock ............................... 20.71 621,368
---------- ------------
Total allocated to Cumulative Preferred Stock ..... $ 1,020.71 30,621,368
========== ------------
Common Stock (14,741,640 shares outstanding) ...... $ 6.45 95,054,710
========== ------------
Total Net Assets .................................. $125,676,078
============
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
[LOGO] Statement of Operations
For the Year Ended March 31, 1997
================================================================================
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest ................................................... $ 16,179,552
Dividends .................................................. 412,744
Less: Interest expense (Note 7) ............................ (1,779,779)
------------
Total Investment Income .................................... 14,812,517
------------
EXPENSES:
Investment advisory fees (Note 2) .......................... 770,618
Administration fees (Note 2) ............................... 305,651
Shareholder communications ................................. 164,670
Audit and legal ............................................ 108,258
Directors' fees ............................................ 40,370
Shareholder and system servicing fees ...................... 31,948
Listing fees ............................................... 28,303
Custody .................................................... 8,500
Registration fees .......................................... 3,223
Other ...................................................... 18,200
------------
Total Expenses ............................................. 1,479,741
------------
Net Investment Income ........................................ 13,332,776
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain From:
Security transactions (excluding short-term securities) .. 778,918
Foreign currency transactions ............................ 160,583
------------
Net Realized Gain .......................................... 939,501
------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year ........................................ 2,661,532
End of year .............................................. 2,870,108
------------
Increase in Net Unrealized Appreciation .................... 208,576
------------
Net Gain on Investments and Foreign Currencies ............... 1,148,077
------------
Increase in Net Assets From Operations ....................... $ 14,480,853
============
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
[LOGO] Statements of Changes in Net Assets
For the Years Ended March 31,
================================================================================
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income ..................... $ 13,332,776 $ 11,968,129
Net realized gain (loss) .................. 939,501 (393,167)
Increase in net unrealized appreciation ... 208,576 6,403,561
------------- -------------
Increase in Net Assets From Operations .... 14,480,853 17,978,523
------------- -------------
DIVIDENDS PAID FROM
NET INVESTMENT INCOME TO:
7.00% Cumulative Preferred Stock .......... (2,100,000) (2,100,000)
Common Stock .............................. (10,475,099) (10,105,946)
------------- -------------
Decrease in Net Assets From
Distributions To Shareholders ........... (12,575,099) (12,205,946)
------------- -------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net asset value of shares issued for
reinvestment of dividends ............... 3,452,357 3,623,826
------------- -------------
Increase in Net Assets From
Fund Share Transactions ................. 3,452,357 3,623,826
------------- -------------
Increase in Net Assets ...................... 5,358,111 9,396,403
NET ASSETS:
Beginning of year ......................... 120,317,967 110,921,564
------------- -------------
End of year* .............................. $ 125,676,078 $ 120,317,967
============= =============
* Includes undistributed net investment
income of: ............................. $ 911,910 $ 179,019
============= =============
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
<TABLE>
<CAPTION>
[LOGO] Statement of Cash Flows
For the Year Ended March 31, 1997
================================================================================
<S> <C> <C>
NET DECREASE IN CASH:
Cash Flows From Operating and Investing Activities:
Interest and dividends received ............ $ 14,239,301
Operating expenses paid .................... (1,493,759)
Interest payments on bank loans ............ (1,768,687)
Purchases of short-term securities, net .... (6,034,000)
Purchases of long-term securities .......... (145,397,123)
Proceeds from disposition of
long-term securities .................... 149,576,868
------------
Net Cash Provided By Operating and
Investing Activities ..................... $ 9,122,600
-----------
Cash Flows From Financing Activities:
Cash dividends paid on 7.00% Cumulative
Preferred Stock .......................... (2,100,000)
Net cash dividends paid on Common Stock* ... (7,022,742)
------------
Net Cash Used By Financing Activities ...... (9,122,742)
------------
Net Decrease in Cash ......................... (142)
Cash--Beginning of Year ...................... 353
------------
Cash--End of Year ............................ $ 211
============
RECONCILIATION OF INCREASE IN NET ASSETS
FROM OPERATIONS TO NET CASH PROVIDED
BY OPERATING AND INVESTING ACTIVITIES:
Increase in Net Assets From Operations ....... $14,480,853
Amortization of discount on securities ..... (2,533,415)
Increase in investments .................... (3,081,108)
Decrease in receivable for securities sold . 78,776
Decrease in interest receivable ............ 180,420
Decrease in accrued expenses ............... (2,926)
----------
Total Adjustments .......................... (5,358,253)
-----------
Net Cash Provided By Operating and
Investing Activities ....................... $ 9,122,600
===========
</TABLE>
* Exclusive of dividend reinvestment of $3,452,357.
See Notes to Financial Statements.
17
<PAGE>
[LOGO] Notes to Financial Statements
================================================================================
1. Significant Accounting Policies
Zenix Income Fund Inc. ("Fund"), a Maryland corporation, is registered
under the Investment Company Act of 1940, as amended, as a diversified,
closed-end management investment company.
The significant accounting policies followed by the Fund are: (a) security
transactions are accounted for on trade date; (b) securities traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
most recently quoted bid and asked prices provided by the principal market
makers; any security for which the primary market is an exchange is valued at
the last sale price on such exchange on the day of valuation or, if there was no
sale on such day, at the last bid price quoted. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Directors of
the Fund including references to valuations of other securities which are
considered comparable in quality, interest rate and maturity; (c) securities
maturing within 60 days are valued at cost plus accreted discount, or minus
amortized premium, which approximates market value; (d) the accounting records
of the Fund are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are adjusted when reported by the custodian bank;
(e) dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis; (f) gains or losses on the sale of securities are
calculated by using the specific identification method; (g) dividends and
distributions to shareholders are recorded monthly by the Fund on the
ex-dividend date for the shareholders of Common Stock based on net investment
income. The holders of the 7.00% Cumulative Preferred Stock shall be entitled to
receive dividends when, as and if declared by the Board of Directors of the Fund
out of funds legally available to shareholders at a rate of 7.00% per annum,
payable semi-annually on June 15 and December 15; (h) the net asset value of the
Fund's
18
<PAGE>
Notes to Financial Statements
[LOGO] (continued)
================================================================================
Common Stock is determined no less frequently than the close of business on the
Fund's last business day of each week (generally Friday). It is determined by
dividing the value of the net assets available to Common Stock by the total
number of shares of Common Stock outstanding. For the purpose of determining the
net asset value per share of the Common Stock, the value of the Fund's net
assets shall be deemed to equal the value for the Fund's assets less (1) the
Fund's liabilities (including the outstanding principal amount), (2) the
aggregate liquidation value (i.e., $1,000 per outstanding share) of the 7.00%
Cumulative Redeemable Preferred Stock and (3) accumulated and unpaid dividends
on the outstanding Cumulative Redeemable Preferred Stock issue; (i) the Fund
intends to comply with the requirements of the Internal Revenue Code of 1986, as
amended, pertaining to regulated investment companies and to make distributions
of taxable income sufficient to relieve it from substantially all Federal income
taxes and excise taxes; (j) the character of income and gains to be distributed
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At March 31, 1997, reclassifications
were made to the Portfolio's capital accounts to reflect permanent book/tax
differences and income and gains available for distributions under income tax
regulations. Accordingly, a portion of accumulated net realized loss amounting
to $67,822 was reclassified to paid-in-capital. Net investment income, net
realized gains and net assets were not affected by this change; and (k)
estimates and assumptions are required to be made regarding assets, liabilities
and changes in net assets resulting from operations when financial statements
are prepared. Changes in the economic environment, financial markets and any
other parameters used in determining these estimates could cause actual results
to differ.
2. Advisory Agreement and Transactions with Affiliated Persons
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), through its Greenwich Street Advisors division,
acts as investment advisor to the Fund. The Fund pays SBMFM a management fee
calculated at an annual rate of 0.50% on the average daily net assets. This fee
is calculated daily and paid monthly.
19
<PAGE>
Notes to Financial Statements
[LOGO] (continued)
================================================================================
SBMFM also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average net assets as defined
above. This fee is calculated daily and paid monthly.
All officers and one Director of the Fund are employees of SB.
3. Investments
During the year ended March 31, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Purchases $145,397,123
- --------------------------------------------------------------------------------
Sales 149,498,092
- --------------------------------------------------------------------------------
</TABLE>
At March 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments, which is substantially the same for Federal income
tax purposes were as follows:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Gross unrealized appreciation $ 7,257,509
Gross unrealized depreciation (4,387,401)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 2,870,108
- --------------------------------------------------------------------------------
</TABLE>
4. Cash Flow Information
The Fund invests in securities and distributes dividends from net
investment income and net realized gains. These activities are reported in the
Statement of Changes in Net Assets. Information on cash payments is presented in
the Statement of Cash Flows. Accounting practices that do not affect reporting
activities on a cash basis include unrealized gains or losses on investment
securities.
5. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
20
<PAGE>
Notes to Financial Statements
[LOGO] (continued)
================================================================================
6. Cumulative Redeemable Preferred Stock
On March 16, 1993, the Fund issued 30,000 shares of 7.00% Cumulative
Preferred Stock, which will be redeemed in full on April 15, 2000, at a price
equal to $1,000 per share, plus accumulated and unpaid dividends. On March 31,
1994, 250,000 shares of $0.01 par value 7.00% Cumulative Preferred Stock were
authorized but remained unissued. Cumulative undeclared dividends on the
outstanding Preferred Stock amounted to $621,368 at March 31, 1997.
Moody's Investors Service, Inc. and Standard & Poor's Rating Services have
reconfirmed their respective Aa3 and AA+ ratings of the Fund's 7% Cumulative
Preferred Stock.
7. Bank Loan
The Fund has a $30,000,000 line of credit with PNC Bank, N.A. Interest on
the loan can be paid based on 30, 60 or 90 day periods as elected by the Fund.
The interest on the loan is currently calculated at the Federal Funds rate plus
40 basis points. The line of credit expires on July 18, 1998. Interest expense
related to the loan for the year ended March 31, 1997 was $1,779,779.
8. Common Stock
At March 31, 1997, the Fund had 250,000,000 shares of common stock
authorized with a par value of $0.01 per share.
Common stock transactions were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 1997 March 31, 1996
---------------- ----------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares issued on
reinvestment 516,581 $3,452,357 569,905 $3,623,826
- --------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Notes to Financial Statements
[LOGO] (continued)
================================================================================
9. Capital Loss Carryforward
As of March 31, 1997, the Fund had, for Federal income tax purposes,
capital loss carryforwards of approximately $32,003,000 available to offset
future realized capital gains, if any. To the extent that these carryforward
losses are used to offset capital gains, it is probable that the gains so offset
will not be distributed. This loss expires as follows:
<TABLE>
<CAPTION>
3/31/99 3/31/00 3/31/03 3/31/04
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Carryforward Amounts $16,444,000 $8,395,000 $4,873,000 $2,291,000
- --------------------------------------------------------------------------------
</TABLE>
10. Asset Maintenance Requirement
The Fund is required to maintain certain asset coverages with respect to
the Cumulative Preferred Stock (of at least 200%). If the Fund fails to maintain
these requirements as of the last business day of a month and does not cure such
failure by the last business day of the following month, the Fund is required to
redeem certain of the Cumulative Preferred Stock in order to meet these
requirements. Additionally, failure to meet the foregoing asset requirements
would restrict the Fund's ability to pay dividends.
22
<PAGE>
[LOGO] Financial Highlights
================================================================================
Contained below is per share operating performance data for a share of common
stock outstanding, total return and ratios to average net assets based on Common
Shares outstanding. This information has been derived from information provided
in the financial statements and market price data for the Fund's shares.
For a share of common stock outstanding throughout each year:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Year ............... $ 6.31 $ 5.88 $ 6.76
---------- ---------- ----------
Income From Operations:
Net investment income .......................... 0.92 0.86 0.93
Net realized and unrealized gain (loss) ........ 0.08 0.45 (0.78)
---------- ---------- ----------
Total Income From Operations ................... 1.00 1.31 0.15
---------- ---------- ----------
Distributions:
Dividends declared to 7.00% Cumulative Preferred
Stockholders ................................. (0.14) (0.15) (0.16)
Dividends paid from net investment income ...... (0.72) (0.73) (0.87)
Change in accumulated undeclared dividends on
Preferred Stock .............................. -- -- --
---------- ---------- ----------
Total Distributions ............................ (0.86) (0.88) (1.03)
---------- ---------- ----------
Net Asset Value, End of Year ..................... $ 6.45 $ 6.31 $ 5.88
========== ========== ==========
Market Value, End of Year ........................ $ 7.25 $ 7.00 $ 6.63
========== ========== ==========
Total Return, Based on Market Value .............. 15.55% 18.35% 6.41%
========== ========== ==========
Total Return, Based on Net Asset Value ........... 14.04% 20.01% (0.53)%
========== ========== ==========
Net Assets*, End of Year (000's) ................. $ 95,034 $ 90,318 $ 80,309
========== ========== ==========
Ratios to Average Net Assets Based on
Common Shares Outstanding:
Net Investment Income .......................... 10.85% 10.48% 15.35%
Interest Expense ............................... 1.45 1.47 1.58
Other Expenses ................................. 1.20 1.21 1.65
Portfolio Turnover Rate .......................... 101% 87% 79%
</TABLE>
- ----------
* Exclusive of preferred shares outstanding.
23
<PAGE>
[LOGO] Financial Highlights (continued)
================================================================================
For a share of common stock outstanding throughout each year:
<TABLE>
<CAPTION>
1994# 1993
------- -------
<S> <C> <C>
Net Asset Value, Beginning of Year ................... $ 6.86 $ 6.39
------- -------
Income From Operations:
Net investment income .............................. 1.02 1.07
Net realized and unrealized gain (loss) ............ (0.13) 0.51
------- -------
Total Income From Operations ....................... 0.89 1.58
------- -------
Underwriting Commissions and Offering Costs on 7.00%
Cumulative Preferred Stock ......................... -- (0.05)
------- -------
Distributions:
Dividends declared to 7.00% Cumulative Preferred
Stockholders ..................................... (0.11) --
Dividends declared to 9.67% Cumulative Preferred
Stockholders ..................................... (0.12) (0.23)
Dividends paid from net investment income .......... (0.82) (0.82)
Change in accumulated undeclared dividends on
Preferred Stock .................................. 0.06 (0.01)
------- -------
Total Distributions ................................ (0.99) (1.06)
------- -------
Net Asset Value, End of Year ......................... $ 6.76 $ 6.86
======= =======
Market Value, End of Year ............................ $ 7.13 $ 7.25
======= =======
Total Return, Based on Market Value .................. 10.02% 24.02%
======= =======
Total Return, Based on Net Asset Value ............... 10.24% 21.66%
======= =======
Net Assets*, End of Year (000's) ..................... $87,726 $85,225
======= =======
Ratios to Average Net Assets Based on
Common Shares Outstanding:
Net Investment Income .............................. 14.38% 12.89%
Interest Expense ................................... 0.92 1.14
Other Expenses ..................................... 1.60 1.99
Portfolio Turnover Rate .............................. 102% 93%
</TABLE>
- ----------
# Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
* Exclusive of preferred shares outstanding.
24
<PAGE>
[LOGO] Independent Auditor's Report
================================================================================
The Shareholders and Board of Directors of
Zenix Income Fund Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Zenix Income Fund Inc. as of March
31, 1997, the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, the statement of cash flows for the year then ended, and the
financial highlights for each of the years in the two-year period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The financial
highlights for each of the years in the three-year period ended March 31, 1995
were audited by other auditors whose report thereon, dated May 12, 1995,
expressed an unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1997, by correspondence with the custodian. As to securities sold but not
delivered, we performed other appropriate auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Zenix Income Fund Inc. as of March 31, 1997, the results of its operations for
the year then ended, the changes in its net assets for each of the years in the
two-year period then ended, its cash flows for the year then ended and its
financial highlights for each of the years in the two-year period then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
May 22, 1997
25
<PAGE>
[LOGO] Other Financial Information (unaudited)
================================================================================
The table below sets out information with respect to Cumulative Preferred
Stock, Senior Money Market Notes and Bank Credit Facility:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
7.00% Cumulative Preferred Stock (1)
Total amount outstanding (000s) $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ --
Asset Coverage Per Share 2,580 2,490 2,439 2,583 2,529 --
Involuntary Liquidating Preferenc 1,000 1,000 1,000 1,000 1,000 --
Per Share (2)
Average Market Value Per Share(2)(3) 1,000 1,000 1,000 1,000 1,000 --
9.67% Cumulative Preferred Stock (4)
Total amount outstanding (000s) -- -- -- -- -- 28,750
Asset Coverage Per Share -- -- -- -- -- 2,413
Involuntary Liquidating Preference-- -- -- -- -- -- 1,000
Per Share (2)
Average Market Value Per Share (2)(3) -- -- -- -- -- 1,000
Senior Money Market Notes
Total amount outstanding (000s) -- -- 25,800 25,800 25,800 25,800
Asset Coverage Per Share -- -- 527,555 558,675 546,948 510,240
Involuntary Liquidating Preference -- -- 100,000 100,000 100,000 100,000
Per Share (2)
Average Market Value Per Share(2)(3) -- -- 100,000 100,000 100,000 100,000
PNC Bank Credit Facility
Total amount outstanding (000s) 30,000 30,000 -- -- -- --
Asset Coverage Per Share 516,000 498,000 -- -- -- --
Involuntary Liquidating Preference 100,000 100,000 -- -- -- --
Per Share (2)
Average Market Value Per Share(2)(3) 100,000 100,000 -- -- -- --
</TABLE>
- ----------
(1) Redeemable April 15, 2000.
(2) Excludes accrued interest or accumulated undeclared dividends.
(3) See Note 7.
(4) Redeemed April 15, 1993.
26
<PAGE>
[LOGO] Quarterly Results of Operations (unaudited)
================================================================================
<TABLE>
<CAPTION>
Net Increase
Net Realized (Decrease)
and Unrealized in Net Assets
Investment Net Investment Gain (Loss) From
Income Income on Investments Operations
-------------------- -------------------- --------------------- ---------------------
Per Per Per Per
Quarter Ended Total Share* Total Share* Total Share* Total Share*
- ------------- ----------- ----- ----------- ----- ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1994 $ 3,739,209 $0.29 $ 3,111,466 $0.24 $(3,899,320) $(0.29) $ (787,854) $(0.06)
September 30, 1994 3,771,958 0.28 3,215,851 0.24 (5,662,951) (0.42) (2,447,100) (0.17)
December 31, 1994 3,833,137 0.28 3,133,437 0.23 (4,508,973) (0.33) (1,375,536) (0.10)
March 31, 1995 3,651,680 0.27 2,926,309 0.22 3,514,541 0.26 6,440,850 0.48
June 30, 1995 3,390,611 0.25 2,647,561 0.19 (1,044,316) (0.07) 1,606,245 0.12
September 30, 1995 3,466,966 0.25 2,743,530 0.20 6,121,932 0.44 8,862,462 0.64
December 31, 1995 3,996,269 0.28 3,176,088 0.23 1,812,127 0.13 4,988,215 0.36
March 31, 1996 4,169,922 0.29 3,400,950 0.24 (879,349) (0.06) 2,521,601 0.18
June 30, 1996 4,102,702 0.29 3,322,425 0.23 (1,014,235) (0.07) 2,308,190 0.16
September 30, 1996 4,224,470 0.29 3,370,554 0.23 2,772,544 0.19 6,143,098 0.42
December 31, 1996 4,132,306 0.28 3,304,424 0.22 1,557,018 0.11 4,861,442 0.33
March 31, 1997 4,132,818 0.28 3,335,373 0.23 (2,167,250) (0.15) 1,168,123 0.08
</TABLE>
- ----------
* Per share of Common Stock.
27
<PAGE>
[LOGO] Financial Data (unaudited)
================================================================================
For a share of common stock outstanding throughout each period:
<TABLE>
<CAPTION>
Dividend
Record Payable NYSE Net Asset Dividend Reinvestment
Date Date Closing Price Value* Paid Price
================================================================================
<S> <C> <C> <C> <C> <C>
1/24/95 1/31/95 $6.250 $5.58 $0.069 $5.799
2/21/95 2/28/95 6.250 5.78 0.063 5.990
3/24/95 3/31/95 6.625 5.87 0.063 5.874
4/21/95 4/28/95 6.625 5.96 0.063 6.290
5/23/95 5/31/95 6.875 6.10 0.063 6.530
6/23/95 6/30/95 6.625 6.03 0.063 6.290
7/26/95 7/31/95 6.625 6.15 0.060 6.290
8/22/95 8/31/95 6.625 6.16 0.060 6.290
9/26/95 9/30/95 6.625 6.17 0.060 6.294
10/24/95 10/31/95 6.625 6.25 0.060 6.290
11/20/95 11/30/95 6.625 6.22 0.060 6.290
12/26/95 12/31/95 6.500 6.28 0.060 6.175
1/23/96 1/26/96 6.625 6.39 0.060 6.294
2/20/96 2/23/96 7.000 6.52 0.060 6.650
3/26/96 3/29/96 7.000 6.31 0.060 6.650
4/23/96 4/26/96 6.875 6.27 0.060 6.531
5/28/96 5/31/96 6.875 6.33 0.060 6.531
6/25/96 6/28/96 6.750 6.22 0.060 6.413
7/23/96 7/26/96 6.875 6.22 0.060 6.531
8/27/96 8/30/96 6.875 6.29 0.060 6.531
9/24/96 9/27/96 7.125 6.37 0.060 6.769
10/22/96 10/25/96 7.125 6.40 0.060 6.769
11/25/96 11/29/96 7.125 6.47 0.060 6.769
12/23/96 12/27/96 7.125 6.53 0.061 6.769
1/28/97 1/31/97 7.250 6.62 0.061 6.888
2/25/97 2/28/97 7.375 6.73 0.061 7.006
3/24/97 3/27/97 7.125 6.51 0.061 6.769
================================================================================
</TABLE>
* As of record date
28
<PAGE>
[LOGO] Additional Information (unaudited)
================================================================================
On July 10, 1996, the annual meeting of the shareholders of the Fund was
held for the purpose of voting on the following matters:
(1) To approve or disapprove the election of seven Directors; and
(2) To approve or disapprove the selection of KMPG Peat Marwick LLP as the
independent auditors for the current fiscal year of the Fund.
The results of the vote on Proposal 1 were as follows:
<TABLE>
<CAPTION>
Shares Percentage of Shares Percentage of
Directors Voted For Shares Voted Voted Against Shares Voted
===================================================================================================
<S> <C> <C> <C> <C>
Common Shares
Allan J. Bloostein 12,709,102.88 97.906% 271,813.53 2.094%
Martin Brody 12,738,833.71 98.135% 242,082.70 1.865%
Dwight B. Crane 12,732,946.08 98.090% 247,970.33 1.910%
William R. Hutchinson 12,720,982.45 97.998% 259,933.97 2.002%
Heath B. McLendon 12,744,744.71 98.181% 236,171.70 1.819%
Preferred Shares
Charles F. Barber 29,000.00 100.000% 0.00 0.000%
Allan J. Bloostein 29,000.00 100.000% 0.00 0.000%
Robert A. Frankel 29,000.00 100.000% 0.00 0.000%
William R. Hutchinson 29,000.00 100.000% 0.00 0.000%
Heath B. McLendon 29,000.00 100.000% 0.00 0.000%
===================================================================================================
</TABLE>
The results of the vote on Proposal 2 were as follows:
<TABLE>
<CAPTION>
Percentage
Shares Percentage of Shares Percentage of Shares of Shares
Voted For Shares Voted Voted Against Shares Voted Abstained Abstained
===================================================================================================
<S> <C> <C> <C> <C> <C>
Common Shares
12,713,514.86 97.940% 80,949.70 0.624% 186,451.86 1.436%
Preferred Shares
29,000.00 100.000% 0.00 0.000% 0.00 0.000%
===================================================================================================
</TABLE>
29
<PAGE>
Dividend Reinvestment Plan
[LOGO] (unaudited)
================================================================================
Under the Fund's Dividend Reinvestment Plan (the "Plan"), a shareholder
whose Common Stock is registered in his own name will have all distributions
reinvested automatically by First Data Investor Services Group, Inc. ("First
Data"), as agent under the Plan, unless the shareholder elects to receive cash.
Distributions with respect to shares registered in the name of a broker-dealer
or other nominee (that is, in "street name") will be reinvested by the broker or
nominee in additional Common Stock under the Plan, but only if the service is
provided by the broker or nominee, and the broker or nominee makes an election
on behalf of the shareholder to participate in the Plan. A shareholder who holds
Common Stock registered in the name of a broker or other nominee may not be able
to transfer the Common Stock to another broker or nominee and continue to
participate in the Plan. Investors who own Common Stock registered in street
name should consult their broker or nominee for details regarding reinvestment.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price of the Fund's Common Stock is equal to or exceeds 98% of net
asset value per share, participants will be issued shares of Common Stock valued
at the greater of (i) 98% of net asset value per share or (ii) 95% of the then
current market price. If 98% of net asset value per share of Common Stock at the
time of valuation exceeds the market price of the Common Stock, First Data will
buy shares of the Fund's Common Stock on the open market, on the New York Stock
Exchange, Inc. or elsewhere, as soon as practicable after the record date of the
dividend or distribution, until it has expended for such purchases all of the
cash that would otherwise be payable to the participants. The number of
purchased shares that will then be credited to the participant's account will be
based on the average per share purchase price of the shares so purchased,
including brokerage commissions. If First Data commences purchases in the open
market and the market price of the shares subsequently exceeds 98% of net asset
value before the completion of the purchases, First Data will attempt to
terminate purchases in the open market and cause the Fund to issue the remaining
dividend or distribution in shares at 98% of net asset value per share. In this
case, the number of shares of Common Stock received by the participant will be
based on the weighted
30
<PAGE>
Dividend Reinvestment Plan (continued)
[LOGO] (unaudited)
================================================================================
average of prices paid for shares purchased in the open market and the price at
which the Fund issues the remaining shares.
Plan participants are not subject to any charge for reinvesting dividends
or capital gains distributions. Each Plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to First
Data's open market purchases of shares of Common Stock in connection with the
reinvestment of dividends or capital gains distributions. For the year ended
March 31, 1997, no such brokerage commissions were incurred.
The automatic reinvestment of dividends and capital gains distributions
will not relieve Plan participants of any income tax that may be payable on the
dividends or capital gains distributions. A participant in the Plan will be
treated for Federal income tax purposes as having received, on the dividend
payment date, a dividend or distribution in an amount equal to the cash that the
participant could have received instead of shares of Common Stock.
A shareholder may terminate participation in the Plan at any time by
notifying First Data in writing. A termination will be effective immediately if
notice is received by First Data not less than 10 days before any dividend or
distribution record date. Otherwise, the termination will be effective, and only
with respect to any subsequent dividends or distributions, on the first trading
day after the dividend or distribution has been credited to the participant's
account in additional shares of Common Stock of the Fund. Upon termination
according to a participant's instructions, First Data will either (a) issue
certificates for the whole shares credited to a Plan account and a check
representing any fractional shares or (b) sell the shares in the market. There
will be a $5.00 fee assessed for liquidation service, plus brokerage
commissions, and First Data is authorized to sell a sufficient number of a
participant's shares to cover such amounts.
The Plan is described in more detail on pages 26-27 of the Fund's
Prospectus dated April 20, 1988. Information concerning the Plan may be obtained
from First Data at 1-800-331-1710.
---------------------------------------------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time the Fund may purchase
shares of its common stock in the open market.
31
<PAGE>
[LOGO] Tax Information (unaudited)
================================================================================
For Federal tax purpose the Fund hereby designates for the fiscal year
ended March 31, 1997:
o 2.00% of the ordinary dividends paid as qualifying for the corporate
dividends received deduction.
32
<PAGE>
DIRECTORS
Charles F. Barber
Allan J. Bloostein
Martin Brody
Dwight B. Crane
Robert A. Frankel
William R. Hutchinson
Heath B. McLendon
OFFICERS
Heath B. McLendon
Chairman of the Board
and Investment Officer
Jessica Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
John C. Bianchi
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
This report is sent to the shareholders of the
ZENIX Income Fund Inc.
for their information. It is not a Prospectus,
circular or representation intended for use in the
purchase or sale of shares of the Fund or of any
securities mentioned in the report.
FD2395 5/97
