<PAGE>
ZENIX
Income
Fund Inc.
[LOGO]
Quarterly Report
December 31, 1997
<PAGE>
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Zenix Income Fund Inc.
Dear Shareholder:
We are pleased to provide you with the third quarter report for the Zenix
Income Fund Inc. ("Fund") for the nine-month period ended December 31, 1997.
Over the past nine months the Fund paid income dividends totaling $0.60 per
share. The table below shows the annualized distribution rate and nine-month
total return for the Fund based on its December 31, 1997 net asset value ("NAV")
per share and its New York Stock Exchange ("NYSE") closing price.
<TABLE>
<CAPTION>
Price Annualized Nine-Month
Per Share Distribution Rate Total Return
--------- ----------------- ------------
<S> <C> <C>
$6.91 (NAV) 10.94% 15.46%
$8.25 (NYSE) 9.16% 22.64%
</TABLE>
The Fund generated a total return based on net asset value of 15.46% for
the nine-month period ended December 31, 1997. The Fund outperformed the
nine-month average total return for closed-end high yield funds of 14.31% for
the same time period, as reported by Lipper Analytical Services, Inc. ("Lipper")
largely due to the Fund's use of leverage. (Lipper is a major independent
fund-tracking organization). A full discussion of the past nine months' economic
and market conditions as well as the investment strategy employed by the Fund
during the period follows.
Market and Economic Overview
The high yield bond market generated relatively strong performance
throughout 1997 with total returns in excess of about 13% compared to the
roughly 6% to 11% returns for intermediate U.S. Treasurys (i.e., maturities of
less than 10 years) and investment grade corporate bonds and roughly 12% to 14%
for long term U.S. Treasurys (i.e., maturities of ten or more years) and
investment grade corporate bonds.
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The Fund generated superior total returns for 1997. Within the high yield
bond market, the lower quality issues generated the strongest total returns in
1997 (i.e., a roughly 16% range). This was not surprising given the strong
performance of the domestic stock market. The lower-quality segment of the high
yield bond market tends to be more closely correlated to the domestic stock
market than the higher-quality segments of the high yield bond market.
The high yield bond market began to underperform U.S. Treasurys in the
fourth quarter of 1997 as fears of an economic slowdown and lower corporate
profits caused high yield bond premiums to increase versus the U.S. Treasury
market. The greatest underperformance in the fourth quarter of 1997 was among
the lower-quality issues. Despite the fact that lower-quality issues
underperformed in the fourth quarter, they generated the strongest total returns
in 1997. In periods of increasing economic uncertainty, the lower-quality
segments of the high yield bond market generally underperform because of their
greater vulnerability to weaker economic conditions. The more interest-rate
sensitive higher quality issues generated the strongest total returns as general
interest rates declined.
By the start of the fourth quarter of 1997, the crisis in Asia had taken
center stage with severe currency and financial market declines in a number of
Asian countries potentially threatening economic stability not only in the Far
Eastern region, but throughout the world. Asia represents more than 25% of world
economic output and is a significant producer and consumer of a large number of
products and services. Consequently, there was a dramatic increase in market
volatility in the fourth quarter of 1997, especially in the stock markets both
domestically and abroad. Many investors began to invest more aggressively in
U.S. Treasurys which are viewed as the ultimate safe haven during periods of
economic uncertainty. Despite this increasing uncertainty over economic growth
and corporate profitability, the domestic stock market had another strong year
with total returns in the 25% to 33% range.
In 1997, the domestic high yield bond market responded favorably to the
strength in the domestic stock market and U.S. Treasury markets. During the
year, a total of approximately $19 billion of new money flowed into open-end
2
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high yield bond funds. In addition, there was higher demand for high-yield bonds
from insurance companies and pension funds. The overall demand was significant
enough to absorb a record total of over $120 billion of new high yield issues.
Given this record new issuance, the high yield bond market now totals more than
$450 billion in size, representing a meaningful 25% of the entire domestic
corporate bond market.
Portfolio Strategy
We continue to believe that U.S. economic growth remains mixed and that
many consumer-sensitive sectors will continue to experience fierce price
competition. In addition, the significant problems in Asia could also put severe
pressure on commodity goods prices as troubled Asian companies attempt to
increase their exports to the rest of the world to make up for the expected
economic declines within their own region. We also believe that a slowdown in
overall world economic growth is inevitable as the severe economic decline in
Asia sharply reduces demand for many U.S. and European products. Consequently,
the first half of 1998 could see a slight increase in default rates among
certain high yield bonds, especially those of weaker more vulnerable companies
that are having difficulty competing.
We will continue to avoid the sectors of the economy that are adversely
affected by weak consumer spending trends as well as heavy pricing competition.
In addition, we also plan to maintain our emphasis on sectors that are
experiencing strong growth such as telecommunications, media, and cable
television. However, we expect to be overweighted in stronger rated "B" and "BB"
credits and avoid the weaker lower tier issues that are generally in the
"CCC/Caa" rating category. We are more committed than ever to our conservative
credit investment strategy because of the higher risks and uncertainty in
today's financial markets.
Outlook
We believe the financial markets will remain choppy as investors continue
to sort out the potential negative impact on world economic growth from the
large declines in both the currencies and financial assets of the emerging
markets in Asia and Latin America.
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In closing, we appreciate your past support and look forward to achieving
competitive investment results in 1998. If you have any questions about your
investment in the Fund, please call First Data Investor Services Group, Inc. at
(800) 331-1710. We look forward to continuing to help you pursue your financial
goals.
Sincerely,
/s/ Heath B. McLendon /s/ John C. Bianchi, CFA
Heath B. McLendon John C. Bianchi, CFA
Chairman Vice President and
Investment Officer
January 30, 1998
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<PAGE>
<TABLE>
<CAPTION>
[LOGO]
Schedule of Investments
December 31, 1997 (unaudited)
==================================================================================================
Face
Amount Ratings Security Value
- --------------------------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES -- 93.3%
Aerospace/Defense -- 1.4%
<C> <C> <S> <C>
$2,000,000 BB Airplanes Pass Through Trust, Corporate Collateralized
Mortgage Obligation, 10.875% due 3/15/19 .................... $ 2,250,040
-----------
Banking -- 2.1%
1,125,000 B First Nationwide Parent Holdings Ltd.,
Sr. Exchange Notes, 12.500% due 4/15/03 ..................... 1,282,500
1,050,000 NR Netia Holdings BV, Guaranteed Notes, 10.250% due 11/1/07+ ..... 994,875
500,000 BB+ SIG Capital Trust, Guaranteed Notes, 9.500% due 8/15/27 ....... 508,750
650,000 BB- Veritas Capital Trust, Guaranteed Notes, 10.000% due 1/1/28 ... 663,000
-----------
3,449,125
-----------
Broadcasting/Cable -- 11.3%
Cablevision Systems Corp., Sr. Sub. Debentures:
2,975,000 B 9.875% due 2/15/13 .......................................... 3,294,812
1,000,000 B 10.500% due 5/15/16 ......................................... 1,165,000
1,500,000 B Comcast UK Cable, Debentures, step bond to yield
11.175% due 11/15/07 ........................................ 1,231,875
500,000 B Marcus Cable Capital Corp., Sr. Discount Notes,
step bond to yield 12.747% due 12/15/05 ..................... 433,750
2,000,000 B Marcus Cable Operating Co., Sr. Debentures,
11.875% due 10/1/05 ......................................... 2,180,000
Rogers Cablesystems of America Inc.:
850,000 BB+ Sr. Notes, Series B, 10.000% due 3/15/05 .................... 941,375
1,000,000 BB+ Sr. Sub. Debentures, 10.000% due 12/1/07 .................... 1,100,000
2,100,000 BB- Sr. Sub. Debentures, 11.000% due 12/1/15 .................... 2,436,000
900,000 BB- Rogers Communications Inc., Sr. Debentures,
8.875% due 7/15/07 .......................................... 902,250
TV Azteca SA, Guaranteed Sr. Notes:
525,000 B+ Series A, 10.125% due 2/15/04 ............................... 543,375
950,000 B Series B, 10.500% due 2/15/07+ .............................. 990,375
UIH Australia Inc., Sr. Discount Notes, step bond to yield:
300,000 B 12.775% due 5/15/06+ ........................................ 205,500
2,150,000 B 14.000% due 5/15/06+ ........................................ 1,472,750
1,000,000 BB+ Videotron Group Ltd., Sr. Notes, 10.625% due 2/15/05 .......... 1,118,750
900,000 B- Wireless One Inc., Sr. Discount Notes, 13.000% due 10/15/03 ... 396,000
-----------
18,411,812
-----------
Building/Construction -- 0.2%
275,000 B3* American Builders and Contractors Supply Inc.,
Guaranteed Notes, Series B, 10.625% due 5/15/07 ............. 286,344
-----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
[LOGO]
Schedule of Investments (continued)
December 31, 1997 (unaudited)
==================================================================================================
Face
Amount Ratings Security Value
- --------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Chemicals -- 2.2%
$ 950,000 CCC+ Interlake Corp., Sr. Sub. Debentures, 12.125% due 3/1/02 ...... $ 986,814
1,000,000 B NL Industries Inc., Sr. Secured Notes, 11.750% due 10/15/03 ... 1,110,000
1,250,000 BB Pt. Polysindo Eka Perkasa, Sr. Notes, 13.000% due 6/15/01 ..... 1,125,000
400,000 B+ Terra Industries Inc., Sr. Notes, 10.500% due 6/15/05 ......... 431,000
-----------
3,652,814
-----------
Diversified Manufacturing -- 2.2%
1,325,000 B Imperial Holly Corp., Sr. Sub. Notes, 9.750% due 12/15/07+ .... 1,333,281
700,000 B+ Park-Ohio Industries, Sr. Sub. Notes, 9.250% due 12/10/07+ .... 718,375
1,500,000 B Unifrax Investment Corp., Sr. Notes, 10.500% due 11/1/03 ...... 1,552,500
-----------
3,604,156
-----------
Electric Utilities -- 4.7%
AES Corp., Sr. Sub. Notes:
425,000 B+ 8.375% due 8/15/07 .......................................... 425,000
1,300,000 B+ 8.500% due 11/1/07 .......................................... 1,303,250
Calpine Corp., Sr. Notes:
1,350,000 BB- 10.500% due 5/15/06 ......................................... 1,471,500
750,000 BB- 8.750% due 7/15/07 .......................................... 763,125
650,000 BB+ Cleveland Electric, Sr. Notes, 7.430% due 11/1/09 ............. 669,500
650,000 BB+ El Paso Electric Co., First Mortgage, 8.900% due 2/1/06 ....... 720,687
983,733 BB- Midland Cogeneration Venture Limited Partnership,
Midland Funding, Sr. Secured Lease Obligation Bond,
Series C, 10.330% due 7/23/02 ............................... 1,058,744
425,000 NR Niagara Mohawk Power, First Mortgage, 7.750% due 5/15/06 ...... 448,375
700,000 B- Stone Energy Corp., Sr. Sub. Notes, 8.750% due 9/15/07+ ....... 715,750
-----------
7,575,931
-----------
Electronics-Computers -- 5.6%
1,000,000 B Celestica International Inc., Guaranteed Sr. Sub. Notes,
10.500% due 12/31/06 ........................................ 1,085,000
1,500,000 B Fairchild Semiconductor Inc., Sr. Sub. Notes,
10.125% due 3/15/07 ......................................... 1,586,250
Flextronics International Ltd., Sr. Sub. Notes,
625,000 B 8.750% due 10/15/07 ......................................... 623,438
1,000,000 B- Graphic Controls Corp., Sr. Sub. Notes, 12.000% due 9/15/05 ... 1,117,500
Unisys Corp., Sr. Notes:
1,400,000 B+ 12.000% due 4/15/03 ......................................... 1,585,500
1,575,000 B+ 11.750% due 10/15/04 ........................................ 1,795,500
1,200,000 B- Viasystems Inc., Sr. Sub. Notes, 9.750% due 6/1/07 ............ 1,240,500
-----------
9,033,688
-----------
</TABLE>
See Notes to Financial Statements.
6
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<TABLE>
<CAPTION>
[LOGO]
Schedule of Investments (continued)
December 31, 1997 (unaudited)
==================================================================================================
Face
Amount Ratings Security Value
- --------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Finance -- 5.2%
$ 1,500,000 B Amresco Inc., Sr. Sub. Notes, Series A, 10.000% due 3/15/04 ... $ 1,560,000
1,000,000 NR Intertek Finance PLC, Sr. Sub. Notes,
Series B, 10.250% due 11/1/06 ............................... 1,047,500
1,950,000++ NR ITT Promedia Corp., Sr. Sub. Notes, 9.125% due 9/15/07+ ....... 1,142,768
525,000 B- ITT Publimedia Corp., Sr. Sub. Notes, 9.375% due 9/15/07+ ..... 553,875
1,000,000 B- Ocwen Capital Trust, Guaranteed Notes, 10.875% due 8/1/27 ..... 1,083,750
2,750,000 B+ Ocwen Financial Corp., Notes, 11.875% due 10/1/03 ............. 3,100,625
-----------
8,488,518
-----------
Food -- 1.8%
425,000 B+ Ameriserve Food Distributors Inc., Guaranteed Notes,
8.875% due 10/15/06 ......................................... 431,375
850,000 B- B&G Foods Inc., Sr. Sub. Notes, 9.625% due 8/1/07 ............. 858,500
1,500,000 B- Van de Kamp Inc., Sr. Sub. Notes, 12.000% due 9/15/05 ......... 1,665,000
-----------
2,954,875
-----------
Health Care/Drugs/Hospital Supplies -- 4.0%
875,000 B- Extendicare Health Services, Sr. Sub. Notes,
9.350% due 12/15/07+ ........................................ 896,875
1,600,000 BB ICN Pharmaceutical Inc., Sr. Notes,
9.250% due 8/15/05+ ......................................... 1,700,000
1,050,000 B Magellan Health Services Inc., Sr. Sub. Notes,
11.250% due 4/15/04 ......................................... 1,168,125
850,000 NR Pharmaceutical Fine Chemicals, Sr. Sub. Notes,
9.750% due 11/15/07+ ........................................ 862,750
Tenet Healthcare Corp.:
750,000 BB Sr. Notes, 8.000% due 1/15/05 ............................... 764,064
1,000,000 B+ Sr. Sub. Notes, 8.625% due 1/15/07 .......................... 1,036,250
-----------
6,428,064
-----------
Hotel, Casinos and Gaming -- 6.3%
1,500,000 B Aztar Corp., Sr. Sub. Notes, 13.750% due 10/1/04 .............. 1,721,250
2,000,000 B- Courtyard By Marriott II, Sr. Secured Notes,
10.750% due 2/1/08 .......................................... 2,200,000
300,000 NR HMC Acquisition Properties Inc., Sr. Notes,
Series B, 9.000% due 12/15/07 ............................... 308,625
HMH Properties Inc., Sr. Notes, Series B:
3,330,000 BB- 9.500% due 5/15/05 .......................................... 3,546,450
800,000 BB- 8.875% due 7/15/05 .......................................... 844,000
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
<TABLE>
<CAPTION>
[LOGO]
Schedule of Investments (continued)
December 31, 1997 (unaudited)
==================================================================================================
Face
Amount Ratings Security Value
- --------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Hotel, Casinos and Gaming -- 6.3% (continued)
$ 620,000 BB+ Mohegan Tribal Gaming Authority, Sr. Secured Notes,
13.500% due 11/15/02 ........................................ $ 802,125
725,000 B Signature Resorts Inc., Sr. Sub. Notes, 9.750% due 10/1/07+ ... 732,250
-----------
10,154,700
-----------
Leisure -- 0.5%
1,150,000 B- CLN Holdings Inc., Guaranteed Notes, zero coupon bond
to yield 11.410% due 5/15/01+ ............................... 764,750
-----------
Machinery -- 1.5%
500,000 B- Alvey Systems Inc., Sr. Sub. Notes, 11.375% due 1/31/03 ....... 522,500
1,667,000 B- Terex Corp., Sr. Secured Notes, 13.250% due 5/15/02 ........... 1,904,548
-----------
2,427,048
-----------
Metals/Mining -- 3.1%
2,400,000 B- Haynes International Inc., Sr. Sub. Notes,
11.625% due 9/1/04 .......................................... 2,769,000
800,000 B- Kaiser Aluminum and Chemical Corp., Sr. Sub. Notes,
12.750% due 2/1/03 .......................................... 854,000
700,000 B- Koppers Industry Inc., Sr. Sub. Notes, 9.875% due 12/1/07+ .... 721,000
600,000 B+ UCAR Global Enterprises Inc., Sr. Sub. Notes,
12.000% due 1/15/05 ......................................... 677,250
-----------
5,021,250
-----------
Oil and Natural Gas -- 6.7%
500,000 B Canadian Forest Oil Ltd., Sr. Sub. Notes,
8.750% due 9/15/07 .......................................... 506,875
Clark R&M Inc.:
375,000 BB Sr. Notes, 8.375% due 11/15/07 .............................. 377,812
650,000 BB Sr. Sub. Notes, 8.875% due 11/15/07 ......................... 656,500
750,000 B- Coho Energy Inc., 8.875% due 10/15/07 ......................... 753,750
1,425,000 B+ Dawson Production Services Inc., Sr. Notes,
9.375% due 2/1/07 ........................................... 1,496,250
1,350,000 BB- Gulf Canada Resources Ltd., Sub. Debentures,
9.625% due 7/1/05 ........................................... 1,468,125
1,800,000 B+ Parker Drilling Co., Sr. Notes, 9.750% due 11/15/06 ........... 1,944,000
900,000 BB- Pride Petroleum Services Inc., Sr. Notes, 9.375% due 5/1/07 ... 969,750
1,675,000 BB- Santa Fe Energy Resources Inc., Sr. Sub. Debentures,
11.000% due 5/15/04 ......................................... 1,817,375
800,000 B United Meridian Corp., Sr. Sub. Notes, 10.375% due 10/15/05 ... 872,000
-----------
10,862,437
-----------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
<TABLE>
<CAPTION>
[LOGO]
Schedule of Investments (continued)
December 31, 1997 (unaudited)
==================================================================================================
Face
Amount Ratings Security Value
- --------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Packaging/Containers -- 1.1%
$ 350,000 B AEP Industries Inc., Sr. Sub. Notes, 9.875% due 11/15/07+ ..... $ 360,500
750,000 B Huntsman Packaging Corp., Sr. Notes,
11.500% due 8/15/07+ ........................................ 774,375
1,000,000 NR Impress Metal Packaging Holdings, Sr. Sub. Notes,
9.875% due 5/29/07+ ......................................... 585,673
-----------
1,720,548
-----------
Paper/Forest Products and Printing -- 7.8%
1,300,000 B- American Pad & Paper Co., Sr. Sub. Notes, Series B,
13.000% due 11/15/05 ........................................ 1,519,375
1,375,000 B Asia Pulp & Paper Ltd., Guaranteed Preferred Notes,
Series A, 12.000% due 12/29/49+ ............................. 1,216,875
650,000 B- Axiohm Transaction Solutions, Sr. Sub. Notes,
9.750% due 10/1/07+ ......................................... 661,375
1,500,000 B Goss Graphic Systems Inc., Sr. Sub. Notes,
12.000% due 10/15/06 ........................................ 1,700,625
2,000,000 BB Indah Kiat International Finance Co., Guaranteed
Secured Notes, 11.875% due 6/15/02 .......................... 1,910,000
3,275,000 B+ S.D. Warren Co., Sr. Sub. Notes, 12.000% due 12/15/04 ......... 3,659,813
2,050,000 BB Tjiwi Kimia International, Sr. Notes, 13.250% due 8/1/01 ...... 1,968,000
-----------
12,636,063
-----------
Pollution Control -- 1.1%
1,000,000 B+ Allied Waste North America Inc., Sr. Sub. Notes,
10.250% due 12/1/06 ......................................... 1,095,000
675,000 NR Clisa SA, Guaranteed Sr. Notes, 11.625% due 6/1/04+ ........... 675,000
-----------
1,770,000
-----------
Real Estate -- 0.8%
1,115,000 BB- Trizec Finance Ltd., Sr. Notes, 10.875% due 10/15/05 .......... 1,258,556
-----------
Telecommunications -- 20.9%
Century Communications Corp., Sr. Notes:
950,000 BB- 8.750% due 10/1/07 .......................................... 971,375
275,000 BB- 8.375% due 12/15/07 ......................................... 275,687
2,100,000 NR Clearnet Communications Inc., Sr. Discount Notes,
step bond to yield, 13.778% due 12/15/05 .................... 1,669,500
Colt Telecommunications Group PLC:
250,000 B Sr. Notes, 10.125% due 11/30/07 ............................. 415,466
2,000,000 B Step bond to yield 11.976% due 12/15/06 ..................... 1,565,000
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
<TABLE>
<CAPTION>
[LOGO]
Schedule of Investments (continued)
December 31, 1997 (unaudited)
==================================================================================================
Face
Amount Ratings Security Value
- --------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Telecommunications -- 20.9% (continued)
Esprit Telecommunications Group PLC, Sr. Notes:
$ 700,000 NR 11.500% due 12/15/07 ........................................ $ 721,000
1,375,000++ NR 11.500% due 12/15/07 ........................................ 787,636
1,100,000 B+ Fonorola Inc., Sr. Notes, 12.500% due 8/15/02 ................. 1,223,750
575,000 B Globalstar LP Corp., Sr. Notes, 11.375% due 2/15/04+ .......... 580,750
700,000 B Hermes Eurorail Telecommunications Inc., Sr. Notes,
11.500% due 8/15/07+ ........................................ 777,000
600,000 NR Intelcom Group USA Inc., Sr. Discount Notes,
step bond to yield 12.500% due 5/1/06 ....................... 450,000
2,275,000 B- Intermedia Communications, Sr. Discount Notes,
step bond to yield 12.351% due 5/15/06 ...................... 1,797,250
Iridium LLC Capital Corp.:
1,325,000 B- Sr. Discount Notes, 14.000% due 7/15/05+ .................... 1,454,188
1,000,000 B- Sr. Notes, 13.000% due 7/15/05+ ............................. 1,053,750
1,725,000 B McLeod Inc., Sr. Discount Notes,
step bond to yield 10.594% due 3/1/07+ ...................... 1,254,939
Metronet Communications Inc.:
375,000 NR Sr. Discount Notes, step bond to yield 10.750%
due 11/1/07+ ............................................... 229,687
1,600,000 NR Sr. Notes, 12.000% due 8/15/07 .............................. 1,848,000
Nextel Communications Inc., Sr. Discount Notes,
step bond to yield:
3,100,000 CCC- 11.846% due 8/15/04+ ....................................... 2,759,000
1,400,000 CCC 10.625% due 9/15/07+ ....................................... 887,250
2,800,000 CCC 9.750% due 10/31/07+ ....................................... 1,708,000
2,000,000 NR Nextlink Communications, Sr. Discount Notes,
12.500% due 4/15/06 ......................................... 2,287,500
1,550,000 NR Pagemart Inc., Sr. Discount Notes, step bond to yield
11.602% due 11/1/03 ......................................... 1,457,000
1,325,000 B- Primus Telecommunications Group, Sr. Notes,
11.750% due 8/1/04 .......................................... 1,417,750
2,750,000 B+ Qwest Communications International Inc., Sr. Discount Notes,
step bond to yield 9.351% due 10/15/07+ ..................... 1,870,000
RCN Corp.:
1,775,000 NR Sr. Discount Notes, step bond to yield 11.141%
due 10/15/07 ............................................... 1,118,250
1,000,000 NR Sr. Notes, 10.000% due 10/15/07 ............................. 1,032,500
1,300,000 NR RSL Communications Ltd., Sr. Notes, 12.250% due 11/15/06 ...... 1,420,250
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
<TABLE>
<CAPTION>
[LOGO]
Schedule of Investments (continued)
December 31, 1997 (unaudited)
==================================================================================================
Face
Amount Ratings Security Value
- --------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Telecommunications -- 20.9% (continued)
Telesystems International Wireless Corp., Sr. Discount Notes:
$ 700,000 NR Step bond to yield 13.250% due 6/30/07+ ..................... $ 439,250
650,000 B- Step bond to yield 10.514% due 11/1/07+ ..................... 360,750
-----------
33,832,478
-----------
Transportation -- 2.8%
1,450,000 BB Guangzhou Shenzhen Superhighway, Sr. Notes,
10.250% due 8/15/07+ ........................................ 1,254,250
375,000 NR Knology Holdings Inc., step bond to yield
11.875% due 10/15/07 ........................................ 206,250
2,805,000 BB- Sea Containers Ltd., Sr. Sub. Debentures,
12.500% due 12/1/04 ......................................... 3,183,675
-----------
4,644,175
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TOTAL CORPORATE BONDS AND NOTES
(Cost-- $144,817,607) ......................................... 151,227,372
-----------
<CAPTION>
Shares Security Value
- --------------------------------------------------------------------------------------------------
PREFERRED STOCKS -- 4.8%
<C> <S> <C>
Banking -- 0.3%
20,100 California Federal Preferred Capital Corp. .................... 537,675
-----------
Broadcasting/Cable -- 3.9%
5,531 Time Warner Inc., Series K, Exchange 0.000%+ .................. 6,222,595
-----------
Publishing -- 0.0%
298 Primedia Inc. ................................................. 31,824
-----------
Telecommunications -- 0.6%
798 IXC Communications Inc. ....................................... 925,845
-----------
TOTAL PREFERRED STOCKS
(Cost-- $7,320,096) ........................................... 7,717,939
-----------
WARRANTS -- 0.3%
Broadcasting/Cable -- 0.0%
1,725 Australis Holdings Property Ltd., Expire 10/30/01# ............ 0
-----------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
<TABLE>
<CAPTION>
[LOGO]
Schedule of Investments (continued)
December 31, 1997 (unaudited)
==================================================================================================
Shares Security Value
- --------------------------------------------------------------------------------------------------
<C> <S> <C>
Telecommunications -- 0.3%
9,735 Clearnet Communications Inc., Expire 9/15/05+# ................ $ 58,410
1,000 Globalstar Telecommunications, Expire 2/15/04# ................ 102,000
1,000 Iridium World Communications Ltd., Expire 7/15/05# ............ 140,000
6,468 Nextel Communications Inc., Expire 4/25/99# ................... 151,351
7,130 Pagemart Inc., Expire 12/31/03+# .............................. 42,780
1,325 Primus Telecommunications Group, Expire 8/1/04# ............... 13,250
1,300 RSL Communications Ltd., Expire 11/15/06# ..................... 13,000
2,150 UIH Australia Inc., Expire 5/15/06# ........................... 25,800
-----------
546,591
-----------
TOTAL WARRANTS
(Cost-- $333,632) ............................................. 546,591
-----------
<CAPTION>
Face
Amount Security Value
- --------------------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT-- 1.6%
$2,522,000 Goldman, Sachs & Co., 6.350% due 1/2/98;
Proceeds at maturity-- $2,522,890; (Fully collateralized
by U.S. Treasury Notes, 5.625% due 12/31/99;
Market value-- $2,573,551) (Cost-- $2,522,000) ................ 2,522,000
-----------
TOTAL INVESTMENTS -- 100%
(Cost-- $154,993,335** ) ...................................... $162,013,902
============
</TABLE>
+ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
++ Represents local currency.
# Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 13 for definition 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 -- Ratings 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 bonds 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 times 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.
NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's.
13
<PAGE>
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
[LOGO] December 31, 1997 (unaudited)
================================================================================
<S> <C>
ASSETS:
Investments, at value (Cost -- $154,993,335) ........... $ 162,013,902
Cash ................................................... 787
Interest and dividend receivable ....................... 3,102,867
Receivable for open forward foreign
currency contracts (Note 11) ........................ 41,119
-------------
Total Assets ........................................... 165,158,675
-------------
LIABILITIES:
Bank loan (Note 7) ..................................... 30,000,000
Dividends payable ...................................... 602,955
Interest payable ....................................... 99,933
Investment advisory fees payable ....................... 98,964
Administration fees payable ............................ 39,062
Accrued expenses ....................................... 122,512
-------------
Total Liabilities ...................................... 30,963,426
-------------
Total Net Assets .......................................... $ 134,195,249
=============
NET ASSETS:
Par value of capital shares ............................ $ 150,739
Capital paid in excess of par value .................... 126,207,338
7.00% Cumulative Preferred Stock (Note 6) .............. 30,000,000
Overdistributed net investment income .................. (4,943)
Accumulated net realized loss from
security transactions ............................... (29,218,780)
Net unrealized appreciation on
investments and foreign currencies .................. 7,060,895
-------------
Total Net Assets .......................................... $ 134,195,249
=============
<CAPTION>
Per Share
------------
<S> <C> <C>
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 ........................... 3.45 103,558
------------ ------------
Total allocated to Cumulative Preferred Stock ... $ 1,003.45 30,103,558
============ ------------
Common Stock (15,073,873 shares outstanding) .... $ 6.91 104,091,691
============ ------------
Total Net Assets ................................ $134,195,249
============
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
For the Nine Months Ended
[LOGO] December 31, 1997 (unaudited)
================================================================================
<S> <C>
INVESTMENT INCOME:
Interest .................................................... $ 12,126,555
Dividends ................................................... 510,151
Less: Interest expense (Note 7) ............................. (1,387,300)
------------
Total Investment Income ..................................... 11,249,406
------------
EXPENSES:
Investment advisory fees (Note 2) ........................... 612,679
Administration fees (Note 2) ................................ 245,072
Shareholder communications .................................. 131,849
Audit and legal ............................................. 68,774
Directors' fees ............................................. 26,370
Listing fees ................................................ 21,000
Shareholder and system servicing fees ....................... 18,142
Pricing ..................................................... 13,085
Custody ..................................................... 5,423
Other ....................................................... 10,267
------------
Total Expenses .............................................. 1,152,661
------------
Net Investment Income .......................................... 10,096,745
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 11):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) .. 2,784,397
Foreign currency transactions ............................ (14,139)
------------
Net Realized Gain ........................................... 2,770,258
------------
Change in Net Unrealized Appreciation of Investments and
Foreign Currencies:
Beginning of period ...................................... 2,870,108
End of period ............................................ 7,060,895
------------
Increase in Net Unrealized Appreciation ..................... 4,190,787
------------
Net Gain on Investments ........................................ 6,961,045
------------
Increase in Net Assets From Operations ......................... $ 17,057,790
============
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
For the Nine Months Ended
December 31, 1997 (unaudited)
[LOGO] and the Year Ended March 31, 1997
================================================================================
December 31 March 31
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income ..................... $ 10,096,745 $ 13,332,776
Net realized gain ......................... 2,770,258 939,501
Increase in net unrealized appreciation ... 4,190,787 208,576
------------- -------------
Increase in Net Assets From Operations .... 17,057,790 14,480,853
------------- -------------
DIVIDENDS PAID FROM
NET INVESTMENT INCOME TO:
7.00% Cumulative Preferred Stock .......... (2,100,000) (2,100,000)
Common Stock .............................. (8,899,459) (10,475,099)
------------- -------------
Decrease in Net Assets From
Distributions To Shareholders .......... (10,999,459) (12,575,099)
------------- -------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net asset value of shares issued for
reinvestment of dividends .............. 2,460,840 3,452,357
------------- -------------
Increase in Net Assets From
Fund Share Transactions ................ 2,460,840 3,452,357
------------- -------------
Increase in Net Assets ....................... 8,519,171 5,358,111
NET ASSETS:
Beginning of period ....................... 125,676,078 120,317,967
------------- -------------
End of period* ............................ $ 134,195,249 $ 125,676,078
============= =============
* Includes undistributed (overdistributed)
net investment income of: .............. $ (4,943) $ 911,910
============= =============
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
<TABLE>
<CAPTION>
Statement of Cash Flows
For the Nine Months Ended
[LOGO] December 31, 1997 (unaudited)
================================================================================================
<S> <C> <C>
NET DECREASE IN CASH:
Cash Flows From Operating and Investing Activities:
Interest and dividends received ........................... $ 11,099,208
Operating expenses paid ................................... (556,319)
Interest payments on bank loans ........................... (1,366,359)
Purchases of long-term securities ......................... (95,598,177)
Proceeds from short-term securities, net .................. 5,025,000
Proceeds from disposition of long-term securities ......... 89,935,842
------------
Net Cash Provided By Operating and
Investing Activities .................................... $ 8,539,195
------------
Cash Flows From Financing Activities:
Cash dividends paid on 7.00% Cumulative
Preferred Stock ......................................... (2,100,000)
Net cash dividends paid on Common Stock* .................. (6,438,619)
------------
Net Cash Used By Financing Activities ..................... (8,538,619)
------------
Net Increase in Cash ......................................... 576
Cash--Beginning of Period .................................... 211
------------
Cash--End of Period .......................................... $ 787
============
RECONCILIATION OF INCREASE IN NET ASSETS
FROM OPERATIONS TO NET CASH PROVIDED
BY OPERATING AND INVESTING ACTIVITIES:
Increase in Net Assets From Operations ....................... $ 17,057,790
Accretion of discount on securities ....................... (1,901,260)
Increase in investments ................................... (9,564,599)
Decrease in receivable for securities sold ................ 1,800,063
Decrease in dividends and interest receivables ............ 529,917
Increase in accrued expenses .............................. 617,284
------------
Total Adjustments ......................................... (8,518,595)
------------
Net Cash Provided By Operating and Investing Activities ...... $ 8,539,195
============
</TABLE>
* Exclusive of dividend reinvestment of $2,460,840.
See Notes to Financial Statements.
17
<PAGE>
Notes to Financial Statements
[LOGO] (unaudited)
================================================================================
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 ask 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 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 or 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 an 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 Common Stock is
18
<PAGE>
Notes to Financial Statements
[LOGO] (unaudited)(continued)
================================================================================
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 of the Fund's assets less (1) the Fund's liabilities
(including the outstanding principal amount on the bank loan), (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
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 Fund'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
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual
Funds Management Inc., a subsidiary of Salomon Smith Barney Holdings Inc.
("SSBH"), acts as investment adviser to the Fund. The Fund pays MMC a management
fee calculated at an annual rate of 0.50% of the average daily net assets. This
fee is calculated daily and paid monthly.
19
<PAGE>
Notes to Financial Statements
[LOGO] (unaudited)(continued)
================================================================================
MMC 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 daily net assets. This fee
is calculated daily and paid monthly.
All officers and one Director of the Fund are employees of Smith Barney
Inc., another subsidiary of SSBH.
3. Investments
During the nine months ended December 31, 1997, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
- --------------------------------------------------------------------------------
Purchases $95,598,177
- --------------------------------------------------------------------------------
Sales 88,135,779
- --------------------------------------------------------------------------------
At December 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
- --------------------------------------------------------------------------------
Gross unrealized appreciation $10,952,445
Gross unrealized depreciation (3,931,878)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 7,020,567
- --------------------------------------------------------------------------------
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
Statements 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
20
<PAGE>
Notes to Financial Statements
[LOGO] (unaudited)(continued)
================================================================================
requires continual maintenance of the market value of the collateral in amounts
at least equal to the repurchase price.
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, 220,000 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 $103,558 at December 31, 1997.
Moody's Investors Service, Inc. and Standard & Poor's Ratings Service 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 nine months ended December 31, 1997 was $1,387,300.
8. Common Stock
At December 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>
Nine Months Ended Year Ended
December 31, 1997 March 31, 1997
---------------------- -----------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares issued on
reinvestment 332,233 $2,460,840 516,581 $3,452,357
- --------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Notes to Financial Statements
[LOGO] (unaudited)(continued)
================================================================================
9. Capital Loss Carryforward
At 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.
The amount and expiration of the carryforwards are indicated below.
Expiration occurs on March 31 of the year indicated:
<TABLE>
<CAPTION>
1999 2000 2003 2004
- --------------------------------------------------------------------------------
<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 the 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.
11. Forward Foreign Currency Contracts
At December 31, 1997, the Fund had open forward foreign currency contracts
as described below. The Fund bears the market risk that arises from changes in
foreign currency exchange rates. The unrealized gain on the contracts is
reflected as follows:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
To Sell:
British Pound 416,745 $ 406,979 5/26/98 $ 9,766
German Deutschemark 1,179,486 1,169,364 1/8/98 10,122
German Deutschemark 654,814 644,944 3/2/98 9,870
German Deutschemark 779,479 768,118 3/18/98 11,361
- --------------------------------------------------------------------------------
Total Unrealized Gain on Forward
Foreign Currency Contracts $41,119
- --------------------------------------------------------------------------------
</TABLE>
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 period:
<TABLE>
<CAPTION>
1997(1) 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .............. $ 6.45 $ 6.31 $ 5.88
----------- ---------- ----------
Income From Operations:
Net investment income .......................... 0.68 0.92 0.86
Net realized and unrealized gain ............... 0.48 0.08 0.45
----------- ---------- ----------
Total Income From Operations ................... 1.16 1.00 1.31
----------- ---------- ----------
Distributions:
Dividends declared to 7.00% Cumulative Preferred
Stockholders ................................ (0.14) (0.14) (0.15)
Dividends paid from net investment income ...... (0.60) (0.72) (0.73)
Change in accumulated undeclared dividends on
Preferred Stock ............................. 0.04 -- --
----------- ---------- ----------
Total Distributions ............................ (0.70) (0.86) (0.88)
----------- ---------- ----------
Net Asset Value, End of Period .................... $ 6.91 $ 6.45 $ 6.31
=========== ========== ==========
Market Value, End of Period ....................... $ 8.25 $ 7.25 $ 7.00
=========== ========== ==========
Total Return, Based on Market Value ............... 22.64%++ 15.55% 18.35%
=========== ========== ==========
Total Return, Based on Net Asset Value* ........... 15.46%++ 14.04% 20.01%
=========== ========== ==========
Net Assets**, End of Period (000's) ............... $ 104,092 $ 95,034 $ 90,318
=========== ========== ==========
Ratios to Average Net Assets Based on
Common Shares Outstanding:
Net Investment Income .......................... 10.20%+ 10.85% 10.48%
Interest Expense ............................... 1.40+ 1.45 1.47
Other Expenses ................................. 1.16+ 1.20 1.21
Portfolio Turnover Rate ........................... 57% 101% 87%
</TABLE>
- ----------
(1) For the nine months ended December 31, 1997 (unaudited).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Total return is based on the beginning and ending net asset value for the
period. Dividends are reinvested in accordance with the Fund's dividend
reinvestment plan.
** Exclusive of preferred shares outstanding.
+ Annualized.
23
<PAGE>
[LOGO] Financial Highlights (continued)
================================================================================
For a share of common stock outstanding throughout each year:
<TABLE>
<CAPTION>
1995 1994# 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Year ................. $ 6.76 $ 6.86 $ 6.39
---------- ---------- ----------
Income From Operations:
Net investment income ........................... 0.93 1.02 1.07
Net realized and unrealized gain (loss) ......... (0.78) (0.13) 0.51
---------- ---------- ----------
Total Income From Operations .................... 0.15 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 ................................. (0.16) (0.11) --
Dividends declared to 9.67% Cumulative Preferred
Stockholders ................................. -- (0.12) (0.23)
Dividends paid from net investment income ....... (0.87) (0.82) (0.82)
Change in accumulated undeclared dividends on
Preferred Stock .............................. -- 0.06 (0.01)
---------- ---------- ----------
Total Distributions ............................. (1.03) (0.99) (1.06)
---------- ---------- ----------
Net Asset Value, End of Year ....................... $ 5.88 $ 6.76 $ 6.86
========== ========== ==========
Market Value, End of Year .......................... $ 6.63 $ 7.13 $ 7.25
========== ========== ==========
Total Return, Based on Market Value ................ 6.41% 10.02% 24.02%
========== ========== ==========
Total Return, Based on Net Asset Value* ............ (0.53)% 10.24% 21.66%
========== ========== ==========
Net Assets**, End of Year (000's) .................. $ 80,309 $ 87,726 $ 85,225
========== ========== ==========
Ratios to Average Net Assets Based on
Common Shares Outstanding:
Net Investment Income ........................... 15.35% 14.38% 12.89%
Interest Expense ................................ 1.58 0.92 1.14
Other Expenses .................................. 1.65 1.60 1.99
Portfolio Turnover Rate ............................ 79% 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.
* Total return is based on the beginning and ending net asset value for the
period. Dividends are reinvested in accordance with the Fund's dividend
reinvestment plan.
** Exclusive of preferred shares outstanding.
24
<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(1) 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
7.00% Cumulative Preferred Stock (2)
Total amount outstanding (000s) $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000
Asset Coverage Per Share 2,730 2,580 2,490 2,439 2,583 2,529
Involuntary Liquidating Preference
Per Share (3) 1,000 1,000 1,000 1,000 1,000 1,000
Average Market Value Per Share (3)(4) 1,000 1,000 1,000 1,000 1,000 1,000
Senior Money Market Notes
Total amount outstanding (000s) -- -- -- 25,800 25,800 25,800
Asset Coverage Per Share -- -- -- 527,555 558,675 546,948
Involuntary Liquidating Preference
Per Share (3) -- -- -- 100,000 100,000 100,000
Average Market Value Per Share (3) -- -- -- 100,000 100,000 100,000
PNC Bank Credit Facility
Total amount outstanding (000s) 30,000 30,000 30,000 -- -- --
Asset Coverage Per Share 547,000 516,000 498,000 -- -- --
Involuntary Liquidating Preference
Per Share (3) 100,000 100,000 100,000 -- -- --
Average Market Value Per Share (3)(5) 100,000 100,000 100,000 -- -- --
</TABLE>
- ----------
(1) For the nine months ended December 31, 1997.
(2) Redeemable April 15, 2000.
(3) Excludes accrued interest or accumulated undeclared dividends.
(4) See Note 6.
(5) See Note 7.
25
<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
June 30, 1997 3,810,798 0.26 3,442,440 0.23 4,087,876 0.29 7,530,316 0.52
September 30, 1997 3,652,220 0.24 3,266,777 0.22 4,374,410 0.29 7,641,187 0.51
December 31, 1997 3,786,388 0.25 3,387,528 0.23 (1,501,241) (0.10) 1,886,287 0.13
</TABLE>
- ----------
* Per share of Common Stock.
26
<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
4/22/97 4/25/97 7.125 6.38 0.061 6.769
5/27/97 5/30/97 7.500 6.59 0.061 7.125
6/24/97 6/27/97 7.625 6.77 0.061 7.244
7/22/97 7/25/97 7.750 6.86 0.061 7.363
8/26/97 8/29/97 7.938 6.89 0.061 7.541
9/23/97 9/26/97 7.938 7.02 0.063 7.541
10/28/97 10/31/97 8.000 6.93 0.063 7.600
11/24/97 11/28/97 8.190 6.91 0.063 7.778
12/22/97 12/26/97 8.250 6.93 0.063 7.838
12/31/97 1/2/98 8.250 6.91 0.040 7.838
========================================================================================
</TABLE>
* As of record date
27
<PAGE>
Dividend Reinvestment Plan
[LOGO] (unaudited)
================================================================================
Under the Fund's Dividend Reinvestment Plan ("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 purchasing 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-dealers for details regarding
reinvestment. All distributions to shareholders who do not participate in the
Plan will be paid by check mailed directly to the record holder by or under the
direction of First Data, as dividend-paying agent.
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 Common Stock is equal to or exceeds 98% of net asset
value per share on the date of valuation, 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 market price. To the extent that the Fund issues shares to
participants in the Plan at a discount to net asset value, the interests of
remaining shareholders (i.e., those who do not participate in the Plan) in the
Fund's net assets will be proportionately diluted.
If 98% of the net asset value per share of the Common Stock at the time of
valuation exceeds the market price of the Common Stock, or if the Fund declares
a dividend or capital gains distribution payable only in cash, First Data will
buy Common Stock on the open market, on the New York Stock Exchange or
elsewhere, for the participants' accounts. If, following the commencement of the
purchases and before First Data has completed its purchases, the market price
exceeds 98% of the net asset value per share of the
28
<PAGE>
Dividend Reinvestment Plan
[LOGO] (unaudited)(continued)
================================================================================
Common Stock, First Data will attempt to terminate purchases in the open market
and cause the Fund to issue the remaining portion of the dividend or
distribution by issuing shares at a price equal to 98% of the net asset value
per share. In this case, the number of shares of Common Stock received by a Plan
participant will be based on the weighted average prices paid for shares
purchased in the open market and the price at which the Fund issues the
remaining shares. To the extent First Data is unable to stop open market
purchases and cause the Fund to issue the remaining shares, the average per
share paid by First Data may exceed 98% of the net asset value per share of the
Common Stock, resulting in the acquisition of fewer shares in Common Stock
issued by the Fund at 98% of net asset value per share. First Data will begin to
purchase Common Stock on the open market as soon as a practicable after the
payment date of the dividend or capital gains distribution, but in no event
shall such purchases continue later than 30 days after that date except when
necessary to comply with applicable provisions of the Federal securities law.
First Data maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in each account, including information
needed by a shareholder for personal and tax records. 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. Common Stock in the account of each Plan participant will be held
by First Data in uncertificated form in the name of the Plan participant.
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 nine months
ended December 31, 1997, no such brokerage commissions were incurred.
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
29
<PAGE>
Dividend Reinvestment Plan
[LOGO] (unaudited)(continued)
================================================================================
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.
Experience under the Plan may indicate that changes to it are desirable.
The Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distributions paid subsequent to written notice of the
change sent to participants at least 90 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by First Data or the Fund at least 90 days' written notice to Plan
participants. All correspondence concerning the Plan should be directed by mail
to First Data Investor Services Group, Inc., P.O. Box 8030, Boston,
Massachusetts 02266-8030 or by telephone 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.
30
<PAGE>
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<PAGE>
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<PAGE>
DIRECTORS
Allan J. Bloostein
Martin Brody
Dwight B. Crane
Robert A. Frankel
William R. Hutchinson
Heath B. McLendon
Charles F. Barber, Emeritus
OFFICERS
Heath B. McLendon
Chairman of the Board
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 intended only for the shareholders of the
ZENIX Income Fund Inc.
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.
FD01066 2/98