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ZENIX
Income
Fund Inc.
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[LOGO]
[GRAPHIC]
Quarterly Report
December 31, 1998
<PAGE>
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Zenix Income Fund Inc.
[PHOTO] [PHOTO]
HEATH B. JOHN C.
MCLENDON BIANCHI
Chairman Vice President and
Investment Officer
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, 1998. Over the
past nine months the Fund paid income dividends totaling $0.54 per share. The
table below shows the annualized distribution rate and the nine-month total
return for the Fund based on its December 31, 1998 net asset value ("NAV") per
share and its New York Stock Exchange ("NYSE") closing price.
Price Annualized Nine-Month
Per Share Distribution Rate* Total Return
--------- ------------------ ------------
$6.04 (NAV) 11.52% (5.88)%
$6.00 (NYSE) 11.60% (13.23)%
For the quarter ended December 31, 1998, the Fund generated a total return of
2.69%. The Fund's performance was competitive with the three-month average total
return of 3.10% for leveraged closed-end high-yield bond funds as reported by
Lipper, Inc. (Lipper is an independent mutual fund performance tracking
organization). The Fund's nine-month total return also compares favorably with
its peer group average of a negative 6.39% for the same period. The Fund clearly
benefited by the beginning of a recovery in the high-yield bond market in the
fourth quarter.
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* The annualized distribution rate assumes a current monthly income dividend
rate of $0.058 per share for twelve months.
1
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<PAGE>
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Market and Economic Overview
The high-yield bond market generated relatively weak results during the third
quarter of 1998, underperforming all of the other domestic bond market sectors.
By the end of September, the Federal Reserve Board ("Fed") began taking
aggressive actions to restore investor confidence in the financial markets. The
Fed concluded that the financial markets were beginning to freeze up and overall
liquidity in the bond market was disappearing. Many companies were finding it
increasingly more difficult to borrow money through bond markets. Moreover,
there was a more pronounced reluctance on the part of many investors to invest
in new bonds, especially from companies that issue high-yield bonds. Fears that
an economic recession was becoming more likely given the turmoil in emerging
market economies such as Korea, Russia and Indonesia added to the growing risk
aversion.
Moreover, investors became concerned that a worldwide credit crunch in the
financial markets might throw the U.S. economy into a meaningful recession. By
acting decisively and lowering short-term interest rates three times, the Fed
was able to stabilize the domestic financial markets and restore investor
confidence. In the fourth quarter of 1998, as investors slowly became more
comfortable with the economic outlook and the Fed's resolve to keep the economy
out of a recession, the high-yield bond market stabilized and outperformed other
bond sectors. Yet because of a lingering uncertainty over the economy, the
high-yield bond market still trades at undervalued levels. As more investors
become convinced that the U.S. economy is still fundamentally sound, the
high-yield bond market should improve.
Portfolio Strategy and Market Outlook
The Fund remains cautiously positioned with a heavy emphasis in better quality,
intermediate maturity "B" and "BB" rated high-yield bonds. As of December 31,
1998, the Fund's average maturity on a call-adjusted basis was approximately 6.5
years. (Average maturity on a call-adjusted basis means that the bonds are
callable earlier than their maturity and are considered to have a maturity date
of the call date for the purposes of this calculation.) In addition, the Fund
continued to emphasize telecommunications issues as well as cable and media
issues.
We viewed the recent correction in the high-yield bond market as a buying
opportunity and carefully redeployed excess cash reserves into the market during
this time. However, given the continued problems in Asia, we remained
underweighted in basic commodity industries such as steel, forest products,
energy and petrochemicals, industries that continue to be negatively affected by
worldwide deflationary trends. (Deflation is when prices actually fall.
Deflation should not be confused with disinflation, which is the slowing down of
the rate at which prices increase).
2
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<PAGE>
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We believe that the Fund is appropriately positioned for the current economic
environment, which we think could be characterized by slower growth and somewhat
weaker corporate profits. It should be noted that we still do not anticipate a
domestic economic recession for 1999. Moreover, we will continue to maintain the
Fund's relatively sound credit quality orientation given the higher volatility
in financial markets.
In closing, thank you for investing in the Zenix Income Fund. We look forward to
continuing to help you pursue your investment goals. Should you have any
questions about your investment in the Fund, please call the First Data Investor
Services Group Inc. at (800) 331-1710.
Sincerely,
/s/ Heath B. McLendon /s/ John C. Bianchi, CFA
Heath B. McLendon John C. Bianchi, CFA
Chairman Vice President and
Investment Officer
January 11, 1999
3
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<PAGE>
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Take Advantage of the Fund's Dividend Reinvestment Plan!
Did you know that Fund investors who reinvest their dividends are taking
advantage of one of the most effective wealth-building tools available today?
Systematic investments put time to work for you through the strength of
compounding.
As an investor in the Fund, you can participate in its Dividend
Reinvestment Plan ("Plan"), a convenient, simple and efficient way to reinvest
your dividends and capital gains, if any, in additional shares of the Fund.
Below is a summary of how the Plan works.
Plan Summary
If you are a Plan participant who has not elected to receive your
dividends in the form of a cash payment then your dividends and capital gains
distributions will be reinvested automatically in additional shares of the Fund.
The number of common stock shares in the Fund you will receive in lieu of
a cash dividend is determined in the following manner. If the market price of
the common stock is equal to or higher than 98% of the net asset value per share
("NAV") on the determination date, you will be issued shares by the Fund at a
price reflecting 98% of the NAV, or 95% of the market price, whichever is
greater.
If the market price is less than 98% of the NAV at the time of valuation
(the close of business on the determination date), or if the Fund declares a
dividend or capital gains distribution payable only in cash, First Data
Investors Services Group, Inc. (the "Plan Agent") will buy common stock for your
account in the open market.
If the Plan Agent begins to purchase additional shares in the open market
and the market price of the shares subsequently rises above 98% of the
previously determined NAV before the purchases are completed, the Plan Agent
will attempt to terminate purchases and have the Fund issue the remaining
dividend or distribution in shares at the greater of 98% of the previously
determined NAV or 95% of the market price. In that case, the number of Fund
shares you receive will be based on the weighted average of prices paid for
shares purchased in the open market and the price at which the Fund issues the
remaining shares.
Restated Plan Adopted
A more complete description of the current Plan appears in the section of
this report beginning on page 29. The descriptions herein are based on a
restated version of the Plan, which was recently adopted to reflect current
practices of the Plan agent and for the purpose of standardizing certain terms
among the various closed-end mutual funds managed by Mutual Management Corp.
To find out more detailed information about the Plan and about how you can
participate, please call First Data Investors Services Group, Inc. at (800)
331-1710.
4
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<PAGE>
[LOGO] Schedule of Investments
December 31, 1998 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES -- 92.9%
Aerospace/Defense -- 0.4%
$ 565,000 B1* BE Aerospace, Sr. Sub. Notes, 9.500% due 11/1/08 (b).................... $ 598,900
------------
Airlines -- 2.0%
2,500,000 BB Airplanes Pass Through Trust, Corp. Collateralized
Mortgage Obligation, 10.875% due 3/15/19............................ 2,658,600
310,000 Ba2* Continental Airlines, Notes, 8.000% due 12/15/05........................ 309,613
------------
2,968,213
------------
Automobile/Auto Parts/Truck Manufactures -- 1.2%
1,200,000 B+ Breed Technologies Inc., Sr. Sub. Notes,
9.250% due 4/15/08 (b).............................................. 1,059,000
765,000 B+ Exide Corp., Sr. Notes, 10.000% due 4/15/05............................. 768,825
------------
1,827,825
------------
Broadcasting/Cable -- 16.1%
130,000 B3* Capstar Broadcasting, Sr. Discount Notes, step bond to
yield 11.002% due 2/1/09............................................ 107,250
1,125,000 BB- Century Communications Corp., Sr. Notes,
8.750% due 10/1/07.................................................. 1,240,313
1,000,000 B1* Chancellor Media Corp., Sr. Sub. Notes,
9.000% due 10/1/08 (b).............................................. 1,062,500
Citadel Broadcasting Co., Sr. Sub. Notes,:
200,000 B- 10.250% due 7/1/07.................................................. 219,000
325,000 B- 9.250% due 11/15/08 (b)............................................. 340,031
1,500,000 B2* Comcast UK Cable , Debentures, step bond to yield
11.175% due 11/15/07................................................ 1,271,250
CSC Holdings Inc., Sr. Sub. Debentures:
2,975,000 BB- 9.875% due 2/15/13.................................................. 3,343,156
1,000,000 BB- 10.500% due 5/15/16................................................. 1,187,500
200,000 BB+ 7.625% due 7/15/18.................................................. 201,250
1,150,000 BB- 9.875% due 4/1/23................................................... 1,289,438
NTL Inc., Sr. Notes:
100,000 B- 11.500% due 10/1/08 (b)............................................. 109,250
970,000 B- Step bond to yield 12.329% due 10/1/08 (b).......................... 613,525
RCN Corp.:
1,000,000 B3* Sr. Notes, 10.000% due 10/15/07..................................... 960,000
1,775,000 B3* Sr. Discount Notes, step bond to yield
11.141% due 10/15/07............................................ 1,038,375
Rogers Cablesystems of America, Inc.:
1,850,000 BB+ Sr. Notes, Series B, 10.000% due 3/15/05............................ 2,083,563
1,000,000 BB+ Sr. Sub. Debentures, 10.000% due 12/1/07............................ 1,127,500
2,100,000 BB- Sr. Sub. Debentures, 11.000% due 12/1/15............................ 2,488,500
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
[LOGO] Schedule of Investments (continued)
December 31, 1998 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Broadcasting/Cable -- 16.1% (continued)
$ 455,000 CCC+ Telemundo Holdings Inc., Sr. Discount Notes,
step bond to yield 11.467% due 8/15/08.............................. $ 261,625
1,250,000 B+ Telewest Communications PLC, Sr. Notes,
11.250% due 11/1/08 (b)............................................. 1,403,125
TV Azteca SA, Guaranteed Sr. Notes:
525,000 B1* Series A, 10.125% due 2/15/04....................................... 455,438
500,000 B1* Series B, 10.500% due 2/15/07....................................... 421,250
6,050,000 B United International Holdings Inc., Sr. Discount Notes,
step bond to yield 11.136% due 2/15/08.............................. 3,267,000
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24,490,839
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Building/Construction -- 1.2%
Building Material Corp., Sr. Notes:
250,000 BB Series B, step bond to yield 10.015% due 7/1/04..................... 256,250
500,000 BB 7.750% due 7/15/05.................................................. 495,000
405,000 BB 8.000% due 12/1/08 (b).............................................. 408,037
275,000 B Columbus McKinnon Corp., Company Guarantee,
8.500% due 4/1/08................................................... 259,875
400,000 B+ Nortek Inc., Sr. Notes, 9.125% due 9/1/07............................... 412,000
------------
1,831,162
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Cellular and Other Wireless -- 8.0%
525,000 CCC+ Centennial Cellular, Sr. Sub. Notes, 10.750% due 12/15/08 (b)........... 528,937
3,275,000 B3* Clearnet Communications Inc., Sr. Discount Notes,
step bond to yield, 12.200% due 12/15/05............................ 2,824,687
Dolphin Telecom PLC, Sr. Discount Notes:
1,600,000 B- Step bond to yield 11.416% due 6/1/08 (b)........................... 568,000
1,125,000+ CCC+ Step bond to yield 11.768% due 6/1/08............................... 429,354
2,545,000 B- Iridium LLC Capital Corp., Guaranteed Notes,
14.000% due 7/15/05................................................. 2,433,656
2,500,000 B Millicom International Cellular S.A., Sr. Discount Notes,
step bond to yield 15.406% due 6/1/06............................... 1,850,000
1,700,000 Ba3* Orange PLC , Sr. Notes, 8.000% due 8/1/08............................... 1,708,500
2,075,000 Caa* Pagemart Wireless Inc., Sr. Discount Notes, step bond to yield
11.250% due 2/1/08.................................................. 996,000
Telesystems International Wireless Corp., Sr. Discount Notes:
1,300,000 CCC+ Step bond to yield 12.460% due 6/30/07.............................. 585,000
715,000 CCC+ Step bond to yield 11.011% due 11/1/07.............................. 268,125
------------
12,192,259
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Chemicals -- 0.1%
175,000 NR Huntsman Corp., Sr. Sub. Notes, 9.500% due 7/1/07 (b)................... 175,438
------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
[LOGO] Schedule of Investments (continued)
December 31, 1998 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Diversified/Conglomerate Manufacturing -- 2.3%
$ 450,000 B- Eagle-Picher Industrial Inc., Sr. Sub. Notes,
9.375% due 3/1/08................................................... $ 432,000
Fisher Scientific International, Sr. Sub. Notes:
250,000 B- 9.000% due 2/1/08................................................... 250,000
135,000 B- 9.000% due 2/1/08 (b)............................................... 135,000
875,000 B3* Interlake Corp., Sr. Sub. Debentures, 12.125% due 3/1/02................ 894,688
1,100,000 B Outboard Marine Corp., Sr. Notes, 10.750% due 6/1/08.................... 1,078,000
700,000 B+ Park-Ohio Industries, Sr. Sub. Notes, 9.250% due 12/1/07................ 715,750
------------
3,505,438
------------
Diversified/Conglomerate Services -- 1.1%
675,000 BB- Clisa SA, Guaranteed Sr. Notes, 11.625% due 6/1/04 (b).................. 448,875
270,000 B Nationsrent Inc., Sr. Sub. Notes, 10.375% due 12/15/08 (b).............. 270,000
500,000 B- Outsourcing Solutions, Sr. Sub. Notes, 11.000% due 11/1/06.............. 482,500
520,000 BB- United Rentals Inc., Sr. Sub. Notes, 9.250% due 1/15/09 (b)............. 525,200
------------
1,726,575
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Electric Utilities -- 4.6%
AES Corp., Sr. Sub. Notes:
1,000,000 Ba1* 10.250% due 7/15/06................................................. 1,085,000
2,350,000 Ba1* 8.500% due 11/1/07.................................................. 2,388,187
Calpine Corp., Sr. Notes:
1,350,000 Ba2* 10.500% due 5/15/06................................................. 1,447,875
1,000,000 Ba2* 8.750% due 7/15/07.................................................. 1,050,000
795,090 BB- Midland Cogeneration Venture Limited Partnership,
Midland Funding, Sr. Secured Lease Obligation Bond,
Series C, 10.330% due 7/23/02....................................... 854,721
200,000 BB+ Niagara Mohawk Power, step bond to yield
8.229% due 7/1/10................................................... 153,500
------------
6,979,283
------------
Electronics/Computers -- 5.6%
650,000 B- Axiohm Transaction Solutions, Sr. Sub. Notes,
9.750% due 10/1/07.................................................. 606,125
725,000 B1* Celestica International Inc., Sr. Sub. Notes,
10.500% due 12/31/06................................................ 793,875
1,240,000 B Fairchild Semiconductor Inc., Sr. Sub. Notes,
10.125% due 3/15/07................................................. 1,240,000
Unisys Corp., Sr. Notes:
1,800,000 BB- 12.000% due 4/15/03................................................. 2,020,500
2,325,000 BB- 11.750% due 10/15/04................................................ 2,702,813
1,200,000 B- Viasystems Inc., Sr. Sub. Notes, 9.750% due 6/1/07...................... 1,140,000
------------
8,503,313
------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
[LOGO] Schedule of Investments (continued)
December 31, 1998 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance -- 2.5%
Amresco Inc., Sr. Sub. Notes, Series A,:
$ 500,000 CCC+ 10.000% due 3/15/04................................................. $ 357,500
135,000 CCC+ 9.875% due 3/15/05.................................................. 96,525
1,000,000 B2* Ocwen Capital Trust, Guaranteed Notes, 10.875% due 8/1/27............... 830,000
2,750,000 BB- Ocwen Financial Corp., Notes, 11.875% due 10/1/03....................... 2,475,000
------------
3,759,025
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Foods -- 2.3%
850,000 B- B & G Foods Inc., Sr. Sub. Notes, 9.625% due 8/1/07..................... 835,125
1,000,000 B2* Carrols Corp., Sr. Sub. Notes, 9.500% due 12/1/08....................... 1,020,000
1,325,000 B Imperial Holly Corp., Sr. Sub Notes, 9.750% due 12/15/07................ 1,311,750
300,000 B SC International Services Inc., Sr. Sub. Notes,
9.250% due 9/1/07................................................... 301,500
------------
3,468,375
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Healthcare/Drugs/Hospital Supplies -- 8.5%
Columbia/HCA Healthcare, Notes :
600,000 BBB 7.000% due 7/1/07................................................... 572,250
200,000 BBB 7.250% due 5/20/08.................................................. 193,000
300,000 BBB 6.630% due 7/15/45.................................................. 293,250
600,000 Ba3* Fresenius Medical Capital Trust II, Company Guarantee,
7.875% due 2/1/08................................................... 597,000
1,000,000 Ba2* Graphic Controls Corp., Sr. Sub. Notes, 12.000% due 9/15/05............. 1,152,500
1,800,000 BB ICN Pharmaceuticals Inc., Sr. Notes, 9.250% due 8/15/05................. 1,849,500
Integrated Health Services Inc., Sr. Sub. Notes:
465,000 B2* 9.500% due 9/15/07.................................................. 444,075
1,650,000 B2* 9.250% due 1/15/08.................................................. 1,571,625
4,750,000 B- Magellan Health Services Inc., Sr. Sub. Notes,
9.000% due 2/15/08.................................................. 4,251,250
1,650,000 Ba3* Mariner Post Acute Network, Sr. Sub. Notes,
9.500% due 11/1/07.................................................. 1,336,500
Sun Healthcare Group Inc., Sr. Sub Notes:
250,000 B2* 9.500% due 7/1/07................................................... 202,500
650,000 B3* 9.375% due 5/1/08................................................... 523,250
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12,986,700
------------
Hotel, Casinos and Gaming -- 5.6%
50,000 BB+ Circus Circus Enterprises, Sr. Sub. Notes,
9.250% due 12/1/05.................................................. 51,187
3,000,000 B- Courtyard By Marriott II, Sr. Secured Notes,
10.750% due 2/1/08.................................................. 3,120,000
900,000 BB Grand Casinos, First Mortgage, 10.125% due 12/1/03...................... 981,000
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
[LOGO] Schedule of Investments (continued)
December 31, 1998 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hotel, Casinos and Gaming-- 5.6% (continued)
$ 620,000 BB+ Harrahs Operations Co. Inc., Company Guarantee,
7.875% due 12/15/05................................................. $ 623,100
HMH Properties:
995,000 BB Company Guarantee, Series B, 7.875% due 8/1/08...................... 971,369
950,000 BB Sr. Notes, Series C, 8.450% due 12/1/08............................. 953,563
620,000 BB+ Mohegan Tribal Gaming Authority, Sr. Secured Notes,
13.500% due 11/15/02................................................ 747,100
525,000 BB+ Park Place Entertainment, Sr. Sub. Notes,
7.875% due 12/15/05 (b)............................................. 526,313
500,000 B+ Stations Casinos, Sr. Sub. Notes, 8.875% due 12/1/08 (b)................ 503,750
------------
8,477,382
------------
Insurance -- 1.0%
1,000,000 BB+ SIG Capital Trust, Guaranteed Notes , 9.500% due 8/15/27................ 832,500
650,000 BB- Veritas Capital Trust, Guaranteed Notes , 10.000% due 1/1/28............ 593,125
------------
1,425,625
------------
Leisure -- 1.7%
195,000 B+ Intrawest Corp., Sr. Notes, 9.750% due 8/15/08 (b)...................... 199,388
915,000 B Regal Cinemas Inc., Sr. Sub. Notes, 9.500% due 6/1/08 (b)............... 953,888
1,500,000 B- SFX Entertainment Inc., Sr. Sub Notes, 9.125% due 2/1/08................ 1,496,250
------------
2,649,526
------------
Machinery -- 0.3%
518,000 B- Alvey Systems Inc., Sr., Sub. Notes, 11.375% due 1/31/03................ 521,885
------------
Metals/Mining -- 0.3%
400,000 B- Haynes International Inc., Sr. Notes, 11.625% due 9/1/04................ 373,000
------------
Miscellaneous -- 0.6%
1,000,000 B2* Intertek Finance PLC., Sr. Sub. Notes, Series B,
10.250% due 11/1/06................................................. 930,000
------------
Oil/Natural Gas -- 4.0%
500,000 B Canadian Forest Oil Ltd., Sr. Sub. Notes, 8.750% due 9/15/07............ 456,250
1,300,000 B+ Clark USA Inc., Sr. Notes, 10.875% due 12/1/05.......................... 1,222,000
Ocean Energy Inc., Sr. Sub Notes:
2,550,000 BB- 10.375% due 10/15/05................................................ 2,703,000
900,000 B- 9.750% due 10/1/06.................................................. 931,500
700,000 B2* Stone Energy Corp., Sr. Sub. Notes, 8.750% due 9/15/07.................. 687,750
------------
6,000,500
------------
Oil Services -- 0.3%
450,000 BB+ J. Ray McDermott SA, Sr. Sub. Notes, 9.375% due 7/15/06................. 479,250
------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
[LOGO] Schedule of Investments (continued)
December 31, 1998 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Packaging/Containers -- 1.0%
$ 575,000 B Huntsman Packaging Corp., Sr. Notes, 9.125% due 10/1/07................. $ 572,125
1,000,000++ B Impress Metal Packaging Holdings, Sr. Sub. Notes,
9.875% due 5/29/07.................................................. 660,422
250,000 B- Tekni-Plex Inc., Sr. Sub Notes, 9.250% due 3/1/08....................... 262,813
------------
1,495,360
------------
Paper/Forest Products and Printing -- 3.4%
750,000 BB Malette Inc., Sr. Notes, 12.250% due 7/15/04............................ 815,625
Riverwood International Corp., Company Guarantee:
370,000 B- 10.625% due 8/1/07.................................................. 370,000
160,000 CCC+ 10.875% due 4/1/08.................................................. 146,400
3,540,000 B+ S.D. Warren Co., Sr. Sub. Notes, 12.000% due 12/15/04................... 3,858,600
------------
5,190,625
------------
Personal Care Products/Cosmetics -- 0.7%
900,000 B- Revlon Consumer Products, Sr., Sub. Notes,
8.625% due 2/1/08................................................... 828,000
470,000 B- Revlon Worldwide Series B, Sr. Disc. Notes,
zero coupon to yield 12.577% due 3/15/01............................ 260,850
------------
1,088,850
------------
Pollution Control -- 0.3%
400,000 Ba1* Allied Waste North America Inc., Sr. Sub. Notes,
7.875% due 1/1/09................................................... 406,500
------------
Publishing -- 1.3%
500,000 B+ Mail-Well Corp., Sr. Sub. Notes, 8.750% due 12/15/08 (b)................ 502,500
975,000# B Middleweb PLC, Sr. Notes, 10.500% due 5/30/08........................... 1,476,215
------------
1,978,715
------------
Real Estate -- 0.9%
1,280,000 BB+ Trizec Finance Ltd., Sr. Notes, 10.875% due 10/15/05.................... 1,414,400
------------
Retail -- 1.1%
300,000 B- Advance Holdings Corp., Sr. Discount Notes, step bond to
yield 12.592% due 4/15/09........................................... 177,000
1,000,000 B- Advance Stores Co., Inc. Sr. Sub. Notes, 10.250% due 4/15/08............ 1,015,000
445,000 BB DR Structured Finance, Pass Through Certificates,
Series A-2, 8.375% due 8/15/15...................................... 437,346
------------
1,629,346
------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
[LOGO] Schedule of Investments (continued)
December 31, 1998 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telecommunications -- 11.7%
$ 250,000# B Colt Telecommunications Group PLC,
Sr. Notes, 10.125% due 11/30/07..................................... $ 420,112
2,450,000 NR E. Spire Communications, Sr. Notes, step bonds to yield
11.175% due 7/1/08.................................................. 1,029,000
Esprit Telecom Group PLC, Sr. Notes:
700,000 B- 11.500% due 12/15/07................................................ 721,875
600,000++ B- 11.500% due 12/15/07................................................ 363,832
400,000 B- 10.875% due 6/15/08................................................. 404,500
1,200,000 NR Facilicom International Inc., Sr. Notes, 10.500% due 1/15/08............ 984,000
Hermes Eurorail Telecommunications Inc., Sr. Notes:
1,000,000 B 11.500% due 8/15/07................................................. 1,077,500
300,000 B 10.375% due 1/15/09 (b)............................................. 304,500
775,000 B+ Impsat Corp., Sr. Notes, 12.375% due 6/15/08............................ 650,031
2,275,000 B Intermedia Communications, Sr. Discount Notes,
step bond to yield 12.351% due 5/15/06.............................. 1,865,500
650,000 B Metromedia Fiber Network, Sr. Notes, 10.000% due 11/15/08+.............. 673,563
Metronet Communications Inc.:
4,800,000 B Sr. Discount Notes, step bond to yield
10.049% due 6/15/08................................................. 2,964,000
1,650,000 B Sr. Notes, 12.000% due 8/15/07...................................... 1,839,750
455,000 B Sr. Notes, 10.625% due 11/1/08 (b).................................. 486,850
1,150,000 B Nextlink Communications, Sr. Notes,
12.500% due 4/15/06................................................. 1,256,375
Psinet Inc., Sr. Notes, 10.000% due 2/15/05
200,000 B- 10.000% due 2/15/05................................................. 198,000
200,000 B- 11.500% due 11/1/08 (b)............................................. 208,000
1,625,000 NR Splitrock Services , Company Guarantee,
11.750% due 7/15/08................................................. 1,405,625
255,000 B- Verio Inc., Sr. Notes, 11.250% due 12/1/08 (b).......................... 257,550
265,000 NR Versatel Telecommunications, Sr. Notes, 13.250% due 5/15/08............. 263,013
850,000 NR Wam!Net Inc., step bond to yield 13.327% due 3/1/05..................... 471,750
------------
17,845,326
------------
Textiles -- 0.3%
800,000++ B Texon International, Sr. Notes, 10.000% due 2/1/08...................... 374,639
------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
[LOGO] Schedule of Investments (continued)
December 31, 1998 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Transportation -- 2.5%
$ 300,000 B+ American Reefer Co. Ltd., 1st Mortgage, 10.250% due 3/1/08.............. $ 190,500
2,455,000 BB- Sea Containers Ltd., Sr. Sub. Debentures, 12.500% due 12/1/04........... 2,700,500
800,000 B+ Stena Line AB, Sr. Notes, 10.625% due 6/1/08............................ 725,000
425,000 B+ TBS Shipping International Ltd., First Mortgage,
10.000% due 5/1/05.................................................. 246,500
------------
3,862,500
------------
TOTAL CORPORATE BONDS AND NOTES
(Cost-- $145,086,723)................................................... 141,156,774
------------
<CAPTION>
Shares Security Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS -- 0.3%
Banking -- 0.3%
20,100 California Federal Preferred Capital Corp., Series A,
Exchange 9.125% (Cost-- $502,500)................................... 508,781
------------
WARRANTS(c) -- 0.8%
Broadcasting/Cable -- 0.0%
2,450 UIH Australia Inc., Expire 5/15/06...................................... 2,450
------------
Cellular and Other Wireless -- 0.2%
9,735 Clearnet Communications Inc., Expire 9/15/05 (b)........................ 48,675
1,000 Globalstar Telecommunications, Expire 2/15/04........................... 70,000
1,000 Iridium World Communications Ltd., Expire 7/15/05....................... 138,980
7,130 Pagemart Inc., Expire 12/31/03 (b)...................................... 28,520
------------
286,175
------------
Telecommunications -- 0.6%
1,750 Alligiance Telecommunications Inc., Expire 2/3/08....................... 19,250
2,000 Colt Telecommunications, Expire 12/31/06................................ 700,000
16,000 Metronet Communications, Expire 8/15/07................................. 56,000
1,325 Primus Telecommunications Group, Expire 8/1/04.......................... 6,459
1,300 RSL Communications Ltd., Expire 11/15/06................................ 50,700
1,625 Splitrock Services, Expire 7/15/08...................................... 17,875
265 Versatel Telecommunication, Expire 5/15/08.............................. 2,650
2,550 Wam! Net Inc., Expire 3/1/05............................................ 20,400
------------
873,334
------------
TOTAL WARRANTS
(Cost-- $433,106)....................................................... 1,161,959
------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
[LOGO] Schedule of Investments (continued)
December 31, 1998 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Security Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT -- 6.0%
$ 9,180,000 Morgan Stanley, Dean Witter & Co., 4.650% due 1/4/99;
Proceeds at maturity-- $9,184,743;
(Fully collateralized by U.S. Treasury Notes
and Bonds, 6.000% to 6.500% due 7/15/99 to 8/15/27;
Market Value-- $9,406,392)
(Cost-- $9,180,000)..................................................... 9,180,000
------------
TOTAL INVESTMENTS -- 100%
(Cost-- $155,202,329** )................................................ $152,007,514
============
</TABLE>
(a) All ratings are by Standard & Poor's Ratings Services, except that those
identified by an asterisk (*) are rated by Moody's Investors Service Inc.
(b) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(c) Non-income producing security.
+ Represents local currency of European Currency Units.
++ Represents local currency of German Marks.
# Represents local currency of British Pounds.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 14 for definition of ratings.
See Notes to Financial Statements.
13
<PAGE>
[LOGO] Bond Ratings (unaudited)
================================================================================
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Rating Service ("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, B and CCC Bonds rated BB, B and CCC are regarded, on balance, as
predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance
with the terms of the obligation. BB indicates the lowest
degree of speculation and CCC the highest degree of
speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Moody's Investors Service Inc. ("Moody's") -- Numerical modifiers 1, 2 and 3 may
be applied to each generic rating from "Ba" to "Caa," where 1 is the highest and
3 the lowest ranking within its generic category.
Ba -- Bonds 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 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.
Caa -- Bonds rated "Caa" are of poor standing. Such issues may be in
default, or there may be present elements of danger may exist
with respect to principal or interest.
NR -- Indicates that the bond is not rated by either Standard &
Poor's or Moody's.
14
<PAGE>
[LOGO] Statement of Assets and Liabilities
December 31, 1998 (unaudited)
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost-- $155,202,329) ............................ $152,007,514
Cash ................................................................... 901
Interest and dividends receivable ...................................... 2,997,481
------------
Total Assets ........................................................... 155,005,896
------------
LIABILITIES:
Bank loan (Note 7) ..................................................... 30,000,000
Payable for securities purchased ....................................... 300,000
Interest payable ....................................................... 171,067
Investment advisory fees payable ....................................... 96,410
Payable for closed forward foreign currency contracts .................. 75,866
Payable for open forward foreign
currency contracts (Note 11) ......................................... 21,013
Administration fees payable ............................................ 38,040
Accrued expenses ....................................................... 163,261
------------
Total Liabilities ...................................................... 30,865,657
------------
Total Net Assets .......................................................... $124,140,239
============
NET ASSETS:
Par value of capital shares ............................................ $ 155,602
Capital paid in excess of par value .................................... 129,546,166
7.00% Cumulative Preferred Stock (Note 6) .............................. 30,000,000
Overdistributed net investment income .................................. (909,922)
Accumulated net realized loss on security transactions ................. (31,436,749)
Net unrealized depreciation on investments and
foreign currencies ................................................... (3,214,858)
------------
Total Net Assets .......................................................... $124,140,239
============
<CAPTION>
NET ASSET VALUE, COMPRISED OF: ............................................ Per Share
---------
<S> <C> <C>
7.00% Cumulative Preferred Stock redemption value ......................... $1,000.00 $ 30,000,000
Cumulative undeclared dividends on 7.00%
Preferred Stock ........................................................ 3.45 103,556
--------- ------------
Total allocated to Cumulative Preferred Stock ............................. $1,003.45 30,103,556
--------- ------------
Common Stock (15,560,197 shares outstanding) .............................. $ 6.04 94,036,683
--------- ------------
Total Net Assets .......................................................... $124,140,239
============
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
[LOGO] Statement of Operations
For the Nine Months Ended
December 31, 1998 (unaudited)
================================================================================
INVESTMENT INCOME:
Interest ...................................................... $ 11,882,193
Dividends ..................................................... 176,122
Less: Interest Expense (Note 7) ............................... (1,363,775)
------------
Total Investment Income ....................................... 10,694,540
------------
EXPENSES:
Investment advisory fees (Note 2) ............................. 599,305
Administration fees (Note 2) .................................. 239,722
Shareholder communications .................................... 131,849
Audit and legal ............................................... 51,438
Directors' fees ............................................... 26,370
Pricing ....................................................... 23,375
Shareholder and system servicing fees ......................... 12,560
Custody ....................................................... 5,423
Other ......................................................... 31,267
------------
Total Expenses ................................................ 1,121,309
------------
Net Investment Income ............................................ 9,573,231
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 11):
Realized Loss From:
Security transactions (excluding short-term securities) ..... (1,075,408)
Foreign currency transactions ............................... (210,654)
------------
Net Realized Loss ............................................. (1,286,062)
------------
Change in Net Unrealized Appreciation (Depreciation) of
Investments and Foreign Currencies:
Beginning of period ......................................... 9,425,614
End of period ............................................... (3,214,858)
------------
Increase in Net Unrealized Depreciation ....................... (12,640,472)
------------
Net Loss on Investments .......................................... (13,926,534)
------------
Decrease in Net Assets From Operations ........................... $ (4,353,303)
============
See Notes to Financial Statements.
16
<PAGE>
[LOGO] Statements of Changes in Net Assets
For the Nine Months Ended
December 31, 1998 (unaudited)
and the Year Ended March 31, 1998
================================================================================
December 31 March 31
------------ ------------
OPERATIONS:
Net investment income ..................... $ 9,573,231 $ 12,914,504
Net realized gain (loss) .................. (1,286,062) 1,717,025
(Increase) decrease in net unrealized
depreciation ............................ (12,640,472) 6,555,506
------------ ------------
Increase (Decrease) in Net Assets
From Operations ......................... (4,353,303) 21,187,035
------------ ------------
DIVIDENDS PAID FROM
NET INVESTMENT INCOME TO:
7.00% Cumulative Preferred Stock .......... (2,100,000) (2,100,000)
Common Stock .............................. (8,245,150) (11,728,952)
------------ ------------
Decrease In Net Assets From
Distributions To Shareholders ........... (10,345,150) (13,828,952)
------------ ------------
FUND SHARE TRANSACTIONS (Note 8):
Net asset value of shares issued for
reinvestment of dividends ............... 2,356,293 3,448,238
------------ ------------
Increase in Net Assets From
Fund Share Transactions ................. 2,356,293 3,448,238
------------ ------------
Increase (Decrease) in Net Assets ............ (12,342,160) 10,806,321
NET ASSETS:
Beginning of period ....................... 136,482,399 125,676,078
------------ ------------
End of period* ............................ $124,140,239 $136,482,399
------------ ------------
* Includes undistributed (overdistributed)
net investment income of: ................. $ (909,922) $ 72,651
============ ============
See Notes to Financial Statements.
17
<PAGE>
[LOGO] Statement of Cash Flows
For the Nine Months Ended
December 31, 1998 (unaudited)
================================================================================
<TABLE>
<S> <C> <C>
NET INCREASE IN CASH:
Cash Flows Provided by Operating
and Investing Activities:
Interest and dividends received ............................ $ 10,387,830
Operating expenses paid .................................... (1,018,516)
Interest payments on bank loans ............................ (1,284,400)
Purchases of short-term securities, net .................... (2,871,000)
Purchases of long-term securities .......................... (111,236,678)
Proceeds from disposition of long-term securities .......... 114,012,408
------------
Net Cash Provided By Operating
and Investing Activities ................................. $ 7,989,644
------------
Cash Flows From Financing Activities:
Cash dividends paid on 7.00% Cumulative
Preferred Stock .......................................... (2,100,000)
Cash dividends paid on Common Stock* ....................... (5,888,857)
------------
Net Cash Used By Financing Activities ...................... $ (7,988,857)
------------
Net Increase in Cash ......................................... 787
Cash--Beginning of Period .................................... 114
------------
Cash--End of Period .......................................... $ 901
============
RECONCILIATION OF DECREASE IN NET ASSETS
FROM OPERATIONS TO NET CASH PROVIDED BY
OPERATING AND INVESTING ACTIVITIES:
Decrease in Net Assets From Operations ....................... $ (4,353,303)
Amortization of discount on securities ..................... (2,007,146)
Decrease in investments .................................... 14,281,731
Decrease in receivable for securities sold ................. 217,091
Increase in payable for securities purchased ............... (852,694)
Decrease in dividends and interest receivable .............. 544,637
Increase in accrued expenses ............................... 159,328
------------
Total Adjustments .......................................... 12,342,947
------------
Net Cash Provided By Operating and Investing Activities ...... $ 7,989,644
============
</TABLE>
* Exclusive of dividend reinvestment of $2,356,293.
See Notes to Financial Statements.
18
<PAGE>
[LOGO] Notes to Financial Statements
(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,
19
<PAGE>
[LOGO] Notes to Financial Statements
(unaudited)(continued)
================================================================================
payable semi-annually on June 15 and December 15; (h) the net asset value of the
Fund's 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 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, 1998, 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. 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"), 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 (defined as the average daily value of the total assets of the Fund
less total liabilities other than the outstanding principal amount of the Bank
loan). This fee is calculated daily and paid monthly.
20
<PAGE>
[LOGO] Notes to Financial Statements
(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 (defined
as the value of average daily net assets shall mean the average daily value of
the total assets of the Fund less liabilities other than the outstanding
principal amount of the Bank loan). This fee is calculated daily and paid
monthly.
All officers and one Director of the Fund are employees of Salomon Smith
Barney Inc., another subsidiary of SSBH.
3. Investments
During the nine months ended December 31, 1998, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $110,383,984
- --------------------------------------------------------------------------------
Sales 113,693,473
================================================================================
At December 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 4,409,618
Gross unrealized depreciation (7,604,433)
- --------------------------------------------------------------------------------
Net unrealized depreciation $ (3,194,815)
================================================================================
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
21
<PAGE>
[LOGO] Notes to Financial Statements
(unaudited)(continued)
================================================================================
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.
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. At December
31, 1998, 220,000 authorized shares of 7.00% Cumulative Preferred Stock with a
par value of $0.01 remained unissued. Cumulative undeclared dividends on the
outstanding Preferred Stock amounted to $103,556 at December 31, 1998.
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 31, 2008. Interest expense
related to the loan for the nine months ended December 31, 1998 was $1,363,775.
8. Common Stock
At December 31, 1998, 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:
Nine Months Ended Year Ended
December 31, 1998 March 31, 1998
-------------------- --------------------
Shares Amount Shares Amount
================================================================================
Shares issued on
reinvestment 358,078 $2,356,293 460,479 $3,448,238
================================================================================
22
<PAGE>
[LOGO] Notes to Financial Statements
(unaudited)(continued)
================================================================================
9. Capital Loss Carryforward
At March 31, 1998, the Fund had, for Federal income tax purposes, capital
loss carryforwards of approximately $29,966,000 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:
1999 2000 2003 2004
================================================================================
Carryforward Amounts $14,407,000 $8,395,000 $4,873,000 $2,291,000
================================================================================
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, 1998, 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 loss on the contracts is
reflected as follows:
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Loss
================================================================================
To Sell:
British Pound 280,906 $ 466,534 2/25/99 $(11,466)
European Currency Unit 443,700 521,038 3/1/99 (6,612)
German Mark 2,404,846 1,448,329 3/3/99 (2,935)
- --------------------------------------------------------------------------------
Total Unrealized Loss on Open Forward
Foreign Currency Contracts $(21,013)
================================================================================
23
<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 ended March 31,
except where noted:
<TABLE>
<CAPTION>
1998(1) 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .................. $ 6.96 $ 6.45 $ 6.31
---------- ---------- ----------
Income (Loss) From Operations:
Net investment income .............................. 0.61 0.87 0.92
Net realized and unrealized gain (loss) ............ (0.89) 0.56 0.08
---------- ---------- ----------
Total Income (Loss) From Operations ................ (0.28) 1.43 1.00
---------- ---------- ----------
Distributions:
Dividends declared to 7.00% Cumulative Preferred
Stockholders ..................................... (0.13) (0.14) (0.14)
Dividends paid from net investment income .......... (0.54) (0.78) (0.72)
Change in accumulated undeclared dividends
on Preferred Stock ............................... 0.03 -- --
---------- ---------- ----------
Total Distributions ................................ (0.64) (0.92) (0.86)
---------- ---------- ----------
Net Asset Value, End of Period ........................ $ 6.04 $ 6.96 $ 6.45
========== ========== ==========
Market Value, End of Period ........................... $ 6.00 $ 7.50 $ 7.25
========== ========== ==========
Total Return, Based on Market Value* .................. (13.23)%++ 14.81% 15.55%
========== ========== ==========
Total Return, Based on Net Asset Value* ............... (5.88)%++ 19.75% 14.04%
========== ========== ==========
Net Assets**, End of Period (000's) ................... $ 94,037 $ 105,861 $ 95,034
========== ========== ==========
Ratios to Average Net Assets Based on
Common Shares Outstanding***:
Net Investment Income .............................. 13.23%+ 12.60% 14.35%
Interest Expense ................................... 1.93+ 1.81 1.92
Other Expenses ..................................... 1.58+ 1.51 1.59
Portfolio Turnover Rate ............................... 73% 79% 101%
</TABLE>
- ----------
(1) For the nine months ended December 31, 1998 (unaudited).
* The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
** Exclusive of preferred shares outstanding.
*** Calculated on basis of average net assets of common shareholders. Ratios
do not reflect the effect of dividend payments to preferred shareholders.
The amounts for 1998 and 1997 have been recalculated to reflect this
methodology.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
24
<PAGE>
[LOGO] Financial Highlights (continued)
================================================================================
For a share of common stock outstanding throughout each year ended March 31:
<TABLE>
<CAPTION>
1996 1995 1994#
---------- ---------- ----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Year .................... $ 5.88 $ 6.76 $ 6.86
---------- ---------- ----------
Income From Operations:
Net investment income .............................. 0.86 0.93 1.02
Net realized and unrealized gain (loss) ............ 0.45 (0.78) (0.13)
---------- ---------- ----------
Total Income From Operations ....................... 1.31 0.15 0.89
---------- ---------- ----------
Distributions:
Dividends declared to 7.00% Cumulative Preferred
Stockholders ..................................... (0.15) (0.16) (0.11)
Dividends declared to 9.67% Cumulative Preferred
Stockholders ..................................... -- -- (0.12)
Dividends paid from net investment income .......... (0.73) (0.87) (0.82)
Change in accumulated undeclared dividends on
Preferred Stock .................................. -- -- 0.06
---------- ---------- ----------
Total Distributions ................................ (0.88) (1.03) (0.99)
---------- ---------- ----------
Net Asset Value, End of Year .......................... $ 6.31 $ 5.88 $ 6.76
========== ========== ==========
Market Value, End of Year ............................. $ 7.00 $ 6.63 $ 7.13
========== ========== ==========
Total Return, Based on Market Value* .................. 18.35% 6.41% 10.02%
========== ========== ==========
Total Return, Based on Net Asset Value* ............... 20.01% (0.53)% 10.24%
========== ========== ==========
Net Assets**, End of Year (000's) ..................... $ 90,318 $ 80,309 $ 87,726
========== ========== ==========
Ratios to Average Net Assets Based on
Common Shares Outstanding***:
Net Investment Income .............................. 14.21% 15.35% 14.38%
Interest Expense ................................... 1.98 1.58 0.92
Other Expenses ..................................... 1.65 1.65 1.60
Portfolio Turnover Rate ............................... 87% 79% 102%
</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.
* The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
** Exclusive of preferred shares outstanding.
*** Calculated on basis of average net assets of common shareholders. Ratios
do not reflect the effect of dividend payments to preferred shareholders.
The amount for 1996 has been recalculated to reflect this methodology.
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>
1998(1) 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
<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 2,570 2,760 2,580 2,490 2,439 2,583
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
Asset Coverage (000s) -- -- -- -- 135,966 143,946
PNC Bank Credit Facility
Total amount outstanding (000s) 30,000 30,000 30,000 30,000 -- --
Asset Coverage (000s) 154,000 165,900 154,800 149,400 -- --
</TABLE>
- ----------
(1) As of December 31, 1998.
(2) Redeemable April 15, 2000.
(3) Excludes accrued interest or accumulated undeclared dividends.
(4) See Note 6.
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, 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
March 31, 1998 3,209,147 0.22 2,817,759 0.19 1,311,486 0.08 4,129,245 0.27
June 30, 1998 3,578,838 0.23 3,185,558 0.21 (1,919,184) (0.13) 1,266,374 0.08
September 30, 1998 3,511,518 0.23 3,123,106 0.20 (11,774,047) (0.76) (8,650,941) (0.56)
December 31, 1998 3,604,184 0.23 3,264,567 0.20 (233,303) 0.00 3,031,264 0.20
</TABLE>
- ----------
* Per share of Common Stock.
27
<PAGE>
[LOGO] Financial Data (unaudited)
================================================================================
For a share of common stock outstanding throughout each period:
Dividend
Record Payable NYSE Net Asset Dividend Reinvestment
Date Date Closing Price Value* Paid Price
================================================================================
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 6.81 0.061 7.363
8/26/97 8/29/97 7.938 6.88 0.061 7.541
9/23/97 9/26/97 7.938 7.01 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
1/27/98 1/30/98 8.063 6.90 0.063 7.659
2/24/98 2/27/98 8.500 6.95 0.063 8.075
3/24/98 3/27/98 7.688 6.95 0.061 7.303
4/21/98 4/24/98 7.500 6.95 0.061 7.125
5/26/98 5/29/98 7.500 6.89 0.061 7.125
6/23/98 6/26/98 7.625 6.82 0.061 7.244
7/28/98 7/31/98 7.438 6.85 0.061 7.066
8/25/98 8/28/98 6.563 6.54 0.061 6.409
9/22/98 9/25/98 6.375 6.02 0.058 6.056
10/27/98 10/30/98 6.625 5.61 0.058 6.294
11/23/98 11/27/98 6.625 6.07 0.058 6.294
12/21/98 12/24/98 6.125 5.98 0.058 5.860
================================================================================
* As of record date
28
<PAGE>
[LOGO] Dividend Reinvestment Plan
(unaudited)
================================================================================
Under the Fund's Dividend Reinvestment Plan (Plan), a shareholder whose
shares of Common Stock are registered in his own name will have all
distributions from the Fund reinvested automatically by 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 shares under the Plan, unless the service is not provided
by the broker or nominee or the shareholder elects to receive distributions in
cash. 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. When the
market price of the common stock is equal to or exceeds 98% of the net asset
value per share of the Common Stock on the determination date (generally, the
record date for the distribution), Plan participants will be issued shares of
Common Stock by the Fund at a price equal to the greater of 98% of net asset
value or 95% of the market price of the Common Stock.
If the market price of the Common Stock is less than 98% of the net asset
value of the Common Stock at the time of valuation (which is the close of
business on the determination date), or if the Fund declares a dividend or
capital gains distribution payable only in cash, First Data will buy common
stock in the open market, on the NYSE 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 the net asset value of the
Common Stock as of the valuation time, 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 in shares at a price equal to the greater of (a)
98% of net asset value as of the valuation time or (b) 95% of the then current
market price. In this case, the number of shares received by
29
<PAGE>
[LOGO] Dividend Reinvestment Plan
(unaudited) (continued)
================================================================================
a Plan participant will be based on the weighted average of 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 purchase price paid by First Data may exceed the net asset value of the
Common Stock as of the valuation time, resulting in the acquisition of fewer
shares than if the dividend or capital gains distribution had been paid in
Common Stock issued by the Fund at such net asset value. First Data will begin
to purchase Common Stock on the open market as soon as practicable after the
determination date for the dividend or capital gains distribution, but in no
event shall such purchases continue later than 30 days after the payment date
for such dividend or distribution, or the record date for a succeeding dividend
or distribution, except when necessary to comply with applicable provisions of
the federal securities laws.
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 subject to no charge for reinvesting dividends and
capital gains distributions under the Plan. First Data's fees for handling the
reinvestment of dividends and capital gains distributions will be paid by the
Fund. No brokerage charges apply with respect to shares of Common Stock issued
directly by the Fund under the Plan. Each Plan participant will, however, bear a
proportionate share of any brokerage commissions actually incurred with respect
to any open market purchases made under the Plan.
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 distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
30
<PAGE>
[LOGO] Dividend Reinvestment Plan
(unaudited) (continued)
================================================================================
terminated by First Data, with the Fund's prior written consent, on at least 30
days' written notice to Plan participants. All correspondence concerning the
Plan should be directed by mail to First Data Investor Services Group, P.O. Box
8030, Boston, Massachusetts 02266-8030 or by telephone at 1-800-451-2010.
------------------------------------------------
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>
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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
Paul A. Brook
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 2/99