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ZENIX
Income
Fund Inc.
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Quarterly Report
June 30, 1999
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[LOGO]
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 first quarter report for the Zenix Income
Fund Inc. ("Fund") for the three months ended June 30, 1999. We hope you find
this report to be useful and informative. Over the past three months, the Fund
paid income dividends totaling $0.17 per share. The table below shows the
annualized distribution rate and three-month total return for the Fund based on
its June 30, 1999 net asset value ("NAV") per share and its New York Stock
Exchange ("NYSE") closing price.
Price Annualized Three-Month
Per Share Distribution Rate* Total Return
--------- ------------------ ------------
$5.68 (NAV) 11.41% (1.92)%
$5.88 (NYSE) 11.02% 3.00%
The Fund generated a total return of a negative 1.92% for the past three-months.
In comparison, the Lipper, Inc. peer group average posted a negative 1.58% for
the same period. We were disappointed by the Fund's performance which reflected
a combination of rising interest rates and heavy new issue supply.
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* The annualized distribution rate assumes a current monthly income dividend
rate of $0.054 per share for twelve months.
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Market and Economic Overview
During the second quarter of 1999, the high yield bond market declined as U.S.
Treasury interest rates continued to move higher on fears that the Federal
Reserve Board ("Fed") would raise short-term rates in response to U.S. economic
growth and inflationary pressures. On June 30, 1999, the Fed raised short-term
interest rates by 25 basis points and recently indicated that it may increase
rates again later in 1999.
The high yield bond market and the investment grade corporate bond market were
not only negatively affected by the general increase in interest rates, but also
by the rush on the part of corporations to issue additional debt before interest
rates went even higher. This added supply caused the high yield bond market to
fall as investors retreated from the market.
With the rise in general interest rates, including those of U.S. Treasury bonds,
compounded by heavy new issuance of corporate bonds, the better quality segments
of the high yield bond market continued to underperform the lower quality
CCC/Caa rated issues during the past three months. Although higher quality
issues have a lower risk of default, these issues tend to be more sensitive to
the movements of the U.S. Treasury market. At the same time, the lower quality
high yield issues have a higher risk of default but tend to react more closely
to stock market trends. The lower quality segment of the high yield market
clearly benefited from strong domestic economic growth in the second quarter and
the strong performance returns generated by the domestic equity markets.
Compared to other segments of the fixed income markets such as U.S. Treasury
bonds and investment grade corporate bonds, the high yield market modestly
outperformed. Thirty-year U.S. Treasuries generated the worst performance with a
negative 4.00% total return for the second quarter of 1999 and a negative 10.50%
total return for the first half of 1999. Ten-year U.S. Treasuries generated a
negative 3.45% total return for the second quarter of 1999 and a negative 6.50%
total return for the first half of 1999. For the second quarter of 1999, the
domestic high yield market generated flat results and a modestly positive 2.00%
total return for the first half of 1999.
The strongest performing industry sectors were basic materials (i.e., forest
products, metals, mining etc.) and energy. This was not surprising given the
increasing risk of higher inflation caused by stronger than expected economic
growth both domestically and globally. The weakest industry sectors included
media (i.e., cable TV and broadcasting) and telecommunications. A number of
media and telecommunications companies rushed new issues into the market in the
second quarter of 1999, putting further pressure on the existing issues in these
sectors.
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The Fund's performance lagged the various high yield indices in the second
quarter of 1999, with total returns below that of the U.S. high yield bond
market overall. We were held back by our underweight in basic materials and our
overweight in the telecommunications sector. Yet, despite adverse short-term
market conditions, we are committed to our long-term investment style -- to
maintain style purity in the funds we manage with a meaningful emphasis on
better quality issues. In fact, our higher quality Ba/BB rated issues generated
the weakest results given the ongoing increase in interest rates in the second
quarter.
Portfolio Strategy Update
As mentioned in our last report, the Fund's management team has begun a
multi-pronged strategy of rebalancing the Fund to better reflect strong economic
conditions. We have therefore been slowly increasing the Fund's exposure to the
basic industry sector and eliminating sectors such as healthcare. Also, we have
modestly increased our energy exposure by investing in higher quality energy
credits. Given the increased volatility in the fixed income markets, this
rebalancing strategy has taken longer than expected. In terms of quality, we
have been increasing our exposure to the middle B-rated segment of the market
where we have continued to find attractive yields.
Some of our recent additions include AES Corporation, an independent power
producer; Nextlink, a Competitive Local Exchange telecommunications provider;
Huntsman Chemical, a specialty chemical company; and Ames Department Stores, a
middle market retailer. We believe the middle B rated segment of the high yield
bond market represents the best value given continued economic strength. We
believe our current investment strategy makes sense in this current environment
where economic growth continues to be strong. The Fund's average maturity of
approximately six to seven years on a call-adjusted basis should continue to
limit the impact of rising rates on the portfolio. We remain bullish on the
total return prospects of the high yield bond market at current valuation
levels, especially given the health of the economy.
Conclusion
For the remainder of 1999, we expect a continuation of solid economic growth
with a modest upward bias in inflation. These factors could result in a modest
increase in general interest rates. We anticipate that both the equity markets
and the high yield bond market should do better than U.S. Treasuries and the
middle quality high yield bonds should outperform. Moreover, we will continue to
focus closely on some of the stronger companies in select commodity sectors such
as paper, energy and steel. And while no guarantees can be made, we expect the
Fund should generate competitive returns over the near term.
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Thank you for your continued confidence in our investment management approach.
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
Heath B. McLendon John C. Bianchi, CFA
Chairman Vice President and
Investment Officer
July 31, 1999
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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. ("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 37. 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 SSBC Fund Management, Inc.,
formerly known as 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.
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Schedule of Investments
June 30, 1999 (unaudited)
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<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
CORPORATE BONDS AND NOTES -- 93.6%
Aerospace -- 0.9%
$ 565,000 B1* BE Aerospace Inc., Sr. Sub. Notes,
9.500% due 11/1/08 ................................................ $ 572,062
380,000 B- Dunlop Standard Aerospace Holdings,
Sr. Notes, 11.875% due 5/15/09+ ................................... 381,900
400,000 B- Fairchild Corp., Sr. Sub. Notes,
10.750% due 4/15/09+ .............................................. 394,000
------------
1,347,962
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Air Freight/Delivery Services -- 0.2%
250,000 BBB- Atlas Air, Inc., Sr. Notes, 8.770% due 1/2/11 ........................ 244,200
------------
Airlines -- 1.4%
1,745,000 BB Airplanes Pass-Through Trust, Corp.
Asset-Backed Securities, Series 1, Class D,
10.875% due 3/15/19 ............................................... 1,743,779
310,000 Ba2* Continental Airlines, Inc., Notes,
8.000% due 12/15/05 ............................................... 294,500
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2,038,279
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Aluminum -- 0.5%
Kaiser Aluminum & Chemical Corp., Sr. Sub. Notes:
600,000 B3* 12.750% due 2/1/03 ................................................ 609,000
140,000 B1* Series D, 10.875% due 10/15/06 .................................... 146,300
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755,300
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Automotive Aftermarket -- 0.6%
865,000 B1* Exide Corp., Sr. Notes, 10.000% due 4/15/05 .......................... 862,837
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Auto Parts: Original Equipment Manufacture -- 0.7%
805,000 B Collins & Aikman Products, Sr. Sub. Notes,
11.500% due 4/15/06 ............................................... 821,100
250,000 B Dura Operating Corp., Sr. Sub. Notes,
9.000% due 5/1/09+ ................................................ 241,250
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1,062,350
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Broadcasting -- 0.5%
130,000 B- Capstar Broadcasting Corp., Sr. Discount Notes,
step bond to yield 11.002% due 2/1/09 ............................. 109,200
65,000 B1* Chancellor Media Corp., Guaranteed Sr. Sub. Notes,
9.000% due 10/1/08 ................................................ 66,462
</TABLE>
See Notes to Financial Statements.
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Schedule of Investments (continued)
June 30, 1999 (unaudited)
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<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
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<C> <C> <S> <C>
Broadcasting -- 0.5% (continued)
Citadel Broadcasting Co.:
$ 400,000 B- Sr. Sub. Notes, 9.250% due 11/15/08 ............................... $ 413,000
200,000 B- Sr. Sub. Notes, 10.250% due 7/1/07 ................................ 216,000
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804,662
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Building Materials -- 0.3%
385,000 B Atrium Cos. Inc., Sr. Sub. Notes,
10.500% due 5/1/09+ ............................................... 379,225
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Building Materials Chains -- 0.4%
Building Materials Corp., Sr. Notes:
405,000 BB Series B, 8.000% due 12/1/08 ...................................... 379,688
250,000 BB Step bond to yield 10.015% due 7/1/04 ............................. 262,500
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642,188
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Building Products -- 1.5%
295,000 B Amatek Industries Pty. Ltd., Sr. Sub. Notes,
12.000% due 2/15/08+ .............................................. 281,725
350,000 B NCI Building Systems Inc., Sr. Sub. Notes,
9.250% due 5/1/09+ ................................................ 350,000
Nortek Inc., Sr. Notes:
125,000 B+ 8.875% due 8/1/08+ ................................................ 128,437
550,000 B+ Series B, 9.250% due 3/15/07 ...................................... 552,750
975,000 B+ Series B, 9.125% due 9/1/07 ....................................... 972,562
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2,285,474
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Cable Television -- 9.8%
CSC Holdings Inc., Sr. Sub. Debentures:
2,360,000 BB- 9.875% due 2/15/13 ................................................ 2,554,700
1,000,000 BB- 10.500% due 5/15/16 ............................................... 1,130,000
600,000 BB- Century Communications Corp., Sr. Notes,
8.750% due 10/1/07 ................................................ 595,500
Charter Communications Holdings LLC /
Charter Communications Capital Corp.:
915,000 B+ Sr. Discount Notes, step bond to yield 9.887%
due 4/1/11+ ................................................ 569,587
625,000 B+ Sr. Notes, 8.625% due 4/1/09+ ................................. 601,563
495,000GBP B- Diamond Holdings PLC, Guaranteed Notes,
10.000% due 2/1/08++ .............................................. 794,752
</TABLE>
See Notes to Financial Statements.
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Schedule of Investments (continued)
June 30, 1999 (unaudited)
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<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
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<C> <C> <S> <C>
Cable Television -- 9.8% (continued)
$ 760,000 B Echostar DBS Corp., Sr. Notes,
9.375% due 2/1/09+ ................................................ $ 777,100
NTL Inc., Sr. Notes:
200,000 B- 11.500% due 10/1/08 ............................................... 216,000
525,000 B- Step bond to yield 12.329% due 10/1/08+ ........................... 358,313
Rogers Cablesystems, Ltd.:
775,000 BB- Guaranteed Sr. Sub. Debentures,
11.000% due 12/1/15++ ............................................. 891,250
1,000,000 BB+ Sr. Secured 2nd Priority Debentures,
10.000% due 12/1/07++ ......................................... 1,080,000
Telewest Communications PLC:
1,250,000 B+ Sr. Notes, 11.250% due 11/1/08 .................................... 1,425,000
315,000GBP B+ Sr. Discount Notes, step bond to
yield 9.471 due 4/15/09++ ...................................... 332,677
4,670,000 B United International Holdings Inc., Sr. Discount
Notes, Series B, step bond to yield
11.284% due 2/15/08 ............................................... 3,105,550
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14,431,992
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Casinos/Gambling -- 2.1%
105,000 BB+ Circus Circus Enterprises Inc., Sr. Sub. Debentures,
7.625% due 7/15/13 ................................................ 92,925
120,000 BB+ Harrah's Operating Co. Inc., Guaranteed Sr. Sub. Notes,
7.875% due 12/15/05 ............................................... 116,400
565,000 B Harveys Casino Resorts, Guaranteed Sr. Sub. Notes,
10.625% due 6/1/06 ................................................ 584,775
530,000 B Hollywood Park, Inc., Sr. Sub. Notes,
9.250% due 2/15/07 ................................................ 524,700
635,000 B+ Horseshoe Gaming Holding, Sr. Sub. Notes,
8.625% due 5/15/09+ ............................................... 615,950
465,000 B Isle of Capri Casinos, Sr. Sub. Notes,
8.750% due 4/15/09+ ............................................... 437,100
Station Casinos, Inc., Sr. Sub. Notes:
195,000 B+ 10.125% due 3/15/06 ............................................... 202,312
500,000 B+ 8.875% due 12/1/08+ 490,000
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3,064,162
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Chemicals - Major -- 0.5%
Huntsman Corp., Sr. Sub. Notes:
380,000 B2* 9.500% due 7/1/07+ ................................................ 364,800
390,000 B+ 10.125% due 7/1/09+ ............................................... 391,950
------------
756,750
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</TABLE>
See Notes to Financial Statements.
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Schedule of Investments (continued)
June 30, 1999 (unaudited)
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<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Chemicals - Specialty -- 0.7%
Lyondell Chemical Co., Sr. Secured Notes:
$ 320,000 BB 9.625% due 5/1/07+ ................................................ $ 328,800
640,000 BB 9.875% due 5/1/07+ ................................................ 652,800
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981,600
------------
Coal Mining -- 0.6%
960,000 B AEI Resources Inc., Guaranteed Notes,
10.500% due 12/15/05+ ............................................. 940,800
------------
Construction/AG Equipment/Trucks -- 0.2%
275,000 B Columbus McKinnon Corp., Guaranteed Sr. Sub. Notes,
8.500% due 4/1/08 ................................................. 268,125
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Contract Drilling -- 1.2%
Pride International Inc., Sr. Notes:
65,000 BB 9.375% due 5/1/07 ................................................. 64,675
590,000 BB 10.000% due 6/1/09 ................................................ 600,325
515,000 Ba3* R&B Falcon Corp., Sr. Notes, 12.250% due 3/15/06+ .................... 527,231
555,000 BB- RBF Finance Corp., Guaranteed Sr. Notes,
11.375% due 3/15/09+ .............................................. 574,425
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1,766,656
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Containers/Packaging -- 3.4%
745,000 B AEP Industries Inc., Sr. Sub. Notes,
9.875% due 11/15/07 ............................................... 746,862
195,000 B Consolidated Container Co. LLC, Sr. Sub. Notes,
10.125% due 7/15/09+ .............................................. 196,950
575,000 B Huntsman Packaging Corp., Guaranteed Sr. Sub. Notes,
9.125% due 10/1/07 ................................................ 569,250
1,000,000DEM B Impress Metal Packaging Holdings, Sr. Sub. Notes,
9.875% due 5/29/07++ .............................................. 583,940
410,000 B Packaging Corp. of America, Sr. Sub. Notes,
9.625% due 4/1/09+ ................................................ 414,100
1,075,000 B Stone Container Finance Corp., Guaranteed Sr. Notes,
11.500% due 8/15/06+ .............................................. 1,161,000
Tekni-Plex Inc.:
260,000 B- Guaranteed Sr. Sub. Notes, Series B,
9.250% due 3/1/08 ............................................. 252,200
1,000,000 B- Sr. Sub. Notes, Series B, 11.250% due 4/1/07 ...................... 1,062,500
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4,986,802
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</TABLE>
See Notes to Financial Statements.
9
<PAGE>
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Schedule of Investments (continued)
June 30, 1999 (unaudited)
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<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Discount Stores -- 1.2%
$ 800,000 B+ Ames Department Stores, Sr. Notes,
10.000% due 4/15/06+ .............................................. $ 784,000
445,000 BB+ DR Structured Finance Securitized Lease Trust,
Pass-Through Certificates, Series A-2,
8.375% due 8/15/15 ................................................ 436,808
490,000 BB+ Kmart Corp., Debentures, 12.500% due 3/1/05 .......................... 596,575
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1,817,383
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Diversified Commercial Services -- 1.3%
675,000 BB- Cia. Latino Americana de Infraestructura & Servicos S.A.,
Guaranteed Sr. Notes, 11.625% due 6/1/04+ ......................... 401,625
1,000,000 B2* Intertek Finance PLC., Guaranteed Sr. Sub. Notes, Series B,
10.250% due 11/1/06 ............................................... 976,250
500,000 B- Outsourcing Solutions Inc., Sr. Sub. Notes,
11.000% due 11/1/06 ............................................... 490,000
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1,867,875
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Diversified Financial Services -- 0.4%
Amresco Inc., Sr. Sub. Notes, Series A:
600,000 CCC+ 10.000% due 3/15/04 ............................................... 498,000
135,000 CCC+ 9.875% due 3/15/05 ................................................ 109,687
------------
607,687
------------
Diversified Manufacturing -- 0.5%
700,000 B+ Park-Ohio Industries, Inc., Sr. Sub. Notes,
9.250% due 12/1/07 ................................................ 694,750
------------
Drugs - Generic -- 1.2%
1,800,000 BB ICN Pharmaceuticals Inc., Sr. Notes, Series B,
9.250% due 8/15/05 ................................................ 1,809,000
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Electronic Components -- 1.1%
725,000 B+ Celestica International Inc., Sr. Sub. Notes,
10.500% due 12/31/06 .............................................. 784,812
910,000 B- Viasystems Inc., Sr. Sub. Notes, 9.750% due 6/1/07 ................... 798,525
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1,583,337
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Electronic Data Processing -- 2.8%
Unisys Corp., Sr. Notes:
1,350,000 BB- Series B, 12.000% due 4/15/03 ..................................... 1,474,875
2,325,000 BB- 11.750% due 10/15/04 .............................................. 2,598,188
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4,073,063
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</TABLE>
See Notes to Financial Statements.
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Schedule of Investments (continued)
June 30, 1999 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Engineering & Construction -- 0.9%
$ 420,000 B- American Plumbing & Mechanic, Sr. Sub. Notes,
11.625% due 10/15/08+ ............................................. $ 405,300
580,000 B Group Maintenance America Corp., Sr. Sub. Notes,
9.750% due 1/15/09+ ............................................... 574,200
255,000 B+ Integrated Electrical Services, Sr. Sub. Notes,
9.375% due 2/1/09+ ................................................ 251,175
100,000 B Metromedia Fiber Network, Sr. Notes,
10.000% due 11/15/08 .............................................. 103,000
------------
1,333,675
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Environmental Services -- 0.5%
315,000 B+ IT Group Inc., Sr. Sub. Notes, 11.250% due 4/1/09+ ................... 303,187
490,000 B+ URS Corp., Sr. Sub. Notes, 12.250% due 5/1/09+ ....................... 491,225
------------
794,412
------------
Food Distributors -- 1.9%
1,000,000 B2* Carrols Corp., Sr. Sub. Notes, 9.500% due 12/1/08 .................... 957,500
1,325,000 B Imperial Holly Corp., Guaranteed Sr. Sub. Notes,
9.750% due 12/15/07 ............................................... 1,311,750
400,000 B- Purina Mills Inc., Sr. Sub. Notes, 9.000% due 3/15/10 ................ 316,000
155,000 B SC International Services Inc., Guaranteed Sr. Sub. Notes,
Series B, 9.250% due 9/1/07 ....................................... 158,487
------------
2,743,737
------------
Foods - Specialty/Candy -- 0.9%
850,000 B- B&G Foods Inc., Guaranteed Sr. Sub. Notes,
9.625% due 8/1/07 ................................................. 799,000
570,000 B+ Chiquita Brands International Inc., Sr. Notes,
10.000% due 6/15/09 ............................................... 571,425
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1,370,425
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Forest Products -- 0.5%
660,000 B Ainsworth Lumber Co. Ltd., Sr. Notes,
12.500% due 7/15/07 ............................................... 735,900
------------
Homebuilding -- 0.8%
650,000 Ba1* D.R. Horton Inc., Guaranteed Sr. Notes,
8.000% due 2/1/09 ................................................. 614,250
660,000 BB- U.S. Home Corp., Sr. Sub. Notes, 8.875% due 2/15/09 .................. 627,000
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1,241,250
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</TABLE>
See Notes to Financial Statements.
11
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Schedule of Investments (continued)
June 30, 1999 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Home Furnishings -- 0.3%
$ 405,000 B Falcon Products Inc., Sr. Sub. Notes,
11.375% due 6/15/09+ .............................................. $ 407,025
100,000 B- Simmons Co., Sr. Sub. Notes, 10.250% due 3/15/09+ .................... 102,000
------------
509,025
------------
Hospital/Nursing Management -- 1.6%
1,090,000 Ba3* Fresenius Medical Care Capital Trust I, Trust Preferred
Securities, 9.000% due 12/1/06 .................................... 1,079,100
1,495,000 B- Magellan Health Services, Inc., Sr. Sub. Notes,
9.000% due 2/15/08 ................................................ 1,278,225
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2,357,325
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Hotel/Resort -- 3.7%
3,000,000 B- Courtyard By Marriott II LP/ Courtyard Finance Co.,
Sr. Secured Notes, Series B, 10.750% due 2/1/08 ................... 3,067,500
HMH Properties, Inc.:
995,000 BB Guaranteed Sr. Notes, Series B, 7.875% due 8/1/08 ................. 915,400
950,000 BB Sr. Notes, Series C, 8.450% due 12/1/08 ........................... 902,500
Intrawest Corp., Sr. Notes:
515,000 B+ 9.750% due 8/15/08 ................................................ 522,725
------------
5,408,125
------------
Insurance - Multi-Line -- 0.9%
1,000,000 BB+ SIG Capital Trust I, Guaranteed Trust Preferred Securities,
9.500% due 8/15/27++ .............................................. 750,000
650,000 B Veritas Capital Trust, Guaranteed Trust Preferred Securities,
10.000% due 1/1/28 ................................................ 520,000
------------
1,270,000
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Internet Services -- 2.3%
PSINet Inc., Sr. Notes:
200,000 B- Series B, 10.000% due 2/15/05 ..................................... 200,500
355,000 B- 11.500% due 11/1/08 ............................................... 372,750
1,625,000 NR Splitrock Services, Inc., Guaranteed Sr. Notes,
11.750% due 7/15/08 ............................................... 1,531,563
Verio Inc., Sr. Notes:
360,000 B- 10.375% due 4/1/05 ................................................ 364,500
380,000 B- 11.250% due 12/1/08 ............................................... 399,000
850,000 CCC+ WAM!NET Inc., Guaranteed Sr. Discount Notes, Series B,
step bond to yield 13.327% due 3/1/05 ............................. 518,500
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3,386,813
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</TABLE>
See Notes to Financial Statements.
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Schedule of Investments (continued)
June 30, 1999 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Leisure/Movies/Entertainment -- 1.4%
$ 590,000 B Regal Cinemas, Inc., Sr. Sub. Notes, 9.500% due 6/1/08 ............... $ 553,125
1,500,000 B- SFX Entertainment, Inc., Sr. Sub. Notes, Series B,
9.125% due 2/1/08 ................................................. 1,470,000
------------
2,023,125
------------
Machinery - Industrial/Components -- 0.4%
518,000 B- Alvey Systems Inc., Sr. Sub. Notes,
11.375% due 1/31/03 ............................................... 521,885
------------
Media Conglomerates -- 1.0%
975,000GBP B Polestar Corp. PLC, Sr. Notes, Series B,
10.500% due 5/30/08++ ............................................. 1,521,516
------------
Medical Specialties -- 0.3%
390,000 B- Hanger Orthopedic Group, Sr. Sub. Notes,
11.250% due 6/15/09+ .............................................. 394,875
------------
Metal/Minerals - Other -- 0.3%
400,000 B- Haynes International, Inc., Sr. Notes,
11.625% due 9/1/04 ................................................ 378,000
------------
Miscellaneous -- 0.3%
390,000 B- Key Plastics Inc., Series B, Sr. Sub. Notes,
10.250% due 3/15/07 ............................................... 382,200
------------
Multi-Sector Companies -- 0.4%
535,000 B- Triarc Consumer Beverage, Sr. Sub. Notes,
10.250% due 2/15/09+ .............................................. 517,613
------------
Newspapers -- 0.1%
225,000 B+ Garden State Newspapers, Sr. Sub. Notes,
8.625% due 7/1/11+ ................................................ 211,500
------------
Oil & Gas Production -- 5.2%
Belco Oil & Gas Corp., Sr. Sub. Notes:
600,000 B1* 8.875% due 9/15/07 ................................................ 582,000
250,000 B1* 10.500% due 4/1/06 ................................................ 254,375
500,000 B Canadian Forest Oil Ltd., Guaranteed Sr. Sub. Notes,
8.750% due 9/15/07 ................................................ 480,000
1,300,000 B+ Clark USA Inc., Sr. Notes, Series B, 10.875% due 12/1/05 ............. 1,113,125
95,000 B+ Nuevo Energy Co., Sr. Sub. Notes,
9.500% due 4/15/06 ................................................ 94,525
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
[LOGO]
Schedule of Investments (continued)
June 30, 1999 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Oil & Gas Production -- 5.2% (continued)
Ocean Energy Inc.:
$ 900,000 BB- Guaranteed Sr. Sub. Debentures, 9.750% due 10/1/06 ................ $ 928,125
2,550,000 BB- Guaranteed Sr. Sub. Notes, 10.375% due 10/15/05 ................... 2,690,250
795,000 B+ Parker Drilling Co., Sr. Notes,
9.750% due 11/15/06 ............................................... 739,350
700,000 B2* Stone Energy Corp., Guaranteed Sr. Sub. Notes,
8.750% due 9/15/07 ................................................ 679,000
------------
7,560,750
------------
Oil & Gas Transmission -- 0.4%
540,000 BB- Leviathan Gas Pipeline Finance Corp., Sr. Sub. Notes,
10.375% due 6/1/09+ ............................................... 556,200
------------
Package Goods/Service -- 0.1%
125,000 B- Revlon Consumer Products Corp., Sr. Sub. Notes,
8.625% due 2/1/08 ................................................. 116,875
------------
Paper -- 3.0%
750,000 BB+ Malette Inc., Sr. Secured Notes, 12.250% due 7/15/04 ................. 797,812
1,050,000 CCC+ Repap New Brunswick, Sr. Secured Notes,
10.625% due 4/15/05 ............................................... 842,625
Riverwood International Corp.:
515,000 B- Guaranteed Sr. Notes, 10.625% due 8/1/07 .......................... 527,875
1,000,000 CCC+ Guaranteed Sr. Sub. Notes, 10.875% due 4/1/08 ..................... 972,500
Tembec Industries Inc., Sr. Notes:
715,000 BB+ 9.875% due 9/30/05 ................................................ 743,600
445,000 BB+ 8.625% due 6/30/09 ................................................ 443,887
------------
4,328,299
------------
Pharmaceuticals - Other -- 0.2%
350,000 B King Pharmaceutical Inc, Sr. Sub. Notes,
10.750% due 2/15/09 ............................................... 362,250
------------
Photographic Products -- 0.3%
430,000 BB- Polaroid Corp., Sr. Notes, 11.500% due 2/15/06 ....................... 451,500
------------
Printing/Forms -- 0.2%
230,000 B Cadmus Communications Corp., Sr. Sub. Notes,
9.750% due 6/1/09+ ................................................ 230,862
45,000 BB- World Color Press Inc., Sr. Sub. Notes,
7.750% due 2/15/09 ................................................ 41,625
------------
272,487
------------
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
[LOGO]
Schedule of Investments (continued)
June 30, 1999 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Real Estate Investment Trusts -- 1.0%
$ 1,280,000 Baa3* Trizec Finance Ltd., Guaranteed Sr. Notes,
10.875% due 10/15/05 .............................................. $ 1,395,200
------------
Recreational Products/Toys -- 0.5%
695,000 BB+ International Game Technology, Sr. Notes,
7.875% due 5/15/04+ ............................................... 682,837
------------
Rental/Leasing Companies -- 1.1%
690,000 BB- Avis Rent A Car Inc., Sr. Sub. Notes,
11.000% due 5/1/09+ ............................................... 692,587
270,000 B Nationsrent, Inc., Guaranteed Sr. Sub. Notes,
10.375% due 12/15/08 .............................................. 267,975
625,000 BB- United Rentals Inc., Sr. Sub. Notes
9.25% due 1/15/09 ................................................. 621,875
------------
1,582,437
------------
Restaurants -- 0.6%
850,000 B Advantica Restaurant Group, Sr. Notes,
11.250% due 1/15/08 ............................................... 813,875
------------
Retail Food Chains -- 0.2%
350,000 CCC+ Pathmark Stores, Inc., Sub. Notes, 12.625% due 6/15/02 ............... 359,187
------------
Retail - Other Specialty Stores -- 0.7%
1,000,000 B- Advance Stores Co., Inc., Guaranteed Sr. Sub. Notes,
Series B, 10.250% due 4/15/08 ..................................... 962,500
------------
Savings & Loan Associations -- 2.3%
1,000,000 B2* Ocwen Capital Trust I, Guaranteed Capital Securities,
10.875% due 8/1/27 ................................................ 785,000
2,750,000 BB- Ocwen Financial Corp., Notes, 11.875% due 10/1/03 .................... 2,653,750
------------
3,438,750
------------
Semiconductors -- 0.8%
1,240,000 B Fairchild Semiconductor Inc., Sr. Sub. Notes,
10.125% due 3/15/07 ............................................... 1,221,400
------------
Steel/Iron Ore -- 1.5%
400,000 Ba3* National Steel Corp., First Mortgage Notes,
9.875% due 3/1/09 ................................................. 407,000
660,000 B+ Russel Metals Inc., Sr. Notes,
10.000% due 6/1/09 ................................................ 663,300
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
[LOGO]
Schedule of Investments (continued)
June 30, 1999 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Steel/Iron Ore -- 1.5% (continued)
$ 780,000 B+ WCI Steel Inc., Sr. Notes, 10.000% due 12/1/04 ....................... $ 795,600
385,000 B WHX Corp., Sr. Notes, 10.500% due 4/15/05 ............................ 365,750
------------
2,231,650
------------
Telecommunications - Other -- 12.7%
250,000GBP B1* COLT Telecommunications Group PLC,
Sr. Notes, 10.125% due 11/30/07++ ................................. 401,955
2,325,000 NR E.Spire Communications, Inc., Sr. Discount Notes,
step bond to yield 11.205% due 7/1/08 ............................. 860,250
Esprit Telecom Group PLC, Sr. Notes:
700,000 B- 11.500% due 12/15/07 .............................................. 740,250
600,000DEM B- 11.500% due 12/15/07++ ............................................ 342,455
400,000 B- 10.875% due 6/15/08+ .............................................. 410,000
1,200,000 NR FaciliCom International, Inc., Sr. Notes, Series B,
10.500% due 1/15/08 ............................................... 930,000
Hermes Europe Railtel B.V., Sr. Notes:
1,000,000 B 11.500% due 8/15/07 ............................................... 1,050,000
300,000 B 10.375% due 1/15/09 ............................................... 304,500
Intermedia Communications Co.:
1,075,000 B Sr. Discount Notes, step bond to
yield 11.887% due 5/15/06 ..................................... 889,563
445,000 B Sr. Discount Notes, step bond to
yield 11.208% due 7/15/07 ..................................... 318,175
530,000 B Sr. Notes, 9.500% due 3/1/09 ...................................... 514,100
160,000 B Sr. Notes, Series B, 8.500% due 1/15/08 ........................... 146,800
240,000 B Sr. Notes, Series B, 8.600% due 6/1/08 ............................ 223,200
380,000 B3* IXC Communications Inc., Sr. Sub. Notes,
9.000% due 4/15/08 ................................................ 362,900
830,000 B- KMC Telecom Holdings Inc., Sr. Notes,
13.500% due 5/15/09+ .............................................. 831,037
1,565,000 B Level 3 Communications, step bond to
yield 11.077% due 12/1/08 ......................................... 966,388
MetroNet Communications Corp.:
1,530,000 B Sr. Discount Notes, step bond to yield
10.455% due 6/15/08 ........................................... 1,139,850
1,650,000 B Sr. Notes, 12.000% due 8/15/07 .................................... 1,901,625
455,000 B Sr. Notes, 10.625% due 11/1/08+ ................................... 511,875
345,000 B- Microcell Telecommunications, Sr. Discount Notes,
step bond to yield 11.944% due 6/1/09+ ............................ 195,788
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
[LOGO]
Schedule of Investments (continued)
June 30, 1999 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Telecommunications - Other -- 12.7% (continued)
NEXTLINK Communications, L.L.C./NEXTLINK
Capital, Inc.:
$ 1,325,000 B Sr. Discount Notes, step bond to
yield 12.050% due 6/1/09 ................................... $ 775,125
440,000 B Sr. Notes, 12.500% due 4/15/06 ................................ 484,000
825,000 B Sr. Notes, 10.750% due 6/1/09 ................................. 847,687
810,000 BB- Orange PLC, Sr. Notes, 9.000% due 6/1/09+ ............................ 812,025
530,000 B3* RCN Corp., Sr. Notes, 10.000% due 10/15/07 ........................... 535,300
Tele1 Europe B.V., Sr. Notes:
320,000 B- 13.000% due 5/15/09+ .............................................. 333,600
325,000ECU B- 13.000% due 5/15/09 ............................................... 348,579
265,000 NR VersaTel Telecom International N.V., Sr. Notes,
13.250% due 5/15/08 ............................................... 275,600
Viatel Inc., Sr. Notes:
675,000 B3* 11.250% due 4/15/08 ............................................... 680,063
400,000 B- 11.500% due 3/15/09+ .............................................. 415,000
------------
18,547,690
------------
Telephone - Cellular -- 4.7%
700,000 CCC+ Centennial Cellular Corp., Sr. Sub. Notes,
10.750% due 12/15/08+ ............................................. 724,500
1,140,000 B3* Clearnet Communications Inc., Sr. Discount Notes,
step bond to yield 12.728% due 12/15/05 ........................... 1,037,400
Crown Castle International Corp.:
220,000 B Sr. Notes, 9.000% due 5/15/11 ..................................... 216,150
865,000 B Sr. Discount Notes, step bond to
yield 10.850% due 5/15/11 ..................................... 506,025
1,600,000 CCC+ Dolphin Telecom PLC, Sr. Discount Notes,
step bond to yield 11.416% due 6/1/08 ............................. 800,000
1,600,000 B- Millicom International Cellular S.A., Sr. Discount
Notes, step bond to yield 15.966% due 6/1/06 ...................... 1,184,000
Nextel Communications, Inc.:
585,000 B2* Sr. Redeemable Discount Notes, step bond to yield
10.943% due 9/15/07 ........................................... 428,513
915,000 B2* Sr. Serial Redeemable Discount Notes, step bond to yield
10.724% due 2/15/08 ........................................... 633,638
680,000 NR Spectrasite Holdings Inc., Sr. Discount Notes,
step bond to yield 11.250% due 4/15/09+ ........................... 387,600
325,000 B3* Telecorp PCS Inc., Sr. Discount Notes,
step bond to yield 12.619% due 4/15/09+ ........................... 182,000
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
[LOGO]
Schedule of Investments (continued)
June 30, 1999 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Telephone - Cellular -- 4.7% (continued)
Telesystems International Wireless Inc.,
Sr. Discount Notes:
$ 160,000 CCC+ Series B, step bond to yield 11.520% due 6/30/07 .................. $ 84,800
715,000 CCC+ Series C, step bond to yield 11.011% due 11/1/07 .................. 321,750
605,000 B3* Triton PCS Inc., Sr. Discount Notes,
step bond to yield 11.766% due 5/1/08 ............................. 391,738
------------
6,898,114
------------
Textiles -- 0.3%
800,000DEM B Texon International PLC, Sr. Notes,
10.000% due 2/1/08++ .............................................. 377,518
------------
Transportation - 1.3%
320,000 B- Oglebay Norton Co., Sr. Sub. Notes, 10.000% due 2/1/09 ............... 308,800
1,030,000 BB- Sea Containers Ltd., Sr. Sub. Debentures, Series A,
12.500% due 12/1/04 ............................................... 1,111,113
705,000 B Stena Line AB, Sr. Notes, 10.625% due 6/1/08 ......................... 528,750
------------
1,948,663
------------
Unregulated Power Generation -- 3.9%
AES Corp., Sr. Sub. Notes:
1,415,000 Ba1* 10.250% due 7/15/06 ............................................... 1,450,375
35,000 Ba3* 8.500% due 11/1/07 ................................................ 32,813
1,715,000 Ba1* 9.500% due 6/1/09 ................................................. 1,766,450
495,000 BB Caithness Coso Fund Corp., Sr. Notes,
9.050% due 12/15/09+ .............................................. 486,338
Calpine Corp., Sr. Notes:
1,350,000 BB 10.500% due 5/15/06 ............................................... 1,458,000
475,000 BB 8.750% due 7/15/07 ................................................ 478,562
------------
5,672,538
------------
Wholesale Distributors -- 0.1%
160,000 B- Fisher Scientific International Inc., Sr. Sub. Notes,
9.000% due 2/1/08 ................................................. 152,000
------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $140,169,896) ............................................... 137,106,580
------------
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
[LOGO]
Schedule of Investments (continued)
June 30, 1999 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Shares Rating(a) Security Value
- ----------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
PREFERRED STOCK -- 0.7%
Savings & Loan Associations -- 0.4%
20,100 California Federal Preferred Capital Corp.,
9.125% Noncumulative Exchangeable, Series A ....................... 525,113
------------
Telephone - Cellular -- 0.3%
5,000 Dobson Communications, 13.000% Exchangeable#.......................... 505,000
------------
TOTAL PREFERRED STOCK
(Cost -- $1,002,500) ................................................. 1,030,113
------------
WARRANTS# -- 1.0%
Broadcasting -- 0.0%
2,450 UIH Australia Pacific, Inc., Expire 5/15/06 .......................... 4,900
------------
Internet Services -- 0.1%
1,625 Splitrock Services, Inc., Expire 7/15/08 ............................. 113,750
2,550 WAM!NET Inc., Expire 3/1/05 .......................................... 58,013
------------
171,763
------------
Telecommunications - Other -- 0.9%
1,750 Allegiance Telecom, Inc., Expire 2/3/08 .............................. 71,750
2,000 COLT Telecommunications Group PLC, Expire 12/31/06+ .................. 1,160,000
7,130 Pagemart, Inc., Expire 12/31/03 ...................................... 14,260
1,300 RSL Communications, Ltd., Expire 11/15/06 ............................ 50,700
265 Versatel Telecommunications, Expire 5/15/08+ ......................... 13,250
------------
1,309,960
------------
Telephone - Cellular -- 0.0%
1,000 Globalstar Telecommunications Ltd., Expire 2/15/04+ .................. 55,000
1,000 Iridium World Communications Ltd., Expire 7/15/05+ ................... 100
------------
55,100
------------
TOTAL WARRANTS
(Cost -- $337,477) ................................................... 1,541,723
------------
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
[LOGO]
Schedule of Investments (continued)
June 30, 1999 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Face
Amount Security Value
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT -- 4.7%
$ 6,873,000 Morgan Stanley, Dean Witter & Co., 4.800% due 7/1/99;
Proceeds at maturity -- $6,873,916; (Fully collateralized by
FNMA Notes and U.S. Treasury Bills, Bonds, and Notes,
0.000% to 7.750% due 7/31/99 to 11/15/27;
Market value -- $6,991,373) (Cost -- $6,873,000 ) .................... $ 6,873,000
------------
TOTAL INVESTMENTS -- 100%
(Cost -- $148,382,873** ) ............................................ $146,551,416
============
</TABLE>
(a) All ratings are by Standard & Poor's Ratings Service ("Standard &
Poor's"), except those identified by an asterisk (*) which are rated by
Moody's Investors Service Inc. ("Moody's").
+ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
++ Security segregated by Custodian for open purchase commitments.
# Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
Currency Abbreviations:
-----------------------
DEM -- German Mark
GBP -- British Pound
ECU -- European Currency Unit
See page 21 for definition of ratings.
See Notes to Financial Statements.
20
<PAGE>
[LOGO]
Bond Ratings (unaudited)
================================================================================
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings 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.
21
<PAGE>
[LOGO]
Statement of Assets and Liabilities
June 30, 1999 (unaudited)
================================================================================
ASSETS:
Investments, at value (Cost -- $148,382,873) .............. $ 146,551,416
Cash ...................................................... 689
Interest and dividends receivable ......................... 2,965,542
Receivables for open forward foreign
currency contracts (Note 11) ........................... 117,353
Receivables for securities sold ........................... 762,089
-------------
Total Assets .............................................. 150,397,089
-------------
LIABILITIES:
Bank loan (Note 7) ........................................ 30,000,000
Payable for securities purchased .......................... 195,000
Interest payable .......................................... 139,259
Investment advisory fees payable .......................... 98,933
Administration fees payable ............................... 39,049
Accrued expenses .......................................... 103,554
-------------
Total Liabilities ......................................... 30,575,795
-------------
Total Net Assets ............................................. $ 119,821,294
=============
NET ASSETS:
Par value of capital shares ............................... $ 158,083
Capital paid in excess of par value ....................... 116,248,570
7.00% Cumulative Preferred Stock (Note 6) ................. 30,000,000
Overdistributed net investment income ..................... (708,166)
Accumulated net realized loss on security transactions .... (24,161,333)
Net unrealized depreciation on investments and
foreign currencies ..................................... (1,715,860)
-------------
Total Net Assets ............................................. $ 119,821,294
=============
NET ASSET VALUE, COMPRISED OF: Per Share
---------
7.00% Cumulative Preferred Stock redemption value ... $1,000.00 $ 30,000,000
Cumulative undeclared dividends on 7.00%
Preferred Stock .................................. 3.16 94,925
--------- ------------
Total allocated to Cumulative Preferred Stock ....... $1,003.16 30,094,925
========= ------------
Common Stock (15,808,271 shares outstanding) ........ $ 5.68 89,726,369
========= ------------
Total Net Assets .................................... $119,821,294
============
See Notes to Financial Statements.
22
<PAGE>
[LOGO]
Statement of Operations
For the Three Months Ended
June 30, 1999 (unaudited)
================================================================================
INVESTMENT INCOME:
Interest .................................................... $ 3,725,658
Dividends ................................................... 35,988
Less: Interest expense (Note 7) ............................. (409,475)
-----------
Total Investment Income ..................................... 3,352,171
-----------
EXPENSES:
Investment advisory fees (Note 2) ........................... 190,694
Administration fees (Note 2) ................................ 76,277
Shareholder communications .................................. 42,612
Audit and legal ............................................. 21,637
Directors' fees ............................................. 8,708
Pricing ..................................................... 7,250
Shareholder and system servicing fees ....................... 5,622
Custody ..................................................... 2,906
Other ....................................................... 9,386
-----------
Total Expenses .............................................. 365,092
-----------
Net Investment Income .......................................... 2,987,079
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 11):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) .. (5,306,648)
Foreign currency transactions ............................ 27,970
-----------
Net Realized Loss ........................................... (5,278,678)
-----------
Change in Net Unrealized Appreciation (Depreciation) of
Investments and Foreign Currencies:
Beginning of period ...................................... (2,628,669)
End of period ............................................ (1,715,860)
-----------
Decrease in Net Unrealized Depreciation ..................... 912,809
-----------
Net Loss on Investments ........................................ (4,365,869)
-----------
Decrease in Net Assets From Operations ......................... $(1,378,790)
===========
See Notes to Financial Statements.
23
<PAGE>
[LOGO]
Statements of Changes in Net Assets
For the Three Months Ended
June 30, 1999 (unaudited)
and the Year Ended March 31
================================================================================
June 30 March 31
------------- -------------
OPERATIONS:
Net investment income ..................... $ 2,987,079 $ 12,708,330
Net realized loss ......................... (5,278,678) (3,046,114)
(Increase) decrease in net unrealized
depreciation ........................... 912,809 (12,054,283)
------------- -------------
Decrease in Net Assets
From Operations ......................... (1,378,790) (2,392,067)
------------- -------------
DISTRIBUTIONS PAID TO:
7.00% Cumulative Preferred Stock
Shareholders From Net Investment
Income ................................. (1,050,000) (2,100,000)
Common Stock Shareholders From Net
Investment Income ...................... (2,610,342) (10,597,803)
Common Stock Shareholders From Capital .... -- (331,100)
------------- -------------
Decrease In Net Assets From
Distributions To Shareholders .......... (3,660,342) (13,028,903)
------------- -------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net asset value of shares issued for
reinvestment of dividends .............. 678,228 3,120,769
------------- -------------
Increase in Net Assets From
Fund Share Transactions ................ 678,228 3,120,769
------------- -------------
Decrease in Net Assets ....................... (4,360,904) (12,300,201)
NET ASSETS:
Beginning of period ....................... 124,182,198 136,482,399
------------- -------------
End of period* ............................ $ 119,821,294 $ 124,182,198
============= =============
* Includes overdistributed
net investment income of: ................. $(708,166) $(62,873)
============= =============
See Notes to Financial Statements.
24
<PAGE>
[LOGO]
Statement of Cash Flows
For the Three Months Ended
June 30, 1999 (unaudited)
================================================================================
<TABLE>
<CAPTION>
<S> <C> <C>
NET INCREASE IN CASH:
Cash Flows Provided by Operating
and Investing Activities:
Interest and dividends received .................... $ 3,590,767
Operating expenses paid ............................ (456,615)
Interest payments on bank loans .................... (403,063)
Purchases of short-term securities, net ............ (132,000)
Purchases of long-term securities .................. (39,971,976)
Proceeds from disposition of long-term securities .. 40,355,302
------------
Net Cash Provided By Operating
and Investing Activities ......................... $ 2,982,415
------------
Cash Flows From Financing Activities:
Cash dividends paid on 7.00% Cumulative
Preferred Stock .................................. (1,050,000)
Cash dividends paid on Common Stock* ............... (1,932,114)
------------
Net Cash Used By Financing Activities .............. (2,982,114)
------------
Net Increase in Cash .................................. 301
Cash--Beginning of period ............................. 388
------------
Cash--End of period ................................... $ 689
============
RECONCILIATION OF DECREASE IN NET ASSETS
FROM OPERATIONS TO NET CASH PROVIDED
BY OPERATING AND INVESTING ACTIVITIES:
Decrease in Net Assets From Operations ................ $ (1,378,790)
Amortization of discount on securities ............. (575,735)
Decrease in investments ............................ 6,729,526
Increase in receivable for securities sold ......... (139,377)
Decrease in payable for securities purchased ....... (1,817,109)
Decrease in dividends and interest receivable ...... 321,760
Increase in receivable for open forward foreign
currency contracts ............................... (72,749)
Decrease in accrued expenses ....................... (85,111)
------------
Total Adjustments .................................. 4,361,205
------------
Net Cash Provided By Operating and Investing Activities $ 2,982,415
============
</TABLE>
* Exclusive of dividend reinvestment of $678,228.
See Notes to Financial Statements.
25
<PAGE>
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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, payable semi-
26
<PAGE>
[LOGO]
Notes to Financial Statements
(unaudited) (continued)
================================================================================
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, 1999,
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
losses amounting to $14,406,719 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
SSBC Fund Management Inc. ("SSBC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), acts as investment adviser to the Fund. The Fund pays
SSBC 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
27
<PAGE>
[LOGO]
Notes to Financial Statements
(unaudited) (continued)
================================================================================
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.
SSBC 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 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.
All officers and one Director of the Fund are employees of Salomon Smith
Barney Inc., another subsidiary of SSBH.
3. Investments
During the three months ended June 30, 1999, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $38,154,867
- --------------------------------------------------------------------------------
Sales 40,494,679
================================================================================
At June 30, 1999, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 3,354,276
Gross unrealized depreciation (5,185,733)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(1,831,457)
================================================================================
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.
28
<PAGE>
[LOGO]
Notes to Financial Statements
(unaudited) (continued)
================================================================================
5. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
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 June 30,
1999, 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 $94,925 at June 30, 1999.
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 $35,000,000 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, 2000.
For the three months ended June 30, 1999, interest expense related to the
loan totalled $409,475 the average dollar amount of the borrowing was
$30,000,000 and the average interest rate was 5.40%.
29
<PAGE>
[LOGO]
Notes to Financial Statements
(unaudited) (continued)
================================================================================
8. Common Stock
At June 30, 1999, 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:
Three Months Ended Year Ended
June 30, 1999 March 31, 1999
--------------------- ---------------------
Shares Amount Shares Amount
================================================================================
Shares issued on
reinvestment 118,137 $ 678,228 488,015 $3,120,769
================================================================================
9. Capital Loss Carryforward
At June 30, 1999, the Fund had, for Federal income tax purposes, capital
loss carryforwards of approximately $17,263,000 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:
2000 2003 2004 2007
================================================================================
Carryforward Amounts $8,395,000 $4,873,000 $2,291,000 $1,704,000
================================================================================
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.
30
<PAGE>
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Notes to Financial Statements
(unaudited) (continued)
================================================================================
11. Forward Foreign Currency Contracts
At June 30, 1999, 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:
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain
================================================================================
To Sell:
British Pound 2,037,952 3,217,785 9/22/99 $ 87,646
European Currency Unit 1,663,076 1,729,237 9/15/99 29,707
- --------------------------------------------------------------------------------
Total Unrealized Gain on Open Forward
Foreign Currency Contracts $117,353
================================================================================
31
<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>
1999(1) 1999 1998
------- ------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ......... $5.96 $6.96 $6.45
------- ------- --------
Income (Loss) From Operations:
Net investment income ..................... 0.19 0.82 0.87
Net realized and unrealized gain (loss) ... (0.28) (0.97) 0.56
------- ------- --------
Total Income (Loss) From Operations ....... (0.09) (0.15) 1.43
------- ------- --------
Distributions Paid To:
7.00% Cumulative Preferred Stock
Shareholders From Net Investment Income (0.06) (0.14) (0.14)
Common Stock Shareholders From Net
Investment Income ...................... (0.17) (0.69) (0.78)
Common Stock Shareholders From Capital .... -- (0.02) --
Change in accumulated undeclared dividends
on Preferred Stock ..................... 0.04 -- --
------- ------- --------
Total Distributions ....................... (0.19) (0.85) (0.92)
------- ------- --------
Net Asset Value, End of Period ............... $5.68 $5.96 $6.96
======= ======= ========
Market Value, End of Period .................. $5.88 $5.88 $7.50
======= ======= ========
Total Return, Based on Market Value* ......... 3.00%++ (12.53)% 14.81%
======= ======= ========
Total Return, Based on Net Asset Value* ...... (1.92)%++ (4.38)% 19.75%
======= ======= ========
Net Assets**, End of Period (000's) .......... $89,726 $93,561 $105,861
======= ======= ========
Ratios to Average Net Assets Based on
Common Shares Outstanding:
Net Investment Income ..................... 12.89%+ 12.99% 12.60%
Interest Expense .......................... 1.77+ 1.81 1.81
Other Expenses ............................ 1.58+ 1.53 1.51
Portfolio Turnover Rate ...................... 27% 91% 79%
</TABLE>
- ----------
(1) For the three months ended June 30, 1999 (unaudited).
* The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
** Exclusive of preferred shares outstanding.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
32
<PAGE>
[LOGO]
Financial Highlights (continued)
================================================================================
For a share of common stock outstanding throughout each year ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net Asset Value, Beginning of Year ........... $6.31 $5.88 $6.76
------- ------- -------
Income (Loss) From Operations:
Net investment income ..................... 0.92 0.86 0.93
Net realized and unrealized gain (loss) ... 0.08 0.45 (0.78)
------- ------- -------
Total Income From Operations .............. 1.00 1.31 0.15
------- ------- -------
Distributions:
Dividends declared to 7.00% Cumulative Preferred
Stockholders ........................... (0.14) (0.15) (0.16)
Dividends paid from net investment income . (0.72) (0.73) (0.87)
------- ------- -------
Total Distributions ....................... (0.86) (0.88) (1.03)
------- ------- -------
Net Asset Value, End of Year ................. $6.45 $6.31 $5.88
======= ======= =======
Market Value, End of Year .................... $7.25 $7.00 $6.63
======= ======= =======
Total Return, Based on Market Value* ......... 15.55% 18.35% 6.41%
======= ======= =======
Total Return, Based on Net Asset Value* ...... 14.04% 20.01% (0.53)%
======= ======= =======
Net Assets**, End of Year (000's) ............ $95,034 $90,318 $80,309
======= ======= =======
Ratios to Average Net Assets Based on
Common Shares Outstanding***:
Net Investment Income ..................... 14.35% 14.21% 15.35%
Interest Expense .......................... 1.92 1.98 1.58
Other Expenses ............................ 1.59 1.65 1.65
Portfolio Turnover Rate ...................... 101% 87% 79%
</TABLE>
- ----------
* 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 1997 and 1996 have been recalculated to reflect this
methodology.
33
<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>
1999(1) 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- --------
<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 2,500 2,560 2,760 2,580 2,490 2,439
Involuntary Liquidating
Preference Per Share (2) 1,000 1,000 1,000 1,000 1,000 1,000
Average Market Value
Per Share (2)(3) 1,000 1,000 1,000 1,000 1,000 1,000
Senior Money
Market Notes
Total amount
outstanding (000s) -- -- -- -- -- 25,800
Asset Coverage (000s) -- -- -- -- -- 135,966
PNC Bank Credit Facility
Total amount
outstanding (000s) 30,000 30,000 30,000 30,000 30,000 --
Asset Coverage (000s) 149,700 153,600 165,900 154,800 149,400 --
</TABLE>
- ----------
(1) For the three months ended June 30, 1999.
(2) Redeemable April 15, 2000.
(3) Excludes accrued interest or accumulated undeclared dividends.
(4) See Note 6 of the Notes to Financial Statements.
34
<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, 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 0.21 (233,303) (0.01) 3,031,264 0.20
March 31, 1999 3,514,767 0.22 3,135,099 0.20 (1,173,863) (0.07) 1,961,236 0.13
June 30, 1999 3,352,171 0.21 2,987,079 0.19 (4,365,869) (0.28) (1,378,790) (0.09)
</TABLE>
- ----------
* Per share of Common Stock.
35
<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
================================================================================
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
1/26/99 1/29/99 6.063 6.06 0.058 5.938
2/23/99 2/26/99 6.063 5.98 0.058 5.859
3/23/99 3/26/99 5.875 5.97 0.056 5.850
4/27/99 4/30/99 5.750 6.07 0.056 5.910
5/25/99 5/28/99 5.932 5.87 0.056 5.750
6/22/99 6/25/99 5.875 5.69 0.054 5.580
================================================================================
* As of record date
36
<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
37
<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
38
<PAGE>
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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.
39
<PAGE>
[This page intentionally left blank]
<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.
FD01153 8/99
