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ZENIX
Income
Fund Inc.
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[LOGO]
[GRAPHIC]
Annual Report
March 31, 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 the annual report for the Zenix Income Fund Inc.
("Fund") for the year ended March 31, 1999. We hope you find this report to be
useful and informative. During the past year, the Fund distributed income
dividends totaling $0.69 per share. The table below shows the annualized
distribution rate and twelve-month total return for the Fund based on its March
31, 1999 net asset value ("NAV") per share and its New York Stock Exchange
("NYSE") closing price.
Price Annualized One-Year
Per Share Distribution Rate* Total Return
--------- ------------------ ------------
$5.96 (NAV) 11.28% (4.38)%
$5.88 (NYSE) 11.43% (12.53)%
The Fund generated a negative total return of 4.38% during the reporting period
and its twelve-month results were roughly in line with the twelve-month average
return of negative 4.16% for leveraged high-yield bond funds as reported by
Lipper Inc. (Lipper is an independent mutual fund performance tracking
organization.)
Although we were disappointed in the Fund's results during the period under
review, we were competitive with our peer group. Moreover, our more conservative
investment strategy versus many of our peers enabled us to somewhat limit losses
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* The annualized distribution rate assumes a current monthly income dividend
rate of $0.056 per share for twelve months.
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during this challenging period. We believe our general cautiousness was
warranted given the higher volatility in the financial markets during the Fund's
fiscal year. Please note that because of our more conservative approach that
emphasizes higher-quality issues with less yield, we needed to slightly reduce
the Fund's dividend payout in March.
Market and Economic Overview
After beginning 1998 on a rather strong footing, the high-yield bond market
generated relatively weak results throughout 1998, underperforming all the other
domestic bond market sectors. In our opinion, the high-yield market at the
beginning of 1998 could be viewed as being fully to overvalued in price with
overall yields not attractive relative to U.S. Treasuries. We think that a
considerable amount of liquidity from investors chasing yield had moved the
market to these overvalued levels. In addition, there was also excessive
speculation in the financial markets, especially by hedge funds. (Hedge funds
are private investment partnerships that can use aggressive strategies such as
buying securities with borrowed money to enhance returns.)
By the middle of 1998, these more speculative investors were making aggressive
bets in a number of financial markets, particularly in the emerging bond markets
such as Russia and Brazil, as well as in the domestic high-yield bond markets.
With the default of Russia and the significant price declines across emerging
bonds, many of these more aggressive hedge funds were forced to sell to pay off
their margin loans. This in turn caused a sympathetic decline not only in
foreign bond markets, but also in the domestic corporate bond and high-yield
bond markets. And while many hedge funds did not own a meaningful percentage of
high-yield bonds, their forced selling during a short period of time caused the
high-yield bond market to decline significantly in the third quarter of 1998.
At the same time the hedge funds were selling, various Wall Street firms that
trade these securities began to reduce their bond market exposure in order to
limit their losses. These actions created even more market volatility during the
second half of 1998.
As mentioned in our last shareholder letter, the Federal Reserve Board ("Fed")
began taking aggressive actions to restore investor confidence in the financial
markets in the third quarter of last year. The Fed realized that the financial
markets were beginning to freeze up with overall liquidity disappearing. Many
companies were finding it increasingly more difficult to borrow money through
the fixed income capital markets. Investors had also become reluctant to invest
in new bond issues, especially from companies that issue high-yield bonds. One
of their fears was that an economic recession was becoming more likely given the
increased turmoil in emerging market economies such as Korea, Russia and
Indonesia. Another was that a worldwide credit
2
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crunch in the financial markets could throw the U.S. economy into a protracted
recession. By acting swiftly and lowering short-term interest rates three times
in the latter part of 1998, the Fed was able to stabilize the domestic financial
markets and restore investor confidence.
First Quarter 1999 Update
The high-yield bond market finished the first quarter of 1999 on a strong note
with the big rally in the stock markets fueling renewed investor interest in
high-yield bonds. Given the continued strength in the U.S. economy, the
high-yield bond market outperformed both the U.S. Treasury and investment grade
corporate bond markets. Interest rates moved higher, with the higher quality end
of the bond markets performing poorly. For example, 30-Year U.S. Treasuries
generated the worst performance with a negative 7.00% return and 10-Year U.S.
Treasuries returned a negative 3.17%. For the first quarter of 1999, the U.S.
high-yield bond market generated a roughly 2.00% total return. The only bonds
that did better during the first quarter were emerging market bonds that
returned 5.50%.
The high yield bond market's performance in the first quarter of 1999 fell in
the middle of the performance range for U.S. Treasuries and stocks. The lowest
quality sectors of the high-yield market bond market generated the strongest
total returns. The strongest performing industry sectors during the reporting
period were basic materials (i.e., forest products, metals and mining), media
(i.e., cable TV, and broadcasting) and telecommunications. The weakest industry
sectors included healthcare and energy.
The Fund's performance lagged the various high yield indices somewhat in the
first quarter with returns modestly below the domestic high-yield bond market.
We were held back by our lower weightings in basic materials companies and our
heavier weightings in healthcare companies. We have continued to maintain a
meaningful emphasis on better quality issues and our strategy clearly did not
help performance in the first quarter of 1999. Put simply, our expectation of
slower U.S. economic growth and lower interest rates did not materialize and
does not appear likely to happen for the foreseeable future.
Portfolio Strategy
During the reporting period, we have started to eliminate underperforming
companies such as some of our deteriorating credits in healthcare and
selectively raising our exposure to basic industries that we think should
benefit from continued economic growth. We have even modestly increased our
energy exposure by investing in some of the higher-quality energy issues. We
believe that our pro-growth sector strategy should work well going forward. In
terms of quality, we have been increasing our exposure to middle B-rated segment
of the market where we continue to find
3
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attractive yields. Some of our recent additions include US Home, Nortek,
Packaging Materials Corporation of America, Tembec Industries and Ainsworth
Lumber.*
Conclusion
We think that the middle B-rated segment of the high-yield bond market
represents the best value given the U.S. economy's continued strength. Moreover,
we believe our current strategy makes sense as long as economic growth continues
to be strong. The Fund's average maturity of approximately 6 to 7 years on a
call-adjusted basis should also somewhat limit the impact of rising rates if
that were to occur.
Over the course of 1999, we expect a continuation of solid economic growth with
modest inflation. This bodes well for the stock markets as well as the
high-yield bond market. If our expectations come true, middle quality high-yield
issues should do better. In addition, we will continue to focus closely on some
of the stronger companies in select commodity sectors such as paper, energy and
steel where conditions appear to be improving. We remain bullish on the total
return prospects for high-yield bonds at current valuation levels, especially
given the health of the U.S. economy.
In closing, thank you for investing in the Zenix Income Fund. We look forward to
continuing to help you pursue your investment goals in the years ahead. If you
have any questions about 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
April 27, 1999
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* As of 3/31/99, please note that these securities are subject to change.
4
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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 36. 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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<PAGE>
[LOGO] Schedule of Investments
March 31, 1999
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<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
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<S> <C> <C> <C>
CORPORATE BONDS AND NOTES -- 94.2%
Aerospace -- 0.4%
$ 565,000 B1* BE Aerospace Inc., Sr. Sub. Notes, 9.500% due 11/1/08 ...... $ 604,550
------------
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 ....... 1,772,868
310,000 Ba2* Continental Airlines, Inc., Notes, 8.000% due 12/15/05 ..... 305,350
------------
2,078,218
------------
Automobile: Aftermarket -- 0.8%
1,215,000 B1* Exide Corp., Sr. Notes, 10.000% due 4/15/05 ................ 1,201,331
------------
Auto Parts: Original Equipment Manufacture -- 0.1%
540,000 B- Breed Technologies, Inc., Sr. Sub. Notes,
9.250% due 4/15/08+ ...................................... 216,000
------------
Broadcasting -- 1.5%
130,000 B- Capstar Broadcasting Corp., Sr. Discount Notes,
step bond to yield 11.002% due 2/1/09 .................... 110,825
750,000 B1* Chancellor Media Corp., Guaranteed Sr. Sub. Notes,
9.000% due 10/1/08 ....................................... 806,250
Citadel Broadcasting Co.:
400,000 B- Guaranteed. Sr. Sub. Notes, 9.250% due 11/15/08 .......... 429,000
200,000 B- Sr. Sub. Notes, 10.250% due 7/1/07 ....................... 220,750
515,000 CCC+ Telemundo Holdings Inc., Sr. Discount Notes, Series B,
step bond to yield 11.552% due 8/15/08 ................... 293,550
470,000 B+ TV Azteca S.A. de C.V., Guaranteed Sr. Notes, Series A,
10.125% due 2/15/04 ...................................... 397,150
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2,257,525
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Building Materials Chains -- 0.8%
Building Materials Corp., Sr. Notes:
500,000 BB Series B, 7.750% due 7/15/05 ............................. 487,500
405,000 BB Series B, 8.000% due 12/1/08+ ............................ 403,987
250,000 BB Step bond to yield 10.015% due 7/1/04 .................... 260,625
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1,152,112
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Building Products -- 1.0%
295,000 B Amatek Industries Pty. Ltd., Sr. Sub. Notes,
12.000% due 2/15/08+ ..................................... 283,937
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
[LOGO] Schedule of Investments (continued)
March 31, 1999
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<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Building Products -- 1.0% (continued)
Nortek Inc., Sr. Notes:
$ 125,000 B+ 8.875% due 8/1/08+ ....................................... $ 128,750
550,000 B+ Series B, 9.250% due 3/15/07 ............................. 574,750
560,000 B+ Series B, 9.125% due 9/1/07 .............................. 585,200
------------
1,572,637
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Cable Television -- 13.3%
CSC Holdings Inc., Sr. Sub. Debentures:
2,530,000 BB- 9.875% due 2/15/13 ....................................... 2,814,625
1,000,000 B1* 10.500% due 5/15/16 ...................................... 1,192,500
170,000 BB+ 7.875% due 2/15/18 ....................................... 175,313
855,000 BB- Century Communications Corp., Sr. Notes,
8.750% due 10/1/07 ....................................... 895,612
Charter Communications Holdings LLC/Charter
Communications Capital Corp.:
1,240,000 B+ Sr. Discount Notes, step bond to yield
9.887% due 4/1/11+ ................................... 801,350
850,000 B+ Sr. Notes, 8.625% due 4/1/09+ .......................... 874,438
1,500,000 B2* Comcast UK Cable Partners Ltd., Sr. Discount Debentures,
step bond to yield 11.175% due 11/15/07 .................. 1,327,500
120,000GBP B- Diamond Holdings PLC, Guaranteed Notes,
10.000% due 2/1/08 ....................................... 202,918
400,000 B Echostar DBS Corp., Sr. Notes, 9.375% due 2/1/09+ .......... 416,000
NTL Inc., Sr. Notes:
200,000 B- 11.500% due 10/1/08+ ..................................... 225,500
620,000 B- Step bond to yield 12.329% due 10/1/08+ .................. 424,700
Rogers Cablesystems, Ltd.:
2,100,000 BB- Guaranteed Sr. Sub. Debentures, 11.000% due 12/1/15 ...... 2,470,125
1,000,000 BB+ Sr. Secured 2nd Priority Debentures,
10.000% due 12/1/07 .................................... 1,125,000
1,850,000 BB+ Sr. Secured 2nd Priority Notes, Series B,
10.000% due 3/15/05 .................................... 2,090,500
1,250,000 B+ Telewest Communications PLC, Sr. Notes,
11.250% due 11/1/08+ ..................................... 1,459,375
5,655,000 B United International Holdings Inc., Sr. Discount Notes,
Series B, step bond to yield 11.191% due 2/15/08 ......... 3,845,400
------------
20,340,856
------------
Casinos/Gambling -- 1.8%
Circus Circus Enterprises Inc.:
255,000 BBB- Debentures, 6.700% due 11/15/96 .......................... 243,844
105,000 BB+ Sr. Sub. Debentures, 7.625% due 7/15/13 .................. 96,206
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
[LOGO] Schedule of Investments (continued)
March 31, 1999
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Casinos/Gambling -- 1.8% (continued)
$ 620,000 BB+ Harrah's Operating Co. Inc., Guaranteed Sr. Sub. Notes,
7.875% due 12/15/05 ...................................... $ 624,650
565,000 B Harveys Casino Resorts, Guaranteed Sr. Sub. Notes,
10.625% due 6/1/06 ....................................... 598,900
530,000 B Hollywood Park, Inc., Sr. Sub. Notes,
9.250% due 2/15/07+ ...................................... 544,575
Station Casinos, Inc., Sr. Sub. Notes:
130,000 B+ 10.125% due 3/15/06 ...................................... 138,125
500,000 B+ 8.875% due 12/1/08+ ...................................... 513,750
------------
2,760,050
------------
Chemicals - Major -- 0.1%
175,000 NR Huntsman Corp., Sr. Sub. Notes, 9.500% due 7/1/07+ ......... 172,375
------------
Coal Mining -- 0.3%
510,000 B AEI Resources Inc., Guaranteed Notes,
10.500% due 12/15/05+ .................................... 515,100
------------
Construction/AG Equipment/Trucks -- 0.2%
275,000 B Columbus McKinnon Corp., Guaranteed Sr. Sub. Notes,
8.500% due 4/1/08 ........................................ 270,875
------------
Contract Drilling -- 0.7%
515,000 Ba3* R&B Falcon Corp., Sr. Notes, 12.250% due 3/15/06+ .......... 540,750
RBF Finance Corp., Guaranteed Sr. Notes:
150,000 BB- 11.000% due 3/15/06+ ..................................... 158,625
305,000 BB- 11.375% due 3/15/09+ ..................................... 323,300
------------
1,022,675
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Containers/Packaging -- 2.0%
180,000 B AEP Industries Inc., Sr. Sub. Notes, 9.875% due 11/15/07 ... 185,850
575,000 B Huntsman Packaging Corp., Guaranteed Sr. Sub. Notes,
9.125% due 10/1/07 ....................................... 574,281
1,000,000DEM B Impress Metal Packaging Holdings, Sr. Sub. Notes,
9.875% due 5/29/07++ ..................................... 612,718
410,000 B Packaging Corp. of America, Sr. Sub. Notes,
9.625% due 4/1/09+ ....................................... 421,531
270,000 B Stone Container Finance Corp., Guaranteed Sr. Notes,
11.500% due 8/15/06+ ..................................... 294,300
Tekni-Plex Inc.:
380,000 B- Guaranteed Sr. Sub. Notes, Series B, 9.250% due 3/1/08 ... 388,550
500,000 B- Sr. Sub. Notes, Series B, 11.250% due 4/1/07 ............. 548,750
------------
3,025,980
------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
[LOGO] Schedule of Investments (continued)
March 31, 1999
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount Stores -- 0.7%
$ 445,000 BB+ DR Structured Finance Securitized Lease Trust,
Pass-Through Certificates, Series A-2,
8.375% due 8/15/15 ....................................... $ 450,202
490,000 BB+ Kmart Corp., Debentures, 12.500% due 3/1/05 ................ 622,913
------------
1,073,115
------------
Diversified Commercial Services -- 1.2%
675,000 BB- Cia. Latino Americana de Infraestructura & Servicos S.A.,
Guaranteed Sr. Notes, 11.625% due 6/1/04+ ................ 374,625
1,000,000 B2* Intertek Finance PLC., Guaranteed Sr. Sub. Notes, Series B,
10.250% due 11/1/06 ...................................... 932,500
500,000 B- Outsourcing Solutions Inc., Sr. Sub. Notes,
11.000% due 11/1/06 ...................................... 495,000
------------
1,802,125
------------
Diversified Financial Services -- 0.3%
Amresco Inc., Sr. Sub. Notes, Series A:
500,000 CCC+ 10.000% due 3/15/04 ...................................... 397,500
135,000 CCC+ 9.875% due 3/15/05 ....................................... 106,650
------------
504,150
------------
Diversified Manufacturing -- 1.4%
450,000 B- Eagle-Picher Industries Inc., Guaranteed Sr. Sub. Notes,
9.375% due 3/1/08 ........................................ 436,500
1,100,000 B Outboard Marine Corp., Sr. Notes, 10.750% due 6/1/08+ ...... 903,375
700,000 B+ Park-Ohio Industries, Inc., Sr. Sub. Notes,
9.250% due 12/1/07 ....................................... 722,750
------------
2,062,625
------------
Drugs - Generic -- 1.2%
1,800,000 BB ICN Pharmaceuticals Inc., Sr. Notes, Series B,
9.250% due 8/15/05 ....................................... 1,836,000
------------
Electric Utilities -- 0.6%
CMS Energy Corp., Sr. Notes:
300,000 BB 6.750% due 1/15/04+ ...................................... 296,250
585,000 BB 7.500% due 1/15/09 ....................................... 591,581
------------
887,831
------------
Electronic Components -- 1.3%
725,000 B+ Celestica International Inc., Sr. Sub. Notes,
10.500% due 12/31/06 ..................................... 801,125
1,200,000 B- Viasystems Inc., Sr. Sub. Notes, 9.750% due 6/1/07 ......... 1,149,000
------------
1,950,125
------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
[LOGO] Schedule of Investments (continued)
March 31, 1999
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Electronic Data Processing -- 3.0%
Unisys Corp., Sr. Notes:
$1,800,000 BB- Series B, 12.000% due 4/15/03 ............................ $ 1,995,750
2,325,000 BB- 11.750% due 10/15/04 ..................................... 2,638,875
------------
4,634,625
------------
Engineering & Construction -- 0.9%
580,000 B Group Maintenance America Corp., Sr. Sub. Notes,
9.750% due 1/15/09+ ...................................... 594,500
255,000 B+ Integrated Electrical Services, Sr. Sub. Notes,
9.375% due 2/1/09+ ....................................... 261,375
510,000 B Metromedia Fiber Network, Sr. Notes,
10.000% due 11/15/08+ .................................... 548,250
------------
1,404,125
------------
Environmental Services -- 0.3%
535,000 BB Allied Waste North America Inc., Guaranteed Sr. Notes,
Series B, 7.875% due 1/1/09 .............................. 522,962
------------
Food Distributors -- 2.0%
1,000,000 B2* Carrols Corp., Sr. Sub. Notes, 9.500% due 12/1/08+ ......... 1,012,500
1,325,000 B Imperial Holly Corp., Guaranteed Sr. Sub. Notes,
9.750% due 12/15/07 ...................................... 1,338,250
400,000 B- Purina Mills Inc., Sr. Sub. Notes, 9.000% due 3/15/10 322,000
300,000 B SC International Services Inc., Guaranteed Sr. Sub. Notes,
Series B, 9.250% due 9/1/07 .............................. 325,875
------------
2,998,625
------------
Foods - Specialty/Candy -- 0.5%
850,000 B- B&G Foods Inc., Guaranteed Sr. Sub. Notes,
9.625% due 8/1/07 ........................................ 837,250
------------
Forest Products -- 0.5%
660,000 B Ainsworth Lumber Co. Ltd., Sr. Notes, 12.500% due 7/15/07 .. 701,250
------------
Homebuilding -- 0.8%
650,000 Ba1* D.R. Horton Inc., Guaranteed Sr. Notes, 8.000% due 2/1/09 .. 638,625
660,000 BB- U.S. Home Corp., Sr. Sub. Notes, 8.875% due 2/15/09 ........ 646,800
------------
1,285,425
------------
Home Furnishings -- 0.1%
100,000 B- Simmons Co., Sr. Sub. Notes, 10.250% due 3/15/09+ .......... 103,500
------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
[LOGO] Schedule of Investments (continued)
March 31, 1999
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Hospital/Nursing Management -- 4.8%
Columbia/HCA Healthcare Corp.:
$ 80,000 BB+ Notes, 7.000% due 7/1/07 ................................. $ 72,400
200,000 BB+ Notes, 7.250% due 5/20/08 ................................ 182,500
300,000 BB+ Medium-Term Notes, 6.630% due 7/15/45 .................... 289,875
950,000 Ba3* Fresenius Medical Care Capital Trust I, Trust Preferred
Securities, 9.000% due 12/1/06 ........................... 976,125
750,000 Ba3* Fresenius Medical Care Capital Trust II, Series A,
Guaranteed Trust Preferred Securities,
7.875% due 2/1/08 ........................................ 738,750
Integrated Health Services, Inc., Sr. Sub. Notes, Series A:
465,000 B2* 9.500% due 9/15/07 ....................................... 297,600
1,475,000 B2* 9.250% due 1/15/08 ....................................... 929,250
4,190,000 B- Magellan Health Services, Inc., Sr. Sub. Notes,
9.000% due 2/15/08 ....................................... 3,613,875
Sun Healthcare Group, Inc., Sr. Sub. Notes:
250,000 CCC Series B, 9.500% due 7/1/07 .............................. 50,000
650,000 CCC 9.375% due 5/1/08+ ....................................... 130,000
------------
7,280,375
------------
Hotel/Resort -- 3.5%
3,000,000 B- Courtyard By Marriott II LP/Courtyard Finance Co.,
Sr. Secured Notes, Series B, 10.750% due 2/1/08 .......... 3,112,500
HMH Properties, Inc.:
995,000 BB Guaranteed Sr. Notes, Series B, 7.875% due 8/1/08 ........ 972,613
950,000 BB Sr. Notes, Series C, 8.450% due 12/1/08 .................. 945,250
Intrawest Corp., Sr. Notes:
100,000 B+ 9.750% due 8/15/08 ....................................... 103,750
195,000 B+ 9.750% due 8/15/08+ ...................................... 201,338
------------
5,335,451
------------
Insurance - Multi-Line -- 0.9%
1,000,000 BB+ SIG Capital Trust I, Guaranteed Trust Preferred Securities,
9.500% due 8/15/27 ....................................... 785,000
650,000 BB- Veritas Capital Trust, Guaranteed Trust Preferred Securities,
10.000% due 1/1/28 ....................................... 597,188
------------
1,382,188
------------
Internet Services -- 2.3%
Psinet Inc., Sr. Notes:
200,000 B- Series B, 10.000% due 2/15/05 ............................ 213,000
355,000 B- 11.500% due 11/1/08 ...................................... 402,038
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
[LOGO] Schedule of Investments (continued)
March 31, 1999
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Internet Services -- 2.3% (continued)
$1,625,000 NR Splitrock Services, Inc., Guaranteed Sr. Notes,
11.750% due 7/15/08 ...................................... $ 1,551,875
Verio Inc., Sr. Notes:
360,000 B- 10.375% due 4/1/05 ....................................... 386,100
380,000 B- 11.250% due 12/1/08+ ..................................... 428,450
850,000 NR WAM!NET Inc., Guaranteed Sr. Discount Notes, Series B,
step bond to yield 13.327% due 3/1/05 .................... 518,500
------------
3,499,963
------------
Leisure/Movies/Entertainment -- 1.6%
915,000 B Regal Cinemas, Inc., Sr. Sub. Notes, 9.500% due 6/1/08 ..... 935,588
1,500,000 B- SFX Entertainment, Inc., Sr. Sub. Notes, Series B,
9.125% due 2/1/08 ........................................ 1,533,750
------------
2,469,338
------------
Machinery - Industrial/Components -- 0.4%
518,000 B- Alvey Systems Inc., Sr. Sub. Notes, 11.375% due 1/31/03 .... 524,475
135,000 Ba3* Westinghouse Air Brake Co., Sr. Notes,
9.375% due 6/15/05+ ...................................... 138,038
------------
662,513
------------
Media Conglomerates -- 1.0%
975,000GBP B Polestar Corp. PLC, Sr. Notes, Series B,
10.500% due 5/30/08 ...................................... 1,597,560
------------
Metal Fabrications -- 0.2%
250,000 BB California Steel Industries Inc., Sr. Notes,
8.500% due 4/1/09+ ....................................... 253,750
------------
Metal/Minerals - Other -- 0.2%
400,000 B- Haynes International, Inc., Sr. Notes, 11.625% due 9/1/04 .. 324,000
------------
Multi-Sector Companies -- 0.4%
535,000 B- Triarc Consumer Beverage, Sr. Sub. Notes,
10.250% due 2/15/09+ ..................................... 535,000
------------
Office Equipment/Supplies -- 0.4%
650,000 B3* Axiohm Transaction Solutions Inc., Guaranteed Sr. Sub.
Notes, 9.750% due 10/1/07 ................................ 591,500
------------
Oil & Gas Production -- 3.8%
500,000 B Canadian Forest Oil Ltd., Guaranteed Sr. Sub. Notes,
8.750% due 9/15/07 ....................................... 482,500
1,300,000 B+ Clark USA Inc., Sr. Notes, Series B, 10.875% due 12/1/05 ... 1,053,000
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
[LOGO] Schedule of Investments (continued)
March 31, 1999
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Oil & Gas Production -- 3.8% (continued)
Ocean Energy Inc.:
$ 900,000 BB- Guaranteed Sr. Sub. Debentures, 9.750% due 10/1/06 ....... $ 918,000
2,550,000 BB- Guaranteed Sr. Sub. Notes, 10.375% due 10/15/05 .......... 2,601,000
700,000 B2* Stone Energy Corp., Guaranteed Sr. Sub. Notes,
8.750% due 9/15/07 ....................................... 689,500
------------
5,744,000
------------
Package Goods/Service -- 0.1%
125,000 B- Revlon Consumer Products Corp., Sr. Sub. Notes,
8.625% due 2/1/08 ........................................ 113,750
------------
Paper -- 1.2%
750,000 BB Malette Inc., Sr. Secured Notes, 12.250% due 7/15/04 ....... 811,875
Riverwood International Corp.:
370,000 B- Guaranteed Sr. Notes, 10.625% due 8/1/07 ................. 390,350
160,000 CCC+ Guaranteed Sr. Sub. Notes, 10.875% due 4/1/08 ............ 155,200
445,000 BB+ Tembec Industries Inc., Guaranteed Sr. Notes,
8.375% due 6/30/09 ....................................... 452,231
------------
1,809,656
------------
Photographic Products -- 0.4%
580,000 BB- Polaroid Corp., Sr. Notes, 11.500% due 2/15/06 ............. 601,750
------------
Printing/Forms -- 0.3%
545,000 BB- World Color Press Inc., Sr. Sub. Notes,
7.750% due 2/15/09+ ...................................... 536,825
------------
Real Estate Investment Trusts -- 0.9%
1,280,000 Baa3* Trizec Finance Ltd., Guaranteed Sr. Notes,
10.875% due 10/15/05 ..................................... 1,388,800
------------
Rental/Leasing Companies -- 0.6%
270,000 B Nationsrent, Inc., Guaranteed Sr. Sub. Notes,
10.375% due 12/15/08 ..................................... 284,175
625,000 BB- United Rentals Inc., Sr. Sub. Notes, 9.250% due 1/15/09+ ... 635,156
------------
919,331
------------
Retail - Food Chains -- 0.2%
350,000 CCC+ Pathmark Stores, Inc., Sub. Notes, 12.625% due 6/15/02 ..... 360,938
------------
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 ............................ 1,020,000
------------
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
[LOGO] Schedule of Investments (continued)
March 31, 1999
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Savings & Loan Associations -- 2.2%
$1,000,000 B2* Ocwen Capital Trust I, Guaranteed Capital Securities,
10.875% due 8/1/27 ....................................... $ 807,500
2,750,000 BB- Ocwen Financial Corp., Notes, 11.875% due 10/1/03 .......... 2,598,750
------------
3,406,250
------------
Semiconductors -- 0.8%
1,240,000 B Fairchild Semiconductor Inc., Sr. Sub. Notes,
10.125% due 3/15/07 ...................................... 1,240,000
------------
Steel/Iron Ore -- 0.9%
720,000 B1* Algoma Steel Inc., First Mortgage Notes,
12.375% due 7/15/05 ...................................... 702,000
275,000 Ba3* National Steel Corp., First Mortgage Notes,
9.875% due 3/1/09+ ....................................... 283,250
485,000 B WHX Corp., Sr. Notes, 10.500% due 4/15/05 .................. 470,450
------------
1,455,700
------------
Telecommunications - Other -- 13.3%
250,000GBP B1 COLT Telecommunications Group PLC, Sr. Notes,
10.125% due 11/30/07++ ................................... 437,881
2,325,000 NR E.Spire Communications, Inc., Sr. Discount Notes,
step bond to yield 11.205% due 7/1/08 .................... 1,121,812
Esprit Telecom Group PLC, Sr. Notes:
700,000 B- 11.500% due 12/15/07++ ................................... 747,250
600,000DEM B- 11.500% due 12/15/07 ..................................... 357,694
400,000 B- 10.875% due 6/15/08+ ..................................... 422,000
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 ...................................... 1,102,500
300,000 B 10.375% due 1/15/09 ...................................... 321,750
300,000 B+ IMPSAT Corp., Sr. Notes, 12.375% due 6/15/08 ............... 269,250
Intermedia Communications Co.:
2,275,000 B Sr. Discount Notes, step bond to yield
12.351% due 5/15/06 .................................... 1,939,438
530,000 B Sr. Notes, 9.500% due 3/1/09+ ............................ 557,825
160,000 B Sr. Notes, Series B, 8.500% due 1/15/08 .................. 160,000
405,000 B Sr. Notes, Series B, 8.600% due 6/1/08 ................... 407,025
230,000 CCC+ IXC Communications Inc., Sr. Sub. Notes,
9.000% due 4/15/08 ....................................... 237,475
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
[LOGO] Schedule of Investments (continued)
March 31, 1999
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telecommunications - Other -- 13.3% (continued)
MetroNet Communications Corp.:
$4,800,000 B Sr. Discount Notes, step bond to yield
10.049% due 6/15/08 .................................... $ 3,720,000
1,650,000 B Sr. Notes, 12.000% due 8/15/07 ........................... 1,959,375
455,000 B Sr. Notes, 10.625% due 11/1/08+ .......................... 530,075
890,000 B NEXTLINK Communications, L.L.C./NEXTLINK Capital, Inc.,
Sr. Notes, 12.500% due 4/15/06 ........................... 985,675
2,075,000 NR PageMart Wireless, Inc., Sr. Discount Notes,
step bond to yield 11.250% due 2/1/08 .................... 752,188
RCN Corp.:
1,775,000 B3* Sr. Discount Notes, step bond to yield
11.141% due 10/15/07 ................................... 1,198,125
875,000 B3* Sr. Notes, 10.000% due 10/15/07 .......................... 901,250
265,000 NR VersaTel Telecom International N.V., Sr. Notes,
13.250% due 5/15/08 ...................................... 276,263
Viatel Inc., Sr. Notes:
550,000 Caa1* 11.250% due 4/15/08 ...................................... 569,250
400,000 Caa1* 11.500% due 3/15/09+ ..................................... 416,000
------------
20,320,101
------------
Telephone - Cellular -- 7.3%
700,000 CCC+ Centennial Cellular Corp., Sr. Sub. Notes,
10.750% due 12/15/08+ .................................... 740,250
2,470,000 B3* Clearnet Communications Inc., Sr. Discount Notes,
step bond to yield 12.294% due 12/15/05 .................. 2,272,400
Dolphin Telecom PLC, Sr. Discount Notes:
1,600,000 B- Step bond to yield 11.416% due 6/1/08 .................... 820,000
1,125,000ECU CCC+ Step bond to yield 11.526% due 6/1/08 ................... 598,165
.
2,545,000 B3* Iridium Operating LLC/Iridium Capital Corp.,
Guaranteed Sr. Notes, Series B, 14.000% due 7/15/05 ...... 1,196,150
2,100,000 B- Millicom International Cellular S.A., Sr. Discount Notes,
step bond to yield 15.595% due 6/1/06 .................... 1,569,750
Nextel Communications, Inc.:
585,000 B2* Sr. Redeemable Discount Notes, step bond to yield
10.943% due 9/15/07 ...................................... 432,900
915,000 B2* Sr. Serial Redeemable Discount Notes, step bond to yield
10.724% due 2/15/08 .................................... 647,363
1,700,00 0 Ba3* Orange PLC, Sr. Notes, 8.000% due 8/1/08 ................... 1,746,750
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
[LOGO] Schedule of Investments (continued)
March 31, 1999
================================================================================
<TABLE>
<CAPTION>
Face
Amount Rating(a) Security Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telephone - Cellular -- 7.3% (continued)
Telesystems International Wireless Inc., Sr. Discount Notes:
$1,300,000 CCC+ Series B, step bond to yield 12.460% due 6/30/07 ......... $ 715,000
715,000 CCC+ Series C, step bond to yield 11.011% due 11/1/07 ......... 343,200
------------
11,081,928
------------
Textiles -- 0.3%
800,000GBP B Texon International PLC, Sr. Notes,
10.000% due 2/1/08++ ..................................... 406,270
------------
Transportation - Marine -- 2.3%
320,000 B- Oglebay Norton Co., Sr. Sub. Notes, 10.000% due 2/1/09+ .... 312,000
2,455,000 BB- Sea Containers Ltd., Sr. Sub. Debentures, Series A,
12.500% due 12/1/04 ...................................... 2,651,400
800,000 B+ Stena Line AB, Sr. Notes, 10.625% due 6/1/08 ............... 617,000
------------
3,580,400
------------
Unregulated Power Generation -- 3.8%
AES Corp., Sr. Sub. Notes:
1,000,000 Ba1* 10.250% due 7/15/06 ...................................... 1,060,000
2,035,000 Ba1* 8.500% due 11/1/07 ....................................... 2,009,563
Calpine Corp., Sr. Notes:
1,350,000 BB 10.500% due 5/15/06 ...................................... 1,485,000
475,000 BB 8.750% due 7/15/07 ....................................... 495,187
780,804 BBB- Midland Cogeneration Venture Limited Partnership,
Midland Funding Corp. I, Sr. Secured Lease Obligation
Bond, Series C-94, 10.330% due 7/23/02 ................... 819,845
------------
5,869,595
------------
Wholesale Distributors -- 0.2%
Fisher Scientific International Inc., Sr. Sub. Notes:
105,000 B- 9.000% due 2/1/08 ........................................ 106,312
160,000 B- 9.000% due 2/1/08 ........................................ 162,000
------------
268,312
------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $147,697,672) ..................................... 143,849,261
------------
</TABLE>
<TABLE>
<CAPTION>
Shares Security Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCKS -- 0.4%
Savings & Loan Associations -- 0.4%
20,100 California Federal Preferred Capital Corp., 9.125%
Noncumulative Exchangeable, Series A (Cost-- $502,500) .... 532,650
------------
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
[LOGO] Schedule of Investments (continued)
March 31, 1999
================================================================================
<TABLE>
<CAPTION>
Shares Security Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
WARRANTS# -- 1.0%
Broadcasting -- 0.0%
2,450 UIH Australia Pacific Inc., Expire 5/15/06 ................... $ 2,450
------------
Internet Services -- 0.1%
1,625 Splitrock Services, Inc., Expire 7/15/08 ..................... 97,500
2,550 WAM!NET Inc., Expire 3/1/05 .................................. 58,013
------------
155,513
------------
Telecommunications - Other -- 0.8%
1,750 Allegiance Telecom, Inc., Expire 2/3/08 ...................... 19,250
2,000 COLT Telecommunications Group PLC, Expire 12/31/06+ .......... 1,000,000
1,600 MetroNet Communications Corp., Expire 8/15/07+ ............... 56,000
7,130 Pagemart, Inc., Expire 12/31/03 .............................. 35,650
1,325 Primus Telecommunications Group Inc., Expire 8/1/04 .......... 11,263
1,300 RSL Communications, Ltd., Expire 11/15/06 .................... 50,700
265 Versatel Telecommunications, Expire 5/15/08+ ................. 18,550
------------
1,191,413
------------
Telephone - Cellular -- 0.1%
9,735 Clearnet Communications Inc., Expire 9/15/05 ................. 38,940
1,000 Globalstar Telecommunications Ltd., Expire 2/15/04+ .......... 55,000
1,000 Iridium World Communications Ltd., Expire 7/15/05+ ........... 138,980
------------
232,920
------------
TOTAL WARRANTS
(Cost -- $433,106) ........................................... 1,582,296
------------
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
[LOGO] Schedule of Investments (continued)
March 31, 1999
================================================================================
<TABLE>
<CAPTION>
Face
Amount Security Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT -- 4.4%
$6,741,000 Morgan Stanley, Dean Witter & Co., 4.93% due 4/1/99;
Proceeds at maturity -- $6,741,923; (Fully collateralized by
U.S. Treasury Notes, 4.875% due 3/31/01,
Market value -- $6,909,008) (Cost -- $6,741,000 ) ............ $ 6,741,000
------------
TOTAL INVESTMENTS -- 100%
(Cost -- $155,374,278** ) .................................... $152,705,207
============
</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 Investor 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 19 for definition of ratings.
See Notes to Financial Statements.
18
<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.
19
<PAGE>
[LOGO] Statement of Assets and Liabilities
March 31, 1999
================================================================================
ASSETS:
Investments, at value (Cost -- $155,374,278) ............... $ 152,705,207
Cash ....................................................... 388
Interest and dividends receivable .......................... 3,287,302
Receivables for open forward foreign
currency contracts (Note 11) ............................. 44,604
Receivables for securities sold ............................ 622,712
-------------
Total Assets ............................................... 156,660,213
-------------
LIABILITIES:
Bank loan (Note 7) ......................................... 30,000,000
Payable for securities purchased ........................... 2,012,109
Interest payable ........................................... 132,847
Investment advisory fees payable ........................... 100,189
Administration fees payable ................................ 39,551
Accrued expenses ........................................... 193,319
--------------
Total Liabilities .......................................... 32,478,015
-------------
Total Net Assets ............................................. $ 124,182,198
=============
NET ASSETS:
Par value of capital shares ................................ $ 156,901
Capital paid in excess of par value ........................ 115,571,524
7.00% Cumulative Preferred Stock (Note 6) .................. 30,000,000
Overdistributed net investment income ...................... (62,873)
Accumulated net realized loss on security transactions ..... (18,854,685)
Net unrealized depreciation on investments and
foreign currencies ....................................... (2,628,669)
-------------
Total Net Assets ............................................. $ 124,182,198
=============
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 ................................... 20.71 621,364
--------- ------------
Total allocated to Cumulative Preferred Stock ........ $1,020.71 30,621,364
========= ------------
Common Stock (15,690,134 shares outstanding) ......... $ 5.96 93,560,834
========= ------------
Total Net Assets ..................................... $124,182,198
============
See Notes to Financial Statements.
20
<PAGE>
[LOGO] Statement of Operations
For the Year Ended March 31, 1999
================================================================================
INVESTMENT INCOME:
Interest ..................................................... $ 15,795,347
Dividends .................................................... 187,585
Less: Interest expense (Note 7) .............................. (1,773,625)
------------
Total Investment Income ...................................... 14,209,307
------------
EXPENSES:
Investment advisory fees (Note 2) ............................ 789,196
Administration fees (Note 2) ................................. 315,678
Shareholder communications ................................... 174,999
Audit and legal .............................................. 72,583
Directors' fees .............................................. 35,000
Pricing ...................................................... 31,025
Listing fees ................................................. 24,260
Shareholder and system servicing fees ........................ 16,998
Custody ...................................................... 14,998
Other ........................................................ 26,240
------------
Total Expenses ............................................... 1,500,977
------------
Net Investment Income .......................................... 12,708,330
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 11):
Realized Loss From:
Security transactions (excluding short-term securities) .... (2,967,186)
Foreign currency transactions .............................. (78,928)
------------
Net Realized Loss ............................................ (3,046,114)
------------
Change in Net Unrealized Appreciation (Depreciation) of
Investments and Foreign Currencies:
Beginning of year .......................................... 9,425,614
End of year ................................................ (2,628,669)
------------
Increase in Net Unrealized Depreciation ...................... (12,054,283)
------------
Net Loss on Investments ........................................ (15,100,397)
------------
Decrease in Net Assets From Operations ......................... $ (2,392,067)
============
See Notes to Financial Statements.
21
<PAGE>
[LOGO] Statements of Changes in Net Assets
For the Years Ended March 31,
================================================================================
1999 1998
------------ ------------
OPERATIONS:
Net investment income .......................... $ 12,708,330 $ 12,914,504
Net realized gain (loss) ....................... (3,046,114) 1,717,025
(Increase) decrease in net unrealized
depreciation ................................. (12,054,283) 6,555,506
------------ ------------
Increase (Decrease) in Net Assets
From Operations .............................. (2,392,067) 21,187,035
------------ ------------
DISTRIBUTIONS PAID TO:
7.00% Cumulative Preferred Stock
Shareholders From Net Investment
Income ....................................... (2,100,000) (2,100,000)
Common Stock Shareholders From Net
Investment Income ............................ (10,597,803) (11,728,952)
Common Stock Shareholders From Capital ......... (331,100) --
------------ ------------
Decrease In Net Assets From
Distributions To Shareholders ................ (13,028,903) (13,828,952)
------------ ------------
FUND SHARE TRANSACTIONS (Note 8):
Net asset value of shares issued for
reinvestment of dividends .................... 3,120,769 3,448,238
------------ ------------
Increase in Net Assets From
Fund Share Transactions ...................... 3,120,769 3,448,238
------------ ------------
Increase (Decrease) in Net Assets ................ (12,300,201) 10,806,321
NET ASSETS:
Beginning of year .............................. 136,482,399 125,676,078
------------ ------------
End of year* ................................... $124,182,198 $136,482,399
============ ============
* Includes undistributed (overdistributed)
net investment income of: ..................... $ (62,873) $ 72,651
============ ============
See Notes to Financial Statements
22
<PAGE>
[LOGO] Statement of Cash Flows
For the Year Ended March 31, 1999
================================================================================
<TABLE>
<S> <C> <C>
NET INCREASE IN CASH:
Cash Flows Provided by Operating
and Investing Activities:
Interest and dividends received ........................ $ 13,467,629
Operating expenses paid ................................ (1,438,702)
Interest payments on bank loans ........................ (1,732,470)
Purchases of short-term securities, net ................ (432,000)
Purchases of long-term securities ...................... (135,529,529)
Proceeds from disposition of long-term securities ...... 135,573,480
-------------
Net Cash Provided By Operating
and Investing Activities ............................. $ 9,908,408
-----------
Cash Flows From Financing Activities:
Cash dividends paid on 7.00% Cumulative
Preferred Stock ...................................... (2,100,000)
Cash dividends paid on Common Stock* ................... (7,808,134)
-------------
Net Cash Used By Financing Activities .................. (9,908,134)
-----------
Net Increase in Cash ..................................... 274
Cash--Beginning of Year .................................. 114
-----------
Cash--End of Year ........................................ $ 388
===========
RECONCILIATION OF DECREASE IN NET ASSETS
FROM OPERATIONS TO NET CASH PROVIDED
BY OPERATING AND INVESTING ACTIVITIES:
Decrease in Net Assets From Operations ................... $(2,392,067)
Amortization of discount on securities ................. (2,687,843)
Decrease in investments ................................ 14,205,128
Increase in receivable for securities sold ............. (405,621)
Increase in payable for securities purchased ........... 859,415
Decrease in dividends and interest receivable .......... 254,816
Increase in receivable for open forward foreign
currency contracts ................................... (6,010)
Increase in accrued expenses ........................... 80,590
-------------
Total Adjustments ...................................... 12,300,475
-----------
Net Cash Provided By Operating and Investing Activities .. $ 9,908,408
===========
</TABLE>
* Exclusive of dividend reinvestment of $3,120,769.
See Notes to Financial Statements.
23
<PAGE>
[LOGO] Notes to Financial Statements
================================================================================
1. Significant Accounting Policies
Zenix Income Fund Inc. ("Fund"), a Maryland corporation, is registered
under the Investment Company Act of 1940, as amended, as a diversified,
closed-end management investment company.
The significant accounting policies followed by the Fund are: (a) security
transactions are accounted for on trade date; (b) securities traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
most recently quoted bid and 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-
24
<PAGE>
[LOGO] Notes to Financial Statements
(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"), formerly known as Mutual Management
Corp., 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 assets of the Fund less
25
<PAGE>
[LOGO] Notes to Financial Statements
(continued)
================================================================================
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 year ended March 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
- --------------------------------------------------------------------------------
Purchases $136,388,944
- --------------------------------------------------------------------------------
Sales 135,862,222
- --------------------------------------------------------------------------------
At March 31, 1999, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
- --------------------------------------------------------------------------------
Gross unrealized appreciation $ 5,963,070
Gross unrealized depreciation (8,632,141)
- --------------------------------------------------------------------------------
Net unrealized depreciation $ (2,669,071)
- --------------------------------------------------------------------------------
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.
26
<PAGE>
[LOGO] Notes to Financial Statements
(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 March 31,
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 $621,364 at March 31, 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 year ended March 31, 1999, interest expense related to the loan
totalled $1,773,625, the average dollar amount of the borrowing was $30,000,000
and the average interest rate was 5.91%.
27
<PAGE>
[LOGO] Notes to Financial Statements
(continued)
================================================================================
8. Common Stock
At March 31, 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:
Year Ended Year Ended
March 31, 1999 March 31, 1998
----------------- ------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------
Shares issued on
reinvestment 488,015 $3,120,769 460,479 $3,448,238
- --------------------------------------------------------------------------------
9. Capital Loss Carryforward
At March 31, 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.
28
<PAGE>
[LOGO] Notes to Financial Statements
(continued)
================================================================================
11. Forward Foreign Currency Contracts
At March 31, 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 1,436,852 $2,314,367 9/22/99 $27,514
European Currency Unit 457,593 496,026 6/10/99 4,582
German Mark 2,559,326 1,418,483 6/10/99 12,508
- --------------------------------------------------------------------------------
Total Unrealized Gain on Open Forward
Foreign Currency Contracts $44,604
- --------------------------------------------------------------------------------
29
<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:
1999 1998
-------- --------
Net Asset Value, Beginning of Year ................ $ 6.96 $ 6.45
Income (Loss) From Operations: -------- --------
Net investment income ........................... 0.82 0.87
Net realized and unrealized gain (loss) ......... (0.97) 0.56
------- --------
Total Income (Loss) From Operations ............. (0.15) 1.43
------- --------
Distributions Paid To:
7.00% Cumulative Preferred Stock
Shareholders From Net Investment
Income ........................................ (0.14) (0.14)
Common Stock Shareholders From Net
Investment Income ............................. (0.69) (0.78)
Common Stock Shareholders From Capital .......... (0.02) --
------- --------
Total Distributions ............................. (0.85) (0.92)
------- --------
Net Asset Value, End of Year ...................... $ 5.96 $ 6.96
======= ========
Market Value, End of Year ......................... $ 5.88 $ 7.50
======= ========
Total Return, Based on Market Value* .............. (12.53)% 14.81%
======= ========
Total Return, Based on Net Asset Value* ........... (4.38)% 19.75%
======= ========
Net Assets**, End of Year (000's) ................. $93,561 $105,861
======= ========
Ratios to Average Net Assets Based on
Common Shares Outstanding:
Net Investment Income ........................... 12.99% 12.60%
Interest Expense ................................ 1.81 1.81
Other Expenses .................................. 1.53 1.51
Portfolio Turnover Rate ........................... 91% 79%
- ----------
* The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
** Exclusive of preferred shares outstanding.
30
<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.
31
<PAGE>
[LOGO] Independent Auditors' Report
================================================================================
The Shareholders and Board of Directors of
Zenix Income Fund Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Zenix Income Fund Inc. as of March
31, 1999, the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, the statement of cash flows for the year then ended and the
financial highlights for each of the years in the four-year period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The financial
highlights for the year ended March 31, 1995 were audited by other auditors
whose report thereon, dated May 12, 1995, expressed an unqualified opinion on
those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1999, by correspondence with the custodian. As to securities purchased or
sold but not yet received or delivered, we performed other appropriate auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Zenix Income Fund Inc. as of March 31, 1999, the results of its operations for
the year then ended, the changes in its net assets for each of the years in the
two-year period then ended, its cash flows for the year then ended and its
financial highlights for each of the years in the four-year period then ended,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
May 12, 1999
32
<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 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
7.00% Cumulative Preferred Stock (1)
Total amount outstanding (000s) $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000
Asset Coverage Per Share 2,560 2,760 2,580 2,490 2,439
Involuntary Liquidating Preference
Per Share (2) 1,000 1,000 1,000 1,000 1,000
Average Market Value Per Share (2)(3) 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 --
Asset Coverage (000s) 153,600 165,900 154,800 149,400 --
</TABLE>
- ----------
(1) Redeemable April 15, 2000.
(2) Excludes accrued interest or accumulated undeclared dividends.
(3) See Note 6 of the Notes to Financial Statements.
33
<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
</TABLE>
- ----------
* Per share of Common Stock.
34
<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
================================================================================
* As of record date
35
<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
36
<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
37
<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.
38
<PAGE>
[LOGO] Tax Information (unaudited)
================================================================================
For Federal tax purposes the Fund hereby designates for the fiscal year
ended March 31, 1999:
o A corporate dividends received deduction of 1.48%.
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
[GRAPHIC]
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.
FD02395 5/99