INCOME
OPPORTUNITIES
FUND 1999,
INC.
Annual Report December 31, 1993
This report, including the financial information herein,
is transmitted to the shareholders of Income Opportunities
Fund 1999, Inc. for their information. It is not a prospectus,
circular or representation intended for use in the purchase
of shares of the Fund or any securities mentioned in the
report. Past performance results shown in this report should
not be considered a representation of future performance.
The Fund has leveraged its Common Stock to provide
Common Stock shareholders with a potentially higher rate
of return. Leverage creates risk for Common Stock share-
holders, including the likelihood of greater volatility of net
asset value and market price of Common Stock shares, and
the risk that fluctuations in short-term interest rates may
reduce the Common Stock's yield.
Income Opportunities
Fund 1999, Inc.
Box 9011
Princeton, NJ
08543-9011
INCOME OPPORTUNITIES FUND 1999, INC.
Officers and
Directors
Arthur Zeikel, President and Director
Walter Mintz, Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Harry Woolf, Director
Terry K. Glenn, Executive Vice President
N. John Hewitt, Senior Vice President
Donald C. Burke, Vice President
Jeffrey B. Hewson, Vice President
Gregory Mark Maunz, Vice President
Gerald M. Richard, Treasurer
Michael J. Hennewinkel, Secretary
<PAGE>
Custodian and Transfer Agent
The Bank of New York
110 Washington Street
New York, New York 10286
NYSE Symbol
IOF
The Benefits and
Risks of Leveraging
Income Opportunities Fund 1999, Inc. is authorized to borrow
funds and utilize leverage in amounts not exceeding 33-1/3% of
its total assets (including the amount borrowed). The Fund's
ability to leverage creates an opportunity for increased net
income, but, at the same time, creates special risks. The Fund
will only borrow or use leverage when the Investment Adviser
believes that it will benefit the Fund. To the extent that the
income derived from securities purchased with borrowed funds
exceeds the cost of borrowing, the Fund's net income will be
greater than if borrowing had not been used.
Conversely, if the income from the securities purchased with
borrowed funds is not sufficient to cover the cost of borrowing,
the net income of the Fund will be less than if borrowing had
not been used, reducing the amount available for distribution to
shareholders. In this case, the Fund may nevertheless maintain
its leveraged position in order to avoid capital losses on securi-
ties purchased with the leverage.
Important Tax
Information
(unaudited)
Income Opportunities Fund 1999, Inc. declared the following
long-term capital gain distributions during the taxable year
ended December 31, 1993.
Long-Term Capital
Record Payable Gain Distribution
Date Date Per Share
12/10/93 12/17/93 $0.058333
12/31/93 01/14/94 $0.016447
Please retain this information for your records.
<PAGE>
DEAR SHAREHOLDER
For the twelve-month period ended December 31, 1993, Income Oppor-
tunities Fund 1999, Inc. earned $0.622 per share income dividends,
representing a net annualized yield of 6.67%, based on a month-end
per share net asset value of $9.32. Over the same period, the
Fund's total investment return was +7.02%, based on a change in per
share net asset value from $9.37 to $9.32, and assuming reinvestment
of $0.622 per share income dividends and $0.075 per share capital
gains distributions.
For the six-month period ended December 31, 1993, the Fund's total
investment return was +2.47%, based on a change in per share net asset
value from $9.50 to $9.32, and assuming reinvestment of $0.334 per share
income dividends and $0.075 per share capital gains distributions.
Economic Environment
We may be entering the best of all economic situations, a growing eco-
nomy with no signs of inflation. People are working; in fact, the
national unemployment level dropped dramatically from October to Dec-
ember from 6.8% to 6.4%. The factory workweek is the longest it has
been since World War II. In December, leading economic indicators
and factory orders increased 0.5% and 1.4%, respectively, the fourth
increase over the last four months. Sales of existing homes are at a
record high and new home sales are at the highest level since 1986.
Third-quarter gross domestic product (GDP) growth was 2.8%, and
fourth quarter projections run as high as 5%, although no one expects
that level to be sustained.
This economic environment is thus far without a hint of inflation. The
consumer price index (CPI) is running at an annualized rate below 3%.
Furthermore, the recent decline in oil prices equates to a 0.5% decline
in the annual rate of inflation, since energy prices comprise 7% of the
CPI. Alan Greenspan, Chairman of the Federal Reserve Board, has stated
that inflation may be returning to the levels of pre-Vietnam War buildup.
In any event, his resolve in fighting inflation is well known within
the investment community. However, even though there was no evidence
that the rate of inflation was picking up, fixed-income investors became
concerned that stronger economic activity would eventually lead to a
rise in inflation. These inflationary concerns led to a backup in
interest rates.
A recovering economy and subdued inflation translate into greater
consumer confidence. The Conference Board reported a huge increase in
consumer confidence for both November and December to the highest level
since the first quarter of 1991. Personal income is flat but consumer
financial health has improved, largely because of home refinancings that
have significantly reduced mortgage payments. Consumer spending is up for
the eighth straight month and is twice income growth, resulting in a drop
in the savings rate to 3.7%. Consumer activity, the largest component of
GDP, is important for economic health, and the holiday season--which
appears to have been very strong--is the most important period for
consumer spending.
<PAGE>
Mortgage-Backed Securities Market
The mortgage market continues to be under tremendous prepayment pres-
sure. In November 1993, annualized prepayment figures for Federal
National Mortgage Association (FNMA) securities with 8.50%, 8% and
7.50% coupons were 63%, 55% and 32%, respectively. Prepayments continue
to be higher than anticipated given the current interest rate structure
as a result of the aggressive solicitations by mortgage bankers
and the evolution of zero point, low document mortgages. Additionally,
FNMA now accepts loan/value ratios of up to 95%. The recent backup in
interest rates--for example, the US Treasury bond ended the year at 6.35%
after being as low as 5.79% in October--has slowed refinance activity
somewhat. Although the Mortgage Bankers' Refinance Index is off its high
by 65%, in an absolute sense it is still very high. The uncertainty of
prepayment levels has caused mortgage spreads to remain very wide,
especially given the relatively low levels of interest rates.
Although the yield curve has flattened significantly, it remains quite
steep. The yield spread between two-year and ten-year US Treasury notes
ended 1993 at 156 basis points (1.56%). Yield curve positioning remains
a very important strategy. For some low-coupon mortgage securities,
the risk has shifted from fast prepayments to slow prepayments, since
slow prepayments cause an extension in average portfolio maturity in a
steep yield curve environment.
Portfolio Matters
The unprecedented level of mortgage prepayments has negatively impacted
both the Fund's yield and net asset value. Although interest rates may
stay low and the yield curve remain steep (allowing for capital gains),
subsequent to the close of the Fund's fiscal year we elected to reduce
the Fund's dividend payout, since a payout higher than the earnings rate
could jeopardize the Fund's ability to return a net asset value of
$10.00 per share at its termination. In addition, the Fund's Investment
Adviser, Fund Asset Management, has accelerated a scheduled reduction in
the Fund's management fee. The fee, which was scheduled to be reduced
from 0.75% of the Fund's average weekly net assets to 0.55% on December
31, 1995, was reduced to 0.55% as of January 19, 1994.
The Fund's new dividend rate is set at an amount equal to a 6.20%
annualized dividend yield based on the Fund's initial maximum offering
price of $10.00 per share. Under current market conditions, we believe
that this dividend yield is attractive relative to direct fixed-income
investment opportunities. For example, as of January 31, 1994, the
Fund's dividend yield compares to a yield of approximately 5.15% on a
US Treasury note with a maturity date comparable to the termination date
of the Fund. Of course, unlike US Treasury securities and most other
fixed-income investments, the Fund does not guarantee that shareholders
will receive the full amount of their principal investment in the Fund
on its termination date, and shareholders may incur a gain or a loss.
In addition, as disclosed in the Fund's prospectus, it is anticipated
that the dividend yield will continue to decline over the life of
the Fund.
<PAGE>
Over the past year interest rates have declined approximately 180 basis
points as measured by seven-year and ten-year Treasury notes. This re-
sulted in record levels of prepayments, which reduced the portfolio's
yield as premium-priced mortgage securities paid down at par and the
proceeds had to be reinvested at lower interest rates. Prepayment
levels on interest only (IO) securities were so high that they effec-
tively had a negative yield. IO securities also declined in price.
To mitigate some of the pressure on the portfolio's yield we extended
duration and took a more aggressive position in the leveraged portion
of the portfolio. Our original strategy was to borrow at rates ranging
from 1 month LIBOR to 12 month LIBOR (London Interbank Offered Rate)
and invest primarily in adjustable rate securities and also 1-year--3-year
fixed-rate securities. This strategy limited interest rate risk, since
short-term borrowings were paired with either adjustable rate or
short-term securities (or both). The differential between investment
yield and borrowing costs added incremental yield to the portfolio.
Currently, the leveraged portfolio is oriented more toward short-term
fixed-rate securities. This strategy further enhances yield, but also
subjects the portfolio to greater risk should interest rates rise and
borrowing costs increase. For example, an increase in interest rates will
affect our borrowing costs more quickly than the assets will reset (in
the case of adjustable rate investments) or mature (in the case of
fixed-rate investments). This would temporarily reduce the yield en-
hancement of leveraging. If interest rates rose significantly, the Fund's
borrowing costs could exceed the income earned on its investments for
a period of time. For more information, see "The Benefits and Risks of
Leveraging" on page 1 of this report to shareholders.
Looking ahead, our strategy will continue to focus on reaching a net
asset value of $10.00 per share on the termination date. Therefore, we
will invest in securities with maturities that are either shorter than
or only marginally beyond the termination date. Although an increase in
interest rates would impact the Fund's net asset value, the effect will
lessen as portfolio securities approach maturity. In addition, munici-
pal income will be retained in the Fund's net asset value.
We thank you for your investment in Income Opportunities Fund 1999, Inc.,
and we look forward to reviewing our outlook and strategy with you again
in our next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
February 2, 1994
<PAGE>
PER SHARE INFORMATION
<TABLE>
Per Share
Selected Quarterly
Financial Data*
(unaudited)
<CAPTION>
Net Realized Unrealized Dividends/Distributions
Investment Gains Gains Net Investment Capital
For the Period Income (Losses) (Losses) Income Gains
<S> <C> <C> <C> <C> <C>
August 28, 1992++ to December 31, 1992 $ .21 $(.03) $(.12) $ .18 --
January 1, 1993 to March 31, 1993 .18 .05 (.05) .11 --
April 1, 1993 to June 30, 1993 .16 (.02) .10 .18 --
July 1, 1993 to September 30, 1993 .16 (.06) .14 .17 --
October 1, 1993 to December 31, 1993 .15 .14 (.31) .13 $ .10
<CAPTION>
Net Asset Value Market Price**
For the Period High Low High Low Volume***
<S> <C> <C> <C> <C> <C>
August 28, 1992++ to December 31, 1992 $9.54 $9.32 $10.125 $9.25 3,949
January 1, 1993 to March 31, 1993 9.57 9.40 9.875 9.125 4,006
April 1, 1993 to June 30, 1993 9.51 9.35 9.75 9.125 4,715
July 1, 1993 to September 30, 1993 9.65 9.38 9.75 9.25 5,810
October 1, 1993 to December 31, 1993 9.63 9.32 9.625 8.75 6,940
<FN>
++Commencement of Operations.
*Calculations are based upon shares of Common Stock outstanding at the end of each period.
**As reported in the consolidated transaction reporting system.
***In thousands.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value Percent of
Rating Rating Amount Issue Cost (Note 1a) Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
Adjustable Rate* AAA Aaa $ 44,080,672 Citicorp Mortgage Securities, Inc.,
Mortgage-Backed REMIC (e) 92-17-A, 5.468% due
Obligations**-- 10/25/2022 (1) $ 45,732,311 $ 45,127,588 8.7%
Constant Maturity AAA Aaa 25,000,000 Prudential Home Mortgage Securities
Treasury Indexed Company, Inc., REMIC (e) 93-25-A1, 4.695%
Obligations due 7/25/2023 (1) 26,261,273 26,250,000 5.1
Total Constant Maturity Treasury Indexed
Obligations 71,993,584 71,377,588 13.8
<PAGE>
Adjustable Rate* 10,000,000 Federal National Mortgage Association,
Mortgage-Backed REMIC (e) 93-123-S, 15.661% due 7/25/2000 11,537,817 10,962,500 2.1
Obligations**-- NR AA++++ 10,000,000 Homart Pooled Asset Finance Trust Corporation,
London Interbank 93-A2, 4.563% due 12/29/2001 10,000,000 10,000,000 1.9
Offered Rate AA Aa2 26,000,000 Saxon Mortgage Securities Corporation,
Indexed Obligations REMIC (e) 92-2-B, 5.526% due 10/25/2022 26,773,410 26,861,250 5.2
AAA Aaa 11,025,336 Sears Mortgage Securities Corporation,
REMIC (e) 92-18-A2, 6.927% due 9/25/2022 11,270,443 11,369,878 2.2
Total London Interbank Offered
Rate Indexed Obligations 59,581,670 59,193,628 11.4
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 131,575,254 130,571,216 25.2
Fixed Rate AA A++ 10,000,000 1211 Finance Corporation, 1993-1-A, 6.736%
Mortgage-Backed due 10/01/2003 9,993,750 9,912,500 1.9
Obligations** AAA Aaa 12,313,745 CMC Securities Corporation,
REMIC (e) 93-B-2, 11.00% due 4/25/2023 13,331,915 12,960,216 2.5
AAA Aaa 5,851,640 Citicorp Mortgage Securities, Inc.,
REMIC (e) 92-12-A3, 8.00% due 3/25/2021 (1) 5,954,859 5,908,328 1.1
Federal Home Loan Mortgage Corporation,
REMIC (e):
27,311,867 93-1561-EB, 5.50% due 6/15/2007 (1) 26,501,046 26,321,812 5.1
16,004,000 93-1615-G, 5.50% due 10/01/2013 (1) 15,816,453 15,323,830 3.0
25,181,337 93-1604-GA, 5.50% due 10/22/2013 (1) 24,799,682 24,272,448 4.7
20,000,000 93-1564-G, 6.25% due 5/15/2007 (1) 20,214,939 19,800,000 3.8
30,326,442 Federal National Mortgage Association,
Pool #80306, 8.00% due 3/01/2000 (1) 31,448,826 31,691,131 6.1
Federal National Mortgage Association,
REMIC (e):
15,000,000 93-168-PG, 6.25% due 3/25/2020 (1) 15,032,637 14,826,562 2.9
50,000,000 93-229-PD, 5.60% due 12/25/2007 50,046,688 49,093,750 9.5
Kidder Peabody Acceptance Corporation,
REMIC (e):
AA++ AA++++ 19,500,000 93-C1-A3, 6.80% due 11/01/2023 18,930,234 19,000,313 3.7
AA++ NR 19,688,805 93-M1-A2, 7.15% due 4/25/2025 (1) 19,603,631 20,021,053 3.9
AAA++ Aaa 18,760,000 Prudential Home Mortgage Securities
Company, Inc., REMIC (e) 92-36-A8, 6.50%
due 11/25/1999 (1) 18,461,013 19,064,850 3.7
AAA AAA++++ 20,000,000 Residential Funding Corporation,
CMO (f) 94-S1-A8, 6.75% due 1/25/2024 19,946,875 19,850,000 3.8
Resolution Trust Corporation, REMIC (e):
A+ ++++A2 12,501,039 92-C7-B, 7.15% due 6/25/2023 12,621,612 12,739,340 2.5
AAA AAA++ 5,328,723 92-CHF-A1, 7.60% due 12/25/2020 5,335,300 5,451,950 1.1
A2 AA- ++++ 10,882,420 92-C6-B, 7.70% due 7/25/2024 11,194,200 11,100,068 2.1
AA++++ Aa2 31,735,695 92-C7-A1C, 7.90% due 6/25/2023 (1) 33,181,234 32,905,948 6.4
Ryland Mortgage Securities Corporation,
REMIC (e):
AAA Aaa 20,000,000 93-A1-A, 7.45% due 5/15/2000 20,777,669 20,300,000 3.9
AA AA++ 19,910,232 93-M1-A, 7.55% due 5/15/2002 20,150,396 20,594,646 4.0
AA+ ++ Aa2 44,000,000 Salomon Brothers Mortgage Securities VII,
Inc., REMIC (e) 93-C1-A2, 6.90% due 1/18/2023 45,311,153 44,825,000 8.7
Structured Asset Securities Corporation,
REMIC (e):
AAA Aaa 16,199,063 93-C1-A1A, 6.60% due 10/25/2024 (1) 16,236,727 16,386,365 3.2
AA AAA++++ 14,961,001 92-C1-A1, 6.70% due 11/25/2023 (1) 15,090,259 15,218,143 2.9
AAA Aaa 25,000,000 92-M1-A2, 7.05% due 11/25/2002 24,392,250 25,914,063 5.0
AAA Aaa 25,000,000 Town & Country Funding Corporation,
REIT (g) 5.85% due 8/15/1998 24,941,000 24,906,250 4.8
Total Investments in Fixed Rate
Mortgage-Backed Obligations 519,314,348 518,388,566 100.3
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value Percent of
Rating Rating Amount Issue Cost (Note 1a) Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
Other AAA NR $ 68,443,731 CMC Securities Corporation, 93-2I-A3,
Mortgage-Backed 0.50% (3) due 9/25/2023 $ 981,895 $ 919,713 0.2%
Obligations** DLJ Mortgage Acceptance Corporation,
REMIC (e):
AAA Aaa 156,063,677 92-9-A1, .615% (3) due 11/25/2022 2,653,733 2,434,593 0.5
AAA Aaa 56,422,271 93-20-S, .752% (3) due 12/25/2023 1,254,013 1,198,973 0.2
Federal Home Loan Mortgage Corporation:
15,000,736 92-143-B, 8.00% (3) due 10/15/2022 6,136,908 2,737,634 0.5
70,181,240 1547-SC, 4.279% (3) due 6/01/2023 6,962,177 6,009,269 1.2
8,446,106 92-1397, 8.00% (3) due 10/15/2022 3,478,566 1,298,589 0.3
13,176,390 Federal National Mortgage Association,
Trust 120-2, 8.00% (3) due 3/25/2022 6,381,206 2,239,986 0.4
Federal National Mortgage Association,
REMIC (e):
4,003,852 92-15-W, 8.00% (3) due 2/25/2022 1,786,579 670,645 0.1
15,005,956 92-G-5H, 9.00% (3) due 1/25/2022 5,827,195 2,400,953 0.5
136,914 92-196-L, 1187.608% (3) due 8/25/2006 4,021,451 1,779,886 0.3
AAA AAA++ 146,221,000 Fund America Investors Corporation,
93-J, .25% (3) due 12/25/2023 1,021,951 1,005,269 0.2
AA++ AA++++ 20,000,000 Kidder Peabody Acceptance Corporation,
93-C1-A3XP, .93% (3) due 9/01/2006 1,171,167 1,171,875 0.2
Total Investments in Other Mortgage-Backed
Obligations 41,676,841 23,867,385 4.6
Total Investments in Mortgage-Backed
Obligations 692,566,443 672,827,167 130.1
<PAGE>
Municipal Bonds AA Aa 4,600,000 Alabama State Refunding Bonds, 5.70% (2)
due 9/01/2000 3,154,954 3,368,212 0.7
AAA Aaa 2,445,000 Allegheny County, Pennsylvania, Sanitation
Authority Revenue Bonds, 5.75% (2)
due 12/01/2000 (b) 1,651,519 1,791,158 0.3
AAA Aaa 1,500,000 Austin, Texas, Utility Systems Revenue
Refunding Bonds, Series A, 5.69% (2)
due 5/15/2000 (b) 1,047,095 1,126,110 0.2
AAA Aaa 1,190,000 Conroe, Texas, Independent School District,
Schoolhouse Refunding Bonds, 5.75% (2)
due 2/01/2000 (d) 841,106 905,066 0.2
Contra Costa, California, School Funding
Authority Revenue Bonds (Site A) (c):
AAA Aaa 1,330,000 5.60% (2) due 9/01/1998 1,028,186 1,093,991 0.2
AAA Aaa 1,325,000 5.85% (2) due 9/01/1999 956,040 1,031,950 0.2
AAA Aaa 1,325,000 6.10% (2) due 9/01/2000 887,998 981,640 0.2
AAA Aaa 1,325,000 6.30% (2) due 9/01/2001 823,872 932,151 0.2
AAA Aaa 1,325,000 6.40% (2) due 9/01/2002 767,854 882,848 0.2
AAA Aaa 12,260,000 Houston, Texas, Water & Sewer System Revenue
Refunding Bonds, 5.65% (2) due 12/01/2000 (a) 8,314,419 8,981,431 1.7
AAA Aaa 5,860,000 Kansas City, Kansas, Refunding Bonds,
5.85% (2) due 3/01/2002 (c) 3,658,555 3,997,047 0.8
Kansas City, Kansas, Utility Systems
Revenue Refunding Bonds (a):
AAA Aaa 6,250,000 5.74% (2) due 9/01/2001 4,043,526 4,396,938 0.8
AAA Aaa 2,105,000 5.82% (2) due 3/01/2002 1,315,314 1,435,799 0.3
Maricopa County, Arizona, School District
No. 28, Refunding Bonds, Second Series (b):
AAA Aaa 3,000,000 5.55% (2) due 1/01/1999 2,281,942 2,406,210 0.5
AAA Aaa 10,000,000 5.55% (2) due 7/01/1999 7,401,074 7,845,800 1.5
AAA Aaa 4,000,000 5.70% (2) due 1/01/2000 2,855,401 3,053,680 0.5
AAA Aaa 9,350,000 5.70% (2) due 7/01/2000 6,489,610 6,979,214 1.3
Maricopa County, Arizona, School District
No. 41, Refunding Bonds, Second Series (b):
AAA Aaa 1,000,000 5.65% (2) due 1/01/2000 715,391 763,420 0.1
AAA Aaa 1,500,000 5.65% (2) due 7/01/2000 1,043,533 1,119,660 0.2
AAA Aaa 3,500,000 5.90% (2) due 1/01/2001 2,329,993 2,538,725 0.5
AAA Aaa 5,000,000 5.90% (2) due 7/01/2001 3,233,182 3,544,550 0.7
AAA Aaa 2,100,000 6.00% (2) due 1/01/2002 1,308,823 1,443,624 0.3
Maricopa County, Arizona, School
District No. 69, Revenue Refunding Bonds
(Paradise Valley) (a):
AAA Aaa 2,000,000 5.90% (2) due 7/01/2001 1,292,340 1,417,820 0.3
AAA Aaa 5,845,000 5.95% (2) due 7/01/2002 3,548,202 3,925,034 0.8
AA- A 2,045,000 Michigan State Building Authority Revenue
Bonds, Series I, 5.20% (2) due 10/01/2001 2,001,217 2,160,931 0.4
AAA Aaa 7,000,000 North Slope Boro, Alaska, Revenue Refunding
Bonds, Series A, 5.90% (2) due 6/30/2001 (d) 4,529,144 4,963,000 1.0
AAA Aaa 2,265,000 Penn Hills, Pennsylvania, School District
Refunding Bonds, 5.75% (2) due 10/01/2000 (d) 1,543,982 1,671,774 0.4
Rosemont, Illinois, Revenue Bonds (b):
AAA Aaa 2,510,000 Series B (Tax Increment 2), 5.80% (2)
due 12/01/2001 1,591,928 1,745,680 0.4
AAA Aaa 2,470,000 Series C (Tax Increment 3), 5.80% (2)
due 12/01/2001 1,566,559 1,717,860 0.3
AAA Aaa 3,000,000 Round Rock, Texas, Independent School
District Refunding Bonds, 5.74% (2)
due 2/15/2001 2,010,170 2,163,900 0.4
AAA Aaa 3,575,000 Spring Branch, Texas, Independent School
District, Schoolhouse Refunding Bonds,
5.95% (2) due 2/01/2002 2,223,297 2,448,017 0.5
AAA Aaa 5,000,000 State Public School Building Authority,
Pennsylvania, School Revenue Refunding Bonds
(District B), 6.00% (2) due 7/15/2002 (d) 3,014,990 3,351,500 0.6
<PAGE>
AA Aa 6,000,000 Washington State Public Power Supply
Systems, Revenue Refunding Bonds (Nuclear
Project No. 3), Series B, 5.98% (2)
due 7/01/2001 3,842,874 4,206,960 0.8
Total Investments in Municipal Bonds 83,314,090 90,391,700 17.5
US Government 15,400,000 Federal Home Loan Mortgage Corporation,
Agency Obligations 5.78% due 10/22/2003 (1) 15,400,000 14,832,125 2.9
Total Investments in US Government Agency
Obligations 15,400,000 14,832,125 2.9
US Government United States Treasury Notes:
Obligations 5,500,000 4.75% due 9/30/1998 5,528,856 5,408,906 1.0
7,000,000 4.75% due 10/31/1998 6,915,781 6,870,938 1.3
Total Investments in US Government
Obligations 12,444,637 12,279,844 2.3
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Short-Term Repurchase $ 771,000 Nikko Capital Markets, Inc. purchased on
Securities Agreements*** 12/31/1993 to yield 3.40% to 1/03/1994 $ 771,000 $ 771,000 0.1%
US Government
Agency
Obligations**** 120,000 US Treasury Bill, 3.02% due 3/31/1994 119,124 119,124 0.0
Total Investments in Short-Term Securities 890,124 890,124 0.1
Total Investments $804,615,294 791,220,96 152.9
============
Interest Rate Swaps 264,000 0.1
Variation Margin on Financial Futures Contracts++++++ 1,812 0.0
Liabilities in Excess of Other Assets (274,339,993) (53.0)
------------ -----
Net Assets $517,146,779 100.0%
============ =====
<PAGE>
<FN>
*Adjustable Rate Mortgage-Backed Obligations have coupon rates
which reset periodically.
**Mortgage-Backed Obligations are subject to principal paydowns
as a result of prepayments or refinancings of the underlying
mortgage instruments. As a result, the average life may be
substantially less than the original maturity.
***Repurchase Agreements are fully collateralized by US
Government & Agency Obligations.
****US Government Agency Discount Obligations are traded on
a discount basis and amortized to maturity. The interest rates
shown are the discount rates paid at the time of purchase by
the Fund.
(1) Security represents collateral in connection with Reverse
Repurchase Agreement (Note 6).
(2) Represents the approximate yield to maturity.
(3) Represents the interest only portion of a mortgage-backed
obligation. Stripped securities are traded on a discount basis and
amortized to maturity.
(a) AMBAC Insured.
(b) FGIC Insured.
(c) FSA Insured.
(d) MBIA Insured.
(e) Real Estate Mortgage Investment Conduits (REMIC).
(f) Collateralized Mortgage Obligation (CMO).
(g) Real Estate Investment Trust (REIT).
++Rating of issue is by Fitch Investors Service.
++++Rating of issue is by Duff and Phelps.
++++++Financial futures contracts purchased as of December 31, 1993 were
as follows:
Number of Expiration Value
Contracts Issue Date (Note 1b)
44 Municipal Bond Index March 1994 $4,540,250
Total Financial Futures Contracts Purchased
(Total Contract Price--$4,508,500) $4,540,250
Financial futures contracts sold as of December 31, 1993 were
as follows:
Number of Expiration Value
Contracts Issue Date (Note 1b)
34 US Treasury Bond March 1994 $(3,893,000)
Total Financial Futures Contracts Sold
(Total Contract Price--$3,895,125) $(3,893,000)
============
Ratings of issues shown have not been audited by Ernst & Young.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of December 31, 1993
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$804,615,294) (Note 1a) $791,220,960
Interest rate swaps, at value (Note 3) 264,000
Variation margin of financial futures contracts (Note 1b) 1,812
Cash 176,728
Receivables:
Securities sold $ 22,008,086
Interest 5,271,756
Principal paydowns 186,863
Loaned securities 44,440 27,511,145
------------
Deferred organization expenses (Note 1f) 48,155
Prepaid expenses and other assets 15,244
-----------
Total assets 819,238,044
-----------
Liabilities: Payables:
Reverse repurchase agreements (Note 6) 255,088,000
Securities purchased 42,127,611
Dividends to shareholders (Note 1g) 3,238,096
Interest expense (Note 6) 1,144,185
Investment adviser (Note 2) 352,254 301,950,146
------------
Accrued expenses and other liabilities 141,119
------------
Total liabilities 302,091,265
------------
Net Assets: Net assets $517,146,779
============
Capital: Capital stock, $.10 par value, 200,000,000 shares authorized $ 5,551,053
Paid-in capital in excess of par 521,127,053
Undistributed investment income--net 4,917,442
Accumulated distributions in excess of realized capital gain on investments--net (Note 1g) (1,352,310)
Unrealized depreciation on investments--net (13,096,459)
------------
Net assets--Equivalent to $9.32 per share based on 55,510,527 shares outstanding
(market price--$8.75) $517,146,779
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended December 31, 1993
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $45,741,343
Income Other 2,644,763
(Note 1e): -----------
Total income 48,386,106
-----------
Expenses: Interest expense (Note 6) $7,775,571
Investment advisory fees (Note 2) 3,963,389
Accounting services (Note 2) 89,356
Printing and shareholder reports 59,864
Professional fees 52,277
Custodian fees 42,258
Directors' fees and expenses 36,023
Transfer agent fees 31,084
Amortization of organization expenses (Note 1f) 13,176
Other 65,110
----------
Total expenses 12,128,108
-----------
Investment income--net 36,257,998
-----------
Realized & Realized gain on investments--net 6,003,805
Unrealized Change in unrealized depreciation on investments--net (6,755,901)
Gain (Loss) -----------
on Invest- Net Increase in Net Assets Resulting from Operations $35,505,902
ments--Net ===========
(Notes
1e & 3):
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the
For the Period
Year Ended Aug. 28, 1992++
Dec. 31, to Dec. 31,
1993 1992
Increase (Decrease) in Net Assets:
<S> <S> <C> <C>
Operations: Investment income--net $ 36,257,998 $ 11,588,941
Realized gain (loss) on investments--net 6,003,805 (1,616,364)
Change in unrealized depreciation on investments--net (6,755,901) (6,340,558)
------------ ------------
Net increase in net assets resulting from operations 35,505,902 3,632,019
------------ ------------
Dividends & Investment income--net (32,922,445) (10,007,052)
Distributions Realized gain on investments--net (4,387,441) --
to In excess of realized gain on investments--net (1,352,310) --
Shareholders ------------ -----------
(Note 1g): Net decrease in net assets resulting from dividends and distributions to shareholders (38,662,196) (10,007,052)
------------ -----------
Capital Share Proceeds from issuance of Common Stock -- 527,250,000
Transactions Offering costs resulting from issuance of Common Stock (15,787) (656,114)
(Note 4): Net increase (decrease) in net assets derived from capital share transactions (15,787) 526,593,886
------------ ------------
Net Assets: Total increase (decrease) in net assets (3,172,081) 520,218,853
Beginning of period 520,318,860 100,007
------------ ------------
End of period* $517,146,779 $520,318,860
============ ============
*Undistributed investment income--net $ 4,917,442 $ 1,581,889
============ ============
<FN>
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Year Ended December 31, 1993
<S> <S> <C>
Cash Provided Net increase in net assets resulting from operations $ 35,505,902
by Operating Adjustments to reconcile net increase (decrease) in net assets resulting from operations to
Activities: net cash provided by operating activities:
Decrease in receivables 1,504,201
Decrease in other assets 4,520
Decrease in other liabilities (539,225)
Realized and unrealized loss on investments--net 752,096
Amortization of premium and discount 7,917,700
--------------
Net cash provided by operating activities 45,145,194
--------------
Cash Used Proceeds from principal payments and sales of long-term securities 1,443,352,980
For Investing Proceeds from futures transactions 107,752
Activities: Purchases of long-term securities (1,507,453,670)
Proceeds from sales of short-term investments--net 15,609,876
--------------
Net cash used for investing activities (48,383,062)
--------------
Cash Provided Cash receipts from borrowings 41,664,000
By Financing Dividends paid to shareholders (38,724,315)
Activities: Offering costs resulting from issuance of Common Stock (15,787)
--------------
Net cash provided by financing activities 2,923,898
--------------
Cash: Net decrease in cash (313,970)
Cash at beginning of year 490,698
--------------
Cash at end of year $ 176,728
==============
Cash Flow Cash paid for interest $ 7,621,041
Information: ==============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the
The following per share data and ratios have been derived from For the Period
information provided in the financial statements. Year Ended Aug. 28, 1992++
Dec. 31, to Dec. 31,
Increase (Decrease) in Net Asset Value: 1993 1992
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 9.37 $ 9.50
Operating ----------- ----------
Performance: Investment income--net .65 .21
Realized and unrealized loss on investments--net (.01) (.15)
----------- ----------
Total from investment operations .64 .06
----------- ----------
Less dividends and distributions to shareholders:
Investment income--net (.59) (.18)
Realized gain on investments--net (.08) --
In excess of realized gain on investments--net (.02) --
----------- -----------
Total dividends and distributions to shareholders (.69) (.18)
----------- -----------
Capital charge resulting from issuance of Common Stock -- (.01)
----------- -----------
Net asset value, end of period $9.32 $9.37
=========== ===========
Market price per share, end of period $8.75 $9.25
=========== ===========
Total Based on market price per share 1.77% (5.78%)+++
Investment =========== ===========
Return:** Based on net asset value per share 7.02% 0.46%+++
=========== ===========
Ratios to Expenses, net of reimbursement 2.30% 1.19%*
Average =========== ===========
Net Assets: Expenses 2.30% 1.63%*
=========== ===========
Investment income--net 6.86% 6.54%*
=========== ===========
Supplemental Net assets, end of period (in thousands) $517,307 $520,319
Data: =========== ===========
Portfolio turnover 185.21% 48.17%
=========== ===========
<FN>
*Annualized.
**Total investment returns based on market value, which can be significantly greater or lesser than the
net asset value, result in substantially different returns. Total investment returns exclude the effects
of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Income Opportunities Fund 1999, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified,
closed-end management investment company. The Fund determines and
makes available for publication the net asset value of its Common
Stock on a weekly basis. The Fund's Common Stock is listed on the
New York Stock Exchange under the symbol IOF. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Corporate debt securities, mortgage-
backed securities, municipal securities, asset-backed securities
and other debt securities are valued on the basis of valuations
provided by dealers or by a pricing service, approved by the Fund's
Board of Directors. Securities having a remaining maturity of
sixty days or less are valued at amortized cost. Any securities
or other assets for which current market quotations are not
readily available are valued at their fair value as determined
in good faith by and under the direction of the Fund's Board of
Directors. Any securities denominated in a currency other than
US dollars will be translated into US dollars on the valuation date.
(b) Futures contracts--The Fund may purchase or sell interest rate
and financial futures contracts and options on such futures contracts
for the purpose of hedging the market risk on existing securities or
the intended purchase of securities. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at a
specific price or yield. Upon entering into a contract, the Fund deposits
and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to
the contract, the Fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When
the contract is closed, the Fund records a realized gain or loss equal
to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
(c) Options--When the Fund sells an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
paid or received (or loss or gain to the extent the cost of the
closing transaction is less than or greater than the premium paid
or received).
Written and purchased options are non-income producing
investments.
<PAGE>
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income
tax provision is required.
(e) Security transactions and investment income--Security trans-
actions are recorded on the dates the transactions are entered into
(the trade dates). Interest income is recognized on the accrual basis.
Original issue discounts and market premiums are amortized into
interest income. Realized gains and losses on security transactions
are determined on the identified cost basis.
(f) Deferred organization expenses--Deferred organization expenses
are amortized on a straight-line basis over a five-year period.
(g) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates. The Fund may at times pay
out less than the entire amount of taxable net investment income
earned in any particular period and may at times pay out such
accumulated undistributed income in addition to taxable net
investment income earned in other periods in order to permit the
Fund to maintain a more stable level of distribution. Distributions
in the amount of approximately $1,400,000 were paid due to the
recognition of Section 1256 contracts and deferral of wash-sale losses.
NOTES TO FINANCIAL STATEMENTS (concluded)
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement
with Fund Asset Management, Inc. ("FAMI"), a wholly-owned
subsidiary of Merrill Lynch Investment Management, Inc. ("MLIM"),
an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc.
FAMI is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund.
For such services, the Fund pays a monthly fee at an annual rate
of 0.75% of the Fund's average weekly net assets from August 28,
1992 through January 18, 1994, 0.55% of average weekly net assets
from January 19, 1994, to September 1, 1997, and 0.40% of average
weekly net assets from September 1, 1997 through termination of
the Fund. For the year ended December 31, 1993, FAMI earned fees
of $3,963,389.
Effective January 1, 1994, the investment advisory business of
FAMI reorganized from a corporation to a limited partnership.
The general partner of FAMI is Princeton Services, Inc., an
indirect wholly-owned subsidiary of Merrill Lynch & Co.
Accounting services are provided to the Fund by FAMI at cost.
Certain officers and/or directors of the Fund are officers
and/or directors of FAMI, MLIM, Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("MLPF&S"), and/or Merrill Lynch & Co., Inc.
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1993 were $1,483,679,368 and
$1,461,778,670, respectively.
Net realized and unrealized gains (losses) as of December 31, 1993
were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
Long-term investments $5,955,709 $(13,394,334)
Options written (25,781) --
Interest rate swaps -- 264,000
Financial futures contracts 73,877 33,875
---------- ------------
Total $6,003,805 $(13,096,459)
========== ============
Transactions in call options written for the year ended December 31, 1993
were as follows:
Premiums
Par Value Received
Outstanding call options -- --
written at beginning of $ 30,000,000 $ 203,907
year Options written (30,000,000) (203,907)
Options closed ------------ -----------
Outstanding call options $ -- $ --
written at end of year ============ ===========
The Fund has entered into the following interest rate swaps as of
December 31, 1993:
Payments Received
Notional Amount Current Rate Type Expiration Date
$ 4,000,000 3.66% Variable 4/09/1994
4,000,000 4.26% Variable 4/09/1995
4,000,000 4.82% Variable 4/09/1996
25,000,000 5.45% Fixed 4/05/1998
25,000,000 5.50% Fixed 3-5 years
25,000,000 5.226% Fixed 3-5 years
Interest rate swaps are agreements to exchange the Fund's interest
rate payments for fixed or variable interest rate payments on the
notional principal amount.
As of December 31, 1993, net unrealized depreciation for Federal
income tax purposes aggregated $13,424,822, of which $11,077,197 related
to appreciated securities and $24,502,019 related to depreciated securities.
The aggregate cost of investments at December 31, 1993 for Federal income tax
purposes was $804,645,782.
<PAGE>
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital
stock, par value $.10 per share. At December 31, 1993, total paid-in
capital amounted to $526,678,106.
5. Loaned Securities:
As of December 31, 1993, the Fund held US Treasury Notes having
an aggregate value of approximately $21,428,000 as collateral for portfolio
securities loaned having a market value of approximately $12,280,000.
6. Reverse Repurchase Agreements:
Under a reverse repurchase agreement, the Fund sells securities
and agrees to repurchase them at a mutually agreed upon date and
price. At the time the Fund enters into a reverse repurchase agreement,
it may establish a segregated account with the custodian containing cash,
cash equivalents or liquid high-grade debt securities having a value at
least equal to the repurchase price.
As of December 31, 1993, the Fund had entered into reverse repurchase
agreements in the amount of $255,088,000. For the year ended December 31,
1993, the maximum amount entered into was $287,858,000, the average
outstanding was $204,769,545, and the daily weighted average interest
rate was 3.73%.
<AUDIT-REPORT>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
Income Opportunities Fund 1999, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital of Income Opportunities Fund 1999, Inc., including the
schedule of investments, as of December 31, 1993, and the related
statements of operations and cash flows for the year then ended and
the statements of changes in net assets and the financial highlights
for the year then ended and for the period from August 28, 1992
(commencement of operations) to December 31, 1992. 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.
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
December 31, 1993 by correspondence with the custodian and
brokers. 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 Income Opportunities Fund 1999, Inc. at
December 31, 1993, the results of its operations and its cash flows
for the year then ended and the changes in its net assets and the
financial highlights for the year then ended and for the period
from August 28, 1992 to December 31, 1992, in conformity with
generally accepted accounting principles.
(Ernst & Young)
New York, New York
February 14, 1994
</AUDIT-REPORT>
