INCOME
OPPORTUNITIES
FUND 1999,
INC.
Semi-Annual Report June 30, 1994
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
<PAGE>
INCOME OPPORTUNITIES FUND 1999, INC.
The Benefits and
Risks of
Leveraging
Income Opportunities Fund 1999, Inc. is authorized to bor-
row 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 bor-
rowing, 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 securities purchased with the leverage.
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
DEAR SHAREHOLDER
For the six-month period ended June 30,
1994, Income Opportunities Fund 1999,
Inc. earned $0.306 per share income
dividends, representing a net annual-
ized yield of 7.24%, based on a month-
end per share net asset value of $8.53.
Over the same period, the Fund's total
investment return was -5.57%, based
on decline in per share net asset
value from $9.32 to $8.53, and assum-
ing reinvestment of $0.272 per share
income dividends.
For the three-month period ended June
30, 1994, the Fund's total invest-
ment return was -2.07%, based on a
decline in per share net asset
value from $8.88 to $8.53, and assuming
reinvestment of $0.155 per share
income dividends.
<PAGE>
Economic Environment
The US economy continues to grow,
although the pace of the expansion is
slowing. After a dramatic rise in gross
domestic product growth of 7% in the
fourth quarter of 1993, the Federal
Reserve Board acted to curb economic
growth and contain inflationary pressures.
During the period from February 4,
1994 through June 30, 1994, the central
bank increased the Federal Funds rate
four times for a total of 100 basis
points (1.00%). This carried over
into the bond market, so that interest
rates are now substantially higher
than they were in the fourth quarter of
1993. For example, five-year and ten-
year Treasury note yields are 6.95% and
7.32%, up 238 basis points and 216
basis points, respectively, from their
1993 lows.
Economic data point to a moderating
trend. First-quarter 1994 GDP growth
was 3.4%, and projections for the sec-
ond quarter's growth rate range from
2.9% to 4.1%. At the same time, inflation
remains subdued, with the May Pro-
ducer Price and Consumer Price
Indexes down 0.4% and 2.3%, respec-
tively, from their prior-year levels. Addi-
tionally, wage and price pressures con-
tinue to remain in control. With a slow-
ing economy and inflation in check,
further increases in short-term interest
rates may not be warranted, and may
push the economy back into a reces-
sion. However, although domestic con-
siderations do not appear to warrant
higher interest rates, the recent dra-
matic decline in the US dollar relative
to the Japanese yen and the German
Deutschemark is increasing pressure
for higher US interest rates.
<PAGE>
The mortgage-backed securities (MBS)
market has followed the Treasury mar-
ket. As interest rates moved higher,
MBS prices declined. Perhaps the most
important aspect of higher interest
rates for the MBS market is the dra-
matic decline in prepayment speeds.
The Mortgage Bankers Association
Refinance Index has declined from
1,727 in September 1993 to only 134 as
of June 30, 1994. However, this decline
in prepayments came too late for many
of the portfolio's MBS holdings, since
they already had significant paydowns,
but it should add a measure of price
stability in the months ahead for the
MBS remaining in the portfolio. With
most mortgages refinanced at lower
interest rates in 1992 and 1993, and
with 30-year mortgage rates back up
over 8.50%, we do not foresee another
episode of "prepayment shock" in
the near term. With greater certainty
that we will experience a lesser degree
of refinancing activity, MBS may
begin to outperform comparable average
life Treasury securities as yield
spreads tighten.
<PAGE>
Investment Activities
As outlined in previous reports to share-
holders, we initially structured the
Fund's portfolio to seek a high level
of monthly income by investing in both
adjustable and fixed-rate MBS and
some derivative securities, and by
utilizing leverage. The unprecedented
high level of mortgage prepayments
which began in 1992 and intensified
in 1993 and early 1994 were detrimental
to the Fund's yield. A number of our
high-yielding MBS investments, many
of which were purchased at a premium
price, paid down at par. The negative
impact on yield was intensified for the
Fund's interest only (IO) investments.
Since only the interest is purchased on
these derivative securities, the entire
cost is at a premium. With high pre-
payments, the loss on paydowns negated
the interest collected on these securi-
ties. Furthermore, the proceeds of the
paydowns for both straight MBS and
derivatives had to be reinvested at the
much lower interest rates prevailing
at that time.
<PAGE>
Although mortgage prepayments have
slowed dramatically, in recent weeks
the yield on our leveraged investments
has been impacted by the 150 basis
point increase in borrowing costs. The
securities in the leveraged portion
of the portfolio are either adjustable
rate or have very short maturities,
which helps reduce the risk that bor-
rowing costs will exceed interest
income on those assets. However, the
recent dramatic increase in short-term
interest rates diminished the spread
between the cost of leverage and the
income earned on these investments.
Barring a continued and more substan-
tial increase in borrowing costs, we
anticipate that the yield on the lev-
eraged portion of the portfolio will
improve as the coupons of adjustable
rate securities reset at the prevailing
higher interest rates. (For a complete
description of the benefits and risks of
leverage, see page 1 of this report to
shareholders.) In light of the downward
pressure on the yield of the Fund's
investments in the near term, the Board
of Directors has approved a reduction
in its dividend to 5.75%, based on the
Fund's initial maximum offering price
of $10 per share.
<PAGE>
The Fund's net asset value has also
declined. Extraordinarily high prepay-
ments caused market declines on our
IO investments. However, the recent
backup in interest rates caused more
significant declines in net asset value.
Our investment strategy continues to
emphasize the goal of seeking to return
$10.00 per share to shareholders on the
Fund's termination date. Since many of
the portfolio's current investments
mature before the Fund's termination
date, the recent unrealized losses
should be recouped as these securities
paydown or mature. Furthermore, we
retain a 11.5% investment in zero cou-
pon municipal securities, for which
most of the accretion income is ex-
pected to be retained by the Fund for
net asset value recovery at termination.
However, given the uncertainty of the
economic environment between now
and the termination date, there can be
no assurance that the Fund's invest-
ment objective in this regard can be
achieved.
Derivative Investments
Recently, the media have focused on the
role various derivative contracts may
play in increasing market volatility.
Additionally, regulatory organizations
have deliberated on the use of deriva-
tives. As described in its prospectus,
Income Opportunities Fund 1999, Inc.
has the ability to use derivatives to
seek to enhance income and to hedge
its portfolio against investment and
interest rate risks.
<PAGE>
The Fund has a 5.8% derivatives expo-
sure in a variety of issues, such as
IOs, inverse floaters, futures and inter-
est rate swaps. IOs and inverse floaters
are listed in the Schedule of Invest-
ments on page 6 of this report to share-
holders, and futures and interest rates
swaps are shown in a table below the
Schedule of Investments on page 8.
These high-yielding MBS derivatives
typically involve greater prepayment,
interest rate or credit risk than straight
MBS. For example, as discussed, the
negative effect of prepayments on
IOs is greater than for straight MBS
investments.
When we consider a derivative for
investment, we view it within the
context of the overall portfolio struc-
ture. For example, the portfolio's
interest rate swaps involve obligations
for the portfolio to pay adjusting short-
term interest rates while it collects
fixed-term rates. This type of derivative
is used to seek an interest rate spread
advantage to enhance the Fund's yield.
While this derivative may expose the
portfolio to a rise in short-term interest
rates, in some cases the portfolio also
has an adjustable rate asset that tends
to mitigate much of the risk over the
long term and also creates an interest
rate spread advantage.
Furthermore, some derivatives have
much greater upside performance
potential with limited downside risk.
For example, we recently purchased an
inverse floater with a current yield
of over 13%. Of course, as interest rates
move higher, the coupon and yield move
lower. However, with this particular
security the purchase price was 83.625,
and its underlying security was a pool
of seven-year balloon mortgages. Even
if the inverse floater's coupon went to
zero, coupled with the unlikely event
of zero prepayments on the underlying
mortgages, the deep discount price
assures a worst-case return of 3.68%.
<PAGE>
Therefore, derivatives do create oppor-
tunities to enhance performance along
with their attendant risks. We will con-
tinue to carefully weigh the potential
benefits of derivatives relative to the
risk incurred, and utilize them in the
portfolio in accordance with the Fund's
investment objectives of seeking high
income and to return $10.00 per share
to investors upon termination.
- --------------------------------------
Share Repurchases
On July 13, 1994, the Board of Directors
of the Fund authorized the Fund to
begin purchasing up to 10% of the
shares of the Fund which were out-
standing as of such date, in accord-
ance with the conditions specified
by applicable law.
- --------------------------------------
In Conclusion
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
July 18, 1994
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value Percent of
Rating Rating Amount Issue Cost (Note 1a) Net Assets
Adjustable Rate++ Mortgage-Backed Obligations*--
Constant Maturity Treasury Indexed Obligations
<S> <S> <C> <S> <C> <C> <C>
AAA Aaa $ 35,000,000 Prudential Home Mortgage Securities Company,
Inc., REMIC** 93-25-A1, 5.999% due 6/01/2023
(1) $ 36,511,303 $ 36,028,125 7.6%
Total Constant Maturity Treasury Indexed
Obligations 36,511,303 36,028,125 7.6
<CAPTION>
Adjustable Rate++ Mortgage-Backed Obligations*--
London Interbank Offered Rate Indexed Obligations
<S> <S> <C> <S> <C> <C> <C>
NR NR 28,389,792 Federal Home Loan Mortgage Corporation, Pool
#845592, 4.005% due 12/01/2023 (1) 29,134,477 28,114,766 5.9
NR AA++++ 10,000,000 Homart Pooled Asset Finance Trust Corporation,
93-A2, 4.625% due 12/29/2001 10,000,000 9,987,500 2.1
A Aa2 26,000,000 Saxon Mortgage Securities Corporation,
REMIC** 92-2-B, 5.048% due 10/25/2022 (1) 26,767,535 26,422,500 5.6
AAA Aaa 8,438,163 Sears Mortgage Securities Corporation,
REMIC** 92-18-A2, 6.865% due 9/25/2022 (1) 8,624,644 8,274,674 1.8
Total London Interbank Offered
Rate Indexed Obligations 74,526,656 72,799,440 15.4
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 111,037,959 108,827,565 23.0
<PAGE>
<CAPTION>
Fixed Rate Mortgage-Backed
Obligations*
<S> <S> <C> <S> <C> <C> <C>
AAA Aaa 7,036,935 CMC Securities Corporation, REMIC** 93-B-2,
11.00% due 4/25/2023 7,617,147 7,197,465 1.5
AAA Aaa 583,999 Citicorp Mortgage Securities, Inc.,
REMIC** 92-12-A3, 8.00% due 3/25/2021 594,246 553,704 0.1
AAA AAA++++++ 18,008,529 Countrywide Funding Corp., REMIC** 94-10-A9,
6.00% due 5/25/2009 17,530,178 16,657,889 3.5
A A 11,585,000 DLJ Mortgage Acceptance Corp., REMIC**
93-MF7-A2, 7.95% due 6/18/2003 11,422,086 11,150,563 2.4
Federal National Mortgage Association, Pool:
NR NR 30,195,006 #80306, 8.00% due 3/01/2000 (1) 31,240,084 30,006,287 6.3
NR NR 2,752,678 #190626, 11.25% due 2/01/2016 3,137,243 3,052,031 0.6
Kidder Peabody Acceptance Corporation,
REMIC**:
AA++++ AA++++ 19,500,000 93-C1-A3, 6.80% due 9/01/2006 18,930,234 17,543,906 3.7
AA++++ NR 19,585,422 93-M1-A2, 7.15% due 4/25/2025 (1) 19,500,695 18,581,669 3.9
NR Aa2 9,660,000 93-M3-B, 6.50% due 11/25/2025 9,572,456 8,766,450 1.9
AAA++++ Aaa 18,760,000 Prudential Home Mortgage Securities Company,
Inc., REMIC** 92-36-A8, 6.50% due
10/01/1999 (1) 18,461,013 17,728,200 3.7
AAA AAA++++++ 20,499,000 Residential Funding Corporation, CMO***
94-S1-A8, 6.75% due 1/25/2024 20,444,550 18,705,338 3.9
Resolution Trust Corporation, REMIC**:
A+++++++ A2 10,871,995 92-C7-B, 7.15% due 6/25/2023 10,976,325 10,714,012 2.3
AAA AAA++++ 3,513,948 92-CHF-A1, 7.60% due 12/25/2020 3,518,260 3,531,517 0.7
A2 AA++++ 26,016,650 92-C6-B, 7.70% due 7/25/2024 26,151,342 25,480,057 5.4
AA++++++ Aa2 27,271,417 92-C7-1C, 7.90% due 6/25/2023 28,507,825 27,416,296 5.8
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value Percent of
Rating Rating Amount Issue Cost (Note 1a) Net Assets
Fixed Rate Mortgage-Backed Obligations* (concluded)
<S> <S> <C> <S> <C> <C> <C>
Ryland Mortgage Securities Corporation,
REMIC**:
AAA Aaa $ 19,911,682 93-A1-A, 7.45% due 1/25/2023 $ 20,681,902 $ 19,787,234 4.2%
AA AA++++ 19,829,004 93-M1-A, 7.55% due 5/15/2000 20,053,327 19,283,706 4.1
AA++++ Aa2 44,000,000 Salomon Brothers Mortgage Securities VII,
Inc., REMIC** 93-C1-A2, 6.90% due 9/01/2013 45,294,826 41,976,000 8.9
Structured Asset Securities Corporation,
REMIC**:
AAA Aaa 12,570,429 93-C1-A1A, 6.60% due 12/25/2024 (1) 12,599,511 12,224,742 2.6
AAA Aaa 25,000,000 92-M1-A2, 7.05% due 11/25/2007 24,392,250 23,515,625 5.0
AAA Aaa 27,100,000 Town & Country Funding Corporation, REIT****,
5.85% due 8/15/1998 26,925,828 25,507,875 5.4
Total Investments in Fixed Rate
Mortgage-Backed Obligations 377,551,328 359,380,566 75.9
<CAPTION>
Derivative Mortgage-Backed Obligations*--Interest Only (3)
<S> <S> <C> <S> <C> <C> <C>
AAA NR 60,649,186 CMC Securities Corporation II, 93-2I-A3,
0.50% (2) due 9/25/2023 836,525 758,115 0.2
DLJ Mortgage Acceptance Corporation,
REMIC**:
AAA Aaa 137,653,789 92-9-A1, 0.615% (2) due 10/25/2022 2,327,364 1,376,538 0.3
NR NR 54,718,433 93-20-1S, 0.752% (2) due 12/25/2023 1,151,165 902,854 0.2
Federal Home Loan Mortgage Corporation,
REMIC**:
NR NR 11,996,286 92-143-B, 8.00% (2) due 7/15/2022 5,747,433 3,718,849 0.8
NR NR 66,992,975 1547-SC, 4.627% due 6/01/2023 (4)(7) 6,507,723 3,559,002 0.7
NR NR 6,704,471 92-1397, 8.00% (2) due 10/15/2022 3,253,551 2,178,953 0.5
NR NR 10,212,391 Federal National Mortgage Association,
Trust 120-2, 8.00% (2) due 3/25/2022 6,016,888 3,216,903 0.7
Federal National Mortgage Association,
REMIC**:
NR NR 3,142,311 92-15-W, 8.00% (2) due 2/25/2022 1,642,723 974,116 0.2
NR NR 11,616,465 92-G-5H, 9.00% (2) due 1/25/2022 5,350,937 3,339,734 0.7
NR NR 11,905,554 92-196-L, 9.96% (2) due 8/25/2006 3,496,904 2,619,222 0.5
AAA AAA++++ 128,256,803 Fund America Investors Corporation II,
93-J, 0.25% (2) due 12/25/2023 897,862 657,316 0.1
AA++++ AA++++++ 20,000,000 Kidder Peabody Acceptance Corporation,
93-C1-A3XP, 0.93% (2) due 9/01/2006 1,141,423 1,087,500 0.2
<PAGE>
<CAPTION>
Derivative Mortgage-Backed Obligations*--Inverse Floaters (4)
<S> <S> <C> <S> <C> <C> <C>
NR NR 7,000,000 Federal Home Loan Mortgage Corporation,
REMIC** 1743-S, 8.70% due 8/15/2001 (5) 5,853,750 5,775,000 1.2
Federal National Mortgage Association,
REMIC**:
NR NR 10,000,000 93-123-S, 12.004% due 7/25/2000 (6) 11,442,925 8,375,000 1.8
NR NR 6,364,718 93-180-SB, 8.321% due 9/25/2000 (7) 5,203,157 5,012,215 1.1
Total Investments in Derivative Mortgage-
Backed Obligations 60,870,330 43,551,317 9.2
Total Investments in Mortgage-Backed
Obligations 549,459,617 511,759,448 108.1
<PAGE>
<CAPTION>
Municipal Bonds
<S> <S> <C> <S> <C> <C> <C>
AA Aa 4,600,000 Alabama State Refunding Bonds, 5.70% (2) due
9/01/2000 3,239,472 3,298,338 0.7
AAA Aaa 2,445,000 Allegheny County, Pennsylvania, Sanitation
Authority Revenue Bonds, 5.75% (2) due
12/01/2000 (b) 1,697,388 1,722,625 0.4
AAA Aaa 1,500,000 Austin, Texas, Utility Systems Revenue
Refunding Bonds, Series A, 5.69% (2)
due 5/15/2000 (b) 1,075,484 1,093,065 0.2
AAA Aaa 1,190,000 Conroe, Texas, Independent School District,
Schoolhouse Refunding Bonds, 5.75% (2) due
2/01/2000 (d) 864,187 880,767 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 1,056,334 1,073,416 0.2
AAA Aaa 1,325,000 5.85% (2) due 9/01/1999 983,382 1,010,763 0.2
AAA Aaa 1,325,000 6.10% (2) due 9/01/2000 914,478 956,358 0.2
AAA Aaa 1,325,000 6.30% (2) due 9/01/2001 849,245 900,868 0.2
AAA Aaa 1,325,000 6.40% (2) due 9/01/2002 791,878 846,940 0.2
AAA Aaa 12,260,000 Houston, Texas, Water and Sewer System Revenue
Refunding Bonds, 5.65% (2) due 12/01/2000 (a) 8,537,692 8,675,666 1.8
AAA Aaa 5,860,000 Kansas City, Kansas, Refunding Bonds, 5.85% (2)
due 3/01/2002 3,749,904 3,802,320 0.8
Kansas City, Kansas, Utility Systems
Revenue Refunding Bonds (a):
AAA Aaa 6,250,000 5.74% (2) due 9/01/2001 4,153,368 4,197,500 0.9
AAA Aaa 2,105,000 5.82% (2) due 3/01/2002 1,351,483 1,365,850 0.3
<PAGE>
Maricopa County, Arizona, School District
No. 28, Refunding Bonds, Second Series (b):
AAA Aaa 3,000,000 5.55% (2) due 1/01/1999 2,344,561 2,347,650 0.5
AAA Aaa 10,000,000 5.55% (2) due 7/01/1999 7,604,168 7,615,400 1.6
AAA Aaa 4,000,000 5.70% (2) due 1/01/2000 2,935,873 2,950,040 0.6
AAA Aaa 9,350,000 5.70% (2) due 7/01/2000 6,672,497 6,707,690 1.4
Maricopa County, Arizona, School District
No. 41, Refunding Bonds, Second Series (b):
AAA Aaa 1,000,000 5.65% (2) due 1/01/2000 735,231 737,510 0.2
AAA Aaa 1,500,000 5.65% (2) due 7/01/2000 1,072,447 1,076,100 0.2
AAA Aaa 3,500,000 5.90% (2) due 1/01/2001 2,397,962 2,426,935 0.5
AAA Aaa 5,000,000 5.90% (2) due 7/01/2001 3,327,499 3,370,850 0.7
AAA Aaa 2,100,000 6.00% (2) due 1/01/2002 1,347,651 1,367,457 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 1,329,567 1,348,340 0.3
AAA Aaa 5,845,000 5.95% (2) due 7/01/2002 3,651,069 3,698,774 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 2,041,155 0.4
AAA Aaa 7,000,000 North Slope Boro, Alaska, Revenue Refunding
Bonds, Series A, 5.90% (2) due 6/30/2001 (d) 4,659,230 4,719,890 1.0
AAA Aaa 2,265,000 Penn Hills, Pennsylvania, School District
Refunding Bonds, 5.75% (2) due 10/01/2000 (d) 1,586,643 1,610,370 0.4
Rosemont, Illinois, Revenue Bonds (b):
AAA Aaa 2,510,000 Series B (Tax Increment 2), 5.80% (2) due
12/01/2001 1,635,385 1,652,935 0.4
AAA Aaa 2,470,000 Series C (Tax Increment 3), 5.80% (2) due
12/01/2001 1,609,323 1,626,594 0.3
AAA Aaa 3,000,000 Round Rock, Texas, Independent School
District Refunding Bonds, 5.74% (2) due
2/15/2001 2,066,533 2,086,050 0.4
AAA Aaa 3,575,000 Spring Beach, Texas, Independent School
District, Schoolhouse Refunding Bonds,
5.95% (2) due 2/01/2002 2,287,424 2,342,662 0.5
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value Percent of
Rating Rating Amount Issue Cost (Note 1a) Net Assets
Municipal Bonds (concluded)
<S> <S> <C> <S> <C> <C> <C>
AAA Aaa $ 5,000,000 State Public School Building Authority,
Pennsylvania, School Revenue Refunding Bonds
(District B), 6.00% (2) due 7/15/2002 $ 3,103,093 $ 3,176,850 0.7%
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 3,951,839 3,984,960 0.8
Total Investments in Municipal Bonds 85,583,507 86,712,688 18.3
<CAPTION>
US Government Agency Obligations
<C> <S> <C> <C> <C>
15,400,000 Federal Home Loan Mortgage Corporation, 5.78%
due 10/22/2003 (1) 15,400,000 13,349,875 2.8
United States Treasury Notes:
3,000,000 5.00% due 1/31/1999 2,817,656 2,778,270 0.6
6,000,000 5.50% due 2/28/1999 5,757,656 5,671,860 1.2
66,000,000 5.50% due 4/15/2000 (1) 61,764,844 61,359,540 13.0
8,000,000 5.75% due 8/15/2003 (1) 8,004,831 7,160,000 1.5
12,000,000 5.875% due 3/31/1999 (1) 11,682,734 11,495,625 2.4
Total Investments in US Government Agency
Obligations 105,427,721 101,815,170 21.5
<CAPTION>
Short-Term Securities
<S> <C> <S> <C> <C> <C>
Repurchase Agreement***** 7,000,000 Nikko Capital Markets, Inc. purchased on
6/30/94 to yield 4.37% to 7/01/94 7,000,000 7,000,000 1.5
<PAGE>
<CAPTION>
US Government Discount Obligation******
<C> <S> <C> <C> <C>
100,000 US Treasury Bill, 4.11% due 9/29/1994 98,973 98,973 0.0
Total Investments in Short-Term Securities 7,098,973 7,098,973 1.5
Total Investments $747,569,818 707,386,279 149.4
============
Interest Rate Swaps (2,858,400) (0.6)
Variation Margin on Financial Futures
Contracts++++++++ 4,719 0.0
Liabilities in Excess of Other Assets (230,943,896) (48.8)
------------ ------
Net Assets $473,588,702 100.0%
============ ======
<PAGE>
<FN>
(1)Security represents collateral in connection with a reverse
repurchase agreement (Note 5).
(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.
(4)Instruments with variable or floating interest rates that move in
the opposite direction of short-term interest rates.
Interest rates are calculated from the following formulas:
(5)19.2--(2.4 x 1-month LIBOR).
(6)26.325--(3.25 x 1-month LIBOR).
(7)23.9645--(3.5503 x 1-month LIBOR).
(8)8.45--(1 x COFI).
(a)AMBAC Insured.
(b)FGIC Insured.
(c)FSA Insured.
(d)MBIA Insured.
*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.
**Real Estate Mortgage Investment Conduits (REMIC) are
identified by the year created, series issued, and the
particular tranche.
***Collateralized Mortgage Obligation (CMO).
****Real Estate Investment Trust (REIT).
*****Repurchase Agreements are fully collateralized by US
Government & Agency Obligations.
******US Government 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.
++Adjustable Rate Mortgage-Backed Obligation has a coupon rate
which resets periodically.
++++Rating of issue is by Fitch Investors Service.
++++++Rating of issue is by Duff and Phelps.
++++++++Financial future contracts purchased as of June 30, 1994 were as follows:
Number of Expiration Value
Contracts Issue Date (Note 1b)
44 Municipal Bond Index September 1994 $ 3,906,375
Total Financial Futures Contracts Purchased
(Total Contract Price--$4,050,750) $ 3,906,375
===========
Financial futures contracts sold as of June 30, 1994 were as follows:
<PAGE>
Number of Expiration Value
Contracts Issue Date (Note 1b)
34 US Treasury Bond September 1994 $(3,441,438)
Total Financial Futures Contracts Sold
(Total Contract Price--$3,566,813) $(3,441,438)
===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of June 30, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$747,569,818) (Note 1a) $707,386,279
Variation margin on financial futures contracts (Note 1b) 4,719
Receivables:
Securities sold $ 44,510,541
Principal paydowns 963,659
Interest 4,829,233
Interest rate swap contract 145,794
Loaned securities 42,197 50,491,424
------------
Deferred organization expenses (Note 1f) 48,155
Prepaid expenses and other assets 15,244
------------
Total assets 757,945,821
------------
Liabilities: Interest rate swaps, at value (Note 3) 2,858,400
Payables:
Reverse repurchase agreements (Note 5) 238,520,691
Securities purchased 35,831,413
Interest expense (Note 5) 2,242,682
Swap contracts terminated 1,191,915
Investment adviser (Note 2) 216,880 278,003,581
------------
Accrued expenses and other liabilities 3,495,138
------------
Total liabilities 284,357,119
------------
Net Assets: Net assets $473,588,702
============
<PAGE>
Capital: Capital stock, $0.10 par value, 200,000,000 shares authorized $ 5,551,053
Paid-in capital in excess of par 521,127,054
Undistributed investment income--net 7,467,845
Accumulated realized capital losses and distributions in excess
of net realized gain on investments--net (17,496,311)
Unrealized depreciation on investments--net (43,060,939)
------------
Net assets--Equivalent to $8.53 per share based on 55,510,527
shares outstanding (market price--$7.625) $473,588,702
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended June 30, 1994
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 22,311,107
Income Other 842,507
(Note 1e): ------------
Total income 23,153,614
------------
Expenses: Interest expense (Note 5) $ 4,615,412
Investment advisory fees (Note 2) 1,388,960
Accounting services (Note 2) 59,584
Transfer agent fees 49,293
Professional fees 32,011
Custodian fees 26,439
Printing and shareholder reports 25,994
Directors' fees and expenses 23,687
Amortization of organization expenses (Note 1f) 6,355
Other 35,258
------------
Total expenses 6,262,993
------------
Investment income--net 16,890,621
------------
Realized & Realized loss on investments--net (16,144,000)
Unrealized Change in unrealized depreciation on investments--net (29,964,480)
Loss on ------------
Investments-- Net Decrease in Net Assets Resulting from Operations $(29,217,859)
Net(Notes 1e ============
& 3):
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the Year
Months Ended Ended
June 30, 1994 Dec. 31, 1993
Increase (Decrease) in Net Assets:
<S> <S> <C> <C>
Operations: Investment income--net $ 16,890,621 $ 36,257,998
Realized gain (loss) on investments--net (16,144,000) 6,003,805
Change in unrealized depreciation on investments--net (29,964,480) (6,755,901)
------------ ------------
Net increase (decrease) in net assets resulting from operations (29,217,859) 35,505,902
------------ ------------
Dividends & Investment income--net (14,340,218) (32,922,445)
Distributions Realized gain on investments--net -- (4,387,441)
to Share- In excess of realized gain on investments--net -- (1,352,310)
holders ------------ ------------
(Note 1g): Net decrease in net assets resulting from dividends and
distributions to shareholders (14,340,218) (38,662,196)
------------ ------------
Capital Share Offering costs resulting from issuance of Common Stock -- (15,787)
Transactions ------------ ------------
(Note 4): Net decrease in net assets derived from capital share transactions -- (15,787)
------------ ------------
Net Assets: Total decrease in net assets (43,558,077) (3,172,081)
Beginning of period 517,146,779 520,318,860
------------ ------------
End of period* $473,588,702 $517,146,779
============ ============
<FN>
*Undistributed investment income--net $ 7,467,845 $ 4,917,442
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Six Months Ended June 30, 1994
<S> <S> <C>
Cash Provided Net decrease in net assets resulting from operations $ (29,217,859)
by Operating Adjustments to reconcile net increase in net assets resulting from
Activities: operations to net cash provided by operating activities:
Decrease in receivables 1,788,131
Increase in other liabilities 5,509,055
Realized and unrealized loss on investments--net 46,108,480
Amortization of premium and discount 1,251,487
-------------
Net cash provided by operating activities 25,439,294
-------------
Cash Provided Termination of swap transactions (5,204,533)
by Investing Proceeds from principal payments and sales of long-term securities 589,437,237
Activities: Proceeds from futures transactions (147,559)
Purchases of long-term securities (569,348,459)
Purchases of short-term investments (324,876,084)
Proceeds from sales and maturities of short-term investments 318,669,000
-------------
Net cash provided by investing activities 8,529,602
-------------
Cash Used Repayments of borrowings--net (16,567,309)
For Financing Dividends paid to shareholders (17,578,315)
Activities: -------------
Net cash used for financing activities (34,145,624)
-------------
Cash: Net decrease in cash (176,728)
Cash at beginning of period 176,728
-------------
Cash at end of period $ 0
=============
Cash Flow Cash paid for interest $ 3,516,915
Information: =============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the For the
Six For the Period
The following per share data and ratios have been derived from Months Year Aug. 28,
information provided in the financial statements. Ended Ended 1992++
June 30, Dec. 31, to Dec. 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.32 $ 9.37 $ 9.50
Operating -------- -------- --------
Performance: Investment income--net .30 .65 .21
Realized and unrealized loss on investments--net (.83) (.01) (.15)
-------- -------- --------
Total from investment operations (.53) .64 .06
-------- -------- --------
Less dividends and distributions:
Investment income--net (.26) (.59) (.18)
Realized gain on investments--net - (.08) --
In excess of realized gain on investments--net - (.02) --
-------- -------- --------
Total dividends and distributions to Common Stock shareholders (.26) (.69) (.18)
-------- -------- --------
Capital charge resulting from issuance of Common Stock -- -- (.01)
-------- -------- --------
Net asset value, end of period $ 8.53 $ 9.32 $ 9.37
======== ======== ========
Market price per share, end of period $ 7.625 $ 8.75 $ 9.25
======== ======== ========
Total Based on market price per share (10.09%)+++ 1.77% (5.78%)+++
Investment ======== ======== ========
Return:** Based on net asset value per share (5.57%)+++ 7.02% .46%+++
======== ======== ========
Ratios to Expenses, net of reimbursement 2.56%* 2.30% 1.19%*
Average ======== ======== ========
Net Assets: Expenses 2.56%* 2.30% 1.63%*
======== ======== ========
Investment income--net 6.92%* 6.86% 6.54%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $473,589 $517,147 $520,319
Data: ======== ======== ========
Portfolio turnover 71.95% 185.21% 48.17%
======== ======== ========
<PAGE>
<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.
+++Aggregate total investment return.
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
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) Financial futures contracts--The Fund may purchase or sell
interest rate 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.
<PAGE>
(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.
(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 and offering expenses--Deferred organ-
ization 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 distributions.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Fund Asset Management, L.P. ("FAM"). Effective January 1, 1994, the
investment advisory business of FAM was reorganized from a corpor-
ation to a limited partnership. Both prior to and after the reorgani-
zation, ultimate control of FAM was vested with Merrill Lynch
and Co., Inc. ("ML & Co."). The general partner of FAM is Princeton
Services, Inc., an indirect wholly-owned subsidiary of ML & Co.
The limited partners are ML & Co. and Merrill Lynch Investment
Management, Inc. ("MLIM"), which is also an indirect wholly-owned
subsidiary of ML & Co.
NOTES TO FINANCIAL STATEMENTS (concluded)
FAM 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.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, MLIM, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended June 30, 1994 were $563,052,261 and
$614,210,366, respectively.
Net realized and unrealized losses as of June 30, 1994 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $(10,844,783) $(40,183,539)
Interest rate swaps (5,204,533) (2,858,400)
Financial futures contracts (94,684) (19,000)
------------ ------------
Total $(16,144,000) $(43,060,939)
============ ============
The Fund has entered into the following interest rate swaps as of
June 30, 1994:
<PAGE>
Notional Interest Received Interest Paid Expiration
Amount Current Rate Type Current Paid Type Date
$ 4,000,000 4% Variable* 4.26% Fixed 4/09/1995
4,000,000 4% Variable* 4.82% Fixed 4/09/1996
25,000,000 5.5% Fixed 5.00% Variable** 3-5 Years
25,000,000 5.23% Fixed 4.5625% Variable* 3-5 Years
[FN]
*3-Month LIBOR.
**6-Month LIBOR.
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 June 30, 1994, net unrealized depreciation for Federal income
tax purposes aggregated $40,183,539, of which $1,142,438 related
to appreciated securities and $41,325,977 related to depreciated
securities. The aggregate cost of investments at June 30, 1994 for
Federal income tax purposes was $747,569,818.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
par value $.10 per share. At June 30, 1994, total paid-in capital
amounted to $526,678,107.
5. 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 agree-
ment, it may establish a segregated account with the custodian
containing cash, cash equivalents or liquid high grade debt securi-
ties having a value at least equal to the repurchase price.
As of June 30, 1994, the Fund had entered into reverse repurchase
agreements in the amount of $238,520,691. For the six months ended
June 30, 1994, the maximum amount entered into was $257,968,000,
the average outstanding was $246,919,133, and the daily weighted
average interest rate was 3.76%.
<PAGE>
6. Subsequent Events:
On July 13, 1994, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$0.047916 per share, payable on July 29, 1994 to shareholders of
record as of July 22, 1994.
PER SHARE INFORMATION
<TABLE>
Per Share
Selected Quarterly
Financial Data*
<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
January 1, 1994 to March 31, 1994 .16 (.05) (.44) .10 --
April 1, 1994 to June 30, 1994 .14 (.24) (.10) .16 --
<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
January 1, 1994 to March 31, 1994 9.46 8.88 8.75 7.875 6,084
April 1, 1994 to June 30, 1994 8.81 8.52 8.25 7.625 4,210
<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>
<PAGE>
