INCOME
OPPORTUNITIES
FUND 1999, INC.
FUND LOGO
Semi-Annual Report
June 30, 1995
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.
<PAGE>
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 shareholders, 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.
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.
<PAGE>
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 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
Custodian and Transfer Agent
The Bank of New York
90 Washington Street
New York, New York 10286
NYSE Symbol
IOF
DEAR SHAREHOLDER
For the six-month period ended June 30, 1995, Income Opportunities
Fund 1999, Inc. earned $0.250 per share income dividends, which
included earned and unpaid dividends of $0.042 per share. This
represents a net annualized yield of 5.51%, based on a month-end net
asset value of $9.15 per share. Over the same period, the Fund's
total investment return was 14.31%, based on a change in per share
net asset value from $8.22 to $9.15, and assuming reinvestment of
$0.208 per share income dividends.
<PAGE>
Economic Environment
In the first quarter of 1995, investor concerns focused on an
overheating economy. Unemployment was down to 5.4% and consumer
confidence was at a high level. Commodity prices were increasing and
capacity utilization was running at a 15-year high. Although the
actual rate of inflation remained at 2.4%, as measured by the change
in consumer prices in 1994, inflationary concerns prevailed. The
Federal Reserve Board had increased short-term interest rates seven
times since February 1994 in a series of preemptive strikes against
inflation. There was additional pressure to increase interest rates
to support the US dollar, which had declined significantly relative
to many currencies, most notably the yen and the Deutschemark. The
consensus was that more interest rate increases were inevitable in
1995.
However, economic releases in the second quarter of 1995 indicated
that US economic activity may finally be slowing. With a significant
decline in the National Association of Purchasing Managers Index and
an employment report indicating a sharp cut in manufacturing jobs,
concerns arose that the planned orchestration of a "soft landing"
for the economy could turn into a recession. First-quarter gross
domestic product growth was reported at 2.7%, and forecasts for the
second quarter are flat to negative. The Index of Leading Economic
Indicators fell for the third consecutive month, a phenomenon which
has occurred prior to all nine recessions since World War II, but
which has not always been followed by a recession. Consumer
confidence dropped sharply in June. Investors began to anticipate an
interest rate cut by the Federal Reserve Board (which took place on
July 6), as illustrated by the inversion in the short-term end of
the yield curve, with one-month interest rates higher than 12-month
interest rates.
Portfolio Matters
The past several years have been a volatile period for investing in
mortgage-backed securities (MBS). The declines in interest rates in
the early 1990s were so great that it became extremely difficult to
manage the call risk inherent in most MBS. The Mortgage Bankers
Association Refinance Index peaked in 1993 as 30-year fixed-rate
mortgages fell to 6.50% and adjustable rate mortgages were 3.50%.
High-yielding, premium-priced MBS prepaid at par and reinvestment
rates were unattractive. Interest only (IO) securities had
significant negative returns as prepayment losses offset coupon
flows.
<PAGE>
In 1994, we experienced the worst bond market on record. While the
Fund experienced substantial price declines, most of its investments
mature near its termination date, so significant recovery in net
asset value was to be expected. However, the real difficulty was the
increase in borrowing costs. Although the Fund's leveraged portfolio
was invested primarily in adjustable rate mortgage securities (ARMS)
and other short-duration assets, the ARMS were hampered by interim
rate adjustment caps. The Fund's net asset value declined and
dividend cuts were necessary, one which took place in mid-1994 and
another effective in early 1995. In addition, a share repurchase
program was initiated, since the Fund's shares were trading on the
New York Stock Exchange at a significant discount to net asset
value. While this repurchase program not only helped support market
price, the discount on the shares repurchased also increased the
Fund's net asset value.
At this time, interest rates are again declining. As of June 30,
1995, yields on five-year and ten-year Treasury securities have
declined 186 basis points (1.86%) and 161 basis points,
respectively. However, although the 12-month London Interbank
Offered Rate (LIBOR) is 175 basis points below its 1994 high, one-
month LIBOR remains within 6 basis points of its 1994 high.
Therefore, the Fund's borrowing costs remain high, and there is
little prospect of an increase in the Fund's dividend rate.
The recent decline in interest rates does not materially expose the
Fund to prepayment risk. Many of the restructuring trades of 1994
purchased discount securities or commercial/multi-family securities
(or both) with prepayment penalties. Also, the remaining IO
positions in the portfolio are of "aged" mortgages, which already
had a refinancing incentive in 1992 and 1993. Since they were
inactive during that period, it appears likely that current
refinancing risk is limited.
Our primary focus continues to be to return $10.00 per share at the
Fund's termination date. Therefore, we are structuring the portfolio
to limit cash flows beyond 1999 to avoid sales at the then-
prevailing market rates. Municipal securities continue to provide
tax-exempt income to the Fund, which is retained to increase net
asset value. The share repurchase program continues to contribute to
net asset value recovery.
Our secondary concern is dividend yield. The greatest negative
impact on the Fund's yield is its borrowing costs. If the Federal
Reserve Board continues to reduce interest rates in the second half
of 1995, we may see a corresponding decline in borrowing costs. We
will not sacrifice the overall quality of the portfolio to seek to
increase dividend yield. As of June 30, the majority of the Fund's
holdings were primarily US Government agency securities and
securities in the two highest Standard & Poor's Corp. or Moody's
Investors Service, Inc. rating categories. Therefore, we expect that
borrowing costs must decline before the Fund's yield will increase
appreciably.
<PAGE>
In Conclusion
We thank you for your continued 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 31, 1995
<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 $ 35,000,000 Prudential Home Mortgage Securities
Mortgage-Backed Company, Inc., REMIC**93-25-A1,
Obligations*-- 6.981% due 6/01/2023 $ 36,169,133 $ 35,525,000 7.6%
Constant
Maturity
Treasury Indexed
Obligations
<PAGE>
Adjustable Rate++ NR+++ AA++++ 10,000,000 Homart Pooled Asset Finance Trust
Mortgage-Backed Corporation, CMO***93-A2, 7.50%
Obligations*-- due 12/29/2001 10,000,000 10,050,000 2.1
London Interbank A Aa2 26,000,000 Saxon Mortgage Securities
Offered Rate Corporation, REMIC**92-2-B,
Indexed 7.476% due 8/25/2022 26,764,906 26,178,750 5.6
Obligations AAA Aaa 7,763,039 Sears Mortgage Securities
Corporation, REMIC**92-18-A2,
6.848% due 9/25/2022 7,932,450 7,794,577 1.7
------------ ------------ ------
44,697,356 44,023,327 9.4
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 80,866,489 79,548,327 17.0
<PAGE>
Fixed Rate AAA AAA++++++ 5,000,000 CBA Mortgage Inc., CMO***93-C1-A2,
Mortgage-Backed 7.154% due 12/25/2003 4,856,250 5,107,813 1.1
Obligations* AAA Aaa 6,141,717 CMC Securities Corporation,
REMIC**93-B-2, 11.00% due
4/25/2023 (1) 6,357,148 6,233,842 1.3
AAA AAA++++++ 17,159,139 Countrywide Funding Corp., REMIC**
94-10-A9, 6.00% due 5/25/2009 16,703,349 16,612,191 3.6
AAA AAA 14,600,000 Debartolo Corp., CMO***A2, 7.48%
due 5/01/2015 14,445,973 15,129,250 3.2
A AA++++++ 11,585,000 DLJ Mortgage Acceptance Corp.,
REMIC**93-MF7-A2, 7.95% due
6/18/2003 11,422,086 11,932,550 2.6
Federal Home Loan Mortgage
Corporation, REMIC**(1):
NR+++ NR+++ 3,000,000 1341-G, 7.00% due 12/15/2003 3,011,149 3,015,000 0.7
NR+++ NR+++ 2,500,000 23-C, 5.00% due 7/25/2011 2,373,828 2,432,031 0.5
NR+++ NR+++ 9,325,000 G28-PN, 5.625% due 11/25/2015 8,639,512 8,957,828 1.9
NR+++ NR+++ 5,642,600 1784-PD, 7.00% due 5/01/2025 5,635,547 5,663,760 1.2
Federal National Mortgage
Association, Pool (1):
NR+++ NR+++ 15,000,000 #160159, 7.156% due 6/30/1999 15,027,230 15,543,750 3.3
NR+++ NR+++ 29,912,210 #80306, 8.00% due 3/01/2000 30,793,434 31,043,265 6.6
NR+++ NR+++ 4,263,674 #160238, 8.18% due 4/01/2001 4,391,659 4,519,495 1.0
NR+++ NR+++ 5,553,871 #160239, 8.305% due 4/01/2001 5,752,580 5,900,988 1.3
NR+++ NR+++ 9,269,147 #73063, 8.20% due 1/01/2002 9,186,594 9,836,882 2.1
NR+++ NR+++ 2,445,518 #190626, 11.25% due 2/01/2024 2,785,093 2,668,231 0.6
NR+++ NR+++ 10,713,261 #160240, 8.43% due 4/01/2001 11,399,508 11,399,579 2.4
NR+++ NR+++ 9,769,639 94-M2-A, 6.625% due 2/25/2001 9,632,254 9,745,215 2.1
NR+++ NR+++ 10,000,000 95-M1-A, 6.65% due 1/25/2002 10,099,696 10,018,750 2.1
NR+++ NR+++ 10,000,000 92-20-PG, 7.00% due 5/25/2005 10,050,542 10,009,370 2.1
NR+++ NR+++ 6,067,915 92-2-Z, 7.50% due 5/25/2005 6,138,849 6,098,255 1.3
NR+++ NR+++ 9,676,257 94-M5-A, 8.40% due 2/25/2009 10,005,125 10,247,761 2.2
NR+++ NR+++ 7,280,000 G93-26-PE, 5.90% due 7/25/2015 6,864,812 7,054,775 1.5
NR+++ NR+++ 5,223,000 G93-16-E, 5.00% due 11/25/2015 4,743,137 4,943,883 1.1
NR+++ NR+++ 5,000,000 G93-3-E, 6.00% due 1/25/2016 4,759,375 4,860,937 1.0
NR+++ NR+++ 5,000,000 G93-20-PE, 5.90% due 5/25/2016 4,912,500 4,878,125 1.0
AA AA++++ 4,000,000 FSA Capital Inc., 95-A, 7.42%
due 6/30/2002 4,020,380 4,092,500 0.9
Kidder Peabody Acceptance
Corporation, REMIC**:
NR+++ AAA++ 5,000,000 92-M2-A, 6.05% due 8/01/2003 4,650,000 4,826,565 1.0
AA++++ NR+++ 9,660,000 93-M3-B, 6.50% due 11/25/2025 9,572,456 9,346,050 2.0
AAA++++ AAA++++++ 4,265,053 Nomura Assets Securities Corp.,
94-MD1-A1A, 7.376% due 3/15/2018 4,273,022 4,346,355 0.9
Prudential Home Mortgage Securities
Company, Inc., REMIC**(1):
AAA++++ Aaa 18,760,000 92-36-A8, 6.50% due 10/01/1999 18,461,012 18,408,250 3.9
AAA++++ Aaa 5,386,231 94-32-A5, 8.25% due 12/25/2024 5,423,150 5,493,956 1.2
AAA AAA++++++ 20,499,000 Residential Funding Corporation,
CMO***94-S1-A8, 6.75% due
1/25/2024 20,444,550 19,884,030 4.3
<PAGE>
Resolution Trust Corporation,
REMIC**:
AAA AAA++++ 5,584,190 92-CHF-A1, 7.60% due 12/25/2020 5,579,928 5,554,524 1.2
A++++++ A2 8,884,827 92-C7-B, 7.15% due 6/25/2023 8,969,156 8,822,356 1.9
AA++++++ Aa2 14,382,453 92-C7-A1C, 7.90% due 6/25/2023 15,027,949 14,328,519 3.1
A2 AA++++ 23,650,056 92-C6-B, 7.70% due 7/25/2024 23,770,027 23,871,775 5.1
AA AA++++++ 5,000,080 93-C2-B, 7.75% due 3/25/2025 5,091,384 5,129,770 1.1
AA AA** 19,653,830 Ryland Mortgage Securities
Corporation, REMIC**93-M1-A,
7.55% due 5/15/2000 19,844,535 19,942,495 4.3
AA++++ Aa2 10,000,000 Salomon Brothers Mortgage
Securities VII, Inc., REMIC**
93-C1-A2, 6.90% due 9/01/2013 10,286,350 9,937,500 2.1
AAA Aaa 9,314,255 Structured Asset Securities
Corporation, REMIC**93-C1-A1A,
6.60% due 10/25/2024 9,335,574 9,209,470 2.0
AAA Aaa 27,100,000 Town & Country Funding Corporation,
CMO***, 5.85% due 8/15/1998 26,925,828 26,418,266 5.7
AAA AAA++++++ 40,375,000 Vornado Finance Corp., CMO***,
6.36% due 12/01/2000 36,531,172 39,668,438 8.5
Total Investments in Fixed Rate
Mortgage-Backed Obligations 448,193,703 453,134,345 97.0
Derivative AAA NR+++ 46,143,817 CMC Securities Corporation II,
Mortgage-Backed REMIC**93-21-A3, 0.50% due
Obligations*-- 9/25/2023 603,944 359,922 0.1
Interest Only (3) DLJ Mortgage Acceptance
Corporation, REMIC**:
AAA Aaa 113,050,531 92-9-A1, 0.615% due 10/25/2022 1,837,717 1,503,572 0.3
NR+++ NR+++ 43,154,826 93-20-1S, 0.752% due 12/25/2023 850,309 638,691 0.1
Federal Home Loan Mortgage
Corporation, REMIC**:
NR+++ NR+++ 10,000,000 G-24-IA, 6.50% due 8/25/2013 (1) 1,049,651 1,056,250 0.2
NR+++ NR+++ 10,964,772 92-143-B, 8.00% due 7/15/2022 (1) 4,759,544 2,933,077 0.6
NR+++ NR+++ 6,155,341 92-1397, 8.00% due 10/15/2022 2,698,259 1,415,728 0.3
NR+++ NR+++ 57,583,177 1547-SC, 4.627% due 6/01/2023 (1) 4,696,431 2,555,253 0.6
Federal National Mortgage
Association, REMIC**(1):
NR+++ NR+++ 10,152,063 92-G-5H, 9.00% due 1/25/2022 4,299,217 2,258,834 0.5
NR+++ NR+++ 2,868,133 92-15-W, 8.00% due 2/25/2022 1,384,183 727,789 0.2
NR+++ NR+++ 9,377,936 120-2, 8.00% due 3/25/2022 5,172,987 2,438,263 0.5
NR+++ NR+++ 89,698 92-196-L, 1,187.608% due
11/01/2022 2,463,789 1,793,968 0.4
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<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>
Derivative AAA AAA++++ $112,174,962 Fund America lnvestors Corporation
Mortgage-Backed II, REMIC**93-J, 0.25% due
Obligations*-- 12/25/2023 $ 682,451 $ 455,711 0.1%
Interest AAA++++ AAA++ 57,129,008 Mortgage Capital Fund Inc.,
Only (3) REMIC**94-MCI-11, 1.044% due
(concluded) 6/25/2019 1,440,649 1,472,857 0.3
------------ ------------ ------
31,939,131 19,609,915 4.2
Derivative NR+++ NR+++ 9,301,050 Government National Mortgage
Mortgage-Backed Association, REMIC**94-5-PA,
Obligations*-- 8.024% (2) due 6/16/2012 (1) 7,966,132 8,062,848 1.7
Principal
Only (4)
Derivative Federal Home Loan Mortgage
Mortgage-Backed Corporation, REMIC**:
Inverse NR+++ NR+++ 11,244,406 1453-S, 6.272% due 1/15/2000 (1) 10,285,117 10,682,185 2.3
Floaters (5) NR+++ NR+++ 3,101,660 1516-SC, 3.841% due 6/15/2000 2,334,968 2,667,427 0.6
NR+++ NR+++ 9,562,732 1566-SB, 3.12% due 9/15/2000 (1) 7,160,465 7,733,859 1.7
NR+++ NR+++ 10,511,525 1765-S, 5.816% due 2/15/2001 (1) 8,711,427 9,453,803 2.0
NR+++ NR+++ 6,811,134 1743-S, 4.65% due 8/15/2001 (1) 5,695,811 6,017,212 1.3
Federal National Mortgage
Association, REMIC**:
NR+++ NR+++ 5,003,830 93-81-S, .934% due 6/25/2000 (1) 3,366,640 3,827,930 0.8
NR+++ NR+++ 10,000,000 93-123-S, 6.52% due 7/25/2000 11,202,491 9,050,000 1.9
NR+++ NR+++ 10,000,000 X-169-B, 2.873% due 9/25/2000 (1) 7,650,000 8,240,625 1.8
------------ ------------ ------
56,406,919 57,673,041 12.4
Total Investments in Derivative
Mortgage-Backed Obligations 96,312,182 85,345,804 18.3
Total Investments in Mortgage-
Backed Obligations 625,372,374 618,028,476 132.3
<PAGE>
Municipal Bonds AA Aa 4,600,000 Alabama State Refunding Bonds,
5.70% (2) due 9/01/2000 3,422,702 3,526,038 0.8
AAA Aaa 2,445,000 Allegheny County, Pennsylvania,
Sanitation Authority Revenue
Bonds, 5.75% (2) due 12/01/2000
(b) 1,795,727 1,865,926 0.4
AAA Aaa 1,500,000 Austin, Texas, Utility Systems,
Revenue Refunding Bonds,
Series A, 5.69% (2) due 5/15/2000
(b) 1,136,527 1,173,797 0.3
AAA Aaa 1,190,000 Conroe, Texas, Independent School
District, Schoolhouse Refunding
Bonds, 5.75% (2) due 2/01/2000 (d) 913,798 944,157 0.2
Contra Costa, California, School
Funding Authority Revenue Bonds
(Site A) (c):
AAA Aaa 1,325,000 5.85% (2) due 9/01/1999 1,042,076 1,084,142 0.2
AAA Aaa 1,325,000 6.10% (2) due 9/01/2000 971,429 1,023,351 0.2
AAA Aaa 12,260,000 Houston, Texas, Water and Sewer
System, Revenue Refunding Bonds,
5.65% (2) due 12/01/2000 (a) 9,047,901 9,422,055 2.0
Maricopa County, Arizona, School
District No. 28, Refunding Bonds,
Second Series (b):
AAA Aaa 3,000,000 5.55% (2) due 1/01/1999 2,477,241 2,530,350 0.5
AAA Aaa 4,000,000 5.70% (2) due 1/01/2000 3,106,570 3,187,040 0.6
AAA Aaa 9,350,000 5.70% (2) due 7/01/2000 7,060,435 7,264,109 1.6
Maricopa County, Arizona, School
District No. 41, Refunding Bonds,
Second Series (b):
AAA Aaa 1,000,000 5.65% (2) due 1/01/2000 777,407 796,760 0.2
AAA Aaa 1,500,000 5.65% (2) due 7/01/2000 1,133,914 1,165,365 0.2
AAA Aaa 3,500,000 5.90% (2) due 1/01/2001 2,542,351 2,637,250 0.6
AAA Aaa 5,000,000 5.90% (2) due 7/01/2001 3,527,857 3,671,850 0.8
AA- A 2,045,000 Michigan State Building Authority
Revenue Bonds, Series I, 5.20% due
10/01/2001 2,001,217 2,078,620 0.4
AAA Aaa 7,000,000 North Slope Boro, Alaska, Revenue
Refunding Bonds, Series A, 5.90%
(2) due 6/30/2001 (d) 4,936,872 5,105,380 1.1
AAA Aaa 2,265,000 Penn Hills, Pennsylvania, School
District Refunding Bonds, 5.75% (2)
due 10/01/2000 (d) 1,678,376 1,742,985 0.4
AAA Aaa 2,510,000 Rosemont, Illinois, Revenue Bonds,
Series B (Tax Increment 2), 5.80%
(2) due 12/01/2001 (b) 1,729,099 1,797,411 0.4
AAA Aaa 3,000,000 Round Rock, Texas, Independent
School District Refunding Bonds,
5.74% (2) due 2/15/2001 2,186,614 2,246,310 0.5
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 4,185,861 4,322,040 0.9
<PAGE>
Total Investments in Municipal
Bonds 55,673,974 57,584,936 12.3
US Government NR+++ NR+++ 19,000,000 United States Treasury Notes,
Obligations 5.50% due 4/15/2000 (1) 17,645,469 18,631,780 4.0
Total Investments in US Government
Obligations 17,645,469 18,631,780 4.0
Total Investments $698,691,817 694,245,192 148.6
============
Interest Rate Swaps (1,040,000) (0.2)
Liabilities in Excess of Other Assets (226,147,509) (48.4)
------------ ------
Net Assets $467,057,683 100.0%
============ ======
<FN>
*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).
(1)Security represents collateral in connection with a Reverse
Repurchase Agreement (Note 5).
(2)Represents the approximate yield to maturity.
(3)Securities which receive some or all of the interest portion of
the underlying collateral and little or no principal. Interest only
securities have either a nominal or a notional amount of principal.
(4)Represents the principal only portion of a mortgage-backed
obligation. Stripped securities are traded on a discount basis and
amortized to maturity.
(5)Instruments with variable or floating interest rates that move in
the opposite direction of short-term interest rates.
(a)AMBAC Insured.
(b)FGIC Insured.
(c)FSA Insured.
(d)MBIA Insured.
++Adjustable Rate Mortgage-Backed Obligations have coupon rates
which reset periodically.
++++Rating of issue is by Fitch Investors Service.
++++++Rating of issue is by Duff & Phelps.
+++Not Rated.
<PAGE>
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of June 30, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$698,691,817) (Note 1a) $694,245,192
Receivables:
Securities sold $ 5,213,797
Interest 4,863,761
Principal paydowns 126,145
Interest rate swap contracts 3,894 10,207,597
------------
Deferred organization expenses (Note 1e) 34,980
Prepaid expenses and other assets 8,829
------------
Total assets 704,496,598
------------
Liabilities: Interest rate swaps, at value (Notes 1b & 3) 1,040,000
Payables:
Reverse repurchase agreements (Note 5) 233,060,269
Interest expense (Note 5) 2,421,811
Capital shares repurchased 602,032
Investment adviser (Note 2) 227,110 236,311,222
------------
Accrued expenses and other liabilities 87,693
------------
Total liabilities 237,438,915
------------
Net Assets: Net assets $467,057,683
============
Capital: Capital stock, $0.10 par value, 200,000,000 shares authorized $ 5,102,693
Paid-in capital in excess of par 487,147,473
Undistributed investment income--net 8,245,290
Accumulated realized capital losses on investments--net (Note 6) (27,951,148)
Unrealized depreciation on investments--net (5,486,625)
------------
Net assets--Equivalent to $9.15 per share based on 51,026,927
shares outstanding (market price--$8.125) $467,057,683
============
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended June 30, 1995
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 21,879,197
(Note 1d): Other 80,669
------------
Total income 21,959,866
------------
Expenses: Interest expense (Note 5) $ 6,727,141
Investment advisory fees (Note 2) 1,240,165
Accounting services (Note 2) 70,050
Transfer agent fees 55,495
Printing and shareholder reports 54,879
Professional fees 39,871
Custodian fees 22,299
Trustees' fees and expenses 21,903
Amortization of organization expenses (Note 1e) 10,538
Listing fees 121
Other 33,235
------------
Total expenses 8,275,697
------------
Investment income--net 13,684,169
------------
Realized & Unreal- Realized loss on investments--net (4,752,590)
ized Gain Change in unrealized depreciation on investments--net 48,027,841
(Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 56,959,420
(Notes 1b, 1d & 3): ============
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: June 30, 1995 Dec. 31, 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 13,684,169 $ 33,431,042
Realized loss on investments--net (4,752,590) (22,098,045)
Change in unrealized depreciation on investments--net 48,027,841 (40,418,007)
------------ ------------
Net increase (decrease) in net assets resulting from
operations 56,959,420 (29,085,010)
------------ ------------
Dividends to Investment income--net (10,854,586) (32,680,981)
Shareholders
(Note 1f): Net decrease in net assets resulting from dividends to
shareholders (10,854,586) (32,680,981)
------------ ------------
Capital Share Decrease in net assets derived from capital share
Transactions transactions. (18,814,629) (15,613,310)
(Note 4): ------------ ------------
Net decrease in net assets derived from capital share
transactions (18,814,629) (15,613,310)
------------ ------------
Net Assets: Total increase (decrease) in net assets. 27,290,205 (77,379,301)
Beginning of period 439,767,478 517,146,779
------------ ------------
End of period* $467,057,683 $439,767,478
============ ============
<FN>
*Undistributed investment income--net $ 8,245,290 $ 5,428,500
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Six Months Ended June 30, 1995
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 56,959,420
Operating Adjustments to reconcile net increase in net assets resulting from
Activities: operations to net cash provided by operating activities:
Decrease in receivables 542,848
Increase in other liabilities 610,936
Realized and unrealized gain on investments--net (43,275,251)
Amortization of premium and discount 2,775,861
------------
Net cash provided by operating activities 17,613,814
------------
<PAGE>
Cash Used for Termination of swap transactions 41,016
Investing Proceeds from principal payments and sales of long-term securities 232,953,291
Activities: Purchases of long-term securities (234,546,005)
Purchases of short-term investments. (178,881,783)
Proceeds from sales and maturities of short-term investments 179,519,137
------------
Net cash used for investing activities (914,344)
------------
Cash Used for Repayments of borrowings--net 15,824,519
Financing Cash payments on capital shares repurchased (19,102,638)
Activities: Dividends paid to shareholders (13,421,351)
------------
Net cash used for financing activities (16,699,470)
------------
Cash: Net increase (decrease) in cash --
Cash at beginning of period --
------------
Cash at end of period $ --
============
Cash Flow Cash paid for interest $ 6,110,619
Information: ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the For the
The following per share data and ratios have been Six Period
derived from information provided in the financial Months Aug, 28,
statements. Ended For the Year Ended 1992++ to
June 30, December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.22 $ 9.32 $ 9.37 $ 9.50
Operating -------- -------- -------- --------
Performance: Investment income--net .27 .60 .65 .21
Realized and unrealized gain (loss) on
investments--net .87 (1.11) (.01) (.15)
-------- -------- -------- --------
Total from investment operations 1.14 (.51) .64 .06
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.21) (.59) (.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 (.21) (.59) (.69) (.18)
-------- -------- -------- --------
Capital charge resulting from issuance of
Common Stock -- -- -- (.01)
-------- -------- -------- --------
Net asset value, end of period $ 9.15 $ 8.22 $ 9.32 $ 9.37
======== ======== ======== ========
Market price per share, end of period $ 8.125 $ 7.375 $ 8.75 $ 9.25
======== ======== ======== ========
Total Investment Based on market price per share 13.13%+++ (9.18%) 1.77% (5.78%)+++
Return:** ======== ======== ======== ========
Based on net asset value per share 14.31%+++ (4.97%) 7.02% .46%+++
======== ======== ======== ========
Ratios to Expenses, net of reimbursement and excluding
Average Net interest expense. .69%* .67% .83% .47%*
Assets: ======== ======== ======== ========
Expenses, excluding interest expense .69%* .67% .83% .91%*
======== ======== ======== ========
Expenses 3.67%* 2.80% 2.30% 1.63%*
======== ======== ======== ========
Investment income--net 6.07%* 6.93% 6.86% 6.54%*
======== ======== ======== ========
<PAGE>
Supplemental Net assets, end of period (in thousands) $467,058 $439,767 $517,147 $520,319
Data: ======== ======== ======== ========
Portfolio turnover 34.71% 94.71% 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, may 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. These unaudited financial
statements reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal
recurring nature. 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, which approximates market value.
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) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
<PAGE>
* 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.
* Options--The Fund is authorized to purchase and write call and put
options. When the Fund writes 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 basis of the security acquired or deducted from
(or added to) 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
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Interest rate transactions--The Fund is authorized to enter into
interest rate swaps and purchase or sell interest rate caps and
floors. In an interest rate swap, the Fund exchanges with another
party their respective commitments to pay or receive interest on a
specified notional principal amount. The purchase of an interest
rate cap (or floor) entitles the purchaser, to the extent that a
specified index exceeds (or falls below) a predetermined interest
rate, to receive payments of interest equal to the difference
between the index and the predetermined rate on a notional principal
amount from the party selling such interest rate cap (or floor).
(c) 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.
<PAGE>
(d) Security transactions and investment income--Security
transactions 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
(e) Deferred organization expenses--Deferred organization expenses
are amortized on a straight-line basis over a five-year period.
(f) 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.
(g) Short sales--When the Fund engages in a short sale, an amount
equal to the proceeds received by the Fund is reflected as an asset
and equivalent liability. The amount of the liability is
subsequently marked to market to reflect the market value of the
short sale. The Fund maintains a segregated account of securities as
collateral for the short sales. The Fund is exposed to market risk
based on the amount, if any, that the market value of the stock
exceeds the market value of the securities in the segregated
account.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
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 0.55% 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, PSI, Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), and/or ML & Co.
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended June 30, 1995 were $231,864,137 and
$237,817,218, respectively.
Net realized and unrealized gains (losses) as of June 30, 1995 were
as follows:
Realized
Gains Unrealized
(Losses) Losses
Long-term investments $ (4,685,598) $ (4,446,625)
Short-term investments (5,362) --
Short sales (102,646) --
Interest rate swaps 41,016 (1,040,000)
------------ ------------
Total $ (4,752,590) $ (5,486,625)
============ ============
The Fund has entered into the following interest rate swaps as of
June 30, 1995:
<TABLE>
<CAPTION>
Notional Interest Received Interest Paid Expiration
Amount Current Rate Type Current Rate Type Date
<C> <C> <S> <C> <S> <C>
4,000,000 6.25 % Variable* 4.82 % Fixed 4/09/1996
25,000,000 5.226% Fixed 5.9375% Variable* 3-5 years
25,000,000 5.50 % Fixed 5.875 % Variable** 3-5 years
<FN>
*3-month LIBOR at reset date.
**6-month LIBOR at reset date.
</TABLE>
As of June 30, 1995, net unrealized depreciation for Federal income
tax purposes aggregated $4,446,625, of which $14,664,305 related to
appreciated securities and $19,110,930 related to depreciated
securities. The aggregate cost of investments at June 30, 1995 for
Federal income tax purposes was $698,691,817.
<PAGE>
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, 1995, total paid-in capital
amounted to $492,250,166.
During the period, the Fund repurchased 2,445,200 shares of
capital stock, at an average market price of $7.67, all of which
have been retired.
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 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 June 30, 1995, the Fund had entered into reverse repurchase
agreements in the amount of $233,060,269 and the weighted average
interest rate was 6.18%. For the six months ended June 30, 1995, the
maximum amount entered into was $236,242,375, the average
outstanding was $219,162,616, and the daily weighted average
interest rate was 6.11%.
6. Capital Loss Carryforward:
At December 31, 1994, the Fund had a net capital loss carryforward
of approximately $17,473,000, all of which expires in 2002. This
amount will be available to offset like amounts of any future
taxable gains.
7. Subsequent Event:
On July 19, 1995, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$.041666 per share, payable on July 31, 1995 to shareholders of
record as of July 21, 1995.
PER SHARE INFORMATION
<PAGE>
<TABLE>
Per Share
Selected Quarterly
Financial Data*
<CAPTION>
Net Realized Unrealized Dividends/Distributions
Investment Gains Gains Net Investment Capital
For the Quarter Income (Losses) (Losses) Income Gains
<S> <C> <C> <C> <C> <C>
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 --
July 1, 1994 to September 30, 1994 .15 (.01) (.03) .14 --
October 1, 1994 to December 31, 1994 .15 (.09) (.15) .19 --
January 1, 1995 to March 31, 1995 .13 (.07) .46 .08 --
April 1, 1995 to June 30, 1995 .14 (.02) .50 .13 --
<CAPTION>
Net Asset Value Market Price**
For the Quarter High Low High Low Volume***
<S> <C> <C> <C> <C> <C>
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
July 1, 1994 to September 30, 1994 8.76 8.50 8.25 7.50 5,988
October 1, 1994 to December 31, 1994 8.54 8.20 8.00 6.875 5,801
January 1, 1995 to March 31, 1995 8.69 8.21 7.75 7.25 5,854
April 1, 1995 to June 30, 1995 9.24 8.73 8.125 7.375 5,463
<FN>
*Calculations are based upon shares of Common Stock outstanding
at the end of each quarter.
**As reported in the consolidated transaction reporting system.
***In thousands.
</TABLE>
