INCOME
OPPORTUNITIES
FUND 1999, INC.
FUND LOGO
Annual Report
December 31, 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 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.
<PAGE>
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.
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.
<PAGE>
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 year ended December 31, 1994, Income Opportunities Fund
1999, Inc. earned $0.594 per share income dividends, which included
earned and unpaid dividends of $0.048 per share, representing a net
annualized yield of 7.22%, based on a month-end net asset value of
$8.22 per share. Over the same period, the Fund's total investment
return was -4.97%, based on a decline in per share net asset value
from $9.32 to $8.22, and assuming reinvestment of $0.594 per share
income dividends.
Economic Environment
Despite six short-term interest rate increases by the Federal
Reserve Board, the US economy was strong throughout 1994. During the
first three quarters of the year, gross domestic product growth
averaged 3.8%, fourth-quarter estimates are as high as 4.5%. This
growth rate suggests building inflationary pressures, and the
Federal Reserve Board continued its anti-inflation stance by
tightening monetary policy on February 1, 1995 at the Federal Open
Market Committee meeting.
<PAGE>
Looking ahead into 1995, the economic outlook is less certain.
Consumer spending is the linchpin for a strong economy. Although the
Consumer Confidence Index is at a four-year high and unemployment is
down, trends in the consumer sector are not all clearly positive.
Total consumer debt outstanding has continually increased throughout
1994, savings continue at a low level and wage increases have been
moderate. Although retail sales increased for most of 1994, results
for the all-important holiday season were lower than expected.
Higher short-term interest rates will put added pressure on the
consumer. This is especially true for those with adjustable rate
mortgages, since most homeowners' rates will increase by the annual
adjustment limit of 200 basis points (2.00%). It remains to be seen
whether the economy is on the verge of slowing down or whether
further short-term interest rate increases will be necessary as 1995
progresses to dampen inflationary pressures.
Investment Activities
To say that 1994 was a difficult year for fixed-income investments
is a tremendous understatement: it was the worst year for the bond
market in over 50 years. After reaching 30-year lows in interest
rates in 1993, short-term interest rates rose 350 basis points in
1994 while long-term interest rates rose 150 basis points. These
interest rate movements translated into total rates of return on 30-
year, 10-year and two-year US Treasury securities of -11.92%, -7.85%
and +0.38%, respectively. In this environment, the Fund's total
return for the year was -4.97%.
For a fund that utilizes leverage, such as ours, the decline in the
bond market had an exaggerated effect. First, leverage enables the
Fund to purchase more securities, so there are more issues in the
portfolio that experience price declines. Second, borrowings must be
renewed at a higher and higher cost. Borrowing costs (which are
pegged to LIBOR, the London Interbank Offering Rate) have increased
dramatically. At the beginning of 1994, six-month LIBOR was 3.50%.
By mid-year, it had increased to 5.25%, and by the end of 1994 six-
month LIBOR was at 7.00%. Yields on the Fund's leveraged assets
could not keep pace with such dramatic rate increases, especially
since they occurred in such a short time span. (For a complete
description of the potential benefits and risks of leveraging, see
page 1 of this report to shareholders.)
<PAGE>
At the same time, the Fund's adjustable rate assets were impacted
by the inherent lag as yields adjust upward and interim caps on rate
increases. Furthermore, our short-term investments have yet to reach
maturity. This has caused a squeeze on the portfolio's earnings.
Continued dividend payments in excess of taxable income would put
additional pressure on the objective of seeking to return $10.00 per
share to shareholders on the Fund's maturity. After the close of the
December reporting period, the Board of Directors approved a
reduction in the Fund's dividend to 5.00%, based on the Fund's
initial maximum offering price of $10.00 per share.
Looking ahead, it appears that at least for the first half of 1995
there will be additional upward pressure on short-term interest
rates. This pressure should continue to depress the Fund's yield as
borrowing costs are somewhat more sensitive to changes in interest
rates than the Fund's investments. However, when the economy finally
slows and short-term interest rates stabilize, the yield on the
portfolio should move higher.
Most of the decline in the Fund's net asset value for the year is
from unrealized losses. Since most of the portfolio is scheduled to
mature prior to the Fund's termination date, most of these
unrealized losses should be recovered. However, since mortgage
prepayments have slowed so dramatically, some securities have estab-
lished cash flows beyond the Fund's termination date. Therefore,
these securities as well as the longer maturities will be subject to
pricing at the then-prevailing interest rate levels. In addition, if
securities with unrealized capital losses are sold to increase
portfolio yield or to raise cash reserves, the losses become
realized and make it more difficult for the Fund to return $10.00
per share to shareholders upon the termination date.
As we look toward the Fund's termination date, we focus on the
Fund's per share net asset value. As noted in our last report to
shareholders, and as reported at right, the Fund began to repurchase
up to 10% of its outstanding shares in August. These repurchases
both support the market price of the Fund's shares and increase
their net asset value as the discount on the shares repurchased
accrues to the Fund. Thus far, most shares have been repurchased
with normal principal and interest cash flows from our investments,
and few securities sales have been necessary. Nevertheless, most of
the potential benefit to net asset value to date has been offset
with additional realized losses taken on securities in an effort to
increase the portfolio's yield and reduce our exposure to securities
that mature beyond the life of the Fund. The dramatic flattening of
the yield curve, especially the narrowing of yield spreads between
five-year and 30-year maturities, afforded an opportunity to shorten
maturities without a yield concession.
<PAGE>
Turning to the Fund's investments in derivative securities, as of
December 31, 1994, 3.62% of the Fund's total assets was invested in
interest only (IO) securities and 4.81% was in inverse floating rate
(IF) securities. The IOs effectively had negative yields in 1992 and
1993 when mortgage prepayments were at record highs. However, now
that prepayments have slowed, these securities are performing very
well and had significant positive returns in 1994. The IFs are all
based on seven-year "balloon" mortgages. We purchased most of these
at large discounts, which assures a minimum return even if the
coupon declines to 0% and prepayments stop completely.
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
January 27, 1995
Share Repurchases
On July 13, 1994 the Fund's Board of Directors authorized the Fund
to begin purchasing up to 10% of its shares outstanding as of that
date, in accordance with the conditions specified by applicable law.
As of December 31, 1994, the Fund had acquired 2,038,400, or 3.6%,
of its outstanding shares.
<PAGE>
<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 AAA Aaa $ 35,000,000 Prudential Home Mortgage Securities
Rate++ Company, Inc., REMIC** 93-25-A1,
Mortgage-Backed 6.528% due 6/01/2023 $ 36,341,104 $ 35,525,000 8.1%
Obligations*--
Constant
Maturity
Treasury
Indexed
Obligations
Adjustable NR+++ NR+++ 17,959,678 Federal Home Loan Mortgage Corporation,
Rate++ Pool #845592, 4.525% due 12/01/2023 (1) 18,410,902 17,185,257 3.9
Mortgage-Backed NR+++ AA++++ 10,000,000 Homart Pooled Asset Finance Trust Corpor-
Obligations*-- ation, CMO*** 93-A2, 6.00% due 12/29/2001 10,000,000 10,000,000 2.3
London A Aa2 26,000,000 Saxon Mortgage Securities Corporation,
Interbank REMIC** 92-2-B, 6.467% due 8/25/2022 26,765,667 25,480,000 5.8
Offered Rate AAA Aaa 8,029,512 Sears Mortgage Securities Corporation,
Indexed REMIC** 92-18-A2, 6.853% due 9/25/2022 8,205,861 7,922,870 1.8
Obligations ------------ ------------ ------
63,382,430 60,588,127 13.8
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 99,723,534 96,113,127 21.9
<PAGE>
Fixed Rate AAA Aaa 6,798,747 CMC Securities Corporation, REMIC**
Mortgage- 93-B-2, 11.00% due 4/25/2023 7,212,747 7,132,310 1.6
Backed AAA AAA++++++ 18,000,233 Countrywide Funding Corp., REMIC**
Obligations* 94-10-A9, 6.00% due 5/25/2009 17,522,101 16,205,834 3.7
A A 11,585,000 DLJ Mortgage Acceptance Corp.,
REMIC** 93-MF7-A2, 7.95% due 6/18/2003 11,422,086 10,884,470 2.5
Federal National Mortgage Association,
Pool:
NR+++ NR+++ 15,000,000 #160159, 7.516% due 6/30/1999 (1) 15,030,103 14,524,219 3.3
NR+++ NR+++ 30,057,037 #80306, 8.00% due 3/01/2000 (1) 31,020,920 29,164,719 6.6
NR+++ NR+++ 9,294,100 #73063, 8.20% due 1/01/2002 (1) 9,211,328 9,230,203 2.1
NR+++ NR+++ 2,585,602 #190626, 11.25% due 2/01/2024 (1) 2,945,748 2,784,435 0.6
Kidder Peabody Acceptance Corporation,
REMIC**:
AA++++ AA++++++ 19,500,000 93-C1-A3, 6.80% due 9/01/2006 18,930,234 17,153,906 3.9
AA++++ NR+++ 9,660,000 93-M3-B, 6.50% due 11/25/2025 9,572,456 8,534,006 2.0
AAA++++ Aaa 18,760,000 Prudential Home Mortgage
Securities Company, Inc., REMIC**
92-36-A8, 6.50% due 10/01/1999 (1) 18,461,012 17,218,163 3.9
AAA AAA++++ 20,499,000 Residential Funding Corporation,
CMO*** 94-S1-A8, 6.75% due
1/25/2024 (1) 20,444,549 18,237,704 4.2
Resolution Trust Corporation, REMIC**:
A++++++ A2 9,719,752 92-C7-B, 7.15% due 6/25/2023 9,812,521 9,338,556 2.1
AAA AAA++++ 9,521,817 92-CHF-A1, 7.60% due 12/15/2020 9,514,566 9,453,379 2.1
A2 AA++++ 24,757,861 92-C6-B, 7.70% due 7/25/2024 24,884,761 23,519,968 5.4
AA++++++Aa2 19,404,294 92-C7-A1C, 7.90% due 6/25/2023 20,279,661 19,246,634 4.4
Ryland Mortgage Securities Corporation,
REMIC**:
AAA Aaa 19,770,564 93-A1-A, 7.45% due 1/25/2023 (1) 20,531,104 18,392,803 4.2
AA AA++++ 19,743,608 93-M1-A, 7.55% due 5/15/2000 19,951,279 18,558,991 4.2
AA++++ Aa2 44,000,000 Salomon Brothers Mortgage Securities
VII, Inc., REMIC** 93-C1-A2,
6.90% due 9/01/2013 (1) 45,277,578 42,649,750 9.7
Structured Asset Securities
Corporation, REMIC**:
AAA Aaa 10,732,362 93-C1-A1A, 6.60% due 10/25/2024 10,757,060 10,061,589 2.3
AAA Aaa 5,000,000 92-M1-A2, 7.05% due 11/25/2007 4,878,450 4,528,125 1.0
AAA Aaa 27,100,000 Town & Country Funding Corporation,
CMO***,5.85% due 8/15/1998 26,925,828 24,821,906 5.6
AAA AAA++++++ 40,375,000 Vornado Finance Corp., CMO***,
6.36% due 12/01/2000 36,531,172 36,299,648 8.3
Total Investments in Fixed Rate
Mortgage-Backed Obligations 391,117,264 367,941,318 83.7
<PAGE>
Derivative AAA NR+++ 53,670,238 CMC Securities Corporation II, REMIC**
Mortgage-Backed 93-2I-A3, 0.50% due 9/25/2023 697,092 445,463 0.1
Obligations*-- DLJ Mortgage Acceptance Corporation,
Interest REMIC**:
Only (3) AAA Aaa 127,369,020 92-9-A1, 0.615% due 10/25/2022 2,030,432 1,273,690 0.3
NR+++ NR+++ 47,271,521 93-20-1S, 0.752% due 12/25/2023 986,523 690,164 0.2
Federal Home Loan Mortgage Corporation,
REMIC**:
NR+++ NR+++ 62,597,852 1547-SC, 4.263% (5) due 6/01/2023 5,692,254 2,464,790 0.6
NR+++ NR+++ 11,354,012 92-143-B, 8.00% due 7/15/2022 5,204,692 3,945,519 0.9
NR+++ NR+++ 6,385,746 92-1397, 8.00% due 10/15/2022 2,948,742 2,063,394 0.5
NR+++ NR+++ 9,693,183 Federal National Mortgage Association,
REMIC** 120-2, 8.00% due 3/25/2022 5,553,348 3,435,022 0.8
Federal National Mortgage Association,
REMIC**:
NR+++ NR+++ 2,969,924 92-15-W, 8.00% due 2/25/2022 1,500,600 1,032,049 0.2
NR+++ NR+++ 10,718,240 92-G-5H, 9.00% due 1/25/2022 4,767,060 3,429,837 0.8
NR+++ NR+++ 101,017 92-196-L, 1,187.61% due 11/01/2022 2,882,972 2,474,926 0.6
AAA AAA++++ 120,608,756 Fund America Investors Corporation II,
REMIC**, 93-J, 0.25% due 12/25/2023 760,673 603,044 0.1
NR+++ NR+++ 10,000,000 Federal Home Loan Mortgage Corporation,
REMIC**, G-24-IA, 6.50% due 8/25/2013 1,324,703 1,301,563 0.3
AA++++ AA++++ 20,000,000 Kidder Peabody Acceptance Corporation,
REMIC**, 93-C1-A3XP, 0.93% (2)
due 9/01/2006 1,095,758 1,052,000 0.2
------------ ------------ ------
35,444,849 24,211,461 5.6
Derivative NR+++ NR+++ 9,846,909 Government National Mortgage Association,
Mortgage-Backed REMIC**, 94-5-PA, 8.024% (2) due
Obligations*-- 6/16/2012 (1) 8,190,482 7,992,921 1.8
Principal Only
(4)
</TABLE>
<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 Federal Home Loan Mortgage Corporation,
Mortgage-Backed REMIC**:
Inverse NR+++ NR+++ $ 7,404,858 1566-SB, 4.725% due 9/15/2000 (1) $ 5,525,876 $ 5,002,907 1.1%
Floaters (5) NR+++ NR+++ 6,899,190 1743-S, 6.30% due 8/15/2001 (1) 5,769,448 5,001,913 1.1
NR+++ NR+++ 10,725,000 1765-S, 6.954% due 2/15/2001 (1) 8,888,344 8,405,719 1.9
Federal National Mortgage Association,
REMIC**:
NR+++ NR+++ 10,000,000 X-169-B, 3.905% due 9/25/2000 (1) 7,650,000 6,750,000 1.5
NR+++ NR+++ 10,000,000 93-123-S, 8.043% due 7/25/2000 (1) 11,320,332 7,062,500 1.6
------------ ------------ ------
39,154,000 32,223,039 7.2
<PAGE>
Total Investments in Derivative
Mortgage-Backed Obligations 82,789,331 64,427,421 14.6
Total Investments in Mortgage-Backed
Obligations 573,630,129 528,481,866 120.2
<PAGE>
Municipal Bonds AA Aa 4,600,000 Alabama State Refunding Bonds, 5.70%
(2) due 9/01/2000 3,330,963 3,317,980 0.8
AAA Aaa 2,445,000 Allegheny County, Pennsylvania,
Sanitation Authority Revenue Bonds,
5.75% (2) due 12/01/2000 (b) 1,746,372 1,745,266 0.4
AAA Aaa 1,500,000 Austin, Texas, Utility Systems, Revenue
Refunding Bonds, Series A, 5.69% (2)
due 5/15/2000 (b) 1,105,774 1,100,415 0.3
AAA Aaa 1,190,000 Conroe, Texas, Independent School
District, Schoolhouse Refunding Bonds,
5.75% (2) due 2/01/2000 (d) 888,758 887,669 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 1,086,570 1,083,471 0.2
AAA Aaa 1,325,000 5.85% (2) due 9/01/1999 1,012,786 1,014,685 0.2
AAA Aaa 1,325,000 6.10% (2) due 9/01/2000 942,991 958,836 0.2
AAA Aaa 1,325,000 6.30% (2) due 9/01/2001 876,593 900,669 0.2
AAA Aaa 12,260,000 Houston, Texas, Water and Sewer System,
Revenue Refunding Bonds, 5.65% (2)
due 12/01/2000 (a) 8,776,866 8,716,125 2.0
AAA Aaa 3,455,000 Kansas City, Kansas, Utility Systems,
Revenue Refunding Bonds, 5.74% (2)
due 9/01/2001 (a) 2,361,569 2,383,017 0.5
Maricopa County, Arizona, School
District No. 28, Refunding Bonds,
Second Series (b):
AAA Aaa 3,000,000 5.55% (2) due 1/01/1999 2,410,355 2,384,820 0.5
AAA Aaa 10,000,000 5.55% (2) due 7/01/1999 7,817,561 7,724,600 1.8
AAA Aaa 4,000,000 5.70% (2) due 1/01/2000 3,020,489 2,986,480 0.6
AAA Aaa 9,350,000 5.70% (2) due 7/01/2000 6,864,801 6,779,872 1.5
Maricopa County, Arizona, School
District No. 41, Refunding Bonds,
Second Series (b):
AAA Aaa 1,000,000 5.65% (2) due 1/01/2000 756,122 749,530 0.2
AAA Aaa 1,500,000 5.65% (2) due 7/01/2000 1,102,894 1,092,345 0.2
AAA Aaa 3,500,000 5.90% (2) due 1/01/2001 2,469,501 2,463,405 0.6
AAA Aaa 5,000,000 5.90% (2) due 7/01/2001 3,426,769 3,417,650 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 1,958,353 0.4
AAA Aaa 7,000,000 North Slope Boro, Alaska, Revenue
Refunding Bonds, Series A, 5.90%
(2) due 6/30/2001 (d) 4,797,577 4,740,400 1.1
AAA Aaa 2,265,000 Penn Hills, Pennsylvania, School
District Refunding Bonds, 5.75% (2)
due 10/01/2000 (d) 1,632,404 1,632,204 0.4
Rosemont, Illinois, Revenue Bonds (b):
AAA Aaa 2,510,000 Series B (Tax Increment 2), 5.80%
(2) due 12/01/2001 1,681,975 1,665,360 0.4
AAA Aaa 2,470,000 Series C (Tax Increment 3), 5.80%
(2) due 12/01/2001 1,655,170 1,638,820 0.4
AAA Aaa 3,000,000 Round Rock, Texas, Independent School
District Refunding Bonds, 5.74% (2)
due 2/15/2001 2,126,284 2,096,430 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 4,067,361 4,024,320 0.9
Total Investments in Municipal Bonds 67,959,722 67,462,722 15.3
<PAGE>
US Government NR+++ NR+++ 10,000,000 Federal Home Loan Mortgage Corporation,
& Agency 5.78% due 10/22/2003 (1) 10,000,000 8,515,625 1.9
Obligations United States Treasury Notes:
NR+++ NR+++ 62,000,000 5.50% due 4/15/2000 (1) 57,906,562 55,770,860 12.7
NR+++ NR+++ 3,000,000 5.75% due 8/15/2003 2,615,306 2,607,180 0.6
Total Investments in US Government
& Agency Obligations 70,521,868 66,893,665 15.2
Short-Term Repurchase 740,000 Nomura Holdings, Inc., purchased
Securities Agreements**** on 12/30/1994 to yield 6.15%
to 1/03/1995 740,000 740,000 0.2
Total Investments in
Short-Term Securities 740,000 740,000 0.2
Total Investments $712,851,719 663,578,253 150.9
============
Interest Rate Swaps (4,241,000) (1.0)
Liabilities in Excess of Other Assets (219,569,775) (49.9)
------------ ------
Net Assets $439,767,478 100.0%
============ ======
<PAGE>
<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 (REMICs) are identified
by the year created, series issued, and the particular tranche.
***Collateralized Mortgage Obligation (CMO).
****Repurchase Agreements are fully collateralized by US Government
& Agency Obligations.
(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)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 and Phelps.
+++Not Rated.
Ratings of issues shown have not been audited by Ernst & Young LLP.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of December 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$712,851,719) (Note 1a) $ 663,578,253
Receivables:
Interest $ 5,363,372
Principal paydowns 476,015
Loaned securities 39,565
Interest rate swap contracts 7,566 5,886,518
-------------
Deferred organization expense (Note 1e) 34,980
Prepaid expenses and other assets 8,829
------------
Total assets 669,508,580
------------
<PAGE>
Liabilities: Interest rate swaps, at value (Notes 1b & 3) 4,241,000
Payables:
Reverse repurchase agreements (Note 5) 217,235,750
Securities purchased 2,681,868
Dividends to shareholders (Note 1f) 2,566,765
Interest expense (Note 5) 1,805,289
Capital shares repurchased 890,041
Investment adviser (Note 2) 221,829 225,401,542
-------------
Accrued expenses and other liabilities 98,560
-------------
Total liabilities 229,741,102
-------------
Net Assets: Net assets $ 439,767,478
=============
Capital: Capital stock, $0.10 par value, 200,000,000 shares authorized $ 5,347,213
Paid-in capital in excess of par 505,717,582
Undistributed investment income--net 5,428,500
Accumulated realized capital losses--net (23,211,351)
Unrealized depreciation on investments--net (53,514,466)
-------------
Net assets--Equivalent to $8.22 per share based on 53,472,127
shares outstanding (market price--$7.375) $ 439,767,478
=============
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended December 31, 1994
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 45,860,718
(Note 1d): Other 1,067,693
-------------
Total income 46,928,411
-------------
<PAGE>
Expenses: Interest expense (Note 5) $ 10,273,749
Investment advisory fees (Note 2) 2,699,211
Accounting services (Note 2) 134,228
Transfer agent fees 114,615
Professional fees 66,827
Directors' fees and expenses 45,101
Custodian fees 44,620
Printing and shareholder reports 34,812
Amortization of organization expenses (Note 1e) 13,176
Other 71,030
------------
Total expenses 13,497,369
-------------
Investment income--net 33,431,042
-------------
Realized & Realized loss on investments--net (22,098,045)
Unrealized Loss on Change in unrealized depreciation on investments--net (40,418,007)
Investments -------------
(Notes 1d & 3): Net Decrease in Net Assets Resulting from Operations $ (29,085,010)
=============
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended December 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 33,431,042 $ 36,257,998
Realized gain (loss) on investments--net (22,098,045) 6,003,805
Change in unrealized depreciation on investments--net (40,418,007) (6,755,901)
------------ ------------
Net increase (decrease) in net assets resulting from operations (29,085,010) 35,505,902
------------ ------------
Dividends & Investment income--net (32,680,981) (32,922,445)
Distributions to Realized gain on investments--net -- (4,387,441)
Shareholders In excess of realized gain on investments--net -- (1,352,310)
(Note 1f): ------------ ------------
Net decrease in net assets resulting from dividends and
distributions to shareholders (32,680,981) (38,662,196)
------------ ------------
<PAGE>
Capital Share Decrease in net assets derived from capital share transactions (15,613,310) --
Transactions Offering costs resulting from the issuance of Common Stock -- (15,787)
(Note 4): ------------ ------------
Net decrease in net assets derived from capital share
transactions (15,613,310) (15,787)
------------ ------------
Net Assets: Total decrease in net assets (77,379,301) (3,172,081)
Beginning of year 517,146,779 520,318,860
------------ ------------
End of year* $439,767,478 $517,146,779
============ ============
<FN>
*Undistributed investment income--net $ 5,428,500 $ 4,678,439
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Year Ended December 31, 1994
<S> <S> <C>
Cash Provided by Net decrease in net assets resulting from operations $(29,085,010)
Operating Adjustments to reconcile net decrease in net assets resulting
Activities: from operations to net cash provided by operating activities:
Increase in receivables (94,307)
Decrease in other assets 19,590
Increase in other liabilities 488,120
Realized and unrealized loss on investments--net 62,516,052
Amortization of premium and discount 4,270,007
------------
Net cash provided by operating activities 38,114,452
------------
Cash Provided by Termination of swap transactions (5,204,533)
Investing Proceeds from principal payments and sales of long-term
Activities: securities 793,228,665
Payments for futures transactions (117,995)
Purchases of long-term securities (740,402,402)
Purchases of short-term investments (500,799,084)
Proceeds from sales and maturities of short-term investments 500,932,000
------------
Net cash provided by investing activities 47,636,651
------------
<PAGE>
Cash Used for Cash payments on capital shares repurchased (14,723,269)
Financing Repayments of borrowings--net (37,852,250)
Activities: Dividends paid to shareholders (33,352,312)
------------
Net cash used for financing activities (85,927,831)
------------
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 $ 9,612,645
Information: ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the
Period
The following per share data and ratios have been derived Aug. 28,
from information provided in the financial statements. For the Year Ended 1992++
December 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 .60 .65 .21
Realized and unrealized loss on investments--net (1.11) (.01) (.15)
-------- -------- --------
Total from investment operations (.51) .64 .06
-------- -------- --------
Less dividends and distributions:
Investment income--net (.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 (.59) (.69) (.18)
-------- -------- --------
Capital charge resulting from the issuance of
Common Stock -- -- (.01)
-------- -------- --------
Net asset value, end of period $ 8.22 $ 9.32 $ 9.37
======== ======== ========
Market price per share, end of period $ 7.375 $ 8.75 $ 9.25
======== ======== ========
<PAGE>
Total Investment Based on market price per share (9.18%) 1.77% (5.78%)+++
Return:** ======== ======== ========
Based on net asset value per share (4.97%) 7.02% .46%+++
======== ======== ========
Ratios to Average Expenses, net of reimbursement++++ .67% .83% .47%*
Net Assets: ======== ======== ========
Expenses++++ .67% .83% .91%*
======== ======== ========
Interest expense 2.13% 1.47% .72%*
======== ======== ========
Investment income--net 6.93% 6.86% 6.54%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $439,767 $517,147 $520,319
Data: ======== ======== ========
Portfolio turnover 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.
++++Net of interest expense.
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.
<PAGE>
(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) 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 market. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* 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--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 (or cost) of the security sold (or
purchased). 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).
<PAGE>
Written and purchased options are non-income producing investments.
* Interest rate swaps--Agreements to exchange the Fund's interest
rate payments for fixed or variable rate payments on the notional
principal amount.
(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.
(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 and offering 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) Reclassification--Certain 1993 amounts have been reclassified to
conform to the 1994 presentation.
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.
<PAGE>
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. For
the year ended December 31, 1994, FAM earned fees of $2,699,211.
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.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1994 were $700,956,659 and
$771,509,731, respectively.
Net realized and unrealized losses as of December 31, 1994 were as
follows:
Realized Unrealized
Losses Losses
Long-term investments $(16,807,580) $(49,273,466)
Interest rate swaps (5,204,533) (4,241,000)
Financial futures contracts (85,932) --
------------ ------------
Total $(22,098,045) $(53,514,466)
============ ============
The Fund has entered into the following interest rate swaps as of
December 31, 1994:
Notional Interest Received Interest Paid Expiration
Amount Current Rate Type Current Rate Type Date
$ 4,000,000 5.6875% Variable* 4.26% Fixed 4/09/1995
4,000,000 5.6875% Variable* 4.82% Fixed 4/09/1996
25,000,000 5.226% Fixed 6.3125% Variable* 3-5 years
25,000,000 5.50% Fixed 6.8125% Variable** 3-5 years
[FN]
*3-Month LIBOR.
**6-Month LIBOR.
<PAGE>
As of December 31, 1994, net unrealized depreciation for Federal
income tax purposes aggregated $50,059,149, of which $82,146 related
to appreciated securities and $50,141,295 related to depreciated
securities. The aggregate cost of investments at December 31, 1994
for Federal income tax purposes was $713,637,402.
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, 1994, total paid-in
capital amounted to $511,064,795.
During the year, the Fund repurchased 2,038,400 shares of capital
stock, at an average market price of $7.66, all of which have been
retired.
NOTES TO FINANCIAL STATEMENTS (concluded)
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 December 31, 1994, the Fund had entered into reverse
repurchase agreements in the amount of $217,235,750 and the weighted
average interest rate was 5.79%. For the year ended December 31,
1994, the maximum amount entered into was $259,487,000, the average
outstanding was $239,251,325, and the daily weighted average
interest rate was 4.26%.
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 February 6, 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 February 28, 1995 to shareholders
of record as of February 17, 1995.
<PAGE>
<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, 1994, and the related
statements of operations and cash flows for the year then ended, the
statements of changes in net assets for each of the two years in the
period then ended and financial highlights for each of the periods
indicated therein. 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, 1994 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, 1994, the results of its operations and its cash flows
for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights
for each of the indicated periods, in conformity with generally
accepted accounting principles.
(Ernst & Young LLP)
New York, New York
February 2, 1995
</AUDIT-REPORT>
<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 Quarter Income (Losses) (Losses) Income Gains
<S> <C> <C> <C> <C> <C>
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 --
July 1, 1994 to September 30, 1994 .15 (.01) (.03) .14 --
October 1, 1994 to December 31, 1994 .15 (.09) (.15) .19 --
<CAPTION>
Net Asset Value Market Price**
For the Quarter High Low High Low Volume***
<S> <C> <C> <C> <C> <C>
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
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
<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>
