INCOME
OPPORTUNITIES
FUND 1999, INC.
FUND LOGO
Semi-Annual Report
June 30, 1996
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. Statements and other
information herein are as dated and are subject to change.
<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>
DEAR SHAREHOLDER
For the six-month period ended June 30, 1996, 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 5.35%, based on a month-end net
asset value of $9.38 per share. Over the same period, the Fund's
total investment return was +1.17%, based on a change in per share
net asset value from $9.50 to $9.38, and assuming reinvestment of
$0.208 per share income dividends.
Economic Environment
During the six-month period ended June 30, 1996, there was a marked
change in the investor outlook on interest rates. From early March,
when non-farm payroll was announced with an expansion of 705,000 new
jobs, to early May, when gross domestic product growth was reported
at 2.8%, investor anticipation of two more interest rate cuts in
1996 shifted to pricing in two interest rate increases. Even after
these numbers were revised to 509,000 and 2.2%, respectively,
conventional wisdom was that the Federal Reserve Board would tighten
credit in an effort to slow economic growth and control inflation.
The reversal in outlook and the magnitude of the change was
dramatic.
In our December 31, 1996 annual report to shareholders, we said that
the industrial sector was mired in near-recessionary conditions as
reflected in the National Association of Purchasing Managers Index
remaining below 50 for seven of the last eight months of 1995. A
level below 50 indicates a contracting manufacturing sector.
However, the May 1, 1996 release was 50.1 and the July 1, 1996
release was 54.3, portending better days ahead.
The Index of Leading Economic Indicators (LEI), as reported in the
December shareholder report, has been predicting a recession for
some time. However, this forecast has apparently changed. In April,
LEI reported a positive 1.3% and remained positive for the May, June
and July 1, 1996 releases. Also, consumer confidence was 104.8 in
April, the highest level since early 1990. This indicates that the
consumer is likely to continue to spend even though the rate of
consumer credit growth is high and the consumer debt/disposable
income ratio has never been greater.
<PAGE>
Although the economy is picking up and inflation concerns exist, so
far actual inflation has been quite muted. As measured by the
Consumer Price Index, inflation has been below 3% for a prolonged
period of time. The Producer Price Index shows inflation to be even
slower. This suggests that there can be growth without corresponding
inflation and that current interest rate levels may be higher than
necessary.
Portfolio Strategy
1995 was a strong bull market for fixed-income investments,
evidenced by the Fund's total investment return of +22.94% for the
year. However, interest rates have moved higher thus far in 1996.
The two-year Treasury note yield increased 100 basis points (1.00%)
to end the June period at 6.15%. The ten-year Treasury note yield
moved from 5.57% to 6.74%, an increase of 117 basis points. The
increase in interest rates resulted in a decline in the Fund's net
asset value.
Fortunately, short-term interest rates have been relatively stable.
The three-month Treasury bill increased only 13 basis points during
the June period. This helped stabilize our borrowing costs. With
high cost borrowings from early 1995 maturing, our total borrowing
costs have moved lower. As a result, the Fund has been earning
income in excess of its distribution rate. For the first half of
1996, our earning rate exceeded the distribution rate by 48 basis
points. This provides a cushion for our distribution rate should
short-term interest rates move higher in the second half of 1996.
More important, it gives us the flexibility to implement strategies
designed to help the Fund's net asset value recovery program. One
such strategy could be to purchase additional municipal securities
where the tax-exempt income could be retained to increase the Fund's
net asset value.
Although the Fund's net asset value has declined thus far in 1996 in
response to higher interest rates, our primary focus continues to be
for the return of $10.00 per share on the Fund's termination date.
As such, we continue to structure the portfolio to limit cash flows
beyond the Fund's maturity, which helps us avoid sales at the then-
prevailing market rates. Also, for securities that mature, the
unrealized loss that exists today will diminish as we approach the
maturity date.
Finally, we continue the Fund's program to buy back shares when the
stock price is at a discount to the net asset value. This increases
the net asset value as the discount on the shares repurchased
accrues to the Fund.
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.
<PAGE>
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
July 31, 1996
Officers and
Directors
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, 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
Ira P. Shapiro, Secretary
Custodian and Transfer Agent
The Bank of New York
90 Washington Street
New York, New York 10286
NYSE Symbol
IOF
<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 $ 34,172,834 Prudential Home Mortgage Securities
Rate++ Mortgage- Company, Inc., REMIC** 93-25-A1,
Backed 7.897% due 6/01/2023 (1) $ 34,993,576 $ 34,813,575 8.0%
Obligations*--
Constant Maturity
Treasury Indexed
Obligations
Adjustable NR+++ AA++++ 10,000,000 Homart Pooled Asset Finance Trust
Rate++ Mortgage- Corporation, CMO*** 93-A2, 7.50%
Backed due 12/29/2001++++++++ 10,000,000 10,025,000 2.3
Obligations*-- A Aa2 26,000,000 Saxon Mortgage Securities
London Corporation, REMIC** 92-2-B,
Interbank 7.575% due 10/25/2022 26,756,545 26,325,000 6.0
Offered Rate AAA Aaa 5,337,027 Sears Mortgage Securities
Indexed Corporation, REMIC** 92-18-A2,
Obligations 7.372% due 9/25/2022 5,452,391 5,387,896 1.2
------------ ------------ ------
42,208,936 41,737,896 9.5
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 77,202,512 76,551,471 17.5
<PAGE>
Fixed Rate AAA++++++ Aaa 7,223,716 American Southwest Financial
Mortgage-Backed Securities Corp., 95-C1-A1A,
Obligations* 7.15% due 10/01/2001 (1) 7,317,406 7,230,489 1.6
AAA AAA++++++ 24,300,000 CBA Mortgage Inc., CMO***
93-C1-A2, 7.153% due 12/25/2003 24,614,616 24,618,938 5.6
AAA Aaa 4,584,678 CMC Securities Corporation,
REMIC** 93-B-2, 11% due
4/25/2023 (b) 4,584,678 4,653,448 1.1
AAA AAA++++++ 20,632,411 CS First Boston Mortgage Securities
Corp., REMIC** 95-WF1-A1, 6.452%
due 12/21/2027 (d) 20,632,411 19,923,172 4.5
A AA++++++ 14,585,000 DLJ Mortgage Acceptance Corp.,
REMIC** 93-MF7-A2, 7.95% due
6/18/2001 (1) 14,522,497 14,585,000 3.3
AAA AAA++++++ 4,600,000 Debartolo Corp., CMO*** A2, 7.48%
due 5/15/2001++++++++ 4,555,348 4,663,250 1.1
AA AA++++ 4,399,669 FSA Capital Inc., 95-A, 7.42% due
6/30/2002++++++++ 4,425,436 4,402,419 1.0
Federal Home Loan Mortgage
Corporation, Pool (1):
NR+++ NR+++ 4,058,871 #W00062, 7.225% due 11/01/1997 4,110,649 4,088,044 0.9
NR+++ NR+++ 14,639,117 #W00058, 6.925% due 6/01/2001 14,848,519 14,575,071 3.3
Federal Home Loan Mortgage
Corporation, REMIC** (1):
NR+++ NR+++ 5,500,000 G-29-P, 7% due 6/25/2001 5,593,597 5,505,115 1.2
NR+++ NR+++ 3,500,000 1341-G, 7% due 12/15/2003 (b) 3,513,641 3,504,375 0.8
NR+++ NR+++ 5,642,600 1784-PD, 7% due 5/01/2025 (c) 5,635,547 5,639,955 1.3
Federal National Mortgage
Association, Pool (1):
NR+++ NR+++ 15,000,000 #160159, 7.516% due 6/30/1999 15,021,187 15,262,500 3.5
NR+++ NR+++ 29,600,595 #80306, 8% due 3/01/2000 30,310,527 30,100,105 6.9
NR+++ NR+++ 4,229,458 #160238, 8.18% due 4/01/2001 4,338,175 4,327,264 1.0
NR+++ NR+++ 5,510,362 #160239, 8.305% due 4/01/2001 5,679,190 5,711,835 1.3
NR+++ NR+++ 10,631,340 #160240, 8.43% due 4/01/2001 11,213,331 10,883,834 2.5
NR+++ NR+++ 9,205,245 #73063, 8.20% due 1/01/2002 9,123,260 9,449,759 2.3
Federal National Mortgage
Association, REMIC** (1):
NR+++ NR+++ 5,000,000 92-122-PG, 7.50% due
12/01/1998 (b) 5,049,428 5,035,950 1.2
NR+++ NR+++ 9,031,039 94-M2-A, 6.625% due 2/25/2001 8,904,040 8,893,406 2.0
NR+++ NR+++ 9,193,294 94-M5-A, 8.40% due 4/01/2001 9,456,707 9,480,584 2.2
NR+++ NR+++ 9,846,324 92-20-PG, 7% due 5/25/2005 9,884,399 9,917,021 2.3
NR+++ NR+++ 5,223,000 G93-16-E, 5% due 11/25/2015 (c) 4,743,137 5,017,318 1.1
NR+++ NR+++ 5,000,000 G93-20-PE, 5.90% due
5/25/2016 (c) 4,912,500 4,915,600 1.1
<PAGE>
AAA AA++++ 11,138,000 GE Capital Mortgage Services,
Inc., REMIC** 95-9-A3, 6.375%
due 11/01/2000 11,037,062 10,817,782 2.5
Kidder Peabody Acceptance
Corporation, REMIC**:
NR+++ AAA++++ 5,000,000 93-M2-A, 6.05% due
8/01/2003++++++++ 4,650,000 4,823,440 1.1
AA++++++ Aa2 9,660,000 93-M3-B, 6.50% due 11/25/2025 (d) 9,572,456 9,303,787 2.1
AAA++++ AAA++++++ 4,031,634 Nomura Assets Securities Corp.,
REMIC** 94-MD1-A1A, 7.375% due
3/15/2018 (c) 4,039,035 4,054,312 0.9
Prudential Home Mortgage Securities
Company, Inc., REMIC**:
AAA++++ Aaa 18,760,000 92-36-A8, 6.50% due
10/01/1999 (1) 18,461,012 18,502,050 4.2
AAA++++ Aaa 16,800,000 93-40-A3, 6.50% due
10/25/2023 (1)(c) 16,485,000 16,309,272 3.7
Resolution Trust Corporation,
REMIC**:
AA AA+++++++ 5,000,082 93-C2-B, 7.75% due 7/01/2000 (d) 5,074,274 5,000,082 1.1
AA AA++++++ 450,535 92-C5-A1C, 7.85% due
5/25/2022 (a) 451,650 448,845 0.1
A++++++ A2 7,011,729 92-C7-B, 7.15% due 6/25/2023 (b) 7,077,498 7,011,729 1.6
AA++++++ Aa2 2,460,427 92-C7-1C, 7.90% due 6/25/2023 (a) 2,569,656 2,451,200 0.7
A2 AA++++ 27,199,951 92-C6-B, 7.70% due 7/25/2024 (b) 27,424,470 27,233,951 6.2
AA AA++++ 12,753,460 Ryland Mortgage Securities
Corporation, REMIC** 93-M1-A,
7.55% due 5/15/2002 12,873,749 12,713,605 2.9
AA++++ Aa2 10,000,000 Salomon Brothers Mortgage
Securities VII, Inc., REMIC**
93-C1-A2, 6.90% due 1/18/2023
(c)(1) 10,289,930 10,096,900 2.3
AA++++ Aa2 27,350,000 Town & Country Funding Corporation,
CMO***, 5.85% due 8/15/1998 27,169,578 26,401,297 6.0
AAA AAA++++++ 40,375,000 Vornado Finance Corp., CMO***,
6.36% due 12/01/2000++++++++ 36,531,172 39,176,367 8.9
Total Investments in Fixed Rate
Mortgage-Backed Obligations 426,696,768 426,729,071 97.4
</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
<S> <S> <S> <C> <S> <C> <C> <C>
Derivative AAA Aaa $ 31,223,559 CMC Securities Corporation II,
Mortgage- REMIC** 93-21-A3, 0.50% due
Backed 9/25/2023 $ 440,793 $ 206,075 0.0%
Obligations*-- DLJ Mortgage Acceptance Corporation,
Interest REMIC**:
Only (3) AAA Aaa 82,545,149 92-9-A1, 0.615% due 10/25/2022 1,336,426 949,269 0.2
AAA Aaa 30,479,086 93-20-1S, 0.752% due 12/25/2023 657,301 411,468 0.1
Federal Home Loan Mortgage
Corporation, REMIC**:
NR+++ NR+++ 7,460,038 G-24-IA, 6.50% due 8/25/2013 562,893 554,840 0.1
NR+++ NR+++ 41,846,617 1547-SC, 4.627% due 3/15/2017 3,352,631 1,830,790 0.4
NR+++ NR+++ 9,565,734 143-B, 8% due 7/15/2022 (1) 3,999,581 3,105,803 0.7
NR+++ NR+++ 5,257,404 1397-IO, 8% due 10/15/2022 2,275,242 1,711,916 0.4
Federal National Mortgage
Association, REMIC**:
NR+++ NR+++ 8,333,859 92-G-5H, 9% due 1/25/2022 3,533,708 2,546,994 0.6
NR+++ NR+++ 2,487,896 92-15-W, 8% due 2/25/2022 1,186,074 810,880 0.2
NR+++ NR+++ 8,015,976 120-2, 8% due 3/25/2022 4,530,965 2,612,647 0.6
NR+++ NR+++ 61,209 92-196-L, 1,187.60% due
8/25/2006 1,642,545 1,424,990 0.3
AAA AAA++++ 63,837,871 Fund America Investors Corporation
II, REMIC** 93-J, 0.25% due
11/25/2023 493,476 236,200 0.1
AAA++++ AAA 44,808,598 Mortgage Capital Fund Inc., REMIC**
94-MCI-11, 1.044% due 6/25/2019 1,092,290 756,145 0.2
------------ ------------ ------
25,103,925 17,158,017 3.9
Derivative Federal Home Loan Mortgage
Mortgage- Corporation, REMIC**:
Backed NR+++ NR+++ 11,244,406 1453-SC, 7.147% due 1/15/2000 10,285,117 10,552,087 2.4
Obligations*-- NR+++ NR+++ 209,313 1444-I, 7.80% due 1/15/2000 197,082 189,362 0.0
Inverse NR+++ NR+++ 3,101,660 1516-SC, 5.08% due 6/15/2000 2,334,968 2,628,657 0.6
Floaters (4) NR+++ NR+++ 9,487,887 1765-A-S, 7.441% due 2/15/2001 7,863,087 8,657,697 2.0
NR+++ NR+++ 6,344,000 1743-S, 6.15% due 8/15/2001 5,305,170 5,558,930 1.3
Federal National Mortgage
Association, REMIC**:
NR+++ NR+++ 5,003,830 93-81-S, 2.443% due 6/25/2000 3,366,640 3,862,307 0.9
NR+++ NR+++ 10,000,000 93-123-S, 8.653% due 7/25/2000 11,010,602 9,812,500 2.2
NR+++ NR+++ 10,000,000 X-169-B, 4.317% due 9/25/2000 7,650,000 8,412,500 1.9
Prudential Home Mortgage Securities
Company, Inc., REMIC**:
AAA++++ Aaa 3,319,298 93-59-A6, 2.977% due 12/25/2000 2,602,537 2,672,234 0.6
AAA++++ Aaa 5,203,532 93-59-A8, 3.436% due 12/25/2000 4,162,826 4,236,508 1.0
------------ ------------ ------
54,778,029 56,582,782 12.9
<PAGE>
Derivative NR+++ NR+++ 7,372,625 Government National Mortgage
Mortgage- Association, REMIC** 94-5-PA,
Backed 8.024% (2) due 6/16/2012 (1) 6,617,369 6,616,931 1.5
Obligations*--
Principal Total Investments in Derivative
Only (5) Mortgage-Backed Obligations 86,499,323 80,357,730 18.3
Total Investments in Mortgage-
Backed Obligations 590,398,603 583,638,272 133.2
Municipal AA Aa 4,600,000 Alabama State Refunding Bonds,
Bonds 5.70% (2) due 9/01/2000 3,617,235 3,753,646 0.9
AAA Aaa 2,445,000 Allegheny County, Pennsylvania,
Sanitation Authority Revenue Bonds,
5.75% (2) due 12/01/2000 (7) 1,899,222 1,994,118 0.5
AAA Aaa 12,260,000 Houston, Texas, Water and Sewer
System, Revenue Refunding Bonds,
5.65% (2) due 12/01/2000 (6) 9,559,899 9,968,974 2.3
Maricopa County, Arizona, School
District No. 28 Refunding Bonds,
Second Series (7):
AAA Aaa 3,000,000 5.55% (2) due 1/01/1999 2,615,862 2,680,110 0.6
AAA Aaa 4,000,000 5.70% (2) due 1/01/2000 3,285,169 3,408,920 0.8
AAA Aaa 9,350,000 5.70% (2) due 7/01/2000 7,466,333 7,758,349 1.8
Maricopa County, Arizona, School
District No. 41 Refunding Bonds,
Second Series (7):
AAA Aaa 1,000,000 5.65% (2) due 1/01/2000 821,666 852,230 0.2
AAA Aaa 1,500,000 5.65% (2) due 7/01/2000 1,198,415 1,244,655 0.3
AAA Aaa 3,500,000 5.90% (2) due 1/01/2001 2,693,719 2,837,380 0.6
AAA Aaa 5,000,000 5.90% (2) due 7/01/2001 3,737,899 3,913,150 0.9
AA- A 2,045,000 Michigan State Building Authority
Revenue Bonds, Series I, 5.20%
due 10/01/2001 2,001,217 2,081,503 0.5
AAA Aaa 7,000,000 North Slope Boro, Alaska, Revenue
Refunding Bonds, Series A, 5.90%
(2) due 6/30/2001 (8) 5,227,660 5,465,810 1.2
AAA Aaa 2,510,000 Rosemont, Illinois, Revenue Bonds,
Series B (Tax Increment 2), 5.80%
(2) due 12/01/2001 (7) 1,828,491 1,913,398 0.4
AAA Aaa 3,000,000 Round Rock, Texas, Independent
School District Refunding Bonds,
5.74% (2) due 2/15/2001 2,312,393 2,393,550 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 4,434,781 4,557,840 1.0
Total Investments in Municipal
Bonds 52,699,961 54,823,633 12.5
<PAGE>
US Government NR+++ NR+++ 15,500,000 United States Treasury Notes,
Obligations 5.25% due 1/31/2001 14,676,031 14,795,215 3.4
Total Investments in US Government
Obligations 14,676,031 14,795,215 3.4
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Short-Term Repurchase $ 681,000 Nikko Securities International,
Securities Agreements+++++ Inc., purchased on 6/28/1996 to
yield 5.45% to 7/01/1996 $ 681,000 $ 681,000 0.1%
US Government United States Treasury Bills:
& Agency 15,000 4.83% due 7/25/1996 14,952 14,953 0.0
Obligations**** 14,000 5.22% due 7/25/1996 13,953 13,956 0.0
------------ ------------ ------
28,905 28,909 0.0
Total Investments in Short-Term
Securities 709,905 709,909 0.1
Total Investments $658,484,500 653,967,029 149.2
============
Interest Rate Swaps (495,500) (0.1)
Liabilities in Excess of Other
Assets (215,138,923) (49.1)
------------ ------
Net Assets $438,332,606 100.0%
============ ======
<PAGE>
<FN>
Average life estimates are made using realistic prepayment
assumptions.Corresponding average life estimates for bonds are as
follows:
(a)0--1 years.
(b)1--2 years.
(c)2--4 years.
(d)4--6 years.
*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).
****Certain US Government & Agency Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid
at the time of purchase by the Fund.
++Adjustable Rate Mortgage-Backed Obligations have coupon rates
which reset periodically to reflect changes in a referenced interest
rate.
++++Rating of issue is by Fitch Investors Service.
++++++Rating of issue is by Duff & Phelps.
(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)Instruments with variable or floating interest rates that move in
the opposite direction of short-term interest rates.
(5)Represents the principal only portion of a mortgage-backed
obligation. Stripped securities are traded on a discount basis and
amortized to maturity.
(6)AMBAC Insured.
(7)FGIC Insured.
(8)MBIA Insured.
+++Not Rated.
+++++Repurchase Agreements are fully collateralized by US Government
& Agency Obligations.
++++++++Restricted security as to resale. The value of the Fund's
investment in restricted securities was approximately $63,090,000,
representing 14.4% of net assets.
<PAGE>
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <C> <C> <C>
Debartolo Corp., CMO A2,
7.48% due 5/15/2001 2/27/1995 $ 4,555,348 $ 4,663,250
FSA Capital Inc., 95-A,
7.42% due 6/30/2002 5/23/1995 4,425,436 4,402,419
Homart Pooled Asset Finance
Trust Corporation, CMO 93-A2,
7.50% due 12/29/2001 12/29/1993 10,000,000 10,025,000
Kidder Peabody Acceptance
Corporation, REMIC 93-M2-A,
6.05% due 8/01/2003 4/11/1995 4,650,000 4,823,440
Vornado Finance Corp., CMO,
6.36% due 12/01/2000 12/08/1994 36,531,172 39,176,367
Total $ 60,161,956 $ 63,090,476
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of June 30, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$658,484,500) (Note 1a) $653,967,029
Cash 147
Receivables:
Securities sold $ 15,004,687
Interest 3,953,693
Principal paydowns 18,828 18,977,208
------------
Deferred organization expenses (Note 1e) 21,804
Prepaid expenses and other assets 11,026
------------
Total assets 672,977,214
------------
<PAGE>
Liabilities: Interest rate swaps, at value (Notes 1b & 3) 495,500
Payables:
Reverse repurchase agreements (Note 5) 198,972,685
Securities purchased 30,033,724
Interest expense (Note 5) 4,350,310
Capital shares repurchased 384,750
Investment adviser (Note 2) 183,145
Interest rate swap contracts 4,348 233,928,962
------------
Accrued expenses and other liabilities 220,146
------------
Total liabilities 234,644,608
------------
Net Assets: Net assets $438,332,606
============
Capital: Capital stock, $0.10 par value, 200,000,000 shares authorized $ 4,673,193
Paid-in capital in excess of par 451,440,227
Undistributed investment income--net 11,511,216
Accumulated realized capital losses on investments--net (Note 6) (24,279,059)
Unrealized depreciation on investments--net (5,012,971)
------------
Net assets--Equivalent to $9.38 per share based on 46,731,927
shares outstanding (market price--$8.50) $438,332,606
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended June 30, 1996
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 21,931,558
(Note 1d):
Expenses: Interest expense (Note 5) $ 6,330,347
Investment advisory fees (Note 2) 1,239,423
Accounting services (Note 2) 56,249
Professional fees 50,910
Printing and shareholder reports 35,950
Transfer agent fees 28,315
Custodian fees 26,553
Trustees' fees and expenses 19,772
Amortization of organization expenses (Note 1e) 6,672
Listing fees 127
Other 32,644
------------
Total expenses 7,826,962
------------
Investment income--net 14,104,596
------------
<PAGE>
Realized & Realized gain on investments--net 795,561
Unrealized Gain Change in unrealized appreciation/depreciation on investments--net (13,148,634)
(Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 1,751,523
(Notes 1b, 1d & 3): ============
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: June 30, 1996 Dec. 31, 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 14,104,596 $ 27,430,126
Realized gain (loss) on investments--net 795,561 (1,876,062)
Change in unrealized appreciation/depreciation on
investments--net (13,148,634) 61,650,129
------------ ------------
Net increase in net assets resulting from operations 1,751,523 87,204,193
------------ ------------
Dividends to Investment income--net (9,976,555) (25,472,302)
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends to
shareholders (9,976,555) (25,472,302)
------------ ------------
Capital Stock Net decrease in net assets derived from capital stock
Transactions transactions (24,125,107) (30,816,624)
(Note 4): ------------ ------------
Net Assets: Total increase (decrease) in net assets (32,350,139) 30,915,267
Beginning of period 470,682,745 439,767,478
------------ ------------
End of period* $438,332,606 $470,682,745
============ ============
<FN>
*Undistributed investment income--net $ 11,511,216 $ 7,383,175
============ ============
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Six Months Ended June 30, 1996
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 1,751,523
Operating Adjustments to reconcile net increase in net assets resulting from
Activities: operations to net cash provided by operating activities:
Decrease in receivables 769,379
Increase in other assets (816)
Decrease in other liabilities (1,392,537)
Realized and unrealized loss on investments--net 12,353,073
Amortization of premium and discount--net 2,067,081
------------
Net cash provided by operating activities 15,547,703
------------
Cash Provided by Proceeds from principal payments and sales of long-term securities 103,730,237
Investing Purchases of long-term securities (59,948,189)
Activities: Purchases of short-term investments (349,709,617)
Proceeds from sales and maturities of short-term investments 356,299,000
------------
Net cash provided by investing activities 50,371,431
------------
Cash Used for Cash receipts from borrowings 32,230,481
Financing Cash payments on borrowings (61,912,128)
Activities: Cash payments on capital shares repurchased (24,479,887)
Dividends paid to shareholders (12,044,384)
------------
Net cash used for financing activities (66,205,918)
------------
Cash: Net decrease in cash (286,784)
Cash at beginning of period 286,931
------------
Cash at end of period $ 147
------------
Cash Flow Cash paid for interest $ 7,704,631
Information: ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the
The following per share data and ratios have For the Period
been derived from information provided Six Months Aug. 28,
in the financial statements. Ended For the Year Ended 1992++ to
June 30, December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1996++++ 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.50 $ 8.22 $ 9.32 $ 9.37 $ 9.50
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .29 .55 .60 .65 .21
Realized and unrealized gain (loss) on
investments--net (.20) 1.23 (1.11) (.01) (.15)
-------- -------- -------- -------- --------
Total from investment operations .09 1.78 (.51) .64 .06
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.21) (.50) (.59) (.59) (.18)
Realized gain on investments--net -- -- -- (.08) --
In excess of realized gain on
investments--net -- -- -- (.02) --
-------- -------- -------- -------- --------
Total dividends and distributions (.21) (.50) (.59) (.69) (.18)
-------- -------- -------- -------- --------
Capital charge resulting from the issuance of
Common Stock -- -- -- -- (.01)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.38 $ 9.50 $ 8.22 $ 9.32 $ 9.37
======== ======== ======== ======== ========
Market price per share, end of period $ 8.50 $ 8.25 $ 7.375 $ 8.75 $ 9.25
======== ======== ======== ======== ========
Total Investment Based on market price per share 5.57%+++ 19.00% (9.18%) 1.77% (5.78%)+++
Return:** ======== ======== ======== ======== ========
Based on net asset value per share 1.17%+++ 22.94% (4.97%) 7.02% .46%+++
======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement and excluding
Net Assets: interest expense. .66%* .69% .67% .83% .47%*
======== ======== ======== ======== ========
Expenses, excluding interest expense .66%* .69% .67% .83% .91%*
======== ======== ======== ======== ========
Expenses 3.46%* 3.70% 2.80% 2.30% 1.63%*
======== ======== ======== ======== ========
Investment income--net 6.24%* 5.98% 6.93% 6.86% 6.54%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $438,333 $470,683 $439,767 $517,147 $520,319
Data: ======== ======== ======== ======== ========
Portfolio turnover 12.45% 60.70% 94.71% 185.21% 48.17%
======== ======== ======== ======== ========
<PAGE>
Leverage: Amount of borrowings, end of period (in
thousands) $198,973 $228,654 $217,236 $255,088 $252,439
======== ======== ======== ======== ========
Average amount of borrowings outstanding during
the period (in thousands) $214,106 $226,188 $239,251 $204,770 $135,203
======== ======== ======== ======== ========
Average amount of borrowings per share during
the period $ 4.45 $ 4.39 $ 4.39 $ 3.69 $ 2.44
======== ======== ======== ======== ========
<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.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
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.
<PAGE>
(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.
* 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).
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
(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. 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 securities
sold short 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.
<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 0.55% 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.
During the six months ended June 30, 1996, the Fund paid Merrill
Lynch Security Pricing Service, an affiliate of Merrill Lynch,
Pierce, Fenner & Smith ("MLPF&S"), $1,087 for security price
quotations to complete the net asset value 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, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended June 30, 1996 were $83,930,318 and
$117,974,566, respectively.
Net realized and unrealized gains (losses) as of June 30, 1996 were
as follows:
Unrealized
Realized Gains
Gains (Losses)
Long-term investments $ 735,701 $(4,517,475)
Short-term investments -- 4
Interest rate swaps -- (495,500)
Financial futures contracts 59,860 --
------------- -----------
Total $ 795,561 $(5,012,971)
============= ===========
The Fund has entered into the following interest rate swaps as of
June 30, 1996:
Notional Interest Received Interest Paid Expiration
Amount Current Rate Type Current Rate Type Date
25,000,000 5.226% Fixed 5.5391% Variable* 3-5 years
<PAGE>
[FN]
*6-Month LIBOR at reset date.
As of June 30, 1996, net unrealized depreciation for Federal income
tax purposes aggregated $4,517,471, of which $9,335,528 related to
appreciated securities and $13,852,999 related to depreciated
securities. The aggregate cost of invest-ments at June 30, 1996 for
Federal income tax purposes was $658,484,500.
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, 1996, total paid-in capital
amounted to $456,113,420.
During the period, the Fund repurchased 2,835,400 shares of capital
stock, at an average market price of $8.51, 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, 1996, the Fund had entered into reverse repurchase
agreements in the amount of $198,972,685. For the six months ended
June 30, 1996, the maximum amount of reverse repurchase agreements
outstanding was $234,646,832, the average outstanding was
approximately $224,303,000, and the daily weighted average interest
rate was 5.69%.
6. Capital Loss Carryforward:
At December 31, 1995, the Fund had a net capital loss carryforward
of approximately $25,075,000, of which $17,404,000 expires in 2002
and $7,671,000 expires in 2003. This amount will be available to
offset like amounts of any future taxable gains.
7. Subsequent Event:
On July 11, 1996, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$0.041667 per share, payable on July 31, 1996 to shareholders of
record as of July 22, 1996.
