INCOME
OPPORTUNITIES
FUND 1999, INC.
FUND LOGO
Semi-Annual Report
June 30, 1997
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
Printed on post-consumer recycled paper
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.
DEAR SHAREHOLDER
For the six months ended June 30, 1997, Income Opportunities Fund
1999, Inc. earned $0.269 per share income dividends, which included
earned and unpaid dividends of $0.050 per share, representing a net
annualized yield of 5.54%, based on a month-end net asset value of
$9.79 per share. Over the same period, the Fund's total investment
return was +3.47%, based on a change in per share net asset value
from $9.69 to $9.79, and assuming reinvestment of $0.219 per share
income dividends.
Investment Activities
Federal Reserve Board (FRB) Chairman Alan Greenspan indicated that
the acceptable, or noninflationary, level of economic growth is in
the range of 2%--2.5%. With first-quarter 1997 gross domestic
product (GDP) reported at 5.8%, three of the last four quarters were
substantially above the targeted range. Although recent economic
data indicates more moderate growth for the second quarter of 1997,
it seems inevitable that economic growth for 1997 will end up at the
upper range of the band.
GDP growth is largely contingent on consumer spending, and real
consumer spending rose 6.4% in the first quarter of 1997, the
fastest pace in nine years. By comparison, consumer spending in 1996
was 2.6%. Behind consumer spending is the rise in consumer
confidence to its highest level since 1969. In turn, this reflects
the lowest unemployment rate (4.8%) in nearly 24 years and the
unprecedented strength of the stock market which continues to set
new record highs.
Interestingly, this environment has not yet led to a period of
inflation. Inflation is at a 31-year low. Despite a tight labor
market, the employment cost index rose just 0.6% in the first
quarter of 1997 and is up just 2.9% from one year ago. This is near
the slowest compensation growth rate in 50 years. Similarly, the
Consumer Price Index and the Producer Price Index rose just 2.5% and
0.1%, respectively, for the past 12 months.
<PAGE>
Strong economic growth with no inflation is the best of both worlds.
Although we may be on the threshold of a new paradigm regarding the
level of noninflationary growth, there are risks ahead that could
trigger inflation. The FRB must keep a vigilant eye on aggregate
consumer demand and the tight labor markets, which could lead to
demand pull or cost push inflation. So far, the FRB seems committed
to keeping the current economic expansion going, which is now in its
seventh year, while maintaining a tough posture on inflation.
Interest rates fluctuated during the six-month period ended June 30,
1997, but ended the period essentially unchanged from the start of
the year. All across the maturity curve--one year--30 years--
interest rates moved higher by just 15 basis points (0.15%) to 20
basis points. Interestingly, short-term interest rates--three-month
and six-month securities--were actually lower by a few basis points
reflecting eased investor concerns that the FRB would raise interest
rates to slow the economy.
Portfolio Strategy
In our December 31, 1996 annual shareholder letter, we mentioned
that our taxable earnings were in excess of the dividend payout and
that, barring an interest rate hike by the FRB, a dividend increase
would be warranted in 1997. At the Fund's July 9, 1997 board
meeting, a dividend increase of 75 basis points was approved,
bringing the dividend to 6.00% based on the original offering price
of $10.00. With the FRB leaving interest rates unchanged at its July
1, and July 2, 1997 Federal Open Market Committee meeting, the
increase is likely to hold throughout 1997.
The portfolio yield increased for several reasons. Borrowing costs
remained stable allowing for the leverage to contribute to income.
(For a complete explanation of the benefits and risks of leveraging,
see page 1 of this report to shareholders.) Prepayment speeds have
slowed increasing the yield on many of the collaterized mortgage
obligations positions. In addition, we collected sizable prepayment
penalties on some commercial mortgage-backed securities. Further,
the impact of the sale of the municipal portion of the portfolio
will help second-half 1997 earnings. Finally, a 15 basis point
management fee reduction is scheduled for September.
Even with the increased yield and the portfolio shift out of
municipal securities, our primary investment strategy remains to
return to a $10.00 per share net asset value by year-end 1999. As
such we continue to shift into securities that offer an attractive
yield and a more definite cash flow structure that reduces
prepayment and extension risks. At this time, in the current
interest rate environment, the portfolio is on track to reach its
net asset value target at the Fund's termination date.
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 25, 1997
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
Joseph T. Monagle Jr., 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, NY 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 NR+++ AA++++ $10,000,000 Homart Pooled Asset Finance Trust
Rate++ Corporation, CMO***93-A2, 6.80% due
Mortgage-Backed 12/29/2001++++++++ $ 10,000,000 $ 10,025,000 2.4%
Obligations*-- AA Aa2 26,000,000 Saxon Mortgage Securities
London Interbank Corporation, REMIC** 92-2-B, 7.622%
Offered Rate due 4/28/1998 26,135,683 26,235,638 6.2
Indexed AA Aaa 3,975,342 Sears Mortgage Securities
Obligations Corportation, REMIC** 92-18-A2,
7.318% due 9/25/2022 4,060,081 4,089,012 1.0
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 40,195,764 40,349,650 9.6
Fixed Rate AAA++++++ Aaa 19,258,418 American Southwest Financial
Mortgage-Backed Securities Corp., 95-C1-A1A, 7.30%
Obligations* due 10/17/2001 19,692,495 19,547,294 4.6
AA AA++++ 6,500,000 Blackrock Capital Finance, L.P.,
CMO*** 96-C2-B, 7.747% due
11/15/2026++++++++ 6,558,535 6,581,250 1.6
AAA AAA++++ 2,890,698 CMC Securities Corporation,
REMIC** 93-B-2, 11% due
4/25/2023 (a) 2,890,698 2,950,318 0.7
Debartolo Corp., CMO***:
AAA++++ Aaa 21,300,000 A2, 7.48% due 5/15/2001++++++++ 21,434,312 21,859,125 5.2
AA++++ Aa2 10,000,000 B1, 7.61% due 5/01/2004++++++++++ 10,419,220 10,230,200 2.4
Federal Home Loan Mortgage
Corporation, Pool:
NR+++ NR+++ 4,014,303 #W00062, 7.225% due 11/01/1997 (1) 4,027,588 3,997,995 0.9
NR+++ NR+++ 1,190,759 #G50191, 5% due 6/01/1999 1,170,665 1,166,944 0.3
NR+++ NR+++ 242,158 #G50200, 5% due 6/01/1999 238,071 237,288 0.1
NR+++ NR+++ 14,446,877 #W00058, 6.925% due 6/01/2001 (1) 14,616,727 14,625,205 3.5
Federal Home Loan Mortgage
Corporation, REMIC**:
NR+++ NR+++ 5,500,000 G-29-P, 7% due 6/25/2001 (1) 5,577,204 5,525,740 1.3
NR+++ NR+++ 3,127,340 1341-G, 7% due 12/15/2003 (1) (a) 3,138,235 3,148,825 0.7
NR+++ NR+++ 5,642,600 1784-PD, 7% due 9/15/2014 (1) (b) 5,635,547 5,677,866 1.3
NR+++ NR+++ 10,318,000 1923-PC, 6.25% due 12/15/2014 (b) 10,251,900 10,208,320 2.4
NR+++ NR+++ 1,500,000 G-13-PG, 6% due 7/25/2016 (a) 1,477,969 1,470,930 0.3
Federal National Mortgage
<PAGE> Association, Pool:
NR+++ NR+++ 15,000,000 #160159, 7.516% due 7/01/1999 (1) 15,014,655 15,239,062 3.6
NR+++ NR+++ 9,825,749 #73041, 7.50% due 9/01/1999 (1) 10,013,419 9,979,277 2.4
NR+++ NR+++ 29,257,219 #80306, 8% due 3/01/2000 (1) 29,785,755 29,847,630 7.1
NR+++ NR+++ 271,472 #209622, 5.50% due 4/01/2000 265,618 264,835 0.1
NR+++ NR+++ 4,192,124 #160238, 8.18% due 4/01/2001 (1) 4,280,289 4,320,508 1.0
NR+++ NR+++ 5,462,831 #160239, 8.305% due 4/01/2001 (1) 5,599,772 5,700,123 1.4
NR+++ NR+++ 10,541,732 #160240, 8.43% due 4/01/2001 (1) 11,012,917 10,877,750 2.6
NR+++ NR+++ 7,360,000 #73643, 6.88% due 9/01/2001 (1) 7,291,000 7,194,400 1.7
NR+++ NR+++ 9,135,240 #73063, 8.20% due 1/01/2002 (1) 9,053,879 9,494,940 2.3
Federal National Mortgage
Association, REMIC**:
NR+++ NR+++ 4,135,022 92-122-PG, 7.50% due 12/01/1998 (a) 4,159,843 4,167,316 1.0
NR+++ NR+++ 8,945,346 94-M2-A, 6.625% due 2/25/2001 8,819,552 8,867,074 2.1
NR+++ NR+++ 7,379,736 94-M5-A, 8.40% due 4/01/2001 7,552,850 7,642,639 1.8
NR+++ NR+++ 10,000,000 92-44G, 7.25% due 10/25/2005
(1) (b) 10,107,052 10,078,125 2.4
NR+++ NR+++ 13,200,000 94-M3B, 7.71% due 4/25/2006
(1) (b) 13,552,227 13,488,750 3.2
NR+++ NR+++ 6,223,000 G93-16-E, 5% due 11/25/2015 (a) 5,713,449 6,100,469 1.5
NR+++ NR+++ 5,000,000 G93-20-PE, 5.90% due 5/25/2016 (a) 4,912,500 4,970,300 1.2
NR+++ NR+++ 11,700,000 G93-19-E, 5% due 3/25/2017 (a) 11,402,930 11,487,879 2.7
NR+++ NR+++ 5,000,000 97-7-PK, 6.50% due 10/18/2017
(1) (b) 5,004,710 4,956,250 1.2
AAA AAA++++ 11,138,000 GE Capital Mortgage Services, Inc.,
REMIC** 95-9-A3, 6.375% due
11/25/2025 (b) 11,037,062 10,998,775 2.6
AA++++++ Aa2 9,660,000 Kidder Peabody Acceptance
Corporation, REMIC** 93-M3-B,
6.50% due 11/25/2025 (a) 9,572,456 9,623,775 2.3
AAA++++ AAA++++++ 3,715,758 Nomura Assets Securities Corp.,
REMIC** 94-MD1-A1A, 7.367% due
3/15/2018 (a) 3,722,446 3,744,787 0.9
Prudential Home Mortgage Securities
Company, Inc., REMIC**:
AAA++++ Aaa 8,760,000 92-36-A8, 6.50% due 11/25/1999 8,620,387 8,710,681 2.1
AAA++++ Aaa 16,800,000 93-40-A3, 6.50% due 10/25/2023 (b) 16,485,000 16,726,500 4.0
Resolution Trust Corporation,
REMIC**:
AA AA+++++++ 5,000,082 93-C2-B, 7.75% due 7/01/2000 (b) 5,057,718 5,037,582 1.2
A+++++++ A2 5,174,462 92-C7-B, 7.15% due 6/25/2023 (a) 5,222,376 5,197,100 1.2
AA-++++++ A2 24,605,479 92-C6-B, 7.70% due 7/25/2024 (a) 24,805,096 24,747,729 5.9
AA++++ Aa2 30,350,000 Town & Country Funding Corporation,
CMO***, 5.85% due 8/15/1998 30,144,266 30,022,789 7.1
AAA AAA++++++ 43,135,000 Vornado Finance Corp., CMO***,
6.36% due 12/01/2000 39,205,137 42,501,476 10.1
Total Investments in Fixed Rate
Mortgage-Backed Obligations 424,543,527 429,215,821 102.0
<PAGE>
Derivative AAA Aaa 24,368,678 CMC Securities Corporation II,
Mortgage-Backed REMIC** 93-2I-A3, 0.50% due
Obligations*-- 9/25/2023 339,563 116,970 0.0
Interest DLJ Mortgage Acceptance Corporation,
Only (3) REMIC**:
AAA Aaa 67,497,395 92-9-A1, 0.615% due 11/25/2022 1,037,273 701,973 0.2
AAA Aaa 24,826,361 93-20-1S, 0.752% due 11/25/2023 557,395 307,847 0.1
Federal Home Loan Mortgage
Corporation, REMIC**:
NR+++ NR+++ 4,030,481 G-24-IA, 6.50% due 8/25/2013 217,169 213,490 0.1
NR+++ NR+++ 28,160,738 1547-SC, 4.627% due 3/15/2017 2,041,009 1,130,830 0.3
NR+++ NR+++ 6,395,142 1523-PH, 6.50% due 2/15/2018 565,570 567,569 0.1
NR+++ NR+++ 8,614,914 143-B, 8% due 10/01/2022 3,271,268 2,802,518 0.7
NR+++ NR+++ 4,678,704 1397-IO, 8% due 10/15/2022 1,877,055 1,527,878 0.4
</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 National Mortgage
Mortgage-Backed Association, REMIC**:
Obligations*-- NR+++ NR+++ $ 7,029,312 92-G-5H, 9% due 1/25/2022 $ 2,839,638 $ 2,152,727 0.5%
Interest NR+++ NR+++ 2,212,648 92-15-W, 8% due 2/25/2022 997,315 715,637 0.2
Only (3) NR+++ NR+++ 7,041,709 120-2, 8% due 3/25/2022 3,926,227 2,277,500 0.5
(concluded) NR+++ NR+++ 42,197 92-196-L, 1,187.60% due 8/25/2006 1,014,201 918,776 0.2
AAA AAA++++ 44,996,330 Fund America Investors Corporation
II, REMIC** 93-J, 0.25% due
11/25/2023 365,223 168,736 0.0
AAA++++++ Aaa 27,924,564 Mortgage Capital Fund Inc.,
REMIC** 94-MCI-I1, 1.044%
due 6/25/2019 869,392 203,849 0.0
------------ ------------ ------
19,918,298 13,806,300 3.3
<PAGE>
Derivative Federal Home Loan Mortgage
Mortgage-Backed Corporation, REMIC**:
Obligations*-- NR+++ NR+++ 11,244,406 1453-S, 6.71% due 1/15/2000 10,285,117 10,868,393 2.6
Inverse NR+++ NR+++ 5,618,048 1516-S, 4.833% due 6/15/2000 5,194,938 5,201,961 1.2
Floaters (4) NR+++ NR+++ 3,101,660 1516-SC, 4.46% due 6/15/2000 2,334,968 2,828,326 0.7
NR+++ NR+++ 1,605,504 1521-S, 4.725% due 7/15/2000 1,465,022 1,477,064 0.3
NR+++ NR+++ 5,966,957 1743-S, 5.40% due 8/15/2001 4,989,868 5,504,518 1.3
NR+++ NR+++ 8,875,878 1765-A-S, 6.629% due 1/15/2002 7,355,884 8,254,567 1.9
Federal National Mortgage
Association, REMIC**:
NR+++ NR+++ 5,003,830 93-81-S, 1.796% due 6/25/2000 3,366,640 4,048,399 1.0
NR+++ NR+++ 10,000,000 93-123-S, 7.739% due 7/25/2000 10,772,464 9,612,500 2.3
NR+++ NR+++ 10,000,000 X-169-B, 3.698% due 9/25/2000 7,650,000 8,850,000 2.1
Prudential Home Mortgage Securities
Company, Inc., REMIC**:
AAA++++ Aaa 3,319,298 93-59-A6, 2.481% due 12/25/2000 2,602,537 2,854,596 0.7
AAA++++ Aaa 5,203,532 93-59-A8, 2.959% due 12/25/2000 4,162,826 4,512,438 1.1
------------ ------------ ------
60,180,264 64,012,762 15.2
Derivative NR+++ NR+++ 4,778,651 Government National Mortgage
Mortgage-Backed Association, REMIC** 94-5-PA,
Obligations*-- 8.023% due 6/16/2012 (1) (a) 4,460,015 4,481,467 1.1
Principal
Only (2) (5) Total Investments in Derivative
Mortgage-Backed Obligations 84,558,577 82,300,529 19.6
Total Investments in Mortgage-
Backed Obligations 549,297,868 551,866,000 131.2
US Government United States Treasury Notes (1):
Obligations NR+++ NR+++ 20,000,000 5% due 2/15/1999 19,642,435 19,684,400 4.7
NR+++ NR+++ 27,000,000 5.50% due 4/15/2000 26,379,716 26,506,440 6.3
NR+++ NR+++ 10,000,000 5.50% due 12/31/2000 9,671,503 9,748,400 2.3
NR+++ NR+++ 16,000,000 5.25% due 1/31/2001 15,420,000 15,467,520 3.7
Total Investments in US Government
Obligations 71,113,654 71,406,760 17.0
Short-Term Repurchase 223,000 Nikko Securities International, Inc.,
Securities Agreements+++++ purchased on 6/30/1997 to yield 6.05%
to 7/01/1997 223,000 223,000 0.0
Total Investments in Short-Term
Securities 223,000 223,000 0.0
<PAGE>
Total Investments $620,634,522 623,495,760 148.2
------------ ------------ ------
Liabilities in Excess of Other Assets (202,812,185) (48.2)
------------ ------
Net Assets $420,683,575 100.0%
============ ======
<FN>
Average life estimates are made using realistic prepayment
assumptions.
Actual maturities could differ from those estimates. Corresponding
average life estimates for bonds are as follows:
(a)0--2 years.
(b)2--4 years.
*Mortgage-Backed Obligations are subject to principal pay downsas 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.
++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)The interest rates shown represent the approximate yield to
maturity.
(3)Securities which receive some or all of the interest portion of
the under-lying collateral and little or no principle. 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.
+++Not Rated.
+++++Repurchase Agreements are fully collateralized by US Government
& Agency Obligations.
++++++++The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
++++++++++Restricted security as to resale. The value of the Fund's
investments in restricted securities was approximately $10,230,000,
representing 2.4% of net assets.
<PAGE>
Acquisition Value
Issue Date Cost (Note 1a)
Debartolo Corp., CMO
B1, 7.61% due 5/01/2004 11/29/1996 $10,419,220 $10,230,200
----------- -----------
Total $10,419,220 $10,230,200
=========== ===========
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of June 30, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$620,634,522) (Note 1a) $623,495,760
Cash 365,875
Receivables:
Interest $ 4,634,124
Principal paydowns 209,100 4,843,224
------------
Deferred organization expenses (Note 1e) 8,628
Prepaid expenses and other assets 6,082
------------
Total assets 628,719,569
------------
Liabilities: Payables:
Reverse repurchase agreements (Note 5) 195,075,020
Securities purchased 10,043,949
Interest expense (Note 5) 2,599,708
Investment adviser (Note 2) 183,772 207,902,449
------------
Accrued expenses and other liabilities 133,545
------------
Total liabilities 208,035,994
------------
Net Assets: Net assets $420,683,575
============
Capital: Capital stock, $0.10 par value, 200,000,000 shares authorized $ 4,297,463
Paid-in capital in excess of par 418,392,442
Undistributed investment income--net 16,063,291
Accumulated realized capital losses on investments--net (Note 6) (20,930,859)
Unrealized appreciation on investments--net 2,861,238
------------
Net assets--Equivalent to $9.79 per share based on 42,974,627
shares outstanding (market price--$9.125) $420,683,575
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended June 30, 1997
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 19,498,922
(Note 1d): Other 511,845
------------
Total income 20,010,767
------------
Expenses: Interest expense (Note 5) $ 5,457,473
Investment advisory fees (Note 2) 1,139,411
Accounting services (Note 2) 59,652
Professional fees 44,716
Transfer agent fees 33,740
Trustees' fees and expenses 20,004
Printing and shareholder reports 18,983
Custodian fees 15,654
Amortization of organization expenses (Note 1e) 4,246
Pricing fees 1,493
Other 31,723
------------
Total expenses 6,827,095
------------
Investment income--net 13,183,672
------------
Realized & Realized gain on investments--net 1,737,192
Unrealized Gain Change in unrealized appreciation on investments--net (1,999,241)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 12,921,623
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the For the
Six Months Year
Ended Ended
June 30, December 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 13,183,672 $ 28,085,289
Realized gain on investments--net 1,737,192 2,406,527
Change in unrealized appreciation on investments--net (1,999,241) (3,275,184)
------------ ------------
Net increase in net assets resulting from operations 12,921,623 27,216,632
------------ ------------
Dividends to Investment income--net (9,411,344) (23,177,460)
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends
to shareholders (9,411,344) (23,177,460)
------------ ------------
Capital Stock Net decrease in net assets derived from capital
Transactions stock transactions (8,268,027) (49,280,594)
(Note 4): ------------ ------------
Net Assets: Total decrease in net assets (4,757,748) (45,241,422)
Beginning of period 425,441,323 470,682,745
------------ ------------
End of period* $420,683,575 $425,441,323
============ ============
<FN>
*Undistributed investment income--net $ 16,063,291 $ 12,290,963
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Six Months Ended June 30, 1997
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 12,921,623
Operating Adjustments to reconcile net increase in net assets resulting
Activities: from operations to net cash provided by operating activities:
Decrease in receivables 174,407
Increase in other assets (295)
Decrease in other liabilities (2,651,714)
Realized and unrealized loss on investments--net 262,049
Amortization of premium and discount--net 1,578,923
------------
Net cash provided by operating activities 12,284,993
------------
Cash Provided by Proceeds from principal payments and sales of long-term securities 254,649,997
Investing Purchases of long-term securities (235,983,299)
Activities: Purchases of short-term investments (261,925,000)
Proceeds from sales and maturities of short-term investments 264,763,000
------------
Net cash provided by investing activities 21,504,698
------------
Cash Used for Cash receipts from borrowings 61,087,940
Financing Cash payments on borrowings (74,513,425)
Activities: Cash payments on capital shares repurchased (8,948,587)
Dividends paid to shareholders (11,246,112)
------------
Net cash used for financing activities (33,620,184)
------------
Cash: Net increase in cash 169,507
Cash at beginning of period 196,368
------------
Cash at end of period $ 365,875
============
Cash Flow Cash paid for interest $ 7,236,819
Information: ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios For the
have been derived from information provided Six Months
in the financial statements. Ended
June 30, For the Year Ended December 31,
Increase (Decrease) in Net Asset Value: 1997++ 1996++ 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.69 $ 9.50 $ 8.22 $ 9.32 $ 9.37
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .31 .60 .55 .60 .65
Realized and unrealized gain (loss) on
investments--net .01 .09 1.23 (1.11) (.01)
-------- -------- -------- -------- --------
Total from investment operations .32 .69 1.78 (.51) .64
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.22) (.50) (.50) (.59) (.59)
Realized gain on investments--net -- -- -- -- (.08)
In excess of realized gain on
` investments--net -- -- -- -- (.02)
-------- -------- -------- -------- --------
Total dividends and distributions (.22) (.50) (.50) (.59) (.69)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.79 $ 9.69 $ 9.50 $ 8.22 $ 9.32
======== ======== ======== ======== ========
Market price per share, end of period $ 9.125 $ 9.00 $ 8.25 $ 7.375 $ 8.75
======== ======== ======== ======== ========
Total Investment Based on market price per share 3.84%+++ 15.53% 19.00% (9.18%) 1.77%
Return:** ======== ======== ======== ======== ========
Based on net asset value per share 3.47%+++ 8.02% 22.94% (4.97%) 7.02%
======== ======== ======== ======== ========
Ratios to Average Expenses, excluding interest expense .66%* .65% .69% .67% .83%
Net Assets: ======== ======== ======== ======== ========
Expenses 3.30%* 3.36% 3.70% 2.80% 2.30%
======== ======== ======== ======== ========
Investment income--net 6.36%* 6.29% 5.98% 6.93% 6.86%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $420,684 $425,441 $470,683 $439,767 $517,147
Data: ======== ======== ======== ======== ========
Portfolio turnover 35.22% 60.96% 60.70% 94.71% 185.21%
======== ======== ======== ======== ========
Leverage: Amount of borrowings, end of period
(in thousands) $195,075 $208,501 $228,654 $217,236 $255,088
======== ======== ======== ======== ========
Average amount of borrowings outstanding
during the period (in thousands) $194,853 $206,923 $226,188 $239,251 $204,770
======== ======== ======== ======== ========
Average amount of borrowings per share
during the period $ 4.51 $ 4.42 $ 4.39 $ 4.39 $ 3.69
======== ======== ======== ======== ========
<PAGE>
<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.
++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 of 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 purchases 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>
NOTES TO FINANCIAL STATEMENTS (concluded)
(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 an 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.
<PAGE>
During the six months ended June 30, 1997, the Fund paid Merrill
Lynch Security Pricing Service, an affiliate of Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), $1,082 for security price
quotations to compute 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, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended June 30, 1997 were $220,133,795 and
$239,447,651, respectively.
Net realized and unrealized gains as of June 30, 1997 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $ 1,633,277 $ 2,861,238
Short sales 103,915 --
------------ ------------
Total $ 1,737,192 $ 2,861,238
============ ============
As of June 30, 1997, net unrealized appreciation for Federal income
tax purposes aggregated $2,861,238, of which $11,275,700 related to
appreciated securities and $8,414,462 related to depreciated
securities. The aggregate cost of investments at June 30, 1997 for
Federal income tax purposes was $620,634,522.
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, 1997, total paid-in capital
amounted to $422,689,905.
During the period, the Fund repurchased 908,800 shares of capital
stock, at an average market price of $9.10, 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.
<PAGE>
As of June 30, 1997, the Fund had entered into reverse repurchase
agreements in the amount of $195,075,020. For the six months ended
June 30, 1997, the maximum amount of reverse repurchase agreements
outstanding was $213,083,005, the average amount outstanding was
approximately $194,853,000, and the daily weighted average interest
rate was 5.68%.
6. Capital Loss Carryforward:
At December 31, 1996, the Fund had a net capital loss carryforward
of approximately $22,531,000, of which $14,861,000 expires in 2002
and $7,670,000 expires in 2003. This amount will be available to
offset like amounts of any future taxable gains.
7. Subsequent Event:
On July 9, 1997, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$.050000 per share, payable on July 31, 1997 to shareholders of
record as of July 21, 1997.
