INCOME
OPPORTUNITIES
FUND 1999, INC.
FUND LOGO
Annual Report
December 31, 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
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.
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
DEAR SHAREHOLDER
For the year ended December 31, 1996, Income Opportunities Fund
1999, Inc. earned $0.500 per share income dividends, which included
earned and unpaid dividends of $0.042 per share. This represents a
net annualized yield of 5.16%, based on a month-end net asset value
of $9.69 per share. Over the same period, the Fund's total
investment return was +8.02%, based on a change in per share net
asset value from $9.50 to $9.69, and assuming reinvestment of $0.500
per share income dividends.
<PAGE>
Investment Activities
The Fund's total investment return for 1996 was +8.02%, including an
increase of $0.19 in net asset value. This follows a 1995 total
investment return of +22.94%. Significantly for 1996, the return was
accomplished during a period where interest rates increased
significantly. Although short-term interest rates were essentially
unchanged with three-month and six-month Treasury bill yields up
just 11 basis points (0.11%) and 15 basis points, respectively;
three-year, five-year and ten-year Treasury notes were all up over
80 basis points in yield. This equates to total returns for those
securities of just +4.21%, +2.43% and +0.07%, respectively.
The Fund outperformed the Treasury benchmarks for several reasons.
The Fund is primarily invested in mortgage-backed securities (MBS),
which have higher yields to compensate for the imbedded prepayment
risk. After interest rates increased, prepayments slowed, reflecting
a reduced refinancing incentive. Therefore, the higher yield was
achieved without the negative impact of prepayments.
Lessened prepayment concerns led to increased investor demand for
MBS. MBS offer both high quality and high yield to investors who
seek higher yields than those found in comparable Treasury and
corporate securities. This is especially true for commercial MBS
where cash flows are more predictable as prepayment lockouts and
penalties protect against unwanted prepayments. The increased demand
for MBS led to a tightening in Treasury/MBS yield spreads. In terms
of price movement, this is the equivalent to a decline in interest
rates.
Slower prepayments and stable short-term interest rates also helped
the returns on the derivative securities in the portfolio. The
Interest Only (IO) securities had large coupon flows that were not
offset by large prepayment losses. The Inverse Floaters (IFs)
maintained their coupons as the benchmark London Interbank Offered
Rate Index did not materially change. As we discussed in previous
shareholder reports, our exposure to derivative products is fairly
limited. The IO positions are backed by seasoned mortgages where
prepayment exposure is less as homeowners have not acted on several
refinancing opportunities. The IFs are backed by balloon mortgages
that mature around the Fund's termination date. Most were purchased
at a sizable discount so that an attractive positive return is
generated even in the highly unlikely worst case scenario of zero
coupon and zero prepayments.
<PAGE>
Leverage also contributed to return. Fortunately our conservative
strategy of investing borrowings in adjustable rate securities and
short-term maturities worked well in 1996 as returns for short-term
securities outpaced those of longer-term securities. Additionally,
borrowing costs remained stable. (For a complete discussion of the
benefits and risks of leverage, see page 1 of this report to
shareholders.) Finally, the share buy back program helped increase
the Fund's return, as the discount between the net asset value and
the market price accrued to the Fund on the shares repurchased.
We are focusing on portfolio structure as 1997 begins. Our primary
investment strategy is to return to a $10.00 per share net asset
value. Therefore, the core portfolio continues to shift into
securities that offer an attractive yield and a more definitive cash
flow maturity structure. This helps limit the reinvestment risk on
cash flows that come in too early and the pricing risk on cash flows
that are beyond the life of the Fund.
Although the net asset value is our main focus, portfolio yield is
also important. For 1996, while our dividend payout was 5.00%, the
actual earnings rate on the Fund's holdings was 5.55%. Short-term
borrowing rates remained fairly stable for most of 1996, and if this
continues the excess earnings rate should continue into early 1997.
This will offer some protection against some unforeseen rise in
borrowing costs. In the absence of such a rise or other unforeseen
adverse circumstances an upward adjustment to the dividend may be
warranted sometime in 1997.
In Conclusion
We thank you for your continued investment in Income Opportunities
Fund 1999, Inc., and we look forward to reviewing our outlook and
strategy with you again in our next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
January 30, 1997
<PAGE>
As of December 31, 1996, N. John Hewitt retired as Senior Vice
President of the Fund. His colleagues at Merrill Lynch Asset
Management, L.P. join the Fund's Board of Directors in wishing Mr.
Hewitt well in his retirement.
Proxy Results
<TABLE>
During the six-month period ended November 30, 1996, Income
Opportunities Fund 1999, Inc. stockholders voted on the following
proposals. The proposals were approved at the annual stockholders'
meeting on October 14, 1996. The description of each proposal and
number of shares voted are as follows:
<CAPTION>
Shares Voted Shares Voted
For Without Authority
<S> <S> <C> <C>
1. To elect the Fund's Board of Directors: Joe Grills 43,506,041 1,548,152
Walter Mintz 43,493,902 1,560,291
Robert S. Salomon Jr. 43,504,143 1,550,050
Melvin R. Seiden 43,501,841 1,552,352
Stephen B. Swendsrud 43,504,895 1,549,298
Arthur Zeikel 43,477,240 1,576,953
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
2. To ratify the selection of Ernst & Young LLP as the
Fund's independent auditors for the current fiscal year. 43,784,984 542,292 726,917
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value Percent of
Rating Rating Amount Issue Cost (Note 1a) Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
Adjustable Rate++ AAA Aaa $ 12,824,129 Prudential Home Mortgage Securities
Mortgage-Backed Company, Inc., REMIC** 93-25-A1,
Obligations*-- 7.89% due 11/25/2002 (1) $ 13,110,257 $ 13,152,747 3.1%
Constant Maturity
Treasury Indexed
Obligations
<PAGE>
Adjustable Rate++ NR+++ AA++++ 10,000,000 Homart Pooled Asset Finance Trust
Mortgage-Backed Corporation, CMO***93-A2, 6.80%
Obligations*-- due 12/29/2001++++++++ 10,000,000 10,025,000 2.3
London Interbank A Aa2 26,000,000 Saxon Mortgage Securities
Offered Rate Corporation, REMIC** 92-2-B,
Indexed 7.793% due 4/28/1998 26,214,221 26,325,000 6.2
Obligations AAA Aaa 4,549,683 Sears Mortgage Securities
Corportation, REMIC** 92-18-A2,
7.389% due 9/25/2022 4,647,393 4,600,867 1.1
------------ ------------ ------
40,861,614 40,950,867 9.6
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 53,971,871 54,103,614 12.7
Fixed Rate AAA++++++ Aaa 21,185,993 American Southwest Financial
Mortgage-Backed Securities Corp., 95-C1-A1A, 7.30%
Obligations* due 10/01/2001 21,710,316 21,662,678 5.1
AA AA++++ 5,000,000 Blackrock Capital Finance, L.P.,
CMO*** 96-C2-B, 7.741% due
11/15/2026++++++++ 5,049,398 5,085,940 1.2
AAA AAA++++++ 14,300,000 CBA Mortgage Inc., CMO*** 93-C1-A2,
7.773% due 12/25/2003 14,616,653 14,550,250 3.4
AAA AAA++++ 3,956,979 CMC Securities Corporation, REMIC**
93-B-2, 11% due 4/25/2023 (a) 3,956,979 4,013,861 0.9
Debartolo Corp., CMO***++++++++:
AAA Aaa 21,300,000 A2, 7.48% due 5/15/2001 21,453,904 21,939,000 5.2
AA++++ Aa2 10,000,000 B1, 7.61% due 5/01/2004 10,442,752 10,387,500 2.4
Federal Home Loan Mortgage
Corporation, Pool (1):
NR+++ NR+++ 4,037,017 #W00062, 7.225% due 11/01/1997 4,069,637 4,052,787 1.0
NR+++ NR+++ 14,544,781 #W00058, 6.925% due 6/01/2001 14,734,497 14,647,049 3.4
Federal Home Loan Mortgage
Corporation, REMIC** (1):
NR+++ NR+++ 5,500,000 G-29-P, 7% due 6/25/2001 5,585,490 5,560,115 1.3
NR+++ NR+++ 3,500,000 1341-G, 7% due 12/15/2003 (a) 3,512,925 3,542,630 0.8
NR+++ NR+++ 5,642,600 1784-PD, 7% due 5/01/2025 (b) 5,635,547 5,687,566 1.3
19,375,554 Federal Housing Association, Loan
Project, CMO*** Series 44, 7.43%
due 11/14/2026 20,028,663 19,763,065 4.6
Federal National Mortgage
Association, Pool (1):
<PAGE> NR+++ NR+++ 15,000,000 #160159, 7.516% due 6/30/1999 15,017,958 15,372,656 3.6
NR+++ NR+++ 29,433,073 #80306, 8% due 3/01/2000 30,052,977 30,076,774 7.1
NR+++ NR+++ 2,877,530 #160301, 7.997% due 11/01/2000 2,921,198 2,935,081 0.7
NR+++ NR+++ 4,211,198 #160238, 8.18% due 4/01/2001 4,309,735 4,421,758 1.0
NR+++ NR+++ 5,487,122 #160239, 8.305% due 4/01/2001 5,640,157 5,775,196 1.4
NR+++ NR+++ 10,587,540 #160240, 8.43% due 4/01/2001 11,114,595 10,852,228 2.5
NR+++ NR+++ 9,171,040 #73063, 8.20% due 1/01/2002 9,089,361 9,606,665 2.3
Federal National Mortgage
Association, REMIC** (1):
NR+++ NR+++ 5,000,000 92-122-PG, 7.50% due 9/25/2017 (a) 5,039,837 5,053,100 1.2
NR+++ NR+++ 8,989,101 94-M2-A, 6.625% due 2/25/2001 8,862,691 8,985,954 2.1
NR+++ NR+++ 8,177,856 94-M5-A, 8.40% due 4/01/2001 8,391,222 8,525,415 2.0
NR+++ NR+++ 10,000,000 92-44G, 7.25% due 10/25/2005 10,111,778 10,100,000 2.4
NR+++ NR+++ 10,000,000 94-M3B, 7.71% due 4/25/2006 10,245,210 10,325,000 2.4
NR+++ NR+++ 5,223,000 G93-16-E, 5% due 11/25/2015 (b) 4,743,137 5,072,839 1.2
NR+++ NR+++ 5,000,000 G93-20-PE, 5.90% due 5/25/2016 (b) 4,912,500 4,946,850 1.2
NR+++ NR+++ 11,700,000 93-19E, 5% due 3/25/2017 (b) 11,402,930 11,385,504 2.7
AAA AAA++++ 11,138,000 GE Capital Mortgage Services, Inc.,
REMIC** 95-9-A3, 6.375% due
11/01/2000 (1) 11,037,062 11,037,062 2.6
Kidder Peabody Acceptance
Corporation, REMIC**:
NR+++ AAA++++ 5,000,000 93-M2-A, 6.05% due 8/01/2003++++++++ 4,650,000 4,912,500 1.2
AA++++++ Aa2 9,660,000 93-M3-B, 6.50% due 11/25/2025 (b) 9,572,456 9,584,531 2.3
AAA++++ AAA++++++ 3,877,376 Nomura Assets Securities Corp.,
REMIC** 94-MD1-A1A, 7.371% due
3/15/2018 (a) 3,884,425 3,877,376 0.9
Prudential Home Mortgage Securities
Company, Inc., REMIC**:
AAA++++ Aaa 8,760,000 92-36-A8, 6.50% due 10/01/1999 8,620,387 8,727,150 2.0
AAA++++ Aaa 16,800,000 93-40-A3, 6.50% due 10/25/2023
(1) (b) 16,485,000 16,660,224 3.9
Resolution Trust Corporation, REMIC**:
AA AA+++++++ 5,000,082 93-C2-B, 7.75% due 7/01/2000 (c) 5,066,101 5,050,082 1.2
A+++++++ A2 6,072,731 92-C7-B, 7.15% due 6/25/2023 (a) 6,129,309 6,078,424 1.4
AA-++++++ A2 25,855,038 92-C6-B, 7.70% due 7/25/2024 (a) 26,066,648 25,903,517 6.1
AA AA++++ 348,858 Ryland Mortgage Securities
Corporation, REMIC** 93-M1-A, 7.55%
due 5/15/2002 351,919 348,858 0.1
AA++++ Aa2 27,350,000 Town & Country Funding Corporation,
CMO***, 5.85% due 8/15/1998 27,169,578 27,136,328 6.4
AAA AAA++++++ 43,135,000 Vornado Finance Corp., CMO***,
6.36% due 12/01/2000++++++++ 39,205,138 42,595,813 10.0
Total Investments in Fixed Rate
Mortgage-Backed Obligations 430,890,070 436,239,326 102.5
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value Percent of
Rating Rating Amount Issue Cost (Note 1a) Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
Derivative AAA Aaa $ 28,077,174 CMC Securities Corporation II,
Mortgage-Backed REMIC** 93-2I-A3, 0.50% due
Obligations*-- 9/25/2023 $ 370,984 $ 154,424 0.0%
Interest Only (3) DLJ Mortgage Acceptance
Corporation, REMIC**:
AAA Aaa 75,087,514 92-9-A1, 0.615% due 10/25/2022 1,195,880 825,963 0.2
AAA Aaa 28,365,313 93-20-1S, 0.752% due 12/25/2023 586,455 368,749 0.1
Federal Home Loan Mortgage
Corporation, REMIC**:
NR+++ NR+++ 5,632,409 G-24-IA, 6.50% due 8/25/2013 337,885 358,186 0.1
NR+++ NR+++ 34,870,713 1547-SC, 4.627% due 3/15/2017 2,483,378 1,525,594 0.4
NR+++ NR+++ 9,038,430 143-B, 8% due 7/15/2022 3,565,758 2,722,827 0.6
NR+++ NR+++ 4,954,691 1397-IO, 8% due 10/15/2022 2,037,565 1,495,672 0.4
Federal National Mortgage
Association, REMIC**:
NR+++ NR+++ 7,650,448 92-G-5H, 9% due 1/25/2022 3,114,928 2,223,373 0.5
NR+++ NR+++ 2,346,429 92-15-W, 8% due 2/25/2022 1,073,408 703,178 0.2
NR+++ NR+++ 7,510,477 120-2, 8% due 3/25/2022 4,169,013 2,250,740 0.5
NR+++ NR+++ 50,059 92-196-L, 1,187.60% due 8/25/2006 1,249,604 1,070,235 0.3
AAA AAA++++ 53,192,962 Fund America Investors Corporation
II, REMIC** 93-J, 0.25% due
11/25/2023 416,593 192,558 0.0
AAA++++++ Aaa 41,439,133 Mortgage Capital Fund Inc., REMIC**
94-MCI-I1, 1.044% due 6/25/2019 934,487 608,658 0.1
------------ ------------ ------
21,535,938 14,500,157 3.4
Derivative Federal Home Loan Mortgage
Mortgage-Backed Corporation, REMIC**:
Obligations*-- NR+++ NR+++ 11,244,406 1453-S, 6.797% due 1/15/2000 (1) 10,285,117 11,082,711 2.6
Inverse NR+++ NR+++ 3,101,660 1516-SC, 4.584% due 6/15/2000 2,334,968 2,667,427 0.6
Floaters (4) NR+++ NR+++ 5,618,048 1516-S, 4.967% due 6/15/2000 5,194,938 5,182,649 1.2
NR+++ NR+++ 9,074,225 1765-A-S, 6.791% due 2/15/2001 7,520,264 8,668,721 2.0
NR+++ NR+++ 6,096,335 1743-S, 5.55% due 8/15/2001 5,098,060 5,669,592 1.3
Federal National Mortgage
Association, REMIC**:
NR+++ NR+++ 5,003,830 93-81-S, 1.80% due 6/25/2000 3,366,640 4,128,160 1.0
NR+++ NR+++ 10,000,000 93-123-S, 7.734% due 7/25/2000 (1) 10,899,149 9,703,125 2.3
NR+++ NR+++ 10,000,000 X-169-B, 4.386% due 9/25/2000 7,650,000 8,906,250 2.1
Prudential Home Mortgage
Securities Company, Inc., REMIC**:
AAA++++ Aaa 3,319,298 93-59-A6, 2.977% due 12/25/2000 2,602,537 2,832,291 0.7
AAA++++ Aaa 5,203,532 93-59-A8, 3.436% due 12/25/2000 4,162,826 4,482,426 1.1
------------ ------------ ------
59,114,499 63,323,352 14.9
<PAGE>
Derivative NR+++ NR+++ 6,093,228 Government National Mortgage
Mortgage-Backed Association, REMIC** 94-5-PA,
Obligations*-- 8.024% due 6/16/2012 (1) 5,579,428 5,630,508 1.3
Principal Only
(2)(5)
Total Investments in Derivative
Mortgage-Backed Obligations 86,229,865 83,454,017 19.6
Total Investments in Mortgage-
Backed Obligations 571,091,806 573,796,957 134.8
Municipal AA Aa 4,600,000 Alabama State Refunding
Bonds (2) Bonds, 5.70% due 9/01/2000 3,722,050 3,906,044 0.9
AAA Aaa 2,445,000 Allegheny County, Pennsylvania,
Sanitation Authority Revenue Bonds,
5.75% due 12/01/2000 (7) 1,954,372 2,058,641 0.5
AAA Aaa 12,260,000 Houston, Texas, Water and Sewer
System, Revenue Refunding Bonds,
5.65% due 12/01/2000 (6) 9,832,734 10,302,936 2.4
Maricopa County, Arizona, School
District No. 28, Refunding Bonds,
Second Series (7):
AAA Aaa 3,000,000 5.55% due 1/01/1999 2,688,861 2,757,990 0.8
AAA Aaa 4,000,000 5.70% due 1/01/2000 3,379,324 3,506,280 0.8
AAA Aaa 9,350,000 5.70% due 7/01/2000 7,680,316 8,017,906 1.9
Maricopa County, Arizona, School
District No. 41, Refunding Bonds,
Second Series (7):
AAA Aaa 1,000,000 5.65% due 1/01/2000 845,049 876,570 0.2
AAA Aaa 1,500,000 5.65% due 7/01/2000 1,232,493 1,286,295 0.3
AAA Aaa 3,500,000 5.90% due 1/01/2001 2,773,633 2,919,000 0.7
AAA Aaa 6,335,000 New Jersey Wastewater Treatment
Trust, Refunding Bonds, Series A,
4.43% due 9/01/1999 5,641,198 5,662,920 1.3
AAA Aaa 7,000,000 North Slope Boro, Alaska, Revenue
Refunding Bonds, Series A, 5.90% due
6/30/2001 (8) 5,381,921 5,662,020 1.3
AAA Aaa 3,000,000 Round Rock, Texas, Independent School
District Refunding Bonds, 5.74% due
2/15/2001 2,378,864 2,483,160 0.6
AA Aa 6,000,000 Washington State Public Power Supply
Systems, Revenue Refunding Bonds
(Nuclear Project No. 3), Series B,
5.98% due 7/01/2001 4,567,626 4,819,140 1.1
Total Investments in Municipal Bonds 52,078,441 54,258,902 12.8
<PAGE>
US Government United States Treasury Notes:
Obligations NR+++ NR+++ 10,000,000 6% due 9/30/1998 10,038,182 10,025,000 2.4
NR+++ NR+++ 5,000,000 5.625% due 11/30/1998 4,978,906 4,977,350 1.2
NR+++ NR+++ 1,500,000 5.50% due 4/15/2000 1,483,680 1,473,285 0.3
Total Investments in US Government
Obligations 16,500,768 16,475,635 3.9
</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 $ 561,000 Nikko Securities International,
Securities Agreements+++++ Inc., purchased on 12/31/1996 to
yield 6.50% to 1/02/1997 $ 561,000 $ 561,000 0.1%
2,500,000 Smith Barney Holdings, Inc.,
purchased on 12/27/1996 to yield
6% to 1/03/1997 2,500,000 2,500,000 0.6
Total Investments in Short-Term
Securities 3,061,000 3,061,000 0.7
Total Investments $642,732,015 647,592,494 152.2
============
Liabilities in Excess of Other
Assets (222,151,171) (52.2)
------------ ------
Net Assets $425,441,323 100.0%
============ ======
<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)1--2 years.
(b)2--4 years.
(c)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).
++Adjustable Rate Mortgage-Backed Obligations have coupon rates
which reset periodically to reflect changes in a referenced
interest rate.
<PAGE> ++++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 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
$94,946,000, representing 22.3% of net assets.
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <S> <C> <C>
Blackrock Capital Finance,
L.P., CMO 96-C2-B,
7.741% due 11/15/2026 9/20/1996 $ 5,049,398 $ 5,085,940
Debartolo Corp., CMO:
A2, 7.48% due 5/15/2001 2/27/1995-
9/06/1996 21,453,904 21,939,000
B1, 7.61% due 5/01/2004 11/29/1996 10,442,752 10,387,500
Homart Pooled Asset Finance
Trust Corporation, CMO 93-A2,
6.80% 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 4,912,500
Vornado Finance Corp., CMO,
6.36% due 12/01/2000 11/01/1994-
7/16/1996 39,205,138 42,595,813
Total $ 90,801,192 $ 94,945,753
============ ============
<PAGE>
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, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$642,732,015) (Note 1a) $647,592,494
Cash 196,368
Receivables:
Securities sold $ 10,185,680
Interest 4,808,531
Principal paydowns 180,564 15,174,775
------------
Deferred organization expenses (Note 1e) 8,628
Prepaid expenses and other assets 5,787
------------
Total assets 662,978,052
------------
Liabilities: Payables:
Reverse repurchase agreements (Note 5) 208,500,505
Securities purchased 20,952,157
Interest expense (Note 5) 4,379,054
Dividends to shareholders (Note 1f) 1,834,768
Capital shares repurchased 680,560
Investment adviser (Note 2) 201,105 236,548,149
------------
Accrued expenses and other liabilities 988,580
------------
Total liabilities 237,536,729
------------
Net Assets: Net assets $425,441,323
============
Capital: Capital stock, $0.10 par value, 200,000,000 shares authorized $ 4,388,343
Paid-in capital in excess of par 426,569,590
Undistributed investment income--net 12,290,963
Accumulated realized capital losses on investments--net (Note 6) (22,668,052)
Unrealized appreciation on investments--net 4,860,479
------------
Net assets--Equivalent to $9.69 per share based on 43,883,427
shares outstanding (market price--$9.00) $425,441,323
============
<PAGE>
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended December 31, 1996
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 43,108,669
(Note 1d):
Expenses: Interest expense (Note 5) $ 12,111,088
Investment advisory fees (Note 2) 2,449,256
Professional fees 100,770
Accounting services (Note 2) 93,480
Transfer agent fees 77,923
Custodian fees 51,310
Trustees' fees and expenses 39,147
Printing and shareholder reports 20,188
Amortization of organization expenses (Note 1e) 13,176
Pricing fees 2,636
Listing fees 375
Other 64,031
------------
Total expenses 15,023,380
------------
Investment income--net 28,085,289
------------
Realized & Realized gain on investments--net 2,406,527
Unrealized Gain Change in unrealized appreciation on investments--net (3,275,184)
(Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 27,216,632
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended December 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 28,085,289 $ 27,430,126
Realized gain (loss) on investments--net 2,406,527 (1,876,062)
Change in unrealized appreciation/depreciation on investments--net (3,275,184) 61,650,129
------------ ------------
Net increase in net assets resulting from operations 27,216,632 87,204,193
------------ ------------
<PAGE>
Dividends to Investment income--net (23,177,460) (25,472,302)
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends to shareholders (23,177,460) (25,472,302)
------------ ------------
Capital Stock Net decrease in net assets derived from capital stock transactions (49,280,594) (30,816,624)
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (45,241,422) 30,915,267
Beginning of year 470,682,745 439,767,478
------------ ------------
End of year* $425,441,323 $470,682,745
============ ============
<FN>
*Undistributed investment income--net (Note 1g) $ 12,290,963 $ 7,383,175
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Year Ended December 31, 1996
<S> <S> <C>
Cash Provided Net increase in net assets resulting from operations $ 27,216,632
by Operating Adjustments to reconcile net increase in net assets resulting from
Activities: operations to net cash provided by operating activities:
Increase in receivables (85,459)
Decrease in other assets 17,599
Decrease in other liabilities (581,747)
Realized and unrealized loss on investments--net 868,657
Amortization of premium and discount--net 5,142,545
--------------
Net cash provided by operating activities 32,578,227
--------------
Cash Provided Proceeds from principal payments and sales of long-term securities 445,394,975
by Investing Purchases of long-term securities (389,398,238)
Activities: Purchases of short-term investments (602,158,617)
Proceeds from sales and maturities of short-term investments 606,397,000
--------------
Net cash provided by investing activities 60,235,120
--------------
<PAGE>
Cash Used for Cash receipts from borrowings 141,653,801
Financing Cash payments on borrowings (161,807,628)
Activities: Cash payments on capital shares repurchased (49,339,563)
Dividends paid to shareholders (23,410,520)
--------------
Net cash used for financing activities (92,903,910)
--------------
Cash: Net decrease in cash (90,563)
Cash at beginning of year 286,931
--------------
Cash at end of year $ 196,368
--------------
Cash Flow Cash paid for interest $ 13,456,628
Information: ==============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the
The following per share data and ratios have Period
been derived from information provided in the Aug. 28,
financial statements. 1992++ to
For the Year Ended 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 .60 .55 .60 .65 .21
Realized and unrealized gain (loss) on
investments--net .09 1.23 (1.11) (.01) (.15)
-------- -------- -------- -------- --------
Total from investment operations .69 1.78 (.51) .64 .06
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.50) (.50) (.59) (.59) (.18)
Realized gain on investments--net -- -- -- (.08) --
In excess of realized gain on investments
--net -- -- -- (.02) --
-------- -------- -------- -------- --------
Total dividends and distributions (.50) (.50) (.59) (.69) (.18)
-------- -------- -------- -------- --------
Capital charge resulting from the issuance
of Common Stock -- -- -- -- (.01)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.69 $ 9.50 $ 8.22 $ 9.32 $ 9.37
======== ======== ======== ======== ========
Market price per share, end of period $ 9.00 $ 8.25 $ 7.375 $ 8.75 $ 9.25
======== ======== ======== ======== ========
<PAGE>
Total Investment Based on market price per share 15.53% 19.00% (9.18%) 1.77% (5.78%)+++
Return:** ======== ======== ======== ======== ========
Based on net asset value per share 8.02% 22.94% (4.97%) 7.02% .46%+++
======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement and excluding
Net Assets: interest expense. .65% .69% .67% .83% .47%*
======== ======== ======== ======== ========
Expenses, excluding interest expense .65% .69% .67% .83% .91%*
======== ======== ======== ======== ========
Expenses 3.36% 3.70% 2.80% 2.30% 1.63%*
======== ======== ======== ======== ========
Investment income--net 6.29% 5.98% 6.93% 6.86% 6.54%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $425,441 $470,683 $439,767 $517,147 $520,319
Data: ======== ======== ======== ======== ========
Portfolio turnover 60.96% 60.70% 94.71% 185.21% 48.17%
======== ======== ======== ======== ========
Leverage: Amount of borrowings, end of period
(in thousands) $208,501 $228,654 $217,236 $255,088 $252,439
======== ======== ======== ======== ========
Average amount of borrowings
outstanding during the period
(in thousands) $206,923 $226,188 $239,251 $204,770 $135,203
======== ======== ======== ======== ========
Average amount of borrowings per
share during the period $ 4.42 $ 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 effect of sales loads.
++Commencement of Operations.
++++Based on average shares outstanding during the period.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Income Opportunities Fund 1999, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified, closed-
end management investment company. The Fund determines and makes
available for publication the net asset value of its Common Stock on
a weekly basis. The Fund's Common Stock is listed on the New York
Stock Exchange under the symbol IOF. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Corporate debt securities, mortgage-
backed securities, municipal securities, asset-backed securities and
other debt securities are valued on the basis of valuations provided
by dealers or by a pricing service, approved by the Fund's Board of
Directors. Securities having a remaining maturity of sixty days or
less are valued at amortized cost, 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.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
<PAGE>
* Options--The Fund is authorized to purchase and write call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Interest rate transactions--The Fund is authorized to enter into
interest rate swaps and purchase or sell interest rate caps and
floors. In an interest rate swap, the Fund exchanges with another
party their respective commitments to pay or receive interest on a
specified notional principal amount. The purchase of an interest
rate cap (or floor) entitles the purchaser, to the extent that a
specified index exceeds (or falls below) a predetermined interest
rate, to receive payments of interest equal to the difference
between the index and the predetermined rate on a notional principal
amount from the party selling such interest rate cap (or floor).
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
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.
<PAGE>
(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 invest-ment 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--Generally accepted accounting principles
require that certain components of net assets be adjusted to reflect
permanent differences between financial and tax reporting.
Accordingly, current year's permanent book/tax differences of $41
have been reclassified between accumulated realized capital losses
and undistributed net investment income. These reclassifications
have no effect on net assets or net asset value per share.
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.
During the year ended December 31, 1996, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce,
Fenner & Smith ("MLPF&S"), $1,779 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, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1996 were $404,357,895 and
$455,669,644, respectively.
<PAGE>
Net realized and unrealized gains as of December 31, 1996 were
as follows:
Realized Unrealized
Gains (Losses) Gains
Long-term investments $ 2,448,729 $ 4,860,479
Options written 10,938 --
Financial futures contracts 59,860 --
Interest rate swaps (113,000) --
----------- -----------
Total $ 2,406,527 $ 4,860,479
=========== ===========
Transactions in call options written for the year ended December 31,
1996 were as follows:
Number of Premiums
Call Options Written Contracts Received
Outstanding call options
written at beginning of year -- --
Options written 10 $ 15,625
Options closed (10) (15,625)
----------- -----------
Outstanding call options
written at end of year -- $ --
=========== ===========
As of December 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $4,807,816 of which $14,303,038
related to appreciated securities and $9,495,222 related to
depreciated securities. The aggregate cost of investments at
December 31, 1996 for Federal income tax purposes was $642,784,678.
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, 1996, total paid-in
capital amounted to $430,957,933.
During the year, the Fund repurchased 5,683,900 shares of capital
stock, at an average market price of $8.67, all of which have been
retired.
5. Reverse Repurchase Agreements:
Under a reverse repurchase agreement, the Fund sells securities and
agrees to repurchase them at a mutually agreed upon date and price.
At the time the Fund enters into a reverse repurchase agreement, it
may establish a segregated account with the custodian containing
cash, cash equivalents or liquid high grade debt securities having a
value at least equal to the repurchase price.
<PAGE>
As of December 31, 1996, the Fund had entered into reverse
repurchase agreements in the amount of $208,500,505. For the year
ended December 31, 1996, the maximum amount of reverse repurchase
agreements outstanding was $234,646,832, the average amount
outstanding was approximately $211,320,000, and the daily weighted
average interest rate was 5.73%.
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.
<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, 1996, 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 comfirmation of securities owned as of
December 31, 1996 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.
<PAGE>
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, 1996, 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)
Princeton, New Jersey
February 3, 1997
</AUDIT-REPORT>
