INCOME
OPPORTUNITIES
FUND 1999, INC.
[FUND LOGO]
STRATEGIC
Performance
Annual Report
December 31, 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 volatil-ity 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.
Income Opportunities
Fund 1999, Inc.
Box 9011
Princeton, NJ
08543-9011 #16390 -- 12/97
[RECYCLE LOGO]
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 331/3% 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.
Income Opportunities Fund 1999, Inc., December 31, 1997
DEAR SHAREHOLDER
For the year ended December 31, 1997, Income Opportunities Fund 1999,
Inc. earned $0.570 per share income dividends, which included earned
and unpaid dividends of $0.052 per share. This represents a net
annualized yield of 5.77%, based on a month-end net asset value of
$9.89 per share. Over the same period, the Fund's total investment
return was +8.45%, based on a change in per share net asset value from
$9.69 to $9.89, and assuming reinvestment of $0.560 per share income
dividends.
Investment Activities
We have continued to maintain the portfolio structure of the Fund with
its termination date in mind. As such, our investment focus is toward
a limited exposure to securities maturing beyond December 1999. The
leveraged portion of the Fund is conservatively managed according to a
strategy of keeping the average life of the assets close to the
average life of the liabilities. In doing this, we limit our exposure
in the event that there might be a sudden increase in interest rates.
(For a complete explanation of the benefits and risks of leveraging,
see page 1 of this report to shareholders.)
At this time, the Fund is also well insulated from any negative impact
of prepayments. Over the past several years, we have shifted the
Fund's investments into securities that we believed offered more
stable and predictable cash flow because of prepayment protection
through yield maintenance or other prepayment penalties. The credit
quality of the portfolio remained high, while the Fund's exposure to
derivative securities continued to be relatively low.
During 1997, interest rates declined significantly at the intermediate
and long end of the yield curve.
The five-year Treasury note yield was lower by 50 basis points
(0.50%), and the ten-year Treasury note yield was down by almost 70
basis points. Because there was a yield curve flattening, short-term
interest rates (where the portfolio is structured) did not participate
to the same extent, thereby limiting the Fund's net asset value
appreciation. At the very short part of the yield curve, where we
borrow money for the leveraged portion of the portfolio, interest
rates were higher. For example, the one-month London Interbank Offered
Rate was 5.50% at the beginning of 1997 and finished the year at
5.72%. High short-term interest rates limit the Fund's yield not only
because borrowing costs are high but also because the coupons on our
inverse floater positions remain low.
Going forward into 1998, there is much uncertainty about the direction
of interest rates. According to recently released economic data, the
US economy remains remarkably strong with the gross domestic product
(GDP) growth at 3.1%. Consumer spending rose 5.8% in the third quarter
of 1997, the fastest pace seen in five years. Job growth was up, and
the unemployment rate was at 4.6%, a new 24-year low. These statistics
would typically suggest that the Federal Reserve Board might be
contemplating an increase in short-term interest rates as a preemptive
strike against inflation. However, offsetting events have effectively
kept monetary policy on hold. First, inflation has been contained for
some time. Both the Producer Price Index and the Consumer Price Index
are at, or near, 30-year lows. Furthermore, the devaluation of several
Asian currencies is expected to allow for lower cost imports, which in
turn should limit domestic price increases. Finally, the combination
of low inflation coupled with high short-term interest rates indicates
that real (adjusted for inflation) interest rates are high and are
already restrictive. The yield spread between 3-month Treasury bills
and 30-year Treasury bonds ended the year at 0.58%. The last time the
curve was this narrow, GDP growth slowed to around 2% in the following
year.
We believe that a slowing economy and lower short-term interest rates
would be very beneficial for the Fund both from a yield perspective
and for net asset value appreciation. However, even in the current
environment, we believe that the Fund is well positioned to maintain
its yield moving into the first half of 1998.
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,
/S/ARTHUR ZEIKEL
Arthur Zeikel
President
/S/GREGORY MARK MAUNZ
Gregory Mark Maunz
Senior Vice President and
Portfolio Manager
February 2, 1998
<TABLE>
<CAPTION>
Proxy Results
During the six-month period ended December 31, 1997, Income Opportunities Fund 1999, Inc. stockholders voted on the
following proposals. The proposals were approved at the annual stockholders' meeting on October 9, 1997. The description
of each proposal and number of shares voted are as follows:
Shares Voted Shares Withheld
For From Voting
<S> <C> <C> <C>
1. To elect the Fund's Board of Directors: Joe Grills 41,119,402 992,204
Walter Mintz 41,112,125 999,481
Robert S. Salomon, Jr. 41,119,018 992,588
Melvin R. Seiden 41,106,001 1,005,605
Stephen B. Swensrud 41,120,907 990,699
Arthur Zeikel 41,090,615 1,020,991
<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. 40,988,435 314,811 808,360
</TABLE>
<TABLE>
<CAPTION>
Income Opportunities Fund 1999, Inc., December 31, 1997
SCHEDULE OF INVESTMENTS
S&P Moody's Face Value Percent of
Rating Rating Amount Issue Cost (Note 1a) Net Assets
<S> <C> <C> <C> <C> <C> <C> <C>
Adjustable Rate+ NR++++ AA++ $10,000,000 Homart Pooled Asset Finance
Mortgage-Backed Trust Corporation, CMO***
Obligations* -- 93-A2, 6.80% due 12/29/2001++++++ $10,000,000 $10,031,250 2.4%
London Interbank AA Aa2 26,000,000 Saxon Mortgage Securities
Offered Rate Corporation, REMIC** 92-2-B,
Indexed Obligations 7.939% due 10/25/2022 26,054,621 26,159,640 6.1
AA+ Aaa 3,322,203 Sears Mortgage Securities
Corporation, REMIC** 92-18B-A2,
7.638% due 9/25/2022 3,392,738 3,428,617 0.8
------------- ------------- ------
Total Investments in Adjustable
Rate Mortgage Backed Obligations
-- London Interbank Offered Rate
Indexed Obligations 39,447,359 39,619,507 9.3
Fixed Rate AAA+++ Aaa 18,690,100 American Southwest Financial
Mortgage-Backed Securities Corp., 95-C1-A1A,
Obligations* 7.30% due 10/17/2001 19,068,005 19,180,716 4.5
AA AA++ 6,500,000 Blackrock Capital Finance, L.P.,
CMO*** 96-C2-B, 7.688% due
11/15/2026++++++ 6,558,256 6,581,250 1.5
AAA AAA++ 1,700,697 CMC Securities Corporation,
REMIC** 93-B2, 11% due 4/25/2023
(a) 1,700,697 1,730,991 0.4
AAA Aaa 1,600,000 California Infrastructure and
Economic Development Bank Purpose
Trust (Southern California Edison
Company), 97-1-A2, 6.14% due
3/25/2000 1,599,944 1,603,500 0.4
A A3 10,893,000 Chrysler Financial Corp., 6.25%
due 3/06/2000 10,852,260 10,794,282 2.5
Federal Home Loan Mortgage
Corporation, Pool:
NR++++ NR++++ 1,046,608 #G50191, 5% due 6/01/1999 1,028,946 1,037,450 0.2
NR++++ NR++++ 213,278 #G50200, 5% due 6/01/1999 209,679 210,128 0.1
NR++++ NR++++ 276,831 #L73244, 5.50% due 8/01/2000 272,246 273,246 0.1
NR++++ NR++++ 14,345,268 #W00058, 6.925% due 6/01/2001 (1) 14,494,636 14,206,298 3.3
Federal Home Loan Mortgage
Corporation, REMIC**:
NR++++ NR++++ 2,111,451 1341-G, 7% due 12/15/2003 (a) 2,118,344 2,117,384 0.5
NR++++ NR++++ 5,642,600 1784-PD, 7% due 9/15/2014 (1)(b) 5,635,547 5,695,499 1.3
NR++++ NR++++ 10,318,000 1923-PC, 6.25% due 12/15/2014 (1)
(b) 10,251,900 10,298,602 2.4
NR++++ NR++++ 1,500,000 G-13-PG, 6% due 7/25/2016 (1)(a) 1,477,969 1,492,020 0.4
NR++++ NR++++ 5,500,000 G-29-P, 7% due 2/25/2018 (1) 5,568,545 5,563,580 1.3
NR++++ NR++++ 5,000,000 1751-PE, 7.625% due 7/15/2019 5,102,240 5,129,650 1.2
NR++++ NR++++ 9,000,000 1747-E, 7.25% due 11/15/2019 (1) 9,140,683 9,191,250 2.2
Federal National Mortgage
Association, Pool:
NR++++ NR++++ 15,000,000 #160159, 7.516% due 7/01/1999 (1) 15,011,179 15,285,937 3.6
NR++++ NR++++ 1,456,059 #50671, 6% due 12/01/1999 1,441,725 1,449,754 0.3
NR++++ NR++++ 29,072,620 #80306, 8% due 3/01/2000 (1) 29,506,492 29,385,151 6.9
NR++++ NR++++ 246,015 #209622, 5.50% due 4/01/2000 240,710 242,777 0.1
NR++++ NR++++ 3,075,115 #50759, 6% due 7/01/2000 (1) 3,044,845 3,055,096 0.7
NR++++ NR++++ 2,230,794 #124909, 6% due 7/01/2000 2,208,835 2,216,272 0.5
NR++++ NR++++ 1,635,838 #50780, 6% due 8/01/2000 1,619,735 1,625,188 0.4
NR++++ NR++++ 4,172,201 #160238, 8.18% due 4/01/2001 (1) 4,249,576 4,326,051 1.0
NR++++ NR++++ 5,437,442 #160239, 8.305% due 4/01/2001 (1) 5,557,636 5,658,338 1.3
NR++++ NR++++ 10,493,824 #160240, 8.43% due 4/01/2001 (1) 10,906,989 10,926,695 2.6
NR++++ NR++++ 9,784,811 #73041, 7.50% due 9/01/2001 (1) 9,930,715 10,084,471 2.4
NR++++ NR++++ 7,360,000 #73643, 6.88% due 9/01/2001 (1) 7,291,000 7,433,600 1.8
NR++++ NR++++ 9,097,770 #73063, 8.20% due 1/01/2002 (1) 9,016,743 9,453,156 2.2
Federal National Mortgage
Association, REMIC**:
NR++++ NR++++ 8,899,697 94-M2-A, 6.625% due 2/25/2001 8,774,545 8,939,746 2.1
NR++++ NR++++ 16,600,000 97-67-PC, 6.25% due 3/18/2005 (1) 16,594,164 16,576,926 3.9
NR++++ NR++++ 10,000,000 92-44-G, 7.25% due 10/25/2005 (1)
(b) 10,102,210 10,096,875 2.4
NR++++ NR++++ 18,200,000 94-M3-B, 7.71% due 4/25/2006 (1)
(b) 18,682,289 18,814,250 4.4
NR++++ NR++++ 5,588,082 94-M5-A, 8.40% due 2/25/2009 (1) 5,703,711 5,839,545 1.4
NR++++ NR++++ 6,223,000 G93-16-E, 5% due 11/25/2015 (1)(a) 5,713,449 6,135,442 1.4
NR++++ NR++++ 4,888,294 G93-20-PE, 5.90% due 5/25/2016 (1)
(a) 4,802,749 4,865,368 1.1
NR++++ NR++++ 11,414,064 G93-19-E, 5% due 3/25/2017 (1)(a) 11,124,254 11,264,197 2.7
NR++++ NR++++ 2,695,851 92-122-PG, 7.50% due 9/25/2017 (a) 2,706,485 2,701,728 0.6
NR++++ NR++++ 5,000,000 97-7-PK, 6.50% due 10/18/2017 (b) 5,004,653 5,027,450 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 11,113,641 2.6
Kidder Peabody Acceptance
Corporation, REMIC**:
AA AA+++ 4,000,000 94-C1-B, 6.85% due 2/01/2006 4,043,699 4,041,252 1.0
NR++ A+++ 8,000,000 94-C1-C, 7% due 2/01/2006 8,092,049 8,117,500 1.9
AAA Aaa 31,269,585 PNC Mortgage Securities Corp.,
CMO*** 97-6-A1, 6.49% due
10/25/2026 31,265,676 31,337,987 7.4
Prudential Home Mortgage
Securities Company, Inc.,
REMIC**:
AAA++ Aaa 8,753,353 92-36-A8, 6.50% due 11/25/1999 8,613,846 8,739,610 2.1
AAA++ Aaa 16,800,000 93-40-A3, 6.50% due 10/25/2023 (b) 16,485,000 16,826,712 4.0
Resolution Trust Corporation,
REMIC**:
A++++ A2 4,387,057 92-C7-B, 7.15% due 6/25/2023 (a) 4,427,400 4,406,250 1.0
AA-+++ A2 23,485,720 92-C6-B, 7.70% due 7/25/2024 (a) 23,674,483 23,610,488 5.6
AA AA++++ 5,000,082 93-C2-B, 7.75% due 3/25/2025 (b) 5,048,926 5,006,332 1.2
AA++ Aa2 30,350,000 Town & Country Funding Corporation,
CMO***, 5.85% due 8/15/1998 30,144,266 30,359,484 7.1
AAA AAA+++ 43,135,000 Vornado Finance Corp., CMO***,
6.36% due 12/01/2000++++++ 39,205,138 43,135,000 10.2
------------- ------------- ------
Total Investments in Fixed Rate
Mortgage-Backed Obligations 466,352,131 473,204,115 111.4
============= ============= ======
Derivative AAA+++ Aaa 51,086,274 American Southwest Financial
Mortgage-Backed Securities Corp., REMIC**
Obligations* -- 95-C1-S1A, 2.572% due 10/17/2001 3,235,911 3,288,679 0.8
Interest Only (3) AAA Aaa 21,219,189 CMC Securities Corporation II,
REMIC** 93-2I-A3, 0.50% due
9/25/2023 283,218 70,023 0.0
DLJ Mortgage Acceptance
Corporation, REMIC**:
AAA Aaa 59,795,080 92-9-A1, 0.615% due 11/25/2022 922,410 597,951 0.1
AAA Aaa 19,828,682 93-20-1S, 0.752% due 11/25/2023 486,970 247,858 0.1
Federal Home Loan Mortgage
Corporation, REMIC**:
NR++++ NR++++ 2,792,522 G-24-IA, 6.50% due 8/25/2013 96,388 104,720 0.0
NR++++ NR++++ 22,563,136 1547-SC, 4.627% due 3/15/2017 1,495,782 800,286 0.2
NR++++ NR++++ 4,419,316 1523-PH, 6.50% due 2/15/2018 397,481 428,939 0.1
NR++++ NR++++ 7,881,636 143-B, 8% due 10/01/2022 2,885,812 1,817,663 0.4
NR++++ NR++++ 4,338,217 1397-IO, 8% due 10/15/2022 1,666,022 1,004,558 0.2
Derivative Federal National Mortgage
Mortgage-Backed Association, REMIC**:
Obligations* -- NR++++ NR++++ 34,131 92-196-L, 1,187.60% due 8/25/2006 742,280 661,668 0.2
Interest Only (3) NR++++ NR++++ 6,332,169 G92-5-H, 9% due 1/25/2022 2,488,672 1,656,242 0.4
(concluded) NR++++ NR++++ 2,055,808 92-15-W, 8% due 2/25/2022 897,462 471,541 0.1
NR++++ NR++++ 6,491,464 120-2, 8% due 3/25/2022 3,610,245 1,488,947 0.4
AAA AAA++ 36,525,797 Fund America Investors Corporation
II, REMIC** 93-J-S10, 0.25% due
11/25/2023 305,045 131,858 0.0
AAA+++ Aaa 25,304,694 Mortgage Capital Fund Inc., REMIC**
94-MCI-I1, 1.044% due 6/25/2019 467,017 328,961 0.1
------------- ------------- ------
19,980,715 13,099,894 3.1
Derivative Federal Home Loan Mortgage
Mortgage-Backed Corporation, REMIC**:
Obligations* -- NR++++ NR++++ 11,244,405 1453-S, 6.71% due 1/15/2000 10,285,117 11,325,140 2.6
Inverse NR++++ NR++++ 3,101,660 1516-SC, 4.46% due 6/15/2000 2,334,968 2,954,331 0.7
Floaters (4) NR++++ NR++++ 5,618,048 1516-S, 4.833% due 6/15/2000 5,194,939 5,393,326 1.3
NR++++ NR++++ 1,605,504 1521-S, 4.725% due 7/15/2000 1,465,023 1,519,208 0.3
NR++++ NR++++ 5,680,840 1743-S, 5.40% due 8/15/2001 4,750,603 5,460,708 1.3
NR++++ NR++++ 8,326,584 1765-A-S, 6.629% due 1/15/2002 6,900,657 8,290,156 1.9
Federal National Mortgage
Association, REMIC**:
NR++++ NR++++ 5,003,830 93-81-S, 1.796% due 6/25/2000 3,366,640 4,641,053 1.1
NR++++ NR++++ 10,000,000 93-123-S, 7.739% due 7/25/2000 10,653,410 10,075,000 2.4
NR++++ NR++++ 10,000,000 X-169-B, 3.698% due 9/25/2000 7,650,000 9,250,000 2.2
Prudential Home Mortgage
Securities Company, Inc.,
REMIC**:
AAA++ Aaa 3,195,363 93-59-A6, 2.605% due 12/25/2000 2,505,364 2,905,895 0.7
AAA++ Aaa 5,009,243 93-59-A8, 3.078% due 12/25/2000 4,007,395 4,583,408 1.1
------------- ------------- ------
59,114,116 66,398,225 15.6
Derivative Government National Mortgage
Mortgage-Backed Association, REMIC**:
Obligations* -- NR++++ NR++++ 3,492,525 94-5-PA, 8.023% due 6/16/2012
Principal Only (5) (2)(a) 3,326,029 3,336,444 0.8
NR++++ NR++++ 8,552,000 97-16-PB, 7% due 7/20/2019 8,679,547 8,717,695 2.0
------------- ------------- ------
12,005,576 12,054,139 2.8
Total Investments in Derivative
Mortgage-Backed Obligations 91,100,407 91,552,258 21.5
============= ============= ======
Total Investments in
Mortgage-Backed Obligations 596,899,897 604,375,880 142.2
============= ============= ======
US Government NR++++ NR++++ 27,000,000 United States Treasury Notes,
Obligations 5.50% due 4/15/2000 (1) 26,379,716 26,890,380 6.3
------------- ------------- ------
Total Investments in US
Government Obligations 26,379,716 26,890,380 6.3
============= ============= ======
Short-Term Repurchase 1,474,000 Nikko Securities International,
Securities Agreements+++++ Inc., purchased on 12/31/1997 to
yield 6.75% to 1/02/1998 1,474,000 1,474,000 0.4
------------- ------------- ------
Total Investments in Short-Term
Securities 1,474,000 1,474,000 0.4
============= ============= ======
Total Investments $624,753,613 632,740,260 148.9
=============
Liabilities in Excess of Other
Assets (207,788,787) (48.9)
------------- ------
Net Assets $424,951,473 100.0%
============= ======
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.
* Mortgage-Backed Obligations are subject to principal paydowns
as a result of prepayments or refinancings of the underlying
mortgage instruments. As a result, the average life may be
substantially less than the original maturity.
** Real Estate Mortgage Investment Conduits (REMICs) are identified by
the year created, series issued, and the particular tranche.
*** Collateralized Mortgage Obligation (CMO).
+ 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
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.
++++ 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.
Ratings of issues shown have not been audited by Ernst & Young LLP.
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of December 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $624,753,613) (Note 1a) $632,740,260
Cash 937
Interest receivable 5,115,778
Prepaid expenses and other assets 10,220
-------------
Total assets 637,867,195
-------------
Liabilities: Payables:
Reverse repurchase agreements (Note 5) $207,718,000
Interest expense (Note 5) 2,656,435
Dividends to shareholders (Note 1g) 2,213,752
Investment adviser (Note 2) 149,412 212,737,599
-------------
Accrued expenses and other liabilities 178,123
-------------
Total liabilities 212,915,722
-------------
Net Assets: Net assets $424,951,473
=============
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 14,142,933
Accumulated realized capital losses on investments -- net (Note 6) (19,868,012)
Unrealized appreciation on investments -- net 7,986,647
-------------
Net assets -- Equivalent to $9.89 per share based on 42,974,627
shares outstanding (market price -- $9.5625) $424,951,473
=============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $39,867,179
(Note 1e): Other 436,497
-------------
Total income 40,303,676
-------------
Expenses: Interest expense (Note 5) $11,271,698
Investment advisory fees (Note 2) 2,217,482
Accounting services (Note 2) 119,645
Professional fees 88,855
Transfer agent fees 65,384
Directors' fees and expenses 40,259
Printing and shareholder reports 35,723
Custodian fees 30,918
Amortization of organization expenses (Note 1f) 8,627
Pricing fees 4,836
Other 50,795
-------------
Total expenses 13,934,222
-------------
Investment income -- net 26,369,454
-------------
Realized & Realized gain on investments -- net 2,800,039
Unrealized Gain on Change in unrealized appreciation on investments -- net 3,126,168
Investments -- Net -------------
(Notes 1c, 1e & 3): Net Increase in Net Assets Resulting from Operations $32,295,661
=============
See Notes to Financial Statements
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended December 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $26,369,454 $28,085,289
Realized gain on investments -- net 2,800,039 2,406,527
Change in unrealized appreciation on investments -- net 3,126,168 (3,275,184)
------------- -------------
Net increase in net assets resulting from operations 32,295,661 27,216,632
------------- -------------
Dividends to Investment income -- net (24,517,484) (23,177,460)
Shareholders ------------- -------------
(Note 1g): Net decrease in net assets resulting from dividends to shareholders (24,517,484) (23,177,460)
------------- -------------
Capital Stock
Transactions Net decrease in net assets derived from capital stock transactions (8,268,027) (49,280,594)
(Note 4): ------------- -------------
Net Assets: Total decrease in net assets (489,850) (45,241 ,422)
Beginning of year 425,441,323 470,682,745
------------- -------------
End of year* $424,951,473 $425,441,323
============= =============
* Undistributed investment income -- net $14,142,933 $12,290,963
============= =============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1997
<S> <C> <C>
Cash Provided by Net increase in net assets resulting from operations $32,295,661
Operating Activities: Adjustments to reconcile net increase in net assets resulting from operations to net
cash provided by operating activities:
Increase in receivables (307,247)
Decrease in other assets 4,195
Decrease in other liabilities (2,584,769)
Realized and unrealized gain on investments -- net (5,926,207)
Amortization of premium and discount -- net 5,282,251
-------------
Net cash provided by operating activities 28,763,884
-------------
Cash Provided by Proceeds from principal payments and sales of long-term securities 416,361,864
Investing Purchases of long-term securities (413,038,587)
Activities: Purchases of short-term investments (412,010,000)
Proceeds from sales and maturities of short-term investments 413,597,000
-------------
Net cash provided by investing activities 4,910,277
-------------
Cash Used for Cash receipts from borrowings 177,273,920
Financing Cash payments on borrowings (178,056,425)
Activities: Cash payments on capital shares repurchased (8,948,587)
Dividends paid to shareholders (24,138,500)
-------------
Net cash used for financing activities (33,869,592)
-------------
Cash: Net decrease in cash (195,431)
Cash at beginning of year 196,368
-------------
Cash at end of year $937
-------------
Cash Flow Cash paid for interest $12,994,317
Information: =============
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
The following per share data and ratios have
been derived from information provided in
the financial statements. For the Year Ended December 31,
1997+ 1996+ 1995 1994 1993
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $9.69 $9.50 $8.22 $9.32 $9.37
Operating --------- --------- --------- --------- ---------
Performance: Investment income -- net .61 .60 .55 .60 .65
Realized and unrealized gain (loss) on
investments -- net .16 .09 1.23 (1.11) (.01)
--------- --------- --------- --------- ---------
Total from investment operations .77 .69 1.78 (.51) .64
--------- --------- --------- --------- ---------
Less dividends and distributions:
Investment income -- net (.57) (.50) (.50) (.59) (.59)
Realized gain on investments -- net -- -- -- -- (.08)
In excess of realized gain on investments
-- net -- -- -- -- (.02)
--------- --------- --------- --------- ---------
Total dividends and distributions (.57) (.50) (.50) (.59) (.69)
--------- --------- --------- --------- ---------
Net asset value, end of year $9.89 $9.69 $9.50 $8.22 $9.32
========= ========= ========= ========= =========
Market price per share, end of year $9.5625 $9.00 $8.25 $7.375 $8.75
========= ========= ========= ========= =========
Total Investment Based on market price per share 12.90% 15.53% 19.00% (9.18%) 1.77%
Return:* ========= ========= ========= ========= =========
Based on net asset value per share 8.45% 8.02% 22.94% (4.97%) 7.02%
========= ========= ========= ========= =========
Ratios to Average Expenses, excluding interest expense .63% .65% .69% .67% .83%
Net Assets: ========= ========= ========= ========= =========
Expenses 3.30% 3.36% 3.70% 2.80% 2.30%
========= ========= ========= ========= =========
Investment income -- net 6.24% 6.29% 5.98% 6.93% 6.86%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $424,951 $425,441 $470,683 $439,767 $517,147
Data: ========= ========= ========= ========= =========
Portfolio turnover 61.65% 60.96% 60.70% 94.71% 185.21%
========= ========= ========= ========= =========
Leverage: Amount of borrowings outstanding, end of
year (in thousands) $207,718 $208,501 $228,654 $217,236 $255,088
========= ========= ========= ========= =========
Average amount of borrowings outstanding
during the year (in thousands) $196,232 $206,923 $226,188 $239,251 $204,770
========= ========= ========= ========= =========
Average amount of borrowings per share
during the year $4.57 $4.42 $4.39 $4.39 $3.69
========= ========= ========= ========= =========
* 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.
See Notes to Financial Statements.
</TABLE>
Income Opportunities Fund 1999, Inc., December 31, 1997
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 is anticipated to terminate on
or about December 31, 1999. 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) Repurchase agreements -- The Fund invests in US Government
securities pursuant to repurchase agreements with a member bank of the
Federal Reserve System or a primary dealer in US Government
securities. Under such agreements, the bank or primary dealer agrees
to repurchase the security at a mutually agreed upon time and price.
The Fund takes possession of the underlying securities, marks to
market such securities and, if necessary, receives additional
securities daily to ensure that the contract is fully collateralized.
(c) 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.
[bullet] 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.
[bullet] 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.
[bullet] 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).
(d) 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.
(e) 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.
(f) Deferred organization expenses -- Deferred organization expenses
are amortized on a straight-line basis over a five-year period.
(g) 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.
(h) 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 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.
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, 1997, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), $2,901 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 year ended December 31, 1997 were $387,172,767 and
$400,978,041, respectively.
Net realized and unrealized gains as of December 31, 1997 were
as follows:
Realized Unrealized
Gains Gains
Long-term investments $2,696,124 $7,986,647
Short sales 103,915 --
------------ ------------
Total $2,800,039 $7,986,647
============ ============
As of December 31, 1997, net unrealized appreciation for Federal
income tax purposes aggregated $7,986,647, of which $16,169,535
related to appreciated securities and $8,182,888 related to
depreciated securities. The aggregate cost of investments at December
31, 1997 for Federal income tax purposes was $624,753,613.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
par value $.10 per share.
During the years ended December 31, 1997 and December 31, 1996, the
Fund repurchased 908,800 shares of capital stock at an average market
price of $9.10 and 5,683,900 shares of capital stock at an average
market price of $8.67, respectively, 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 December 31, 1997, the Fund had entered into reverse repurchase
agreements in the amount of $207,718,000. For the year ended December
31, 1997, the average amount outstanding was approximately
$196,232,000 and the daily weighted average interest rate was 5.74%.
6. Capital Loss Carryforward:
At December 31, 1997, the Fund had a net capital loss carryforward of
approximately $19,784,000, of which $12,114,000 expires in 2002 and
$7,670,000 expires in 2003. This amount will be available to offset
like amounts of any future taxable gains.
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, 1997, 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 years
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 and financial highlights.
Our procedures included confirmation of securities owned as of
December 31, 1997 by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Income Opportunities Fund 1999, Inc. at December
31, 1997, 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 years, in conformity with generally accepted
accounting principles.
/S/Ernst & Young LLP
Princeton, New Jersey
February 2, 1998
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
Gregory Mark Maunz, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President
Jeffrey B. Hewson, 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
