INCOME
OPPORTUNITIES
FUND 1999, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
June 30, 1998
<PAGE>
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 1/43% of its total assets (including the
amount borrowed). The Fund's ability to leverage creates an opportunity for
increased net income, but, at the same time, creates special risks. The Fund
will only borrow or use leverage when the Investment Adviser believes that it
will benefit the Fund. To the extent that the income derived from securities
purchased with borrowed funds exceeds the cost of borrowing, the Fund's net
income will be greater than if borrowing had not been used.
Conversely, if the income from the securities purchased with borrowed funds is
not sufficient to cover the cost of borrowing, the net income of the Fund will
be less than if borrowing had not been used, reducing the amount available for
distribution to shareholders. In this case, the Fund may nevertheless maintain
its leveraged position in order to avoid capital losses on securities purchased
with the leverage.
<PAGE>
Income Opportunities Fund 1999, Inc., June 30, 1998
DEAR SHAREHOLDER
For the six months ended June 30, 1998, Income Opportunities Fund 1999, Inc.
earned $0.296 per share income dividends, which included earned and unpaid
dividends of $0.046 per share. This represents a net annualized yield of 6.03%,
based on a month-end net asset value of $9.90 per share. Over the same period,
the Fund's total investment return was +2.72%, based on a change in per share
net asset value from $9.89 to $9.90, and assuming reinvestment of $0.250 per
share income dividends.
Economic Environment
The US economy continued to expand at an above-trend pace for the six months
ended June 30, 1998. Despite declining export growth and a relatively high real
interest rate environment, gross domestic product (GDP) rose 5.4% in the first
quarter of 1998, marking the sixth consecutive quarter that the annualized
growth rate of GDP has exceeded 3.0%. Consumer spending, which has more than
offset the trade drag resulting from the Asian financial crisis, rose 6.1% in
the first quarter and has been largely responsible for the strong showing of the
US economy. Nonetheless, despite continued overall economic strength, the
Federal Reserve Board refrained from raising interest rates during the period.
Two fundamental catalysts contributing to the surge in consumer spending have
been the strength of the job market and the strength of the US equity market.
With an average gain of 243,000 new jobs per month through the first six months
of 1998, employment growth in the United States remains strong. As a result, the
unemployment rate has fallen to a 28-year low of 4.3%. More important, labor
costs continue to trend upward. Average hourly earnings rose 4.1% over the 12
months ended June 30, 1998 (the highest year-over-year pace in the current
economic expansion) and well above the current rate of inflation. Consumer
spending has also been influenced by the strength of the US stock market. In the
three years since December 1994, the overall net wealth of US households has
risen 38% in response to the climb of equity prices. As a result, US households
are spending more and saving less of their personal income, while still seeing
their overall net wealth increase.
The strength of consumer demand has carried over to other sectors of the economy
as well. Reflecting a confluence of favorable factors (low mortgage rates,
strong income growth and high consumer confidence), housing remains
exceptionally strong. New housing starts rose to an annualized 1.58 million-unit
rate in the first quarter of 1998, the fastest pace in ten years. In addition,
both new and existing home sales are currently at or near record levels. Despite
rising wage growth and strong domestic demand, the lack of corporate pricing
power has kept inflation subdued. During the 12-month period ended June 30,
1998, the consumer price index rose just 1.7%, while the producer price index
fell 0.8%.
Although the Asian crisis should continue to hamper export growth and act as a
drag on GDP, we do not expect consumer spending to slow significantly in the
second half of 1998, barring a major stock market correction. Since domestic
demand accounts for nearly two-thirds of GDP, we expect economic growth to
remain moderately strong throughout 1998. Meanwhile, should labor markets
tighten further, the current benign inflationary environment could be threatened
by escalating wage pressures. Consequently, we believe that the risk of a
tightening in monetary policy by the Federal Reserve Board has increased and
that interest rates could rise in the near term.
Portfolio Matters
At the meeting of the Fund's Board of Directors held on July 9, 1997, a dividend
increase of 75 basis points (0.75%) was approved, which raised the dividend of
Income Opportunities Fund 1999, Inc. shares from 5.25% to 6.00%, based on the
original offering price of $10.00 per share. To a large extent that increase was
a result of slow prepayment speeds which increased the yields on many of the
Fund's collateralized mortgage obligations. In addition, we had collected
sizeable prepayment penalties on many commercial mortgage securities.
However, one year later the environment is quite different. Interest rates are
lower by over 100 basis points, as measured by the ten-year Treasury note.
Mortgage prepayments have soared as the MBA Mortgage Refinance Index has
recently hit an all-time high. Yet our borrowing costs have remained high as the
Federal Reserve Board has kept short-term interest rates high in an effort to
slow the robust economic growth. For example, the one month London Interbank
Offered Rate ended the month of June at 5.66%, just 3 basis points lower from a
year earlier. These events, coupled with a portfolio structured with the shorter
time horizon in mind, necessitate a modest reduction in the dividend rate.
Therefore, effective with the July 1998 distribution, the annualized
distribution rate will be 5.50%.
Our primary investment strategy continues to focus on seeking to return $10.00
per share net asset value upon the Fund's maturity. As such, our portfolio
structure and dividend policy at this time are in keeping with that goal 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 discussing our outlook and strategy with you 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
August 6, 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
2 & 3
<PAGE>
Income Opportunities Fund 1999, Inc., June 30, 1998
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
S&P Moody's Face Value Percent of
Rating Rating Amount Issue Cost (Note 1a) Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate+
Mortgage-Backed
Obligations*--
London Interbank
Offered Rate
Indexed Obligations
DLJ Commercial Mortgage Corp.++++++:
NR++ Aaa $ 7,991,029 98-STFA-A1, 5.97% due 2/08/2000 $ 7,991,029 $ 8,006,012 1.9%
NR++ Aa2 4,000,000 98-STFA-A2, 6.12% due 10/08/2000 4,000,000 4,007,500 0.9
NR++ A2 5,000,000 98-STFA-A3, 6.32% due 12/08/2000 5,006,204 5,009,375 1.2
NR++ Baa2 3,300,000 98-STFA-B1, 6.63% due 12/08/2000 3,300,000 3,306,187 0.8
NR++ AA@@ 8,638,282 Homart Pooled Asset Finance Trust Corporation, CMO***
93-A2, 6.80% due 12/29/2001++++++ 8,638,282 8,659,878 2.0
AA+ Aaa 2,834,862 Sears Mortgage Securities Corporation, REMIC**
92-18B-A2, 7.506% due 9/25/2022 2,894,546 2,887,309 0.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in Adjustable Rate
Mortgage-Backed Obligations--London
Interbank Offered Rate Indexed Obligations 31,830,061 31,876,261 7.5
====================================================================================================================================
Fixed Rate
Mortgage-Backed
Obligations*
American Southwest Financial Securities Corp.:
A- NR++ 651,824 94-1-A1, 5.50% due 6/02/1999(7) 646,936 647,140 0.1
AAA@@@ Aaa 17,090,180 95-C1-A1A, 7.30% due 10/17/2001 (b) 17,395,207 17,319,829 4.1
NR++ AA@@ 6,500,000 Blackrock Capital Finance L.P., CMO*** 96-C2-B,
7.788% due 11/15/2026++++++(a) 6,537,129 6,502,990 1.5
AAA AAA@@ 4,355 CMC Securities Corporation, REMIC** 93-B2,
11% due 4/25/2023 (a) 4,355 4,355 0.0
NR++ A2 10,000,000 CS First Boston Mortgage Securities Corp., 98-FL1-D,
6.156% due 12/10/2000 10,000,000 10,000,000 2.4
Federal Home Loan Mortgage Corporation, Pool:
NR++ NR++ 888,023 #G50191, 5% due 6/01/1999 873,038 884,138 0.2
NR++ NR++ 179,240 #G50200, 5% due 6/01/1999 176,215 178,182 0.0
NR++ NR++ 219,789 #L73244, 5.50% due 8/01/2000 216,149 217,554 0.1
NR++ NR++ 14,239,815 #W00058, 6.925% due 6/01/2001 (1) 14,368,520 14,155,266 3.3
Federal Home Loan Mortgage Corporation, REMIC**:
NR++ NR++ 844,178 1341-G, 7% due 12/15/2003 (a) 846,745 842,853 0.2
NR++ NR++ 5,642,600 1784-PD, 7% due 9/15/2014 (1)(a) 5,635,547 5,670,136 1.3
NR++ NR++ 10,318,000 1923-PC, 6.25% due 12/15/2014 (1)(b) 10,251,900 10,308,301 2.4
NR++ NR++ 1,500,000 G-13-PG, 6% due 7/25/2016 (1)(b) 1,477,969 1,498,125 0.4
NR++ NR++ 5,500,000 G-29-P, 7% due 2/25/2018 (1)(b) 5,559,695 5,570,455 1.3
NR++ NR++ 9,000,000 1747-E, 7.25% due 1/15/2019 (1)(b) 9,123,787 9,095,580 2.1
NR++ NR++ 5,000,000 1751-PE, 7.625% due 7/15/2019 (1)(b) 5,077,445 5,059,350 1.2
Federal National Mortgage Association, Pool:
NR++ NR++ 1,249,669 #50671, 6% due 12/01/1999 1,237,367 1,246,182 0.3
NR++ NR++ 28,878,839 #80306, 8% due 3/01/2000 (1) 29,216,798 29,137,882 6.9
NR++ NR++ 213,820 #209622, 5.50% due 4/01/2000 209,209 212,233 0.0
NR++ NR++ 1,959,816 #124909, 6% due 7/01/2000 1,940,524 1,953,173 0.5
NR++ NR++ 2,642,924 #50759, 6% due 7/01/2000 (1) 2,616,908 2,633,965 0.6
NR++ NR++ 1,408,439 #50780, 6% due 8/01/2000 1,394,575 1,403,665 0.3
NR++ NR++ 4,151,390 #160238, 8.18% due 4/01/2001 (1) 4,217,783 4,310,959 1.0
NR++ NR++ 7,360,000 #73643, 6.88% due 9/01/2001 (1) 7,291,000 7,345,295 1.7
Federal National Mortgage Association, REMIC**:
NR++ NR++ 8,090,822 94-M2-A, 6.625% due 2/25/2001 7,977,045 8,146,446 1.9
NR++ NR++ 16,600,000 97-67-PC, 6.25% due 3/18/2005 (1)(b) 16,594,164 16,620,750 3.9
NR++ NR++ 8,979,139 92-44-G, 7.25% due 10/25/2005 (1)(a) 9,066,461 9,041,993 2.1
NR++ NR++ 10,826,779 94-M3-B, 7.71% due 4/25/2006 (1) 11,100,955 11,009,481 2.6
NR++ NR++ 3,283,771 94-M5-A, 8.40% due 2/25/2009 3,342,387 3,369,970 0.8
NR++ NR++ 5,067,170 G93-16-E, 5% due 11/25/2015 (1)(a) 4,652,260 5,019,639 1.2
NR++ NR++ 3,645,236 G93-20-PE, 5.90% due 5/25/2016 (1)(a) 3,581,444 3,636,122 0.9
NR++ NR++ 6,901,043 G93-19-E, 5% due 3/25/2017 (1)(a) 6,725,821 6,851,424 1.6
NR++ NR++ 5,000,000 97-7-PK, 6.50% due 10/18/2017 (1)(b) 5,004,594 5,017,335 1.2
AAA Aaa 15,000,000 Ford Credit Auto Owner Trust, 98-B-A3, 5.85%
due 10/15/2001 14,992,969 15,000,000 3.5
GE Capital Mortgage Services, Inc., REMIC** (b):
AAA AAA@@ 11,138,000 95-9-A3, 6.375% due 11/25/2025 11,037,062 11,126,706 2.6
AAA AAA@@ 17,772,554 98-9-A1, 6.50% due 6/25/2028 17,821,363 17,844,755 4.2
Kidder Peabody Acceptance Corp., REMIC** (b):
AA AA+@@ 4,000,000 94-C1-B, 6.85% due 2/01/2006 4,041,635 3,987,500 0.9
NR++ A+@@ 8,000,000 94-C1-C, 7% due 2/01/2006 8,087,728 8,055,000 1.9
A A2 6,000,000 NationsBank Credit Card Master Trust, 95-1-B, 6.625%
due 4/15/2003 (b) 6,077,099 6,063,720 1.4
PNC Mortgage Securities Corp., CMO***:
AAA Aaa 23,985,474 97-6-A1, 6.49% due 10/25/2026 (b) 23,982,476 24,037,942 5.7
AAA AAA@@@ 5,000,000 98-6-1A3, 6.40% due 9/25/2028 5,010,756 5,010,937 1.2
Prudential Home Mortgage Securities Company, Inc.,
REMIC**:
AAA@@ Aaa 4,889,756 92-36-A8, 6.50% due 11/25/1999 4,811,825 4,880,563 1.1
AAA@@ Aaa 16,800,000 93-40-A3, 6.50% due 10/25/2023 (b) 16,485,000 16,807,728 4.0
Resolution Trust Corporation, REMIC**:
A+@@@ A2 3,629,301 92-C7-B, 7.15% due 6/25/2023 (a) 3,662,440 3,637,240 0.9
AA-@@@ A2 15,131,608 92-C6-B, 7.70% due 7/25/2024 (a) 15,252,056 15,183,623 3.6
AA AA+@@@ 4,277,689 93-C2-B, 7.75% due 3/25/2025 (b) 4,311,761 4,269,668 1.0
AA++ Aa2 30,350,000 Town & Country Funding Corporation, CMO***,
5.85% due 8/15/1998 30,144,266 30,305,234 7.1
AAA AAA@@@ 43,135,000 Vornado Finance Corp., CMO***, 6.36% due
12/01/2000++++++ 39,205,137 42,973,244 10.1
NR++ A3 5,000,000 World Omni Automobile Lease Securitization Corp.,
97-B-B, 6.46% due 11/25/2003++++++(b) 5,020,729 5,006,250 1.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in Fixed Rate
Mortgage-Backed Obligations 414,304,234 419,100,878 98.5
====================================================================================================================================
Derivative
Mortgage-Backed
Obligations*--
Interest Only (3)
AAA@@@ Aaa 46,713,158 American Southwest Financial Securities Corp.,
REMIC** 95-C1-S1A, 2.575% due 10/17/2001 2,730,153 2,452,441 0.6
Federal Home Loan Mortgage Corporation, REMIC**:
NR++ NR++ 1,651,126 G-24-IA, 6.50% due 8/25/2013 (a) 38,752 38,777 0.0
NR++ NR++ 3,210,184 1523-PH, 6.50% due 2/15/2018 (b) 308,286 286,525 0.1
AAA@@@ Aaa 7,014,162 Mortgage Capital Funding Inc., REMIC** 94-MCI-I1,
0.865% due 6/25/2019 120,826 109,421 0.0
----------- ----------- -----
3,198,017 2,887,164 0.7
====================================================================================================================================
</TABLE>
4 & 5
<PAGE>
Income Opportunities Fund 1999, Inc., June 30, 1998
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
S&P Moody's Face Value Percent of
Rating Rating Amount Issue Cost (Note 1a) Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Assets
Derivative
Mortgage-Backed
Obligations*--
Inverse Floaters (4)
Federal Home Loan Mortgage Corporation, REMIC**:
NR++ NR++ $ 11,244,405 1453-S, 6.798% due 1/15/2000 $ 10,285,117 $ 11,370,905 2.7%
NR++ NR++ 3,101,660 1516-SC, 4.584% due 6/15/2000 2,334,968 3,002,835 0.7
NR++ NR++ 5,618,048 1516-S, 4.968% due 6/15/2000 5,194,939 5,480,709 1.3
NR++ NR++ 1,605,504 1521-S, 4.86% due 7/15/2000 1,465,023 1,512,184 0.3
NR++ NR++ 5,160,446 1743-S, 5.55% due 8/15/2001 4,315,423 5,069,462 1.2
NR++ NR++ 7,441,155 1765-A-S, 6.792% due 1/15/2002 6,166,857 7,492,730 1.8
Federal National Mortgage Association, REMIC**:
NR++ NR++ 5,003,830 93-81-S, 1.868% due 6/25/2000 3,366,640 4,648,859 1.1
NR++ NR++ 9,580,754 93-123-S, 7.841% due 7/25/2000 10,093,180 9,664,586 2.3
NR++ NR++ 10,000,000 X-169-B, 3.768% due 9/25/2000 7,650,000 9,439,360 2.2
Prudential Home Mortgage Securities Company, Inc.,
REMIC**:
AAA@@ Aaa 2,449,155 93-59-A6, 2.481% due 12/25/2000 1,920,291 2,347,618 0.5
AAA@@ Aaa 3,839,444 93-59-A8, 2.959% due 12/25/2000 3,071,555 3,696,355 0.9
------------ ------------ ----
55,863,993 63,725,603 15.0
====================================================================================================================================
Derivative
Mortgage-Backed
Obligations*--
Principal Only (5)
Government National Mortgage Association, REMIC**:
NR++ NR++ 2,234,104 94-5-PA, 8.034% due 6/16/2012 (2)(a) 2,172,680 2,158,703 0.5
NR++ NR++ 8,552,000 97-16-PB, 7% due 7/20/2019 (b) 8,678,237 8,578,725 2.0
------------ ------------ ----
10,850,917 10,737,428 2.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in Derivative
Mortgage-Backed Obligations 69,912,927 77,350,195 18.2
====================================================================================================================================
Total Investments in Mortgage-Backed Obligations 516,047,222 528,327,334 124.2
====================================================================================================================================
US Government
Obligations
US Treasury Notes & Bonds:
AAA Aaa 26,300,000 5.375% due 1/31/2000 26,234,250 26,234,250 6.2
AAA Aaa 10,000,000 5.50% due 3/31/2000 (1) 9,993,201 9,996,900 2.3
AAA Aaa 5,000,000 5.50% due 4/15/2000 (1) 4,891,406 4,998,450 1.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in US Government Obligations 41,118,857 41,229,600 9.7
- ------------------------------------------------------------------------------------------------------------------------------------
Short-Term
Securities
Repurchase 941,000 Nikko Securities International, Inc., purchased
Agreements++++ on 6/30/1998 to yield 5.80% to 7/01/1998 941,000 941,000 0.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in Repurchase Agreements 941,000 941,000 0.2
- ------------------------------------------------------------------------------------------------------------------------------------
US Government 75,000 US Treasury Bills, 4.94% due 7/02/1998 (6) 74,990 74,950 0.0
Obligations++++++++
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in US Government Obligations 74,990 74,950 0.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities 1,015,990 1,015,950 0.2
====================================================================================================================================
Total Investments $558,182,069 570,572,884 134.1
============
Variation Margin on Financial Futures Contracts++++++++++ 39,662 0.0
Liabilities in Excess of Other Assets (145,262,311) (34.1)
------------ -----
Net Assets $425,350,235 100.0%
============ =====
====================================================================================================================================
</TABLE>
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) Less than 1 year.
(b) 1-3 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 Reverse Repurchase
Agreements (Note 5).
(2) The interest rate shown represents the approximate yield to maturity.
(3) Securities which receive some or all of the interest portion of the
underlying collateral and little or no principal. Interest only securities
have either a nominal or a notional amount of principal.
(4) Instruments with variable or floating interest rates that move in the
opposite direction of short-term interest rates.
(5) Represents the principal only portion of a mortgage-backed obligation.
Stripped securities are traded on a discount basis and amortized to
maturity.
(6) All or portion of the security held as collateral in connection with open
financial futures contracts.
(7) Restricted security as to resale. The value of the Fund's investments in
restricted securities was approximately $647,000, representing 0.2% of net
assets.
- --------------------------------------------------------------------------------
Acquisition Value
Issue Date Cost (Note 1a)
- --------------------------------------------------------------------------------
American Southwest Financial
Securities Corp., 94-1-A1,
5.50% due 6/02/1999 11/18/1997 $646,936 $647,140
- --------------------------------------------------------------------------------
Total $646,936 $647,140
======== ========
- --------------------------------------------------------------------------------
++ 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.
++++++++ Certain US Government Agency Obligations are traded on a discount
basis; the interest rate shown is the discount rate paid at time of
purchase by the Fund.
++++++++++ Financial futures contracts sold as of June 30, 1998 were as follows:
- --------------------------------------------------------------------------------
Number of Expiration Value
Contracts Issue Exchange Date (Notes 1a & 1c)
- --------------------------------------------------------------------------------
65 Eurodollar CME December 1998 $15,318,875
65 Eurodollar CME March 1999 15,327,813
50 Eurodollar CME June 1999 11,787,500
- --------------------------------------------------------------------------------
Total Financial Futures Contracts Sold
(Total Contract Price--$42,449,313) $42,434,188
===========
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
6 & 7
<PAGE>
Income Opportunities Fund 1999, Inc., June 30, 1998
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of June 30, 1998
=========================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost-$558,182,069) (Note 1a)... $ 570,572,884
Cash............................................................. 49,156
Receivables:
Securities sold................................................ $ 36,361,352
Interest....................................................... 4,283,172
Principal paydowns............................................. 123,531
Variation margin (Note 1c)..................................... 39,662 40,807,717
------------
Prepaid expenses and other assets................................ 10,220
-------------
Total assets .................................................... 611,439,977
-------------
=========================================================================================================================
Liabilities: Payables:
Reverse repurchase agreements (Note 5)......................... 148,831,250
Securities purchased........................................... 36,149,711
Interest expense (Note 5)...................................... 654,516
Investment adviser (Note 2).................................... 140,154 185,775,631
------------
Accrued expenses and other liabilities........................... 314,111
-------------
Total liabilities................................................ 186,089,742
-------------
=========================================================================================================================
Net Assets: Net assets....................................................... $ 425,350,235
=============
=========================================================================================================================
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.............................. 16,440,177
Accumulated realized capital losses on investments-net (Note 6).. (26,185,787)
Unrealized appreciation on investments-net....................... 12,405,940
-------------
Net assets-Equivalent to $9.90 per share based on 42,974,627
shares outstanding (market price-$9.625)......................... $ 425,350,235
=============
=========================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1998
=================================================================================================================================
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned......... $ 19,143,525
(Note 1e): Other............................................................ 143,505
-------------
Total income..................................................... 19,287,030
-------------
=================================================================================================================================
Expenses: Interest expense (Note 5)........................................ $ 5,180,147
Investment advisory fees (Note 2)................................ 842,769
Accounting services (Note 2)..................................... 54,926
Professional fees................................................ 45,976
Transfer agent fees.............................................. 34,740
Custodian fees .................................................. 21,086
Directors' fees and expenses..................................... 19,904
Printing and shareholder reports ................................ 16,890
Pricing fees..................................................... 1,799
Other............................................................ 27,888
------------
Total expenses................................................... 6,246,125
-------------
Investment income-net............................................ 13,040,905
-------------
=================================================================================================================================
Realized & Realized loss on investments-net ................................ (6,317,775)
Unrealized Gain Change in unrealized appreciation on investments-net ............ 4,419,293
(Loss) on -------------
Investments--Net Net Increase in Net Assets Resulting from Operations ............ $ 11,142,423
(Notes 1c, 1e & 3): =============
=================================================================================================================================
</TABLE>
See Notes to Financial Statements.
8 & 9
<PAGE>
Income Opportunities Fund 1999, Inc., June 30, 1998
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the For the
Six Months Year
Ended Ended
June 30, December 31,
Increase (Decrease) in Net Assets: 1998 1997
============================================================================================================================
<S> <C> <C> <C>
Operations: Investment income-net............................................ $ 13,040,905 $ 26,369,454
Realized gain (loss) on investments-net.......................... (6,317,775) 2,800,039
Change in unrealized appreciation on investments-net............. 4,419,293 3,126,168
------------ -------------
Net increase in net assets resulting from operations............. 11,142,423 32,295,661
------------ -------------
============================================================================================================================
Dividends to Investment income-net............................................ (10,743,661) (24,517,484)
Shareholders ------------ -------------
(Note 1f): Net decrease in net assets resulting from dividends to
shareholders .................................................... (10,743,661) (24,517,484)
------------ -------------
============================================================================================================================
Capital Stock Net decrease in net assets derived from capital stock
Transactions transactions .................................................... -- (8,268,027)
(Note 4): ------------ -------------
============================================================================================================================
Net Assets: Total increase (decrease) in net assets.......................... 398,762 (489,850)
Beginning of period.............................................. 424,951,473 425,441,323
------------ -------------
End of period*................................................... $425,350,235 $ 424,951,473
============ =============
============================================================================================================================
* Undistributed investment income-net.............................. $ 16,440,177 $ 14,142,933
============ =============
============================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1998
=============================================================================================================
<S> <C> <C>
Cash Provided by Net increase in net assets resulting from operations............. $ 11,142,423
Operating Activities: Adjustments to reconcile net increase in net assets
resulting from operations to net cash provided by operating
activities:
Decrease in receivables........................................ 832,606
Increase in other assets....................................... (24,537)
Decrease in other liabilities.................................. (1,875,189)
Realized and unrealized loss on investments-net................ 1,898,482
Amortization of premium and discount-net....................... 2,995,835
-------------
Net cash provided by operating activities ....................... 14,969,620
-------------
=============================================================================================================
Cash Provided by Proceeds from principal payments and sales of long-term
Investing Activities: securities ...................................................... 259,447,179
Purchases of long-term securities ............................... (203,047,800)
Purchases of short-term investments.............................. (565,709,211)
Proceeds from sales and maturities of short-term investments..... 566,232,594
-------------
Net cash provided by investing activities........................ 56,922,762
-------------
=============================================================================================================
Cash Used for Cash receipts from borrowings.................................... 99,266,000
Financing Activities: Cash payments on borrowings (158,152,750)
Dividends paid to shareholders................................... (12,957,413)
-------------
Net cash used for financing activities........................... (71,844,163)
-------------
=============================================================================================================
Cash: Net increase in cash............................................. 48,219
Cash at beginning of period...................................... 937
-------------
Cash at end of period............................................ $ 49,156
=============
=============================================================================================================
Cash Flow Cash paid for interest........................................... $ 7,182,066
Information: =============
=============================================================================================================
</TABLE>
See Notes to Financial Statements.
10 & 11
<PAGE>
Income Opportunities Fund 1999, Inc., June 30, 1998
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the
The following per share data and ratios have been derived Six Months For the Year Ended
from information provided in the financial statements. Ended December 31,
June 30, ----------------------------------------------
Increase (Decrease) in Net Asset Value: 1998+ 1997+ 1996+ 1995 1994
===============================================================================================================================
Per Share
Operating
Performance:
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ............................ $ 9.89 $ 9.69 $ 9.50 $ 8.22 $ 9.32
-------- -------- -------- -------- --------
Investment income-net ........................................... .30 .61 .60 .55 .60
Realized and unrealized gain (loss) on investments-net .......... (.04) .16 .09 1.23 (1.11)
-------- -------- -------- -------- --------
Total from investment operations ................................ .26 .77 .69 1.78 (.51)
-------- -------- -------- -------- --------
Less dividends from investment income-net ....................... (.25) (.57) (.50) (.50) (.59)
-------- -------- -------- -------- --------
Net asset value, end of period .................................. $ 9.90 $ 9.89 $ 9.69 $ 9.50 $ 8.22
======== ======== ======== ======== ========
Market price per share, end of period ........................... $ 9.625 $ 9.5625 $ 9.00 $ 8.25 $ 7.375
======== ======== ======== ======== ========
===============================================================================================================================
Total Investment
Return:**
Based on market price per share ................................. 3.28%++ 12.90% 15.53% 19.00% (9.18%)
======== ======== ======== ======== ========
Based on net asset value per share .............................. 2.72%++ 8.45% 8.02% 22.94% (4.97%)
======== ======== ======== ======== ========
===============================================================================================================================
Ratios to Average
Net Assets:
Expenses, excluding interest expense ............................ .51%* .63% .65% .69% .67%
======== ======== ======== ======== ========
Expenses ........................................................ 2.96%* 3.30% 3.36% 3.70% 2.80%
======== ======== ======== ======== ========
Investment income-net ........................................... 6.19%* 6.24% 6.29% 5.98% 6.93%
======== ======== ======== ======== ========
===============================================================================================================================
Supplemental
Data:
Net assets, end of period (in thousands) ........................ $425,350 $424,951 $425,441 $470,683 $439,767
======== ======== ======== ======== ========
Portfolio turnover .............................................. 39.32% 61.65% 60.96% 60.70% 94.71%
======== ======== ======== ======== ========
===============================================================================================================================
Leverage:
Amount of borrowings outstanding, end of period (in thousands)... $148,831 $207,718 $208,501 $228,654 $217,236
======== ======== ======== ======== ========
Average amount of borrowings outstanding during the
period (in thousands) ........................................... $181,316 $196,232 $206,923 $226,188 $239,251
======== ======== ======== ======== ========
Average amount of borrowings per share during the period ........ $ 4.22 $ 4.57 $ 4.42 $ 4.39 $ 4.39
======== ======== ======== ======== ========
===============================================================================================================================
</TABLE>
* 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.
++ Aggregate total investment return.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Income Opportunities Fund 1999, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, closed-end management
investment company. These unaudited financial statements reflect all adjustments
which are, in the opinion of management, necessary to a fair statement of the
results for the interim period presented. All such adjustments are of a normal
recurring nature. The Fund 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. Options written are
valued at the last sale price in the case of exchange-traded options or, in the
case of options traded in the over-the-counter market, the last asked price.
Options purchased are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last bid price. Securities having a remaining
maturity of sixty days or less are valued at amortized cost, which approximates
market value. Other investments, including financial futures contracts and
related options, are stated at 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. Under such agreements, the counterparty 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.
o Financial futures contracts--The Fund may purchase or sell financial 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.
o 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
12 & 13
<PAGE>
Income Opportunities Fund 1999, Inc., June 30, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
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.
o 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) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distri butions 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 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 0.40% of the Fund's average weekly net assets from September
1, 1997 through termination of the Fund.
During the six months ended June 30, 1998, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), $1,980 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, 1998 were $239,197,511 and $295,932,062, respectively.
Net realized gains (losses) for the six months ended June 30, 1998 and net
unrealized gains (losses) as of June 30, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------------------
Long-term investments .............. $ (6,375,275) $ 12,390,855
Short-term investments ............. -- (40)
Financial futures contracts ........ -- 15,125
Options purchased .................. (16,406) --
Options written .................... 73,906 --
------------ ------------
Total $ (6,317,775) $ 12,405,940
============ ============
- --------------------------------------------------------------------------------
As of June 30, 1998, net unrealized appreciation for Federal income tax purposes
aggregated $12,390,815, of which $14,069,322 related to appreciated securities
and $1,678,507 related to depreciated securities. The aggregate cost of
investments at June 30, 1998 for Federal income tax purposes was $558,182,069.
Transactions in call options written for the six months ended June 30, 1998 were
as follows:
- --------------------------------------------------------------------------------
Nominal Value
Covered by Premiums
Options Written Received
- --------------------------------------------------------------------------------
Outstanding call options written,
at beginning of period ......................... -- --
Options written ................................ 620,000 $ 103,594
Options exercised .............................. (200,000) (29,688)
Options closed ................................. (270,000) (48,515)
Options expired ................................ (150,000) (25,391)
--------- ---------
Outstanding call options written,
at end of period ............................... -- $ --
========= =========
- --------------------------------------------------------------------------------
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, par value
$.10 per share.
Shares issued and outstanding during the six months ended June 30, 1998 remained
constant and during the year ended December 31, 1997 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.
As of June 30, 1998, the Fund had entered into reverse repurchase agreements in
the amount of $148,831,250. For the six months ended June 30, 1998, the average
amount outstanding was approximately $181,316,000 and the daily weighted average
interest rate was 5.79%.
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.
7. Subsequent Event:
On July 8, 1998, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.045833 per share,
payable on July 31, 1998 to shareholders of record as of July 23, 1998.
14 & 15
<PAGE>
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. Statements and other information herein
are as dated and are subject to change.
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.
Income Opportunities
Fund 1999, Inc.
Box 9011
Princeton, NJ
08543-9011
#16390--6/98
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