INCOME
OPPORTUNITIES
FUND 1999, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
June 30, 1999
<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 33 1/3% of its total assets (including the
amount borrowed). The Fund's ability to leverage creates an opportunity for
increased net income, but, at the same time, creates special risks. The Fund
will only borrow or use leverage when the Investment Adviser believes that it
will benefit the Fund. To the extent that the income derived from securities
purchased with borrowed funds exceeds the cost of borrowing, the Fund's net
income will be greater than if borrowing had not been used.
Conversely, if the income from the securities purchased with borrowed funds is
not sufficient to cover the cost of borrowing, the net income of the Fund will
be less than if borrowing had not been used, reducing the amount available for
distribution to shareholders. In this case, the Fund may nevertheless maintain
its leveraged position in order to avoid capital losses on securities purchased
with the leverage.
<PAGE>
Income Opportunities Fund 1999, Inc., June 30, 1999
DEAR SHAREHOLDER
For the six months ended June 30, 1999, Income Opportunities Fund 1999, Inc.
earned $0.237 per share income dividends, which included earned and unpaid
dividends of $0.029 per share. This represents a net annualized yield of 4.83%,
based on a month-end net asset value of $9.91 per share. Over the same period,
the Fund's total investment return was +2.54%, based on a change in per share
net asset value from $9.87 to $9.91, and assuming reinvestment of $0.208 per
share income dividends.
Economic Environment
Gross domestic product (GDP) rose 4.1% in the first quarter of 1999, as robust
consumer spending continued to fuel US growth and prop up flagging economies
globally. US consumer spending rose 6.8% in the first quarter of 1999, the
fastest pace in nearly 15 years. In addition, had the US trade deficit not
reached record levels in the quarter, GDP growth would have been reported much
higher. Consequently, as a result of excessive growth, inflationary fears
entered the financial markets and interest rates rose during the three-month
period ended June 30, 1999.
Many sectors of the US economy continued to show strength during the June
quarter. In April, new home sales were reported at a 978,000-unit rate, the
second-highest level ever recorded while vehicle sales in April rose to a
13-year high. The manufacturing sector was strong, and the National Association
of Purchasing Managers Index (NAPM), a measure of strength within the
manufacturing sector of the US economy, rose to a 19-month high in May. More
interestingly, strength within the manufacturing sector appeared to be broad
based as every component within the NAPM Index rose in May, with the exception
of inventory accumulation. US labor market conditions remain taut. The US
unemployment rate continued to decline and hit a 29-year low of 4.2% in May.
Significantly, hourly wages rose 0.4% in May and are up 3.6% from a year ago,
the first year-over-year increase in 13 months. As a result of these series of
strong economic reports, the Federal Reserve Board raised short-term interest
rates at its Federal Open Market Committee meeting in June.
Although inflation is currently at a 33-year low, the Federal Reserve Board
raised interest rates as a pre-emptive measure to counter potential inflationary
pressures resulting from tight labor market conditions. While investors are
pricing in two more interest rate hikes, we believe the Federal Reserve Board
will remain on hold for the rest of 1999. We believe there is little reason to
increase interest rates further. First, with the possible exception of wage
pressures, there are no indications other sectors of the economy are
experiencing inflationary strains. Second, while many foreign countries have
rebounded nicely from last year's global economic turmoil, there are still
several countries in the midst of the recovery process. A sharp increase in US
interest rates could be detrimental to the global economy. Key economic
indicators, which will dictate Federal Reserve Board policy, are employment
reports, retail sales reports and consumer price index reports.
Portfolio Matters
As recently as April it appeared that we would reach our goal of achieving a
$10.00 net asset value by year-end. However, it now seems that reaching this
goal will be a difficult challenge. Subsequent to the close of the Fund's
six-month period ended June 30, 1999, we elected to reduce the Fund's dividend
payout, since a payout higher than the earnings rate could jeopardize the Fund's
ability to return a net asset value of $10.00 per share at its termination.
There are two primary reasons for this decline. First, although interest rates
have increased, the two-year Treasury note has moved up over 60 basis points
(0.60%) in yield since mid-April. Second, there are growing expectations that
the Federal Reserve Board could raise interest rates further. Most securities,
including those in which the Fund invests, have their cash flows priced in the
marketplace based on expectations of future interest rates. With higher interest
rates and expectations that rates will continue to rise, there were significant
price declines for many of the Fund's holdings.
Concerns about multiple interest rate increases led us to sell most of the
Fund's securities with large cash flows into the second half of 2000. This
included several inverse floater positions (securities whose coupons vary
inversely with the interest rate). We reinvested the proceeds into Treasury
notes and Federal Home Loan Mortgage Corporation discount notes at much lower
yields. This, in part, reflects the gap in yield between 12-month Treasury
securities at 5.06% and 12-month London Interbank Offered Rate at 5.84%. More
than 25% of the portfolio's net assets are invested in US Government and
Government agency issues, which reduces the portfolio yield. Furthermore, any
paydowns and subsequent reinvestments are likely to reduce the yield further.
In addition to moving toward a more conservative portfolio structure, we are
continually reducing the Fund's leveraged position. By the end of October 1999,
we expect the portfolio to be unleveraged with more than half of the Fund's
investments in US Government and agency securities with fixed maturity dates. By
December 1, 1999, we expect the portfolio to be substantially invested in cash
and money market instruments, awaiting the Fund's termination and the final
distribution in late December.
In Conclusion
We thank you for your investment in Income Opportunities Fund 1999, Inc., and we
look forward to updating you in our next report to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Gregory Mark Maunz
Gregory Mark Maunz
Senior Vice President and
Portfolio Manager
August 11, 1999
After more than 20 years of service, Arthur Zeikel recently retired as Chairman
of Merrill Lynch Asset Management, L.P. (MLAM). Mr. Zeikel served as President
of MLAM from 1977 to 1997 and as Chairman since December 1997. Mr. Zeikel is one
of the country's most respected leaders in asset management and presided over
the growth of Merrill Lynch's asset management business. During his tenure,
client assets under management grew from $300 million to over $500 billion. Mr.
Zeikel will remain on Income Opportunities Fund 1999, Inc.'s Board of Directors.
We are pleased to announce that Terry K. Glenn has been elected President and
Director of the Fund. Mr. Glenn has held the position of Executive Vice
President of MLAM since 1983.
Mr. Zeikel's colleagues at MLAM join the Fund's Board of Directors in wishing
him well in his retirement from Merrill Lynch and are pleased that he will
continue as a member of the Fund's Board of Directors.
2 & 3
<PAGE>
Income Opportunities Fund 1999, Inc., June 30, 1999
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Percent
S&P Moody's Face Value of Net
Rating Rating Amount Issue Cost (Note 1a) Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Adjustable Rate+ CS First Boston Mortgage Securities Corp.:
Mortgage-Backed & AAA++ Aaa $ 5,153,399 98-FL2A-A1, 5.47% due 1/15/2000 $ 5,144,542 $ 5,148,568 1.2%
Asset-Backed AAA Aaa 6,831,148 98-FL1A-A, 5.08% due 9/10/2000 6,824,744 6,747,894 1.6
Obligations*-- NR++ A2 25,000,000 98-FL1-D, 5.72% due 12/10/2000 24,950,781 24,812,500 5.8
London Inter- AAA Aaa 4,295,477 ContiMortgage Home Equity Loan Trust,
bank Offered 98-3-A12, 5.148% due 5/15/2013 (b) 4,288,094 4,294,317 1.0
Rate Indexed DLJ Commercial Mortgage Corp.++++++:
Obligations NR++ Aaa 1,808,293 98-ST1A-A1, 5.15% due 2/08/2000 1,808,293 1,808,010 0.4
NR++ Aa2 7,400,000 98-ST1A-A2, 5.31% due 10/08/2000 7,387,250 7,395,375 1.7
NR++ A2 5,000,000 98-ST1A-A3, 5.51% due 12/08/2000 5,003,759 4,994,531 1.2
AAA Aaa 1,279,366 IMC Home Equity Loan Trust, 98-1-A1, 5.134%
due 12/20/2012 1,278,567 1,278,829 0.3
AA Aa2 8,000,000 Morgan Stanley Aircraft Finance, 1-A1,
5.198% due 3/15/2023 (a) 7,993,750 7,980,000 1.9
AA+ Aaa 2,174,786 Sears Mortgage Securities Corporation,
REMIC** 92-18B-A2, 6.773% due 9/25/2022 (b) 2,185,280 2,140,664 0.5
AAA Aaa 3,000,000 World Omni Wholesale Master Trust, 96-2-A,
5.363% due 10/25/2001 3,000,000 3,000,000 0.7
------------------------------------------------------------------------------------------------------------------
Total Investments in Adjustable Rate
Mortgage-Backed & Asset-Backed Obligations--
London Interbank Offered Rate Indexed
Obligations 69,865,060 69,600,688 16.3
====================================================================================================================================
Fixed Rate AAA+++Aaa 3,351,080 American Southwest Financial Securities
Mortgage- Corp., 95-C1-A1A, 7.30% due 10/17/2001 3,394,097 3,351,080 0.8
Backed & AAA Aaa 15,000,000 Arcadia Automobile Receivables Trust,
Asset-Backed 97-B-A4, 6.50% due 6/17/2002 15,136,138 15,104,250 3.5
Obligations* BankBoston RV Asset Backed Trust (a):
AAA Aaa 10,794,057 97-1-A5, 6.35% due 10/15/2005 10,811,322 10,823,417 2.5
AAA Aaa 11,215,000 97-1-A6, 6.44% due 1/15/2007 11,273,620 11,234,514 2.6
AAA Aaa 1,628,117 Block Mortgage Finance Inc., 98-1-A1, 6.35%
due 9/25/2012 (a) 1,624,301 1,623,689 0.4
AAA Aaa 3,512,596 Bombardier Capital Mortgage Securitization
Corp., 99-A-A1, 5.825% due 2/15/2010 (b) 3,512,595 3,497,228 0.8
AAA Aaa 4,156,255 EQCC Home Equity Loan Trust, 96-2-A2, 6.70%
due 9/15/2008 (a) 4,165,036 4,165,773 1.0
NR++ NR++ 126,494 Federal Home Loan Mortgage Corporation,
Pool L73244, 5.50% due 8/01/2000 124,399 125,254 0.0
NR++ NR++ 1,500,000 Federal Home Loan Mortgage Corporation,
REMIC** G-13-PG, 6% due 7/25/2016 (b) 1,477,969 1,499,520 0.4
Federal National Mortgage Association, Pool:
NR++ NR++ 710,176 #50671, 6% due 12/01/1999 703,185 707,406 0.2
NR++ NR++ 8,232,801 #80306, 8% due 3/01/2000 8,272,838 8,248,608 1.9
NR++ NR++ 109,648 #209622, 5.50% due 4/01/2000 107,284 109,085 0.0
NR++ NR++ 1,630,088 #50759, 6% due 7/01/2000 1,614,042 1,620,503 0.4
NR++ NR++ 1,307,181 #124909, 6% due 7/01/2000 1,294,313 1,299,495 0.3
NR++ NR++ 889,687 #50780, 6% due 8/01/2000 880,930 884,456 0.2
Federal National Mortgage Association,
REMIC**:
NR++ NR++ 5,265,350 94-M2-A, 6.625% due 2/25/2001 5,191,306 5,289,728 1.2
NR++ NR++ 16,600,000 97-67-PC, 6.25% due 3/18/2005 (1)(b) 16,594,164 16,597,842 3.9
NR++ NR++ 1,797,217 92-44-G, 7.25% due 10/25/2005 (1)(a) 1,804,792 1,798,349 0.4
NR++ NR++ 2,690,434 94-M3-B, 7.71% due 4/25/2006 (1)(b) 2,751,850 2,693,958 0.6
NR++ NR++ 2,023,232 G93-16-E, 5% due 11/25/2015 (a) 1,857,566 2,011,842 0.5
NR++ NR++ 1,258,926 G93-20-PE, 5.90% due 5/25/2016 (a) 1,236,895 1,254,596 0.3
NR++ NR++ 1,051,696 93-142-A, 5.25% due 9/25/2016 (b) 1,047,753 1,046,438 0.2
NR++ NR++ 1,991,586 97-7-PK, 6.50% due 10/18/2017 (1)(b) 1,991,871 1,994,052 0.5
NR++ NR++ 5,696,243 G97-5-SB, 9% due 3/17/2019 (1)(a) 5,738,469 5,797,543 1.4
NR++ NR++ 4,083,010 99-W5-A1, 5.825% due 2/25/2029 (b) 4,083,010 4,062,758 1.0
Ford Credit Auto Owner Trust:
AAA Aaa 6,504,657 98-B-A2, 5.80% due 10/15/2000 6,517,285 6,514,804 1.5
A A2 18,000,000 96-A, 7% due 12/15/2001 18,081,243 18,061,740 4.2
AAA AAA++ 8,277,320 GE Capital Mortgage Services, Inc., REMIC**
95-9-A3, 6.375% due 11/25/2025 (b) 8,202,306 8,273,181 1.9
AA++ AAA++ 8,552,000 Government National Mortgage Association,
CMO*** 97-16-PB, 7% due 7/20/2019 (b) 8,591,022 8,610,923 2.0
AA++ Aa2 299,870 Green Tree Financial Corporation, 94-5-A3,
7.60% due 11/15/2019 300,016 300,056 0.1
AAA AAA++ 5,000,000 Green Tree Home Improvement Loan Trust,
96-F-HEA3, 6.90% due 1/15/2028 (a) 5,028,070 5,025,650 1.2
AAA Aaa 6,500,000 Household Automobile Revolving Trust,
98-1-A2, 5.514% due 11/19/2001 6,500,000 6,494,922 1.5
Kidder Peabody Acceptance Corp.,
REMIC** (b):
AA AA+++ 4,000,000 94-C1-B, 6.85% due 2/01/2006 4,022,193 4,045,480 1.0
NR++ A+++ 8,000,000 94-C1-C, 7% due 2/01/2006 8,046,572 8,109,120 1.9
A A2 15,000,000 NationsBank Auto Owner Trust, 96-A-B2,
6.875% due 5/15/2003 (b) 15,111,832 15,111,450 3.6
AAA Aaa 15,272,196 Newcourt Equipment Trust Securities,
98-2-A2, 5.29% due 10/15/2000 15,270,421 15,264,560 3.6
AAA Aaa 15,000,000 Olympic Automobile Receivables Trust,
95-E-A5, 5.95% due 11/15/2001 15,035,547 15,032,400 3.5
AAA Aaa 11,214,381 PNC Mortgage Securities Corp., CMO***
97-6-A1, 6.49% due 10/25/2026 (b) 11,212,980 11,012,824 2.6
Prudential Home Mortgage Securities
Company, Inc., REMIC**:
AAA++ Aaa 37,703 92-36-A8, 6.50% due 11/25/1999 37,102 37,550 0.0
AAA++ Aaa 9,084,209 93-40-A3, 6.50% due 10/25/2023 (b) 8,913,880 9,067,857 2.1
AA+++ Aa2 629,310 Resolution Trust Corporation, REMIC**
95-C2-B, 6.80% due 5/25/2027 (b) 629,113 629,310 0.2
AAA Aaa 2,692,481 UCFC Home Equity Loan, 96-D1-A3, 6.541% due
11/15/2013 (a) 2,693,236 2,692,023 0.6
WFS Financial Owner Trust:
AAA Aaa 4,215,129 98-B-A2, 5.777% due 1/20/2001 4,219,732 4,192,736 1.0
AAA Aaa 10,000,000 99-A-A2, 5.385% due 8/20/2001 10,000,000 10,000,000 2.4
NR++ A3 4,981,820 World Omni Automobile Lease Securitization
Corp., 97-B-B, 6.46% due 11/25/2003 (b) 4,993,942 5,001,199 1.2
------------------------------------------------------------------------------------------------------------------
Total Investments in Fixed Rate Mortgage-
Backed & Asset-Backed Obligations 260,096,237 260,319,169 61.1
====================================================================================================================================
</TABLE>
4 & 5
<PAGE>
Income Opportunities Fund 1999, Inc., June 30, 1999
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Percent
S&P Moody's Face Value of Net
Rating Rating Amount Issue Cost (Note 1a) Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Derivative AAA+++Aaa $ 9,159,620 American Southwest Financial Securities Corp.,
Mortgage- REMIC** 95-C1-S1A, 2.582% due 10/17/2001 $ 1,513,209 $ 239,009 0.1%
Backed NR++ NR++ 2,058,284 Federal Home Loan Mortgage Corporation,
Obligations*-- REMIC** 1523-PH, 6.50% due 2/15/2018 (b) 149,811 143,045 0.0
Interest ----------- ---------- -----
Only (2)
1,663,020 382,054 0.1
====================================================================================================================================
Derivative Federal Home Loan Mortgage Corporation,
REMIC**:
Mortgage-Backed NR++ NR++ 7,167,214 1453-S, 7.76% due 1/15/2000 (1) 6,555,761 7,212,009 1.7
Obligations*-- NR++ NR++ 2,454,226 1516-SC, 5.947% due 6/15/2000 1,847,572 2,421,879 0.6
Inverse NR++ NR++ 5,618,048 1516-S, 6.444% due 6/15/2000 5,194,938 5,557,301 1.3
Floaters (3) NR++ NR++ 1,442,833 1521-S, 6.337% due 7/15/2000 1,316,585 1,372,946 0.3
Federal National Mortgage Association,
REMIC**:
NR++ NR++ 5,003,830 93-81-S, 3.234% due 6/25/2000 3,366,640 4,601,923 1.1
NR++ NR++ 10,000,000 X-169-B, 5.074% due 9/25/2000 7,650,000 9,609,379 2.2
Prudential Home Mortgage Securities Company,
Inc., REMIC**:
NR++ Aaa 819,865 93-59-A6, 4.094% due 12/25/2000 642,825 784,677 0.2
NR++ Aaa 1,285,270 93-59-A8, 4.51% due 12/25/2000 1,028,216 1,234,761 0.3
------------ ------------ -----
27,602,537 32,794,875 7.7
------------------------------------------------------------------------------------------------------------------
Total Investments in Derivative
Mortgage-Backed Obligations 29,265,557 33,176,929 7.8
====================================================================================================================================
Total Investments in Mortgage-Backed &
Asset-Backed Obligations 359,226,854 363,096,786 85.2
====================================================================================================================================
Corporate Bonds BBB Baa3 10,000,000 AT&T Capital Corporation, 6.501% due
6/07/2000 (4) 10,000,000 10,000,000 2.4
------------------------------------------------------------------------------------------------------------------
Total Investments in Corporate Bonds 10,000,000 10,000,000 2.4
====================================================================================================================================
US Government AAA Aaa 40,000,000 US Treasury Notes, 5.625% due 4/30/2000 (1) 40,233,774 40,106,400 9.4
Obligations ------------------------------------------------------------------------------------------------------------------
Total Investments in US Government
Obligations 40,233,774 40,106,400 9.4
====================================================================================================================================
Short-Term Repurchase 1,058,000 Morgan Stanley, Dean Witter, Discover & Co.,
Securities Agreements++++ purchased on 6/30/1999 to yield 4.90% to
7/01/1999 1,058,000 1,058,000 0.2
------------------------------------------------------------------------------------------------------------------
US Government 80,000,000 Federal National Mortgage Association,
Agency 4.90% due 12/03/1999 78,312,222 78,219,200 18.4
Obligations++++++++
------------------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities 79,370,222 79,277,200 18.6
====================================================================================================================================
Total Investments $488,830,850 492,480,386 115.6
============
Liabilities in Excess of Other Assets (66,429,889) (15.6)
------------ -----
Net Assets $426,050,497 100.0%
============ =====
====================================================================================================================================
</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 & Asset-Backed Obligations are subject to principal
paydowns as a result of prepayments or refinancings of the
underlying 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 & Asset-Backed Obligations have
coupon rates that 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) Securities that 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.
(3) Instruments with variable or floating interest rates that move in
the opposite direction of short-term interest rates.
(4) Floating rate note.
++ 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 reflects the discount rate paid at
the time of purchase by the Fund.
See Notes to Financial Statements.
6 & 7
<PAGE>
Income Opportunities Fund 1999, Inc., June 30, 1999
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of June 30, 1999
===============================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$488,830,850) (Note 1a) $ 492,480,386
Cash ........................................................... 365,467
Receivables:
Interest .................................................... $ 1,679,144
Principal paydowns .......................................... 535,862 2,215,006
-------------
Prepaid expenses and other assets .............................. 8,626
-------------
Total assets ................................................... 495,069,485
-------------
===============================================================================================================
Liabilities: Payables:
Reverse repurchase agreements (Note 5) ...................... 67,325,000
Interest expense (Note 5) ................................... 448,170
Investment adviser (Note 2) ................................. 140,279 67,913,449
-------------
Accrued expenses and other liabilities ......................... 1,105,539
-------------
Total liabilities .............................................. 69,018,988
-------------
===============================================================================================================
Net Assets: Net assets ..................................................... $ 426,050,497
=============
===============================================================================================================
Capital: Capital Stock, $.10 par value, 200,000,000 shares authorized ... $ 4,297,463
Paid-in capital in excess of par ............................... 418,307,442
Undistributed investment income--net ........................... 19,725,978
Accumulated realized capital losses on investments--net (Note 6) (19,929,922)
Unrealized appreciation on investments--net .................... 3,649,536
-------------
Net assets--Equivalent to $9.91 per share based on 42,974,627
shares outstanding (market price--$9.75) ....................... $ 426,050,497
=============
===============================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999
============================================================================================================
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 15,369,668
(Note 1e): Other .................................................. 145,298
------------
Total income ........................................... 15,514,966
------------
============================================================================================================
Expenses: Interest expense (Note 5) .............................. $ 2,220,416
Investment advisory fees (Note 2) ...................... 831,946
Accounting services (Note 2) ........................... 47,731
Professional fees ...................................... 37,053
Transfer agent fees .................................... 27,025
Directors' fees and expenses ........................... 16,786
Custodian fees ......................................... 15,409
Printing and shareholder reports ....................... 14,223
Pricing fees ........................................... 3,658
Other .................................................. 21,008
------------
Total expenses ......................................... 3,235,255
------------
Investment income--net ................................. 12,279,711
------------
============================================================================================================
Realized & Realized gain on investments--net ...................... 5,737,937
Unrealized Gain Change in unrealized appreciation on investments--net .. (6,972,240)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations ... $ 11,045,408
(Notes 1c, 1e & 3) ============
============================================================================================================
</TABLE>
See Notes to Financial Statements.
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: 1999 1998
====================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ............................................ $ 12,279,711 $ 26,702,492
Realized gain (loss) on investments--net .......................... 5,737,937 (5,799,847)
Change in unrealized appreciation on investments--net ............. (6,972,240) 2,635,129
------------- -------------
Net increase in net assets resulting from operations .............. 11,045,408 23,537,774
------------- -------------
====================================================================================================================
Dividends to Investment income--net ............................................ (8,952,904) (24,531,254)
Shareholders ------------- -------------
(Note 1f): Net decrease in net assets resulting from dividends to shareholders (8,952,904) (24,531,254)
------------- -------------
====================================================================================================================
Net Assets: Total increase (decrease) in net assets ........................... 2,092,504 (993,480)
Beginning of period ............................................... 423,957,993 424,951,473
------------- -------------
End of period* .................................................... $ 426,050,497 $ 423,957,993
============= =============
====================================================================================================================
*Undistributed investment income--net .............................. $ 19,725,978 $ 16,399,171
============= =============
====================================================================================================================
</TABLE>
See Notes to Financial Statements.
8 & 9
<PAGE>
Income Opportunities Fund 1999, Inc., June 30, 1999
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999
==========================================================================================================
<S> <C> <C>
Cash Provided by Net increase in net assets resulting from operations ............. $ 11,045,408
Operating Activities: Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Decrease in receivables ........................................ 1,270,500
Increase in other liabilities .................................. 190,170
Realized and unrealized loss on investments--net ............... 1,234,303
Amortization of premium and discount--net ...................... 453,896
-------------
Net cash provided by operating activities ........................ 14,194,277
-------------
==========================================================================================================
Cash Used for Proceeds from principal payments and sales of long-term securities 283,679,770
Investing Activities: Purchases of long-term securities ................................ (221,685,761)
Purchases of short-term investments .............................. (710,720,450)
Proceeds from sales and maturities of short-term investments ..... 646,270,191
-------------
Net cash used for investing activities ........................... (2,456,250)
-------------
==========================================================================================================
Cash Used for Cash receipts from borrowings .................................... 156,962,000
Financing Activities: Cash payments on borrowings ...................................... (157,412,000)
Dividends paid to shareholders ................................... (10,922,560)
-------------
Net cash used for financing activities ........................... (11,372,560)
-------------
==========================================================================================================
Cash: Net increase in cash ............................................. 365,467
Cash at beginning of period ...................................... 0
-------------
Cash at end of period ............................................ $ 365,467
=============
==========================================================================================================
Cash Flow Cash paid for interest ........................................... $ 2,844,254
Information: =============
==========================================================================================================
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have For the
been derived from information provided in the Six Months For the Year Ended
financial statements. Ended December 31,
June 30, -----------------------------------------
Increase (Decrease) in Net Asset Value: 1999+ 1998+ 1997+ 1996+ 1995
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ........... $ 9.87 $ 9.89 $ 9.69 $ 9.50 $ 8.22
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ......................... .29 .62 .61 .60 .55
Realized and unrealized gain (loss) on
investments--net ............................... (.04) (.07) .16 .09 1.23
-------- -------- -------- -------- --------
Total from investment operations ............... .25 .55 .77 .69 1.78
-------- -------- -------- -------- --------
Less dividends from investment income--net ..... (.21) (.57) (.57) (.50) (.50)
-------- -------- -------- -------- --------
Net asset value, end of period ................. $ 9.91 $ 9.87 $ 9.89 $ 9.69 $ 9.50
======== ======== ======== ======== ========
Market price per share, end of period .......... $ 9.75 $ 9.6875 $ 9.5625 $ 9.00 $ 8.25
======== ======== ======== ======== ========
=============================================================================================================================
Total Investment Based on market price per share ................ 2.78%++ 7.42% 12.90% 15.53% 19.00%
Return:** ======== ======== ======== ======== ========
Based on net asset value per share ............. 2.54%++ 5.82% 8.45% 8.02% 22.94%
======== ======== ======== ======== ========
=============================================================================================================================
Ratios to Average Expenses, excluding interest expense ........... .49%* .52% .63% .65% .69%
Net Assets: ======== ======== ======== ======== ========
Expenses ....................................... 1.56%* 2.39% 3.30% 3.36% 3.70%
======== ======== ======== ======== ========
Investment income--net ......................... 5.93%* 6.24% 6.24% 6.29% 5.98%
======== ======== ======== ======== ========
=============================================================================================================================
Supplemental Net assets, end of period (in thousands) ....... $426,050 $423,958 $424,951 $425,441 $470,683
Data: ======== ======== ======== ======== ========
Portfolio turnover ............................. 45.73% 66.64% 61.65% 60.96% 60.70%
======== ======== ======== ======== ========
=============================================================================================================================
Leverage: Amount of borrowings outstanding, end of
period (in thousands) .......................... $ 67,325 $ 67,775 $207,718 $208,501 $228,654
======== ======== ======== ======== ========
Average amount of borrowings outstanding
during the period (in thousands) ............... $ 75,356 $132,298 $196,232 $206,923 $226,188
======== ======== ======== ======== ========
Average amount of borrowings per share
during the period .............................. $ 1.75 $ 3.08 $ 4.57 $ 4.42 $ 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.
10 & 11
<PAGE>
Income Opportunities Fund 1999, Inc., June 30, 1999
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's financial statements are prepared in accordance
with generally accepted accounting principles, which may require the use of
management accruals and estimates. 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 or
purchased are valued at the last sale price in the case of exchange-traded
options. In the case of options traded in the over-the-counter market, valuation
is the last asked price (options written) or the last bid price (options
purchased). 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 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. Distributions of capital gains are recorded on the
ex-dividend dates. The Fund may at times pay out less than the entire amount of
taxable net investment income earned in any particular period and may at times
pay out such accumulated undistributed income in addition to taxable net
investment income earned in other periods in order to permit the Fund to
maintain a more stable level of distribution.
(g) Short sales--When the Fund engages in a short sale, an amount equal to the
proceeds received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market to
reflect the market value of the short sale. The Fund maintains a segregated
account of securities as collateral for the short sales. The Fund is exposed to
market risk based on the amount, if any, that the market value of the 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, 1999, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, $1,154 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, 1999 were $221,685,761 and $283,795,130, respectively.
Net realized gains (losses) for the six months ended June 30, 1999 and net
unrealized gains (losses) as of June 30, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------------------
Long-term investments .................... $ 5,906,746 $ 3,742,558
Short-term investments ................... -- (93,022)
Financial futures contracts .............. (168,809) --
----------- -----------
Total .................................... $ 5,737,937 $ 3,649,536
=========== ===========
- --------------------------------------------------------------------------------
12 & 13
<PAGE>
Income Opportunities Fund 1999, Inc., June 30, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
As of June 30, 1999, net unrealized appreciation for Federal income tax purposes
aggregated $3,649,536, of which $5,941,266 related to appreciated securities and
$2,291,730 related to depreciated securities. The aggregate cost of investments
at June 30, 1999 for Federal income tax purposes was $488,830,850.
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, 1999 and the
year ended December 31, 1998 remained constant.
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.
For the six months ended June 30, 1999, the average amount outstanding was
approximately $75,356,000 and the daily weighted average interest rate was
6.04%.
6. Capital Loss Carryforward:
At December 31, 1998, the Fund had a net capital loss carryforward of
approximately $25,785,000, of which $12,114,000 expires in 2002, $7,670,000
expires in 2003 and $6,001,000 expires in 2006. This amount will be available to
offset like amounts of any future taxable gains.
7. Subsequent Event:
On July 8, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.029166 per share,
payable on July 30, 1999 to shareholders of record as of July 23, 1999.
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund's management that they
also expect to resolve the Year 2000 Problem, and the Fund's management will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on the securities in which
the Fund invests and this could hurt the Fund's investment returns.
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Arthur Zeikel, Director
Gregory Mark Maunz, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Jeffrey B. Hewson, Vice President
Donald C. Burke, Vice President and Treasurer
Ira P. Shapiro, Secretary
- --------------------------------------------------------------------------------
Gerald M. Richard, Treasurer of Income Opportunities Fund 1999, Inc. has
recently retired. His colleagues at Merrill Lynch Asset Management, L.P. join
the Fund's Board of Directors in wishing Mr. Richard well in his retirement.
- --------------------------------------------------------------------------------
Custodian and Transfer Agent
The Bank of New York
90 Washington Street
New York, NY 10286
NYSE Symbol
IOF
14 & 15
<PAGE>
This report, including the financial information herein, is transmitted to the
shareholders of Income Opportu-nities 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 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.
Income Opportunities
Fund 1999, Inc.
Box 9011
Princeton, NJ
08543-9011 #16390--6/99
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