INCOME
OPPORTUNITIES
FUND 1999, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
December 31, 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 331/3% 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.
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
<PAGE>
Income Opportunities Fund 1999, Inc., December 31, 1998
DEAR SHAREHOLDER
For the year ended December 31, 1998, Income Opportunities Fund 1999, Inc.
earned $0.571 per share income dividends, which included earned and unpaid
dividends of $0.046 per share. This represents a net annualized yield of 5.78%,
based on a month-end net asset value of $9.87 per share. Over the same period,
the Fund's total investment return was +5.82%, based on a change in per share
net asset value from $9.89 to $9.87, and assuming reinvestment of $0.571 per
share income dividends.
Economic Environment
During the six-month period ended December 31, 1998, global market volatility
increased, marked by a series of adverse business, economic and political
developments. Despite a precipitous drop in interest rates, US credit market
spreads widened significantly during the six-month period, as investors became
more risk averse in response to the deepening global financial problems. In an
effort to alleviate the liquidity squeeze gripping the US credit market and
prevent the US economy from tumbling into a recession, the Federal Reserve Board
lowered interest rates on three separate occasions during the six-month period.
Numerous events caused market volatility to increase and credit market spreads
to widen. The deleveraging process caused by the hedge fund crisis, coupled with
deteriorating economic conditions in Latin America and Japan and US presidential
impeachment proceedings, prompted wide gyrations in US equity prices and a
tightening of bank credit standards. Consequently, US credit spreads widened to
levels seen only in past recessions. In a preemptive move to ease the liquidity
strain upon the credit markets, the Federal Reserve Board lowered the Federal
Funds rate by 75 basis points (0.75%) to 4.75% and the discount rate was reduced
50 basis points to 4.50% over a span of just seven weeks, the fastest easing
move since the last economic recession in 1991.
Despite global economic turmoil, the US economy continued to exhibit
stronger-than-expected growth in the third quarter of 1998. Led by an improved
trade deficit and strong consumer demand, gross domestic product (GDP) growth
rose 3.7% in the third quarter. After a 2.2% and 2.1% reduction in GDP during
the first and second quarters of 1998, respectively, fewer imports helped
improve the trade deficit in the third quarter. As a result, the US trade
deficit subtracted just 0.6% from third-quarter GDP. More important, consumer
spending, which rose 4.1% in the third quarter, remains exceptionally strong and
continues to outstrip income growth. In addition, housing growth remains
particularly strong with new home sales and new housing starts at or near their
all-time highs.
As we move into 1999, we expect low interest rates and low inflation coupled
with strong wage and employment growth to continue to serve as the catalysts for
strong overall economic growth. More important, consumer demand should remain
strong, driven by the wealth effect generated from high equity market
valuations. As a result, we believe GDP growth will remain firm throughout the
first half of 1999. Consequently, we expect monetary policy to remain neutral
over the near term, as the Federal Reserve Board reassesses the impact of its
interest rate cuts upon the US economy. Barring further unforeseen global
economic turmoil, we believe this environment is likely to be positive for
mortgage-backed securities.
Portfolio Matters
At year-end 1998, Income Opportunities Fund 1999, Inc.'s per share net asset
value was $9.87, just $.13 below its year-end 1999 target of $10.00 per share.
As we begin the Fund's final year of operations, our primary investment strategy
continues to focus on seeking to return $10.00 per share net asset value upon
the Fund's maturity. With that in mind, it is essential that we monitor the
monthly dividend to avoid a payout above the earnings rate. It is inevitable
that the dividend rate will be reduced as we get closer to the Fund's maturity
and the Fund's earnings on assets are likely to decline.
While the Fund's per share net asset value was $9.87 at December 31, 1998, it
continues to be restricted by two significant situations. First, the yield curve
remains very flat. As a result, the holdings in the portfolio are not benefiting
from rolling down the yield curve (that is, appreciate over time with no change
in interest rates). Second, the financial turmoil that has existed since the
summer has caused yield spreads to comparable maturities of Treasury securities
to widen dramatically. This has moved prices on most securities lower. Looking
ahead, we expect that yield spreads should return to more historic levels,
especially since the securities held by the Fund will be closer to their
maturity dates. If this occurs in 1999, it will have a positive effect on the
Fund's net asset value.
From a perspective of earnings, the portfolio is moving lower in yield as many
of the high-yielding assets are paying down. We are reinvesting assets at much
lower rates, since interest rates are lower and our reinvestment time frame is
shorter. In addition, the flat yield curve is keeping borrowing costs high. This
is compounded by the credit-induced decoupling of Treasury interest rates and
the London Interbank Offered Rate (LIBOR). LIBOR, a benchmark for our borrowing
costs, has not dropped nearly as much as Treasury interest rates, which have
benefited from a worldwide flight to quality. Finally, as the Fund nears its
scheduled maturity we are seeking to structure the portfolio more conservatively
to protect the net asset value. As such, we are reducing some of the leveraged
positions that were enhancing the Fund's yield.
In Conclusion
We thank you for your investment in Income Opportunities Fund 1999, Inc., and we
look forward to reviewing our 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
February 5, 1999
PROXY RESULTS
During the six-month period ended December 31, 1998, Income Opportunities 1999
Fund, Inc. stockholders voted on the following proposals. The proposals were
approved at a stockholders' meeting on October 8, 1998. The description of each
proposal and number of shares voted are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. To elect the Fund's Board of Directors: Joe Grills 40,788,274 881,772
Walter Mintz 40,772,302 897,744
Robert S. Salomon Jr. 40,788,279 881,767
Melvin R. Seiden 40,761,451 908,595
Stephen B. Swensrud 40,779,483 890,563
Arthur Zeikel 40,766,031 904,015
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2. To ratify the selection of Ernst & Young LLP as the Fund's independent
auditors for the current fiscal year. 40,945,968 213,147 510,931
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
2 & 3
<PAGE>
Income Opportunities Fund 1999, Inc., December 31, 1998
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 $11,962,553 98-FL2A-A1, 6.001% due 1/15/2000 $ 11,941,993 $ 11,941,993 2.8%
& Asset-Backed AAA Aaa 12,160,384 98-FL1A-A, 5.707% due 9/10/2000 12,148,984 12,126,183 2.9
Obligations*-- NR# A2 25,000,000 98-FL1-D, 6.156% due 12/10/2000 24,950,781 24,796,875 5.8
London Interbank AAA Aaa 5,000,000 ContiMortgage Home Equity Loan Trust,
Offered Rate 98-3-A12, 5.695% due 5/15/2013 (b) 4,991,406 4,958,400 1.2
Indexed Obligations DLJ Commercial Mortgage Corp.###:
NR# Aaa 6,246,494 98-STFA-A1, 5.91% due 2/08/2000 6,246,494 6,223,069 1.5
NR# Aa2 7,400,000 98-STFA-A2, 6.06% due 10/08/2000 7,387,250 7,358,375 1.7
NR# A2 5,000,000 98-ST1A-A3, 6.26% due 12/08/2000 5,004,981 4,964,062 1.2
AAA@@@ Aaa 5,000,000 Saks Master Trust, 96-1-A, 5.791% due
3/20/2002 4,998,828 4,999,219 1.2
AA+ Aaa 2,346,370 Sears Mortgage Securities Corporation,
REMIC** 92-18B-A2, 7.199% due 9/25/2022 (b) 2,361,691 2,364,317 0.5
--------------------------------------------------------------------------------------------------------------
Total Investments in Adjustable Rate
Mortgage-Backed & Asset-Backed Obligations--
London Interbank Offered Rate Indexed
Obligations 80,032,408 79,732,493 18.8
====================================================================================================================================
Fixed Rate American Southwest Financial Securities
Mortgage-Backed Corp.:
& Asset-Backed A- NR# 330,270 94-1-A1, 5.50% due 6/02/1999 (7) 327,793 328,206 0.1
Obligations* AAA@@@ Aaa 9,144,187 95-C1-A1A, 7.30% due 10/17/2001 9,284,485 9,241,344 2.2
AAA Aaa 15,000,000 Arcadia Automobile Receivables Trust,
97-B-A4, 6.50% due 6/17/2002 15,202,922 15,215,625 3.6
NR# AAA@@ 1,278,942 Blackrock Capital Finance L.P., CMO***
96-C2-B, 7.728% due 11/15/2026###(a) 1,284,841 1,272,547 0.3
Federal Home Loan Mortgage Corporation, Pool:
NR# NR# 577,681 G50191, 5% due 6/01/1999 567,933 581,292 0.1
NR# NR# 123,029 G50200, 5% due 6/01/1999 120,953 122,585 0.0
NR# NR# 180,962 L73244, 5.50% due 8/01/2000 177,965 180,524 0.0
Federal Home Loan Mortgage Corporation,
REMIC** (b):
NR# NR# 2,765,347 1923-PC, 6.25% due 12/15/2014 (1) 2,747,631 2,759,291 0.7
NR# NR# 1,500,000 G-13-PG, 6% due 7/25/2016 1,477,969 1,501,875 0.4
NR# NR# 5,500,000 G-29-P, 7% due 2/25/2018 (1) 5,550,347 5,541,250 1.3
NR# NR# 7,860,370 1747-E, 7.25% due 1/15/2019 (1) 7,952,881 7,870,196 1.9
NR# NR# 3,184,125 1751-PE, 7.625% due 7/15/2019 (1) 3,216,771 3,189,092 0.8
Federal National Mortgage Association, Pool:
NR# NR# 965,021 50671, 6% due 12/01/1999 955,521 962,608 0.2
NR# NR# 19,051,528 80306, 8% due 3/01/2000 (1) 19,209,444 19,050,575 4.5
NR# NR# 165,706 209622, 5.50% due 4/01/2000 162,133 165,430 0.0
NR# NR# 2,082,846 50759, 6% due 7/01/2000 2,062,343 2,082,221 0.5
NR# NR# 1,582,262 124909, 6% due 7/01/2000 1,566,686 1,581,787 0.4
NR# NR# 1,113,264 50780, 6% due 8/01/2000 1,102,305 1,112,930 0.3
Federal National Mortgage Association,
REMIC**:
NR# NR# 7,781,618 94-M2-A, 6.625% due 2/25/2001 (1) 7,672,189 7,895,911 1.9
NR# NR# 16,600,000 97-67-PC, 6.25% due 3/18/2005 (1)(b) 16,594,164 16,610,375 3.9
NR# NR# 5,440,937 92-44-G, 7.25% due 10/25/2005 (1)(a) 5,471,396 5,469,121 1.3
NR# NR# 8,872,127 94-M3-B, 7.71% due 4/25/2006 (1)(b) 9,085,751 8,983,029 2.1
NR# NR# 100,628 94-M5-A, 8.40% due 2/25/2009 (b) 102,121 101,886 0.0
NR# NR# 3,525,915 G93-16-E, 5% due 11/25/2015 (a) 3,237,207 3,503,878 0.8
NR# NR# 2,435,778 G93-20-PE, 5.90% due 5/25/2016 (a) 2,393,152 2,429,689 0.6
NR# NR# 5,000,000 97-7-PK, 6.50% due 10/18/2017 (1)(b) 5,004,533 5,020,365 1.2
AAA Aaa 15,000,000 Ford Credit Auto Owner Trust, 98-B-A3, 5.85%
due 10/15/2001 14,992,969 15,135,937 3.6
GE Capital Mortgage Services, Inc.,
REMIC** (b):
AAA AAA@@ 11,138,000 95-9-A3, 6.375% due 11/25/2025 11,037,062 11,153,389 2.6
AAA AAA@@ 17,772,554 98-9-A1, 6.50% due 6/25/2028 17,821,089 17,866,971 4.2
NR# NR# 8,552,000 Government National Mortgage Association,
CMO*** 97-16-PB, 7% due 7/20/2019 (b) 8,616,654 8,573,380 2.0
AAA Aaa 6,500,000 Household Automobile Revolving Trust,
98-1-A2, 5.514% due 11/19/2001 6,500,000 6,430,938 1.5
Kidder Peabody Acceptance Corp., REMIC** (b):
AA AA+@@ 4,000,000 94-C1-B, 6.85% due 2/01/2006 4,028,625 4,030,000 1.0
NR# A+@@ 8,000,000 94-C1-C, 7% due 2/01/2006 8,060,052 8,215,520 1.9
A A2 15,000,000 NationsBank Auto Owner Trust, 96-A-B2, 6.875%
due 5/15/2003 (b) 15,177,640 15,243,750 3.6
A A2 6,000,000 NationsBank Credit Card Master Trust, 95-1-B,
6.625% due 4/15/2003 (b) 6,057,648 6,086,220 1.4
AAA Aaa 15,272,196 Newcourt Equipment Trust Securities, 98-2-A2,
5.29% due 10/15/2000 15,270,421 15,272,196 3.6
PNC Mortgage
Securities Corp., CMO*** (b):
AAA Aaa 16,921,269 97-6-A1, 6.49% due 10/25/2026 16,919,154 16,963,573 4.0
AAA AAA@@@ 5,250,000 98-6-1A3, 6.40% due 9/25/2028 5,261,420 5,276,460 1.2
Prudential Home Mortgage Securities
Company, Inc., REMIC**:
AAA@@ Aaa 3,416,705 92-36-A8, 6.50% due 11/25/1999 3,362,251 3,428,424 0.8
AAA@@ Aaa 16,800,000 93-40-A3, 6.50% due 10/25/2023 (b) 16,485,000 16,815,960 4.0
AA AA+@@@ 121,498 Resolution Trust Corporation, REMIC**
93-C2-B, 7.75% due 3/25/2025 (b) 122,233 121,498 0.0
UCFC Home Equity Loan (b):
AAA Aaa 3,242,228 97-B-A2, 6.52% due 11/15/2011 3,239,188 3,233,085 0.8
AAA Aaa 6,000,000 96-D1-A3, 6.541% due 11/15/2013 6,003,737 6,016,980 1.4
AAA AAA@@@ 43,135,000 Vornado Finance Corp., CMO***, 6.36% due
12/01/2000### 39,205,137 42,959,764 10.1
NR# A3 4,997,228 World Omni Automobile Lease Securitization
Corp., 97-B-B, 6.46% due 11/25/2003###(b) 5,016,278 5,059,693 1.2
--------------------------------------------------------------------------------------------------------------
Total Investments in Fixed Rate
Mortgage-Backed & Asset-Backed Obligations 325,707,994 330,657,370 78.0
====================================================================================================================================
</TABLE>
4 & 5
<PAGE>
Income Opportunities Fund 1999, Inc., December 31, 1998
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 $24,994,111 American Southwest Financial Securities
Mortgage-Backed Corp., REMIC**
Obligations*-- 95-C1-S1A, 2.579% due 10/17/2001 $ 2,227,264 $ 499,882 0.1%
Interest Only (3) Federal Home Loan Mortgage Corporation,
REMIC**:
NR# NR# 541,086 G-24-IA, 6.50% due 8/25/2013 (a) 0 6,637 0.0
NR# NR# 2,626,753 1523-PH, 6.50% due 2/15/2018 (b) 208,044 194,704 0.1
------------ ------------ -----
2,435,308 701,223 0.2
====================================================================================================================================
Derivative Federal Home Loan Mortgage Corporation,
Mortgage-Backed REMIC**:
Obligations*-- NR# NR# 9,309,541 1453-S, 6.97% due 1/15/2000 8,515,321 9,440,433 2.2
Inverse Floaters (4) NR# NR# 2,998,970 1516-SC, 4.83% due 6/15/2000 (1) 2,257,662 2,928,145 0.7
NR# NR# 5,618,048 1516-S, 5.24% due 6/15/2000 (1) 5,194,939 5,586,088 1.3
NR# NR# 1,605,504 1521-S, 5.13% due 7/15/2000 1,465,023 1,549,813 0.4
NR# NR# 4,381,205 1743-S, 5.85% due 8/15/2001 3,663,783 4,381,614 1.0
NR# NR# 5,983,631 1765-S, 7.12% due 1/15/2002 4,958,934 6,015,381 1.4
Federal National Mortgage Association,
REMIC**:
NR# NR# 5,003,830 93-81-S, 1.94% due 6/25/2000 3,366,640 4,789,566 1.1
NR# NR# 7,229,513 93-123-S, 7.94% due 7/25/2000 (1) 7,423,500 7,484,787 1.8
NR# NR# 10,000,000 X-169-B, 3.84% due 9/25/2000 7,650,000 9,718,656 2.3
Prudential Home Mortgage Securities
Company, Inc., REMIC**:
AAA@@ Aaa 1,353,653 93-59-A6, 2.605% due 12/25/2000 1,061,349 1,283,192 0.3
AAA@@ Aaa 2,122,069 93-59-A8, 3.078% due 12/25/2000 1,697,655 2,020,580 0.5
------------ ------------ -----
47,254,806 55,198,255 13.0
====================================================================================================================================
Derivative Government National Mortgage Association,
Mortgage-Backed REMIC**
Obligations*-- NR# NR# 1,002,660 94-5-PA, 8.023% due 6/16/2012 (2)(a) 1,000,428 992,313 0.2
Principal Only (5) --------------------------------------------------------------------------------------------------------------
Total Investments in Derivative
Mortgage-Backed Obligations 50,690,542 56,891,791 13.4
====================================================================================================================================
Total Investments in Mortgage-Backed &
Asset-Backed Obligations 456,430,944 467,281,654 110.2
====================================================================================================================================
Corporate BBB Baa3 10,000,000 AT&T Capital Corp., 6.501% due 6/07/2000 10,000,000 9,980,000 2.3
Bonds --------------------------------------------------------------------------------------------------------------
Total Investments in Corporate Bonds 10,000,000 9,980,000 2.3
====================================================================================================================================
Short-Term Repurchase 14,700,000 Morgan Stanley Co., purchased on 12/31/1998
Securities Agreements## to yield 5.60% to 1/04/1999 14,700,000 14,700,000 3.5
--------------------------------------------------------------------------------------------------------------
US Government 75,000 US Treasury Bills, 4.08% due 1/07/1999 (6) 74,975 74,978 0.0
Obligations####
--------------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities 14,774,975 14,774,978 3.5
====================================================================================================================================
Total Investments $481,205,919 492,036,632 116.0
============
Variation Margin on Financial Futures
Contracts##### 261,998 0.1
Liabilities in Excess of Other Assets (68,340,637) (16.1)
------------ -----
Net Assets $423,957,993 100.0%
============ =====
====================================================================================================================================
</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 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 a 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 $328,000, representing 0.1% of net
assets.
--------------------------------------------------------------------------
Acquisition Value
Issue Date Cost (Note 1a)
--------------------------------------------------------------------------
American Southwest Financial
Securities Corp., 94-1-A1,
5.50% due 6/02/1999 2/11/1998 $327,793 $328,206
--------------------------------------------------------------------------
Total $327,793 $328,206
======== ========
--------------------------------------------------------------------------
# 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 time of
purchase by the Fund.
##### Financial futures contracts sold as of December 31, 1998 were as follows:
--------------------------------------------------------------------------
Number of Expiration Value
Contracts Issue Exchange Date (Notes 1a & 1c)
--------------------------------------------------------------------------
65 Eurodollar CME March 1999 $15,444,812
50 Eurodollar CME June 1999 11,886,250
--------------------------------------------------------------------------
Total Financial Futures Contracts Sold
(Total Contract Price--$27,122,125) $27,331,062
===========
--------------------------------------------------------------------------
Ratings of issues shown have not been audited by Ernst & Young LLP.
See Notes to Financial Statements.
6 & 7
<PAGE>
Income Opportunities Fund 1999, Inc., December 31, 1998
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of December 31, 1998
=================================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$481,205,919) (Note 1a) .......... $ 492,036,632
Receivables:
Interest ............................................................... $ 2,478,709
Principal paydowns ..................................................... 420,502
Variation margin (Note 1c) ............................................. 261,998 3,161,209
-------------
Prepaid expenses and other assets ........................................ 8,626
-------------
Total assets ............................................................. 495,206,467
-------------
=================================================================================================================================
Liabilities: Payables:
Reverse repurchase agreements (Note 5) ................................. 67,775,000
Dividends to shareholders (Note 1g) .................................... 1,969,656
Interest expense (Note 5) .............................................. 1,072,008
Investment adviser (Note 2) ............................................ 158,706 70,975,370
-------------
Accrued expenses and other liabilities ................................... 273,104
-------------
Total liabilities ........................................................ 71,248,474
-------------
=================================================================================================================================
Net Assets: Net assets ............................................................... $ 423,957,993
=============
=================================================================================================================================
Capital: Capital Stock, $0.10 par value, 200,000,000 shares authorized ............ $ 4,297,463
Paid-in capital in excess of par ......................................... 418,307,442
Undistributed investment income--net ..................................... 16,399,171
Accumulated realized capital losses on investments--net (Note 6) ......... (25,667,859)
Unrealized appreciation on investments--net .............................. 10,621,776
-------------
Net assets--Equivalent to $9.87 per share based on 42,974,627
shares outstanding (market price--$9.6875) ............................... $ 423,957,993
=============
=================================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
=================================================================================================================================
<S> <C> <C> <C>
Investment Income Interest and amortization of premium and discount earned ................. $ 36,071,391
(Note 1e): Other .................................................................... 875,739
-------------
Total income ............................................................. 36,947,130
-------------
=================================================================================================================================
Expenses: Interest expense (Note 5) ................................................ $ 8,010,628
Investment advisory fees (Note 2) ........................................ 1,717,659
Accounting services (Note 2) ............................................. 115,467
Professional fees ........................................................ 92,656
Transfer agent fees ...................................................... 47,777
Custodian fees ........................................................... 42,095
Directors' fees and expenses ............................................. 40,326
Printing and shareholder reports ......................................... 31,643
Pricing fees ............................................................. 4,110
Other .................................................................... 142,277
-------------
Total expenses ........................................................... 10,244,638
-------------
Investment income--net ................................................... 26,702,492
-------------
=================================================================================================================================
Realized & Realized loss on investments--net ........................................ (5,799,847)
Unrealized Gain Change in unrealized appreciation on investments--net .................... 2,635,129
(Loss) on -------------
Investments--Net Net Increase in Net Assets Resulting from Operations ..................... $ 23,537,774
(Notes 1c, 1e & 3): =============
=================================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------
Increase (Decrease) in Net Assets: 1998 1997
=================================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ................................................... $ 26,702,492 $ 26,369,454
Realized gain (loss) on investments--net ................................. (5,799,847) 2,800,039
Change in unrealized appreciation on investments--net .................... 2,635,129 3,126,168
------------- -------------
Net increase in net assets resulting from operations ..................... 23,537,774 32,295,661
------------- -------------
=================================================================================================================================
Dividends to Investment income--net ................................................... (24,531,254) (24,517,484)
Shareholders ------------- -------------
(Note 1f): Net decrease in net assets resulting from dividends to shareholders ...... (24,531,254) (24,517,484)
------------- -------------
=================================================================================================================================
Capital Stock Net decrease in net assets derived from capital stock transactions ....... -- (8,268,027)
Transactions ------------- -------------
(Note 4):
=================================================================================================================================
Net Assets: Total decrease in net assets ............................................. (993,480) (489,850)
Beginning of year ........................................................ 424,951,473 425,441,323
------------- -------------
End of year* ............................................................. $ 423,957,993 $ 424,951,473
============= =============
=================================================================================================================================
*Undistributed investment income--net (Note 1h) ........................... $ 16,399,171 $ 14,142,933
============= =============
=================================================================================================================================
</TABLE>
See Notes to Financial Statements.
8 & 9
<PAGE>
Income Opportunities Fund 1999, Inc., December 31, 1998
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
======================================================================================================================
<S> <C> <C>
Cash Provided by Net increase in net assets resulting from operations ....................... $ 23,537,774
Operating Activities: Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Decrease in receivables .................................................. 2,166,134
Decrease in other assets ................................................. 1,594
Decrease in other liabilities ............................................ (1,480,152)
Realized and unrealized loss on investments--net ......................... 3,164,718
Amortization of premium and discount--net ................................ 3,149,826
---------------
Net cash provided by operating activities .................................. 30,539,894
---------------
======================================================================================================================
Cash Provided by Proceeds from principal payments and sales of long-term securities ......... 519,167,523
Investing Activities: Purchases of long-term securities .......................................... (371,681,713)
Purchases of short-term investments ........................................ (1,183,258,071)
Proceeds from sales and maturities of short-term investments ............... 1,169,949,780
---------------
Net cash provided by investing activities .................................. 134,177,519
---------------
======================================================================================================================
Cash Used for Cash receipts from borrowings .............................................. 149,006,488
Financing Activities: Cash payments on borrowings ................................................ (288,949,488)
Dividends paid to shareholders ............................................. (24,775,350)
---------------
Net cash used for financing activities ..................................... (164,718,350)
---------------
======================================================================================================================
Cash: Net decrease in cash ....................................................... (937)
Cash at beginning of year .................................................. 937
---------------
Cash at end of year ........................................................ $ --
===============
======================================================================================================================
Cash Flow Cash paid for interest ..................................................... $ 9,595,055
Information: ===============
======================================================================================================================
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been
derived from information provided in the financial
statements. For the Year Ended December 31,
----------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998+ 1997+ 1996+ 1995 1994
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ................... $ 9.89 $ 9.69 $ 9.50 $ 8.22 $ 9.32
Operating -------- -------- -------- -------- --------
Performance: Investment income--net ............................... .62 .61 .60 .55 .60
Realized and unrealized gain (loss) on
investments--net ..................................... (.07) .16 .09 1.23 (1.11)
-------- -------- -------- -------- --------
Total from investment operations ..................... .55 .77 .69 1.78 (.51)
-------- -------- -------- -------- --------
Less dividends from investment income--net ........... (.57) (.57) (.50) (.50) (.59)
-------- -------- -------- -------- --------
Net asset value, end of year ......................... $ 9.87 $ 9.89 $ 9.69 $ 9.50 $ 8.22
======== ======== ======== ======== ========
Market price per share, end of year .................. $ 9.6875 $ 9.5625 $ 9.00 $ 8.25 $ 7.375
======== ======== ======== ======== ========
=================================================================================================================================
Total Investment Based on market price per share ...................... 7.42% 12.90% 15.53% 19.00% (9.18%)
Return:* ======== ======== ======== ======== ========
Based on net asset value per share ................... 5.82% 8.45% 8.02% 22.94% (4.97%)
======== ======== ======== ======== ========
=================================================================================================================================
Ratios to Average Expenses, excluding interest expense ................. .52% .63% .65% .69% .67%
Net Assets: ======== ======== ======== ======== ========
Expenses ............................................. 2.39% 3.30% 3.36% 3.70% 2.80%
======== ======== ======== ======== ========
Investment income--net ............................... 6.24% 6.24% 6.29% 5.98% 6.93%
======== ======== ======== ======== ========
=================================================================================================================================
Supplemental Net assets, end of year (in thousands) ............... $423,958 $424,951 $425,441 $470,683 $439,767
Data: ======== ======== ======== ======== ========
Portfolio turnover ................................... 66.64% 61.65% 60.96% 60.70% 94.71%
======== ======== ======== ======== ========
=================================================================================================================================
Leverage: Amount of borrowings outstanding, end of year
(in thousands) ....................................... $ 67,775 $207,718 $208,501 $228,654 $217,236
======== ======== ======== ======== ========
Average amount of borrowings outstanding during
the year (in thousands) .............................. $132,298 $196,232 $206,923 $226,188 $239,251
======== ======== ======== ======== ========
Average amount of borrowings per share during the
year ................................................. $ 3.08 $ 4.57 $ 4.42 $ 4.39 $ 4.39
======== ======== ======== ======== ========
=================================================================================================================================
</TABLE>
* Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
+ Based on average shares outstanding.
See Notes to Financial Statements.
10 & 11
<PAGE>
Income Opportunities Fund 1999, Inc., December 31, 1998
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. 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.
(h) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $85,000 have been reclassified between paid-in capital
in excess of par and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML &
Co."), which is the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of 0.40% of the Fund's average weekly net assets from September
1, 1997 through termination of the Fund.
During the year ended December 31, 1998, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), $2,302 for security price quotations to compute the net
asset value of the Fund.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 1998 were $371,681,713 and $519,588,025, respectively.
12 & 13
<PAGE>
Income Opportunities Fund 1999, Inc., December 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
Net realized gains (losses) for the year ended December 31, 1998 and net
unrealized gains (losses) as of December 31, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------------------
Long-term investments ..................... $(5,769,557) $10,830,713
Financial futures contracts ............... (87,790) (208,937)
Options purchased ......................... (16,406) --
Options written ........................... 73,906 --
----------- -----------
Total ..................................... $(5,799,847) $10,621,776
=========== ===========
- --------------------------------------------------------------------------------
As of December 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $10,830,713, of which $13,460,654 related to appreciated
securities and $2,629,941 related to depreciated securities. The aggregate cost
of investments at December 31, 1998 for Federal income tax purposes was
$481,205,919.
Transactions in call options written for the year ended December 31, 1998 were
as follows:
- --------------------------------------------------------------------------------
Nominal Value
Covered by Premiums
Options Written Received
- --------------------------------------------------------------------------------
Outstanding call options written,
beginning of year ......................... -- --
Options written ........................... 1,025,000 $ 134,570
Options exercised ......................... (505,000) (60,664)
Options expired ........................... (520,000) (73,906)
----------- -----------
Outstanding call options written,
end of year ............................... -- $ --
=========== ===========
- --------------------------------------------------------------------------------
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 year ended December 31, 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.
For the year ended December 31, 1998, the average amount outstanding was
approximately $132,298,000 and the daily weighted average interest rate was
6.02%.
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.
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
Income Opportunities Fund 1999, Inc.
We have audited the accompanying statement of assets, liabilities and capital of
Income Opportunities Fund 1999, Inc., including the schedule of investments, as
of December 31, 1998, and the related statements of operations and cash flows
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended and financial highlights for each of the
years indicated therein. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Income
Opportunities Fund 1999, Inc. at December 31, 1998, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the indicated years, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Princeton, New Jersey
February 1, 1999
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 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--12/98
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