INCOME
OPPORTUNITIES
FUND 2000,
INC.
Annual Report December 31, 1993
This report, including the financial information herein, is
transmitted to the shareholders of Income Opportunities
Fund 2000, Inc. for their information. It is not a prospectus,
circular or representation intended for use in the purchase
of shares of the Fund or any securities mentioned in the
report. Past performance results shown in this report should
not be considered a representation of future performance.
The Fund has leveraged its Common Stock to provide Common Stock
shareholders with a potentially higher rate of return. Leverage
creates risk for Common Stock shareholders, including the
likelihood of greater volatility of net asset value and market
price of Common Stock shares, and the risk that fluctuations in
short-term interest rates may reduce the Common Stock's yield.
Income Opportunities
Fund 2000, Inc.
Box 9011
Princeton, NJ
08543-9011
INCOME OPPORTUNITIES FUND 2000, INC.
Officers and
Directors
Arthur Zeikel, President and Director
Walter Mintz, Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Harry Woolf, Director
Terry K. Glenn, Executive Vice President
N. John Hewitt, Senior Vice President
Donald C. Burke, Vice President
Jeffrey B. Hewson, Vice President
Gregory Mark Maunz, Vice President
Gerald M. Richard, Treasurer
Michael J. Hennewinkel, Secretary
<PAGE>
Custodian & Transfer Agent
The Bank of New York
110 Washington Street
New York, New York 10286
NYSE Symbol
IFT
The Benefits and
Risks of Leveraging
Income Opportunities Fund 2000, 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.
DEAR SHAREHOLDER
For the twelve-month period ended December 31, 1993, Income
Opportunities Fund 2000, Inc. earned $0.696 per share income
dividends, representing a net annualized yield of 6.96%, based on
a month-end per share net asset value of $10.00. Over the same
period, the Fund's total investment return was +11.43%, based on
a change in per share net asset value from $9.64 to $10.00, and
assuming reinvestment of $0.696 per share income dividends.
For the six-month period ended December 31, 1993, the Fund's
total investment return was +3.40%, based on a change in per
share net asset value from $10.09 to $10.00, and assuming
reinvestment of $0.408 per share income dividends.
<PAGE>
Economic Environment
We may be entering the best of all economic situations, a growing
economy with no signs of inflation. People are working; in fact,
the national unemployment level dropped dramatically from October
to December from 6.8% to 6.4%. The factory workweek is the
longest it has been since World War II. In December, leading
economic indicators and factory orders increased 0.5% and 1.4%,
respectively, the fourth increase over the last four months.
Sales of existing homes are at a record high and new home sales
are at the highest level since 1986. Third-quarter gross domestic
product (GDP) growth was 2.8%, and fourth quarter projections run
as high as 5%, although no one expects that level to be
sustained.
This economic environment is thus far without a hint of
inflation. The consumer price index (CPI) is running at an
annualized rate below 3%. Furthermore, the recent decline in oil
prices equates to a 0.5% decline in the annual rate of inflation,
since energy prices comprise 7% of the CPI. Alan Greenspan,
Chairman of the Federal Reserve Board, has stated that inflation
may be returning to the levels of pre-Vietnam War buildup. In any
event, his resolve in fighting inflation is well known within the
investment community. However, even though there was no evidence
that the rate of inflation was picking up, fixed-income investors
became concerned that stronger economic activity would eventually
lead to a rise in inflation. These inflationary concerns led to a
backup in interest rates.
A recovering economy and subdued inflation translate into greater
consumer confidence. The Conference Board reported a huge
increase in consumer confidence for both November and December to
the highest level since the first quarter of 1991. Personal
income is flat but consumer financial health has improved,
largely because of home refinancings that have significantly
reduced mortgage payments. Consumer spending is up for the eighth
straight month and is twice income growth, resulting in a drop in
the savings rate to 3.7%. Consumer activity, the largest
component of GDP, is important for economic health, and the
holiday season--which appears to have been very strong--is the
most important period for consumer spending.
<PAGE>
Mortgage-Backed
Securities Market
The mortgage market continues to be under tremendous prepayment
pressure. In November 1993, annualized prepayment figures for
Federal National Mortgage Association (FNMA) securities with
8.50%, 8% and 7.50% coupons were 63%, 55% and 32%, respectively.
Prepayments continue to be higher than anticipated given the
current interest rate structure as a result of the aggressive
solicitations by mortgage bankers and the evolution of zero
point, low document mortgages. Additionally, FNMA now accepts
loan/value ratios of up to 95%. The recent backup in interest
rates--for example, the US Treasury bond ended the year at 6.35%
after being as low as 5.79% in October--has slowed refinance
activity somewhat. Although the Mortgage Bankers' Refinance Index
is off its high by 65%, in an absolute sense it is still very
high. The uncertainty of prepayment levels has caused mortgage
spreads to remain very wide, especially given the relatively low
levels of interest rates.
Although the yield curve has flattened significantly, it remains
quite steep. The yield spread between two-year and ten-year US
Treasury notes ended 1993 at 156 basis points (1.56%). Yield curve
positioning remains a very important strategy. For some low-coupon
mortgage securities, the risk has shifted from fast prepayments to
slow prepayments, since slow prepayments cause an extension in
average portfolio maturity in a steep yield curve environment.
Portfolio Matters
The unprecedented level of mortgage prepayments has negatively
impacted both the Fund's yield and net asset value. Although
interest rates may stay low and the yield curve remain steep
(allowing for capital gains), subsequent to the close of the
fiscal year 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. In addition, the Fund's Investment Adviser, Fund
Asset Management, has accelerated a scheduled reduction in the
Fund's management fee. The fee, which was scheduled to be reduced
from 0.75% of the Fund's average weekly net assets to 0.55% on
December 31, 1995, was reduced to 0.55% as of January 19, 1994.
The Fund's new dividend rate is set at an amount equal to a 6.20%
annualized dividend yield based on the Fund's initial maximum
offering price of $10.00 per share. Under current market
conditions, we believe that this dividend yield is attractive
relative to direct fixed-income investment opportunities. For
example, as of January 31, 1994, the Fund's dividend yield
compares to a yield of approximately 5.30% on a US Treasury note
with a maturity date comparable to the termination date of the
Fund. Of course, unlike US Treasury securities and most other
fixed-income investments, the Fund does not guarantee that
shareholders will receive the full amount of their principal
investment in the Fund on its termination date, and shareholders
may incur a gain or a loss. In addition, as disclosed in the
Fund's prospectus, it is anticipated that the dividend yield will
continue to decline over the life of the Fund.
<PAGE>
Over the past year interest rates have declined approximately 180
basis points as measured by seven-year and ten-year Treasury
notes. This resulted in record levels of prepayments, which
reduced the portfolio's yield as premium-priced mortgage secur-
ities paid down at par and the proceeds had to be reinvested at
lower interest rates.
To mitigate some of the pressure on the portfolio's yield we extended
duration and took a more aggressive position in the leveraged portion
of the portfolio. Our original strategy was to borrow at rates
ranging from 1 month LIBOR to 12 month LIBOR (London Interbank
Offered Rate) and invest primarily in adjustable rate securities
and also 1-year--3-year fixed-rate securities. This strategy limited
interest rate risk, since short-term borrowings were paired with either
adjustable rate or short-term securities (or both). The differential
between investment yield and borrowing costs added incremental yield
to the portfolio.
Currently, the leveraged portfolio is oriented more toward short-
term fixed-rate securities. This strategy further enhances yield,
but also subjects the portfolio to greater risk should interest
rates rise and borrowing costs increase. For example, an increase
in interest rates will affect our borrowing costs more quickly
than the assets will reset (in the case of adjustable rate
investments) or mature (in the case of fixed-rate investments).
This would temporarily reduce the yield enhancement of
leveraging. If interest rates rose significantly, the Fund's
borrowing costs could exceed the income earned on its investments
for a period of time. For more information, see "The Benefits
and Risks of Leveraging" on page 1 of this report to
shareholders.
Looking ahead, our strategy will continue to focus on reaching a
net asset value of $10.00 per share on the termination date.
Therefore, we will invest in securities with maturities that are
either shorter than or only marginally beyond the termination
date. Although an increase in interest rates would impact the
Fund's net asset value, the effect will lessen as portfolio
securities approach maturity. In addition, municipal income will
be retained in the Fund's net asset value.
We thank you for your investment in Income Opportunities Fund 2000,
Inc., and we look forward to reviewing our outlook and strategy with
you again in our next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
February 3, 1994
<PAGE>
PER SHARE INFORMATION
<TABLE>
Per Share
Selected Quarterly
Financial Data*
(unaudited)
<CAPTION>
Net Realized Unrealized Dividends/Distributions
Investment Gains Gains Net Investment Capital
For the Period Income (Losses) (Losses) Income Gains
<S> <C> <C> <C> <C> <C>
November 27, 1992++ to December 31, 1992 $ 0.04 $ 0.03 $ 0.09 -- --
January 1, 1993 to March 31, 1993 0.15 0.03 0.22 $0.11 --
April 1, 1993 to June 30, 1993 0.21 0.04 0.09 0.18 --
July 1, 1993 to September 30, 1993 0.16 (0.04) 0.24 0.11 $0.06
October 1, 1993 to December 31, 1993 0.17 -- (0.22) 0.23 --
<CAPTION>
Net Asset Value Market Price**
For the Period High Low High Low Volume***
<S> <C> <C> <C> <C> <C>
November 27, 1992++ to December 31, 1992 $ 9.64 $9.47 $10.125 $9.625 12,963
January 1, 1993 to March 31, 1993 10.02 9.65 10.125 9.375 10,954
April 1, 1993 to June 30, 1993 10.09 9.94 10.00 9.375 17,129
July 1, 1993 to September 30, 1993 10.31 9.96 9.875 9.50 27,270
October 1, 1993 to December 31, 1993 10.37 9.99 9.875 9.125 25,127
<FN>
++Commencement of Operations.
*Calculations are based upon shares outstanding at the end of each period.
**As reported in the consolidated transaction reporting system.
***In thousands.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value Percent of
Rating Rating Amount Issue Cost (Note 1a) Net Assets
Adjustable Rate* Mortgage-Backed Obligations**--Constant Maturity Treasury Indexed Obligations
<S> <S> <C> <S> <C> <C> <C>
AA Aa2 $ 5,000,000 Prudential Home Mortgage Securities Company, Inc.,
REMIC (c) 93-25-A1, 4.695% due 6/25/2023 $ 5,252,255 $ 5,250,000 3.89%
AAA Aa2 5,754,220 Sears Mortgage Securities Corp., REMIC (c), 92-2-A1,
6.481% due 12/25/2024 (1) 5,918,001 5,926,847 4.39
Total Constant Maturity Treasury Indexed Obligations 11,170,256 11,176,847 8.28
<CAPTION>
Adjustable Rate* Mortgage-Backed Obligations**--London Interbank Offered Rate Indexed Obligations
<S> <S> <C> <S> <C> <C> <C>
Ryland ARM (f) Trust, REMIC (c):
AAA Aaa 7,000,000 92-10-B, 5.407% due 8/25/2022 7,071,080 7,247,187 5.37
AAA Aaa 7,000,000 92-9-B, 5.459% due 7/25/2022 7,067,853 7,247,187 5.37
AAA Aaa 5,145,157 Sears Mortgage Securities Corp., REMIC (c), 92-18-A2,
6.926% due 9/25/2022 5,259,547 5,305,943 3.93
Total London Interbank Offered Rate Indexed Obligations 19,398,480 19,800,317 14.67
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 30,568,736 30,977,164 22.95
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
S&P Moody's Face Value Percent of
Rating Rating Amount Issue Cost (Note 1a) Net Assets
Fixed Rate Mortgage-Backed Obligations**
<S> <S> <C> <S> <C> <C> <C>
AAA AA++ $ 5,546,468 Capstead Securities Corporation IV, CMO (d) 92-12-B,
8.325% due 11/25/2005 $ 5,731,141 $ 5,650,464 4.18%
AAA AAA++ 120,986,814 Fund America Investors Corporation II, 93-E-SIO,
9.50% (3) due 10/25/2023 (2) 1,765,679 1,909,172 1.41
Kidder Peabody Acceptance Corp., REMIC (c):
AA++ AA++++ 5,000,000 93-C1-A3, 6.80% due 9/01/2006 4,852,344 4,871,875 3.61
AA++ AA++++ 3,977,476 93-M1-A2, 7.15% due 4/25/2025 3,960,269 4,044,596 2.99
AA++ AA++++ 5,000,000 93-C1-A3XP, 9.60% (3) due 9/01/2006 (2) 292,969 292,969 0.22
Resolution Trust Corporation, REMIC (c):
A++ A2 5,067,782 92-C7-B, 7.15% due 6/25/2023 (1) 5,121,247 5,139,048 3.81
AAA Aaa 2,002,416 92-C6-A1B, 7.50% due 7/25/2024 1,927,988 2,024,943 1.50
AAA Aa2 6,000,000 92-C5-A1C, 7.85% due 5/25/2022 5,990,625 6,105,000 4.52
AA Aa2 8,000,679 92-C7-A1C, 7.90% due 6/25/2023 7,858,168 8,295,704 6.14
AAA Aa2 5,744,506 92-C4-A1A, 8.15% due 6/25/2024 5,741,813 5,895,299 4.37
AA+++ Aa2 5,000,000 Salomon Brothers Mortgage Securities VII, Inc.,
REMIC (c) 93-C1-A2, 6.90% due 1/18/2023 5,148,995 5,093,750 3.77
AAA Aaa 8,000,000 Structured Asset Securities Corporation Trust I,
92-M1-A2, 7.05% due 11/25/2007 7,453,335 8,292,500 6.14
NR NR 5,000,000 Town & Country Funding Corporation, REIT (e)
5.85% due 8/15/1998 4,988,200 4,981,250 3.69
Total Investments in Fixed Rate
Mortgage-Backed Obligations 60,832,773 62,596,570 46.35
<PAGE>
<CAPTION>
Other Mortgage-Backed Obligations**
<C> <S> <C> <C> <C>
Federal Home Loan Mortgage Association, REMIC (c):
25,000,000 93-1584-G, 6.00% due 9/15/2018 (1) 24,736,000 24,462,250 18.11
5,000,000 93-1564-G, 6.25% due 5/15/2007 (1) 5,053,735 4,950,000 3.66
6,686,000 93-1589-D, 6.25% due 7/15/2021 (1) 6,692,086 6,656,749 4.93
Federal National Mortgage Association, REMIC (c):
25,465,720 93-186-G, 6.25% due 3/25/2008 (1) 25,751,799 25,346,349 18.77
11,039,322 G-92-39-Z, 7.00% due 10/25/2016 (1) 9,750,827 11,039,322 8.17
6,387,518 92-185-Z, 7.00% due 6/25/2017(1) 5,986,358 6,487,323 4.80
Total Investments in Other Mortgage-Backed Obligations 77,970,805 78,941,993 58.44
Total Investments in Mortgage-Backed Obligations 169,372,314 172,515,727 127.74
<CAPTION>
Municipal Bonds
<S> <S> <C> <S> <C> <C> <C>
AAA Aaa 1,000,000 El Paso, Texas, Independent School District, Refunding
Revenue Bonds, 5.70% (2) due 7/01/2000 696,608 746,440 0.55
Maricopa County, Arizona, School District No. 28,
Refunding Bonds, Second Series (b):
AAA Aaa 1,500,000 5.75% (3) due 1/01/2001 1,008,857 1,088,025 0.81
AAA Aaa 2,375,000 5.75% (3) due 7/01/2001 1,552,702 1,683,661 1.25
AAA Aaa 1,300,000 5.80% (3) due 1/01/2002 822,940 893,672 0.66
AAA Aaa 2,300,000 5.80% (3) due 7/01/2002 1,414,938 1,544,496 1.14
AAA Aaa 5,000,000 Maricopa County, Arizona, School District No. 41,
Refunding Bonds, Second Series, 5.40% (3)
due 1/01/2003 (b) 3,102,045 3,254,050 2.41
Metropolitan Pier & Exposition Authority, Illinois,
Dedicated State Tax Revenue Bonds (a):
AAA Aaa 2,750,000 5.70% (3) due 12/15/1999 1,967,605 2,115,630 1.57
AAA Aaa 3,700,000 5.95% (3) due 6/15/2000 2,534,529 2,729,453 2.02
AAA Aaa 7,455,000 5.95% (3) due 12/15/2000 4,959,206 5,371,328 3.98
AAA Aaa 5,250,000 Texas State Refunding Bonds (Superconducting-C),
6.05% (3) due 4/01/2002 (b) 3,230,500 3,567,008 2.64
Total Investments in Municipal Bonds 21,289,930 22,993,763 17.03
<CAPTION>
US Government Obligations
<C> <S> <C> <C> <C>
11,000,000 US Treasury Note, 6.375% due 8/15/2002 10,578,906 11,467,500 8.49
Total Investments in US Government Obligations 10,578,906 11,467,500 8.49
<CAPTION>
Short-Term Securities
<C> <S> <C> <C> <C>
Repurchase
Agreements*** 888,000 Nikko Securities Co., purchased on 12/31/1993 to yield
3.40% to 1/03/1994 888,000 888,000 0.66
US Government
Obligations**** US Treasury Bills:
30,000 3.02% due 3/31/1994 29,781 29,781 0.02
35,000 3.11% due 3/31/1994 34,737 34,737 0.03
Total Investments in Short-Term Securities 952,518 952,518 0.71
Total Investments $202,193,668 207,929,508 153.97
============
Interest Rate Swaps (80,000) (0.06)
Variation Margin on Financial Futures Contracts+++ 7,469 0.00
Liabilities in Excess of Other Assets (72,806,682) (53.91)
------------ ------
Net Assets $135,050,295 100.00%
============ ======
<FN>
*Adjustable Rate Mortgage-Backed Obligations have coupon rates which reset periodically.
**Mortgage-Backed Obligations are subject to principal paydowns as a result of prepayments
or refinancing of the underlying mortgage instruments. As a result, the average life may
be substantially less than the original maturity.
***Repurchase Agreements are fully collateralized by US Government & Agency Obligations.
****US Government Obligations are traded on a discount basis and amortized to maturity.
The interest rates shown are the discount rates paid at the time of purchase by the Fund.
(a)AMBAC Insured.
(b)FGIC Insured.
(c)Real Estate Mortgage Investment Conduits (REMIC).
(d)Collateralized Mortgage Obligation (CMO).
(e)Real Estate Investment Trust (REIT).
(f)Adjustable Rate Mortgage (ARM).
(1)Security represents collateral in connection with Reverse Repurchase Agreements (Note 5).
(2)Represents the interest only portion of a mortgage-backed obligation.
(3)Represents the approximate yield to maturity.
++Rating of issue is by Fitch Investors Service.
++++Rating of issue is by Duff & Phelps.
+++Financial futures contracts purchased as of December 31, 1993 were as follows:
Number of Expiration Value
Contracts Issue Date (Note 1b)
12 Municipal Bond Index March 1994 $ 1,238,250
Total Financial Futures Contracts Purchased
(Total Contract Price--$1,229,595) $ 1,238,250
===========
Financial futures contracts sold as of December 31, 1993 were as follows:
Number of Expiration Value
Contracts Issue Date (Note 1b)
56 US Treasury Notes March 1994 $(6,308,750)
9 US Treasury Bonds March 1994 $(1,030,500)
===========
Total Financial Futures Contracts Sold
(Total Contract Price--$7,320,564) $(7,339,250)
===========
Ratings of issues shown have not been audited by Ernst & Young.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of December 31, 1993
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$202,193,668) (Note 1a) $207,929,508
Variation margin of financial futures contracts (Note 1b) 7,469
Cash 30,645
Receivables:
Interest $ 1,416,327
Principal paydowns 89,746
Loaned securities 16,283
Extended delivery 14,062 1,536,418
------------
Deferred organization expenses (Note 1f) 42,144
Prepaid expenses and other assets 11,186
------------
Total assets 209,557,370
------------
Liabilities: Interest rate swaps, at value 80,000
Payables:
Reverse repurchase agreements (Note 5) 67,842,000
Securities purchased 5,148,533
Dividends to shareholders (Note 1g) 788,110
Interest (Note 5) 427,088
Investment adviser (Note 2) 91,904 74,297,635
------------
Accrued expenses and other liabilities 129,440
------------
Total liabilities 74,507,075
------------
Net Assets: Net assets $135,050,295
============
Capital: Capital Stock $.10 par value, 200,000,000 shares authorized $ 1,351,053
Paid-in capital in excess of par 126,666,599
Undistributed investment income--net 1,389,005
Overdistributed realized capital gains--net (2,171)
Unrealized appreciation on investments--net 5,645,809
------------
Net assets--equivalent to $10.00 per share based on 13,510,527 shares
outstanding (market price--$9.25) $135,050,295
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended December 31, 1993
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 12,027,902
Income (Note 1e): Other 523,102
------------
Total Income 12,551,004
------------
Expenses: Interest (Note 5) $ 2,056,377
Investment advisory fees (Note 2) 1,022,428
Professional fees 65,630
Accounting services (Note 2) 52,318
Printing and shareholder reports 33,597
Directors' fees and expenses 30,874
Transfer agent fees 26,554
Custodian fees 19,666
Amortization of organization expenses (Note 1f) 10,787
Other 36,154
------------
Total expenses before reimbursement 3,354,385
Reimbursement of expenses (Note 2) (131,580)
------------
Total expenses after reimbursement 3,222,805
------------
Investment income--net 9,328,199
------------
Realized & Realized gain on investments--net 464,448
Unrealized Gain on Change in unrealized appreciation on investments--net 4,395,423
Investments--Net ------------
(Notes 1e & 3): Net Increase in Net Assets Resulting from Operations $ 14,188,070
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the For the Period
Year Ended Nov. 27, 1992++
Increase (Decrease) in Net Assets: Dec. 31, 1993 to Dec. 31, 1992
<S> <S> <C> <C>
Operations: Investment income--net $ 9,328,199 $ 550,983
Realized gain on investments--net 464,448 440,073
Change in unrealized appreciation on investments--net 4,395,423 1,250,386
------------ ------------
Net increase in net assets resulting from operations 14,188,070 2,241,442
------------ ------------
Dividends & Investment income--net (8,490,177) --
Distributions to Realized gain on investments--net (906,692) --
Shareholders ------------ ------------
(Note 1g): Net decrease in net assets resulting from dividends and
distributions to shareholders (9,396,869) --
------------ ------------
Capital Share Proceeds from issuance of common stock -- 128,250,000
Transactions Offering costs resulting from issuance of common stock -- (332,355)
(Note 4): ------------ ------------
Net increase in net assets derived from capital share transactions -- 127,917,645
------------ ------------
Net Assets: Total increase in net assets 4,791,201 130,159,087
Beginning of period 130,259,094 100,007
------------ ------------
End of period* $135,050,295 $130,259,094
============ ============
<FN>
*Undistributed investment income--net $ 1,389,005 $ 550,983
============ ============
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Year Ended December 31, 1993
<S> <S> <C>
Cash Provided Net increase in net assets resulting from operations $ 14,188,070
by Operating Adjustments to reconcile net increase (decrease) in net assets
Activities: resulting from operations to net cash provided by operating activities:
Decrease in receivables 22,697
Increase in other assets (1,150)
Increase in other liabilities 159,700
Realized and unrealized gain on investments--net (4,859,871)
Amortization of premium and discount (360,286)
------------
Net cash provided by operating activities 9,149,160
------------
<PAGE>
Cash Used for Proceeds from principal payments and sales of long-term securities 260,899,339
Investing Purchases of long-term securities (302,606,741)
Activities: Proceeds from short-term investments--net 2,367,820
------------
Net cash used for investing activities (39,339,582)
------------
Cash Provided Cash receipts from borrowings 38,737,000
by Financing Dividends paid to shareholders (8,608,759)
Activities: ------------
Net cash provided by financing activities 30,128,241
------------
Cash: Net decrease in cash (62,181)
Cash at beginning of year 92,826
------------
Cash at end of year $ 30,645
============
Cash Flow Cash paid for interest $ 1,635,723
Information: ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the For the Period
Year Ended Nov. 27, 1992++
Increase (Decrease) in Net Asset Value: Dec. 31, 1993 to Dec. 31, 1992
<S> <S> <C> <C>
Per Share Net asset value, beginning of period $ 9.64 $ 9.50
Operating ------------ ------------
Performance: Investment income--net .69 .04
Realized and unrealized gain on investments--net .36 .12
------------ ------------
Total from investment operations 1.05 .16
------------ ------------
Less dividends and distributions to shareholders:
Investment income--net (.63) --
Realized gain on investments--net (.06) --
------------ ------------
Total dividends and distributions to shareholders (.69) --
------------ ------------
Capital charge resulting from issuance of Common Stock -- (.02)
------------ ------------
Net asset value, end of period $ 10.00 $ 9.64
============ ============
Market price per share, end of period $ 9.25 $ 10.00
============ ============
<PAGE>
Total Investment Based on market price per share (0.64%) 0.00%+++
Return:** ============ ============
Based on net asset value per share 11.43% 1.47%+++
============ ============
Ratios to Average Expenses, net of reimbursement 2.36% 1.15%*
Net Assets: ============ ============
Expenses 2.46% 1.90%*
============ ============
Investment income--net 6.84% 4.46%*
============ ============
Supplemental Net assets, end of period (in thousands) $ 135,050 $ 130,259
Data: ============ ============
Portfolio turnover 129.32% 27.94%
============ ============
<FN>
*Annualized.
**Total investment returns based on market value, which can be significantly greater
or lesser than the net asset value, result in substantially different returns. Total
investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
++Commencement of Operations.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Income Opportunities Fund 2000, Inc. (the "Fund") is registered
under the Investment Company Act of 1940 as a diversified,
closed-end management investment company. The Fund determines and
makes available for publication the net asset value of its Common
Stock on a weekly basis. The Fund's Common Stock is listed on the
New York Stock Exchange under the symbol IFT. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--Corporate debt securities,
mortgage-backed securities, municipal securities, asset-backed
securities and other debt securities are valued on the basis of
valuations provided by dealers or by a pricing service, approved
by the Fund's Board of Directors. Securities having a remaining
maturity of sixty days or less are valued at amortized cost. 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.
<PAGE>
(b) Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures
contracts are contracts for delayed delivery of securities at a
specific future date and at a specific price or yield. Upon
entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on
which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in value of the contract.
Such receipts or payments are known as variation margin and are
recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed.
(c) Options--When the Fund sells 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 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 paid or received (or loss or gain to the extent the cost
of the closing transaction is less than or greater than the premium
paid or received).
Written and purchased options are non-income producing
investments.
(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. Original issue discounts and market premiums
are amortized into interest income. Realized gains and losses on
security transactions are determined on the identified cost
basis.
<PAGE>
(f) Deferred organization and offering expenses--Deferred
organization expenses are amortized on a straight-line basis over
a five-year period beginning with the commencement of operations
of the Fund. Direct expenses relating to the public offering of
the Common Stock were charged to capital at the time of issuance.
(g) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital
gains are recorded on the ex-dividend date.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Fund Asset Management, Inc. ("FAMI"), a wholly-owned subsidiary
of Merrill Lynch Investment Management, Inc. ("MLIM"), an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc.
FAMI 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 0.75% of the Fund's average weekly net assets from November
27, 1992 through January 18, 1994, 0.55% of average weekly assets
from January 19, 1994 to December 1, 1997, and 0.30% of average
weekly net assets from December 1, 1997 through termination of
the Fund. For the year ended December 31, 1993, FAMI earned fees
of $1,022,428, of which $131,580 was waived.
Effective January 1, 1994, the investment advisory business of
FAMI reorganized from a corporation to a limited partnership. The
general partner of FAMI is Princeton Services, Inc., an indirect
wholly-owned subsidiary of Merrill Lynch & Co.
Accounting services are provided to the Fund by FAMI at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAMI, MLIM, Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), and/or Merrill Lynch & Co., Inc.
3. Investments:
Purchases and sales of investments, excluding short-term secu-
rities, for the year ended December 31, 1993 were $274,751,308
and $260,939,172, respectively.
Net realized and unrealized gains (losses) as of December 31,
1993 were as follows:
Realized Unrealized
Gains Gains
(Losses) (Losses)
<PAGE>
Long-term investments $ 450,440 $5,735,840
Financial futures contracts 19,164 (10,031)
Options written (5,156) --
Interest rate swaps -- (80,000)
---------- ----------
Total $ 464,448 $5,645,809
========== ==========
Transactions in call options written for the year ended December
31, 1993 were as follows:
Premiums
Par Value Received
Outstanding call options written at
beginning of period -- --
Options written $6,000,000 $ 40,781
Options closed (6,000,000) (40,781)
---------- ----------
Outstanding call options written at end
of period $ -- $ --
========== ==========
The Fund has entered into the following interest rate swaps as of
December 31, 1993:
Notional Payments Received Expiration
Amount Current Rate Type Date
$10,000,000 5.226% Fixed 3-5 years
Interest rate swaps are agreements to exchange the Fund's
interest rate payments for fixed or variable interest rate
payments on the notional principal amount.
As of December 31, 1993, net unrealized appreciation for Federal
income tax purposes aggregated $5,735,840, of which $6,702,076
related to appreciated securities and $966,236 related to
depreciated securities. The aggregate cost of investments at
December 31, 1993 for Federal income tax purposes was
$202,193,668.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital
stock, par value $.10 per share. At December 31, 1993, total
paid-in capital amounted to $128,017,652.
5. Reverse Repurchase Agreements:
Under a reverse repurchase agreement, the Fund sells securities
and agrees to repurchase them at a mutually agreed upon date and
price. At the time the Fund enters into a reverse repurchase
agreement, it may establish a segregated account with the
custodian containing cash, cash equivalents or liquid high grade
debt securities having a value at least equal to the repurchase
price.
<PAGE>
As of December 31, 1993, the Fund had entered into reverse
repurchase agreements in the amount of $67,842,000. For the year
ended December 31, 1993, the maximum amount entered into was
$70,559,000, the average outstanding was $54,104,591, and the
daily weighted average interest rate was 3.76%.
<AUDIT-REPORT>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
Income Opportunities Fund 2000, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital of Income Opportunities Fund 2000, Inc., including
the schedule of investments, as of December 31, 1993, and the
related statements of operations and cash flows for the year then
ended and the statements of changes in net assets and the
financial highlights for the year then ended and for the period
from November 27, 1992 (commencement of operations) to December
31, 1992. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is
to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements and financial highlights are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of
securities owned as of December 31, 1993 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 2000, Inc. at
December 31, 1993, the results of its operations and its cash
flows for the year then ended, the changes in its net assets and
the financial highlights for the year then ended and for the
period from November 27, 1992 to December 31, 1992, in conformity
with generally accepted accounting principles.
(Ernst & Young)
New York, New York
February 14, 1994
</AUDIT-REPORT>
