INCOME
OPPORTUNITIES
FUND 2000, INC.
FUND LOGO
Semi-Annual Report
June 30, 1995
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.
<PAGE>
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.
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.
<PAGE>
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
Custodian and Transfer Agent
The Bank of New York
90 Washington Street
New York, New York 10286
NYSE Symbol
IFT
DEAR SHAREHOLDER
For the six-month period ended June 30, 1995, Income Opportunities
Fund 2000, Inc. earned $0.275 per share income dividends, which
included earned and unpaid dividends of $0.046 per share. This
represents a net annualized yield of 5.81%, based on a month-end net
asset value of $9.54 per share. Over the same period, the Fund's
total investment return was +15.33%, based on a change in per share
net asset value from $8.51 to $9.54, and assuming reinvestment of
$0.229 per share income dividends.
<PAGE>
Economic Environment
In the first quarter of 1995, investor concerns focused on an
overheating economy. Unemployment was down to 5.4% and consumer
confidence was at a high level. Commodity prices were increasing and
capacity utilization was running at a 15-year high. Although the
actual rate of inflation remained at 2.4%, as measured by the change
in consumer prices in 1994, inflationary concerns prevailed. The
Federal Reserve Board had increased short-term interest rates seven
times since February 1994 in a series of preemptive strikes against
inflation. There was additional pressure to increase interest rates
to support the US dollar, which had declined significantly relative
to many currencies, most notably the yen and the Deutschemark. The
consensus was that more interest rate increases were inevitable in
1995.
However, economic releases in the second quarter of 1995 indicated
that US economic activity may finally be slowing. With a significant
decline in the National Association of Purchasing Managers Index and
an employment report indicating a sharp cut in manufacturing jobs,
concerns arose that the planned orchestration of a "soft landing"
for the economy could turn into a recession. First-quarter gross
domestic product growth was reported at 2.7%, and forecasts for the
second quarter are flat to negative. The Index of Leading Economic
Indicators fell for the third consecutive month, a phenomenon which
has occurred prior to all nine recessions since World War II, but
which has not always been followed by a recession. Consumer
confidence dropped sharply in June. Investors began to anticipate an
interest rate cut by the Federal Reserve Board (which took place on
July 6), as illustrated by the inversion in the short-term end of
the yield curve, with one-month interest rates higher than 12-month
interest rates.
Portfolio Matters
The past several years have been a volatile period for investing in
mortgage-backed securities (MBS). The declines in interest rates in
the early 1990s were so great that it became extremely difficult to
manage the call risk inherent in most MBS. The Mortgage Bankers
Association Refinance Index peaked in 1993 as 30-year fixed-rate
mortgages fell to 6.50% and adjustable rate mortgages were 3.50%.
High-yielding, premium-priced MBS prepaid at par and reinvestment
rates were unattractive.
<PAGE>
In 1994, we experienced the worst bond market on record. While the
Fund experienced substantial price declines, most of its investments
mature near its termination date, so some significant recovery in
net asset value was to be expected. However, the real difficulty was
the increase in borrowing costs. Although the Fund's leveraged
portfolio was invested primarily in adjustable rate mortgage
securities (ARMS) and other short-duration assets, the ARMS were
hampered by interim rate adjustment caps. The Fund's net asset value
declined and dividend cuts were necessary, one which took place in
mid-1994 and another effective in early 1995. In addition, a share
repurchase program was initiated, since the Fund's shares were
trading on the New York Stock Exchange at a significant discount to
net asset value. While this repurchase program not only helped
support market price, the discount on the shares repurchased also
increased the Fund's net asset value.
At this time, interest rates are again declining. As of June 30,
1995, yields on five-year and ten-year Treasury securities have
declined 186 basis points (1.86%) and 161 basis points,
respectively. However, although the 12-month London Interbank
Offered Rate (LIBOR) is 175 basis points below its 1994 high, one-
month LIBOR remains within 6 basis points of its 1994 high.
Therefore, the Fund's borrowing costs remain high and there is
little prospect of an in-crease in the Fund's dividend rate.
The recent decline in interest rates does not materially expose the
Fund to prepayment risk. Many of the restructuring trades of 1994
purchased discount securities or commercial/multi-family securities
(or both) with prepayment penalties.
Our primary focus continues to be to return $10.00 per share at the
Fund's termination date. Therefore, we are structuring the portfolio
to limit cash flows beyond 2000 to avoid sales at the then-
prevailing market rates. Municipal securities continue to provide
tax-exempt income to the Fund, which is retained to increase net
asset value. The share repurchase program continues to contribute to
net asset value recovery.
Our secondary concern is dividend yield. The greatest negative
impact on the Fund's yield is its borrowing costs. If the Federal
Reserve Board continues to reduce interest rates in the second half
of 1995, we may see a corresponding decline in borrowing costs. We
will not sacrifice the overall quality of the portfolio to seek to
increase dividend yield. As of June 30, the majority of the Fund's
holdings were primarily US Government agency securities and
securities in the two highest Standard & Poor's Corp. or Moody's
Investors Service, Inc. rating categories. Therefore, we expect
that borrowing costs must decline before the Fund's yield will
increase appreciably.
<PAGE>
In Conclusion
We thank you for your continued 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
July 31, 1995
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value Percent of
Rating Rating Amount Issue Cost (Note 1a) Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
Adjustable Rate* AA Aaa $ 10,000,000 Prudential Home Mortgage
Mortgage-Backed Securities Company, Inc., REMIC
Obligations**-- (c) 93-25-A1, 6.981% due
Constant Maturity 6/01/2023 $ 10,307,146 $ 10,150,000 8.5%
Treasury Indexed
Obligations
<PAGE>
Adjustable Rate* A++ A-++++ 2,355,226 Resolution Trust Corp., REMIC (c)
Mortgage-Backed 91-M4-B, 8.125% due 2/25/2020 2,390,046 2,338,666 2.0
Obligations**-- Ryland Trust, REMIC (c):
London Interbank AA Aa2 7,000,000 92-9-B, 7.248% due 7/25/2022 7,066,998 7,056,875 6.0
Offered Rate AA Aa2 7,000,000 92-10-B, 7.422% due 8/25/2022 7,070,262 7,050,312 5.9
Indexed Sears Mortgage Securities
Obligations Corp., REMIC (c):
AAA Aaa 4,593,317 91-M-A2, 7.375% due 11/25/2021 4,640,082 4,547,384 3.8
AAA Aaa 3,622,752 92-18-A2, 6.848% due 9/25/2022 3,701,815 3,637,469 3.1
AAA Aa2 4,145,457 92-2-A1, 8.998% due 12/25/2024 4,262,734 4,202,457 3.5
------------ ------------ ------
29,131,937 28,833,163 24.3
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 39,439,083 38,983,163 32.8
Fixed Rate AAA AAA++ 677,079 Capstead Securities Corporation
Mortgage-Backed IV, CMO (d) 92-12-B, 8.325% due
Obligations** 11/25/2005 697,794 675,597 0.6
AAA AAA++ 4,274,341 Countrywide Funding Corp.,
REMIC (c)94-10 A9, 6% due
5/25/2009 4,160,804 4,138,097 3.5
AAA AAA 5,000,000 Debartolo Corp., A2, 7.48%
due 5/01/2015 4,945,313 5,181,250 4.4
Federal Home Loan Mortgage
Association, REMIC (c) (1):
NR+++ NR+++ 5,000,000 1224-F, 6.80% due 8/15/2005 5,022,609 5,017,187 4.2
NR+++ NR+++ 6,686,000 1589-D, 6.25% due 10/15/2024 6,691,936 6,485,420 5.5
Federal National Mortgage
Association, Pool (1):
NR+++ NR+++ 12,000,000 #160160, 7.778% due 6/30/2001 12,080,148 12,684,375 10.7
NR+++ NR+++ 3,870,840 #073046, 7.60% due 10/25/2001 3,832,131 4,003,900 3.4
NR+++ NR+++ 5,547,644 #73059, 8.375% due 12/01/2001 5,547,644 5,901,306 5.0
Federal National Mortgage
Association, REMIC (c) (1):
NR+++ NR+++ 3,907,856 94-M2-A, 6.625% due 2/25/2001 3,695,366 3,898,086 3.3
NR+++ NR+++ 12,257,752 G-92-39-Z, 7% due 10/25/2016 10,969,257 11,847,853 10.0
NR+++ NR+++ 7,092,520 92-185-Z, 7% due 6/25/2017 6,691,360 6,986,132 5.9
Kidder Peabody Acceptance
Corp., REMIC (c):
NR+++ AAA++ 5,000,000 93-M2-A, 6.05% due 8/01/2003 4,650,000 4,826,565 4.1
AA++++ Aa2 3,912,575 93-M1-A2, 7.15% due 4/25/2025 3,895,650 3,874,672 3.3
Resolution Trust Corporation,
REMIC (c):
AAA Aa2 3,020,145 92-C5-A1C, 7.85% due 5/25/2022 3,013,051 2,999,382 2.5
AA+++++ A2 3,601,810 92-C7-B, 7.15% due 6/25/2023 3,639,203 3,563,541 3.0
AA++++ Aa2 3,625,867 92-C7-A1C, 7.90% due 6/25/2023 3,561,281 3,612,270 3.0
AAA Aa2 3,283,768 92-C4-A1A, 8.15% due 6/25/2024 3,282,229 3,329,946 2.8
AAA Aaa 656,764 92-C6-A1B, 7.50% due 7/25/2024 632,361 651,633 0.5
NR+++ NR+++ 5,000,000 Town & Country Funding Corporation,
CMO (d), 5.85% due 8/15/1998 4,988,200 4,874,219 4.1
AAA AAA++++ 11,025,000 Vornado Finance Corp., CMO (d),
6.36% due 12/01/2000 9,980,621 10,832,062 9.1
Total Investments in Fixed Rate
Mortgage-Backed Obligations 101,976,958 105,383,493 88.9
<PAGE>
Derivative AAA AAA++ 95,462,862 Fund America Investors Corporation
Mortgage-Backed II, CMO (d) 93-E-SIO, 0.50% due
Obligations**-- 9/25/2023 1,214,923 805,516 0.7
Interest Only (2) AAA++++ AAA 37,869,484 Mortgage Capital Fund Inc.,
REMIC (c) 94-MC1-I1, 1.044% due
6/25/2019 954,971 976,323 0.8
------------ ------------ ------
2,169,894 1,781,839 1.5
Derivative Federal Home Loan Mortgage
Mortgage-Backed Corporation, REMIC (c):
Obligations**-- NR+++ NR+++ 86,094 1330-I, 7.770% due 9/15/1999 81,359 81,359 0.1
Inverse NR+++ NR+++ 786,725 1566-SB, 3.12% due 9/15/2000 613,645 613,645 0.5
Floaters (3) NR+++ NR+++ 3,892,077 1743-S, 4.65% due 8/15/2001 (1) 3,268,128 3,438,407 2.9
NR+++ NR+++ 9,150,000 Federal National Mortgage
Association, REMIC (c) 93-227-S,
2.873% due 12/25/2000 (1) 6,567,281 7,354,312 6.2
------------ ------------ ------
10,530,413 11,487,723 9.7
Total Investments in Derivative
Mortgage-Backed Obligations 12,700,307 13,269,562 11.2
Total Investments in
Mortgage-Backed Obligations 154,116,348 157,636,218 132.9
Municipal Bonds AAA Aaa 1,000,000 El Paso, Texas, Independent
School District, Refunding
Revenue Bonds, 5.70% (4) due
7/01/2000 755,395 776,910 0.6
Maricopa County, Arizona, School
District No. 28, Refunding Bonds,
Second Series (b):
AAA Aaa 1,500,000 5.75% (4) due 1/01/2001 1,098,389 1,130,250 1.0
AAA Aaa 2,375,000 5.75% (4) due 7/01/2001 1,690,502 1,744,129 1.5
Metropolitan Pier and Exposition
Authority Illinois, Dedicated State
Tax Revenue Bonds (a):
AAA Aaa 2,750,000 5.70% (4) due 12/15/1999 2,139,579 2,208,442 1.9
AAA Aaa 3,700,000 5.95% (4) due 6/15/2000 2,767,120 2,872,643 2.4
AAA Aaa 7,455,000 5.95% (4) due 12/15/2000 5,414,293 5,642,168 4.8
Total Investments in
Municipal Bonds 13,865,278 14,374,542 12.2
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
S&P Moody's Face Value Percent of
Rating Rating Amount Issue Cost (Note 1a) Net Assets
<S> <S> <S> <C> <S> <C> <C> <C>
US Government NR+++ NR+++ $ 2,500,000 US Treasury Note, 6.25%
Obligations due 5/31/2000 (1) $ 2,538,208 $ 2,526,550 2.1%
Total Investments in
US Government Obligations 2,538,208 2,526,550 2.1
Short-Term Repurchase 1,226,000 Nikko Securities, purchased
Securities Agreements*** on 6/30/1995 to yield 6.20%
to 7/03/1995 1,226,000 1,226,000 1.0
Total Investments in
Short-Term Securities 1,226,000 1,226,000 1.0
Total Investments $171,745,834 175,763,310 148.2
============
Interest Rate Swaps (233,000) (0.2)
Liabilities in Excess of
Other Assets (56,948,396) (48.0)
------------ ------
Net Assets $118,581,914 100.0%
============ ======
<PAGE>
<FN>
*Adjustable Rate Mortgage-Backed Obligations have coupon rates which
reset periodically.
**Mortgage-Backed Obligations are subject to principal paydowns as a
a result of prepayments or refinancings of the underlying mortgage
instruments. As a result, the average life may be substantially less
than the original maturity.
***Repurchase Agreements are fully collateralized by US Government &
Agency Obligations.
(1)Security represents collateral in connection with a Reverse
Repurchase Agreement (Note 5).
(2)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.
(3)Instruments with variable or floating interest rates that move in
the opposite direction of short-term interest rates.
(4)Represents the approximate yield to maturity.
(a)AMBAC Insured.
(b)FGIC Insured.
(c)Real Estate Mortgage Investment Conduits (REMIC) are identified
by the year created, series issued and the particular tranche.
(d)Collateralized Mortgage Obligation (CMO).
++Rating of issue is by Fitch Investors Service.
++++Rating of issue is by Duff & Phelps.
+++Not Rated.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of June 30, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$171,745,834) (Note 1a) $175,763,310
Receivables:
Securities sold $ 2,860,103
Interest 1,187,481
Principal paydowns 17,263 4,064,847
------------
Deferred organization expenses (Note 1e) 31,357
Prepaid expenses and other assets 7,067
------------
Total assets 179,866,581
------------
Liabilities: Interest rate swaps, at value (Notes 1b & 3) 233,000
Payables:
Reverse repurchase agreements (Note 5) 58,445,375
Securities purchased 1,524,185
Interest expense (Note 5) 792,319
Capital shares repurchased 92,675
Investment adviser (Note 2) 57,669 60,912,223
------------
Accrued expenses and other liabilities 139,444
------------
Total liabilities 61,284,667
------------
Net Assets: Net assets $118,581,914
============
Capital: Capital stock, $.10 par value, 200,000,000 shares authorized $ 1,243,383
Paid-in capital in excess of par 118,331,816
Undistributed investment income--net 2,165,812
Accumulated realized capital losses on investments--net (Note 6) (6,943,573)
Unrealized appreciation on investments--net 3,784,476
------------
Net assets--Equivalent to $9.54 per share based on
12,433,827 shares outstanding (market price--$8.25) $118,581,914
============
<PAGE>
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended June 30, 1995
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 5,945,363
(Note 1d):
Expenses: Interest expense (Note 5) $ 1,766,343
Investment advisory fees (Note 2) 312,330
Accounting services (Note 2) 50,192
Professional fees 40,046
Printing and shareholder reports 35,835
Transfer agent fees 20,502
Trustees' fees and expenses 12,462
Custodian fees 8,250
Amortization of organization expenses (Note 1e) 5,303
Other 18,837
------------
Total expenses 2,270,100
------------
Investment income--net 3,675,263
------------
Realized & Realized loss on investments--net (176,540)
Unrealized Gain Change in unrealized appreciation/depreciation on investments--net 11,906,760
(Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 15,405,483
(Notes 1d & 3): ============
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: June 30, 1995 Dec. 31, 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 3,675,263 $ 8,361,701
Realized loss on investments--net (176,540) (6,764,900)
Change in unrealized appreciation/depreciation on
investments--net 11,906,760 (13,768,093)
------------ ------------
Net increase (decrease) in net assets resulting from operations 15,405,483 (12,171,292)
------------ ------------
Dividends & Investment income--net (2,891,070) (8,356,840)
Distributions to Realized gain on investments--net -- (12,209)
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends and
distributions to shareholders (2,891,070) (8,369,049)
------------ ------------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (3,811,004) (4,631,449)
(Note 4): ------------ ------------
Net Assets: Total increase (decrease) in net assets 8,703,409 (25,171,790)
Beginning of period 109,878,505 135,050,295
------------ ------------
End of period* $118,581,914 $109,878,505
============ ============
<FN>
*Undistributed investment income--net $ 2,165,812 $ 1,381,619
============ ============
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
For the Six Months Ended June 30, 1995
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 15,405,483
Operating Adjustments to reconcile net increase in net assets
Activities: resulting from operations to net cash provided by
operating activities:
Increase in receivables (73,429)
Decrease in other liabilities 296,781
Realized and unrealized gain on investments--net (11,730,220)
Amortization of premium and discount (230,447)
------------
Net cash provided by operating activities 3,668,168
------------
Cash Provided by Proceeds from principal payments and sales of long-term securities 29,180,770
Investing Purchases of long-term securities (27,730,594)
Activities: Purchases of short-term investments (52,415,000)
Proceeds from sales and maturities of short-term investments 51,414,000
------------
Net cash provided by investing activities 449,176
------------
Cash Used for Repayments of borrowings--net 3,250,250
Financing Dividends paid to shareholders (3,562,243)
Activities: Cash payments on capital shares repurchased (3,921,636)
------------
Net cash used for financing activities (4,233,629)
------------
Cash: Net decrease in cash (116,285)
Cash at beginning of period 116,285
------------
Cash at end of period $ --
============
Cash Flow Cash paid for interest $ 1,515,547
Information: ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the For the
The following per share data and ratios have been Six Period
derived from information provided in the financial Months Nov. 27,
statements. Ended For the Year Ended 1992++ to
June 30, December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 8.51 $ 10.00 $ 9.64 $ 9.50
Operating -------- -------- -------- --------
Performance: Investment income--net .29 .64 .69 .04
Realized and unrealized gain (loss) on
investments--net .97 (1.50) .36 .12
-------- -------- -------- --------
Total from investment operations 1.26 (.86) 1.05 .16
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.23) (.63) (.63) --
Realized gain on investments--net -- --++++ (.06) --
-------- -------- -------- --------
Total dividends and distributions to Common
Stock shareholders (.23) (.63) (.69) --
-------- -------- -------- --------
Capital charge resulting from issuance of Common
Stock -- -- -- (.02)
-------- -------- -------- --------
Net asset value, end of period $ 9.54 $ 8.51 $ 10.00 $ 9.64
======== ======== ======== ========
Market price per share, end of period $ 8.25 $ 7.375 $ 9.25 $ 10.00
======== ======== ======== ========
Total Investment Based on market price per share 15.08%+++ (13.91%) (.64%) (.00%)+++
Return:** ======== ======== ======== ========
Based on net asset value per share 15.33%+++ (8.11%) 11.43% 1.47%+++
======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement and excluding
Net Assets: interest expense .89%* .90% .85% 1.10%*
======== ======== ======== ========
Expenses, excluding interest expense .89%* .90% .95% 1.85%*
======== ======== ======== ========
Expenses 4.00%* 3.05% 2.46% 1.90%*
======== ======== ======== ========
Investment income--net 6.47%* 6.79% 6.84% 4.46%*
======== ======== ======== ========
<PAGE>
Supplemental Net assets, end of period (in thousands) $118,582 $109,879 $135,050 $130,259
Data: ======== ======== ======== ========
Portfolio turnover 17.40% 109.96% 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, may result
in substantially different returns. Total investment returns exclude
the effects of sales loads.
+++Aggregate total investment return.
++Commencement of Operations.
++++Amount is less than $.01 per share.
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. 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 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, which approximates market value.
Any securities or other assets for which current market quotations
are not readily available are valued at their fair value as
determined in good faith by and under the direction of the Fund's
Board of Directors. Any securities denominated in a currency other
than US dollars will be translated into US dollars on the valuation
date.
<PAGE>
(b) 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.
* 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.
* 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).
NOTES TO FINANCIAL STATEMENTS (concluded)
Written and purchased options are non-income producing investments.
<PAGE>
* 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 be-
tween the index and the predetermined rate on a notional principal
amount from the party selling such interest rate cap (or floor).
(c) 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.
(d) 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.
(e) Deferred organization expenses--Deferred organization expenses
are amortized on a straight-line basis over a five-year period.
(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.
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. ("ML & Co."), which is the limited
partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.55% of
the Fund's average weekly net assets from December 1, 1994 to
December 1, 1997, and 0.30% of average weekly net assets from
December 1, 1997 through termination 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, Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), and/or ML & Co.
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended June 30, 1995 were $29,254,779 and
$32,037,829, respectively.
Net realized and unrealized gains (losses) as of June 30, 1995 were
as follows:
Realized Unrealized
Losses Gains (Losses)
Long-term investments $ (176,540) $ 4,017,476
Interest rate swaps -- (233,000)
------------ ------------
Total $ (176,540) $ 3,784,476
============ ============
The Fund has entered into the following interest rate swaps as of
June 30, 1995:
Notional Interest Received Interest Paid Expiration
Amount Current Rate Type Current Rate Type Date
$10,000,000 5.226% Fixed 5.9375% Variable* 3-5 years
[FN]
*3-month LIBOR at reset date.
As of June 30, 1995, net unrealized appreciation for Federal income
tax purposes aggregated $4,017,476, of which $5,375,591 related to
appreciated securities and $1,358,115 related to depreciated
securities. The aggregate cost of investments at June 30, 1995 for
Federal income tax purposes was $171,745,834.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
par value $.10 per share. At June 30, 1995, total paid-in capital
amounted to $119,575,199.
During the period, the Fund repurchased 479,300 shares of capital
stock, at an average market price of $7.89, all of which have been
retired.
<PAGE>
5. Reverse Repurchase Agreements:
Under a reverse repurchase agreement, the Fund sells securities and
agrees to repurchase them at a mutually agreed upon date and price.
At the time the Fund enters into a reverse repurchase agreement, it
may establish a segregated account with the custodian containing
cash, cash equivalents or liquid high grade debt securities having a
value at least equal to the repurchase price.
As of June 30, 1995, the Fund had entered into reverse repurchase
agreements in the amount of $58,445,375 and the weighted average
interest rate was 6.26%. For the six months ended June 30, 1995, the
maximum amount entered into was $62,399,000, the average outstanding
was $56,942,241, and the daily weighted average interest rate was
6.17%.
6. Capital Loss Carryforward:
At December 31, 1994, the Fund had a net capital loss carryforward
of approximately $6,149,000, all of which expires in 2002. This
amount will be available to offset like amounts of any future
taxable gains.
7. Subsequent Event:
On July 19, 1995, the Fund's Board of Directors declared an ordinary
income dividend to Common Stock shareholders in the amount of
$0.045833 per share, payable on July 31, 1995 to shareholders of
record as of July 21, 1995.
PER SHARE INFORMATION
<TABLE>
Per Share
Selected Quarterly
Financial Data*
<CAPTION>
Net Realized Unrealized Dividends/Distributions
Investment Gains Gains Net Investment Capital
For the Quarter Income (Losses) (Losses) Income Gains
<S> <C> <C> <C> <C> <C>
July 1, 1993 to September 30, 1993 $.16 $(.04) $ .24 $.11 $.06
October 1, 1993 to December 31, 1993 .17 -- (.22) .23 --
January 1, 1994 to March 31, 1994 .17 -- (.60) .11 --
April 1, 1994 to June 30, 1994 .14 (.44) (.10) .17 --
July 1, 1994 to September 30, 1994 .17 (.01) (.11) .15 --
October 1, 1994 to December 31, 1994 .16 (.04) (.20) .20 --++
January 1, 1995 to March 31, 1995 .14 (.02) .43 .09 --
April 1, 1995 to June 30, 1995 .15 .01 .55 .14 --
<PAGE>
<CAPTION>
Net Asset Value Market Price**
For the Quarter High Low High Low Volume***
<S> <C> <C> <C> <C> <C>
July 1, 1993 to September 30, 1993 $10.31 $9.96 $9.875 $9.50 1,745
October 1, 1993 to December 31, 1993 10.37 9.99 9.875 9.125 1,608
January 1, 1994 to March 31, 1994 10.18 9.44 9.375 8.375 1,332
April 1, 1994 to June 30, 1994 9.33 8.89 8.625 8.00 1,222
July 1, 1994 to September 30, 1994 9.09 8.78 8.375 7.75 1,519
October 1, 1994 to December 31, 1994 8.81 8.51 7.75 7.125 1,724
January 1, 1995 to March 31, 1995 9.01 8.49 7.75 7.375 1,079
April 1, 1995 to June 30, 1995 9.65 9.05 8.50 7.625 1,481
<FN>
*Calculations are based upon shares of Common Stock outstanding
at the end of each quarter.
**As reported in the consolidated transaction reporting system.
***In thousands.
++Amount is less than $.01 per share.
</TABLE>
