INCOME
OPPORTUNITIES
FUND 2000, INC.
FUND LOGO
Annual Report
December 31, 1994
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
<PAGE>
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.
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 and Transfer Agent
The Bank of New York
90 Washington Street
New York, New York 10286
NYSE Symbol
IFT
Important Tax
Information
(unaudited)
Income Opportunities Fund 2000, Inc. declared the following long-
term capital gains distributions during the taxable year ended
December 31, 1994.
Long-Term Capital
Record Payable Gain Distribution
Date Date Per Share
12/12/94 12/31/94 $.000936
Please retain this information for your records.
DEAR SHAREHOLDER
For the year ended December 31, 1994, Income Opportunities Fund
2000, Inc. earned $0.624 per share income dividends, which included
earned and unpaid dividends of $0.051. This represents a net annu-
alized yield of 7.33%, based on a month-end net asset value of $8.51
per share. Over the same period, the Fund's total investment return
was -8.11%, based on a decline in per share net asset value from
$10.00 to $8.51, and assuming reinvestment of $0.624 per share
income dividends and $0.001 per share capital gains distributions.
Economic Environment
Despite six short-term interest rate increases by the Federal
Reserve Board, the US economy was strong throughout 1994. During the
first three quarters of the year gross domestic product growth
averaged 3.8%, fourth-quarter estimates are as high as 4.5%. This
growth rate suggests building inflationary pressures, and the
Federal Reserve Board continued its anti-inflation stance by
tightening monetary policy on February 1, 1995 at the Federal Open
Market Committee meeting.
<PAGE>
Looking ahead into 1995, the economic outlook is less certain.
Consumer spending is the linchpin for a strong economy. Although the
Consumer Confidence Index is at a four-year high and unemployment is
down, trends in the consumer sector are not all clearly positive.
Total consumer debt outstanding has continually increased throughout
1994, savings continue at a low level and wage increases have been
moderate. Although retail sales increased for most of 1994, results
for the all-important holiday season were lower than expected.
Higher short-term interest rates will put added pressure on the
consumer. This is especially true for those with adjustable rate
mortgages, since most homeowners' rates will increase by the annual
adjustment limit of 200 basis points (2.00%). It remains to be seen
whether the economy is on the verge of slowing down or whether
further short-term interest rate increases will be necessary as 1995
progresses to dampen inflationary pressures.
Investment Activities
To say that 1994 was a difficult year for fixed-income investments
is a tremendous understatement: it was the worst year for the bond
market in over 50 years. After reaching 30-year lows in interest
rates in 1993, short-term interest rates rose 350 basis points in
1994 while long-term interest rates rose 150 basis points. These
interest rate movements translated into total rates of return on 30-
year, 10-year and two-year US Treasury securities of -11.92%, -7.85%
and +0.38%, respectively. In this environment, the Fund's total
return for the year was -8.11%.
For a fund that utilizes leverage, such as ours, the decline in the
bond market had an exaggerated effect. First, leverage enables the
Fund to purchase more securities, so there are more issues in the
portfolio that experience price declines. Second, borrowings must be
renewed at a higher and higher cost. Borrowing costs (which are
pegged to LIBOR, the London Interbank Offering Rate) have increased
dramatically. At the beginning of 1994, six-month LIBOR was 3.50%.
By mid-year, it had increased to 5.25%, and by the end of 1994 six-
month LIBOR was at 7.00%. Yields on the Fund's leveraged assets
could not keep pace with such dramatic rate increases, especially
since they occurred in such a short time span. (For a complete
description of the potential benefits and risks of leverage, see
page 1 of this report to shareholders.)
At the same time, the Fund's adjustable rate assets were impacted by
the inherent lag as yields adjust upward and interim caps on rate
increases. Furthermore, our short-term investments have yet to reach
maturity. This has caused a squeeze on the portfolio's earnings.
Continued dividend payments in excess of taxable income would put
additional pressure on the objective of seeking to return $10.00 per
share to shareholders on the Fund's maturity. After the close of the
December reporting period, the Board of Directors approved a
reduction in the Fund's dividend to 5.00%, based on the Fund's
initial maximum offering price of $10.00 per share.
<PAGE>
Looking ahead, it appears that at least for the first half of 1995
there will be additional upward pressure on short-term interest
rates. This pressure should continue to depress the Fund's yield as
borrowing costs are somewhat more sensitive to changes in interest
rates than the Fund's investments. However, when the economy finally
slows and short-term interest rates stabilize, the yield on the
portfolio should move higher.
Most of the decline in the Fund's net asset value for the year is
from unrealized losses. Since most of the portfolio is scheduled to
mature prior to the Fund's termination date, most of these
unrealized losses should be recovered. However, since mortgage
prepayments have slowed so dramatically, some securities have
established cash flows beyond the Fund's termination date.
Therefore, these securities as well as the longer maturities will be
subject to pricing at the then-prevailing interest rate levels. In
addition, if securities with unrealized capital losses are sold to
increase portfolio yield or to raise cash reserves, the losses
become realized and make it more difficult for the Fund to return
$10.00 per share to shareholders upon the termination date.
Share Repurchases
On July 13, 1994 the Fund's Board of Directors authorized the Fund
to begin purchasing up to 10% of its shares outstanding as of that
date, in accordance with the conditions specified by applicable law.
As of December 31, the Fund had acquired 597,400, or 4.4%, of its
outstanding shares.
As we look toward the Fund's termination date, we focus on the
Fund's per share net asset value. As noted in our last report to
shareholders, and as reported below, the Fund began to repurchase up
to 10% of its outstanding shares in August. These repurchases both
support the market price of the Fund's shares and increase their net
asset value as the discount on the shares repurchased accrues to the
Fund. Thus far, most shares have been repurchased with normal
principal and interest cash flows from our investments, and few
securities sales have been necessary. Nevertheless, most of the
potential benefit to net asset value to date has been offset with
additional realized losses taken on securities in an effort to
increase the portfolio's yield and reduce our exposure to securities
that mature beyond the life of the Fund. The dramatic flattening of
the yield curve, especially the narrowing of yield spreads between
five-year and 30-year maturities, afforded an opportunity to shorten
maturities without a yield concession.
<PAGE>
Turning to the Fund's investments in derivative securities, as of
December 31, 0.72% of the Fund's total assets was invested in
interest only (IO) securities and 6.40% was in inverse floating rate
(IF) securities. The IFs are all based on seven-year "balloon"
mortgages. We purchased most of these at large discounts, which
assures a minimum return even if the coupon declines to 0% and
prepayments stop completely. While these securities do add some
volatility to the portfolio's yield, we believe that under a worst-
case scenario their yields are comparable to the yield on the
securities sold.
In Conclusion
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
January 27, 1995
<PAGE>
<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 AA Aaa $ 10,000,000 Prudential Home Mortgage Securities
Rate* Mortgage Company, Inc., REMIC (c) 93-25-A1, 6.528%
- -Backed due 6/01/2023 $ 10,342,132 $ 10,150,000 9.2%
Obligations**--
Constant
Maturity
Treasury
Indexed
Obligations
Adjustable Rate* A++ AA-++++ 2,598,071 Resolution Trust Corp., REMIC (c) 1991-
Mortgage-Backed M4, 7.625% due 2/25/2020 2,636,699 2,578,992 2.3
Obligations**-- Ryland Trust, REMIC (c):
London AA Aa2 7,000,000 92-9-B, 6.249% due 7/25/2022 (1) 7,067,095 6,881,875 6.3
Interbank AA Aa2 7,000,000 92-10-B, 6.42% due 8/25/2022 7,070,358 6,886,250 6.3
Offered Rate Sears Mortgage Securities Corp.,
Indexed REMIC (c):
Obligations AAA Aaa 5,028,521 91-M-A2, 6.327% due 11/25/2021 5,079,963 5,003,378 4.6
AAA Aaa 3,747,106 92-18-A2, 6.853% due 9/25/2022 3,829,407 3,697,339 3.4
AAA Aa2 4,443,554 92-2-A1, 7.702% due 12/25/2024 4,569,225 4,437,999 4.0
------------ ------------ ------
30,252,747 29,485,833 26.9
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 40,594,879 39,635,833 36.1
<PAGE>
Fixed Rate AAA AAA++ 1,018,593 Capstead Securities Corporation IV,
Mortgage-Backed CMO (d) 92-12-B, 8.325% due 11/25/2005 1,050,711 1,020,503 0.9
Obligations** AAA AAA++ 4,483,858 Countrywide Funding Corp., REMIC (c)
94-10 A9, 6.00% due 5/25/2009 4,364,755 4,036,873 3.7
NR+++ NR+++ 6,686,000 Federal Home Loan Mortgage Association,
REMIC (c) 93-1589-D, 6.25% due
10/15/2024 (1) 6,691,988 5,848,161 5.3
Federal National Mortgage Association,
Pool:
NR+++ NR+++ 10,000,000 #160160, 7.778% due 6/30/2001 (1) 10,075,377 9,721,875 8.9
NR+++ NR+++ 3,892,870 #073046, 7.60% due 10/25/2001 (1) 3,853,942 3,737,155 3.4
NR+++ NR+++ 5,565,000 #73059, 8.375% due 12/01/2001 5,565,000 5,571,956 5.1
Federal National Mortgage Association,
REMIC (c):
NR+++ NR+++ 11,837,355 G-92-39-Z, 7.00% due 10/25/2016 (1) 10,548,861 9,913,785 9.0
NR+++ NR+++ 6,849,272 92-185-Z, 7.00% due 6/25/2017 (1) 6,448,112 6,091,571 5.6
Kidder Peabody Acceptance Corp.,
REMIC (c):
AA++++ AA++++ 5,000,000 93-C1-A3, 6.80% due 9/01/2006 4,852,344 4,398,437 4.0
AA++++ Aa2 3,935,296 93-M1-A2, 7.15% due 4/25/2025 3,918,272 3,600,796 3.3
Resolution Trust Corporation,
REMIC (c):
AA+++++ A2 3,940,280 92-C7-B, 7.15% due 6/25/2023 3,981,415 3,762,967 3.4
AAA Aaa 1,032,597 92-C6-A1B, 7.50% due 7/25/2024 994,230 1,024,853 0.9
AAA Aa2 4,029,301 92-C5-A1C, 7.85% due 5/25/2022 4,023,005 4,001,599 3.6
AA++++ Aa2 4,891,891 92-C7-A1C, 7.90% due 6/25/2023 4,804,754 4,852,144 4.4
AAA Aa2 4,367,600 92-C4-A1A, 8.15% due 6/25/2024 4,365,554 4,319,830 3.9
AA++++ Aa2 5,000,000 Salomon Brothers Mortgage
Securities VII, Inc., REMIC (c)
93-C1-A2, 6.90% due 9/1/2013 (1) 5,145,179 4,846,563 4.4
NR+++ NR+++ 5,000,000 Town & Country Funding Corporation,
CMO (d) 5.85% due 8/15/1998 4,988,200 4,579,688 4.2
AAA AAA++++ 11,025,000 Vornado Finance Corp., CMO (d),
6.36% due 12/01/2000 9,980,621 9,912,164 9.0
Total Investments in Fixed Rate
Mortgage-Backed Obligations 95,652,320 91,240,920 83.0
Derivative AAA AAA++ 103,118,582 Fund America Investors Corporation
Mortgage-Backed II, CMO (d) 93-E-SIO, 0.50% due
Obligations**-- 9/25/2023 1,355,929 950,650 0.9
Interest AA++ AA++++ 5,000,000 Kidder Peabody Acceptance Corp.,
Only (2) REMIC (c) 93-C1-A3XP, 0.93% due
9/01/2006 273,933 263,000 0.2
------------ ------------ ------
1,629,862 1,213,650 1.1
<PAGE>
Derivative NR+++ NR+++ 2,956,796 Federal Home Loan Mortgage Corp-
Mortgage-Backed oration, REMIC (c) 1743-S, 6.30%
Obligations**-- due 8/15/2001 (1) 2,472,620 2,143,677 2.0
Inverse Federal National Mortgage Association,
Floaters (4) REMIC (c):
NR+++ NR+++ 9,150,000 93-227-S, 3.905% due 12/25/2000 (1) 6,567,281 6,067,594 5.5
NR+++ NR+++ 3,378,103 93-180-SB, 3.994% due 9/25/2000 (1) 2,685,592 2,508,242 2.3
------------ ------------ ------
11,725,493 10,719,513 9.8
Total Investments in Derivative
Mortgage-Backed Obligations 13,355,355 11,933,163 10.9
Total Investments in Mortgage-Backed
Obligations 149,602,554 142,809,916 130.0
Municipal AAA Aaa 1,000,000 El Paso, Texas, Independent School
Bonds District, Refunding
Revenue Bonds, 5.70% (3) due 7/01/2000 735,276 728,230 0.7
Maricopa County, Arizona, School
District No. 28,
Refunding Bonds, Second Series (b):
AAA Aaa 1,500,000 5.75% (3) due 1/01/2001 1,067,697 1,050,840 0.9
AAA Aaa 2,375,000 5.75% (3) due 7/01/2001 1,643,263 1,615,214 1.5
AAA Aaa 1,300,000 5.80% (3) due 1/01/2002 871,362 853,047 0.8
Metropolitan Pier and Exposition
Authority Illinois, Dedicated State
Tax Revenue Bonds (a):
AAA Aaa 2,750,000 5.70% (3) due 12/15/1999 2,080,883 2,069,457 1.9
AAA Aaa 3,700,000 5.95% (3) due 6/15/2000 2,687,625 2,689,937 2.4
AAA Aaa 7,455,000 5.95% (3) due 12/15/2000 5,258,754 5,263,752 4.8
Total Investments in Municipal Bonds 14,344,860 14,270,477 13.0
</TABLE>
<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+++ $ 10,000,000 US Treasury Note, 5.50% due
Obligations 4/15/2000 (1) $ 9,301,563 $ 8,995,300 8.2%
Total Investments in US Government
Obligations 9,301,563 8,995,300 8.2
<PAGE>
Short-Term Repurchase 225,000 Nomura Holdings Inc., purchased
Securities Agreements*** on 12/30/1994 to yield 6.15% to
1/03/1995 225,000 225,000 0.2
Total Investments in Short-Term
Securities 225,000 225,000 0.2
Total Investments $173,473,977 166,300,693 151.4
============
Interest Rate Swaps (949,000) (0.9)
Liabilities in Excess of Other
Assets (55,473,188) (50.5)
------------ ------
Net Assets $109,878,505 100.0%
============ ======
<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 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 Reverse Repurchase
Agreements.
(2)Represents the interest only portion of a mortgage-backed obligation.
(3)Represents the approximate yield to maturity.
(4)Instruments with variable or floating interest rates that move in
the opposite direction of short-term interest rates.
(a)AMBAC Insured.
(b)FGIC Insured.
(c)Real Estate Mortgage Investment Conduits (REMICs) 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.
Ratings of issues shown have not been audited by Ernst & Young LLP.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of December 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$173,473,977) (Note 1a) $166,300,693
Cash 116,285
Receivables:
Interest $ 1,114,052
Principal paydowns 20,307 1,134,359
------------
Deferred organization expense (Note 1e) 31,357
Prepaid expenses and other assets 7,067
------------
Total assets 167,589,761
------------
Liabilities: Interest rate swaps, at value (Notes 1b & 3) 949,000
Payables:
Reverse repurchase agreements (Note 5) 55,195,125
Dividends to shareholders (Note 1f) 671,173
Interest expense (Note 5) 541,523
Capital shares repurchased 203,307
Investment adviser (Note 2) 55,534 56,666,662
------------
Accrued expenses and other liabilities 95,594
------------
Total liabilities 57,711,256
------------
Net Assets: Net assets $109,878,505
============
<PAGE>
Capital: Capital stock, $.10 par value, 200,000,000 shares authorized $ 1,291,313
Paid-in capital in excess of par 122,094,890
Undistributed investment income--net 1,381,619
Accumulated realized capital losses--net (6,767,033)
Unrealized depreciation on investments--net (8,122,284)
------------
Net assets--Equivalent to $8.51 per share based on 12,913,127 shares
outstanding (market price--$7.375) $109,878,505
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended December 31, 1994
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 11,711,188
(Note 1d): Other 410,186
------------
Total income 12,121,374
------------
Expenses: Interest expense (Note 5) $ 2,645,524
Investment advisory fees (Note 2) 796,456
Accounting services (Note 2) 82,429
Professional fees 61,995
Directors' fees and expenses 39,851
Printing and shareholder reports 36,498
Transfer agent fees 32,137
Custodian fees 16,331
Amortization of organization expenses (Note 1e) 10,787
Other 37,665
------------
Total expenses 3,759,673
------------
Investment income--net 8,361,701
------------
<PAGE>
Realized & Realized loss on investments--net (6,764,900)
Unrealized Change in unrealized appreciation on investments--net (13,768,093)
Loss on ------------
Investments Net Decrease in Net Assets Resulting from Operations $(12,171,292)
(Notes 1d ============
& 3):
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended December 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 8,361,701 $ 9,328,199
Realized gain (loss) on investments--net (6,764,900) 464,448
Change in unrealized appreciation on investments--net (13,768,093) 4,395,423
------------ ------------
Net increase (decrease) in net assets resulting from operations (12,171,292) 14,188,070
------------ ------------
Dividends & Investment income--net (8,356,840) (8,490,177)
Distributions to Realized gain on investments--net (12,209) (906,692)
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends and
distributions to shareholders (8,369,049) (9,396,869)
------------ ------------
Capital Share Net decrease in net assets derived from capital share transactions (4,631,449) --
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (25,171,790) 4,791,201
Beginning of year 135,050,295 130,259,094
------------ ------------
End of year* $109,878,505 $135,050,295
============ ============
<FN>
*Undistributed investment income--net $ 1,381,619 $ 1,376,758
============ ============
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Year Ended December 31, 1994
<S> <S> <C>
Cash Provided by Net decrease in net assets resulting from operations $(12,171,292)
Operating Adjustments to reconcile net decrease in net assets resulting from
Activities: operations to net cash provided by operating activities:
Decrease in receivables 332,620
Decrease in other assets 14,906
Increase in other liabilities 44,219
Realized and unrealized loss on investments--net 20,532,993
Amortization of premium and discount (487,969)
------------
Net cash provided by operating activities 8,265,477
------------
Cash Provided by Termination of swap transactions (3,726,534)
Investing Proceeds from principal payments and sales of long-term securities 234,429,652
Activities: Proceeds from futures transactions 26,596
Purchases of long-term securities (214,077,123)
Purchases of short-term investments (504,306,425)
Proceeds from sales and maturities of short-term investments 505,035,000
------------
Net cash provided by investing activities 17,381,166
------------
Cash Used for Cash payments on capital shares repurchased (4,428,142)
Financing Repayments of borrowings--net (12,646,875)
Activities Dividends paid to shareholders (8,485,986)
------------
Net cash used for financing activities (25,561,003)
------------
Cash: Net increase in cash 85,640
Cash at beginning of year 30,645
------------
Cash at end of year $ 116,285
============
Cash Flow Cash paid for interest $ 2,531,089
Information: ============
<PAGE>
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. For the Year Ended Nov. 27, 1992++
December 31, to Dec. 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 10.00 $ 9.64 $ 9.50
Operating ---------- ---------- ----------
Performance: Investment income--net .64 .69 .04
Realized and unrealized gain (loss) on
investments--net (1.50) .36 .12
---------- ---------- ----------
Total from investment operations (.86) 1.05 .16
---------- ---------- ----------
Less dividends and distributions:
Investment income--net (.63) (.63) --
Realized gain on investments--net --++++ (.06) --
---------- ---------- ----------
Total dividends and distributions to Common
Stock shareholders (.63) (.69) --
---------- ---------- ----------
Capital charge resulting from issuance of
Common Stock -- -- (.02)
---------- ---------- ----------
Net asset value, end of period $ 8.51 $ 10.00 $ 9.64
========== ========== ==========
Market price per share, end of period $ 7.375 $ 9.25 $ 10.00
========== ========== ==========
Total Investment Based on market price per share (13.91%) (.64%) (.00%)+++
Return:** ========== ========== ==========
Based on net asset value per share (8.11%) 11.43% 1.47%+++
========== ========== ==========
Ratios to Average Expenses, net of reimbursement++++++ .90% .85% 1.10%*
Net Assets: ========== ========== ==========
Expenses++++++ .90% .95% 1.85%*
========== ========== ==========
Interest expense 2.15% 1.51% .05%
========== ========== ==========
Investment income--net 6.79% 6.84% 4.46%*
========== ========== ==========
<PAGE>
Supplemental Net assets, end of period (in thousands) $ 109,879 $ 135,050 $ 130,259
Data: ========== ========== ==========
Portfolio turnover 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.
++++++Net of interest expense.
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, 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 market. 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--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 (or cost) of the security sold (or
purchased). 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.
* Interest rate swaps--Agreements to exchange the Fund's interest
rate payments for fixed or variable rate payments on the notional
principal amount.
(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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
(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 and offering expenses--Deferred
organization expenses are amortized on a straight-line basis over a
five-year period. Direct expenses relating to the public offering of
the Common Stock were charged to capital at the time of issuance.
(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) Reclassification--Certain 1993 amounts have been reclassified to
conform to the 1994 presentation.
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 and 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 0.75% of
the Fund's average weekly net assets from November 27, 1993 through
January 18, 1994, 0.65% of average weekly assets from January 19,
1994 to December 1, 1994, 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. For the year ended December 31, 1994, FAM earned fees
of $796,456.
<PAGE>
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.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1994 were $208,928,590 and
$234,360,213, respectively.
Net realized and unrealized gains (losses) as of December 31, 1994
were as follows:
Realized
Gains Unrealized
(Losses) Losses
Long-term investments $ (3,047,462) $ (7,173,284)
Interest rate swaps (3,726,534) (949,000)
Financial futures contracts 9,096 --
------------ ------------
Total $ (6,764,900) $ (8,122,284)
============ ============
The Fund has entered into the following interest rate swaps as of
December 31, 1994:
Notional Interest Received Interest Paid Expiration
Amount Current Rate Type Current Rate Type Date
$10,000,000 5.1686% Fixed 6.3125% Variable* 3-5 years
[FN]
*3-month LIBOR.
As of December 31, 1994, net unrealized depreciation for Federal
income tax purposes aggregated $7,228,284, of which $92,278 related
to appreciated securities and $7,320,562 related to depreciated
securities. The aggregate cost of investments at December 31, 1994
for Federal income tax purposes was $173,528,977.
<PAGE>
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, 1994, total paid-in
capital amounted to $123,386,203.
During the year, the Fund repurchased 597,400 shares of capital
stock, at an average market price of $7.75, all of which have been
retired.
5. Reverse Repurchase Agreements:
Under a reverse repurchase agreement, the Fund sells securities and
agrees to repurchase them at a mutually agreed upon date and price.
At the time the Fund enters into a reverse repurchase agreement, it
may establish a segregated account with the custodian containing
cash, cash equivalents or liquid high grade debt securities having
a value at least equal to the repurchase price.
As of December 31, 1994, the Fund had entered into reverse
repurchase agreements in the amount of $55,195,125 and the weighted
average interest rate was 5.72%. For the year ended December 31,
1994, the maximum amount entered into was $69,311,400, the average
outstanding was $61,770,506, and the daily weighted average interest
rate was 4.29%.
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 February 6, 1995, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.045833 per share, payable on February 28, 1995 to shareholders
of record as of February 17, 1995.
<AUDIT-REPORT>
REPORT OF INDEPENDENT AUDITORS
<PAGE>
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, 1994, 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 the financial highlights for each of the
periods 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.
Our procedures included confirmation of securities owned as of
December 31, 1994 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, 1994, 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 financial highlights for
each of the indicated periods, in conformity with generally accepted
accounting principles.
(Ernst and Young LLP)
New York, New York
February 2, 1995
</AUDIT-REPORT>
<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 Quarter Income (Losses) (Losses) Common Gains
<S> <C> <C> <C> <C> <C>
January 1, 1993 to March 31, 1993 $.15 $ .03 $ .22 $.11 --
April 1, 1993 to June 30, 1993 .21 .04 .09 .18 --
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 --++
<CAPTION>
Net Asset Value Market Price**
For the Quarter High Low High Low Volume***
<S> <C> <C> <C> <C> <C>
January 1, 1993 to March 31, 1993 $10.02 $9.65 $10.125 $9.375 668
April 1, 1993 to June 30, 1993 10.10 9.94 10.00 9.375 1,079
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
<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>
<PAGE>
