INCOME
OPPORTUNITIES
FUND 2000, INC.
FUND LOGO
Semi-Annual Report
June 30, 1996
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. Statements and other
information herein are as dated and are subject to change.
The Fund has leveraged its Common Stock to provide Common Stock
shareholders with a potentially higher rate of return. Leverage
creates risk for Common Stock's yield.
<PAGE>
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
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Terry K. Glenn, Executive Vice President
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
Ira P. Shapiro, Secretary
Custodian and Transfer Agent
The Bank of New York
90 Washington Street
New York, New York 10286
NYSE Symbol
IFT
<PAGE>
DEAR SHAREHOLDER
For the six-month period ended June 30, 1996, 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 5.77%, based on a month-end net
asset value of $9.55 per share. Over the same period, the Fund's
total investment return was -0.24%, based on a change in per share
net asset value from $9.83 to $9.55, and assuming reinvestment of
$0.229 per share income dividends.
Economic Environment
During the six-month period ended June 30, 1996, there was a marked
change in the investor outlook on interest rates. From early March,
when non-farm payroll was announced with an expansion of 705,000 new
jobs, to early May, when gross domestic product growth was reported
at 2.8%, investor anticipation of two more interest rate cuts in
1996 shifted to pricing in two interest rate increases. Even after
these numbers were revised to 509,000 and 2.2%, respectively,
conventional wisdom was that the Federal Reserve Board would tighten
credit in an effort to slow economic growth and control inflation.
The reversal in outlook and the magnitude of the change was
dramatic.
In our December 31, 1995 annual report to shareholders, we said that
the industrial sector was mired in near-recessionary conditions as
reflected in the National Association of Purchasing Managers Index
remaining below 50 for seven of the last eight months of 1995. A
level below 50 indicates a contracting manufacturing sector.
However, the May 1, 1996 release was 50.1, and the July 1, 1996
release was 54.3, portending better days ahead.
The Index of Leading Economic Indicators (LEI), as reported in the
December shareholder report, has been predicting a recession for
some time. However, this forecast has apparently changed. In April,
LEI reported a positive 1.3% and remained positive for the May, June
and July 1, 1996 releases. Also, consumer confidence was 104.8 in
April, the highest level since early 1990. This indicates that the
consumer is likely to continue to spend even though the rate of
consumer credit growth is high and the consumer debt/disposable
income ratio has never been greater.
Although the economy is picking up and inflation concerns exist, so
far actual inflation has been quite muted. As measured by the
Consumer Price Index, inflation has been below 3% for a prolonged
period of time. The Producer Price Index shows inflation to be even
slower. This suggests that there can be growth without corresponding
inflation and that current interest rate levels may be higher than
necessary.
<PAGE>
Portfolio Strategy
1995 was a strong bull market for fixed-income investments,
evidenced by the Fund's total investment return of +23.42% for the
year. However, interest rates have moved higher thus far in 1996.
The two-year Treasury note yield increased 100 basis points (1.00%)
to end the June period at 6.15%. The ten-year Treasury note yield
moved from 5.57% to 6.74%, an increase of 117 basis points. The
increase in interest rates resulted in a decline in the Fund's net
asset value.
Fortunately, short-term interest rates have been relatively stable.
The three-month Treasury bill increased only 13 basis points during
the June quarter. This helped stabilize our borrowing costs. With
high cost borrowings from early 1995 maturing, our total borrowing
costs have moved lower. As a result, the Fund is earning income in
excess of its distribution rate. For the first half of 1996, our
earning rate exceeded the distribution rate by 78 basis points. This
provides a cushion for our distribution rate should short-term
interest rates move higher in the second half of 1996. More
important, it allows for strategies that will help our net asset
value recovery program. One such strategy would be to purchase
additional municipal securities where the tax-exempt income could be
retained to increase the Fund's net asset value.
Although the Fund's net asset value has declined thus far in 1996 in
response to higher interest rates, our primary focus continues to be
for the return of $10.00 per share on the Fund's termination date.
As such, we continue to structure the portfolio to limit cash flows
beyond the Fund's maturity, which helps us avoid sales at the then-
prevailing market rates. Also, for securities that mature, the
unrealized loss that exists today will diminish as we approach the
maturity date.
Finally, we continue the Fund's program to buy back shares when the
stock price is at a discount to the net asset value. This increases
the net asset value as the discount on the shares repurchased
accrues to the Fund.
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, 1996
<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 Rate* AAA Aaa $ 9,763,667 Prudential Home Mortgage Securities
Mortgage- Company, Inc., REMIC (5) 93-25-A1,
Backed 7.897% due 6/01/2023 $ 9,998,165 $ 9,946,736 8.9%
Obligations**--
Constant
Maturity
Treasury
Indexed
Obligations
Adjustable Rate* A++ A-++++ 1,779,833 Resolution Trust Corp., REMIC (5)
Mortgage-Backed 91-M4-B, 7.437% due 2/25/2020 1,805,709 1,803,471 1.6
Obligations**-- Ryland Trust, REMIC (5):
London AA++ Aa2 7,000,000 92-9-B, 7.979% due 7/25/2022 7,066,498 7,013,125 6.3
Interbank AA++ Aa2 7,000,000 92-10-B, 7.987% due 8/25/2022 7,069,684 7,013,125 6.3
Offered Sears Mortgage Securities Corp.,
Rate REMIC (5):
Indexed AAA Aaa 3,614,830 91-M-A2, 6.687% due 11/25/2021 3,651,043 3,556,089 3.2
Obligations AAA Aaa 2,490,613 92-18-A2, 7.372% due 9/25/2022 2,544,452 2,514,351 2.2
AAA Aa2 3,039,430 92-2-A1, 7.444% due 12/25/2024 3,124,039 3,028,982 2.7
------------ ------------ ------
25,261,425 24,929,143 22.3
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 35,259,590 34,875,879 31.2
</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>
Fixed Rate AAA AAA++ $ 6,602 Capstead Securities Corporation IV,
Mortgage- CMO (4) 92-12-B, 8.325%
Backed due 11/25/2005 (a) $ 6,791 $ 6,585 0.0%
Obligations** AAA AA++ 3,000,000 DLJ Mortgage Acceptance Corp.,
REMIC (5) 93-MF7-A2, 7.95%
due 6/18/2001 3,174,176 3,000,000 2.7
AAA AAA 15,000,000 Debartolo Corp., A2, 7.48%
due 5/15/2001++++++ 15,585,907 15,206,250 13.6
NR+++ NR+++ 6,686,000 Federal Home Loan Mortgage
Association, REMIC (5)(1)
1589-D, 6.25% due 10/15/2024 (d) 6,691,829 6,355,879 5.7
Federal National Mortgage
Association, Pool (1):
NR+++ NR+++ 12,000,000 #160160, 7.778% due 6/30/2001 12,940,982 12,375,000 11.1
NR+++ NR+++ 3,823,746 #73046, 7.60% due 10/25/2001 3,785,508 3,900,221 3.5
NR+++ NR+++ 5,510,415 #73059, 8.375% due 12/01/2001 5,510,415 5,637,844 5.1
Federal National Mortgage
Association, REMIC (5)(1):
NR+++ NR+++ 5,000,000 92-122-PG, 7.50% due 12/01/1998 (b) 5,049,428 5,035,950 4.5
NR+++ NR+++ 4,515,519 94-M2-A, 6.625% due 2/25/2001 4,337,015 4,446,703 4.0
NR+++ NR+++ 13,143,866 G-92-39-Z, 7% due 10/25/2016 (d) 13,191,853 12,745,344 11.4
Kidder Peabody Acceptance Corp.,
REMIC (5):
NR+++ AAA++ 5,000,000 93-M2-A, 6.05% due 8/01/2003++++++ 4,650,000 4,823,440 4.3
AA++++ Aa2 3,581,135 93-M1-A2, 7.15% due 4/25/2025 (d) 3,565,643 3,455,795 3.1
Resolution Trust Corporation,
REMIC (5):
AA AA+++ 4,408,072 93-C2-B, 7.75% due 7/01/2000 (b) 4,584,332 4,408,072 3.9
AAA AA+++ 1,196,953 92-C5-B, 6.90% due 5/25/2002 (b) 1,203,284 1,178,998 1.1
AA AA+++ 1,653,413 92-CHF-B, 7.15% due 12/25/2020 (b) 1,671,384 1,651,863 1.5
AAA Aa2 285,193 92-C5-A1C, 7.85% due 5/25/2022 (a) 284,523 284,124 0.3
A+++++ A2 2,842,477 92-C7-B, 7.15% due 6/25/2023 (b) 2,871,640 2,842,477 2.5
AA++++ Aa2 839,707 92-C7-A1C, 7.90% due 6/25/2023 (a) 828,658 836,558 0.8
A2 AA++++ 647,618 92-C6-B, 7.70% due 7/25/2024 (b) 662,127 648,428 0.6
AA+++ Aa2 9,000,000 Salomon Brothers Mortgage
Securities VII, Inc., REMIC (5)
93-C1-A2, 6.90% due 1/18/2023 (c) 9,034,849 9,087,210 8.1
AA++ Aa2 5,000,000 Town & Country Funding Corporation,
CMO (4), 5.85% due 8/15/1998 4,988,200 4,826,563 4.3
AAA AAA++++ 11,025,000 Vornado Finance Corp., CMO (4),
6.36% due 12/01/2000++++++ 9,980,621 10,697,695 9.6
Total Investments in Fixed Rate
Mortgage-Backed Obligations 114,599,165 113,450,999 101.7
<PAGE>
Derivative AAA AAA++ 61,866,241 Fund America Investors
Mortgage- Corporation II, CMO (4) 93-E-SIO,
Backed 0.50% due 9/25/2023 889,458 347,997 0.4
Obligations**-- AAA++++ AAA 29,702,572 Mortgage Capital Fund Inc.,
Interest REMIC (5) 94-MC1-I1, 1.044%
Only (2) due 6/25/2019 712,046 501,231 0.4
------------ ------------ ------
1,601,504 849,228 0.8
Derivative Federal Home Loan Mortgage
Mortgage- Corporation, REMIC (5):
Backed NR+++ NR+++ 86,094 1330-I, 9.695% due 9/15/1999 81,359 79,637 0.1
Obligations**-- NR+++ NR+++ 3,625,143 1743-S, 6.15% due 8/15/2001 (1) 3,043,987 3,176,531 2.8
Inverse NR+++ NR+++ 9,150,000 Federal National Mortgage
Floaters (3) Association, REMIC (5) 93-227-S,
4.317% due 12/25/2000 6,567,281 7,418,454 6.6
------------ ------------ ------
9,692,627 10,674,622 9.5
Total Investments in Derivative
Mortgage-Backed Obligations 11,294,131 11,523,850 10.3
Total Investments in Mortgage-
Backed Obligations 161,152,886 159,850,728 143.2
US Government NR+++ NR+++ 1,000,000 US Treasury Notes, 5.875% due
Obligations 6/30/2000 973,740 980,620 0.9
Total Investments in US Government
Obligations 973,740 980,620 0.9
Short-Term Repurchase 1,155,000 Nikko Securities International,
Securities Agreements*** Inc., purchased on 6/28/1996 to
yield 5.45% to 7/01/1996 1,155,000 1,155,000 1.0
US Government & 10,000 US Treasury Bills, 5.22% due
Agency 7/25/1996 9,967 9,969 0.1
Obligations****
Total Investments in Short-Term
Securities 1,164,967 1,164,969 1.1
Total Investments $163,291,593 161,996,317 145.2
============
Interest Rate Swaps (198,200) (0.2)
Liabilities in Excess of Other Assets (50,199,698) (45.0)
------------ ------
Net Assets $111,598,419 100.0%
============ ======
<PAGE>
<FN>
Average life estimates are made using realistic prepayment assumptions.
Corresponding average life estimates for bonds are as follows:
(a)0-1 years.
(b)1-2 years.
(c)2-4 years.
(d)4-6 years.
*Adjustable Rate Mortgage-Backed Obligations have coupon rates which
reset periodically to reflect changes in a referenced interest rate.
**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.
****Certain US Government & Agency Obligations are traded on a
discount basis; the interest rate shown is the discount rate paid at
the time of purchase by the Fund.
(1)Security represents collateral in connection with Reverse
Repurchase Agreements (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)Collateralized Mortgage Obligation (CMO).
(5)Real Estate Mortgage Investment Conduits (REMICs) are identified
by the year created, series issued and the particular tranche.
+++Not Rated.
++Rating of issue is by Fitch Investors Service.
++++Rating of issue is by Duff & Phelps.
++++++Restricted security as to resale. The value of the Fund's
investments in restricted securities was approximately $30,727,000,
representing 27.5% of net assets.
Acquisition Value
Issue Date(s) Cost (Note 1a)
Debartolo Corp., A2, 7.48% 2/27/1995-
due 5/15/2001 2/09/1996 $15,585,907 $15,206,250
Kidder Peabody Acceptance
Corp., REMIC 93-M2-A,
6.05% due 8/01/2003 4/11/1995 4,650,000 4,823,440
Vornado Finance Corp.,
CMO, 6.36% due 12/01/2000 12/22/1994 9,980,621 10,697,695
Total $30,216,528 $30,727,385
=========== ===========
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of June 30, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$163,291,593) (Note 1a) $161,996,317
Cash 158
Receivables:
Interest $ 968,127
Principal paydowns 27,472 995,599
------------
Deferred organization expenses (Note 1e) 20,570
Prepaid expenses and other assets 9,681
------------
Total assets 163,022,325
------------
Liabilities: Interest rate swaps, at value (Notes 1b & 3) 198,200
Payables:
Reverse repurchase agreements (Note 5) 49,190,750
Securities purchased 975,175
Interest expense (Note 5) 815,701
Investment adviser (Note 2) 46,792
Capital shares repurchased 44,460 51,072,878
------------
Accrued expenses and other liabilities 152,828
------------
Total liabilities 51,423,906
------------
Net Assets: Net assets $111,598,419
============
Capital: Capital stock, $0.10 par value, 200,000,000 shares authorized $ 1,168,943
Paid-in capital in excess of par 111,994,605
Undistributed investment income--net 2,979,500
Accumulated realized capital losses on investments--net (Note 6) (3,051,153)
Unrealized depreciation on investments--net (1,493,476)
------------
Net assets--Equivalent to $9.55 per share based on 11,689,427
shares outstanding (market price--$8.50) $111,598,419
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended June 30, 1996
<S> <S> <C> <C>
Investment Interest and amortization of premium and discount earned $ 5,819,775
Income
(Note 1d):
Expenses: Interest expense (Note 5) $ 1,591,909
Investment advisory fees (Note 2) 314,345
Accounting services (Note 2) 46,904
Professional fees 40,233
Trustees' fees and expenses 19,953
Transfer agent fees 15,978
Printing and shareholder reports 15,250
Custodian fees 9,651
Amortization of organization expenses (Note 1e) 5,534
Other 23,809
------------
Total expenses 2,083,566
------------
Investment income--net 3,736,209
------------
Realized & Unreal- Realized gain on investments--net 3,313,521
ized Gain (Loss) Change in unrealized appreciation/depreciation on investments--net (8,167,948)
on Investments ------------
(Notes 1b, 1d & 3): Net Decrease in Net Assets Resulting from Operations $ (1,118,218)
============
See Notes to Financial Statements.
</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, 1996 Dec. 31, 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 3,736,209 $ 7,365,846
Realized gain on investments--net 3,313,521 402,360
Change in unrealized appreciation/depreciation on investments--net (8,167,948) 14,796,756
------------ ------------
Net increase (decrease) in net assets resulting from operations (1,118,218) 22,564,962
------------ ------------
Dividends to Investment income--net (2,716,152) (6,821,103)
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends to shareholders (2,716,152) (6,821,103)
------------ ------------
Capital Stock Net decrease in net assets derived from capital stock transactions (3,895,706) (6,293,869)
Transactions ------------ ------------
(Note 4):
Net Assets: Total increase (decrease) in net assets (7,730,076) 9,449,990
Beginning of period 119,328,495 109,878,505
------------ ------------
End of period* $111,598,419 $119,328,495
============ ============
<FN>
*Undistributed investment income--net $ 2,979,500 $ 1,959,443
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Six Months Ended June 30, 1996
<S> <S> <C> <C>
Cash Provided by Net decrease in net assets resulting from operations $ (1,118,218)
Operating Adjustments to reconcile net decrease in net assets resulting
Activities: from operations to net cash provided by operating activities:
Decrease in receivables 165,636
Decrease in other liabilities (708,122)
Realized and unrealized loss on investments--net 4,854,427
Amortization of premium and discount 372,275
------------
Net cash provided by operating activities 3,565,998
------------
Cash Provided by Proceeds from principal payments and sales of long-term securities 86,128,595
Investing Purchases of long-term securities (77,468,108)
Activities: Purchases of short-term investments. (66,149,000)
Proceeds from sales and maturities of short-term investments 64,994,000
------------
Net cash provided by investing activities 7,505,487
------------
Cash Used for Cash receipts from borrowings 40,192,938
Financing Cash payments on borrowings (44,072,438)
Activities: Dividends paid to shareholders (3,274,420)
Cash payments on capital shares repurchased (4,017,806)
------------
Net cash used for financing activities (11,171,726)
------------
Cash: Net decrease in cash (100,241)
Cash at beginning of period 100,399
------------
Cash at end of period $ 158
============
Cash Flow Cash paid for interest $ 2,305,726
Information: ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the
The following per share data and ratios have For the Period
been derived from information provided Six Months Nov. 27,
in the financial statements. Ended For the Year Ended 1992++ to
June 30, December 31, Dec. 31,
Increase (Decrease) in Net Asset Value: 1996+++++ 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.83 $ 8.51 $ 10.00 $ 9.64 $ 9.50
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .32 .60 .64 .69 .04
Realized and unrealized gain (loss) on
investments--net (.37) 1.27 (1.50) .36 .12
-------- -------- -------- -------- --------
Total from investment operations (.05) 1.87 (.86) 1.05 .16
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.23) (.55) (.63) (.63) --
Realized gain on investments--net -- -- --++++ (.06) --
-------- -------- -------- -------- --------
Total dividends and distributions to
Common Stock shareholders (.23) (.55) (.63) (.69) --
-------- -------- -------- -------- --------
Capital charge resulting from issuance of
Common Stock -- -- -- -- (.02)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.55 $ 9.83 $ 8.51 $ 10.00 $ 9.64
======== ======== ======== ======== ========
Market price per share, end of period $ 8.50 $ 8.75 $ 7.375 $ 9.25 $ 10.00
======== ======== ======== ======== ========
Total Investment Based on market price per share (.25%)+++ 26.77% (13.91%) (.64%) .00%+++
Return:** ======== ======== ======== ======== ========
Based on net asset value per share (.24%)+++ 23.42% (8.11%) 11.43% 1.47%+++
======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement and excluding
Net Assets: interest expense. .86%* .89% .90% .85% 1.10%*
======== ======== ======== ======== ========
Expenses, net of interest expense .86%* .89% .90% .95% 1.85%*
======== ======== ======== ======== ========
Expenses 3.64%* 3.90% 3.05% 2.46% 1.90%*
======== ======== ======== ======== ========
Investment income--net 6.53%* 6.34% 6.79% 6.84% 4.46%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $111,603 $119,328 $109,879 $135,050 $130,259
Data: ======== ======== ======== ======== ========
Portfolio turnover 42.90% 32.78% 109.96% 129.32% 27.94%
======== ======== ======== ======== ========
Leverage: Amount of borrowings, end of period
(in thousands) $ 49,191 $ 53,070 $ 55,195 $ 67,842 $ 29,105
======== ======== ======== ======== ========
Average amount of borrowings outstanding
during the period (in thousands) $ 57,094 $ 56,355 $ 61,771 $ 54,105 $ 5,821
======== ======== ======== ======== ========
Average amount of borrowings outstanding
per share during the period $ 4.13 $ 4.50 $ 4.68 $ 4.00 $ 0.43
======== ======== ======== ======== ========
<PAGE>
<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.
+++++Based on average shares outstanding during the period.
++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 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--The Fund is authorized to purchase and write call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Interest rate transactions--The Fund is authorized to enter into
interest rate swaps and purchase or sell interest rate caps and
floors. In an interest rate swap, the Fund exchanges with another
party their respective commitments to pay or receive interest on a
specified notional principal amount. The purchase of an interest
rate cap (or floor) entitles the purchaser, to the extent that a
specified index exceeds (or falls below) a predetermined interest
rate, to receive payments of interest equal to the difference
between the index and the predetermined rate on a notional principal
amount from the party selling such interest rate cap (or floor).
<PAGE>
(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. 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., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.55% 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.
During the six months ended June 30, 1996, the Fund paid Merrill
Lynch Security Pricing Service, an affiliate of Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), $75 for security price
quotations to compute the net asset value of the Fund.
Accounting services are provided to the Fund by FAM at cost.
<PAGE>
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended June 30, 1996 were $73,449,533 and
$86,137,462, respectively.
Net realized and unrealized gains (losses) as of June 30, 1996 were
as follows:
Realized Unrealized
Gains Gains (Losses)
Long-term investments $ 3,293,581 $(1,295,278)
Short-term investments -- 2
Interest rate swaps -- (198,200)
Financial futures contracts 19,940 --
----------- -----------
Total $ 3,313,521 $(1,493,476)
=========== ===========
The Fund has entered into the following interest rate swaps as of
June 30, 1996:
<TABLE>
Notional Interest Received Interest Paid Expiration
Amount Current Rate Type Current Rate Type Date
<C> <C> <C> <C> <C> <C>
$10,000,000 5.226% Fixed 5.5391% Variable* 3-5 Years
<FN>
*3-Month LIBOR.
</TABLE>
As of June 30, 1996, net unrealized depreciation for Federal income
tax purposes aggregated $1,295,276, of which $2,293,204 related to
appreciated securities and $3,588,480 related to depreciated
securities. The aggregate cost of investments at June 30, 1996 for
Federal income tax purposes was $163,291,593.
<PAGE>
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, 1996, total paid-in capital
amounted to $113,163,548.
During the six months ended June 30, 1996, the Fund repurchased
448,800 shares of capital stock, at an average market price of
$8.68, 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 June 30, 1996, the Fund had entered into reverse repurchase
agreements in the amount of $49,190,750. For the six months ended
June 30, 1996, the maximum amount entered into was $84,406,500; the
average outstanding was approximately $57,094,000; and the daily
weighted average interest rate was 5.62%.
6. Capital Loss Carryforward:
At December 31, 1995, the Fund had a net capital loss carryforward
of approximately $6,361,000, of which $6,156,000 expires in 2002 and
$205,000 expires in 2003. This amount will be available to offset
like amounts of any future taxable gains.
7. Subsequent Event:
On July 11, 1996, 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, 1996 to shareholders of
record as of July 22, 1996.