INCOME
OPPORTUNITIES
FUND 2000, INC.
FUND LOGO
Annual Report
December 31, 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. Statements and other
information herein are as dated and are subject to change.
The Fund has leveraged its Common Stock to provide Common Stock
shareholders with a potentially higher rate of return. Leverage
creates risk for Common Stock shareholders, including the likelihood
of greater 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.
<PAGE>
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.
<PAGE>
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
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
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 year ended December 31, 1995, Income Opportunities Fund
2000, Inc. earned $0.550 per share income dividends, which included
earned and unpaid dividends of $0.046. This represents a net
annualized yield of 5.60%, based on a month-end net asset value of
$9.83 per share. Over the same period, the Fund's total investment
return was +23.42%, based on an increase in per share net asset
value from $8.51 to $9.83, and assuming reinvestment of $0.550 per
share income dividends.
<PAGE>
Economic Environment
Economic data released during December 1995 indicated a slowing
economy. Gross domestic product (GDP) growth was forecast at 2.6%
for the year, and even slower in 1996. Retail sales for the holiday
period appeared weak, signaling a possible retrenchment by the
consumer. Consumer activity represents two thirds of the GDP, and
consumers are currently saddled with record levels of debt.
Leading economic indicators (LEI) were negative for seven of the
last nine months. During the one-year period ended December 31,
1995, LEI were negative for four consecutive months. In the June 30,
1995 shareholders' letter, we reported that negative LEI for three
consecutive months has been a predictor of all nine recessions since
World War II, but has also occurred three times when a recession did
not follow.
The National Association of Purchasing Managers (NAPM) Index surveys
purchasing managers for information relating to the manufacturing
sector. A rating below 50 indicates a contraction in the
manufacturing sector. The NAPM Index has been below 50 for seven of
the last eight months. In addition, housing starts continued to
decline since August 1995, even though the decline in interest rates
has meant very attractive mortgage financing. This, in turn, does
not bode well for durable good expenditures which turned negative in
October 1995.
The good news is that inflation remains well under control with the
Consumer Price Index (CPI) at 2.6% and slowing. In addition, the CPI
annualized rate was only 1.8% for the past six months. We expect the
Federal Reserve Board to look at the combination of slow growth and
low inflation, and it is likely to further reduce short-term
interest rates in its orchestration of a soft landing for the
economy.
Federal Reserve Board Chairman
Alan Greenspan appears intent on controlling inflation. Therefore,
with low inflation, real interest rates are high, especially at the
short end of the yield curve. Long-term interest rates are at
appropriate levels given the rate of inflation, but near term there
is uncertainty regarding the budget negotiations between Congress
and President Clinton, which may cause fluctuations within a trading
range.
Although 1996 may be a more temperate year for returns on fixed-
income investments, the expected steepening of the yield curve will
provide many opportunities. Also, there will be a greater focus on
yield and coupon flow, as these components will play a more
important role in investment returns.
<PAGE>
Investment Activities
1995 was a strong bull market for fixed-income securities. Yield
declines on the five-year Treasury note and 30-year Treasury bond
were 245 basis points (2.45%) and 193 basis points, respectively,
with year-end yields at 5.37% and 5.95%. This strong bull market was
evidenced by the Fund's total investment return of +23.42%. This
helps offset the impact of 1994--the worst bond market on record--
when the Fund's total investment return was -8.11%.
But 1995's rally still did not bring us back to the low interest
rates seen in late 1993. This is especially true for the short end
of the yield curve where the three-month Treasury bill only declined
61 basis points in 1995. While the ten-year Treasury note yield is
only 40 basis points above its 1993 low, the one-year Treasury bill
yield is 198 basis points over its 1993 low. This exemplifies the
flattening of the yield curve.
Although the general decline in interest rates during 1995 led to an
increase in the Fund's net asset value from $8.51 to $9.83, the
relatively high level of short-term interest rates kept borrowing
costs high, which subsequently hampered the portfolio yield and
dividend payout.
In 1996, we expect short-term interest rates to decline. This would
be beneficial to the Fund both in terms of yield and price
appreciation. The Fund's yield would benefit from a reduction in
borrowing costs. In addition, an interest rate decline would
generate higher coupons on the positions of inverse floating rate
securities backed by balloon mortgages. Finally, the interest rate
swap agreement--for which we pay a floating rate and collect a fixed
rate--would reset in the Fund's favor. However, the Fund's
adjustable rate assets would go down in coupon. In such a scenario,
likely price appreciation would come from the increased value of the
front loaded cash flows of mortgage-backed securities and from
"rolling down" the yield curve.
Our primary focus continues to be the return of $10.00 per share at
the Fund's termination date. Therefore, 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. Municipal
securities continued to provide tax-exempt income which is retained
to increase the net asset value. Also, we are in the process of
completing the Fund's second share repurchase program. These
repurchases, made when the stock price is 10% or more below the net
asset value, both supports the market price of the Fund's shares and
increases their net asset value as the discount on the shares
repurchased accrues to the Fund.
<PAGE>
As of December 31, 1995, 1.1% of the Fund's net assets were invested
in interest only securities and 9.7% was in inverse floating rate
(IF) securities. The IFs are all based on seven-year balloon
mortgages and were purchased at a large discount which assures a
minimum return even if the coupon declines to zero and mortgage
prepayments stop completely.
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
January 31, 1996
Proxy Results
During the six-month period ended December 31, 1995, Income
Opportunities Fund 2000, Inc. shareholders voted on the following
proposals. The proposals were approved at a special shareholders'
meeting on October 13, 1995. The description of each proposal and
number of shares voted are as follows:
<PAGE>
<TABLE>
<CAPTION>
Shares Voted Shares Voted
For Without Authority
<S> <S> <C> <C>
1. To elect the Fund's Board of Directors: Joe Grills 11,801,855 352,747
Walter Mintz 11,798,325 356,277
Melvin R. Seiden 11,801,855 352,747
Stephen B. Swensrud 11,801,855 352,747
Harry Woolf 11,785,157 369,445
Arthur Zeikel 11,799,055 355,547
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
2. To ratify the selection of Ernst & Young LLP as the independent auditors
of the Fund to serve for the current fiscal year. 11,719,860 180,474 254,268
</TABLE>
<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 Securities
Mortgage-Backed Company, Inc., REMIC (7) 93-25-A1,
Obligations**-- 8.40% due 7/25/2023 $ 10,271,568 $ 10,300,000 8.6%
Constant Maturity
Treasury Indexed
Obligations
Adjustable Rate* A++ A-++++ 2,130,339 Resolution Trust Corp., REMIC (7)
Mortgage-Backed 91-M4-B, 7.875% due 2/25/2020 2,161,598 2,098,383 1.8
Obligations**-- Ryland Trust, REMIC (7):
London Interbank AA++ Aa2 7,000,000 92-9-B, 7.193% due 7/25/2022 7,066,565 7,043,750 5.9
Offered Rate AA++ Aa2 7,000,000 92-10-B, 7.402% due 8/25/2022 7,069,840 7,043,750 5.9
Indexed Obligations Sears Mortgage Securities Corp.,
REMIC (7):
AAA Aaa 4,061,428 91-M-A2, 7.062% due 11/25/2021 4,102,477 3,990,353 3.3
AAA Aaa 2,915,587 92-18-A2, 7.583% due 9/25/2022 2,979,111 2,944,743 2.5
AAA Aa2 3,675,582 92-2-A1, 8.086% due 12/25/2024 3,778,826 3,682,473 3.1
------------ ------------ ------
27,158,417 26,803,452 22.5
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 37,429,985 37,103,452 31.1
<PAGE>
Fixed Rate AAA AAA++ 464,472 Capstead Securities Corporation IV,
Mortgage-Backed CMO (8) 92-12-B, 8.325% due
Obligations** 11/25/2005 (a) 478,234 466,794 0.4
AAA AAA++ 5,000,000 Debartolo Corp., A2, 7.48% due
5/01/2001++++++ 4,945,312 5,287,500 4.4
Federal Home Loan Mortgage
Association, REMIC (7)(1):
NR+++ NR+++ 5,000,000 1224-F, 6.80% due 8/15/2005 (b) 5,021,820 5,050,000 4.2
NR+++ NR+++ 6,686,000 1589-D, 6.25% due 10/15/2021 (d) 6,691,883 6,635,855 5.6
Federal National Mortgage
Association, Pool (1):
NR+++ NR+++ 12,000,000 #160160, 7.778% due 6/30/2001 12,074,800 12,963,750 10.9
NR+++ NR+++ 3,847,813 #073046, 7.60% due 10/01/2001 3,809,335 4,032,989 3.4
NR+++ NR+++ 5,529,462 #73059, 8.375% due 12/01/2001 5,529,462 5,857,774 4.9
Federal National Mortgage
Association, REMIC (7)(1):
NR+++ NR+++ 3,891,415 94-M2-A, 6.625% due 2/25/2001 3,679,819 3,886,551 3.3
NR+++ NR+++ 12,693,079 G-92-39-Z, 7% due 10/25/2016 (d) 11,404,584 12,673,151 10.6
NR+++ NR+++ 5,000,000 92-122-PG, 7.50% due 9/25/2017 (b) 5,060,790 5,065,625 4.3
Kidder Peabody Acceptance Corp.,
REMIC (7):
NR+++ AAA++ 5,000,000 93-M2-A, 6.05% due 8/01/2003++++++ 4,650,000 4,953,125 4.2
AA++ Aa2 3,655,775 93-M1-A2, 7.15% due 4/25/2025 (d) 3,639,961 3,692,333 3.1
Resolution Trust Corporation,
REMIC (7):
AAA++ Aa2 1,664,681 92-C5-A1C, 7.85% due 5/25/2022 (b) 1,660,770 1,670,403 1.4
AA+++++ A2 3,231,727 92-C7-B, 7.15% due 6/25/2023 (b) 3,265,084 3,257,985 2.7
AA++++ Aa2 2,632,852 92-C7-A1C, 7.90% due 6/25/2023 (a) 2,598,210 2,652,599 2.2
AA+++ Aa2 9,000,000 Salomon Brothers Mortgage Securities
VII, Inc., REMIC (7) 93-C1-A2, 6.90%
due 1/18/2023 (c) 9,035,075 9,022,500 7.6
AA++ Aa2 5,000,000 Town & Country Funding Corporation,
CMO (8), 5.85% due 8/15/1998 4,988,200 4,946,094 4.1
AAA AAA 11,025,000 Vornado Finance Corp., CMO (8), 6.36%
due 12/01/2000++++++ 9,980,621 11,128,359 9.3
Total Investments in Fixed Rate
Mortgage-Backed Obligations 98,513,960 103,243,387 86.6
Derivative AAA AAA 75,573,461 Fund America Investors Corporation
Mortgage-Backed II, CMO (8) 93-E-SIO, 0.50% due
Obligations**-- 9/25/2023 1,028,989 448,717 0.4
Interest Only (2) AAA++++ AAA 36,207,071 Mortgage Capital Fund Inc., REMIC (7)
94-MC1-I1, 1.028% due 6/25/2019 820,188 837,289 0.7
------------ ------------ ------
1,849,177 1,286,006 1.1
<PAGE>
Derivative Federal Home Loan Mortgage
Mortgage-Backed Corporation, REMIC (7):
Obligations**-- NR+++ NR+++ 86,094 1330-I, 8.47% due 9/15/1999 81,359 85,932 0.1
Inverse NR+++ NR+++ 3,746,358 1743-S, 5.10% due 8/15/2001 (1) 3,145,770 3,521,577 2.9
Floaters (3) NR+++ NR+++ 9,150,000 Federal National Mortgage
Association, REMIC (7) 93-227-S,
3.423% due 12/25/2000 (1) 6,567,281 8,052,000 6.7
------------ ------------ ------
9,794,410 11,659,509 9.7
Total Investments in Derivative
Mortgage-Backed Obligations 11,643,587 12,945,515 10.8
Total Investments in Mortgage-
Backed Obligations 147,587,532 153,292,354 128.5
Municipal Bonds AAA Aaa 1,000,000 El Paso, Texas, Independent
School District, Refunding
Revenue Bonds, 5.70% (4)
due 7/01/2000 775,945 820,740 0.7
Maricopa County, Arizona,
School District No. 28, Refunding
Bonds, Second Series (6):
AAA Aaa 1,500,000 5.75% (4) due 1/01/2001 1,129,792 1,206,840 1.0
AAA Aaa 2,375,000 5.75% (4) due 7/01/2001 1,738,835 1,857,107 1.6
Metropolitan Pier and Exposition
Authority, Illinois, Dedicated
State Tax Revenue Bonds (5):
AAA Aaa 2,750,000 5.70% (4) due 12/15/1999 2,200,297 2,319,460 1.9
AAA Aaa 3,700,000 5.95% (4) due 6/15/2000 2,849,467 3,041,992 2.6
AAA Aaa 7,455,000 5.95% (4) due 12/15/2000 5,575,414 5,981,594 5.0
Total Investments in
Municipal Bonds 14,269,750 15,227,733 12.8
US Government US Treasury Notes (1):
Obligations NR+++ NR+++ $ 5,000,000 5.25% due 12/31/1997 4,993,750 5,008,600 4.2
NR+++ NR+++ 3,000,000 5.875% due 8/15/1998 3,018,752 3,047,340 2.6
NR+++ NR+++ 2,000,000 5.875% due 6/30/2000 2,010,306 2,040,620 1.7
Total Investments in US
Government Obligations 10,022,808 10,096,560 8.5
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Amount Issue Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Short-Term 10,000 US Treasury Bills, 5.22% due
Securities 7/25/1996***(9) $ 9,715 $ 9,711 0.0%
Total Investments in Short-Term
Securities 9,715 9,711 0.0
Total Investments $171,889,805 178,626,358 149.8
============
Interest Rate Swaps (57,000) (0.1)
Variation Margin on Financial
Futures Contracts**** (4,331) (0.0)
Liabilities in Excess of Other Assets (59,236,532) (49.7)
------------ ------
Net Assets $119,328,495 100.0%
============ ======
<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.
***Certain US Government and Agency Obligations are traded on a
discount basis; the interest rates shown are the discount rates paid
at the time of purchase by the Fund.
****Financial Futures Contracts sold as of December 31, 1995 were as
follows:
<PAGE>
<CAPTION>
Number of Expiration Value
Contracts Issue Date (Note 1a)
10 Eurodollar June 1996 $9,493,000
Total Financial Futures Contracts Sold
(Total Contract Price--$9,487,919) $9,493,000
==========
(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)Represents the approximate yield to maturity.
(5)AMBAC Insured.
(6)FGIC Insured.
(7)Real Estate Mortgage Investment Conduits (REMICs) are identified
by the year created, series issued and the particular tranche.
(8)Collateralized Mortgage Obligation (CMO).
(9)Security represents collateral in connection with financial
futures contracts.
++Rating of issue is by Fitch Investors Service.
++++Rating of issue is by Duff & Phelps.
++++++Restricted security. The value of the Fund's investments in
restricted securities was approximately $21,369,000, representing
17.9% of net assets.
+++Not Rated.
Ratings of issues shown have not been audited by Ernst & Young LLP.
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
Debartolo Corp., A2, 7.48%
due 5/01/2004 2/27/1995 $ 4,945,312 $ 5,287,500
Kidder Peabody Acceptance
Corp., REMIC, 93-M2-A,
6.05% due 8/01/2003 4/11/1995 4,650,000 4,953,125
Vornado Finance Corp.,
CMO, 6.36% due 12/01/2000 12/22/1994 9,980,621 11,128,359
Total Restricted Securities $19,575,933 $21,368,984
=========== ===========
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<CAPTION>
As of December 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$171,889,805) (Note 1a) $178,626,358
Cash 100,399
Receivables:
Interest $ 1,133,763
Principal paydowns 6,995 1,140,758
------------
Deferred organization expenses (Note 1e) 20,570
Prepaid expenses and other assets 9,681
------------
Total assets 179,897,766
------------
Liabilities: Interest rate swaps, at value (Notes 1b & 3) 57,000
Payables:
Reverse repurchase agreements (Note 5) 53,070,250
Securities purchased 4,993,750
Interest expense (Note 5) 1,529,518
Dividends to shareholders (Note 1f) 558,268
Capital shares repurchased 166,560
Investment adviser (Note 2) 57,662
Variation margin (Note 1b) 4,331 60,380,339
------------
Accrued expenses and other liabilities 131,932
------------
Total liabilities 60,569,271
------------
Net Assets: Net assets $119,328,495
============
Capital: Capital stock, $0.10 par value, 200,000,000 shares authorized $ 1,213,803
Paid-in capital in excess of par 115,845,451
Undistributed investment income--net 1,959,443
Accumulated realized capital losses on investments--net (Note 6) (6,364,674)
Unrealized appreciation on investments--net 6,674,472
------------
Net assets--Equivalent to $9.83 per share based on 12,138,027
shares outstanding (market price--$8.75) $119,328,495
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended December 31, 1995
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 11,894,155
(Note 1d):
Expenses: Interest expense (Note 5) $ 3,496,916
Investment advisory fees (Note 2) 638,898
Accounting services (Note 2) 108,115
Professional fees 81,968
Printing and shareholder reports 74,698
Transfer agent fees 35,329
Trustees' fees and expenses 25,454
Custodian fees 16,986
Amortization of organization expenses (Note 1e) 10,787
Other 39,158
------------
Total expenses 4,528,309
------------
Investment income--net 7,365,846
------------
Realized & Unreal- Realized gain on investments--net 402,360
ized Gain on Change in unrealized appreciation/depreciation on investments--net 14,796,756
Investments ------------
(Notes 1b, 1d & 3): Net Increase in Net Assets Resulting from Operations $ 22,564,962
============
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended
December 31,
Increase (Decrease) in Net Assets: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 7,365,846 $ 8,361,701
Realized gain (loss) on investments--net 402,360 (6,764,900)
Change in unrealized appreciation/depreciation on invest-
ments--net 14,796,756 (13,768,093)
------------ ------------
Net increase (decrease) in net assets resulting from operations 22,564,962 (12,171,292)
------------ ------------
<PAGE>
Dividends & Investment income--net (6,821,103) (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 (6,821,103) (8,369,049)
------------ ------------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (6,293,869) (4,631,449)
(Note 4): ------------ ------------
Net Assets: Total increase (decrease) in net assets 9,449,990 (25,171,790)
Beginning of year 109,878,505 135,050,295
------------ ------------
End of year* $119,328,495 $109,878,505
============ ============
<FN>
*Undistributed investment income--net (Note 1g) $ 1,959,443 $ 1,381,619
============ ============
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Year Ended December 31, 1995
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 22,564,962
Operating Adjustments to reconcile net increase in net assets resulting from
Activities: operations to net cash provided by operating activities:
Increase in receivables (19,711)
Decrease in other assets 8,173
Increase in other liabilities 1,030,792
Realized and unrealized gain on investments--net (15,199,116)
Amortization of premium and discount (312,146)
------------
Net cash provided by operating activities 8,072,954
------------
<PAGE>
Cash Provided by Proceeds from principal payments and sales of long-term securities 58,100,756
Investing Purchases of long-term securities (51,017,136)
Activities: Purchases of short-term investments. (134,037,699)
Proceeds from sales and maturities of short-term investments 134,254,738
------------
Net cash provided by investing activities 7,300,659
------------
Cash Used for Repayments of borrowings--net (2,124,875)
Financing Dividends paid to shareholders (6,934,008)
Activities: Cash payments on capital shares repurchased (6,330,616)
------------
Net cash used for financing activities (15,389,499)
------------
Cash: Net decrease in cash (15,886)
Cash at beginning of year 116,285
------------
Cash at end of year $ 100,399
============
Cash Flow Cash paid for interest $ 2,508,921
Information: ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the
The following per share data and ratios have Period
been derived from information provided in Nov. 27,
the financial statements. For the Year Ended 1992++ to
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 .60 .64 .69 .04
Realized and unrealized gain (loss) on
investments--net 1.27 (1.50) .36 .12
-------- -------- -------- --------
Total from investment operations 1.87 (.86) 1.05 .16
-------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.55) (.63) (.63) --
Realized gain on investments--net -- --++++ (.06) --
-------- -------- -------- --------
Total dividends and distributions (.55) (.63) (.69) --
-------- -------- -------- --------
Capital charge resulting from issuance
of Common Stock -- -- -- (.02)
-------- -------- -------- --------
Net asset value, end of period $ 9.83 $ 8.51 $ 10.00 $ 9.64
======== ======== ======== ========
Market price per share, end of period $ 8.75 $ 7.375 $ 9.25 $ 10.00
======== ======== ======== ========
<PAGE>
Total Investment Based on market price per share 26.77% (13.91%) (.64%) .00%+++
Return:** ======== ======== ======== ========
Based on net asset value per share 23.42% (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, net of interest expense .89% .90% .95% 1.85%*
======== ======== ======== ========
Expenses 3.90% 3.05% 2.46% 1.90%*
======== ======== ======== ========
Investment income--net 6.34% 6.79% 6.84% 4.46%*
======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $119,328 $109,879 $135,050 $130,259
Data: ======== ======== ======== ========
Portfolio turnover 32.78% 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>
<PAGE>
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.
(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.
<PAGE>
* 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).
(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.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded)
(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--Generally accepted accounting principles
require that certain components of net assets be reclassified to
reflect permanent differences between financial reporting and tax
purposes. Accordingly, current year's permanent book/tax differences
of $33,081 have been reclassified from paid-in capital in excess of
par to undistributed net investment income. These reclassifications
have no effect on net assets or net asset value per share.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee at an annual rate of 0.55% 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.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1995 were $56,010,886 and
$58,087,444, respectively.
Net realized and unrealized gains (losses) as of December 31, 1995
were as follows:
<PAGE>
Realized Unrealized
Gains Gains (Losses)
Long-term investments $402,360 $6,736,557
Short-term investments -- (4)
Interest rate swaps -- (57,000)
Financial futures contracts -- (5,081)
-------- ----------
Total $402,360 $6,674,472
======== ==========
The Fund has entered into the following interest rate swaps as of
December 31, 1995:
Notional Interest Received Interest Paid Expiration
Amount Current Rate Type Current Rate Type Date
$10,000,000 5.226% Fixed 5.8731% Variable* 3-5 years
[FN]
*3-Month LIBOR.
As of December 31, 1995, net unrealized appreciation for Federal
income tax purposes aggregated $6,736,553, of which $7,801,041
related to appreciated securities and $1,064,488 related to
depreciated securities. The aggregate cost of investments at
December 31, 1995 for Federal income tax purposes was $171,889,805.
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, 1995, total paid-in
capital amounted to $117,059,254.
During the year, the Fund repurchased 775,100 shares of capital
stock, at an average market price of $8.12, 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 December 31, 1995, the Fund had entered into reverse
repurchase agreements in the amount of $53,070,250. For the year
ended December 31, 1995, the maximum amount of reverse repurchase
agreements outstanding was $62,399,000, the average amount outstanding
was $56,354,785, and the daily weighted average interest rate was 6.21%.
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 February 9, 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 February 29, 1996 to shareholders
of record as of February 20, 1996.
<AUDIT-REPORT>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors,
Income Opportunities Fund 2000, Inc.
We have audited the accompanying statement of assets, liabilities
and capital of Income Opportunities Fund 2000, Inc., including the
schedule of investments, as of December 31, 1995, and the related
statements of operations and cash flows for the year then ended, the
statements of changes in net assets for each of the two years in the
period then ended and financial highlights for each of the 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, 1995 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.
<PAGE>
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, 1995, the results of its operations and its cash flows
for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights
for each of the indicated periods, in conformity with generally
accepted accounting principles.
(Ernst & Young LLP)
Princeton, New Jersey
February 6, 1996
</AUDIT-REPORT>
PER SHARE INFORMATION (unaudited)
<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>
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 .15 (.02) .43 .09 --
April 1, 1995 to June 30, 1995 .15 .01 .55 .14 --
July 1, 1995 to September 30, 1995 .15 .01 .03 .14 --
October 1, 1995 to December 31, 1995 .15 .05 .21 .18 --
<PAGE>
<CAPTION>
Net Asset Value Market Price**
For the Quarter High Low High Low Volume***
<S> <C> <C> <C> <C> <C>
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
July 1, 1995 to September 30, 1995 9.69 9.46 8.50 8.00 1,362
October 1, 1995 to December 31, 1995 9.84 9.67 8.75 8.25 1,265
<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>
