INCOME
OPPORTUNITIES
FUND 2000, INC.
FUND LOGO
Annual Report
December 31, 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.
<PAGE>
The Fund has leveraged its Common Stock to provide Common Stock
shareholders with a potentially higher rate of return. Leverage
creates risk for Common Stock shareholders, including the likelihood
of greater volatility of net asset value and market price of Common
Stock shares, and the risk that fluctuations in short-term interest
rates may reduce the Common Stock's yield.
Income Opportunities
Fund 2000, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
INCOME OPPORTUNITIES FUND 2000, INC.
The Benefits and
Risks of
Leveraging
<PAGE>
Income Opportunities Fund 2000, Inc. is authorized to borrow funds
and utilize leverage in amounts not exceeding 33 1/3% of its total
assets (including the amount borrowed). The Fund's ability to
leverage creates an opportunity for increased net income, but, at
the same time, creates special risks. The Fund will only borrow or
use leverage when the Investment Adviser believes that it will
benefit the Fund. To the extent that the income derived from
securities purchased with borrowed funds exceeds the cost of
borrowing, the Fund's net income will be greater than if borrowing
had not been used.
Conversely, if the income from the securities purchased with
borrowed funds is not sufficient to cover the cost of borrowing, the
net income of the Fund will be less than if borrowing had not been
used, reducing the amount available for distribution to shareholders.
In this case, the Fund may nevertheless maintain its leveraged
position in order to avoid capital losses on securities
purchased with the leverage.
DEAR SHAREHOLDER
For the year ended December 31, 1996, Income Opportunities Fund
2000, Inc. earned $0.562 per share income dividends, which included
earned and unpaid dividends of $0.050. This represents a net
annualized yield of 5.70%, based on a month-end net asset value of
$9.87 per share. Over the same period, the Fund's total investment
return was +7.02%, based on a change in per share net asset value
from $9.83 to $9.87, and assuming reinvestment of $0.558 per share
income dividends.
Investment Activities
The Fund's total investment return for 1996 was +7.02%, including an
increase of $0.04 in net asset value. This follows a 1995 total
investment return of +23.42%. Significantly for 1996, the return was
accomplished during a period where interest rates increased
significantly. Although short-term interest rates were essentially
unchanged with three-month and six-month Treasury bills up just 11
basis points (0.11%) and 15 basis points, respectively; three-year,
five-year and ten-year Treasury notes were all up over 80 basis
points in yield. This equates to total returns for those securities
of just +4.21%, +2.43% and +0.07%, respectively.
The Fund outperformed the Treasury benchmarks for several reasons.
The Fund is primarily invested in mortgage-backed securities (MBS),
which have higher yields to compensate for the imbedded prepayment
risk. After interest rates increased, prepayments slowed reflecting
a reduced refinancing incentive. Therefore, the higher yield was
achieved without the negative impact of prepayments.
<PAGE>
Lessened prepayment concerns led to increased investor demand for
MBS. MBS offer both high quality and high yield to investors who
seek higher yields than those found in comparable Treasury and
corporate securities. This is especially true for commercial MBS
where cash flows are more predictable as prepaymentlockouts and
penalties protect against unwanted prepayments. The increased demand
for MBS led to a tightening in the Treasury/MBS yield spreads. In
terms of price movement, this is the equivalent to a decline in
interest rates.
Stable short-term interest rates also helped with the returns on the
derivative securities in the portfolio. The Inverse Floaters (IFs)
maintained their coupons as the benchmark London Interbank Offered
Rate Index did not materially change. As we discussed in previous
shareholder reports, our exposure to derivative products is fairly
limited. The IFs are backed by balloon mortgages that mature at
around the Fund's termination date. They were all purchased at
sizable discounts so that an attractive positive return is generated
even on the highly unlikely worst case scenario of zero coupon and
zero prepayments.
Leverage also contributed to return. Fortunately our conservative
strategy of investing borrowings in adjustable rate securities and
short-term maturities worked well in 1996 as returns for short-term
securities outpaced those of longer-term securities. Additionally,
borrowing costs remained stable. (For a complete discussion of the
benefits and risks of leverage, see page 1 of this report to
shareholders.) Finally, the share buy back program helped increase
the Fund's return as the discount between the net asset value and
the market price accrued to the Fund on the shares repurchased.
We are focusing on portfolio structure as 1997 begins. Our primary
investment strategy is to return to a $10.00 per share net asset
value. Therefore, the core portfolio continues to shift into
securities that offer an attractive yield and a more definitive cash
flow maturity structure. This helps limit the reinvestment risk on
cash flows that come in too early and the pricing risk on cash flows
that are beyond the life of the Fund.
Although the net asset value is our main focus, portfolio yield is
also important. While the Fund's dividend rate increased from 5.50%
to 6% in November, the actual earnings rate on the Fund's holdings
for 1996 was 6.24%. Short-term borrowing rates remained fairly
stable for most of 1996, and, if this continues, the excess earnings
rate should continue into early 1997. This will offer some
protection against some unforeseen rise or other unforeseen adverse
circumstances in borrowing costs. In the absence of such a rise, an
upward adjustment to the dividend may be warranted sometime in 1997.
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.
<PAGE>
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
January 30, 1997
As of December 31, 1996, N. John Hewitt retired as Senior Vice
President of the Fund. His colleagues at Merrill Lynch Asset
Management, L.P. join the Fund's Board of Directors in wishing Mr.
Hewitt well in his retirement.
Proxy Results
<TABLE>
During the six-month period ended November 30, 1996, Income
Opportunities Fund 2000, Inc. stockholders voted on the following
proposals. The proposals were approved at the annual stockholders'
meeting on October 14, 1996. The description of each proposal and
number of shares voted are as follows:
<CAPTION>
Shares Voted Shares Voted
For Without Authority
<S> <S> <C> <C>
1. To elect the Fund's Board of Directors: Joe Grills 10,870,989 420,480
Walter Mintz 10,866,551 424,918
Robert S. Salomon Jr. 10,870,989 420,480
Melvin R. Seiden 10,870,989 420,480
Stephen B. Swensrud 10,870,989 420,480
Arthur Zeikel 10,870,140 421,329
<PAGE>
<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 Fund's independent
auditors for the current fiscal year. 11,005,015 143,493 142,961
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value Percent of
Rating Rating Amount Issue Cost (Note 1a) Net Assets
<S> <C> <C> <C> <S> <C> <C> <C>
Adjustable Rate* A BBB+++++ $ 1,500,708 Resolution Trust Corp., REMIC (5)
Mortgage-Backed 91-M4-B, 7.437% due 2/25/2020 $ 1,522,348 $ 1,504,460 1.4%
Obligations**-- Ryland Trust, REMIC (5):
London Interbank AA Aa2 7,000,000 92-9-B, 7.516% due 7/25/2022 7,065,864 7,078,750 6.4
Offered Rate AA Aa2 7,000,000 92-10-B, 7.512% due 8/25/2022 7,069,018 7,091,875 6.4
Indexed Sears Mortgage Securities Corp.,
Obligations REMIC (5):
AAA A1 3,223,179 91-M-A2, 6.812% due 11/25/2021 3,243,474 3,233,251 2.9
AAA Aaa 2,123,186 92-18-A2, 7.389% due 9/25/2022 2,168,786 2,147,071 1.9
NR+++ A1 2,512,736 92-2-A1, 7.792% due 12/25/2024 2,558,274 2,554,354 2.3
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 23,627,764 23,609,761 21.3
Fixed Rate AAA++++ Aaa 4,237,199 American Southwest Financial
Mortgage-Backed Securities Corp.,95-C1-A1A, 7.30%
Obligations** due 10/01/2001 4,317,214 4,332,536 3.9
AA AA++ 7,266,000 Blackrock Capital Finance L.P.,
96-C2-B, 7.741% due
11/15/2026++++++ (a) 7,337,786 7,390,888 6.7
AAA++ Aaa 15,000,000 Debartolo Corp., A2, 7.48% due
5/15/2001++++++ 15,528,078 15,450,000 13.9
NR+++ NR+++ 6,686,000 Federal Home Loan Mortgage
Association, REMIC (5) 1589-D,
6.25% due 10/15/2024 (c) (1) 6,691,772 6,527,207 5.9
Federal National Mortgage
Association, Pool (1):
NR+++ NR+++ 7,112,466 #50917, 6% due 11/01/2000 7,036,896 6,945,750 6.3
NR+++ NR+++ 12,000,000 #160160, 7.778% due 6/30/2001 12,858,504 12,521,250 11.3
NR+++ NR+++ 3,798,591 #73046, 7.60% due 10/25/2001 3,760,605 3,903,052 3.5
NR+++ NR+++ 5,490,463 #73059, 8.375% due 12/01/2001 5,782,127 5,792,438 5.2
NR+++ NR+++ 3,196,193 #73181, 7.14% due 9/01/2002 3,176,216 3,236,145 2.9
<PAGE> Federal National Mortgage
Association, REMIC (5)(1):
NR+++ NR+++ 5,000,000 92-122-PG, 7.50% due 9/25/2017 (a) 5,039,838 5,053,100 4.6
NR+++ NR+++ 4,494,550 94-M2-A, 6.625% due 2/25/2001 4,315,185 4,492,977 4.0
NR+++ NR+++ 13,610,663 G-92-39-Z, 7% due 10/25/2016 (b) 13,658,099 13,474,556 12.2
NR+++ AAA++ 5,000,000 Kidder Peabody Acceptance Corp.,
REMIC (5) 93-M2-A, 6.05% due
8/01/2003++++++ 4,650,000 4,912,500 4.4
NR+++ AAA++ 5,000,000 Paine Webber Mortgage Acceptance
Corp., CMO (4) 96-M1-A1, 6.80%
due 1/02/2012 5,050,000 5,048,440 4.5
Resolution Trust Corporation, REMIC
(5)(b):
AA AA+++++ 4,408,072 93-C2-B, 7.75% due 7/01/2000 4,564,661 4,452,153 4.0
AAA AA+++ 1,120,640 92-C5-B, 6.90% due 5/25/2002 (1) 1,126,150 1,119,239 1.0
AA AA+++ 1,387,786 92-CHF-B, 7.15% due 12/25/2020 1,402,752 1,391,039 1.3
A+++++ A2 2,461,817 92-C7-B, 7.15% due 6/25/2023 2,486,915 2,464,125 2.2
AA-++++ A2 615,596 92-C6-B, 7.70% due 7/25/2024 629,314 616,750 0.6
AA++ Aa2 5,000,000 Town & Country Funding Corporation,
CMO (4), 5.85% due 8/15/1998 4,988,200 4,960,937 4.5
AAA AAA++++ 11,025,000 Vornado Finance Corp., CMO (4),
6.36% due 12/01/2000++++++ 9,980,621 10,887,187 9.8
Total Investments in Fixed Rate
Mortgage-Backed Obligations 124,380,933 124,972,269 112.7
Derivative Federal National Mortgage
Mortgage-Backed Association, REMIC (5):
Obligations**-- NR+++ NR+++ 8,134,397 93-221-JD, 6% due 11/25/2006 785,302 788,874 0.7
Interest Only (2) NR+++ NR+++ 5,278,328 94-23-PN, 6% due 7/25/2017 880,864 854,842 0.8
AAA Aaa+ 54,220,046 Fund America Investors Corporation
II, CMO (4) 93-E-SIO, 0.50% due
9/25/2023 728,996 372,763 0.3
AAA++++ Aaa 27,469,033 Mortgage Capital Fund Inc., REMIC (5)
94-MC1-I1, 1.044% due 6/25/2019 610,460 403,465 0.4
------------ ------------ ------
3,005,622 2,419,944 2.2
Derivative Federal Home Loan Mortgage
Mortgage-Backed Corporation, REMIC (5):
Obligations**-- NR+++ NR+++ 4,158,144 1557-S, 3.604% due 8/15/1998 3,852,781 3,959,333 3.6
Inverse NR+++ NR+++ 86,094 1330-I, 9.695% due 9/15/1999 81,359 83,404 0.1
Floaters (3) NR+++ NR+++ 3,483,620 1743-S, 6.15% due 8/15/2001 2,925,152 3,239,767 2.9
NR+++ NR+++ 9,150,000 Federal National Mortgage
Association, REMIC (5) 93-227-S,
4.386% due 12/25/2000 6,567,281 7,875,680 7.1
------------ ------------ ------
13,426,573 15,158,184 13.7
<PAGE>
Total Investments in Derivative
Mortgage-Backed Obligations 16,432,195 17,578,128 15.9
Total Investments in Mortgage-
Backed Obligations 164,440,892 166,160,158 149.9
US Government NR+++ NR+++ 2,000,000 US Treasury Note, 6% due 9/30/1998 2,006,044 2,005,000 1.8
Obligations
Total Investments in US Government
Obligations 2,006,044 2,005,000 1.8
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Amount Issue Cost (Note 1a) Net Assets
<S> <C> <C> <S> <C> <C> <C>
Short-Term Repurchase $1,037,500 CS First Boston, Inc., purchased
Securities Agreements*** on 12/27/1996 to yield 5.20% to
1/09/1997 $ 1,037,500 $ 1,037,500 0.9%
216,000 Nikko Securities International,
Inc., purchased on 12/31/1996 to
yield 6.50% to 1/02/1997 216,000 216,000 0.2
Total Investments in Short-Term
Securities 1,253,500 1,253,500 1.1
Total Investments $167,700,436 169,418,658 152.8
============
Liabilities in Excess of Other
Assets (58,568,856) (52.8)
------------ ------
Net Assets $110,849,802 100.0%
============ ======
<PAGE>
<FN>
Average life estimates are made using realistic prepayment
assumptions. Actual maturities could differ from those estimates.
Corresponding average life estimates for bonds are as follows:
(a)1-2 years.
(b)2-4 years.
(c)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.
(1)All or a portion of the 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 $38,641,000,
representing 34.9% of net assets.
<CAPTION>
Acquisition Value
Issue Date(s) Cost (Note 1a)
<S> <S> <C> <C>
Blackrock Capital Finance
L.P., 96-C2-B, 7.741% due
11/15/2026 9/20/1996 $ 7,337,786 $ 7,390,888
Debartolo Corp., A2, 7.48% 2/27/1995-
due 5/15/2001 2/09/1996 15,528,078 15,450,000
Kidder Peabody Acceptance
Corp., REMIC 93-M2-A,
6.05% due 8/01/2003 4/11/1995 4,650,000 4,912,500
Vornado Finance Corp.,
CMO, 6.36% due 12/01/2000 12/22/1994 9,980,621 10,887,187
Total $37,496,485 $38,640,575
=========== ===========
<PAGE>
Ratings of issues shown have not been audited by Ernst & Young LLP.
See Notes to Financial Statements.
</TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
As of December 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$167,700,436) (Note 1a) $169,418,658
Cash 214
Receivables:
Interest $ 1,193,960
Principal paydowns 711 1,194,671
------------
Deferred organization expenses (Note 1e) 9,753
Prepaid expenses and other assets 6,223
------------
Total assets 170,629,519
------------
Liabilities: Payables:
Reverse repurchase agreements (Note 5) 49,781,000
Securities purchased 8,128,077
Interest expense (Note 5) 1,021,769
Dividends to shareholders (Note 1f) 562,840
Capital shares repurchased 94,707
Investment adviser (Note 2) 52,512 59,640,905
------------
Accrued expenses and other liabilities 138,812
------------
Total liabilities 59,779,717
------------
Net Assets: Net assets $110,849,802
============
Capital: Capital stock, $0.10 par value, 200,000,000 shares authorized $ 1,123,073
Paid-in capital in excess of par 107,974,064
Undistributed investment income--net 2,766,437
Accumulated realized capital losses on investments--net (Note 6) (2,731,994)
Unrealized appreciation on investments--net 1,718,222
------------
Net assets--Equivalent to $9.87 per share based on 11,230,727
shares outstanding (market price--$9.00) $110,849,802
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
For the Year Ended December 31, 1996
<S> <S> <C> <C>
Investment Income Interest and amortization of premium and discount earned $ 11,130,341
(Note 1d): Other income 40,623
------------
Total income 11,170,964
------------
Expenses: Interest expense (Note 5) $ 2,907,081
Investment advisory fees (Note 2) 625,576
Professional fees 80,407
Accounting services (Note 2) 49,537
Directors' fees and expenses 38,890
Transfer agent fees 30,194
Printing and shareholder reports 22,722
Custodian fees 18,762
Amortization of organization expenses (Note 1e) 10,817
Pricing fees 2,244
Listing fees 375
Other 44,419
------------
Total expenses 3,831,024
------------
Investment income--net 7,339,940
------------
Realized & Realized gain on investments--net 3,632,680
Unrealized Gain Change in unrealized appreciation on investments--net (4,956,250)
(Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 6,016,370
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended December 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 7,339,940 $ 7,365,846
Realized gain on investments--net 3,632,680 402,360
Change in unrealized appreciation/depreciation on
investments--net (4,956,250) 14,796,756
------------ ------------
Net increase in net assets resulting from operations 6,016,370 22,564,962
------------ ------------
Dividends to Investment income--net (6,532,946) (6,821,103)
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends to
shareholders (6,532,946) (6,821,103)
------------ ------------
<PAGE>
Capital Stock Net decrease in net assets derived from capital stock
Transactions transactions (7,962,117) (6,293,869)
(Note 4): ------------ ------------
Net Assets: Total increase (decrease) in net assets (8,478,693) 9,449,990
Beginning of year 119,328,495 109,878,505
------------ ------------
End of year* $110,849,802 $119,328,495
============ ============
<FN>
*Undistributed investment income--net (Note 1g) $ 2,776,437 $ 1,959,443
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Year Ended December 31, 1996
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 6,016,370
Operating Adjustments to reconcile net increase in net assets resulting from
Activities: operations to net cash provided by operating activities:
Increase in receivables (60,197)
Decrease in other assets 14,275
Decrease in other liabilities (510,350)
Realized and unrealized loss on investments--net 1,323,570
Amortization of premium and discount--net 886,933
------------
Net cash provided by operating activities 7,670,601
------------
Cash Provided by Proceeds from principal payments and sales of long-term securities 197,385,174
Investing Purchases of long-term securities (186,060,868)
Activities: Purchases of short-term investments. (179,712,500)
Proceeds from sales and maturities of short-term investments 178,469,000
------------
Net cash provided by investing activities 10,080,806
------------
Cash Used for Cash receipts from borrowings 159,322,688
Financing Cash payments on borrowings (162,611,938)
Activities: Dividends paid to shareholders (6,528,373)
Cash payments on capital shares repurchased (8,033,969)
------------
Net cash used for financing activities (17,851,592)
------------
<PAGE>
Cash: Net decrease in cash (100,185)
Cash at beginning of year 100,399
------------
Cash at end of year $ 214
============
Cash Flow Cash paid for interest $ 3,414,830
Information: ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
For the
The following per share data and ratios Period
have been derived from information provided Nov. 27,
in the financial statements. For the Year Ended 1992++ to
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 .63 .60 .64 .69 .04
Realized and unrealized gain (loss) on
investments--net (.03) 1.27 (1.50) .36 .12
-------- -------- -------- -------- --------
Total from investment operations .60 1.87 (.86) 1.05 .16
-------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net (.56) (.55) (.63) (.63) --
Realized gain on investments--net -- -- --++++ (.06) --
-------- -------- -------- -------- --------
Total dividends and distributions to Common
Stock shareholders (.56) (.55) (.63) (.69) --
-------- -------- -------- -------- --------
Capital charge resulting from issuance of
Common Stock -- -- -- -- (.02)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.87 $ 9.83 $ 8.51 $ 10.00 $ 9.64
======== ======== ======== ======== ========
Market price per share, end of period $ 9.00 $ 8.75 $ 7.375 $ 9.25 $ 10.00
======== ======== ======== ======== ========
<PAGE>
Total Investment Based on market price per share 9.63% 26.77% (13.91%) (.64%) .00%+++
Return:** ======== ======== ======== ======== ========
Based on net asset value per share 7.02% 23.42% (8.11%) 11.43% 1.47%+++
======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement and
Net Assets: excluding interest expense. .81% .89% .90% .85% 1.10%*
======== ======== ======== ======== ========
Expenses, net of interest expense .81% .89% .90% .95% 1.85%*
======== ======== ======== ======== ========
Expenses 3.36% 3.90% 3.05% 2.46% 1.90%*
======== ======== ======== ======== ========
Investment income--net 6.46% 6.34% 6.79% 6.84% 4.46%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $110,850 $119,328 $109,879 $135,050 $130,259
Data: ======== ======== ======== ======== ========
Portfolio turnover 112.79% 32.78% 109.96% 129.32% 27.94%
======== ======== ======== ======== ========
Leverage: Amount of borrowings, end of period
(in thousands) $ 49,781 $ 53,070 $ 55,195 $ 67,842 $ 29,105
======== ======== ======== ======== ========
Average amount of borrowings outstanding
during the period (in thousands) $ 51,951 $ 56,355 $ 61,771 $ 54,105 $ 5,821
======== ======== ======== ======== ========
Average amount of borrowings outstanding
per share during the period $ 4.44 $ 4.50 $ 4.68 $ 4.00 $ 0.43
======== ======== ======== ======== ========
<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 effect 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
<PAGE>
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.
* 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.
<PAGE>
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.
(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.
<PAGE>
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 year ended December 31, 1996, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce,
Fenner & Smith Inc. ("MLPF&S"), $478 for security price quotations
to compute the net asset value 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, MLPF&S, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended December 31, 1996 were $189,207,359 and
$197,321,890, respectively.
Net realized and unrealized gains as of December 31, 1996 were as
follows:
Realized Unrealized
Gains Gains
Long-term investments $3,612,740 $ 1,718,222
Financial futures contracts 19,940 --
---------- -----------
Total $3,632,680 $ 1,718,222
========== ===========
As of December 31, 1996, net unrealized appreciation for Federal
income tax purposes aggregated $1,710,986, of which $3,412,157
related to appreciated securities and $1,701,171 related to
depreciated securities. The aggregate cost of investments at
December 31, 1996 for Federal income tax purposes was $167,707,672.
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, 1996, total paid-in
capital amounted to $109,097,137.
During the year ended December 31, 1996, the Fund repurchased
907,300 shares of capital stock, at an average market price of
$8.78, 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, 1996, the Fund had entered into reverse
repurchase agreements in the amount of $49,781,000. For the year
ended December 31, 1996, the maximum amount entered into was
$84,406,500, the average amount outstanding was approximately
$51,951,000, and the daily weighted average interest rate was 5.60%.
6. Capital Loss Carryforward:
At December 31, 1996, the Fund had a net capital loss carryforward
of approximately $2,697,000, of which $2,492,000 expires in 2002 and
$205,000 expires in 2003. This amount will be available to offset
like amounts of any future taxable gains.
<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, 1996, 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, 1996 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, 1996, 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 3, 1997
</AUDIT-REPORT>
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