INCOME
OPPORTUNITIES
FUND 2000, INC.
[GRAPHIC OMITTED]
Strategic
Performance
Semi-Annual Report
June 30, 2000
<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 331/3% 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
Terry K. Glenn, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Arthur Zeikel, Director
Gregory Mark Maunz, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Jeffrey B. Hewson, Vice President
Donald C. Burke, Vice President and Treasurer
Ira P. Shapiro, Secretary
Custodian and Transfer Agent
The Bank of New York
100 Church Street
New York, NY 10286
NYSE Symbol
IFT
<PAGE>
Income Opportunities Fund 2000, Inc., June 30, 2000
DEAR SHAREHOLDER
For the six months ended June 30, 2000, Income Opportunities Fund 2000, Inc.
earned $0.250 per share income dividends, which included earned and unpaid
dividends of $0.042 per share. This represents a net annualized yield of +4.99%,
based on a month-end net asset value of $10.04 per share. Over the same period,
the Fund's total investment return was +2.94%, based on a change in per share
net asset value from $9.96 to $10.04, and assuming reinvestment of $0.208 per
share income dividends.
Portfolio Commentary
The Fund is approaching its final distribution date, which will be sometime in
late December. As planned, we are experiencing large principal inflows as
securities reach their respective maturity/paydown dates and/or we liquidate
holdings. We are using those cash flows to reduce the leverage in the portfolio.
(For a complete explanation of the benefits and risks of leveraging, see page 1
of this report to shareholders.) Furthermore, after the special year-end
dividend was paid in January 2000, we adjusted the monthly dividend rate to
better balance the dividend payout with the primary goal of returning $10.00 (or
greater) per share at the Fund's termination date.
What has been somewhat unexpected for us is the large backup in short-term
interest rates, coupled with a dramatic widening in credit spreads. Since the
Federal Reserve Board started tightening monetary policy on June 30, 1999,
interest rates are up 175 basis points (1.75%). Providing some relief is that
interest rates were left unchanged at the Federal Open Market Committee meeting
on June 28, 2000. However, credit spreads have also moved wider, exacerbating
the effect of higher interest rates. For example, while the three-month Treasury
bill was 5.86% at June 30, 2000, the three-month London Interbank Offering Rate
(LIBOR) was 6.77%. All of the securities in the portfolio are priced to the
LIBOR yield curve.
The backup in interest rates and widening in yield spreads has moved prices
lower. Additionally, there has been a slowdown in prepayment speeds, which has
lengthened expected maturities. This has led to more than half of the Fund's
securities having cash flows beyond the Fund's termination date. The bad news is
that we have to sell more securities than originally anticipated. The good news
is that the balances will be very low and the sales will not materially effect
the Fund's net asset valuation projection. Also, because interest rates are
high, the reinvestment of scheduled cash flows will be at more attractive
levels.
At June 30, 2000, the Fund's per share net asset value was $10.04, and the
Fund's income level was just slightly higher than the dividend distribution.
Leverage has been reduced to 23% of total assets and will be reduced further as
we receive cash flow in excess of the dividend rate. Since virtually all
securities in the Fund are currently being priced at a discount, any early
principal payments at par will increase the net asset value, increasing the
likelihood of meeting our objective of returning $10.00 or more on the
termination date.
In Conclusion
We thank you for your investment in Income Opportunities Fund 2000, Inc.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Gregory Mark Maunz
Gregory Mark Maunz
Senior Vice President and
Portfolio Manager
August 1, 2000
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
S&P Moody's Face Percent of
Ratings Ratings Amount Issue Value Net Assets
==================================================================================================================================
<C> <C> <C> <C> <S> <C> <C>
Adjustable Rate* DLJ Commercial Mortgage Corp.:
Mortgage-Backed NR@@ Aa2 $ 5,000,000 98-ST2A-A2, 7.495% due 11/05/2000 $ 5,001,563 4.5%
Obligations**-- NR@@ Aa2 5,000,000 98-ST1A-A3, 7.258% due 12/08/2000++ 4,998,438 4.5
London Interbank Sears Mortgage Securities Corporation, REMIC (5)(b):
Offered Rate AAA A1 1,135,714 91-MA-A2, 7.40% due 11/25/2021 1,135,880 1.0
Indexed Obligations AA+ Aaa 696,159 92-18B-A2, 7.863% due 9/25/2022 692,839 0.6
NR@@ A1 644,262 92-2A-A1, 8.493% due 12/25/2024 642,342 0.6
-------------------------------------------------------------------------------------------------------------
Total Investments in Adjustable Rate Mortgage-Backed
Obligations--London Interbank Offered Rate Indexed
Obligations (Cost--$12,480,958) 12,471,062 11.2
==================================================================================================================================
Fixed Rate AAA Aaa 1,676,621 Americredit Automobile Receivables Trust, 99-B-A2,
Mortgage-Backed & 5.304% due 10/12/2002 1,666,796 1.5
Asset-Backed Arcadia Automobile Receivables Trust (a):
Obligations** AAA Aaa 2,272,971 98-E-A1, 5.429% due 7/15/2002 2,264,802 2.0
AAA Aaa 2,844,866 98-A-A3, 5.90% due 11/15/2002 2,835,990 2.6
AAA Aaa 5,000,000 Banc One Credit Card Master Trust, 95-B-A, 6.30% due
10/15/2002 (b) 4,993,950 4.5
AAA Aaa 5,000,000 Chemical Master Credit Card Trust 1, 95-2-A, 6.23%
due 6/15/2003 (a) 4,990,200 4.5
Federal Home Loan Mortgage Association, Pool:
NR@@ NR@@ 142,539 #M80294, 5% due 10/01/2000 138,406 0.1
NR@@ NR@@ 270,108 #L90202, 5.50% due 12/01/2000 267,801 0.2
Federal Home Loan Mortgage Corporation, REMIC (5):
NR@@ NR@@ 3,537,973 1332-KC, 8% due 5/15/2001 3,547,950 3.2
NR@@ NR@@ 3,421,634 1627-PZ, 5.60% due 8/15/2017 (b) 3,405,552 3.1
Federal National Mortgage Association, Pool:
NR@@ NR@@ 152,667 #199718, 5.50% due 8/01/2000 151,042 0.1
NR@@ NR@@ 166,027 #227383, 5.50% due 9/01/2000 164,261 0.1
NR@@ NR@@ 142,690 #50932, 5.50% due 11/01/2000 141,172 0.1
NR@@ NR@@ 152,854 #241824, 5.50% due 12/01/2000 151,228 0.1
NR@@ NR@@ 671,640 #250038, 5.50% due 4/01/2001 664,493 0.6
NR@@ NR@@ 3,013,650 #73181, 7.14% due 9/01/2002 3,000,151 2.7
NR@@ NR@@ 2,027,190 Federal National Mortgage Association, REMIC (5)
94-M2-A, 6.625% due 2/25/2001 (b) 2,016,977 1.8
AAA Aaa 15,000,000 Ford Credit Auto Loan Master Trust, 96-1-A, 5.50%
due 2/15/2003 (b) 14,848,950 13.4
</TABLE>
2 & 3
<PAGE>
Income Opportunities Fund 2000, Inc., June 30, 2000
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
S&P Moody's Face Percent of
Ratings Ratings Amount Issue Value Net Assets
==================================================================================================================================
<C> <C> <C> <C> <S> <C> <C>
Fixed Rate AAA Aaa $ 2,606,511 Ford Credit Auto Owner Trust, 98-B-A3, 5.85% due
Mortgage-Backed & 10/15/2001 $ 2,600,412 2.3%
Asset-Backed AAA AAA@ 3,204,020 GE Capital Mortgage Services, Inc., REMIC (5) 98-9-A1,
Obligations** 6.50% due 6/25/2028 (b) 3,180,791 2.9
(concluded) PNC Mortgage Securities Corp., CMO (4)(b):
AAA Aaa 2,447,144 97-6-IA, 6.49% due 10/25/2026 2,430,494 2.2
AAA AAA@ 4,422,232 98-6-1A3, 6.40% due 9/25/2028 4,386,190 4.0
AAA AA+@ 5,000,000 Sawgrass Finance LLC, 93-1-A, 6.45% due 1/20/2006 (a) 4,972,350 4.5
AAA Aaa 4,845,733 WFS Financial Owner Trust, 99-A-A3, 5.55% due
2/20/2003 (b) 4,730,647 4.3
NR@@ A3 5,292,465 World Omni Automobile Lease Securitization Corp.,
97-B-B, 6.46% due 11/25/2003 (b) 5,290,507 4.8
-------------------------------------------------------------------------------------------------------------
Total Investments in Fixed Rate Mortgage-Backed &
Asset-Backed Obligations (Cost--$73,243,117) 72,841,112 65.6
==================================================================================================================================
Derivative Federal National Mortgage Association, REMIC (5) (b):
Mortgage-Backed NR@@ NR@@ 1,065,751 93-221-JD, 6% due 11/25/2006 25,427 0.0
Obligations**-- NR@@ NR@@ 1,633,313 94-23-PN, 6% due 7/25/2017 33,064 0.1
Interest Only (2) NR@@ Aaa 11,711,444 Fund America Investors Corporation II, CMO (4)
93-E-SIO, 0.50% due 9/25/2023 (b) 28,154 0.0
------------ -----
86,645 0.1
==================================================================================================================================
Derivative NR@@ NR@@ 7,336,264 Federal National Mortgage Association, REMIC (5)
Mortgage-Backed 93-227-S, 1.636% due 12/25/2000 7,134,517 6.4
Obligations**-- -------------------------------------------------------------------------------------------------------------
Inverse Floaters (3) Total Investments in Derivative Mortgage-Backed
Obligations (Cost--$5,791,331) 7,221,162 6.5
==================================================================================================================================
Total Investments in Mortgage-Backed & Asset-Backed
Obligations (Cost--$91,515,406) 92,533,336 83.3
==================================================================================================================================
Corporate Bonds Associates Corp. NA:
A+ Aa3 2,150,000 5.60% due 1/15/2001 2,132,198 1.9
A+ Aa3 5,000,000 6% due 6/15/2001 (Callable) 4,937,250 4.4
AAA Aaa 750,000 General Electric Capital Corporation, 5.19% due
1/16/2001 742,702 0.7
A A3 3,625,000 New Century Energies, 6.24% due 11/27/2000 3,612,276 3.3
-------------------------------------------------------------------------------------------------------------
Total Investments in Corporate Bonds (Cost--$11,508,691) 11,424,426 10.3
==================================================================================================================================
Short-Term US Government 20,000,000 Federal Farm Credit Banks, 5.95% due 12/13/2000 (1) 19,550,000 17.6
Securities Agency 15,000,000 Federal Home Loan Mortgage Corporation, 5.88% due
Obligations*** 12/20/2000 (1) 14,537,550 13.1
5,000,000 Student Loan Marketing Association, 5.98% due
12/20/2000 (1) 4,858,350 4.4
-------------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities
(Cost--$38,903,500) 38,945,900 35.1
==================================================================================================================================
Total Investments (Cost--$141,927,597) 142,903,662 128.7
Liabilities in Excess of Other Assets (31,897,325) (28.7)
------------ -----
Net Assets $111,006,337 100.0%
============ =====
==================================================================================================================================
</TABLE>
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) Less than 1 year.
(b) 1-3 years.
(1) Security represents collateral in connection with Reverse Repurchase
Agreements.
(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 Obligations (CMO).
(5) Real Estate Mortgage Investment Conduits (REMICs) are identified by the
year created, series issued and the particular tranche.
* Adjustable Rate Mortgage-Backed Obligations have coupon rates, which reset
periodically to reflect changes in a referenced interest rate.
** Mortgage-Backed & Asset-Backed Obligations are subject to principal
paydowns as a result of the prepayments or refinancings of the underlying
instruments. As a result, the average life may be substantially less than
the original maturity.
*** Certain US Government Agency Obligations are traded on a discount basis;
the interest rates shown reflect the discount rates paid at the time of
purchase by the Fund.
@ Rating of issue is by Fitch Investors Service.
++ The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
@@ Not Rated.
See Notes to Financial Statements.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of June 30, 2000
=============================================================================================================
<C> <S> <C> <C>
Assets: Investments, at value (identified cost--$141,927,597) ........ $ 142,903,662
Receivables:
Interest .................................................. $ 878,780
Principal paydowns ........................................ 222,158 1,100,938
-------------
Prepaid expenses ............................................. 6,573
-------------
Total assets ................................................. 144,011,173
-------------
=============================================================================================================
Liabilities: Payables:
Reverse repurchase agreements ............................. 32,775,000
Custodian bank ............................................ 102,104
Interest expense .......................................... 62,036
Investment adviser ........................................ 25,405 32,964,545
-------------
Accrued expenses and other liabilities ....................... 40,291
-------------
Total liabilities ............................................ 33,004,836
-------------
=============================================================================================================
Net Assets: Net assets ................................................... $ 111,006,337
=============
=============================================================================================================
Capital: Capital Stock, $.10 par value, 200,000,000 shares authorized . $ 1,105,773
Paid-in capital in excess of par ............................. 106,408,040
Undistributed investment income--net ......................... 3,179,326
Accumulated realized capital losses on investments--net ...... (662,867)
Unrealized appreciation on investments--net .................. 976,065
-------------
Net assets--Equivalent to $10.04 per share based on 11,057,727
shares outstanding (market price--$9.8125) ................... $ 111,006,337
=============
=============================================================================================================
</TABLE>
See Notes to Financial Statements.
4 & 5
<PAGE>
Income Opportunities Fund 2000, Inc., June 30, 2000
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 2000
=========================================================================================================
<C> <S> <C> <C>
Investment Income: Interest and amortization of premium and discount earned $ 4,659,865
-----------
=========================================================================================================
Expenses: Interest expense ....................................... $ 1,453,822
Investment advisory fees ............................... 164,812
Accounting services .................................... 38,331
Professional fees ...................................... 23,741
Trustees' fees and expenses ............................ 20,906
Transfer agent fees .................................... 19,726
Listing fees ........................................... 12,504
Printing and shareholder reports ....................... 10,169
Custodian fees ......................................... 7,856
Pricing fees ........................................... 5,084
Other .................................................. 8,060
-----------
Total expenses ......................................... 1,765,011
-----------
Investment income--net ................................. 2,894,854
-----------
=========================================================================================================
Realized & Realized gain on investments--net ...................... 1,182,240
Unrealized Gain Change in unrealized appreciation on investments--net .. (887,723)
(Loss) on -----------
Investments--Net: Net Increase in Net Assets Resulting from Operations ... $ 3,189,371
===========
=========================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six For the
Months Ended Year Ended
June 30, December 31,
Increase (Decrease) in Net Assets: 2000 1999
=======================================================================================================
<C> <S> <C> <C>
Operations: Investment income--net .............................. $ 2,894,854 $ 6,402,952
Realized gain on investments--net ................... 1,182,240 565,538
Change in unrealized appreciation on investments--net (887,723) (2,022,609)
------------- -------------
Net increase in net assets resulting from operations 3,189,371 4,945,881
------------- -------------
=======================================================================================================
Dividends to Dividends to shareholders from investment income--net (2,303,656) (6,155,383)
Shareholders: ------------- -------------
=======================================================================================================
Net Assets: Total increase (decrease) in net assets ............. 885,715 (1,209,502)
Beginning of period ................................. 110,120,622 111,330,124
------------- -------------
End of period* ...................................... $ 111,006,337 $ 110,120,622
============= =============
=======================================================================================================
*Undistributed investment income--net ................ $ 3,179,326 $ 2,588,128
============= =============
=======================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 2000
=====================================================================================================
<C> <S> <C>
Cash Provided by Net increase in net assets resulting from operations ............. $ 3,189,371
Operating Adjustments to reconcile net increase in net assets resulting from
Activities: operations to net cash provided by operating activities:
Decrease in receivables ....................................... 280,099
Decrease in other liabilities ................................. (191,915)
Realized and unrealized gain on investments--net .............. (294,517)
Amortization of premium and discount--net ..................... (724,853)
-------------
Net cash provided by operating activities ........................ 2,258,185
-------------
=====================================================================================================
Cash Provided by Proceeds from principal payments and sales of long-term securities 47,715,550
Investing Purchases of long-term securities ................................ (561,065)
Activities: Purchases of short-term investments .............................. (224,770,228)
Proceeds from sales and maturities of short-term investments ..... 188,326,000
-------------
Net cash provided by investing activities ........................ 10,710,257
-------------
=====================================================================================================
Cash Used for Cash receipts from borrowings .................................... 34,097,000
Financing Cash payments on borrowings ...................................... (44,043,000)
Activities: Dividends paid to shareholders ................................... (3,022,442)
-------------
Net cash used for financing activities ........................... (12,968,442)
-------------
=====================================================================================================
Cash: Net increase in cash ............................................. --
Cash at beginning of period ...................................... --
-------------
Cash at end of period ............................................ $ --
=============
=====================================================================================================
Cash Flow Cash paid for interest ........................................... $ 1,442,418
Information: =============
=====================================================================================================
</TABLE>
See Notes to Financial Statements.
6 & 7
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios For the
have been derived from information provided Six Months For the Year Ended
in the financial statements. Ended December 31,+
June 30, ---------------------------------------------
Increase (Decrease) in Net Asset Value: 2000+ 1999 1998 1997 1996
==================================================================================================================================
<C> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period ......... $ 9.96 $ 10.07 $ 10.02 $ 9.87 $ 9.83
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .................... .26 .58 .60 .62 .63
Realized and unrealized gain (loss)
on investments--net ..................... .03 (.13) .06 .17 (.03)
-------- -------- -------- -------- --------
Total from investment operations ............. .29 .45 .66 .79 .60
-------- -------- -------- -------- --------
Less dividends from investment income--net ... (.21) (.56) (.61) (.64) (.56)
-------- -------- -------- -------- --------
Net asset value, end of period ............... $ 10.04 $ 9.96 $ 10.07 $ 10.02 $ 9.87
======== ======== ======== ======== ========
Market price per share, end of period ........ $ 9.8125 $ 9.8125 $ 9.6875 $ 9.625 $ 9.00
======== ======== ======== ======== ========
==================================================================================================================================
Total Investment Based on market price per share .............. 2.12%++ 7.16% 7.16% 14.47% 9.63%
Return:** ======== ======== ======== ======== ========
Based on net asset value per share ........... 2.94%++ 4.64% 7.00% 8.67% 7.02%
======== ======== ======== ======== ========
==================================================================================================================================
Ratios to Average Expenses, excluding interest expense ......... .56%* .58% .57% .81% .81%
Net Assets: ======== ======== ======== ======== ========
Expenses ..................................... 3.20%* 3.03% 2.96% 3.50% 3.36%
======== ======== ======== ======== ========
Investment income--net ....................... 5.25%* 5.77% 5.89% 6.22% 6.46%
======== ======== ======== ======== ========
==================================================================================================================================
Supplemental Net assets, end of period (in thousands) ..... $111,006 $110,121 $111,330 $110,846 $110,850
Data: ======== ======== ======== ======== ========
Portfolio turnover ........................... .45% 66.27% 56.38% 22.35% 112.97%
======== ======== ======== ======== ========
==================================================================================================================================
Leverage: Amount of borrowings outstanding, end of
period (in thousands) ...................... $ 32,775 $ 42,721 $ 37,285 $ 47,733 $ 49,781
======== ======== ======== ======== ========
Average amount of borrowings outstanding
during the period (in thousands) ........... $ 46,790 $ 51,025 $ 46,747 $ 51,306 $ 51,951
======== ======== ======== ======== ========
Average amount of borrowings outstanding
per share during the period ................ $ 4.23 $ 4.61 $ 4.23 $ 4.64 $ 4.44
======== ======== ======== ======== ========
==================================================================================================================================
</TABLE>
* 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
charges.
+ Based on average shares outstanding.
++ Aggregate total investment return.
See Notes to Financial Statements.
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's financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. 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 is
anticipated to terminate on or about December 31, 2000. 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. Options written or
purchased are valued at the last sale price in the case of exchange-traded
options. In the case of options traded in the over-the-counter market, valuation
is the last asked price (options written) or the last bid price (options
purchased). Securities having a remaining maturity of sixty days or less are
valued at amortized cost, which approximates market value. Other investments,
including financial futures contracts and related options, are stated at 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) Repurchase agreements--The Fund invests in US Government securities pursuant
to repurchase agreements. Under such agreements, the counterparty agrees to
repurchase the security at a mutually agreed upon time and price. The Fund takes
possession of the underlying securities, marks to market such securities and, if
necessary, receives additional securities daily to ensure that the contract is
fully collateralized. If the counterparty defaults and the fair value of the
collateral declines, liquidation of the collateral by the Fund may be delayed or
limited.
(c) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.
o Financial futures contracts--The Fund may purchase or sell financial 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.
o Options--The Fund is authorized to purchase and write call and put options.
When the Fund writes an option, an
8 & 9
<PAGE>
Income Opportunities Fund 2000, Inc., June 30, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
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.
o 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).
(d) 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.
(e) 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.
(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) Short sales--When the Fund engages in a short-sale, an amount equal to the
proceeds 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 market value of the short sale. The Fund maintains a segregated
account of securities as collateral for the short sales. The Fund is exposed to
market risk based on the amount, if any, that the market value of the securities
sold short exceeds the market value of the securities in the segregated account.
(h) Custodian bank--The Fund recorded an amount payable to the Custodian bank
reflecting an overnight overdraft which resulted from management estimates of
available cash.
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 .30% of the Fund's average weekly net assets from December 1,
1997 through termination of the Fund.
For the six months ended June 30, 2000, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, $972 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, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended June 30, 2000 were $561,065 and $47,025,642, respectively.
Net realized gains for the six months ended June 30, 2000 and net unrealized
gains as of June 30, 2000 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains Gains
--------------------------------------------------------------------------------
Long-term investments ................ $1,182,240 $ 933,665
Short-term investments ............... -- 42,400
---------- ----------
Total ................................ $1,182,240 $ 976,065
========== ==========
--------------------------------------------------------------------------------
As of June 30, 2000, net unrealized appreciation for Federal income tax purposes
aggregated $976,065, of which $2,028,947 related to appreciated securities and
$1,052,882 related to depreciated securities. The aggregate cost of investments
at June 30, 2000 for Federal income tax purposes was $141,927,597.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, par value
$.10 per share.
Shares issued and outstanding during the six months ended June 30, 2000 and the
year ended December 31, 1999 remained constant.
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.
For the six months ended June 30, 2000, the average amount outstanding was
approximately $46,790,000 and the daily weighted average interest rate was
6.23%.
6. Capital Loss Carryforward:
At December 31, 1999, the Fund had a net capital loss carryforward of
approximately $1,843,000, of which $1,616,000 expires in 2002, $205,000 expires
in 2003 and $22,000 expires in 2006. This amount will be available to offset
like amounts of any future taxable gains.
7. Subsequent Event:
On July 6, 2000, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.041666 per share,
payable on July 31, 2000 to shareholders of record as of July 17, 2000.
10 & 11
<PAGE>
Income Opportunities Fund 2000, Inc. seeks to provide high monthly income and
return $10 per share to shareholders on or about December 31, 2000 (the
termination date of the Fund) through the active management of a portfolio of
fixed-income securities primarily consisting of high-grade mortgage-backed and
asset-backed securities, derivative mortgage-backed securities and zero coupon
securities.
This report, including the financial information herein, is transmitted to
shareholders of Income Opportunities Fund 2000, Inc. for their information. It
is not a prospectus. 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.
Income Opportunities
Fund 2000, Inc.
Box 9011
Princeton, NJ
08543-9011 #16523--6/00
[LOGO] Printed on post-consumer recycled paper
