DEBT
STRATEGIES
FUND, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
August 31, 1999
<PAGE>
DEBT STRATEGIES FUND, INC.
The Benefits and Risks of Leveraging
Debt Strategies Fund, Inc. has the ability to utilize leverage through
borrowings or issuance of short-term debt securities or shares of Preferred
Stock. The concept of leveraging is based on the premise that the cost of assets
to be obtained from leverage will be based on short-term interest rates, which
normally will be lower than the return earned by the Fund on its longer-term
portfolio investments. Since the total assets of the Fund (including the assets
obtained from leverage) are invested in higher-yielding portfolio investments,
the Fund's Common Stock shareholders are the beneficiaries of the incremental
yield. Should the differential between the underlying interest rates narrow, the
incremental yield "pick up" will be reduced. Furthermore, if long-term interest
rates rise, the Common Stock's net asset value will reflect the full decline in
the entire portfolio holdings resulting therefrom since the assets obtained from
leverage do not fluctuate.
Leverage creates risks for holders of Common Stock including the likelihood of
greater net asset value and market price volatility. In addition, there is the
risk that fluctuations in interest rates on borrowings (or in the dividend rates
on any Preferred Stock, if the Fund were to issue Preferred Stock) may reduce
the Common Stock's yield and negatively impact its market price. If the income
derived from securities purchased with assets received from leverage exceeds the
cost of leverage, the Fund's net income will be greater than if leverage had not
been used. Conversely, if the income from the securities purchased is not
sufficient to cover the cost of leverage, the Fund's net income will be less
than if leverage had not been used, and therefore the amount available for
distribution to Common Stock shareholders will be reduced. In this case, the
Fund may nevertheless decide to maintain its leveraged position in order to
avoid capital losses on securities purchased with leverage. However, the Fund
will not generally utilize leverage if it anticipates that its leveraged capital
structure would result in a lower rate of return for its Common Stock than would
be obtained if the Common Stock were unleveraged for any significant amount of
time.
<PAGE>
Debt Strategies Fund, Inc., August 31, 1999
DEAR SHAREHOLDER
For the six-month period ended August 31, 1999, Debt Strategies Fund, Inc.'s
total investment return was +1.01%, based on a change in per share net asset
value from $8.20 to $7.84, and assuming reinvestment of $0.423 per share income
dividends. During the same six-month period, the net annualized yield of the
Fund's Common Stock was 10.86%. Since inception (May 30, 1997) through August
31, 1999, the total investment return on the Fund's Common Stock was - 2.22%,
based on a change in per share net asset value from $10.00 to $7.84, and
assuming reinvestment of $1.985 per share income dividends. At the end of the
August period, the Fund was 27.7% leveraged as a percentage of total assets.
(For a complete explanation of the benefits and risks of leverage, see page 1 of
this report to shareholders.)
Investment Approach
The Fund's performance reflects the ongoing difficulties experienced since 1998
in the markets in which the Fund invests. We would like to remind shareholders
that Debt Strategies Fund, Inc. is a diversified, closed-end Fund that seeks to
provide current income by investing primarily in a diversified portfolio of debt
securities, including leveraged bank loans and high-yield bonds that are rated
in the lower rating categories of the established rating services, or unrated
obligations of comparable quality. The leveraged bank loans in which the Fund
invests are often senior secured obligations that offer investors greater
principal protection than unsecured bonds. In addition, bank loans are floating
rate instruments whose principal value generally does not move conversely with
interest rate fluctuations, as is the case with fixed-income bonds. The
high-yield bonds in which the Fund invests are often unsecured debt securities
with a fixed rate of interest.
Market Review
Late in the summer of 1998, the high-yield bond market was pressured by
disruptions in the equity and emerging markets, which resulted in a marked
decrease in liquidity and, in turn, a decrease in prices in all three markets
virtually across the board. These events negatively impacted the leveraged bank
loan market as well.
After a brief period in early 1999 when the high-yield bond and bank loan
markets had begun to stabilize, a combination of rising interest rates and
widening credit spreads (that is, the spread over a risk-free investment that an
investor requires to invest in high-yield bonds or leveraged loans) pushed the
price of existing high-yield bond issues and bank loans (which were issued at
narrower spreads) down. In addition, certain sectors experienced extreme
difficulties.
During the latter half of the six-month period ended August 31, 1999, the
interest rate environment dominated the US capital markets. Investors were
concerned that the ongoing strength in the economy would prompt the Federal
Reserve Board into a round of increasing of the Federal Funds rate. At the end
of June, there was relief when the Federal Reserve Board only raised interest
rates by 25 basis points (0.25%). However, there were continued signs of
strength in the economy, and the Federal Reserve Board raised short-term
interest rates another 0.25% on August 24, 1999. During the six-month period
ended August 31, 1999, the bellwether ten-year Treasury yield increased 0.68% to
5.97%, while credit spreads in both the high-yield bond and bank loan markets
increased throughout the period to near historic highs.
During the same period, a number of cyclical industries including paper, steel,
and energy began to show signs of improvement. However, certain sectors such as
healthcare and mining continued to experience difficulties, resulting in credit
deterioration and principal losses (realized and unrealized) for some of the
Fund's holdings. The healthcare situation is particularly problematic in the
long-term care sector (for example, nursing homes) as a result of Federal
legislation that effectively cut Medicaid/Medicare reimbursement payments to
these service providers by as much as 40%. The mining industry is suffering
through cyclical troughs in a number of commodities.
This difficult market environment resulted in high-yield market outflows rather
consistently since July, which, in turn, dampened investor interest in new
issues. Despite a strong US economy, a rebound in the equity markets and default
rates at near historic averages, the high-yield bond sector (as measured by the
unmanaged Donaldson, Lufkin and Jenrette High Yield Index) generated a total
return for the six-month period ended August 31, 1999 of +1.31%. Bank loans (as
measured by the unmanaged Donaldson, Lufkin and Jenrette Leveraged Loan Index)
fared better, given the floating rate nature of the asset class, and generated a
total return of +3.86% for the same period. There is a growing correlation
between the leveraged loan market and the high-yield bond market.
Correlation Between Markets
This correlation can be explained by the fact that high-yield bond and bank loan
markets are comprised of similar industry sectors and often contain overlapping
issuers. As a result, general economic events and trends tend to move the two
markets in the same direction, although the bonds typically move to a greater
degree than the bank loans.
In fact, an analysis by Donaldson, Lufkin and Jenrette suggests that the
correlation is approximately 25% and that over time the loan market has produced
80% of the return of the high-yield bond market with only 30% of the volatility.
That same study suggests that the leveraged loan market has virtually no
correlation to any other major asset class (equities, investment-grade corporate
bonds, government securities or emerging market bonds), thus providing investors
with an attractive investment diversification alternative.
The "Risk/Reward of Various Assets" graph that appears on page 5 of this report
to shareholders plots the annualized return and volatility experienced by
several asset classes averaged over the last seven years, eight months. Asset
classes resting on the line experienced a proportionate amount of return for the
corresponding amount of risk. Asset classes falling below the capital markets
line endured a disproportionate amount of risk relative to the return they
achieved. Finally, asset classes lying above the line achieved higher returns
than justified by the risk they experienced. Leveraged bank loans and high-yield
bonds are the only asset classes to fall above the line, which illustrates that,
compared to other asset classes, the bank loan and high-yield markets provide
superior risk/reward characteristics. For these reasons, we are optimistic about
the Fund's investment potential.
Investment Strategy
Throughout the six months ended August 31, 1999, the Fund's investment
philosophy remained unchanged: to invest in leveraged transactions in which
borrowers have strong market shares, experienced managements, consistent cash
flows and appropriate risk/reward characteristics. In addition, we look for
companies with significant underlying asset and franchise value, strong capital
structures and equity sponsors that support their investments. It is these
characteristics that we believe provide optimal downside protection to the
Fund's net asset value.
During the six months ended August 31, 1999, we focused on the new-issue market.
These new issues were clearing the market at spreads higher than those required
by investors earlier in the year. The new-issue transactions were also much more
conservatively structured, with lower leverage and higher interest coverage as
investors became more demanding. We continuously monitor our positions and
manage the Fund's composition to reflect our views on industries and specific
issuers.
At August 31, 1999, 58% of the Fund's assets were allocated to bonds and 42% to
bank loans. This position reflected our belief that bonds were very compelling
given the very wide credit spreads. More than 97% of the Fund's bank loan
holdings were accruing interest at a yield spread above the London Interbank
Offered Rate (LIBOR), the rate that major banks charge each other for US
2 & 3
<PAGE>
Debt Strategies Fund, Inc., August 31, 1999
dollar-denominated deposits outside of the United States. LIBOR tracks very
closely with other short-term interest rates, such as the Federal Funds rate.
Since the average interest rate reset across the bank loan portion of the Fund
is about 45 days, the yield on that portion of the Fund will move within a
two-month period of any change in the Federal Funds rate. The Fund's stated
average maturity was approximately 6.7 years at August 31, 1999, but based on
our experience, the Fund's holdings can be expected to have an actual average
life of approximately 3 years - 4 years in response to the freely prepayable
nature of the bank loans.
The Fund was approximately 28% leveraged as of August 31, 1999. While we have
the ability to adjust leverage to react to market conditions, we believe the
current level is appropriate given our strategy, and we expect leverage to
remain at present levels.
The Fund's investments were spread across 180 issuers in 45 industries. See the
"Portfolio Profile" section on page 22 of this report to shareholders, which
provides listings of the Fund's ten largest holdings and five largest industries
at August 31, 1999.
While we expect that the Federal Reserve Board may increase short-term interest
rates by another 0.25% before year-end, and we acknowledge that this may put
pressure on high-yield bond prices over the next few months, we are optimistic
about the Fund as we enter the year 2000. This is based on our expectations for
a continuation of the strong economy in the United States with a relatively
stable interest rate environment, a gradual improvement in the Asian economies
and a gradual decline in credit spreads to a more normal range.
In Conclusion
As difficult as the months of July and August 1999 were for the high-yield bond
and leveraged loan markets and the Fund, their performances illustrate the bank
loan market's ability to weather market fluctuations with less volatility than
the high-yield bond market. This is what differentiates the Fund from a pure
high-yield bond fund. This attribute continues to draw many new institutional
buyers to the bank loan market. We believe that both the technical and
fundamental aspects are improving in both the high-yield bond and bank loan
sectors. We also believe we have positively positioned the Fund to follow
further expected improvements in the marketplace in an effort to seek to enhance
total return potential over the coming months.
We thank you for your investment in Debt Strategies Fund, Inc., and we look
forward to reviewing our outlook and strategy with you again in our next report
to shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Richard C. Kilbride
Richard C. Kilbride
Vice President and
Co-Portfolio Manager
/s/ Gilles Marchand
Gilles Marchand
Vice President and
Co-Portfolio Manager
/s/ Paul Travers
Paul Travers
Vice President and
Co-Portfolio Manager
October 15, 1999
Risk /Reward of Various Assets
1992 - July 1999
A line graph depicting the annualized return and volatility for various assets
from 1992 to July 1999.
Volatility Return
Broad Equity Market 14.68% 19.94%
Emerging Market Bonds 20.61% 14.08%
High Yield Bonds 5.78% 10.56%
Leveraged Loans 1.92% 8.44%
U.S. Long-Term Treasury Bonds 9.17% 8.81%
Investment Grade Bonds 5.13% 7.73%
U.S. Intermediate Treasury Bonds 4.81% 6.25%
Mortgage Secs 3.27% 6.85%
Money Market Secs .30% 4.46%
U.S. Inflation .56% 2.57%
Source: Calculated by Merrill Lynch using information and data presented in
Ibbotson Investment Analysis Software, (C)1999 Ibbotson Associates, Inc. All
rights reserved. Used with permission.
The assets used in the above analysis are represented by the following indexes:
US 30-day Treasury bill Index (Money Market Securities); Merrill Lynch Mortgage
Index (Mortgage Securities); Ibbotson's U.S. IT (Intermediate Treasuries);
Ibbotson's U.S. LT Index (Long-Term Treasuries); Merrill Lynch Corporate Index
(Investment Grade Bonds); Donaldson, Lufkin & Jenrette HY Index (High Yield
Bonds); Donaldson, Lufkin & Jenrette Leveraged Loan Index (Leveraged Loans);
EMBI Fixed Rate Index (Emerging Market Bonds); and Standard & Poor's 500 Index
(Broad Equity Market).
4 & 5
<PAGE>
Debt Strategies Fund, Inc., August 31, 1999
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Debt Obligations Cost (Note 1b)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Advertising--1.2% B B1 US$3,000,000 Outdoor Systems Inc., 8.875% due 6/15/2007 $ 2,979,217 $ 3,082,500
====================================================================================================================================
Agricultural Products-- B B2 3,000,000 Sun World International, Inc., 11.25% due
1.3% 4/15/2004 3,146,250 3,090,000
====================================================================================================================================
Amusement & AMC Entertainment Inc.:
Recreational B- B3 2,000,000 9.50% due 3/15/2009 2,082,500 1,720,000
Services--4.9% B- B3 850,000 9.50% due 2/01/2011 850,000 722,500
B B1 1,051,829 AMF Group, Inc., Term, due 3/31/2002** 1,050,159 987,405
B B2 475,000 Carmike Cinemas Inc., 9.375% due 2/01/2009 476,313 439,375
B+ B1 500,000 Intrawest Corp., 9.75% due 8/15/2008 (b) 515,000 485,000
NR* NR* 5,000,000 Metro Goldwyn Mayer Co. (MGM), Term A, due
12/31/2005** 4,894,293 4,831,250
B B2 3,350,000 Riddell Sports, Inc., 10.50% due 7/15/2007 3,393,875 2,830,750
------------ ------------
13,262,140 12,016,280
====================================================================================================================================
Apparel--2.2% ArenaBrands, Inc.**:
NR* NR* 1,423,182 Term A, due 6/01/2002 1,424,961 1,402,724
NR* NR* 3,070,384 Term B, due 6/01/2002 3,074,222 3,028,166
B- B3 1,175,000 GFSI Inc., 9.625% due 3/01/2007 1,198,500 938,531
------------ ------------
5,697,683 5,369,421
====================================================================================================================================
Automotive B- Caa1 486,988 Breed Technologies Inc., Revolving Credit,
Equipment--5.2% due 4/27/2004** 486,988 206,158
CCC+ B3 3,500,000 Cambridge Industries Inc., 10.25% due
7/15/2007 3,291,657 2,520,000
B B2 500,000 Hayes Lemmerz International Inc., 8.25%
due 12/15/2008 500,000 465,000
B- B3 1,850,000 Key Plastics, Inc., 10.25% due 3/15/2007 1,823,566 1,748,250
B- B3 1,000,000 Newcor Inc., 9.875% due 3/01/2008 1,000,000 895,000
Safelite Glass Corp.**:
BB B2 2,061,429 Term B, due 12/23/2003 2,057,969 2,051,121
BB B2 2,061,429 Term C, due 12/23/2004 2,057,884 2,051,121
B- B3 950,000 Special Devices Inc., 11.375% due
12/15/2008 950,000 783,750
Venture Holdings Trust:
B B2 1,800,000 9.50% due 7/01/2005 1,803,000 1,674,000
B B2 400,000 11% due 6/01/2007 (b) 400,000 396,000
------------ ------------
14,371,064 12,790,400
====================================================================================================================================
Broadcast--Radio & B B2 1,865,000 Ackerley Group Inc., 9% due 1/15/2009 1,917,825 1,827,700
Television--4.1% B- B3 1,000,000 Acme Television/Finance, 10.875% due
9/30/2004 (d) 891,786 825,000
CCC+ NR* 1,450,000 CD Radio Inc., 14.50% due 5/15/2009 (b) 1,450,000 1,466,312
B B2 4,000,000 Capstar Broadcasting, 9.25% due 7/01/2007 3,986,585 4,040,000
NR* Caa1 3,175,000 Radio Unica Corp., 14.384% due
8/01/2006 (d) 2,000,226 1,920,875
------------ ------------
10,246,422 10,079,887
====================================================================================================================================
Building & B- B2 850,000 Webb (Del E.) Corp., 10.25% due 2/15/2010 836,686 799,000
Construction--0.3%
====================================================================================================================================
Building NR* NR* 4,940,000 Dal-Tile International Inc., Term B, due
Materials--3.7% 12/31/2003** 4,922,310 4,855,610
B+ B1 3,707,143 Falcon Building Products, Inc., Term, due
6/30/2005** 3,695,463 3,682,427
NR* NR* (euro)511,292 Thyssen Schulte Bautechnik & Co., Term B,
due 12/02/2003** 547,930 534,036
------------ ------------
9,165,703 9,072,073
====================================================================================================================================
Cable Television B B3 US$2,575,000 @ Entertainment Inc., 17.50% due
Services--5.2% 2/01/2009 (d) 1,046,507 1,535,344
B+ Ba3 2,000,000 Avalon Cable, Term B, due 10/31/2006** 1,986,088 2,010,000
CSC Holdings Inc.:
BB+ Ba2 500,000 7.25% due 7/15/2008 500,000 463,125
BB+ Ba2 650,000 7.625% due 7/15/2018 649,373 577,687
Charter Communications Holdings LLC (b):
B+ B2 1,400,000 8.625% due 4/01/2009 1,395,855 1,312,500
B+ B2 1,280,000 9.922% due 4/01/2011 (d) 821,339 768,000
B- B3 475,000 Classic Cable Inc., 9.375% due
8/01/2009 (b) 475,000 460,750
B B3 1,000,000 Coaxial Communications/Phoenix, 10% due
8/15/2006 1,052,500 1,000,000
CCC+ Caa1 1,000,000 Coaxial LLC, 11.864% due 8/15/2008 (d) 653,659 670,000
B+ B2 1,000,000 Globo Comunicacoes e Participacoes, Ltd.,
10.625% due 12/05/2008 (b) 1,003,000 718,200
CCC+ B3 500,000 Park 'N View Inc., 13% due 5/15/2008 470,266 151,250
NR* B3 775,000 RCN Corp., 11% due 7/01/2008 (d) 514,028 484,375
B- B3 1,000,000 Rifkin Acquisition Partners LP, 11.125%
due 1/15/2006 1,108,750 1,105,000
D Caa3 1,000,000 +Supercanal Holdings SA, 11.50% due
5/15/2005 (b) 1,000,000 510,000
B+ B1 1,650,000 TeleWest Communications PLC, 8.97% due
4/15/2009 (b)(d) 1,110,782 1,008,563
------------ ------------
13,787,147 12,774,794
====================================================================================================================================
Chemicals--6.7% BBB- Baa3 2,000,000 Equistar Chemicals LP, 8.75% due
2/15/2009 (b) 1,994,557 1,965,004
B+ B2 6,000,000 Huntsman Corp., 8.873% due
7/01/2007 (b)(f) 6,000,000 5,460,000
NR* Ba3 4,987,500 Lyondell Petrochemical Co., Term E, due
5/17/2006** 4,981,445 5,007,241
NR* B2 4,900,000 Pioneer American Holding Corporation,
Term, due 12/05/2006** 4,895,885 4,091,500
------------ ------------
17,871,887 16,523,745
====================================================================================================================================
Consumer B+ B1 2,132,813 Hedstrom Corp., Term B, due 6/30/2005** 2,126,507 2,103,486
Products--1.4% B B3 675,000 Home Products International Inc., 9.625%
due 5/15/2008 675,000 594,000
B+ B2 870,000 Scotts Company, 8.625% due 1/15/2009 (b) 870,000 843,900
------------ ------------
3,671,507 3,541,386
====================================================================================================================================
Drilling--2.9% BB- B1 3,000,000 Cliffs Drilling, 10.25% due 5/15/2003 3,255,000 2,932,500
BBB- NR* 3,000,000 Falcon Drilling Co. Inc., 9.75% due
1/15/2001 3,172,500 2,906,250
B+ B1 1,450,000 Parker Drilling Co., 9.75% due 11/15/2006 1,252,531 1,388,375
------------ ------------
7,680,031 7,227,125
====================================================================================================================================
Drug Stores--1.0% B+ B1 2,462,500 Duane Reade Co., Term B, due 2/15/2005** 2,456,151 2,463,012
====================================================================================================================================
Electronics/Electrical B B2 1,881,000 Advanced Glassfiber Yarn, 9.875% due
Components--1.9% 1/15/2009 1,844,767 1,808,111
B B2 939,000 BGF Industries Inc., 10.25% due 1/15/2009 920,899 840,405
B+ B3 1,000,000 High Voltage Engineering, 10.50% due
8/15/2004 1,000,000 930,000
B B3 1,000,000 Intersil Corporation, 13.25% due
8/15/2009 (b) 1,000,000 1,015,000
------------ ------------
4,765,666 4,593,516
====================================================================================================================================
</TABLE>
6 & 7
<PAGE>
Debt Strategies Fund, Inc., August 31, 1999
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Debt Obligations Cost (Note 1b)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Energy--6.9% B B1 US$2,000,000 Belco Oil & Gas Corp., 8.875% due
9/15/2007 $ 2,000,000 $ 1,920,000
CCC- Caa1 3,000,000 Belden & Blake Corp., 9.875% due 6/15/2007 3,000,000 2,040,000
CCC Caa1 625,000 Continental Resources, 10.25% due
8/01/2008 625,000 471,875
B B2 2,000,000 Cross Timbers Oil Company, 8.75% due
11/01/2009 2,000,000 1,920,000
NR* Ca 2,000,000 +Forcenergy, Inc., 8.50% due 2/15/2007 1,978,215 1,640,000
B B2 2,000,000 Forest Oil Corporation, 10.50% due
1/15/2006 1,977,588 2,060,000
BB- Ba2 2,000,000 Gulf Canada Resources Ltd., 9.25% due
1/15/2004 2,105,000 2,004,420
B+ B1 1,000,000 Nuevo Energy Co., 9.50% due 6/01/2008 (b) 956,667 997,500
BB- Ba3 4,000,000 Snyder Oil Corp., 8.75% due 6/15/2007 3,981,656 3,950,000
------------ ------------
18,624,126 17,003,795
====================================================================================================================================
Environmental--0.7% B+ B3 1,800,000 IT Group Inc., 11.25% due 4/01/2009 (b) 1,800,000 1,728,000
====================================================================================================================================
Financial NR* NR* 2,522,523 Blackstone, Term, due 11/30/2000** 2,519,876 2,517,793
Services--4.0% NR* NR* 500,000 Investcorp SA, 7.54% due 10/21/2008 500,000 500,000
RBF Finance Company:
BB- Ba3 575,000 11% due 3/15/2006 575,000 603,750
BB- Ba3 250,000 11.375% due 3/15/2009 250,000 262,500
SKM--Libertyview Limited (b)(g):
NR* Baa2 1,500,000 1A-C1, 8.71% due 4/10/2011 1,500,000 1,363,845
NR* Ba3 1,000,000 1A-D, 11.91% due 4/10/2011 984,960 931,563
NR* NR* 2,477,477 Wasserstein, Term, due 11/30/2000** 2,474,878 2,472,832
B+ Ba3 1,425,000 Willis Corroon Corporation, 9% due
2/01/2009 (b) 1,425,000 1,325,250
------------ ------------
10,229,714 9,977,533
====================================================================================================================================
Food & Kindred B- Caa1 4,000,000 Envirodyne Industries, 10.25% due
Products--7.1% 12/01/2001 4,030,000 3,240,000
NR* NR* 2,500,000 GoldenState Foods, Term, due 5/01/2008** 2,463,874 2,454,688
Nebco Evans:
B+ B1 3,000,000 8.875% due 10/15/2006 3,000,000 2,490,000
B- B3 3,000,000 10.125% due 7/15/2007 3,000,000 2,295,000
B B2 2,000,000 SC International Services, Inc., 9.25%
due 9/01/2007 2,041,358 1,987,500
Specialty Foods, Inc.**:
NR* NR* 1,832,299 Revolving Credit, due 1/31/2000 1,832,299 1,828,863
NR* NR* 3,143,287 Term A, due 1/31/2000 3,147,216 3,137,394
------------ ------------
19,514,747 17,433,445
====================================================================================================================================
Forest Products--2.9% B B2 3,000,000 Ainsworth Lumber Company, 12.50% due
7/15/2007 (c) 2,927,280 3,300,000
B+ B3 350,000 Millar Western Forest, 9.875% due
5/15/2008 350,000 333,375
BB+ Ba3 1,500,000 Tembec Finance Corporation, 9.875% due
9/30/2005 1,556,250 1,530,000
B B3 3,000,000 Uniforet Inc., 11.125% due 10/15/2006 2,248,209 2,070,000
------------ ------------
7,081,739 7,233,375
====================================================================================================================================
Furniture & B- B3 1,800,000 Formica Corp., 10.875% due 3/01/2009 (b) 1,800,000 1,694,250
Fixtures--0.7%
====================================================================================================================================
Gaming--3.9% B- B3 550,000 Argosy Gaming Co., 10.75% due
6/01/2009 (b) 550,000 562,375
B B2 700,000 Hollywood Park Inc., 9.25% due
2/15/2007 (b) 700,000 675,500
B B3 1,340,000 Isle of Capri Casinos, 8.75% due
4/15/2009 (b) 1,350,678 1,232,800
B B2 3,500,000 Majestic Star Casino LLC, 10.875% due
7/01/2006 (b) 3,491,345 3,465,000
BB+ Ba2 1,500,000 Park Place Entertainment, 7.875% due
12/15/2005 1,500,000 1,425,000
B B2 2,150,000 Peninsula Gaming LLC, 12.25% due
7/01/2006 (b) 2,216,048 2,209,125
------------ ------------
9,808,071 9,569,800
====================================================================================================================================
Health Care B+ Ba3 4,925,000 Integrated Health Services, Inc., Term C,
Providers--3.8% due 12/31/2005** 4,949,625 4,145,210
Mariner Post**:
B+ Caa2 2,383,049 Term B, due 3/31/2005 1,926,256 1,176,630
B+ Caa2 2,383,049 Term C, due 3/31/2006 1,921,343 1,176,630
NR* B1 1,635,307 MedPartners, Inc., Term B, due 6/08/2001** 1,631,477 1,556,268
NR* B1 1,300,444 Paracelsus Healthcare Corp., Term A, due
3/31/2003** 1,295,343 1,235,422
------------ ------------
11,724,044 9,290,160
====================================================================================================================================
Hotels--4.6% B- B2 500,000 Extended Stay America, 9.15% due 3/15/2008 478,434 475,000
BB Ba2 800,000 HMH Properties, Inc., 8.45% due 12/01/2008 797,440 738,000
NR* Ba1 10,000,000 Starwood Hotels and Resorts Worldwide,
Inc., Bridge, due 2/23/2003** 10,000,000 10,002,080
------------ ------------
11,275,874 11,215,080
====================================================================================================================================
Industrial-- B- B3 500,000 American Plumbing & Mechanic Inc., 11.625%
Services--0.5% due 10/15/2008 (b) 489,845 475,000
B B2 850,000 Building One Services, 10.50% due
5/01/2009 831,207 790,500
------------ ------------
1,321,052 1,265,500
====================================================================================================================================
Leasing & Rental B B3 500,000 National Equipment Services, 10% due
Services--2.6% 11/30/2004 490,139 500,000
B B3 250,000 Neff Corp., 10.25% due 6/01/2008 246,465 252,500
NR* Ba1 4,991,667 Panavision Inc., Term B, due 3/31/2005** 4,985,900 4,767,042
B B3 1,000,000 Universal Hospital Services, 10.25% due
3/01/2008 855,378 740,000
------------ ------------
6,577,882 6,259,542
====================================================================================================================================
Manufacturing--1.5% B+ B1 2,000,000 Bucyrus International, 9.75% due 9/15/2007 2,006,250 1,800,000
B- B2 1,115,000 Fairfield Manufacturing Company Inc.,
9.625% due 10/15/2008 1,115,000 1,057,856
B- B3 725,000 Russell-Stanley Holdings Inc., 10.875%
due 2/15/2009 (b) 719,722 721,375
------------ ------------
3,840,972 3,579,231
====================================================================================================================================
Medical CC Caa1 3,000,000 GrahamField Health Products, Inc., 9.75%
Equipment--1.6% due 8/15/2007 (b) 3,000,000 1,860,000
NR* NR* 2,500,000 Wilson Great Batch, 13% due 7/10/2007 2,213,998 2,162,500
------------ ------------
5,213,998 4,022,500
====================================================================================================================================
Metals & Mining-- NR* B3 5,000,000 Acme Metals, Term, due 12/01/2005** 3,639,477 4,018,750
7.9% CC Ca 2,000,000 +Anker Coal Group, Inc., 9.75% due
10/01/2007 2,030,000 895,000
B B1 550,000 Bayou Steel Corp., 9.50% due 5/15/2008 545,192 517,000
B B2 5,000,000 GS Technologies Operating Co., 12% due
9/01/2004 5,425,000 4,112,500
</TABLE>
8 & 9
<PAGE>
Debt Strategies Fund, Inc., August 31, 1999
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Debt Obligations Cost (Note 1b)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Metals & Mining Ispat Inland LP**:
(concluded) BB Ba3 US$1,287,000 Term B, due 7/15/2005 $ 1,285,593 $ 1,277,750
BB Ba3 1,287,000 Term C, due 7/15/2006 1,285,560 1,277,750
CCC+ Caa2 1,000,000 Metal Management Inc., 10% due 5/15/2008 1,000,000 760,000
B+ B2 550,000 Pen Holdings Inc., 9.875% due 6/15/2008 546,020 522,500
B+ B1 1,000,000 Russel Metals Inc., 10% due 6/01/2009 1,000,000 1,013,750
NR* Ba3 4,978,992 UCAR Global Enterprises, Term B, due
12/31/2002** 4,941,862 4,991,439
------------ ------------
21,698,704 19,386,439
====================================================================================================================================
Online Services--0.5% B- B3 675,000 PSINet Inc., 11% due 8/01/2009 (b) 675,000 668,250
B- B3 500,000 Verio Inc., 11.25% due 12/01/2008 500,000 507,500
------------ ------------
1,175,000 1,175,750
====================================================================================================================================
Packaging--0.2% B B1 400,000 Consumers Packaging Inc., 9.75% due
2/01/2007 (b) 400,000 372,000
====================================================================================================================================
Paging--0.2% CCC+ B3 525,000 Metrocall Inc., 11% due 9/15/2008 (b) 521,498 399,000
====================================================================================================================================
Paper--3.9% B B3 650,000 American Tissue Inc., 12.50% due
7/15/2006 (b) 628,401 619,125
B- Caa1 5,000,000 Gaylord Container Corp., 9.75% due
6/15/2007 5,000,000 4,687,500
NR* NR* 4,500,000 Repap New Brunswick, Inc., Term B, due
6/01/2004** 4,540,000 4,353,750
------------ ------------
10,168,401 9,660,375
====================================================================================================================================
Petroleum BB Ba3 5,000,000 Clark Refining & Marketing Inc., Term,
Refineries--2.5% due 11/15/2004** 4,937,907 4,750,000
B- B3 2,000,000 United Refining Co., 10.75% due 6/15/2007 2,000,000 1,340,000
------------ ------------
6,937,907 6,090,000
====================================================================================================================================
Printing & Big Flower Press Holdings:
Publishing--2.5% B+ B2 2,000,000 8.875% due 7/01/2007 1,986,049 1,922,500
B+ B2 850,000 8.625% due 12/01/2008 850,000 800,062
B+ B1 475,000 Mail-Well I Corp., 8.75% due 12/15/2008 475,000 456,000
B B3 475,000 Premier Graphics Inc., 11.50% due
12/01/2005 475,000 432,250
B- B3 575,000 Regional Independent Media, 10.50% due
7/01/2008 575,000 573,563
B- B3 1,500,000 T/SF Communications Corp., 10.375% due
11/01/2007 1,479,992 1,447,500
BB- Baa3 500,000 World Color Press Inc., 8.375% due
11/15/2008 500,000 485,000
------------ ------------
6,341,041 6,116,875
====================================================================================================================================
Property B+ Ba2 350,000 Prison Realty Trust Inc., 12% due 6/01/2006 350,000 353,500
Management--0.8% NR* NR* 2,000,000 Rockefeller Center Property Trust,
11.404% due 12/31/2000 (Convertible) (d) 1,737,215 1,670,000
------------ ------------
2,087,215 2,023,500
====================================================================================================================================
Retail Specialty--2.9% B B3 1,000,000 TM Group Holdings, 11% due 5/15/2008 1,000,000 982,500
B B2 4,997,528 US Office, Term B, due 6/09/2006** 4,514,391 4,385,331
B- Caa1 2,000,000 United Auto Group, Inc., 11% due 7/15/2007 1,974,431 1,800,000
------------ ------------
7,488,822 7,167,831
====================================================================================================================================
Satellite Echostar DBS Corporation:
Telecommunication B B2 400,000 9.25% due 2/01/2006 400,000 392,000
Distribution B B2 1,925,000 9.375% due 2/01/2009 1,925,000 1,896,125
Systems--1.0% B- B3 250,000 Pegasus Communications, 9.75% due
12/01/2006 250,000 248,750
------------ ------------
2,575,000 2,536,875
====================================================================================================================================
Shipping--1.0% B+ NR* 4,000,000 Equimar Shipholdings Ltd., 9.875% due
7/01/2007 4,000,000 2,560,000
====================================================================================================================================
Textile Mill B Caa3 1,400,000 Galey & Lord, Inc., 9.125% due 3/01/2008 1,116,710 728,000
Products--2.6% B- Caa1 575,000 Globe Manufacturing Corp., 10% due
8/01/2008 575,000 385,250
Joan Fabrics Corp.**:
NR* NR* 3,482,323 Term B, due 6/30/2005 3,478,131 3,473,618
NR* NR* 1,806,952 Term C, due 6/30/2006 1,804,686 1,802,435
------------ ------------
6,974,527 6,389,303
====================================================================================================================================
Tower Construction NR* NR* 4,000,000 American Tower Systems Co., Term, due
& Leasing--2.1% 12/16/2006** 3,991,007 3,991,668
Crown Castle International Corporation:
B B3 300,000 9% due 5/15/2011 300,000 279,000
B B3 690,000 10.375% due 5/15/2011 (d) 428,648 382,950
NR* NR* 1,150,000 Spectrasite Holdings Inc., 11.25% due
4/15/2009 (b)(d) 693,368 580,750
------------ ------------
5,413,023 5,234,368
====================================================================================================================================
Transportation D Ca 3,000,000 +AmeriTruck Distribution Corp., 12.25%
Services--1.6% due 11/15/2005 3,210,000 150,000
BB- NR* 2,250,000 Autopistas del Sol SA, 10.25% due
8/01/2009 (b) 2,293,750 1,462,500
B NR* 3,000,000 MRS Logistica SA, 10.625% due 8/15/2005 (b) 2,972,131 1,935,000
D Caa3 2,000,000 +Trism Inc., 10.75% due 12/15/2000 2,010,000 510,000
------------ ------------
10,485,881 4,057,500
====================================================================================================================================
Utilities--0.9% B+ Ba3 2,500,000 AES Corporation, 8.50% due 11/01/2007 2,495,635 2,306,250
====================================================================================================================================
Waste BB- B3 1,000,000 Norcal Waste Systems, 13.50% due 11/15/2005 1,103,750 1,075,000
Management--0.7% B+ B3 750,000 Safety-Kleen Corporation, 9.25% due
5/15/2009 (b) 750,000 740,625
------------ ------------
1,853,750 1,815,625
====================================================================================================================================
Wired B B3 1,925,000 Caprock Communications, 11.50% due
Telecommunications-- 5/01/2009 (b) 1,897,354 1,925,000
9.4% NR* NR* 2,100,000 E. Spire Communications, 10.52% due
7/01/2008 (d) 1,421,382 842,625
B- Caa1 650,000 Esprit Telecom Group PLC, 10.875% due
6/15/2008 650,000 658,937
BB Ba2 1,500,000 Global Cross, Term B, due 7/02/2007** 1,496,263 1,491,563
B B3 300,000 Hermes Europe Railtel BV, 10.375% due
1/15/2009 300,000 300,750
CCC+ B3 4,000,000 IXC Communications Inc., 9% due 4/15/2008 4,160,000 3,910,000
B B2 2,000,000 Intermedia Communications Inc., 8.875%
due 11/01/2007 2,000,000 1,810,000
B B3 750,000 Level 3 Communications Inc., 10.50% due
12/01/2008 (d) 485,418 431,250
B B2 500,000 Metromedia Fiber Network, 10% due
11/15/2008 500,000 495,000
B B3 1,050,000 Metronet Communications, 9.95% due
6/15/2008 (d) 726,726 798,000
B B3 500,000 Netia Holdings II BV, 13.125% due
6/15/2009 (b) 500,000 508,750
Nextlink Communications Inc.:
B B3 1,500,000 9% due 3/15/2008 1,497,269 1,413,750
B B3 3,000,000 9.45% due 4/15/2008 (d) 2,146,977 1,800,000
</TABLE>
10 & 11
<PAGE>
Debt Strategies Fund, Inc., August 31, 1999
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Debt Obligations Cost (Note 1b)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Wired Primus Telecommunications Group:
Telecommunications B- B3 US$ 500,000 11.75% due 8/01/2004 $ 517,500 $ 487,500
(concluded) B- B3 850,000 11.25% due 1/15/2009 850,000 811,750
+Telegroup Inc.:
NR* NR* 1,500,000 8% due 11/01/2004 (d) 1,339,219 577,500
NR* NR* 1,500,000 8% due 4/15/2005 (Convertible) (b) 1,500,000 150
NR* NR* 3,333,333 Teligent Inc., Term, due 7/01/2002** 3,315,415 3,187,500
NR* NR* 350,000 Versatel Telecom BV, 11.875% due 7/15/2009 347,468 335,391
Worldwide Fiber Inc.:
B B3 900,000 12.50% due 12/15/2005 900,000 918,000
B B3 350,000 12% due 8/01/2009 (b) 350,000 350,875
------------ ------------
26,900,991 23,054,291
====================================================================================================================================
Wireless Cellular, Inc.**:
Telecommunications-- NR* NR* 586,527 Term B, due 9/30/2006 585,258 587,187
12.9% NR* NR* 1,161,440 Term C, due 3/31/2007 1,158,894 1,162,747
NR* NR* 3,252,033 Term D, due 9/30/2007 3,244,810 3,257,724
B B3 1,600,000 ClearNet Communications, 10.125% due
5/01/2009 (d) 1,008,928 936,000
Dolphin Telecom PLC
CCC+ Caa1 850,000 11.50% due 6/01/2008 558,915 374,000
CCC+ Caa1 670,000 14% due 5/15/2009 (b) 354,399 275,538
B B2 5,000,000 Iridium Operating LLC, Term, due
12/29/2000** 4,935,687 1,487,500
B- B3 950,000 Microcell Telecommunications, 12% due
6/01/2009 (d) 546,224 565,250
CCC+ B3 2,475,000 Nextel Partners Inc., 14% due
2/01/2009 (b)(d) 1,361,597 1,485,000
NR* B2 8,071,553 Omnipoint Communications Corp., Term C,
due 2/17/2006** 7,766,032 7,994,203
NR* B2 2,000,000 PTC International Finance BV, 10.269% due
7/01/2007 (d) 1,521,092 1,360,000
NR* NR* 3,835,714 PowerTel PCS, Term B, due 2/26/2003** 3,825,589 3,808,147
NR* B2 5,000,000 TeleCorp PCS, Term B, due 1/15/2008** 4,990,806 4,956,250
CCC+ Caa1 2,000,000 Telesystem International Wireless Inc.,
11.929% due 6/30/2007 (d) 1,472,655 980,000
NR* NR* 2,500,000 VoiceStream PCS Holdings Corp., Term B,
due 6/30/2007** 2,495,468 2,492,708
------------ ------------
35,826,354 31,722,254
====================================================================================================================================
Total Investments in Corporate Debt
Obligations--136.4% 372,093,522 335,763,586
====================================================================================================================================
<CAPTION>
Shares
Held Preferred Stocks & Warrants
====================================================================================================================================
<S> <C> <C> <C> <C>
Broadcast--Radio & 50 Paxson Communications (c) 488,117 476,352
Television--0.3% 24 Paxson Communications (Convertible) (b)(c) 192,862 255,780
704 Paxson Communications (Warrants) (a)(b) 0 2,816
------------ ------------
680,979 734,948
====================================================================================================================================
Cable Television 500 Park 'N View (Warrants) (a) 31,000 500
Services--0.0%
====================================================================================================================================
High Technology-- 318,830 WGL Holdings (Warrants) (a)(e) 318,830 159,415
0.1%
====================================================================================================================================
Wired 3,500 Metronet Communications (Warrants) (a)(b) 35,875 366,046
Telecommunications-- 2,000 Unifi Communications (Warrants) (a)(b) 113,180 20
0.1% ------------ ------------
149,055 366,066
====================================================================================================================================
Wireless 2,000 Dobson Communications (c) 1,925,000 1,920,000
Telecommunications--
0.8%
====================================================================================================================================
Total Investments in Preferred Stocks &
Warrants--1.3% 3,104,864 3,180,929
====================================================================================================================================
<CAPTION>
Face
Amount Short-Term Securities
====================================================================================================================================
<S> <C> <C> <C> <C>
Commercial US$ 283,000 General Motors Acceptance Corp., 5.56%
Paper***--0.1% due 9/01/1999 283,000 283,000
====================================================================================================================================
Total Investments in Short-Term
Securities--0.1% 283,000 283,000
====================================================================================================================================
Total Investments--137.8% $375,481,386 339,227,515
============
Unrealized Appreciation on Forward Foreign
Exchange Contracts--Net****--0.0% 31,220
Liabilities in Excess of Other
Assets--(37.8%) (93,009,570)
------------
Net Assets--100.0% $246,249,165
============
====================================================================================================================================
</TABLE>
(a) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock and are non-income producing. The purchase price and number
of shares are subject to adjustment under certain conditions until the
expiration date.
(b) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(c) Represents a pay-in-kind security which may pay interest in additional
face.
(d) Represents a zero coupon or step bond; the interest rate shown reflects
the effective yield at the time of purchase by the Fund.
(e) Restricted securities as to resale. The value of the Fund's investment in
restricted securities was approximately $159,000, representing 0.1% of net
assets.
--------------------------------------------------------------------------
Acquisition Value
Issue Date Cost (Note 1a)
--------------------------------------------------------------------------
WGL Holdings (Warrants) 9/03/1997 $318,830 $159,415
--------------------------------------------------------------------------
Total $318,830 $159,415
======== ========
--------------------------------------------------------------------------
(f) Floating rate note.
(g) Mortgage-Backed Obligations are subject to principal paydowns as a result
of prepayments or refinancings of the underlying mortgage instruments. As
a result, the average life may be substantially less than the original
maturity.
+ Non-income producing security.
* Not Rated.
** Floating or Variable Rate Corporate Debt -- The interest rates on floating
or variable rate corporate debt are subject to change periodically based
on the change in the prime rate of a US Bank, LIBOR (London Interbank
Offered Rate) or, in some cases, another base lending rate. Corporate
loans represent 57.1% of the Fund's net assets.
*** Commercial Paper is traded on a discount basis; the interest rate shown
reflects the discount rate paid at the time of purchase by the Fund.
**** Forward foreign exchange contracts as of August 31, 1999 were as follows:
--------------------------------------------------------------------------
Foreign Expiration Unrealized
Currency Purchased Date Appreciation (Note 1c)
--------------------------------------------------------------------------
(euro) 323,648 September 1999 $ 3,995
--------------------------------------------------------------------------
Total (US$ Commitment--$338,063)
--------------------------------------------------------------------------
Foreign
Currency Sold
--------------------------------------------------------------------------
(euro) 1,361,431 September 1999 27,225
--------------------------------------------------------------------------
Total (US$ Commitment--$1,465,462)
--------------------------------------------------------------------------
Total Unrealized Appreciation on
Forward Foreign Exchange Contracts--Net $31,220
=======
--------------------------------------------------------------------------
See Notes to Financial Statements.
12 & 13
<PAGE>
Debt Strategies Fund, Inc., August 31, 1999
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of August 31, 1999
=================================================================================================
<C> <S> <C> <C>
Assets: Investments, at value (identified
cost--$375,481,386) (Note 1b) .................... $ 339,227,515
Unrealized appreciation on forward
foreign exchange contracts (Note 1c) ............. 31,220
Receivables:
Interest ....................................... $ 6,267,420
Securities sold ................................ 908,646 7,176,066
-------------
Deferred facility fees ........................... 126
Deferred organization expenses (Note 1g) ......... 18,750
Prepaid expenses ................................. 155,374
-------------
Total assets ..................................... 346,609,051
-------------
=================================================================================================
Liabilities: Loans (Note 6) ................................... 96,000,000
Payables:
Custodian bank (Note 1i) ....................... 3,282,581
Interest on loans (Note 6) ..................... 433,482
Dividends to shareholders (Note 1h) ............ 189,564
Investment adviser (Note 2) .................... 172,140
Commitment fees ................................ 4,883 4,082,650
-------------
Deferred income (Note 1f) ........................ 65,615
Accrued expenses and other liabilities ........... 211,621
-------------
Total liabilities ................................ 100,359,886
-------------
=================================================================================================
Net Assets: Net assets ....................................... $ 246,249,165
=============
=================================================================================================
Capital: Common Stock, $.10 par value, 200,000,000
shares authorized ................................ $ 3,142,523
Paid-in capital in excess of par ................. 310,639,558
Undistributed investment income--net ............. 1,971,057
Accumulated realized capital losses on investments
and foreign currency transactions--net (Note 7) .. (33,324,566)
Unrealized depreciation on investments and foreign
currency transactions--net ....................... (36,179,407)
-------------
Total--Equivalent to $7.84 per share based on
31,425,226 shares of capital stock outstanding
(market price--$7.125) ........................... $ 246,249,165
=============
=================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended August 31, 1999
=======================================================================================================
<C> <S> <C> <C>
Investment Income Interest and discount earned ....................... $ 17,425,008
(Note 1f): Facility and other fees ............................ 185,676
Dividends .......................................... 36,997
------------
Total income ....................................... 17,647,681
------------
=======================================================================================================
Expenses: Loan interest expense (Note 6) ..................... $ 2,771,124
Investment advisory fees (Note 2) .................. 1,078,306
Borrowing costs (Note 6) ........................... 164,765
Professional fees .................................. 105,090
Accounting services (Note 2) ....................... 51,830
Printing and shareholder reports ................... 26,799
Listing fees ....................................... 25,322
Custodian fees ..................................... 20,294
Organization expenses (Note 1g) .................... 20,036
Transfer agent fees (Note 2) ....................... 14,311
Directors' fees and expenses ....................... 13,961
Pricing services ................................... 7,319
Other .............................................. 24,395
------------
Total expenses ..................................... 4,323,552
------------
Investment income--net ............................. 13,324,129
------------
=======================================================================================================
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net ................................. (17,356,001)
(Loss) On Foreign currency transactions--net ............... 130,109 (17,225,892)
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions--Net Investments--net ................................. 5,730,180
(Notes 1c, 1d, 1f Foreign currency transactions--net ............... (74,653) 5,655,527
& 3): ------------ ------------
Net Increase in Net Assets Resulting from Operations $ 1,753,764
============
=======================================================================================================
</TABLE>
See Notes to Financial Statements.
14 & 15
<PAGE>
Debt Strategies Fund, Inc., August 31, 1999
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six For the
Months Ended Year Ended
August 31, February 28,
Increase (Decrease) in Net Assets: 1999 1999
====================================================================================================================================
<C> <S> <C> <C>
Operations: Investment income--net ........................................................ $ 13,324,129 $ 28,979,361
Realized loss on investments and foreign currency transactions--net ........... (17,225,892) (14,808,405)
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net .................................................... 5,655,527 (46,022,747)
------------ ------------
Net increase (decrease) in net assets resulting from operations ............... 1,753,764 (31,851,791)
------------ ------------
====================================================================================================================================
Dividends to Investment income--net ........................................................ (13,283,914) (29,289,396)
Shareholders ------------ ------------
(Note 1h): Net decrease in net assets resulting from dividends to shareholders ........... (13,283,914) (29,289,396)
------------ ------------
====================================================================================================================================
Capital Share Value of shares issued in reinvestment of dividends ........................... -- 1,185,810
Transactions ------------ ------------
(Note 4):
====================================================================================================================================
Net Assets: Total decrease in net assets .................................................. (11,530,150) (59,955,377)
Beginning of period ........................................................... 257,779,315 317,734,692
------------ ------------
End of period* ................................................................ $246,249,165 $257,779,315
============ ============
====================================================================================================================================
* Undistributed investment income--net .......................................... $ 1,971,057 $ 1,930,842
============ ============
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended August 31, 1999
====================================================================================================================================
<C> <S> <C>
Cash Provided by Net increase in net assets resulting from operations .................................... $ 1,753,764
Operating Activities: Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Increase in receivables ............................................................... (379,912)
Decrease in other assets .............................................................. 33,280
Increase in other liabilities ......................................................... 3,030,732
Realized and unrealized loss on investments and foreign currency transactions--net .... 11,570,365
Amortization of discount .............................................................. (1,207,470)
------------
Net cash provided by operating activities ............................................... 14,800,759
------------
====================================================================================================================================
Cash Provided by Proceeds from sales of long-term investments ............................................ 111,679,681
Investing Activities: Purchases of long-term investments ...................................................... (97,884,797)
Purchases of short-term investments ..................................................... (69,203,240)
Proceeds from sales and maturities of short-term investments ............................ 69,750,000
------------
Net cash provided by investing activities ............................................... 14,341,644
------------
====================================================================================================================================
Cash Used for Cash receipts from borrowings ........................................................... 79,000,000
Financing Activities: Cash payments from borrowings ........................................................... (95,000,000)
Dividends paid to shareholders .......................................................... (13,289,179)
------------
Net cash used for financing activities .................................................. (29,289,179)
------------
====================================================================================================================================
Cash: Net decrease in cash .................................................................... (146,776)
Cash at beginning of period ............................................................. 146,776
------------
Cash at end of period ................................................................... $ 0
============
====================================================================================================================================
Cash Flow Cash paid for interest .................................................................. $ 3,162,661
Information: ============
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
16 & 17
<PAGE>
Debt Strategies Fund, Inc., August 31, 1999
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the Six For the For the Period
from information provided in the financial statements. Months Ended Year Ended May 30, 1997+
August 31, February 28, to February 28,
Increase (Decrease) in Net Asset Value: 1999++ 1999 1998
====================================================================================================================================
<C> <S> <C> <C> <C>
Per Share Net asset value, beginning of period ......................... $ 8.20 $ 10.15 $ 10.00
Operating --------- --------- ---------
Performance: Investment income--net ....................................... .42 .91 .71
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net .......................... (.36) (1.93) .09
--------- --------- ---------
Total from investment operations ............................. .06 (1.02) .80
--------- --------- ---------
Less dividends from investment income--net ................... (.42) (.93) (.63)
--------- --------- ---------
Capital charge resulting from the issuance of Common Stock ... -- -- (.02)
--------- --------- ---------
Net asset value, end of period ............................... $ 7.84 $ 8.20 $ 10.15
========= ========= =========
Market price per share, end of period ........................ $ 7.125 $ 7.625 $ 10.5625
========= ========= =========
====================================================================================================================================
Total Investment Based on market price per share .............................. (1.28%)+++ (19.90%) 12.38%+++
Return:** ========= ========= =========
Based on net asset value per share ........................... 1.01%+++ (10.36%) 7.99%+++
========= ========= =========
====================================================================================================================================
Ratios to Average Expenses, net of reimbursement and excluding interest expense 1.20%* 1.09% .61%*
Net Assets: ========= ========= =========
Expenses, net of reimbursement ............................... 3.33%* 3.48% 2.28%*
========= ========= =========
Expenses ..................................................... 3.33%* 3.48% 2.56%*
========= ========= =========
Investment income--net ....................................... 10.32%* 10.03% 9.64%*
========= ========= =========
====================================================================================================================================
Leverage: Amount of borrowings, end of period (in thousands) ........... $ 96,000 $ 112,000 $ 142,600
========= ========= =========
Average amount of borrowings outstanding during the period
(in thousands) ............................................... $ 100,418 $ 120,528 $ 85,903
========= ========= =========
Average amount of borrowings outstanding per share during
the period ................................................... $ 3.20 $ 3.84 $ 2.79
========= ========= =========
====================================================================================================================================
Supplemental Net assets, end of period (in thousands) ..................... $ 246,249 $ 257,779 $ 317,735
Data: ========= ========= =========
Portfolio turnover ........................................... 27.21% 61.30% 43.79%
========= ========= =========
====================================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales charges. 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.
+ Commencement of operations.
++ Based on average shares outstanding.
+++ Aggregate total investment return.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Debt Strategies Fund, 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 generally
accepted accounting principles, 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 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 DBS.
(a) Corporate debt obligations -- The Fund invests principally in debt
obligations of companies, including corporate loans made by banks and other
financial institutions and both privately and publicly offered corporate bonds
and notes. Because agents and intermediaries are primarily commercial banks, the
Fund's investment in corporate loans could be considered concentrated in
financial institutions.
(b) Valuation of investments -- Corporate Loans will be valued in accordance
with guidelines established by the Board of Directors. Until July 9, 1999,
Corporate Loans for which an active secondary market exists and for which the
Investment Adviser can obtain at least two quotations from banks or dealers in
Corporate Loans were valued by calculating the mean of the last available bid
and asked prices in the markets for such Corporate Loans, and then using the
mean of those two means. If only one quote for a particular Corporate Loan was
available, such Corporate Loan were valued on the basis of the mean of the last
available bid and asked prices in the market. As of July 12, 1999, pursuant to
the approval of the Board of Directors, the Corporate Loans are valued at the
mean between the last available bid and asked prices from one or more brokers or
dealers as obtained from Loan Pricing Corporation. For Corporate Loans for which
an active secondary market does not exist to a reliable degree in the opinion of
the Investment Adviser, such Corporate Loans will be valued by the Investment
Adviser at fair value, which is intended to approximate market value.
Other portfolio securities may be valued on the basis of prices furnished by one
or more pricing services, which determines prices for normal, institutional-size
trading units of such securities using market information, transactions for
comparable securities and various relationships between securities that are
generally recognized by institutional traders. In certain circumstances,
portfolio securities are valued at the last sale price on the exchange that is
the primary market for such securities, or the last quoted bid price for those
securities for which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. The value of
interest rate swaps, caps, and floors is determined in accordance with a formula
and then confirmed periodically by obtaining a bank quotation. 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). Short-term securities with remaining maturities of sixty days or
less are valued at amortized cost, which approximates market value. Securities
and assets for which market price quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Fund.
(c) 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 and currency markets. 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
18 & 19
<PAGE>
Debt Strategies Fund, Inc., August 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
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 Forward foreign exchange contracts -- The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters into such contracts.
o Options -- The Fund is authorized to write covered call and put options and
purchase 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.
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) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into US dollars. Realized and unrealized gains or losses from
investments include the effects of foreign exchange rates on investments.
(e) 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. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(f) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Interest income (including
amortization of discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified cost basis.
Facility fees are accreted to income over the term of the related loan. Facility
fees are accreted into income over the term of the related loan.
(g) Organization expenses -- In accordance with Statement of Position 98-5,
unamortized organization expenses of $20,036 were expensed during the six months
ended August 31, 1999. The remaining unamortized organization expenses will be
expensed by February 29, 2000. This is considered to be a change in accounting
principle and had no material impact on the operations of the Fund.
(h) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(i) Custodian bank -- The Fund recorded an amount payable to the custodian bank
reflecting an overnight overdraft resulting from a failed trade that settled the
next day.
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 perform the investment advisory function. For such services the Fund pays a
monthly fee at an annual rate of .60% of the Fund's average weekly net assets
plus the proceeds of any outstanding borrowings used for leverage.
For the six months ended August 31, 1999, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), $209 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 August 31, 1999 were $95,859,797 and $111,590,499, respectively.
Net realized gains (losses) for the six months ended August 31, 1999 and net
unrealized gains (losses) as of August 31, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------------------
Long-term investments ...................... $(17,356,001) $(36,253,871)
Forward foreign exchange contracts ......... -- 31,220
Foreign currency transactions .............. 130,109 (20,840)
Unfunded corporate loans ................... -- 64,084
------------ ------------
Total ...................................... $(17,225,892) $(36,179,407)
============ ============
- --------------------------------------------------------------------------------
As of August 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $36,253,871, of which $2,860,034 related to appreciated
securities and $39,113,905 related to depreciated securities. The aggregate cost
of investments at August 31, 1999 for Federal income tax purposes was
$375,481,386.
4. Capital Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of Common Stock, par value
$.10 per share. Shares issued and outstanding during the six months ended August
31, 1999 remained constant and during the year ended February 28, 1999 increased
by 122,228 as a result of dividend reinvestment.
5. Unfunded Corporate Loans:
As of August 31, 1999, the Fund had unfunded loan commitments of $109,227, which
would be extended at the option of the borrower, pursuant to the following loan
agreements:
- --------------------------------------------------------------------------------
Unfunded
Commitment
Borrower (in thousands)
- --------------------------------------------------------------------------------
Breed Technologies Inc. ..................................... $109
- --------------------------------------------------------------------------------
6. Short-Term Borrowings:
On August 3, 1999, the Fund extended its one-year credit agreement with The Bank
of New York, Fleet National Bank and certain other institutions party thereto.
The agreement is a $160,000,000 credit facility bearing interest at the Prime
rate, Federal Funds rate plus .55% and /or Eurodollar rate plus .55%. For the
six months ended August 31, 1999, the average amount borrowed by the Fund was
approximately $100,418,000 and the daily weighted average interest rate was
5.47%. For the six months ended August 31, 1999, facility and commitment fees
were approximately $165,000.
7. Capital Loss Carryforward:
At February 28, 1999, the Fund had a net capital loss carryforward of
approximately $12,330,000, of which $263,000 expires in 2006 and $12,067,000
expires in 2007. This amount will be available to offset like amounts of any
future taxable gains.
8. Subsequent Event:
On September 8, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.070418 per share,
payable on September 30, 1999 to shareholders of record as of September 22,
1999.
20 & 21
<PAGE>
Debt Strategies Fund, Inc., August 31, 1999
PORTFOLIO PROFILE
As of August 31, 1999
Percent of
Quality Ratings Long-Term
S&P/Moody's Investments
- --------------------------------------------------------------------------------
BBB/Baa ............................................................... 2.0%
BB/Ba ................................................................. 19.6
B/B ................................................................... 55.7
CCC/Caa or lower ...................................................... 4.3
NR (Not Rated) ........................................................ 18.4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Percent of
Long-Term
Breakdown of Investments by Country Investments
- --------------------------------------------------------------------------------
United States ......................................................... 91.0%
Canada ................................................................ 4.4
United Kingdom ........................................................ 1.5
Poland ................................................................ 1.0
Brazil ................................................................ 0.8
Argentina ............................................................. 0.6
Australia ............................................................. 0.4
Germany ............................................................... 0.1
Netherlands ........................................................... 0.1
Belgium ............................................................... 0.1
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries Total Assets
- --------------------------------------------------------------------------------
Wireless Communications ............................................... 9.7%
Wired Telecommunications .............................................. 6.8
Metals & Mining ....................................................... 5.6
Food & Kindred Products ............................................... 5.0
Energy ................................................................ 4.9
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Percent of
Ten Largest Holdings Total Assets
- --------------------------------------------------------------------------------
Starwood Hotels and Resorts Worldwide, Inc. ........................... 2.9%
Omnipoint Communications Corp. ........................................ 2.3
Huntsman Corp. ........................................................ 1.6
Joan Fabrics Corp. .................................................... 1.5
Cellular, Inc. ........................................................ 1.4
Lyondell Petrochemical Co. ............................................ 1.4
UCAR Global Enterprises ............................................... 1.4
Specialty Foods, Inc. ................................................. 1.4
TeleCorp PCS .......................................................... 1.4
Dal-Tile International Inc. ........................................... 1.4
- --------------------------------------------------------------------------------
YEAR 2000 ISSUES
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by the Fund's management or other Fund
service providers do not properly address this problem before January 1, 2000.
The Fund's management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely affected.
The Fund's other service providers have told the Fund's management that they
also expect to resolve the Year 2000 Problem, and the Fund's management will
continue to monitor the situation as the Year 2000 approaches. However, if the
problem has not been fully addressed, the Fund could be negatively affected. The
Year 2000 Problem could also have a negative impact on the issuers of securities
in which the Fund invests. This negative impact may be greater for companies in
foreign markets, particularly emerging markets, since they may be less prepared
for the Year 2000 Problem than domestic companies and markets. If the companies
in which the Fund invests have Year 2000 Problems, the Fund's returns could be
adversely affected.
22 & 23
<PAGE>
Officers and Directors
Terry K. Glenn, President and Director
Ronald Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Arthur Zeikel, Director
Joseph T. Monagle Jr., Senior Vice President
Richard C. Kilbride, Vice President
Gilles Marchand, Vice President
Paul Travers, Vice President
Donald C. Burke, Vice President and
Treasurer
Patrick D. Sweeney, Secretary
Custodian
The Bank of New York
110 Washington Street
New York, NY 10286
Transfer Agent
The Bank of New York
101 Barclay Street
New York, NY 10286
NYSE Symbol
DBS
This report, including the financial information herein, is transmitted to the
shareholders of Debt Strategies Fund, Inc. for their information. It is not a
prospectus, circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in the report. Past performance
results shown in this report should not be considered a representation of future
performance. The Fund has the ability to leverage 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. Statements and other information herein are as dated and are
subject to change.
Debt Strategies
Fund, Inc.
Box 9011
Princeton, NJ
08543-9011 #DEBT01--8/99
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