DEBT
STRATEGIES
FUND II, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
February 28, 1999
<PAGE>
DEBT STRATEGIES FUND II, INC.
The Benefits and Risks of Leveraging
Debt Strategies Fund II, 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.
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 securities in which
the Fund invests, and this could hurt the Fund's investment returns.
<PAGE>
Debt Strategies Fund II, Inc., February 28, 1999
DEAR SHAREHOLDER
Since inception (March 27, 1998) through February 28, 1999, the total investment
return on Debt Strategies Fund II, Inc.'s Common Stock was -1.09%, based on a
change in per share net asset value from $10.00 to $9.15, and assuming
reinvestment of $0.692 per share income dividends. During the same period, the
net annualized yield of the Fund's Common Stock was 8.96%. For the three-month
period ended February 28, 1999, the Fund was 19.6% leveraged as a percentage of
total assets, having borrowed $142 million of its $300 million credit facility
at an average rate of 5.60%. (For a complete explanation of the benefits and
risks of leverage, see page 1 of this report to shareholders.)
The Fund's benchmark, which is comprised of the average return of the unmanaged
Donaldson, Lufkin and Jenrette (DLJ) Loan Index (which returned +3.76% for the
period) and the unmanaged DLJ High Yield Index (which returned -2.05%) had a
total return of +0.86% for the period March 27, 1998 to February 28, 1999. We
attribute the negative variance between the Fund's return and the benchmark to
the Fund's 7% emerging market exposure last August and its leveraged position
before the correction that occurred in the latter part of 1998. We gradually
reduced the Fund's emerging market exposure and at February 28, 1999, it
accounted for 2% of total assets. As there are plenty of opportunities
domestically and in major developed countries to find attractive yields for the
Fund, we plan to reduce the Fund's emerging markets exposure further.
Portfolio Strategy
During the six months ended February 28, 1999, we repositioned the portfolio to
overweight high-yield bonds instead of loans. Bonds represented 60% of the
Fund's assets at the end of the current period compared to 33% last August. We
are also beginning to select more second-tier and third-tier bond issues where
we believe good value exists. Despite ongoing investor concerns after 1998's
correction, the underpinnings of the high-yield market remain sound with strong
mutual fund inflows and an expanding buyer base. Thus, we believe demand will
outweigh supply in 1999, which would lead to tighter yield spreads in the
high-yield market relative to late 1998 levels. However, we are prepared to
change our strategy and become more defensive if market conditions warrant.
Our shift in investment strategy reflects our optimism toward high-yield bonds
as we see a tremendous opportunity in the high-yield market against a backdrop
of an economy that continues to surprise economists and outperform their
consensus growth rates. Over the next few quarters, we believe the high-yield
market should continue to regain the value it lost last fall and spreads should
tighten to normalized levels. (We discuss the performance of high-yield debt and
corporate loans during last year's market correction in "The Environment"
section that follows.) With strong data on employment levels, income growth and
consumer confidence through February, gross domestic product growth should
continue at a pace that is very supportive to the high-yield market, in our
opinion. With the fragility of Brazil and Asia still a major concern, we believe
the Federal Reserve Board is unlikely to tighten its monetary policy and will
maintain a neutral policy.
Currently, there are some unique circumstances in the high-yield sector.
Absolute yields and spreads are relatively high compared to prior periods, yet
major drivers of the market, the economy and default rates, are demonstrative of
a very strong market. General interest rates are also relatively low compared to
previous years, which provides more cash flow and refinancing opportunities to
high-yield borrowers. In addition, the equity markets are at relatively high
levels and investor interest remains strong in initial public offerings,
providing financing alternatives not available to issuers in prior years. With
few fixed-income markets providing double-digit yields, we believe that the
high-yield asset class should attract more investors. If capital markets
continue to stabilize, we believe that the need to outperform will push
high-yield investors more aggressively down the credit spectrum as their
appetite for risk increases.
As of February 28, 1999, virtally all of the Fund's investments in corporate
loans were accruing interest at a yield spread above the London Interbank
Offered Rate (LIBOR), the rate that major international banks charge each other
for US dollar-denominated deposits outside of the United States. LIBOR
historically has been strongly correlated to the Federal Funds rate. Since the
average reset on the Fund's floating rate investments is 39 days, the yield on
the Fund's bank loan investments is likely to move up or down within a one
month-two month period after any LIBOR rate change. Therefore, bank loans tend
to provide a good hedge against rising interest rates.
As of February 28, 1999, the weighted average maturity of the Fund's loan
investments was 5.3 years, and the bond portfolio was 8.4 years. Because the
loans in the portfolio are prepayable at no cost to the borrower, on average
they are likely to prepay in two years. However, borrowers are under no
obligation to repay their loans until maturity. The LIBOR spread (averaging
2.85% on February 28, 1999) on each loan is a contractual percentage and cannot
change unless legally amended. LIBOR was 5.0% at the end of February; therefore,
the average gross yield on our bank loan investments was 7.85%.
At February 28, 1999, the Fund was fully invested, but had the ability to borrow
on its credit line. As of period-end, $158 million remained available for the
Fund to borrow under its $300 million credit facility. By period- end, the
Fund's floating rate loan investments were spread across 43 borrowers in 24
industries. Fixed-rate investments were spread across 154 borrowers in 41
industries.
The Environment
Since our last report to shareholders, the credit markets virtually shut down
through mid-October. Fallout in the emerging markets and hedge fund arena spread
to the domestic high-yield bond and leveraged loan markets, reducing demand and
trading liquidity to levels not seen since the recession in 1990. However,
market circumstances were different in 1998 compared to 1990. In 1990, the
economy was in a recession, the corporate debt default rate exceeded 10%, and
the high-yield bond and loan markets were much smaller and more susceptible to
drastic swings. In 1998, these markets had strong fundamentals with domestic
economic growth of 3.9% and a below-average default rate of 1.6% (incorporating
only domestic and non-emerging market issues). Consequently, the correction was
largely technical and poised for a recovery when confidence and liquidity
returned to the marketplace.
However, the most recent correction had a major impact on the market indexes and
prices of the bonds and loans in our portfolio. High-yield bond prices fell
sharply as high-yield spreads relative to credit risk-free US Treasury bonds
widened to levels last experienced in the 1990-1991 recession. At the same time,
demand only existed for the largest issuers with the strongest credit
fundamentals. In July 1998, 1.7% of the outstanding bonds in the high-yield
market yielded more than 20%; in October, 8.4% of high-yield issues yielded over
20%. The market experienced a credit crunch, and no new high-yield debt was
issued for several weeks last fall. During the correction, the leveraged loan
market was also punished. Although we cannot compare recent experience to
1990-1991 since the leveraged loan market was then at its infancy, 1998 was the
worst year in the past five.
After the Federal Reserve Board's third interest rate cut in October, the
fixed-income markets began to recover. However, market conditions remain fragile
as investors are wary that a new set of negative events could trigger another
liquidity crisis. Therefore, as discussed, we are monitoring economic and market
conditions carefully to deter mine if we should adopt a more defensive strategy.
For 1998, leverage loan new-issue volume grew 45% to $316 billion, a new record.
Loan trading volume also reached record levels, increasing approximately 10% to
nearly $70 billion. The new-issue and trading volumes in the loan market were
particularly impressive given the market's correction last fall. Investor
interest in corporate loans continued to broaden, including high-yield mutual
funds, new loan mutual funds, insurance companies, hedge funds, pension plans
and leveraged vehicles focused exclusively on loans known as collateralized loan
obligations. The number of buyers of institutional leveraged loans (excluding
the loans taken by commercial banks) has grown from less than 10 in 1990 to over
100 as of February 28, 1999. The stability and returns of the asset class have
attracted numerous institutions.
2 & 3
<PAGE>
Debt Strategies Fund II, Inc., February 28, 1999
With leveraged buyouts providing the majority of financings for our markets, the
$55 billion raised by buyout sponsors in 1998 has the potential to produce
another record year for new loans in 1999. Recently, cash inflows into the
leveraged loan market have made it very competitive. Trading volume increased
markedly since the 1998 correction and 1999 trading volumes are likely to
surpass 1998 levels, potentially reaching $100 billion.
The high-yield market also had a record year in 1998 in terms of overall size
and new issuance, with a record high in new issuance for the third consecutive
year. Media and telecommunications continued to dominate new issuance,
accounting for $60 billion of the total primary market. The overall high-yield
market (limited to US dollar-denominated issues) grew 26.5% to $572 billion,
also a record level. Dealers estimated trading volume reached a record $300
billion.
In Conclusion
We appreciate your ongoing investment in Debt Strategies Fund II, Inc., and we
look forward to reviewing our strategy with you again in our next report to
shareholders.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Joseph T. Monagle Jr.
Joseph T. Monagle Jr.
Senior Vice President
April 19, 1999
================================================================================
We are pleased to announce that Richard C. Kilbride, Paul Travers and Gilles
Marchand have each been appointed Vice President and Portfolio Manager of Debt
Strategies Fund II, Inc. Mr. Kilbride has almost 20 years experience in the
fixed-income markets and has previously served as a Managing Director of Fixed
Income for Merrill Lynch Asset Management, L.P. (MLAM) and its affiliated asset
management companies in London and in Los Angeles. Mr. Travers joined MLAM's
Bank Loan Portfolio Group last year, bringing with him 15 years of diversified
professional experience in the bank loan industry. He was previously Head of
U.S. Corporate Banking in the New York branch of BHF-BANK. Mr. Marchand has been
a Bank Loan Credit Analyst for MLAM for the last three years and has almost 10
years buy side experience in a wide range of fixed-income securities.
These appointments follow the resignation of R. Douglas Henderson as Senior
Portfolio Manager. Mr. Henderson has left MLAM to pursue opportunities on the
sell side of the loan participation market. We appreciate the contribution Mr.
Henderson made to the growth of the Fund and we wish him well for the future. We
continue to have an excellent team of portfolio managers and analysts in place,
and we look forward to building upon the successful performance of the Fund to
date. You will be hearing directly from Messrs. Kilbride, Travers and Marchand
in subsequent reports.
================================================================================
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>
Aircraft & Argo-Tech Corp.:
Parts--2.9% B- B3 US$ 1,500,000 8.625% due 10/01/2007 $ 1,420,574 $ 1,410,000
B- B3 2,500,000 8.625% due 10/01/2007 (c) 2,376,865 2,350,000
B B1 1,000,000 BE Aerospace, 9.50% due 11/01/2008 (c) 1,000,000 1,052,500
BB Ba2 5,000,000 Coltec Industries Inc., 7.50% due 4/15/2008 4,992,815 5,262,500
B- Caa1 6,970,000 Compass Aerospace Corp., 10.125% due 4/15/2005 (c) 6,786,348 6,656,350
------------ ------------
16,576,602 16,731,350
===================================================================================================================================
Amusement & B- B3 1,850,000 AMC Entertainment, Inc., 9.50% due 2/01/2011 (c) 1,850,000 1,826,875
Recreational AMF Group, Inc.**:
Services--5.4% B NR* 4,216,770 Axel A, due 3/31/2003 4,138,872 3,942,680
B NR* 2,611,142 Axel B, due 3/31/2004 2,562,015 2,441,418
NR* B1 1,428,571 ASC East Inc., Term, due 5/31/2006** 1,434,643 1,421,429
NR* B1 3,571,428 ASC West Inc., Term, due 5/31/2006** 3,586,607 3,553,571
B B2 1,000,000 Carmike Cinemas Inc., 9.375% due 2/01/2009 (c) 1,003,500 1,015,000
CCC+ B3 3,000,000 Hollywood Entertainment, 10.625% due 8/15/2004 (c) 3,086,250 3,045,000
B+ B1 1,050,000 Intrawest Corp., 9.75% due 8/15/2008 1,081,500 1,082,812
B+ NR* 4,962,500 Kerasotes Theatres, Inc., Term B, due 12/31/2004** 4,962,500 4,962,500
B B3 1,300,000 Loews Cineplex Entertainment, 8.875% due 8/01/2008 1,289,787 1,303,250
Metro Goldwyn Mayer Co. (MGM)**:
NR* NR* 662,500 Revolving Credit, due 9/30/2003 662,500 640,555
NR* NR* 6,000,000 Term A, due 12/31/2005 5,944,548 5,891,250
------------ ------------
31,602,722 31,126,340
===================================================================================================================================
Apparel--1.3% NR* NR* 3,250,000 CS Brooks, Term, due 6/25/2006** 3,225,811 3,225,625
BB Ba2 5,000,000 Phillips Van-Heusen, 7.75% due 11/15/2023 4,559,147 4,475,000
------------ ------------
7,784,958 7,700,625
===================================================================================================================================
Automotive BB B1 2,000,000 Breed Technologies Inc., Term B, due 4/27/2006** 1,640,374 1,680,000
Equipment--4.4% NR* B3 6,415,194 Exide Corp., Term B, due 3/19/2005** 6,463,308 6,310,947
BB+ Ba2 3,000,000 Federal-Mogul Corp., 7.50% due 1/15/2009 (c) 2,987,075 2,911,971
B B2 1,000,000 Hayes Lemmerz International Inc., 8.25% due
12/15/2008 (c) 1,000,000 1,005,000
B- B3 3,000,000 Newcor Inc., 9.875% due 3/01/2008 3,060,000 2,670,000
Safelite Glass Corp.**:
BB- B2 2,061,429 Term B, due 12/23/2003 2,071,736 2,020,844
BB- B2 2,061,429 Term C, due 12/23/2004 2,071,736 2,020,844
B- B3 2,050,000 Special Devices Inc., 11.375% due 12/15/2008 (c) 2,050,000 2,070,500
B- B2 1,000,000 Trident Automotive, 10% due 12/15/2005 1,075,000 1,020,000
B+ B2 3,575,000 Venture Holdings Trust, 9.50% due 7/01/2005 3,575,000 3,467,750
------------ ------------
25,994,229 25,177,856
===================================================================================================================================
Broadcast--Radio B B2 4,125,000 Ackerley Group Inc., 9% due 1/15/2009 (c) 4,163,609 4,228,125
& Television-- B- B3 1,700,000 Citadel Broadcasting Co., 9.25% due 11/15/2008 (c) 1,772,250 1,810,500
4.0% B- Caa2 2,425,000 Global Telesystems Group, 9.875% due 2/15/2005 2,370,657 2,328,000
B+ B2 2,500,000 Globo Comunicacoes e Participacoes SA, 10.625% due
12/05/2008 (c) 2,507,500 1,368,750
B- B3 1,325,000 Granite Broadcasting, 8.875% due 5/15/2008 1,321,281 1,318,375
B B3 2,250,000 Jones International Networks Ltd., 11.75% due
7/01/2005 2,250,000 1,687,500
NR* Caa1 12,350,000 Radio Unica Corp., 14.452% due 8/01/2006 (a) 7,116,058 6,792,500
B+ B1 2,250,000 TV Azteca, SA de CV, 10.50% due 2/15/2007 2,376,563 1,800,000
B B2 1,500,000 Young Broadcasting Inc., 8.75% due 6/15/2007 1,593,750 1,556,250
------------ ------------
25,471,668 22,890,000
===================================================================================================================================
Building & B- B2 1,600,000 Webb (Del E.) Corp., 10.25% due 2/15/2010 1,574,275 1,594,000
Construction--0.3%
===================================================================================================================================
</TABLE>
4 & 5
<PAGE>
Debt Strategies Fund II, Inc., February 28, 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>
Building B B3 US$ 5,950,000 Amatek Industries Property Limited, 12% due
Marerials--4.8% 2/15/2008 (c) $ 5,639,632 $ 5,697,125
BB- Ba3 5,000,000 American Standard Inc., 7.375% due 4/15/2005 4,976,939 4,902,795
B B2 5,100,000 Republic Group Inc., 9.50% due 7/15/2008 5,016,399 5,163,750
NR* NR* (euro)1,278,230 Thyssen Schulte Bautechnik GmbH & Co. KG, Term B,
due 12/02/2003** 1,373,738 1,388,205
NR* NR* US$10,621,421 Walter Industries, Inc., Term, due 10/15/2003** 10,621,421 10,621,421
------------ ------------
27,628,129 27,773,296
===================================================================================================================================
Cable Television B B3 4,875,000 @ Entertainment Inc., 17.50% due 2/01/2009 (a)(c) 1,930,172 1,998,750
Services--5.8% CSC Holdings Inc.:
BB+ Ba2 1,025,000 7.25% due 7/15/2008 1,025,000 1,030,125
BB+ Ba2 1,275,000 7.625% due 7/15/2018 1,273,755 1,306,875
NR* Ba3 2,000,000 Charter Communications Entertainment, Term, due
9/30/2007** 1,990,298 2,002,500
CCC+ Caa1 17,000,000 Coaxial LLC/Coaxial Finance, 11.864% due
8/15/2008 (a) 10,546,153 10,200,000
BB+ Ba3 4,300,000 Comcast Corp., 9.375% due 5/15/2005 4,611,750 4,568,750
B B2 5,000,000 Falcon Holding Group LP, 8.375% due 4/15/2010 4,989,771 5,087,500
BB+ Ba3 2,000,000 Multicanal SA, 10.50% due 4/15/2018 2,050,000 1,540,000
B- B3 3,305,000 Rifkin Acquisition Partners LP, 11.125% due
1/15/2006 3,664,419 3,701,600
CCC B3 2,000,000 Supercanal Holdings SA, 11.50% due 5/15/2005 (c) 2,000,000 870,000
B+ B1 1,000,000 Telewest Communications PLC, 11.25% due
11/01/2008 (c) 1,000,000 1,180,000
------------ ------------
35,081,318 33,486,100
===================================================================================================================================
Chemicals--1.8% BBB- Baa3 5,000,000 Equistar Chemicals LP, 8.75% due 2/15/2009 (c) 4,985,930 5,106,250
NR* NR* 3,442,437 Huntsman Corporation, Term B, due 3/15/2004** 3,400,827 3,408,013
B B3 2,700,000 LaRoche Industries Inc., 9.50% due 9/15/2007 2,674,134 1,593,000
------------ ------------
11,060,891 10,107,263
===================================================================================================================================
Computer Related DecisionOne Corporation**:
Products--1.1% B+ B1 9,408,000 Term A, due 8/07/2003 9,333,913 3,951,360
B+ B1 4,937,500 Term B, due 8/07/2005 4,909,403 2,073,750
------------ ------------
14,243,316 6,025,110
===================================================================================================================================
Consumer CCC+ Caa1 2,500,000 Diamond Brands Inc., 12.875% due 4/15/2009 (a) 1,493,969 700,000
Products--2.0% CCC+ B3 2,500,000 Diamond Brands Operating, 10.125% due 4/15/2008 2,500,000 2,150,000
B+ B2 1,225,000 Evenflo Co. Inc., 11.75% due 8/15/2006 (c) 1,225,000 1,249,500
B B3 1,325,000 Home Products International Inc., 9.625% due
5/15/2008 1,325,000 1,298,500
B+ B2 1,900,000 Scotts Company, 8.625% due 1/15/2009 (c) 1,900,000 1,957,000
B+ Ba3 3,500,000 Shop-Vac Corp., 10.625% due 9/01/2003 3,865,938 3,828,125
------------ ------------
12,309,907 11,183,125
===================================================================================================================================
Diversified--2.1% NR* NR* 5,000,000 Bridge Information Systems, Term B, due 5/29/2005** 4,958,265 4,990,625
NR* Ba3 7,000,000 Superior/Essex Corp., Term, due 11/27/2006** 6,930,919 6,951,875
------------ ------------
11,889,184 11,942,500
===================================================================================================================================
Drilling--1.9% BB+ Ba2 5,000,000 Cliffs Drilling, 10.25% due 5/15/2003 5,425,000 5,100,000
B+ B1 3,075,000 Parker Drilling Co., 9.75% due 11/15/2006 2,638,600 2,337,000
BB+ Ba1 3,700,000 R&B Falcon Corp., 9.50% due 12/15/2008 (c) 3,702,500 3,589,000
------------ ------------
11,766,100 11,026,000
===================================================================================================================================
Educational B- B3 1,325,000 La Petite Academy/LPA Holdings, 10% due 5/15/2008 1,325,000 1,291,875
Services--0.2%
===================================================================================================================================
Electronics/ B B2 4,112,000 Advanced Glassfiber Yarn, 9.875% due 1/15/2009 (c) 4,030,268 4,142,840
Electrical B B2 2,053,000 BGF Industries Inc., 10.25% due 1/15/2009 (c) 2,012,188 2,073,530
Components--2.1% B B1 1,575,000 Filtronic PLC, 10% due 12/01/2005 (c) 1,575,000 1,614,375
B+ B1 4,250,000 Flextronics International Ltd., 8.75% due
10/15/2007 4,409,375 4,409,375
------------ ------------
12,026,831 12,240,120
===================================================================================================================================
Energy--4.1% CCC B3 550,000 Belden & Blake Corp., 9.875% due 6/15/2007 551,375 330,000
B B3 1,000,000 Chesapeake Energy Corp., 9.625% due 5/01/2005 1,000,000 640,000
CCC Caa1 1,275,000 Continental Resources, 10.25% due 8/01/2008 1,275,000 994,500
B B2 2,000,000 Energy Corp. of America, 9.50% due 5/15/2007 2,000,000 1,850,000
B B2 2,750,000 Forest Oil Corporation, 10.50% due 1/15/2006 2,717,507 2,763,750
CCC+ B3 1,850,000 Gothic Production Corp., 11.125% due 5/01/2005 1,850,000 1,332,000
B+ B1 3,000,000 Nuevo Energy Co., 8.875% due 6/01/2008 2,873,090 2,760,000
B+ B2 12,640,000 Pool Energy Services Co., 8.625% due 4/01/2008 13,126,000 12,703,200
------------ ------------
25,392,972 23,373,450
===================================================================================================================================
Financial NR* NR* 1,500,000 Ares Leveraged Investment Fund II, Bridge, due
Services--1.7% 10/31/2005** 1,500,000 1,500,000
NR* NR* 1,000,000 Investcorp SA, Term B, due 10/21/2008** 1,000,000 1,000,000
Outsourcing Solutions, Inc.**:
BB B2 1,763,566 Revolving Credit, due 10/15/2001 1,763,566 1,706,250
BB B2 2,314,680 Term A, due 10/15/2001 2,307,871 2,279,960
B+ Ba3 3,150,000 Willis Corroon Corporation, 9% due 2/01/2009 (c) 3,150,000 3,150,000
------------ ------------
9,721,437 9,636,210
===================================================================================================================================
Food & Kindred B+ B1 2,250,000 Canandaigua Brands Inc., 8.50% due 3/01/2009 2,250,000 2,250,000
Products--3.7% B- B3 7,500,000 Luigino's Inc., 10% due 2/01/2006 (c) 7,515,000 7,518,750
B B2 2,000,000 SC International Services, Inc., 9.25% due 9/01/2007 1,941,469 2,040,000
Specialty Foods, Inc.**:
BB B2 3,572,648 Revolving Credit, due 1/31/2000 3,572,648 3,554,785
BB B2 6,160,571 Term, due 1/31/2000 6,162,497 6,125,918
------------ ------------
21,441,614 21,489,453
===================================================================================================================================
Forest B B3 2,000,000 Ainsworth Lumber Company, 12.50% due 7/15/2007 (b) 2,075,000 2,010,000
Products--1.4% B+ B3 650,000 Millar Western Forest, 9.875% due 5/15/2008 650,000 533,000
NR* NR* 5,000,000 Strategic Timber Trust, Inc., Bridge, due
10/27/1999** 5,000,000 5,000,000
B B3 1,000,000 Uniforet Inc., 11.125% due 10/15/2006 937,988 730,000
------------ ------------
8,662,988 8,273,000
===================================================================================================================================
Furniture & B- B3 3,425,000 Formica Corp., 10.875% due 3/01/2009 (c) 3,425,000 3,403,594
Fixtures--0.6%
===================================================================================================================================
Gaming--8.1% B- B3 4,250,000 Ameristar Casinos, Inc., 10.50% due 8/01/2004 4,574,062 4,080,000
B- B3 3,525,000 Argosy Gaming Co., 12% due 6/01/2001 (Convertible) 3,512,541 3,604,312
B B1 1,500,000 Eldorado Resorts LLC, 10.50% due 8/15/2006 1,582,500 1,575,000
</TABLE>
6 & 7
<PAGE>
Debt Strategies Fund II, Inc., February 28, 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>
Gaming B+ B1 US$ 6,500,000 Empress Entertainment, 8.125% due 7/01/2006 $ 6,520,347 $ 6,516,250
(concluded) BB+ Ba2 1,500,000 Harrah's Operating Co. Inc., 7.875% due 12/15/2005 1,500,000 1,511,250
B B2 4,465,000 Harvey Casino Resorts, 10.625% due 6/01/2006 4,704,413 4,654,762
B B2 1,350,000 Hollywood Park Inc., 9.25% due 2/15/2007 (c) 1,350,000 1,355,062
B B2 2,750,000 Hollywood Park/Operating, 9.25% due 2/15/2007 2,779,219 2,750,000
Horseshoe Gaming LLC:
BB- B1 4,300,000 12.75% due 9/30/2000 4,568,750 4,563,375
B+ B3 9,200,000 9.375% due 6/15/2007 9,310,750 9,384,000
BB- Ba3 1,525,000 Mohegan Tribal Gaming Authority, 8.75% due
1/01/2009 (c) 1,525,000 1,525,000
BB+ Ba2 3,275,000 Park Place Entertainment, 7.875% due 12/15/2005 (c) 3,275,000 3,209,500
B B2 1,950,000 Trump Atlantic City Associates/Funding Inc., 11.25%
due 5/01/2006 1,672,744 1,657,500
------------ ------------
46,875,326 46,386,011
===================================================================================================================================
Healthcare B+ Ba3 10,271,250 Integrated Health Services, Inc., Term B, due
Services--3.2% 9/15/2004** 10,239,266 9,064,379
B- B3 4,000,000 Pediatric Services of America, 10% due 4/15/2008 4,000,000 2,800,000
Sun Healthcare Group Inc.**:
NR* Ba3 2,745,453 Term B, due 11/12/2004 2,761,925 2,093,408
NR* Ba3 2,745,453 Term C, due 11/12/2005 2,761,925 2,093,408
BB- Ba3 2,000,000 Tenet Healthcare Corp., 8.125% due 12/01/2008 (c) 1,992,615 2,000,000
------------ ------------
21,755,731 18,051,195
===================================================================================================================================
Hotels & B- B2 6,000,000 Extended Stay America, 9.15% due 3/15/2008 5,731,685 5,820,000
Motels--9.0% HMH Properties, Inc.:
BB Ba2 3,200,000 7.875% due 8/01/2008 3,180,058 3,048,000
BB Ba2 2,025,000 8.45% due 12/01/2008 2,018,292 1,984,500
Patriot American Hospitality, Inc.**:
NR* NR* 5,837,245 Revolving Credit, due 7/18/2000 5,837,245 5,773,400
NR* NR* 14,981,250 Term B, due 3/31/2003 14,741,676 14,925,070
NR* NR* 20,000,000 Starwood Hotels and Resorts Worldwide, Inc.,
Bridge, due 2/23/2003** 20,007,500 19,993,751
------------ ------------
51,516,456 51,544,721
===================================================================================================================================
Leasing & Rental BB- NR* 3,750,000 Anthony Crane Rental, Term, due 7/22/2006** 3,750,000 3,750,000
Services--1.8% BB NR* 3,970,000 Coinmach Laundry Corp., Term B, due 6/30/2005** 3,989,850 3,966,278
B B3 550,000 National Equipment Services, Inc., 10% due
11/30/2004 (c) 538,385 561,000
B B3 500,000 Neff Corp., 10.25% due 6/01/2008 (c) 492,684 495,000
B- B3 900,000 Penhall International, 12% due 8/01/2006 900,000 900,000
B B3 750,000 Universal Hospital Services, 10.25% due
3/01/2008 (c) 638,102 667,500
------------ ------------
10,309,021 10,339,778
===================================================================================================================================
Manufacturing-- BB- B1 5,000,000 Environmental Systems Product, Inc., Term B, due
6.4% 9/30/2005** 4,975,897 5,025,000
B- B2 8,500,000 Fairfield Manufacturing, 11.375% due 7/01/2001 8,765,625 8,755,000
B- B2 1,150,000 Globe Manufacturing Corp., 10% due 8/01/2008 (c) 1,150,000 1,012,000
NR* Ba3 5,000,000 Metokote Corporation, Term B, due 11/02/2005** 4,963,619 5,031,250
B B3 4,500,000 Morris Materials Handling, 9.50% due 4/01/2008 3,358,067 2,632,500
B- B3 1,575,000 Russell-Stanley Holdings Inc., 10.875% due
2/15/2009 (c) 1,563,189 1,543,500
NR* Ba3 9,391,344 Terex Corporation, Term B, due 3/06/2005** 9,377,825 9,350,257
B+ Ba3 3,000,000 Westinghouse Air Brake, 9.375% due 6/15/2005 (c) 3,075,000 3,090,000
------------ ------------
37,229,222 36,439,507
===================================================================================================================================
Medical CC Caa1 2,500,000 Graham Field Health PDS, 9.75% due 8/15/2007 (c) 2,543,750 1,450,000
Equipment--0.9% B- B3 4,000,000 Hudson Respiratory Care, 9.125% due 4/15/2008 4,000,000 3,480,000
------------ ------------
6,543,750 4,930,000
===================================================================================================================================
Metals & B+ Ba3 5,000,000 Ameristeel Corp., 8.75% due 4/15/2008 5,000,000 5,075,000
Mining--5.1% B B1 1,050,000 Bayou Steel Corp., 9.50% due 5/15/2008 1,040,486 1,023,750
B B2 1,625,000 GS Technologies Operating Co., 12% due 9/01/2004 1,780,391 1,096,875
D Ca 5,000,000 +Geneva Steel, 9.50% due 1/15/2004 4,536,787 1,050,000
BB- B2 4,000,000 Golden Northwest Aluminum, 12% due 12/15/2006 (c) 4,000,000 4,050,000
BB Ba2 4,000,000 Great Central Mines Ltd., 8.875% due 4/01/2008 4,000,000 3,990,000
NR* Ba2 4,923,077 Koppers Industries, Inc., Term B, due 11/30/2004** 4,947,692 4,898,462
B Caa2 2,400,000 Lonestar Holdings Inc., 11.50% due 5/15/2005 2,400,000 2,028,000
CCC+ Caa1 1,975,000 Metal Management Inc., 10% due 5/15/2008 1,975,000 1,254,125
B B3 5,000,000 WHX Corp., 10.50% due 4/15/2005 5,000,000 4,750,000
------------ ------------
34,680,356 29,216,212
===================================================================================================================================
Online NR* NR* 3,000,000 Splitrock Services Inc., 11.75% due 7/15/2008 2,968,085 2,715,000
Services--0.7% B- B3 1,000,000 Verio Inc., 11.25% due 12/01/2008 (c) 1,000,000 1,075,000
------------ ------------
3,968,085 3,790,000
===================================================================================================================================
Packaging--0.7% BB- B1 850,000 Consumers Packaging Inc., 9.75% due 2/01/2007 (c) 850,000 876,562
B- B3 1,000,000 Indesco International, 9.75% due 4/15/2008 1,000,000 892,500
B B3 2,750,000 Spinnaker Industries Inc., 10.75% due 10/15/2006 2,853,125 2,344,375
------------ ------------
4,703,125 4,113,437
===================================================================================================================================
Paging--1.2% CCC+ B3 1,175,000 Metrocall Inc., 11% due 9/15/2008 (c) 1,166,912 1,104,500
NR* Ba3 6,060,000 PageNet Finance Corp., Revolving Credit, due
12/31/2004** 6,060,000 5,870,625
------------ ------------
7,226,912 6,975,125
===================================================================================================================================
Paper--3.3% B+ B2 2,550,000 Norampac Inc., 9.50% due 2/01/2008 2,611,625 2,652,000
NR* NR* 6,000,000 Repap New Brunswick, Inc., Term B, due 6/01/2004** 6,038,750 5,745,000
B+ B1 4,000,000 S.D. Warren Co., 12% due 12/15/2004 4,270,000 4,330,000
NR* NR* 6,085,153 Stone Container Corporation, Term E, due
10/01/2003** 6,100,366 6,100,366
------------ ------------
19,020,741 18,827,366
===================================================================================================================================
Printing & B+ B2 1,825,000 Big Flower Press Holdings, 8.625% due
Publishing--1.9% 12/01/2008 (c) 1,825,000 1,843,250
NR* NR* (pound)750,000 Hurst Group PLC, 11.125% due 8/06/2008 (Convertible) 1,218,253 1,165,309
B+ B1 US$ 1,650,000 Mail-Well Corp., 8.75% due 12/15/2008 (c) 1,646,669 1,691,250
B- B3 1,650,000 Phoenix Color Corporation, 10.375% due 2/01/2009 (c) 1,650,000 1,678,875
B B3 1,050,000 Premier Graphics Inc., 11.50% due 12/01/2005 (c) 1,050,000 1,023,750
NR* NR* (pound)2,500,000 Regional Independent Media, 12.470% due 7/01/2008 (a) 2,425,209 2,242,520
BB- B1 US$ 1,000,000 World Color Press Inc., 8.375% due 11/15/2008 (c) 1,000,000 1,000,000
------------ ------------
10,815,131 10,644,954
====================================================================================================================================
</TABLE>
8 & 9
<PAGE>
Debt Strategies Fund II, Inc., February 28, 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>
Property NR* NR* US$ 2,500,000 Rockefeller Center Property Trust, 10.573%
Management-- due 12/31/2000 (Convertible) (a) $ 2,081,497 $ 1,875,000
0.3%
===================================================================================================================================
Refineries-- BB Ba3 2,000,000 Clark Refining & Marketing Inc., Term, due
Petroleum-- 11/15/2004** 1,933,362 1,840,000
0.3%
===================================================================================================================================
Restaurants--0.4% Dominos Inc. & Bluefence Inc.**:
B+ NR* 1,175,000 Term B, due 12/21/2006 1,163,446 1,177,203
B+ NR* 1,175,000 Term C, due 12/21/2007 1,163,414 1,175,734
------------ ------------
2,326,860 2,352,937
===================================================================================================================================
Retail-- NR* NR* 4,000,000 Asbury Automotive Group, Term B, due 3/31/2005** 4,000,000 4,000,000
Specialty--1.0% B B3 2,000,000 TM Group Holdings, 11% due 5/15/2008 (c) 2,000,000 2,020,000
------------ ------------
6,000,000 6,020,000
===================================================================================================================================
Satellite Echostar DBS Corp. (c):
Telecommunication B B2 900,000 9.25% due 2/01/2006 900,000 911,250
Systems--1.8% B B2 4,225,000 9.375% due 2/01/2009 4,225,000 4,235,562
CCC+ B3 4,250,000 Golden Sky Systems, 12.375% due 8/01/2006 (c) 4,643,125 4,643,125
B- B3 450,000 Pegasus Communications, 9.75% due 12/01/2006 (c) 450,000 470,250
------------ ------------
10,218,125 10,260,187
===================================================================================================================================
Shipping-- B+ Ba3 2,000,000 Enterprises Shipholding, 8.875% due 5/01/2008 1,995,632 1,580,000
0.3%
===================================================================================================================================
Textile Mill B B3 6,500,000 Galey & Lord, Inc., 9.125% due 3/01/2008 5,913,147 4,907,500
Products--2.1% NR* NR* 7,234,441 Joan Fabrics Corp., Term A, due 6/30/2003** 7,252,527 7,207,312
------------ ------------
13,165,674 12,114,812
===================================================================================================================================
Transportation-- NR* Ba3 6,608,108 Atlas Freighter Leasing II, Inc., Term, due
1.7% 5/29/2004** 6,612,238 6,585,393
BB- NR* 1,000,000 Autopistas del Sol SA, 10.25% due 8/01/2009 (c) 986,865 750,000
B NR* 5,000,000 MRS Logistica SA, 10.625% due 8/15/2005 (c) 4,919,984 2,250,000
------------ ------------
12,519,087 9,585,393
===================================================================================================================================
Utilities--0.7% BB Ba3 1,475,000 CMS Energy Corp., 7.50% due 1/15/2009 1,475,000 1,464,398
CCC Caa1 1,000,000 Cathay International Ltd., 13% due 4/15/2008 (c) 1,010,000 270,000
BB+ Baa3 800,000 Empressa Electric del Norte, 7.75% due 3/15/2006 (c) 726,077 456,000
BB Ba2 2,750,000 Monterrey Power SA de CV, 9.625% due 11/15/2009 (c) 2,749,288 2,083,125
------------ ------------
5,960,365 4,273,523
===================================================================================================================================
Waste BB Ba2 1,950,000 Allied Waste North America, 7.875% due 1/01/2009 (c) 1,946,649 1,998,750
Management--0.8% B- Caa1 2,500,000 ISG Resources Inc., 10% due 4/15/2008 2,500,000 2,500,000
------------ ------------
4,446,649 4,498,750
===================================================================================================================================
Wired NR* NR* 4,275,000 E. Spire Communications, 10.521% due 7/01/2008 (a) 2,748,873 1,560,375
Telecommunications B B3 650,000 Hermes Europe Railtel BV, 10.375% due 1/15/2009 (c) 650,000 690,625
- --6.2% Intermedia Communications Inc.:
B B2 4,000,000 9.046% due 7/15/2007 (a) 3,160,465 2,780,000
B B2 4,250,000 9.50% due 3/01/2009 (c) 4,230,930 4,239,375
Level 3 Communications:
B B3 3,250,000 9.125% due 5/01/2008 3,237,051 3,193,125
B B3 1,575,000 10.50% due 12/01/2008 (a)(c) 968,122 917,437
B B2 1,000,000 Metromedia Fiber Network, 10% due 11/15/2008 (c) 1,000,000 1,040,000
NR* B3 5,000,000 Nextlink Communications, 9.45% due 4/15/2008 (a) 3,415,758 2,925,000
NR* NR* 2,000,000 Pacific Crossing Ltd., Term B, due 7/28/2006** 2,002,917 1,980,000
Primus Telecommunications Group:
B- B3 1,000,000 11.75% due 8/01/2004 1,035,000 1,030,000
B- B3 1,875,000 11.25% due 1/15/2009 (c) 1,875,000 1,903,125
B- B2 3,000,000 RSL Communications PLC, 11.965% due 3/01/2008 (a) 1,771,950 1,702,500
BBB- Ba3 1,700,000 Telefonica de Argentina, 9.125% due 5/07/2008 (c) 1,690,007 1,538,500
B- B2 3,000,000 Time-Warner Telecom LLC, 9.75% due 7/15/2008 3,000,000 3,210,000
Viatel Inc.:
B NR* (euro)3,834,689 11.15% due 4/15/2008 4,070,988 4,332,691
B NR* 206,342 10% due 4/15/2011 (Convertible) 219,108 232,121
B- B3 US$ 1,950,000 Worldwide Fiber Inc., 12.50% due 12/15/2005 (c) 1,950,000 2,018,250
------------ ------------
37,026,169 35,293,124
===================================================================================================================================
Wireless NR* NR* 4,000,000 American Tower Systems Co., Term, due 12/16/2006** 4,000,000 4,000,000
Communications-- B B3 8,750,000 CTI Holdings SA, 11.316% due 4/15/2008 (a) 5,584,261 3,850,000
13.2% NR* Ba3 10,000,000 Cellular Financial Inc., Term A, due 9/30/2005** 9,988,566 9,837,500
NR* NR* 10,000,000 Cox Communications, Inc., Term B, due 12/31/2006** 10,000,000 10,000,000
B- Caa1 700,000 Dolphin Telecom PLC, 16.331% due 6/01/2008 (a) 303,991 308,000
ESAT Telecom Group PLC:
B+ Caa1 3,225,000 12.427% due 2/01/2007 (a) 2,276,086 2,313,937
B+ Caa1 8,160,000 11.875% due 12/01/2008 (c) 8,651,700 8,649,600
B B2 5,000,000 Iridium Operating LLC, Term, due 12/29/2000** 4,936,539 4,887,500
Nextel Communications, Inc.**:
B B+ 1,162,500 Revolving Credit, due 6/30/2003 1,162,500 1,102,922
B B+ 1,250,000 Term A, due 3/31/2003 1,231,001 1,198,438
B B+ 18,000,000 Term B, due 9/30/2006 18,132,500 17,921,250
CCC+ B3 5,450,000 Nextel Partners Inc., 14% due 2/01/2009 (a)(c) 2,799,589 2,834,000
Omnipoint Communications Corp.**:
NR* B2 2,363,281 Term A, due 2/17/2006 2,372,143 2,126,953
NR* B2 1,118,576 Term B, due 2/17/2006 1,122,771 1,006,719
B+ Ba3 1,100,000 Orange PLC, 8% due 8/01/2008 1,104,125 1,138,500
NR* B3 3,500,000 PTC International Finance BV, 9.623% due
7/01/2007 (a) 2,641,632 2,520,000
CCC+ Caa1 4,250,000 Telesystem International Wireless, 10.052% due
11/01/2007 (a) 3,005,954 1,636,250
------------ ------------
79,313,358 75,331,569
===================================================================================================================================
Total Investments in Corporate Debt
Obligations--122.7% 746,609,775 702,754,868
===================================================================================================================================
</TABLE>
10 & 11
<PAGE>
Debt Strategies Fund II, Inc., February 28, 1999
SCHEDULE OF INVESTMENTS (concluded)
<TABLE>
<CAPTION>
Shares Value
INDUSTRIES Held Preferred Stocks & Warrants Cost (Note 1a)
===================================================================================================================================
<S> <C> <C> <C> <C>
Online Services--0.0% 3,000 Splitrock Services Inc. (Warrants) (d) $ 33,000 $ 45,000
===================================================================================================================================
Tower Construction & 5,150 Crown Castle International Corp. (b) 5,646,250 5,742,250
Leasing--1.0%
===================================================================================================================================
Wired 37 Viatel Inc., Series A (Convertible) 3,515 4,995
Telecommunications--
0.0%
===================================================================================================================================
Wireless 2,000 Centaur Funding Corp. 2,000,000 2,202,500
Communications--
0.4%
===================================================================================================================================
Total Investments in Preferred Stocks &
Warrants--1.4% 7,682,765 7,994,745
===================================================================================================================================
<CAPTION>
Face
Amount Short-Term Securities
===================================================================================================================================
<S> <C> <C> <C> <C>
Commercial US$ 544,000 Raytheon Company, 5% due 3/01/1999 544,000 544,000
Paper***--0.1%
===================================================================================================================================
Total Investments in Short-Term Securities--0.1% 544,000 544,000
===================================================================================================================================
Total Investments--124.2% $754,836,540 711,293,613
============
Unrealized Appreciation on Forward Foreign
Exchange Contracts--Net****--0.0% 178,598
Liabilities in Excess of Other Assets--(24.2%) (138,570,110)
------------
Net Assets--100.0% $572,902,101
============
===================================================================================================================================
</TABLE>
(a) Represents a zero coupon or step bond; the interest rate shown
reflects the effective yield at the time of purchase by the Fund.
(b) Represents a pay-in-kind security which may pay interest/dividends
in additional face/shares.
(c) The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(d) 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.
* 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 47.9% 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 February 28, 1999 were as
follows:
Unrealized
Foreign Expiration Appreciation
Currency Sold Date (Note 1c)
-------------------------------------------------------
(euro)1,386,880 March 1999 $ 85,709
(pound)2,124,425 March 1999 $ 92,889
-------------------------------------------------------
Total Unrealized Appreciation on Forward
Foreign Exchange Contracts--Net
(US$ Commitment--$5,104,225) $178,598
========
-------------------------------------------------------
+ Non-income producing security.
Ratings of issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of February 28, 1999
=============================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$754,836,540) (Note 1b) ........... $711,293,613
------------
Cash ...................................................................... 282,063
Foreign cash (Note 1d) .................................................... 74
Unrealized appreciation on forward foreign exchange contracts (Note 1c) ... 178,598
Interest receivable ....................................................... 11,522,951
Deferred facility fees .................................................... 7,158
Deferred organization expenses (Note 1g) .................................. 45,317
Prepaid expenses and other assets ......................................... 104,113
------------
Total assets .............................................................. 723,433,887
------------
=============================================================================================================================
Liabilities: Loans (Note 6) ............................................................ 142,000,000
Payables:
Securities purchased .................................................... $ 5,360,563
Dividends to shareholders (Note 1h) ..................................... 1,312,744
Interest on loans (Note 6) .............................................. 1,056,755
Investment adviser (Note 2) ............................................. 398,868
Commitment fees ......................................................... 43,100 8,172,030
------------
Deferred income (Note 1f) ................................................. 47,411
Accrued expenses and other liabilities .................................... 312,345
------------
Total liabilities ......................................................... 150,531,786
------------
=============================================================================================================================
Net Assets: Net assets ................................................................ $572,902,101
============
=============================================================================================================================
Capital: Common Stock, $.10 par value, 200,000,000 shares authorized ............... $ 6,261,000
Paid-in capital in excess of par .......................................... 619,266,581
Undistributed investment income--net ...................................... 4,159,105
Accumulated realized capital losses on investments and
foreign currency transactions--net (Note 7) ............................ (13,407,574)
Unrealized depreciation on investments and foreign currency
transactions--net ......................................................... (43,377,011)
------------
Net Assets--Equivalent to $9.15 per share based on 62,610,000
shares of capital stock outstanding (market price--$7.875) ................ $572,902,101
=============
=============================================================================================================================
</TABLE>
See Notes to Financial Statements.
12 & 13
<PAGE>
Debt Strategies Fund II, Inc., February 28, 1999
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Period March 27, 1998+ to February 28, 1999
==========================================================================================================================
<S> <C> <C> <C>
Investment Income Interest and discount earned .................................. $ 52,347,583
(Note 1f): Facility and other fees ....................................... 404,821
Dividends ..................................................... 5,326
------------
Total income .................................................. 52,757,730
------------
==========================================================================================================================
Expenses: Investment advisory fees (Note 2) ............................. $ 3,557,015
Loan interest expense (Note 6) ................................ 2,201,672
Borrowing costs (Note 6) ...................................... 203,333
Accounting services (Note 2) .................................. 128,877
Professional fees ............................................. 118,947
Commitment fees ............................................... 117,817
Custodian fees ................................................ 55,532
Listing fees .................................................. 55,495
Directors' fees and expenses .................................. 35,687
Transfer agent fees (Note 2) .................................. 33,558
Printing and shareholder reports .............................. 17,201
Amortization of organization expenses (Note 1g) ............... 9,616
Pricing services .............................................. 6,818
Other ......................................................... 99,980
------------
Total expenses before reimbursement ........................... 6,641,548
Reimbursement of expenses (Note 2) ............................ (1,473,969)
------------
Expenses after reimbursement .................................. 5,167,579
------------
Investment income--net ........................................ 47,590,151
------------
==========================================================================================================================
Realized & Realized loss from:
Unrealized Gain (Loss) Investments--net ............................................ (13,407,574)
On Investments & Foreign currency transactions--net .......................... (81,967) (13,489,541)
Foreign Currency ------------
Transactions--Net Unrealized appreciation/depreciation on:
(Notes 1c, 1d, 1f & 3): Investments--net ............................................ (43,542,927)
Foreign currency transactions--net .......................... 165,916 (43,377,011)
------------ ------------
Net Decrease in Net Assets Resulting from Operations .......... $ (9,276,401)
============
==========================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Period
March 27, 1998+ to
Increase (Decrease) in Net Assets: February 28, 1999
============================================================================================================================
<S> <C> <C>
Operations: Investment income--net ............................................................... $ 47,590,151
Realized loss on investments and foreign currency transactions--net .................. (13,489,541)
Unrealized depreciation on investments and foreign currency transactions--net ........ (43,377,011)
------------
Net decrease in net assets resulting from operations ................................. (9,276,401)
------------
============================================================================================================================
Dividends to Investment income--net ............................................................... (43,349,079)
Shareholders ------------
(Note 1h): Net decrease in net assets resulting from dividends to shareholders .................. (43,349,079)
------------
============================================================================================================================
Capital Share Proceeds from issuance of Common Stock ............................................... 626,000,000
Transactions Offering costs resulting from the issuance of Common Stock ........................... (572,419)
(Notes 1g & 4): ------------
Net increase in net assets resulting from capital share transactions ................. 625,427,581
------------
============================================================================================================================
Net Assets: Total increase in net assets ......................................................... 572,802,101
Beginning of period .................................................................. 100,000
------------
End of period* ....................................................................... $572,902,101
============
============================================================================================================================
* Undistributed investment income--net (Note 1i) ....................................... $ 4,159,105
============
============================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
14 & 15
<PAGE>
Debt Strategies Fund II, Inc., February 28, 1999
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period March 27, 1998+ to February 28, 1999
==================================================================================================================================
<S> <C> <C>
Cash Provided by Net decrease in net assets resulting from operations .................................. $ (9,276,401)
Operating Activities: Adjustments to reconcile net decrease in net assets resulting from
operations to net cash provided by operating activities:
Increase in receivables ............................................................. (11,522,951)
Increase in other assets ............................................................ (156,588)
Increase in other liabilities ....................................................... 1,858,479
Realized and unrealized loss on investments and foreign currency transactions--net .. 56,866,552
Amortization of discount ............................................................ (6,128,845)
---------------
Net cash provided by operating activities ............................................. 31,640,246
---------------
==================================================================================================================================
Cash Used for Proceeds from sales of long-term investments .......................................... 528,198,167
Investing Activities: Purchases of long-term investments .................................................... (1,287,258,626)
Purchases of short-term investments ................................................... (2,290,422,160)
Proceeds from sales and maturities of short-term investments .......................... 2,292,633,264
---------------
Net cash used for investing activities ................................................ (756,849,355)
---------------
==================================================================================================================================
Cash Provided by Cash receipts on capital shares sold .................................................. 626,000,000
Financing Activities: Cash payments resulting from the issuance of shares ................................... (572,419)
Cash receipts from borrowings ......................................................... 386,000,000
Cash payments on borrowings ........................................................... (244,000,000)
Dividends paid to shareholders ........................................................ (42,036,335)
---------------
Net cash provided by financing activities ............................................. 725,391,246
---------------
==================================================================================================================================
Cash: Net increase in cash .................................................................. 182,137
Cash at beginning of period ........................................................... 100,000
---------------
Cash at end of period ................................................................. $ 282,137
===============
==================================================================================================================================
Cash Flow Cash paid for interest ................................................................ $ 1,144,917
Information: ===============
==================================================================================================================================
</TABLE>
+ Commencement of operations.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Period
March 27, 1998+ to
Increase (Decrease) in Net Asset Value: February 28, 1999
==================================================================================================================================
<S> <C> <C>
Per Share Net asset value, beginning of period..................................................... $ 10.00
Operating -----------
Performance: Investment income--net................................................................... .76
Realized and unrealized loss on investments and foreign currency transactions--net....... (.91)
-----------
Total from investment operations......................................................... (.15)
-----------
Less dividends from investment income--net............................................... (.69)
-----------
Capital charge resulting from the issuance of Common Stock............................... (.01)
-----------
Net asset value, end of period........................................................... $ 9.15
===========
Market price per share, end of period.................................................... $ 7.875
===========
==================================================================================================================================
Total Investment Based on market price per share.......................................................... (14.87%)++
Return:** ===========
Based on net asset value per share....................................................... (1.09%)++
===========
==================================================================================================================================
Ratios to Average Expenses, net of reimbursement and excluding interest expense............................ .54%*
Net Assets: ===========
Expenses, net of reimbursement........................................................... .93%*
===========
Expenses................................................................................. 1.20%*
===========
Investment income--net................................................................... 8.60%*
===========
==================================================================================================================================
Leverage: Amount of borrowings, end of period (in thousands)....................................... $ 142,000
===========
Average amount of borrowings outstanding during the period (in thousands)................ $ 42,330
===========
Average amount of borrowings outstanding per share during the period .................... $ .69
===========
==================================================================================================================================
Supplemental Net assets, end of period (in thousands)................................................. $ 572,902
Data: ===========
Portfolio turnover....................................................................... 89.76%
===========
==================================================================================================================================
</TABLE>
* Annualized.
** Total investment returns exclude the effects of sales loads. 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.
++ Aggregate total investment return.
See Notes to Financial Statements.
16 & 17
<PAGE>
Debt Strategies Fund II, Inc., February 28, 1999
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Debt Strategies Fund II, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a diversified, closed-end management investment company.
Prior to commencement of operations on March 27, 1998, the Fund had no
operations other than those relating to organizational matters and the issuance
of 10,000 shares of Common Stock to Fund Asset Management, L.P. ("FAM") for
$100,000 on March 20, 1998. The Fund's financial statements are prepared in
accordance with generally accepted accounting principles which may require the
use of management accruals and estimates. 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 DSU.
(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. Under the Fund's current
guidelines, 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 will be 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 is available, such Corporate Loan will be valued on the basis of the mean
of the last available bid and asked prices in the market. 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 which 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 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.
(g) Deferred organization expenses--Deferred organization expenses are amortized
on a straight-line basis over a period not exceeding five years. In accordance
with Statement of Position 98-5, any unamortized organization expenses will be
expensed on the first day of the next fiscal year beginning after December 15,
1998. This charge will not have any material impact on the operations of the
Fund. Direct expenses relating to the public offering of the Fund's Common Stock
were charged to capital at the time of issuance of the shares.
(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) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax
18 & 19
<PAGE>
Debt Strategies Fund II, Inc., February 28, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
differences of $81,967 have been reclassified between accumulated net realized
capital losses and undistributed net investment income. These reclassifications
have no effect on net assets or net asset value per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with 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 0.60% of the Fund's average weekly net assets
plus the proceeds of any out standing borrowings used for leverage. For the
period March 27, 1998 to February 28, 1999, FAM earned fees of $3,557,015, of
which $1,427,175 was voluntarily waived. In addition, FAM also reimbursed the
Fund for additional expenses of $46,794.
For the period March 27, 1998 to February 28, 1999, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), $190 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
period March 27, 1998 to February 28, 1999 were $1,292,619,189 and $528,198,167,
respectively.
Net realized gains (losses) for the period March 27, 1998 to February 28, 1999
and net unrealized gains (losses) as of February 28, 1999 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------------------
Long-term investments ................... $(13,408,405) $(43,542,927)
Short-term investments .................. 831 --
Forward foreign exchange contracts ...... (119,872) 178,598
Foreign currency transactions ........... 37,905 (12,682)
------------ ------------
Total ................................... $(13,489,541) $(43,377,011)
============ ============
- --------------------------------------------------------------------------------
As of February 28, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $43,925,366, of which $3,929,695 related to appreciated
securities and $47,855,061 related to depreciated securities. The aggregate cost
of investments at February 28, 1999 for Federal income tax purposes was
$755,218,979.
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 period March 27, 1998
to February 28, 1999 increased by 62,600,000 from shares sold.
5. Unfunded Loan Interests:
As of February 28, 1999, the Fund had unfunded loan commitments of approximately
$10,267,000, which would be extended at the option of the borrower, pursuant to
the following loan agreements:
- --------------------------------------------------------------------------------
Unfunded
Commitment
Borrower (in thousands)
- --------------------------------------------------------------------------------
Ares Leveraged Investment Fund II .............................. $ 1,500
Metro Goldwyn Mayer Co. (MGM) .................................. 837
Nextel Communications, Inc. .................................... 2,588
Outsourcing Solutions, Inc. .................................... 1,159
PageNet Finance Corp. .......................................... 3,940
Patriot American Hospitality, Inc. ............................. 163
Specialty Foods, Inc. .......................................... 80
- --------------------------------------------------------------------------------
6. Short-Term Borrowings:
On July 15, 1998, the Fund entered into a one-year credit agreement with The
Bank of New York, Harris Trust and Savings Bank and certain other institutions
party thereto. The agreement is a $100,000,000 credit facility bearing interest
at the Prime rate, the Federal Funds rate plus 0.48% and/or LIBOR plus 0.48%. On
September 10, 1998, the amount of the credit facility was increased to
$300,000,000. For the period March 27, 1998 to February 28, 1999, the average
amount borrowed was approximately $42,330,000 and the daily weighted average
interest rate was 5.60%. For the period March 27, 1998 to February 28, 1999,
facility and commitment fees aggregated approximately $203,000.
7. Capital Loss Carryforward:
At February 28, 1999, the Fund had a net capital loss carry forward of
approximately $5,992,000, all of which expires in 2007. This amount will be
available to offset like amounts of any future taxable gains.
8. Subsequent Event:
On March 8, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.068886 per share,
payable on March 31, 1999 to shareholders of record as of March 24, 1999.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Debt Strategies Fund II, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of Debt Strategies Fund II, Inc. as of
February 28, 1999, the related statements of operations, changes in net assets,
cash flows, and the financial highlights for the period March 27, 1998
(commencement of operations) to February 28, 1999. These financial statements
and the financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements and
the financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at February 28, 1999 by
correspondence with the custodian, brokers and financial intermediaries or other
alternative procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Debt Strategies Fund
II, Inc. as of February 28, 1999, the results of its operations, the changes in
its net assets, its cash flows, and the financial highlights for the period
March 27, 1998 (commencement of operations) to February 28, 1999 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
April 22, 1999
20 & 21
<PAGE>
Debt Strategies Fund II, Inc., February 28, 1999
PORTFOLIO INFORMATION (unaudited)
As of February 28, 1999
================================================================================
Percent of
Quality Ratings Long-Term
S&P/Moody's Investments
- --------------------------------------------------------------------------------
BBB/Baa ........................................................... 1.0%
BB/Ba ............................................................. 26.2
B/B ............................................................... 51.2
CCC/Caa ........................................................... 3.3
C/C ............................................................... 0.2
NR (Not Rated) .................................................... 18.1
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries Total Assets
- --------------------------------------------------------------------------------
Wireless Communications ........................................... 10.7%
Hotels & Motels ................................................... 7.1
Gaming ............................................................ 6.4
Manufacturing ..................................................... 5.0
Wired Communications .............................................. 4.9
- --------------------------------------------------------------------------------
Percent of
Ten Largest Holdings Total Assets
- --------------------------------------------------------------------------------
Patriot American Hospitality, Inc. ................................ 2.9%
Nextel Communications, Inc. ....................................... 2.8
Starwood Hotels and Resorts Worldwide, Inc. ....................... 2.8
Horseshoe Gaming LLC .............................................. 1.9
Pool Energy Services Co. .......................................... 1.8
ESAT Telecom Group PLC ............................................ 1.5
Walter Industries, Inc. ........................................... 1.5
Coaxial LLC/Coaxial Finance ....................................... 1.4
Cox Communications, Inc. .......................................... 1.4
Cellular Financial Inc. ........................................... 1.4
- --------------------------------------------------------------------------------
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 and Transfer Agent
The Bank of New York
110 Washington Street
New York, NY 10286
NYSE Symbol
DSU
================================================================================
After more than 20 years of service, Arthur Zeikel recently retired as Chairman
of Merrill Lynch Asset Management, L.P. (MLAM). Mr. Zeikel served as President
of MLAM from 1977 to 1997 and as Chairman since December 1997. Mr. Zeikel is one
of the country's most respected leaders in asset management and presided over
the growth of Merrill Lynch's asset management business. During his tenure,
client assets under management grew from $300 million to over $500 billion. Mr.
Zeikel will remain on Debt Strategies Fund II, Inc.'s Board of Directors. We are
pleased to announce that Terry K. Glenn has been elected President and Director
of the Fund. Mr. Glenn has held the position of Executive Vice President of MLAM
since 1983.
Mr. Zeikel's colleagues at MLAM join the Fund's Board of Directors in wishing
him well in his retirement from Merrill Lynch and are pleased that he will
continue as a member of the Fund's Board of Directors.
Gerald M. Richard, Treasurer of Debt Strategies Fund II, Inc. has also recently
retired. His colleagues at Merrill Lynch Asset Management, L.P. join the Fund's
Board of Directors in wishing Mr. Richard well in his retirement.
22 & 23
<PAGE>
This report, including the financial information herein, is transmitted to the
shareholders of Debt Strategies Fund II, 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 II, Inc.
Box 9011
Princeton, NJ
08543-9011 #DEBTII--2/99
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