DEBT
STRATEGIES
FUND II, INC.
[GRAPHIC OMITTED]
STRATEGIC
Performance
Semi-Annual Report
August 31, 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.
<PAGE>
Debt Strategies Fund II, Inc., August 31, 1999
DEAR SHAREHOLDER
For the six-month period ended August 31, 1999, Debt Strategies Fund II, Inc.'s
total investment return was +2.89%, based on a change in per share net asset
value from $9.15 to $8.91, and assuming reinvestment of $0.466 per share income
dividends. During the same six-month period, the net annualized yield of the
Fund's Common Stock was 10.63%. Since inception (March 27, 1998) through August
31, 1999, the total investment return on the Fund's Common Stock was +1.77%,
based on a change in per share net asset value from $10.00 to $8.91, and
assuming reinvestment of $1.158 per share income dividends. At the end of the
August period, the Fund was 25.6% 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 II, 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 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%.
Furthermore, 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 continues to be a convergence
of the leveraged bank loan market and the high-yield bond market.
Correlation Between Markets
There is a growing correlation between the leveraged loan market and the
high-yield bond market. 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, 60% of the Fund's assets were allocated to bonds and 40% to
bank loans. This position reflected our belief that bonds were very compelling
given the wide credit spreads. More than 97% of
2 & 3
<PAGE>
Debt Strategies Fund II, Inc., August 31, 1999
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 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 7.3 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 26% 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 220 issuers in 50 industries. The
"Portfolio Profile" section on page 25 of this report to shareholders 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 markets 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 II, 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 18, 1999
Risk/Reward of Various Assets 1992-July 1999
ML Debt Strategies Fund II, Inc. Risk/Reward of Various Assets
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 II, 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>
Aircraft & B- B3 US$ 2,500,000 Argo-Tech Corporation, 8.625% due 10/01/2007 $ 2,381,700 $ 2,200,000
Parts -- 1.7% B B1 1,000,000 BE Aerospace, 9.50% due 11/01/2008 1,000,000 1,000,000
B- B3 6,970,000 Compass Aerospace Corp., 10.125% due
4/15/2005 (c) 6,797,329 6,238,150
------------ ------------
10,179,029 9,438,150
===================================================================================================================================
Amusement & B- B3 1,850,000 AMC Entertainment Inc., 9.50% due 2/01/2011 1,850,000 1,572,500
Recreational AMF Group, Inc.**:
Services -- 4.3% B NR* 4,193,946 Term A, due 3/31/2003 4,124,185 3,995,782
B NR* 2,589,337 Term B, due 3/31/2004 2,544,231 2,470,119
B1 NR* 883,929 ASC East Inc., Term, due 5/31/2006** 879,657 848,572
B1 NR* 2,211,311 ASC West Inc., Term, due 5/31/2006** 2,200,625 2,122,858
B B2 1,000,000 Carmike Cinemas Inc., 9.375% due 2/01/2009 1,003,500 925,000
B- B3 3,000,000 Hollywood Entertainment, 10.625% due 8/15/2004 (c) 3,086,250 2,895,000
B+ NR* 4,937,500 Kerasotes Theatres, Inc., Term B, due 12/31/2004** 4,931,543 4,925,156
B B3 1,300,000 Loews Cineplex Entertainment, 8.875% due 8/01/2008 1,290,148 1,147,250
NR* NR* 922,500 Metro-Goldwyn-Mayer Co. (MGM), Revolving Credit,
due 9/30/2003** 922,500 887,618
NR* NR* 2,000,000 SFX Entertainment, Term B, due 6/30/2006** 1,987,518 1,986,250
------------ ------------
24,820,157 23,776,105
===================================================================================================================================
Apparel -- 1.3% NR* NR* 3,250,000 CS Brooks Canada, Inc., Term, due 6/25/2006** 3,226,986 3,225,625
BB Ba2 5,000,000 Phillips Van-Heusen, 7.75% due 11/15/20 4,561,863 4,050,000
------------ ------------
7,788,849 7,275,625
===================================================================================================================================
Automotive B B2 4,250,000 American Axle and Manufacturing Inc.,
Equipment -- 5.4% 9.75% due 3/01/2009 4,217,833 4,281,875
NR* NR* 2,000,000 American Bumper, Term B, due 10/31/2002** 1,995,329 2,001,876
B- Caa1 456,204 Breed Technologies Inc., Revolving Credit,
due 4/27/2004** 456,204 193,126
BB- Ba3 10,000,000 Collins & Aikman Corp., Term C, due 12/31/2005** 9,987,923 9,968,750
B B2 4,500,000 Group 1 Automotive Inc., 10.875% due 3/01/2009 4,402,897 4,365,000
B- B3 3,000,000 Newcor Inc., 9.875% due 3/01/2008 3,060,000 2,685,000
Safelite Glass Corp.**:
BB- B1 2,061,429 Term B, due 12/23/2003 2,071,736 2,051,121
BB- B1 2,061,429 Term C, due 12/23/2004 2,071,736 2,051,121
B- B3 2,050,000 Special Devices Inc., 11.375% due 12/15/2008 2,050,000 1,691,250
B B2 800,000 Venture Holdings Trust, 11% due 6/01/2007 (c) 800,000 792,000
------------ ------------
31,113,658 30,081,119
===================================================================================================================================
Broadcast -- Radio B B2 4,875,000 Ackerley Group Inc., 9% due 1/15/2009 4,936,109 4,777,500
& Television NR* NR* 5,000,000 Benedek Broad, Term B, due 11/20/2007** 4,992,622 4,993,750
- -- 5.8% CCC+ NR* 2,950,000 CD Radio Inc., 14.50% due 5/15/2009 (c) 2,950,000 2,983,188
B- B3 1,700,000 Citadel Broadcasting Company, 9.25%
due 11/15/2008 1,772,250 1,691,500
Cumulus Media**:
NR* NR* 1,200,000 Term B, due 9/30/2007 1,197,000 1,197,000
NR* NR* 800,000 Term C, due 2/28/2008 798,000 798,000
B- B3 1,525,000 Granite Broadcasting, 9.375% due 12/01/2005 1,525,000 1,517,375
B B3 2,250,000 Jones International Networks Ltd., 11.75%
due 7/01/2005 2,250,000 1,980,000
NR* Caa1 18,550,000 Radio Unica Corp., 14.636% due 8/01/2006 (a) 11,558,550 11,222,750
B B2 1,500,000 Young Broadcasting Inc., 8.75% due 6/15/2007 1,593,750 1,447,500
------------ ------------
33,573,281 32,608,563
===================================================================================================================================
Building & B- B2 1,600,000 Webb (Del E.) Corp., 10.25% due 2/15/2010 1,574,937 1,504,000
Construction
- -- 0.3%
===================================================================================================================================
Building B B3 5,950,000 Amatek Industries Property Limited, 12%
Materials -- 2.5% due 2/15/2008 (c) 5,649,422 5,593,000
B B2 5,100,000 Republic Group Inc., 9.50% due 7/15/2008 5,019,960 4,896,000
NR* NR* (Euro) 639,115 Thyssen Schulte Bautechnik & Co., Term B,
due 12/02/2003** 687,573 667,545
NR* B1 US$ 3,000,000 Trussway Industries, Term B, due 7/08/2005** 2,985,222 3,000,000
------------ ------------
14,342,177 14,156,545
===================================================================================================================================
Business B- Caa1 7,500,000 Muzak Holdings LLC, 13% due 3/15/2010 (a)(c) 4,233,445 4,237,500
Services -- 0.8%
===================================================================================================================================
Cable Television B B2 4,875,000 @Entertainment Inc., 17.50% due 2/01/2009 (a) 1,981,252 2,906,719
Services -- 7.2% CSC Holdings Inc.:
BB+ Ba2 1,025,000 7.25% due 7/15/2008 1,025,000 949,406
BB+ Ba2 1,275,000 7.625% due 7/15/2018 1,273,769 1,133,156
Charter Communications Holdings LLC (c):
B+ B2 2,800,000 8.625% due 4/01/2009 2,791,711 2,625,000
B+ B2 2,500,000 9.922% due 4/01/2011 (a) 1,604,177 1,500,000
B- B3 1,000,000 Classic Cable Inc., 9.375% due 8/01/2009 (c) 1,000,000 970,000
CCC+ Caa1 17,000,000 Coaxial LLC, 11.864% due 8/15/2008 (a) 11,112,210 11,390,000
BBB- Ba2 4,300,000 Comcast Corp., 9.375% due 5/15/2005 4,611,750 4,498,875
B B2 5,000,000 Falcon Holding Group LP, 8.375% due 4/15/2010 4,990,059 4,950,000
BB+ Ba3 2,000,000 Multicanal SA, 10.50% due 4/15/2018 2,050,000 1,400,000
B- B3 3,305,000 Rifkin Acquisition Partners LP, 11.125%
due 1/15/2006 3,664,419 3,652,025
D Caa3 2,000,000 + Supercanal Holdings SA, 11.50% due 5/15/2005 (c) 2,000,000 1,020,000
Telewest Communications PLC:
B+ B1 1,000,000 11.25% due 11/01/2008 1,000,000 1,092,500
B+ B1 3,300,000 8.97% due 4/15/2009 (a)(c) 2,221,564 2,017,125
------------ ------------
41,325,911 40,104,806
===================================================================================================================================
Chemicals -- 4.5% BBB- Baa3 5,000,000 Equistar Chemicals LP, 8.75% due 2/15/2009 (c) 4,986,392 4,912,510
BB Ba2 3,442,437 Huntsman Corporation, Term B, due 3/15/2004** 3,403,044 3,429,528
Huntsman ICI Chemical**:
NR* Ba3 2,500,000 Term B, due 6/30/2007 2,490,748 2,508,333
NR* Ba3 2,500,000 Term C, due 6/30/2008 2,490,728 2,508,333
NR* Ba2 4,884,615 Koppers Industries, Inc., Term B, due 11/30/2004** 4,909,038 4,863,245
B Caa2 2,700,000 LaRoche Industries Inc., 9.50% due 9/15/2007 2,675,143 1,701,000
NR* Ba3 4,987,500 Lyondell Petrochemical Co., Term E, due 5/17/2006** 4,981,445 5,007,241
------------ ------------
25,936,538 24,930,190
===================================================================================================================================
</TABLE>
6 & 7
<PAGE>
Debt Strategies Fund II, 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>
Computer-Related NR* NR* US$ 5,000,000 Bridge Information Systems, Term B,
Products -- 0.9% due 5/29/2005** $ 4,960,833 $ 5,003,125
===================================================================================================================================
Consumer CCC+ Caa1 2,500,000 Diamond Brands Inc., 12.875% due 4/15/2009 (a) 1,590,819 421,875
Products -- 1.2% CCC+ B3 2,500,000 Diamond Brands Operating, 10.125% due 4/15/2008 2,500,000 1,950,000
B+ B2 1,225,000 Evenflo Company Inc., 11.75% due 8/15/2006 1,225,000 1,214,281
B B3 1,325,000 Home Products International Inc., 9.625%
due 5/15/2008 1,325,000 1,166,000
B+ B2 1,900,000 Scotts Company, 8.625% due 1/15/2009 (c) 1,900,000 1,843,000
------------ ------------
8,540,819 6,595,156
===================================================================================================================================
Diversified B+ B1 2,000,000 Blount Inc., Term B, due 6/30/2006** 1,995,010 1,997,500
- -- 0.4%
===================================================================================================================================
Drilling -- 3.6% BB- B1 5,000,000 Cliffs Drilling, 10.25% due 5/15/2003 5,425,000 4,887,500
B- B1 5,000,000 Key Energy Services Inc., Term B, due 9/14/2004** 4,939,102 4,962,500
Parker Drilling Co.:
B- B3 2,500,000 5.50% due 8/01/2004 (Convertible) 1,547,896 1,900,000
B+ B1 3,075,000 9.75% due 11/15/2006 2,656,226 2,944,312
RBF Finance Company:
BB- Ba3 1,100,000 11% due 3/15/2006 1,100,000 1,155,000
BB- Ba3 4,200,000 11.375% due 3/15/2009 4,401,280 4,410,000
------------ ------------
20,069,504 20,259,312
===================================================================================================================================
Educational B- B3 1,325,000 La Petite Academy/LPA Holdings, 10% due 5/15/2008 1,325,000 1,182,562
Services -- 0.2%
===================================================================================================================================
Electronics/ B B2 4,112,000 Advanced Glassfiber Yarn, 9.875% due 1/15/2009 4,032,793 3,952,660
Electrical BB- Ba3 1,500,000 Amkor Technologies Inc., 9.25% due 5/01/2006 (c) 1,490,916 1,462,500
Components -- 3.4% B B2 2,053,000 BGF Industries Inc., 10.25% due 1/15/2009 2,013,424 1,837,435
B B1 1,575,000 Filtronic PLC, 10% due 12/01/2005 (c) 1,575,000 1,512,000
B+ B1 4,250,000 Flextronics International Ltd., 8.75% due 10/15/2007 4,409,375 4,165,000
NR* NR* 5,000,000 General Cable, Term B, due 6/30/2007** 4,992,673 5,009,375
B B3 1,000,000 Intersil Corporation, 13.25% due 8/15/2009 (c) 1,000,000 1,015,000
------------ ------------
19,514,181 18,953,970
===================================================================================================================================
Energy -- 4.7% CCC- Caa1 550,000 Belden & Blake Corp., 9.875% due 6/15/2007 551,375 374,000
B B3 1,000,000 Chesapeake Energy Corp., 9.625% due 5/01/2005 1,000,000 930,000
CCC Caa1 1,275,000 Continental Resources, 10.25% due 8/01/2008 1,275,000 962,625
B B2 2,000,000 Energy Corp. of America, 9.50% due 5/15/2007 2,000,000 1,775,000
B B2 2,750,000 Forest Oil Corporation, 10.50% due 1/15/2006 2,719,183 2,832,500
CCC+ B3 1,850,000 Gothic Production Corp., 11.125% due 5/01/2005 1,850,000 1,572,500
B+ B1 3,000,000 Nuevo Energy Co., 8.875% due 6/01/2008 (c) 2,877,387 2,992,500
NR* NR* 2,500,000 PlainsScurlo, Term B, due 5/12/2004** 2,487,853 2,494,533
B+ B2 12,640,000 Pool Energy Services Co., 8.625% due 4/01/2008 13,126,000 12,324,000
------------ ------------
27,886,798 26,257,658
===================================================================================================================================
Environmental URS Corporation**:
Services -- 0.4% BB Ba3 1,000,000 Term B, due 6/09/2006 999,017 1,005,000
BB Ba3 1,000,000 Term C, due 6/09/2007 999,014 1,005,000
------------ ------------
1,998,031 2,010,000
===================================================================================================================================
Financial NR* B2 2,610,000 Ares Leveraged Fund II, 12.15% due 10/31/2005 (c)(e) 2,610,000 2,350,827
Services -- 1.8% NR* NR* 1,000,000 Investcorp SA, 7.54% due 10/21/2008 1,000,000 1,000,000
Outsourcing Solutions, Inc.**:
NR* B2 2,166,667 Revolving Credit, due 10/15/2001 2,166,667 2,098,633
NR* B2 1,980,862 Term A, due 10/15/2001 1,976,082 1,923,913
B+ Ba3 3,150,000 Willis Corroon Corporation, 9% due 2/01/2009 (c) 3,150,000 2,929,500
------------ ------------
10,902,749 10,302,873
===================================================================================================================================
Food & Kindred B+ B1 3,250,000 B & G Foods, Term B, due 3/15/2006** 3,243,816 3,250,000
Products -- 4.2% B- B3 7,500,000 Luigino's Inc., 10% due 2/01/2006 7,515,000 7,125,000
BB- Ba3 1,500,000 Pabst Brewing, Term B, due 4/30/2003** 1,495,814 1,500,000
B B2 2,000,000 SC International Services, Inc., 9.25% due 9/01/2007 1,943,757 1,987,500
Specialty Foods, Inc.**:
NR* B3 3,572,648 Revolving Credit, due 1/31/2001 3,572,648 3,565,949
NR* B3 6,128,836 Term, due 1/31/2001 6,136,497 6,117,344
------------ ------------
23,907,532 23,545,793
===================================================================================================================================
Forest B B2 2,000,000 Ainsworth Lumber Company, 12.50% due 7/15/2007 (b) 2,075,000 2,200,000
Products -- 1.5% B+ B3 650,000 Millar Western Forest, 9.875% due 5/15/2008 650,000 619,125
NR* NR* 5,000,000 Strategic Timber Trust, Inc., Bridge,
due 10/27/1999** 4,995,029 4,995,029
B B3 1,000,000 Uniforet Inc., 11.125% due 10/15/2006 940,563 690,000
------------ ------------
8,660,592 8,504,154
===================================================================================================================================
Furniture & B- B3 3,425,000 Formica Corp., 10.875% due 3/01/2009 (c) 3,425,000 3,223,781
Fixtures -- 0.6%
===================================================================================================================================
Gaming -- 7.9% Aladdin Gaming**:
CCC+ B2 3,000,000 Term B, due 8/26/2006 2,735,821 2,874,375
CCC+ B2 4,500,000 Term C, due 2/26/2008 4,101,517 4,311,563
B- B3 4,250,000 Ameristar Casinos, Inc., 10.50% due 8/01/2004 4,574,062 4,250,000
B- B3 1,600,000 Argosy Gaming Co., 10.75% due 6/01/2009 (c) 1,600,000 1,636,000
B B1 1,500,000 Eldorado Resorts LLC, 10.50% due 8/15/2006 1,582,500 1,537,500
B+ B2 6,500,000 Empress Entertainment, 8.125% due 7/01/2006 6,520,840 6,418,750
B B2 4,465,000 Harvey Casino Resorts, 10.625% due 6/01/2006 4,704,413 4,598,950
B B2 1,350,000 Hollywood Park Inc., 9.25% due 2/15/2007 (c) 1,350,000 1,302,750
B B2 2,750,000 Hollywood Park/Operating, 9.50% due 8/01/2007 2,779,219 2,681,250
B+ B3 9,200,000 Horseshoe Gaming LLC, 9.375% due 6/15/2007 9,310,750 9,177,000
B B3 4,180,000 Isle of Capri Casinos, 8.75% due 4/15/2009 (c) 4,212,606 3,845,600
B B2 1,950,000 Trump Atlantic City Associates/Funding Inc.,
11.25% due 5/01/2006 1,684,436 1,657,500
------------ ------------
45,156,164 44,291,238
===================================================================================================================================
Grocery -- 0.9% B B2 5,000,000 Grand Union Co., Term, due 8/17/2003** 5,006,250 4,987,500
===================================================================================================================================
</TABLE>
8 & 9
<PAGE>
Debt Strategies Fund II, 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>
Healthcare B+ Ba3 US$10,219,375 Integrated Health Services, Inc., Term B,
Providers -- 1.5% due 9/15/2003** $ 10,190,222 $ 8,601,311
===================================================================================================================================
Hotels & B- B2 6,000,000 Extended Stay America, 9.15% due 3/15/2008 5,741,210 5,700,000
Motels -- 8.2% NR* NR* 3,000,000 Starwood Hotels & Resorts Trust, Term,
due 2/23/2003** 2,971,567 2,975,625
NR* Ba1 17,000,000 Starwood Hotels and Resorts Worldwide, Inc.,
Bridge, due 2/23/2003** 17,006,000 17,003,536
Wyndham International, Term**:
B+ B3 6,500,000 due 6/30/2004 6,468,367 6,461,410
B+ B3 13,500,000 due 6/30/2006 13,466,830 13,430,394
------------ ------------
45,653,974 45,570,965
===================================================================================================================================
Industrial B- B3 1,750,000 American Plumbing & Mechanic Inc., 11.625%
Services -- 0.6% due 10/15/2008 (c) 1,714,456 1,662,500
B B2 1,750,000 Building One Services, 10.50% due 5/01/2009 1,711,309 1,627,500
------------ ------------
3,425,765 3,290,000
===================================================================================================================================
Leasing & Rental BB- B2 3,750,000 Anthony Crane Rental, Term, due 7/22/2006** 3,745,796 3,712,500
Services -- 3.1% Avis Rent A Car**:
BB+ Ba3 3,500,000 Term B, due 6/30/2006 3,491,403 3,473,750
BB+ Ba3 3,500,000 Term C, due 6/30/2007 3,491,376 3,475,938
BB NR* 3,950,000 Coinmach Laundry Corp., Term B, due 6/30/2004** 3,969,750 3,945,063
B B3 550,000 National Equipment Services, 10% due 11/30/2004 539,152 550,000
B B3 500,000 Neff Corp., 10.25% due 6/01/2008 492,930 505,000
B- B3 900,000 Penhall International, 12% due 8/01/2006 900,000 891,000
B B3 750,000 Universal Hospital Services, 10.25% due 3/01/2008 641,533 555,000
------------ ------------
17,271,940 17,108,251
===================================================================================================================================
Manufacturing BB- B1 4,975,000 Environmental Systems, Term B, due 9/30/2005** 4,952,369 4,925,250
- -- 4.2% B B2 2,478,000 Fairfield Manufacturing Company Inc., 9.625%
due 10/15/2008 2,478,000 2,351,002
NR* NR* 5,000,000 Metokote Corp., Term B, due 11/02/2005** 4,965,642 5,009,375
CCC Ca 4,500,000 Morris Materials Handling, 9.50% due 4/01/2008 3,390,297 1,800,000
B- B3 1,575,000 Russell-Stanley Holdings Inc., 10.875%
due 2/15/2009 (c) 1,563,535 1,567,125
NR* B1 4,273,065 Terex Corporation, Term B, due 3/06/2005** 4,257,752 4,255,259
B+ Ba3 3,000,000 Westinghouse Air Brake, 9.375% due 6/15/2005 3,075,000 3,022,500
------------ ------------
24,682,595 22,930,511
===================================================================================================================================
Medical CC Caa1 1,000,000 Graham Field Health Products, Inc., 9.75%
Equipment -- 0.7% due 8/15/2007 1,017,500 620,000
B- B3 4,000,000 Hudson Respiratory Care, 9.125% due 4/15/2008 4,000,000 3,305,000
------------ ------------
5,017,500 3,925,000
===================================================================================================================================
Metals & NR* NR* 3,000,000 AEI Resources, Term B, due 12/31/2004** 2,978,257 2,962,500
Mining -- 5.3% NR* B3 2,922,857 Acme Metals Inc., Term, due 12/01/2005** 2,193,342 2,349,246
BB- Ba3 5,000,000 Ameristeel Corp., 8.75% due 4/15/2008 5,000,000 4,975,000
B B1 1,050,000 Bayou Steel Corp., 9.50% due 5/15/2008 1,040,821 987,000
B B2 1,625,000 GS Technologies Operating Co., 12% due 9/01/2004 1,780,391 1,336,562
D C 5,000,000 +Geneva Steel, 9.50% due 1/15/2004 4,536,787 1,100,000
BB- B2 4,000,000 Golden Northwest Aluminum, 12% due 12/15/2006 4,000,000 4,075,000
BB Ba2 4,000,000 Great Central Mines Ltd., 8.875% due 4/01/2008 4,000,000 3,660,000
B Caa2 2,400,000 Lodestar Holdings Inc., 11.50% due 5/15/2005 2,400,000 2,016,000
CCC+ Caa2 1,975,000 Metal Management Inc., 10% due 5/15/2008 1,975,000 1,501,000
B- B3 5,000,000 WHX Corp., 10.50% due 4/15/2005 5,000,000 4,775,000
------------ ------------
34,904,598 29,737,308
===================================================================================================================================
Online B- B3 1,425,000 PSINet Inc., 11% due 8/01/2009 (c) 1,425,000 1,410,750
Services -- 0.9% NR* NR* 3,000,000 Splitrock Services Inc., 11.75% due 7/15/2008 2,969,066 2,700,000
B- B3 1,000,000 Verio Inc., 11.25% due 12/01/2008 1,000,000 1,015,000
------------ ------------
5,394,066 5,125,750
===================================================================================================================================
Packaging -- 1.7% B B1 850,000 Consumers Packaging Inc., 9.75% due 2/01/2007 (c) 850,000 790,500
B- Caa1 1,000,000 Indesco International, 9.75% due 4/15/2008 1,000,000 590,000
NR* NR* 3,500,000 Kerr Group, Term B, due 3/12/2006** 3,483,377 3,497,813
B B3 2,500,000 Packaging Corporation of America, 9.625%
due 4/01/2009 2,500,000 2,525,000
B B3 2,750,000 Spinnaker Industries Inc., 10.75% due 10/15/2006 2,853,125 2,062,500
------------ ------------
10,686,502 9,465,813
===================================================================================================================================
Paging -- 1.1% CCC+ B3 325,000 Metrocall Inc., 11% due 9/15/2008 322,832 247,000
NR* Ba3 6,680,000 PageNet Finance Corp., Revolving Credit,
due 12/31/2004** 6,680,000 6,106,636
------------ ------------
7,002,832 6,353,636
===================================================================================================================================
Paper -- 4.3% BB B2 2,550,000 Norampac Inc., 9.50% due 2/01/2008 2,611,625 2,562,750
NR* Ba2 5,000,000 Pacifica, Term B, due 12/31/2006** 4,994,017 5,012,500
NR* NR* 6,000,000 Repap New Brunswick, Inc., Term B, due 6/01/2004** 6,038,750 5,805,000
B+ B1 4,000,000 SD Warren Co., 12% due 12/15/2004 4,270,000 4,520,000
NR* Ba3 5,801,556 Stone Container Corporation, Term E, due
10/01/2003** 5,816,060 5,808,808
------------ ------------
23,730,452 23,709,058
===================================================================================================================================
Petroleum BB Ba3 2,000,000 Clark Refining & Marketing Inc., Term,
Refineries -- 0.3% due 11/15/2004** 1,937,955 1,900,000
===================================================================================================================================
Pharmaceuticals Dade Behring Inc.**:
- -- 0.5% B+ Ba3 1,250,000 Term B, due 6/30/2006 1,243,862 1,254,166
B+ Ba3 1,250,000 Term C, due 6/30/2007 1,243,843 1,254,166
------------ ------------
2,487,705 2,508,332
===================================================================================================================================
Printing & B+ B2 1,825,000 Big Flower Press Holdings, 8.625% due 12/01/2008 1,825,000 1,717,781
Publishing -- 1.4% B+ B1 1,650,000 Mail-Well I Corp., 8.75% due 12/15/2008 1,646,780 1,584,000
B B3 1,050,000 Premier Graphics Inc., 11.50% due 12/01/2005 1,050,000 955,500
B- B3 (pound)2,500,000 Regional Independent Media, 12.47%
due 7/01/2008 (a)(c) 2,514,872 2,450,218
BB- Baa3 US$ 1,000,000 World Color Press Inc., 8.375% due 11/15/2008 1,000,000 970,000
------------ ------------
8,036,652 7,677,499
===================================================================================================================================
</TABLE>
10 & 11
<PAGE>
Debt Strategies Fund II, 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>
Property B+ Ba2 US$ 675,000 Prison Realty Trust Inc., 12% due 6/01/2006 $ 675,000 $ 681,750
Management -- 0.5% NR* NR* 2,500,000 Rockefeller Center Property Trust, 10.573%
due 12/31/2000 (Convertible) (a) 2,189,448 2,087,500
------------ ------------
2,864,448 2,769,250
===================================================================================================================================
Restaurants -- 0.4% Domino & Bluefence**:
B+ B1 1,171,130 Term B, due 12/21/2006 1,160,134 1,174,058
B+ B1 1,171,130 Term C, due 12/21/2007 1,160,016 1,174,058
------------ ------------
2,320,150 2,348,116
===================================================================================================================================
Retail -- NR* NR* 4,000,000 Asbury Automotive Group, Senior Secured Note,
Specialty -- 1.4% due 3/31/2005** 3,969,899 3,950,000
B B3 2,000,000 TM Group Holdings, 11% due 5/15/2008 2,000,000 1,965,000
B- Caa1 1,890,000 United Auto Group, Inc., 11% due 7/15/2007 1,767,727 1,701,000
------------ ------------
7,737,626 7,616,000
===================================================================================================================================
Satellite Echostar DBS Corporation:
Telecommunication B- B2 900,000 9.25% due 2/01/2006 900,000 882,000
Distribution B B2 4,225,000 9.375% due 2/01/2009 4,225,000 4,161,625
Systems -- 1.8% CCC B3 4,250,000 Golden Sky Systems, 12.375% due 8/01/2006 4,643,125 4,648,437
B- B3 450,000 Pegasus Communications, 9.75% due 12/01/2006 450,000 447,750
------------ ------------
10,218,125 10,139,812
===================================================================================================================================
Shipping -- 0.2% B+ B2 2,000,000 Enterprises Shipholding, 8.875% due 5/01/2008 1,995,792 1,360,000
===================================================================================================================================
Textile Mill B Caa3 6,500,000 Galey & Lord, Inc., 9.125% due 3/01/2008 5,932,325 3,380,000
Products -- 1.9% B- Caa1 1,150,000 Globe Manufacturing Corp., 10% due 8/01/2008 1,150,000 770,500
NR* NR* 6,682,019 Joan Fabrics Corp., Term A, due 6/30/2006** 6,698,724 6,636,080
------------ ------------
13,781,049 10,786,580
===================================================================================================================================
Tower Construction NR* NR* 4,000,000 American Tower Systems Co., Term, due 12/16/2006** 3,991,007 3,991,668
& Leasing -- 1.9% Crown Castle International Corporation:
B B3 650,000 9% due 5/15/2011 650,000 604,500
B B3 1,495,000 10.375% due 5/15/2011 928,737 829,725
NR* NR* 4,000,000 Spectracite, Term B, due 6/30/2006** 4,030,000 4,008,752
NR* NR* 2,400,000 Spectrasite Holdings Inc., 11.25%
due 4/15/2009 (a)(c) 1,447,028 1,212,000
------------ ------------
11,046,772 10,646,645
===================================================================================================================================
Transportation BB- NR* 1,000,000 Autopistas del Sol SA, 10.25% due 8/01/2009 (c) 987,233 650,000
Services -- 2.3% NR* NR* (pound)3,199,000 Eurotunnel, Tier 1 Tranche, due 11/04/2011** 4,241,810 4,111,867
B NR* US$ 5,000,000 MRS Logistica SA, 10.625% due 8/15/2005 (c) 4,924,465 3,225,000
NR* NR* 5,000,000 Transport Man, Term B, due 6/15/2006** 4,987,855 5,000,000
------------ ------------
15,141,363 12,986,867
===================================================================================================================================
Utilities -- 0.4% BB Ba1 2,750,000 Monterrey Power, SA de CV, 9.625% due 11/15/2009 (c) 2,749,386 2,255,000
===================================================================================================================================
Waste Management B- Caa1 2,500,000 ISG Resources Inc., 10% due 4/15/2008 2,500,000 2,450,000
- -- 1.6% BB- B3 4,590,000 Norcal Waste Systems, 11.185% due 11/15/2005 (a) 5,081,088 4,934,250
B+ B3 1,525,000 Safety-Kleen Corporation, 9.25% due 5/15/2009 (c) 1,525,000 1,505,937
------------ ------------
9,106,088 8,890,187
===================================================================================================================================
Wired BB- B2 2,000,000 Call-Net Enterprises Inc., 9.375% due 5/15/2009 1,995,509 1,865,000
Telecommunications B B3 3,925,000 Caprock Communications, 11.50% due 5/01/2009 (c) 3,868,630 3,925,000
- -- 10.3% NR* NR* 4,275,000 E. Spire Communications, 10.521% due 7/01/2008 (a) 2,893,455 1,715,344
B- Caa2 4,825,000 Global Telesystems Group, 9.875% due 2/15/2005 4,740,214 4,632,000
B Caa1 5,000,000 Globenet Communications Group Ltd., 13%
due 7/15/2007 (c) 5,000,000 4,900,000
B B3 650,000 Hermes Europe Railtel BV, 10.375% due 1/15/2009 650,000 651,625
Intermedia Communications Inc.:
B B2 4,000,000 9.046% due 7/15/2007 (a) 3,267,355 2,780,000
B B2 4,250,000 9.50% due 3/01/2009 4,231,520 3,984,375
Level 3 Communications Inc.:
B B3 3,250,000 9.125% due 5/01/2008 3,237,518 3,022,500
B B3 1,575,000 10.50% due 12/01/2008 (a) 1,019,378 905,625
B B2 1,000,000 Metromedia Fiber Network, 10% due 11/15/2008 1,000,000 990,000
B B3 1,400,000 Netia Holdings II BV, 13.125% due 6/15/2009 (c) 1,400,000 1,424,500
B B3 5,000,000 Nextlink Communications, 9.45% due 4/15/2008 (a) 3,578,295 3,000,000
Primus Telecommunications Group:
B- B3 1,000,000 11.75% due 8/01/2004 1,035,000 975,000
B- B3 1,875,000 11.25% due 1/15/2009 1,875,000 1,790,625
RSL Communications PLC:
B- B2 3,000,000 11.965% due 3/01/2008 (a) 1,903,443 1,620,000
B- B2 1,950,000 9.875% due 11/15/2009 (c) 1,904,348 1,696,500
BBB- Ba3 1,700,000 Telefonica de Argentina, 9.125% due 5/07/2008 (c) 1,690,367 1,453,500
NR* B3 6,129,032 Teligent Inc., Term, due 7/01/2002** 6,004,731 5,860,887
B- B2 3,000,000 Time-Warner Telecom LLC, 9.75% due 7/15/2008 3,000,000 3,045,000
NR* NR* 700,000 Versatel Telecom BV, 11.875% due 7/15/2009 694,936 670,783
NR* Caa1 DM 7,500,000 Viatel Inc., 11.15% due 4/15/2008 4,070,988 3,969,111
Worldwide Fiber Inc.:
B B3 US$ 1,950,000 12.50% due 12/15/2005 1,950,000 1,989,000
B B3 700,000 12% due 8/01/2009 (c) 700,000 701,750
------------ ------------
61,710,687 57,568,125
===================================================================================================================================
Wireless B B1 8,750,000 CTI Holdings SA, 11.316% due 4/15/2008 (a) 5,896,927 4,112,500
Telecommunications B B3 3,350,000 ClearNet Communications, 10.125% due 5/01/2009 (a) 2,112,442 1,959,750
- -- 8.1% Dolphin Telecom PLC (a):
CCC+ Caa1 700,000 16.331% due 6/01/2008 342,369 308,000
CCC+ Caa1 1,500,000 14% due 5/15/2009 (c) 793,429 616,875
ESAT Telecom Group PLC:
B+ Caa1 3,225,000 12.427% due 2/01/2007 (a) 2,417,386 2,322,000
B+ Caa1 8,160,000 11.875% due 12/01/2008 8,651,700 8,364,000
B NR* 5,000,000 Iridium Operating LLC, Term, due 12/29/2000** 4,952,755 1,487,500
</TABLE>
12 & 13
<PAGE>
Debt Strategies Fund II, 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>
===================================================================================================================================
Wireless B- B3 US$ 1,900,000 Microcell Telecommunications, 12% due 6/01/2009 (a) $ 1,092,448 $ 1,130,500
Telecommunications Nextel Communications, Inc.**:
(concluded) B Ba3 1,250,000 Term A, due 3/31/2006 1,232,993 1,222,396
B Ba3 8,000,000 Term B, due 9/30/2006 8,056,250 7,968,568
CCC+ B3 5,450,000 Nextel Partners Inc., 14% due 2/01/2009 (a)(c) 2,998,265 3,270,000
Omnipoint Communications Corp.**:
NR* B2 2,353,703 Term A, due 2/17/2006 2,362,529 2,331,148
NR* B2 1,113,993 Term B, due 2/17/2006 1,118,171 1,103,318
Telesystem International Wireless Inc. (a):
CCC+ Caa1 3,350,000 16.147% due 6/30/2007 1,999,763 1,641,500
CCC+ Caa1 4,250,000 10.052% due 11/01/2007 3,150,012 1,785,000
NR* B2 4,000,000 Tritel Holdings, Term B, due 12/31/2007** 3,951,526 3,995,832
NR* B3 2,625,000 Tritel PCS Inc., 12.75% due 5/15/2009 (a)(c) 1,467,184 1,496,250
------------ ------------
52,596,149 45,115,137
===================================================================================================================================
Total Investments in Corporate Debt
Obligations -- 130.1% 769,926,838 725,612,378
===================================================================================================================================
<CAPTION>
Shares
Held Preferred Stocks, Common Stocks & Warrants
===================================================================================================================================
<S> <C> <C> <C> <C>
Online 3,000 Splitrock Services Inc. (Warrants) (d) 33,000 144,000
Services -- 0.0%
===================================================================================================================================
Packaging -- 0.5% 25,000 Packaging Corporation of America (Preferred) (b)(c) 2,500,000 2,737,500
===================================================================================================================================
Tower Construction 5,658 Crown Castle International Corporation
& Leasing -- 1.0% (Preferred) (b) 6,185,228 5,686,458
===================================================================================================================================
Wired 17,336 Viatel, Inc. 231,880 670,687
Telecommunications -- 0.1%
===================================================================================================================================
Wireless 2,000 Centaur Funding Corp. (Preferred) 2,000,000 2,103,750
Telecommunications -- 1.2% 4,500 Dobson Communications (Preferred) (b) 4,331,250 4,320,000
------------ ------------
6,331,250 6,423,750
===================================================================================================================================
Total Investments in Preferred Stocks,
Common Stocks & Warrants -- 2.8% 15,281,358 15,662,395
===================================================================================================================================
Face
Amount Short-Term Securities
===================================================================================================================================
Commercial US$ 224,000 General Motors Acceptance Corp., 5.56% due 9/01/1999 224,000 224,000
Paper*** -- 0.1%
===================================================================================================================================
Total Investments in Short-Term Securities -- 0.1% 224,000 224,000
===================================================================================================================================
Total Investments -- 133.0% $785,432,196 741,498,773
============
Unrealized Depreciation on Forward Foreign
Exchange Contracts -- Net**** -- 0.0% (37,430)
Liabilities in Excess of Other Assets -- (33.0%) (183,847,524)
------------
Net Assets -- 100.0% $557,613,819
============
===================================================================================================================================
</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 amount/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.
(e) Floating rate note.
* 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 52.0% 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:
- --------------------------------------------------------------------------------
Unrealized
Appreciation
Foreign Expiration (Depreciation)
Currency Sold Date (Note 1c)
- --------------------------------------------------------------------------------
(euro) 1,297,228 September 1999 $ 33,377
(pound) 4,053,590 September 1999 (70,807)
- --------------------------------------------------------------------------------
Total Unrealized Depreciation on Forward Foreign
Exchange Contracts--Net
(US$ Commitment--$7,847,150) $(37,430)
========
- --------------------------------------------------------------------------------
+ Non-income producing security.
See Notes to Financial Statements.
14 & 15
<PAGE>
Debt Strategies Fund II, Inc., August 31, 1999
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
<TABLE>
<CAPTION>
As of August 31, 1999
==========================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $785,432,196) (Note 1b). $741,498,773
Cash .......................................................... 14,432
Receivables:
Interest .................................................... $ 12,712,791
Dividends ................................................... 215,080
Securities sold ............................................. 36,000
Forward foreign exchange contracts (Note 1c) ................ 3,450 12,967,321
------------
Deferred facility fees ........................................ 7,071
Deferred organization expenses (Note 1g) ...................... 21,468
Prepaid expenses and other assets ............................. 106,597
------------
Total assets .................................................. 754,615,662
------------
==========================================================================================================================
Liabilities: Loans (Note 6) ................................................ 193,000,000
Unrealized depreciation on forward foreign exchange
contracts (Note 1c) ........................................... 37,430
Payables:
Interest on loans (Note 6) .................................. 1,483,477
Dividends to shareholders (Note 1h) ......................... 1,244,281
Investment adviser (Note 2) ................................. 371,950
Securities purchased ........................................ 175,220
Commitment fees ............................................. 5,553 3,280,481
------------
Deferred income (Note 1f) ..................................... 376,362
Accrued expenses and other liabilities ........................ 307,570
------------
Total liabilities ............................................. 197,001,843
------------
==========================================================================================================================
Net Assets: Net assets .................................................... $557,613,819
============
==========================================================================================================================
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 ........................ 5,043,388
Accumulated realized capital losses on investments and
foreign currency transactions -- net (Note 7) ................. (29,006,033)
Unrealized depreciation on investments and foreign
currency transactions -- net .................................. (43,951,117)
------------
Net Assets -- Equivalent to $8.91 per share based on 62,610,000
shares of capital stock outstanding (market price -- $8.125) ..... $557,613,819
============
==========================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended August 31, 1999
==========================================================================================================================
<S> <C> <C> <C>
Investment Income Interest and discount earned .................................. $ 36,635,266
(Note 1f): Dividends ..................................................... 707,471
Facility and other fees ....................................... 236,195
------------
Total income .................................................. 37,578,932
------------
==========================================================================================================================
Expenses: Loan interest expense (Note 6) ................................ $ 4,815,882
Investment advisory fees (Note 2) ............................. 2,259,475
Borrowing costs (Note 6) ...................................... 145,486
Professional fees ............................................. 95,443
Accounting services (Note 2) .................................. 61,202
Commitment fees ............................................... 56,164
Listing fees .................................................. 46,918
Custodian fees ................................................ 30,335
Organization expenses (Note 1g) ............................... 21,365
Transfer agent fees (Note 2) .................................. 18,340
Printing and shareholder reports .............................. 15,675
Directors' fees and expenses .................................. 13,528
Pricing services .............................................. 7,477
Other ......................................................... 20,068
------------
Total expenses ................................................ 7,607,358
------------
Investment income -- net ...................................... 29,971,574
------------
==========================================================================================================================
Realized & Realized gain (loss) from:
Unrealized Gain (Loss) Investments -- net .......................................... (15,668,331)
On Investments & Foreign currency transactions -- net ........................ 69,872 (15,598,459)
Foreign Currency ------------
Transactions -- Net Change in unrealized appreciation/depreciation on:
(Notes 1c, 1d, 1f & 3): Investments -- net .......................................... (456,785)
Foreign currency transactions -- net ........................ (117,321) (574,106)
------------ ------------
Net Increase in Net Assets Resulting from Operations .......... $ 13,799,009
============
==========================================================================================================================
</TABLE>
See Notes to Financial Statements.
16 & 17
<PAGE>
Debt Strategies Fund II, Inc., August 31, 1999
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Six For the Period
Months Ended Mar. 27, 1998+ to
Increase (Decrease) in Net Assets: Aug. 31, 1999 Feb. 28, 1999
=============================================================================================================================
<S> <C> <C> <C>
Operations: Investment income -- net ......................................... $ 29,971,574 $ 47,590,151
Realized loss on investments and foreign currency
transactions -- net .............................................. (15,598,459) (13,489,541)
Change in unrealized appreciation/depreciation on
investments and foreign currency transactions -- net ............. (574,106) (43,377,011)
------------ ------------
Net increase (decrease) in net assets resulting from operations .. 13,799,009 (9,276,401)
------------ ------------
=============================================================================================================================
Dividends to Investment income -- net ......................................... (29,087,291) (43,349,079)
Shareholders Net decrease in net assets resulting from dividends to ------------ ------------
(Note 1h): shareholders ..................................................... (29,087,291) (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 (decrease) in net assets .......................... (15,288,282) 572,802,101
Beginning of period .............................................. 572,902,101 100,000
------------ ------------
End of period* ................................................... $557,613,819 $572,902,101
============ ============
=============================================================================================================================
*Undistributed investment income -- net ........................... $ 5,043,388 $ 4,159,105
============ ============
=============================================================================================================================
</TABLE>
+Commencement of operations.
See Notes to Financial Statements.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended August 31, 1999
===========================================================================================================================
<S> <C> <C>
Cash Provided by Net increase in net assets resulting from operations ............................ $ 13,799,009
Operating Activities: Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Increase in receivables ....................................................... (1,408,370)
Decrease in other assets ...................................................... 87
Increase in other liabilities ................................................. 707,798
Realized and unrealized loss on investments and foreign currency
transactions -- net ........................................................... 16,172,565
Amortization of discount ...................................................... (4,591,951)
------------
Net cash provided by operating activities ....................................... 24,679,138
------------
===========================================================================================================================
Cash Used for Proceeds from sales of long-term investments .................................... 258,273,472
Investing Activities: Purchases of long-term investments .............................................. (305,403,091)
Purchases of short-term investments ............................................. (102,991,470)
Proceeds from sales and maturities of short-term investments .................... 103,330,000
------------
Net cash used for investing activities .......................................... (46,791,089)
------------
===========================================================================================================================
Cash Provided by Cash receipts from borrowings ................................................... 229,000,000
Financing Activities: Cash payments on borrowings ..................................................... (178,000,000)
Dividends paid to shareholders .................................................. (29,155,754)
------------
Net cash provided by financing activities ....................................... 21,844,246
------------
===========================================================================================================================
Cash: Net decrease in cash ............................................................ (267,705)
Cash at beginning of period ..................................................... 282,137
------------
Cash at end of period ........................................................... $ 14,432
============
===========================================================================================================================
Cash Flow Cash paid for interest .......................................................... $ 4,389,160
Information: ============
===========================================================================================================================
</TABLE>
See Notes to Financial Statements.
18 & 19
<PAGE>
Debt Strategies Fund II, Inc., August 31, 1999
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived For the Six For the Period
from information provided in the financial statements. Months Ended March 27, 1998+
August 31, to Feb. 28,
Increase (Decrease) in Net Asset Value: 1999 1999
================================================================================================================================
<S> <C> <C> <C>
Per Share Net asset value, beginning of period ............................... $ 9.15 $ 10.00
Operating --------- ---------
Performance: Investment income -- net ........................................... .47 .76
Realized and unrealized loss on investments and foreign
currency transactions -- net ...................................... (.25) (.91)
--------- ---------
Total from investment operations ................................... .22 (.15)
--------- ---------
Less dividends from investment income -- net ....................... (.46) (.69)
--------- ---------
Capital charge resulting from the issuance of Common Stock ......... -- (.01)
--------- ---------
Net asset value, end of period ..................................... $ 8.91 $ 9.15
========= =========
Market price per share, end of period .............................. $ 8.125 $ 7.875
========= =========
================================================================================================================================
Total Investment Based on market price per share .................................... 9.01%++ (14.87%)++
========= =========
Return:** Based on net asset value per share ................................. 2.89%++ (1.09%)++
========= =========
================================================================================================================================
Ratios to Average Expenses, net of reimbursement and excluding interest expense ...... .96%* .54%*
========= =========
Net Assets: Expenses, net of reimbursement ..................................... 2.62%* .93%*
========= =========
Expenses ........................................................... 2.62%* 1.20%*
========= =========
Investment income -- net ........................................... 10.33%* 8.60%*
========= =========
================================================================================================================================
Leverage: Amount of borrowings, end of period (in thousands) ................. $ 193,000 $ 142,000
Average amount of borrowings outstanding during the ========= =========
period (in thousands) ............................................. $ 172,750 $ 42,330
========= =========
Average amount of borrowings outstanding per share during
the period ........................................................ $ 2.76 $ .69
========= =========
================================================================================================================================
Supplemental Net assets, end of period (in thousands) ........................... $ 557,614 $ 572,902
========= =========
Data: Portfolio turnover ................................................. 35.05% 89.76%
========= =========
================================================================================================================================
</TABLE>
* Annualized.
** Total investment returns based on market value, which
can be significantly greater or lesser than the net
asset value, may result in substantially different
returns. Total investment returns exclude the effects of
sales charges.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
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.
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 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. 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 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 was 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.
20 & 21
<PAGE>
Debt Strategies Fund II, Inc., August 31, 1999
NOTES TO FINANCIAL STATEMENTS (continued)
(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) Organization expenses -- In accordance with Statement of Position 98-5,
unamortized organization expenses of $21,365 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.
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"), $217 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 $300,217,748 and $258,309,472, 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 ...................... $(15,668,331) $(43,933,423)
Forward foreign exchange contracts ......... 197,607 (37,430)
Foreign currency transactions .............. (127,735) 86,025
Unfunded corporate loans ................... -- (66,289)
------------ ------------
Total ...................................... $(15,598,459) $(43,951,117)
============ ============
- --------------------------------------------------------------------------------
As of August 31, 1999, net unrealized depreciation for Federal income tax
purposes aggregated $43,933,423, of which $5,273,054 related to appreciated
securities and $49,206,477 related to depreciated securities. The aggregate cost
of investments at August 31, 1999 for Federal income tax purposes was
$785,432,196.
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 period March 27, 1998 to February 28,
1999 increased by 62,600,000 from shares sold.
5. Unfunded Corporate Loans:
As of August 31, 1999, the Fund had unfunded loan commitments of approximately
$9,108,000, which would be extended at the option of the borrower, pursuant to
the following loan agreements:
- --------------------------------------------------------------------------------
Unfunded
Commitment
Borrower (in thousands)
- --------------------------------------------------------------------------------
Ares Leveraged Fund II .......................................... $ 390
Breed Technologies Inc. ......................................... 102
Metro-Goldwyn-Mayer Co. (MGM) ................................... 543
Nextel Communications, Inc. ..................................... 3,750
Outsourcing Solutions, Inc. ..................................... 923
PageNet Finance Corp. ........................................... 3,320
Specialty Foods, Inc. ........................................... 80
- --------------------------------------------------------------------------------
22 & 23
<PAGE>
Debt Strategies Fund II, Inc., August 31, 1999
NOTES TO FINANCIAL STATEMENTS (continued)
6. Short-Term Borrowings:
On July 14, 1999, the Fund extended its 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 $225,000,000 credit facility bearing interest at the
Prime rate, the Federal Funds rate plus .55% and/or Eurodollar plus .55%. For
the six months ended August 31, 1999, the average amount borrowed was
$172,750,000 and the daily weighted average interest rate was 5.53%. For the six
months ended August 31, 1999, facility and commitment fees aggregated
approximately $145,000.
7. Capital Loss Carryforward:
At February 28, 1999, the Fund had a net capital loss carryforward 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 September 8, 1999, the Fund's Board of Directors declared an ordinary income
dividend to Common Stock shareholders in the amount of $.080552 per share,
payable on September 30, 1999 to shareholders of record as of September 22,
1999.
PORTFOLIO PROFILE
As of August 31, 1999
Percent of
Quality Ratings Long-Term
S&P/Moody's Investments
- --------------------------------------------------------------------------------
BBB/Baa ............................................................... 1.6%
BB/Ba ................................................................. 21.6
B/B ................................................................... 58.5
CCC/Caa ............................................................... 5.8
NR (Not Rated) ........................................................ 12.5
- --------------------------------------------------------------------------------
Percent of
Long-Term
Breakdown of Investments by Country Investments
- --------------------------------------------------------------------------------
United States ......................................................... 89.8%
Canada ................................................................ 2.5
United Kingdom ........................................................ 2.2
Ireland ............................................................... 1.4
Argentina ............................................................. 1.2
Australia ............................................................. 0.9
Poland ................................................................ 0.5
Brazil ................................................................ 0.4
Mexico ................................................................ 0.3
Cayman Islands ........................................................ 0.3
Greece ................................................................ 0.2
Netherlands ........................................................... 0.1
Germany ............................................................... 0.1
Belgium ............................................................... 0.1
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries Total Assets
- --------------------------------------------------------------------------------
Wired Telecommunications .............................................. 7.7%
Wireless Telecommunications ........................................... 6.8
Hotels & Motels ....................................................... 6.0
Gaming ................................................................ 5.9
Cable Television Services ............................................. 5.3
- --------------------------------------------------------------------------------
Percent of
Ten Largest Holdings Total Assets
- --------------------------------------------------------------------------------
Wyndham International ................................................. 2.6%
Starwood Hotels and Resorts Worldwide, Inc. ........................... 2.3
Pool Energy Services Co. .............................................. 1.6
Coaxial LLC ........................................................... 1.5
Radio Unica Corp. ..................................................... 1.5
ESAT Telecom Group PLC ................................................ 1.4
Collins & Aikman Corp. ................................................ 1.3
Specialty Foods, Inc. ................................................. 1.3
Nextel Communications, Inc. ........................................... 1.2
Horseshoe Gaming LLC .................................................. 1.2
- --------------------------------------------------------------------------------
24 & 25
<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 and Transfer Agent
The Bank of New York
110 Washington Street
New York, NY 10286
NYSE Symbol
DSU
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.
26 & 27
<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--8/99
[RECYCLE LOGO] Printed on post-consumer recycled paper
