As filed with the Securities and Exchange Commission on May 18, 2000
Securities Act File No. _________
Investment Company Act File No. 811-08603
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________________
[ ] PRE-EFFECTIVE AMENDMENT NO. [ ] POST-EFFECTIVE AMENDMENT NO.
(CHECK APPROPRIATE BOX OR BOXES)
__________________________
DEBT STRATEGIES FUND II, INC.
(Exact Name Of Registrant As Specified In Its Charter)
__________________________
(609) 282-2800
(Area Code And Telephone Number)
__________________________
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address Of Principal Executive Offices:
Number, Street, City, State, Zip Code)
__________________________
Terry K. Glenn
DEBT STRATEGIES FUND II, INC.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name And Address Of Agent For Service)
__________________________
Copies To:
Frank P. Bruno, Esq. Michael J. Hennewinkel, Esq.
BROWN & WOOD LLP MERRILL LYNCH ASSET MANAGEMENT, L.P.
One World Trade Center 800 Scudders Mill Road
New York, NY 10048-0557 Plainsboro, NJ 08536
__________________________
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable
after the Registration Statement becomes effective under the Securities Act of
1933.
__________________________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
================================================================================================================
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Amount Being Offering Price Offering Registration
Title Of Securities Being Registered Registered (1) Per Unit (1) Price(1) Fee(2)
- ---------------------------------------- -------------- -------------- --------- ------------
<S> <C> <C> <C> <C>
Common Stock ($.10 par value).......... 41,842,399 $8.30 $347,291,911.70 $91,685
</TABLE>
(1) Estimated solely for the purpose of calculating the filing fee.
(2) Paid by wire transfer to the designated lockbox of the Securities and
Exchange Commission in Pittsburgh, Pennsylvania.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
DEBT STRATEGIES FUND, INC.
DEBT STRATEGIES FUND II, INC.
DEBT STRATEGIES, FUND III, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
__________________________
NOTICE OF ANNUAL MEETINGS OF STOCKHOLDERS
__________________________
To Be Held On August 23, 2000
TO THE STOCKHOLDERS OF
DEBT STRATEGIES FUND, INC.
DEBT STRATEGIES FUND II, INC
DEBT STRATEGIES FUND III, INC.
NOTICE IS HEREBY GIVEN that the annual meetings of stockholders (the
"Meetings") of Debt Strategies Fund, Inc. ("Debt Strategies"), Debt Strategies
Fund II, Inc. ("Debt Strategies II") and Debt Strategies Fund III, Inc. ("Debt
Strategies III") will be held at the offices of Merrill Lynch Asset
Management, L.P., 800 Scudders Mill Road, Plainsboro, New Jersey on Wednesday,
August 23, 2000 at __:__ _.m. Eastern time (Debt Strategies), __:__ _.m.
Eastern time (Debt Strategies II) and __:__ _.m. Eastern time (Debt Strategies
III) for the following purposes:
(1) To approve or disapprove an Agreement and Plan of Merger (the
"Agreement and Plan of Merger") whereby (i) each of Debt Strategies
and Debt Strategies III will be merged with and into Debt Strategies
II in accordance with the General Corporation Law of the State of
Maryland; (ii) the separate existence of each of Debt Strategies and
Debt Strategies III will cease; (iii) Debt Strategies II will be the
surviving corporation; (iv) Debt Strategies II will change its name
to Debt Strategies Fund, Inc. immediately after the Effective Date
(as defined below); and (v) each share of common stock ("Common
Stock") of each of Debt Strategies and Debt Strategies III will be
converted into the right to receive an equivalent dollar amount (to
the nearest one ten-thousandth of one cent) of full shares of Common
Stock of Debt Strategies II, with a par value of $.10 per share
("Debt Strategies II Common Stock"), plus cash in lieu of any
fractional shares, computed based on the net asset value per share
of each Fund on the effective date of the merger, all upon and
subject to the terms hereinafter set forth (the "Merger"). The
currently issued and outstanding shares of Debt Strategies II will
remain issued and outstanding. A vote in favor of this proposal will
constitute a vote in favor of the termination of Debt Strategies and
Debt Strategies III's respective registrations under the Investment
Company Act of 1940, as amended; and
(2) To elect a Board of Directors of each Fund to serve for the ensuing
year;
(3) To consider and act upon a proposal to ratify the selection of
Deloitte & Touche LLP to serve as independent auditors of each Fund
for its current fiscal year; and
(4) To transact such other business as properly may come before the
Meetings or any adjournment thereof.
The Boards of Directors of Debt Strategies, Debt Strategies II and Debt
Strategies III have fixed the close of business on June 27, 2000 as the record
date for the determination of stockholders entitled to notice of, and to vote
at, the Meetings or any adjournments thereof.
A complete list of the stockholders of Debt Strategies, Debt Strategies
II and Debt Strategies III entitled to vote at the Meetings will be available
and open to the examination of any stockholder of Debt Strategies, Debt
Strategies II or Debt Strategies III, respectively, for any purpose germane to
the Meetings during ordinary business hours from and after August 9, 2000, at
the offices of Debt Strategies II, 800 Scudders Mill Road, Plainsboro, New
Jersey.
You are cordially invited to attend the Meetings. Stockholders who do not
expect to attend the meetings in person are requested to complete, date and
sign the enclosed form of proxy applicable to their fund and return it
promptly in the envelope provided for that purpose. If you have been provided
with the opportunity on your proxy card or voting instruction form to provide
voting instructions via telephone or the Internet, please take advantage of
these prompt and efficient voting options. The enclosed proxy is being
solicited on behalf of the Board of Directors of Debt Strategies, Debt
Strategies II or Debt Strategies III, as applicable.
By Order of the Boards of Directors
BRADLEY J. LUCIDO
Secretary of:
Debt Strategies Fund, Inc.,
Debt Strategies Fund II, Inc., and
Debt Strategies Fund III, Inc.
Plainsboro, New Jersey
Dated: July __, 2000
The information in this prospectus is not complete and may be changed. We
may not use this prospectus to sell securities until the registration
statement filed with the Securities and Exchange Commission is effective.
This prospectus is not an offer to sell these securities and is not soliciting
an offer to buy these securities in any State where the offer or sale is not
permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROXY STATEMENT AND
PROSPECTUS DATED MAY __, 2000
PROXY STATEMENT AND PROSPECTUS
DEBT STRATEGIES FUND, INC.
DEBT STRATEGIES FUND II, INC.
DEBT STRATEGIES FUND III, INC.
P.O. BOX 9011, PRINCETON, NEW JERSEY 08543-9011
(609) 282-2800
__________________________
ANNUAL MEETINGS OF STOCKHOLDERS
__________________________
AUGUST 23, 2000
This Proxy Statement and Prospectus is furnished to you as a stockholder
of one of the funds listed above. An Annual Meeting of the stockholders of
each of these funds will be held on August 23, 2000 to consider several items
that are listed below and discussed in greater detail elsewhere in this Proxy
Statement and Prospectus. The Board of Directors of each of the funds is
requesting its stockholders to submit a proxy to be used at the Annual Meeting
to vote the shares held by the stockholder submitting the proxy.
The proposals to be considered at the Annual Meetings are:
1. To approve or disapprove an Agreement and Plan of Merger among the
funds;
2. To elect a Board of Directors of each fund to serve for the ensuing
year;
3. To consider and act upon a proposal to ratify the selection of
Deloitte & Touche LLP to serve as independent auditors of each fund for its
current fiscal year; and
4. To transact such other business as may properly come before the Annual
Meetings or any adjournment thereof.
The Agreement and Plan of Merger that you are being asked to consider
involves a transaction that will be referred to in this Proxy Statement and
Prospectus as the Merger. The Merger involves the merger of two funds into a
third fund. The three funds are:
Debt Strategies Fund II, Inc. ("Debt Strategies II"), which will be the
surviving fund
Debt Strategies Fund, Inc. ("Debt Strategies")
Debt Strategies Fund III, Inc. ("Debt Strategies III")
Debt Strategies and Debt Strategies III are sometimes referred to
herein collectively as the "Acquired Funds" and individually as an "Acquired
Fund," as the context requires. Debt Strategies, Debt Strategies II and Debt
Strategies III are sometimes referred to herein collectively as the "Funds"
and individually as a "Fund," as the context requires. The fund resulting from
the Merger is sometimes referred to herein as the "Surviving Fund."
In the Merger: (i) each of Debt Strategies and Debt Strategies III
will be merged with and into Debt Strategies II in accordance with the General
Corporation Law of the State of Maryland ("Maryland Law"); (ii) the separate
existence of each of Debt Strategies and Debt Strategies III will cease; (iii)
Debt Strategies II will be the surviving corporation; (iv) Debt Strategies II
will change its name to Debt Strategies Fund, Inc. immediately after the
Effective Date (as defined below); and (v) each share of common stock ("Common
Stock") of each of Debt Strategies and Debt Strategies III will be converted
into the right to receive an equivalent dollar amount (to the nearest one
ten-thousandth of one cent) of full shares of Common Stock of Debt Strategies
II, with a par value of $.10 per share ("Debt Strategies II Common Stock"),
plus cash in lieu of any fractional shares, computed based on the net asset
value per share of each Fund on the Effective Date (as defined below), all
upon and subject to the terms hereinafter set forth (the "Merger"). All
references to the Common Stock of an Acquired Fund will include shares of
Common Stock of an Acquired Fund representing Dividend Reinvestment Plan
shares held in the book deposit accounts of holders of Common Stock of an
Acquired Fund. The currently issued and outstanding shares of Debt Strategies
II will remain issued and outstanding. Debt Strategies II will continue to
operate as a registered closed-end investment company with the investment
objective and policies described in this Proxy Statement and Prospectus.
This Proxy Statement and Prospectus serves as a prospectus of Debt
Strategies II in connection with the issuance of Debt Strategies II Common
Stock in the Merger.
__________________________
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of this Proxy
Statement and Prospectus. Any representation to the contrary is a criminal
offense.
__________________________
The date of this Proxy Statement and Prospectus is July __, 2000.
The Proxy Statement and Prospectus sets forth information about Debt
Strategies, Debt Strategies II and Debt Strategies III that stockholders of
the Funds should know before considering the Merger and should be retained for
future reference. Each Fund has authorized the solicitation of proxies in
connection with the Merger solely on the basis of this Proxy Statement and
Prospectus and the accompanying documents.
The address of the principal executive offices of Debt Strategies,
Debt Strategies II and Debt Strategies III is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, and the telephone number is (609) 282-2800.
The Common Stock of Debt Strategies, Debt Strategies II and Debt
Strategies III is listed on the New York Stock Exchange (the "NYSE") under the
symbols "DBS," "DSU," and "DBU," respectively. After the Merger shares of Debt
Strategies II Common Stock will continue to be listed on the NYSE under the
symbol "DSU". Reports, proxy materials and other information concerning the
Funds may be inspected at the offices of the NYSE, 20 Broad Street, New York,
New York 10005.
Table of Contents
Page
INTRODUCTION.................................................................4
ITEM 1. THE MERGER...........................................................5
SUMMARY......................................................................5
RISK FACTORS AND SPECIAL CONSIDERATIONS.....................................15
Corporate Loans.......................................................15
Lower-Rated Securities................................................16
Distressed Securities.................................................17
Leverage..............................................................18
Other Investment Management Techniques................................18
Non-U.S. Securities...................................................19
Concentration in Financial Institutions...............................19
Illiquid Securities...................................................19
Antitakeover Provisions...............................................19
COMPARISON OF THE FUNDS.....................................................21
Financial Highlights..................................................21
Investment Objective and Policies.....................................25
Description of Corporate Loans........................................27
Description of Participation Interests................................29
Description of High-Yield Securities..................................31
Description of Distressed Securities..................................33
Description of Convertible Securities and Preferred Stock.............33
Illiquid Securities...................................................34
Other Investment Policies.............................................34
Interest Rate Transactions............................................37
Foreign Currency Swaps................................................38
Options on Portfolio Securities.......................................39
Financial Futures and Options Thereon.................................40
Risk Factors In Interest Rate Transactions and Options and
Futures Transactions................................................41
Other Investment Strategies...........................................42
Investment Restrictions...............................................44
Portfolio Composition.................................................46
Portfolio Transactions................................................48
Portfolio Turnover....................................................48
Net Asset Value.......................................................49
Capital Stock.........................................................50
Management of the Funds...............................................52
Code of Ethics........................................................54
Voting Rights.........................................................54
Stockholder Inquiries.................................................55
Dividends and Distributions...........................................55
Automatic Dividend Reinvestment Plan..................................55
Mutual Fund Investment Option.........................................58
Tax Rules Applicable to the Funds and Their Stockholders..............58
Tax Treatment of Options and Futures Transactions.....................60
Special Rules for Certain Foreign Currency Transactions...............61
AGREEMENT AND PLAN OF MERGER................................................61
General...............................................................61
Procedure.............................................................62
Terms of the Agreement and Plan of Merger.............................63
Potential Benefits to Common Stockholders of the Funds as a Result
of the Merger.......................................................65
Surrender and Exchange of Stock Certificates..........................66
Tax Consequences of the Merger........................................67
Capitalization........................................................68
ITEM 2. ELECTION OF DIRECTORS...............................................70
Committee and Board Meetings..........................................72
Compliance with Section 16(a) of the Securities Exchange Act
of 1934.............................................................72
Interested Persons....................................................72
Compensation of Directors.............................................73
Officers of the Funds.................................................73
ITEM 3. SELECTION OF INDEPENDENT AUDITORS...................................73
INFORMATION CONCERNING THE ANNUAL MEETINGS..................................74
Date, Time and Place of Meetings......................................74
Solicitation, Revocation and Use of Proxies...........................74
Record Date and Outstanding Shares....................................74
Security Ownership of Certain Beneficial Owners and Management........74
Voting Rights and Required Vote.......................................75
Appraisal Rights......................................................75
ADDITIONAL INFORMATION......................................................75
CUSTODIAN...................................................................77
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR.....................77
LEGAL PROCEEDINGS...........................................................77
LEGAL OPINIONS..............................................................77
EXPERTS.....................................................................77
STOCKHOLDER PROPOSALS.......................................................78
INDEX TO FINANCIAL STATEMENTS...............................................F-1
EXHIBIT I INFORMATION PERTAINING TO EACH FUND..............................I-1
EXHIBIT II AGREEMENT AND PLAN OF MERGER....................................II-1
EXHIBIT III ARTICLES OF MERGER............................................III-1
EXHIBIT IV DESCRIPTION OF CORPORATE BOND RATINGS...........................IV-1
INTRODUCTION
This Proxy Statement and Prospectus is furnished to you in connection
with the solicitation of proxies on behalf of the Boards of Directors of Debt
Strategies, Debt Strategies II and Debt Strategies III for use at the Meetings
to be held at the offices of Merrill Lynch Asset Management, L.P. ("MLAM"),
800 Scudders Mill Road, Plainsboro, New Jersey on August 23, 2000, at the time
specified for each Fund in Exhibit I to this Proxy Statement and Prospectus.
The mailing address for each Fund is P.O. Box 9011, Princeton, New Jersey
08543-9011. The approximate mailing date of this Proxy Statement and
Prospectus is July __, 2000.
Any person giving a proxy may revoke it at any time prior to its exercise
by executing a superseding proxy, by giving written notice of the revocation
to the Secretary of Debt Strategies, Debt Strategies II or Debt Strategies
III, as applicable, at the address indicated above or by voting in person at
the appropriate Meeting. All properly executed proxies received prior to the
Meetings will be voted at the Meetings in accordance with the instructions
marked thereon or otherwise as provided therein. Unless instructions to the
contrary are marked, proxies will be voted "FOR" the following proposals: (1)
to approve the Agreement and Plan of Merger among Debt Strategies, Debt
Strategies II and Debt Strategies III (the "Agreement and Plan of Merger");
(2) to elect a Board of Directors of each Fund to serve for the ensuing year;
and (3) to ratify the selection of Deloitte & Touche LLP as the independent
auditors of each Fund for the current fiscal year.
In each case, assuming the required quorums are present at the Meetings,
(a) with respect to Item 1, approval of the Agreement and Plan of Merger will
require the affirmative vote of stockholders representing (i) a majority of
the outstanding shares of Common Stock of Debt Strategies, (ii) a majority of
the outstanding shares of Common Stock of Debt Strategies II and (iii) a
majority of the outstanding shares of Common Stock of Debt Strategies III; (b)
with respect to Item 2, the election of Directors of each of Debt Strategies,
Debt Strategies II and Debt Strategies III will require the affirmative vote
of a plurality of votes cast by holders of shares of Common Stock of Debt
Strategies, Debt Strategies II and Debt Strategies III, respectively,
represented at the Meetings and entitled to vote; (c) with respect to Item 3,
approval of the ratification of the selection of Deloitte & Touche LLP as the
independent auditors of Debt Strategies, Debt Strategies II and Debt
Strategies III will require the affirmative vote of a majority of votes cast
by holders of shares of Common Stock of Debt Strategies, Debt Strategies II,
and Debt Strategies III, respectively, represented at the Meetings and
entitled to vote. Because of the requirement that the Agreement and Plan of
Merger be approved by stockholders of all three Funds, the Merger will not
take place if stockholders of any one Fund do not approve the Agreement and
Plan of Merger.
The Board of Directors of each Fund has fixed the close of business on
June 27, 2000 as the record date (the "Record Date") for the determination of
stockholders entitled to notice of, and to vote at, the Meetings or any
adjournments thereof. Stockholders on the Record Date will be entitled to one
vote for each share held, with no shares having cumulative voting rights. At
the Record Date, each Fund had outstanding the number of shares of Common
Stock set forth in Exhibit I to this Proxy Statement and Prospectus. To the
knowledge of the management of each Fund, no person owned beneficially more
than 5% of the respective outstanding shares of capital stock of any Fund at
the Record Date.
The Boards of Directors of the Funds know of no business other than that
discussed in Items 1, 2 and 3 above that will be presented for consideration
at the Meetings. If any other matter is properly presented, it is the
intention of the persons named in the enclosed proxies to vote in accordance
with their best judgment.
ITEM 1.
THE MERGER
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus and is qualified in its entirety by
reference to the more complete information contained in this Proxy Statement
and Prospectus and in the Agreement and Plan of Merger attached hereto as
Exhibit II.
In this Proxy Statement and Prospectus, the term "Merger" refers
collectively to the following: (i) each of Debt Strategies and Debt Strategies
III will be merged with and into Debt Strategies II in accordance with
Maryland Law; (ii) the separate existence of each of Debt Strategies and Debt
Strategies III will cease; (iii) Debt Strategies II will be the surviving
corporation; (iv) Debt Strategies II will change its name to Debt Strategies
Fund, Inc. immediately after the Effective Date (as defined below); and (v)
each share of Common Stock of each of Debt Strategies and Debt Strategies III
will be converted into the right to receive an equivalent dollar amount (to
the nearest one ten-thousandth of one cent) of full shares of Debt Strategies
II Common Stock, plus cash in lieu of any fractional shares, computed based on
the net asset value per share of each Fund on the Effective Date (as defined
below), all upon and subject to the terms hereinafter set forth (the
"Merger"). The currently issued and outstanding shares of Debt Strategies II
will remain issued and outstanding.
Assuming the stockholders of each Fund approve the Merger, the Funds will
collectively file articles of merger (the "Articles of Merger") with the State
Department of Assessments and Taxation of the State of Maryland (the "SDAT").
The Merger will become effective at such time as the Articles of Merger are
accepted for filing by SDAT or at such later time as is specified in the
Articles of Merger (the "Effective Date"). Thereafter, each Acquired Fund will
terminate its registration under the Investment Company Act of 1940, as
amended the (the "Investment Company Act").
At meetings of the Boards of Directors of each Fund, the Board of
Directors of each Fund determined the Merger advisable and directed that it be
submitted for consideration by the stockholders of each Fund. Subject to
obtaining the necessary approvals from the stockholders of each Fund, the
Board of Directors of each Acquired Fund also deemed advisable the
deregistration of each Acquired Fund under the Investment Company Act. The
Merger requires approval of the stockholders of each of the three Funds. The
Merger will not take place if the stockholders of any one Fund do not approve
the Agreement and the Plan of Merger.
Each Fund is a diversified, leveraged, closed-end management investment
company registered under the Investment Company Act. Each Fund seeks to
provide stockholders with current income by investing primarily in a
diversified portfolio of U.S. companies' debt instruments, including corporate
loans, that are rated in the lower rating categories of the established rating
services (Baa or lower by Moody's Investors Service, Inc. ("Moody's") or BBB
or lower by Standard & Poor's ("S&P")) or unrated debt instruments of
comparable quality. As a secondary objective, the Funds seek capital
appreciation. In addition, each Fund seeks to enhance income by entering into
a revolving credit facility and borrowing in amounts up to 33 1/3% of its
total assets (including the amounts borrowed) under such credit facility. As
part of the Merger, Debt Strategies II will enter into a credit facility to
refinance the outstanding credit facilities of each of the Funds in an amount
approximately equal to the aggregate commitment amount of the credit facilities
currently outstanding for the three Funds.
Based upon their evaluation of all relevant information, the Board of
Directors of each Fund has determined that the Merger will potentially benefit
the holders of Common Stock of that Fund. Specifically, after the Merger,
stockholders of each Acquired Fund will remain invested in a closed-end fund
with an investment objective and policies substantially similar to the
Acquired Fund's investment objectives and policies and that uses substantially
the same management personnel. In addition, it is anticipated that the holders
of Common Stock of each Fund will be subject to a reduced overall operating
expense ratio based on the anticipated pro forma combined total operating
expenses (excluding leverage) and the total combined assets of the Surviving
Fund after the Merger.
In deciding to recommend the Merger, the Boards of Directors of Debt
Strategies, Debt Strategies II, and Debt Strategies III took into account the
investment objective and policies of each Fund, as well as the management
arrangements of each Fund, the expenses incurred both due to the Merger and on
an ongoing basis by the new and existing stockholders of Debt Strategies II
and the potential benefits, including economies of scale, to each Fund's
stockholders as a result of the Merger. The Board of Directors of each Fund,
including all of the Directors who are not "interested persons," as defined in
the Investment Company Act, have determined that the Merger is in the best
interests of the stockholders of Debt Strategies, Debt Strategies II and Debt
Strategies III and that the interests of such stockholders will not be diluted
or otherwise adversely affected as a result of the Merger. The Board of
Directors of Debt Strategies, Debt Strategies II and Debt Strategies III
generally considered the following factors in evaluating whether to approve
the Merger: (i) the terms and conditions of the Merger and the anticipated
effect of the Merger on per share expenses and costs of the Funds; (ii)
whether the Merger would achieve economies of scale for the Funds and benefit
stockholders by promoting more efficient operations; (iii) whether the
interests of the Funds' stockholders will be diluted as a result of the
proposed transactions contemplated by the Merger; (iv) the relative,
comparative past investment performance of the Funds; (v) the future prospects
of the Funds if the Merger is effected and if the Merger is not effected; (vi)
whether the investment objectives, policies and restrictions of the Funds are
compatible; (vii) the service features available to stockholders in the Funds;
(viii) whether the Merger will result in the recognition of any gain or loss
for Federal income tax purposes to the Funds or to the stockholders of the
Funds; and (ix) alternatives to the Merger.
Under the Agreement and Plan of Merger, the Board of Directors of any
Fund may cause the Merger to be postponed or abandoned in certain
circumstances should such Board determine that it is in the best interests of
the stockholders of that Fund to do so. The Agreement and Plan of Merger may
be terminated, and the Merger abandoned, whether before or after approval by
the Funds' stockholders, at any time prior to the Effective Date, (i) by
mutual consent of the Boards of Directors of all of the Funds or (ii) by the
Board of Directors of any Fund if any condition to that Fund's obligations has
not been fulfilled or waived by such Fund's Board of Directors.
Fee Table for Common Stockholders of Debt Strategies,
Debt Strategies II, Debt Strategies III and the Surviving Fund*
as of February 29, 2000 (Unaudited)(a)
The following table illustrates, based on net assets as of February 29,
2000 the expenses currently incurred by stockholders of each Fund individually
and the estimated pro forma expenses to be incurred by the Surviving Fund
stockholders after the Merger:
<TABLE>
<CAPTION>
Actual
---------------------------------------------
Pro Forma
Debt Debt Debt Surviving
Strategies Strategies II Strategies III Fund(c)
---------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
Common Stockholder Transaction Expenses
Maximum Sales Load (as a percentage of the
offering price) imposed on purchases of
Common Stock.................................. None(a)(b) None(a)(b) None(a)(b) None(a)(b)
Dividend Reinvestment and Cash Purchase Plan
Fees.......................................... None None None None
Annual Expenses (as a percentage of net assets
attributable to Common Stock at February 29,
2000)(including leverage)
Investment Advisory Fees(d)..................... 0.79% 0.78% 0.82% 0.79%
Interest Payments on Borrowed Funds(e).......... 2.01% 1.94% 2.33% 2.00%
Other Expenses.................................. 0.34% 0.17% 0.37% 0.13%
----- ----- ----- -----
Total Annual Expenses (including leverage)....... 3.14% 2.89% 3.52% 2.92%
===== ===== ===== =====
Annual Expenses (as a percentage of net assets
attributable to Common Stock at February 29,
2000) (excluding leverage)
Investment Advisory Fees....................... 0.60% 0.60% 0.60% 0.60%
Interest Payments on Borrowed Funds(e)......... None None None None
Other Expenses................................. 0.34% 0.17% 0.37% 0.13%
----- ----- ----- -----
Total Annual Expenses (excluding leverage)........ 0.94% 0.77% 0.97% 0.73%
===== ===== ===== =====
</TABLE>
______________________
(a) Shares of Common Stock purchased in the secondary market may be subject to
brokerage commissions or other charges.
(b) No sales load will be charged on the issuance of shares in the Merger.
Shares of Common Stock are not available for purchase from the Funds but
may be purchased in the secondary market through a broker-dealer subject
to individually negotiated commission rates.
(c) The pro forma annual operating expenses for the Surviving Fund are
projections for a 12-month period.
(d) Based on net assets plus the proceeds of any outstanding borrowings
used for leverage as of February 29, 2000.
(e) Based on the amount of outstanding borrowings for each of the Funds as of
February 29, 2000.
* The expenses for the Surviving Fund represent the estimated annualized
expenses as of February 29, 2000 assuming Debt Strategies II had acquired the
assets and assumed the liabilities of Debt Strategies and Debt Strategies III
as of that date.
Example:
Cumulative Expenses Paid on Shares of Common Stock
for the Periods Indicated:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
An investor would pay the following expenses on a $1,000 investment assuming
(1) the operating expense ratio for each Fund set forth above and (2) a 5%
annual return throughout the period:
<S> <C> <C> <C> <C>
Debt Strategies (including leverage)...................................... $32 $97 $164 $345
Debt Strategies (excluding leverage) ..................................... $10 $30 $52 $115
Debt Strategies II (including leverage)................................... $29 $89 $152 $321
Debt Strategies II (excluding leverage)................................... $8 $25 $43 $95
Debt Strategies III (including leverage)................................... $35 $108 $183 $379
Debt Strategies III (excluding leverage).................................. $10 $31 $54 $119
Surviving Fund*+ (including leverage)..................................... $30 $90 $154 $324
Surviving Fund*+ (excluding leverage) .................................... $7 $23 $41 $91
</TABLE>
______________________
* Assumes that the Merger had taken place on February 29, 2000.
+ As of February 29, 2000, the operating expense ratio of the Surviving Fund
(on a pro forma basis) is higher than such ratio for Debt Strategies II as a
result of the higher leverage percentage of Debt Strategies and Debt
Strategies III as of February 29, 2000 and the related costs of such leverage.
The foregoing Fee Table is intended to assist investors in understanding
the costs and expenses that a common stockholder of each Fund will bear
directly or indirectly as compared to the costs and expenses that would be
borne by such investors taking into account the Merger. The example set forth
above assumes that shares of common stock were purchased in the initial
offerings and the reinvestment of all dividends and distributions and uses a
5% annual rate of return as mandated by Securities and Exchange Commission
(the "SEC") regulations. The example should not be considered a representation
of past or future expenses or annual rates of return. Actual expenses or
annual rates of return may be more or less than those assumed for purposes of
the example. See "Comparison of the Funds" and "The Merger -- Potential
Benefits to Common Stockholders of the Funds as a Result of the Merger."
Debt Strategies.......... Debt Strategies was incorporated under the laws of
the State of Maryland on April 1, 1997 and
commenced operations on May 30, 1997. Debt
Strategies is a diversified, leveraged, closed-end
management investment company whose investment
objective is to provide stockholders with current
income by investing primarily in a diversified
portfolio of U.S. companies' debt instruments,
including corporate loans, that are rated in the
lower rating categories of the established rating
services (Baa or lower by Moody's or BBB or lower
by S&P) or unrated debt instruments of comparable
quality. As a secondary objective, the Fund seeks
capital appreciation. See "Comparison of the
Funds--Investment Objectives and Policies."
Debt Strategies has outstanding shares of Common
Stock. As of February 29, 2000, Debt Strategies had
net assets of approximately $226.5 million.
Debt Strategies II...... Debt Strategies II was incorporated under the laws
of the State of Maryland on December 10, 1997 and
commenced operations on March 27, 1998. Debt
Strategies II is a diversified, leveraged,
closed-end management investment company whose
investment objective is to provide stockholders
with current income by investing primarily in a
diversified portfolio of U.S. companies' debt
instruments, including corporate loans, that are
rated in the lower rating categories of the
established rating services (Baa or lower by
Moody's or BBB or lower by S&P) or unrated debt
instruments of comparable quality. As a secondary
objective, the Fund seeks capital appreciation. See
"Comparison of the Funds--Investment Objectives
and Policies."
Debt Strategies II has outstanding shares of Common
Stock. As of February 29, 2000, Debt Strategies had
net assets of approximately $538.3 million.
Debt Strategies III...... Debt Strategies III was incorporated under the laws
of the State of Maryland on May 26, 1998 and
commenced operations on July 31, 1998. Debt
Strategies III is a diversified, leveraged,
closed-end management investment company whose
investment objective is to provide stockholders
with current income by investing primarily in a
diversified portfolio of U.S. companies' debt
instruments, including corporate loans, that are
rated in the lower rating categories of the
established rating services (Baa or lower by
Moody's or BBB or lower by S&P) or unrated debt
instruments of comparable quality. As a secondary
objective, the Fund seeks capital appreciation. See
"Comparison of the Funds--Investment Objectives
and Policies."
Debt Strategies III has outstanding shares of
Common Stock. As of February 29, 2000, Debt
Strategies III had net assets of approximately
$103.1 million.
Comparison of the Funds.. Investment Objectives and Policies. The Funds have
substantially similar investment objectives and
policies. Each Fund seeks to provide stockholders
with current income by investing primarily in a
diversified portfolio of U.S. companies' debt
instruments, including corporate loans, that are
rated in the lower rating categories of the
established rating services (Baa or lower by
Moody's or BBB or lower by S&P) or unrated debt
instruments of comparable quality. As a secondary
objective, the Funds will seek capital
appreciation. Up to 35% of the total assets of Debt
Strategies and up to 20% of the total assets of
each of Debt Strategies II and Debt Strategies III
may be invested in debt instruments which, at the
time of investment, are the subject of bankruptcy
proceedings or otherwise in default as to the
repayment of principal or the payment of interest
or are rated in the lowest rating categories (Ca or
lower by Moody's and CC or lower by S&P) or unrated
debt instruments of comparable quality. After the
Merger, up to 20% of the Surviving Fund's total
assets may be invested in such debt instruments.
Each Fund also may invest up to 20% of its total
assets in financial instruments of issuers
domiciled outside the United States or that are
denominated in various foreign currencies and
multinational foreign currency units.
The same investment restrictions apply to each
Fund. See "Comparison of the Funds--Investment
Objectives and Policies."
Capital Stock. Each Fund has outstanding Common
Stock. The Common Stock of each Fund is traded on
the NYSE. As of February 29, 2000, (i) the net
asset value per share of Debt Strategies Common
Stock was $7.21 and the market price per share was
$6.1875; (ii) the net asset value per share of Debt
Strategies II Common Stock was $8.60 and the market
price per share was $7.1875; and (iii) the net
asset value per share of Debt Strategies III Common
Stock was $9.36 and the market price per share was
$8.75. See "Comparison of the Funds--Capital
Stock."
Advisory Fees. The investment adviser for each Fund
is FAM. The principal business address of FAM is
800 Scudders Mill Road, Plainsboro, New Jersey
08536. FAM was organized as an investment adviser
in 1977 and offers investment advisory services to
more than 50 registered investment companies. The
Asset Management Group of Merrill Lynch & Co., Inc.
("ML & Co.") (which includes FAM) acts as
investment adviser for over 100 registered
investment companies and also offers portfolio
management and portfolio analysis services to
individuals and institutional accounts.
FAM is responsible for the management of each
Fund's investment portfolio and for providing
administrative services to each Fund. Richard C.
Kilbride and Gilles Marchand serve as the portfolio
managers for each Fund. After the Merger, the
Surviving Fund will be managed by the same
management team.
Advisory Fees. Pursuant to separate investment
advisory agreements between FAM and each Fund, each
Fund pays FAM a monthly fee at the annual rate of
0.60% of such Fund's average weekly net assets plus
the proceeds of any outstanding borrowings used for
leverage. After the Merger, the Surviving Fund will
pay FAM a monthly fee at the same annual rate of
0.60% of its average weekly net assets, plus the
proceeds of any outstanding borrowings used for
leverage. See "Comparison of the Funds--
Management of the Funds."
Other Significant Fees. The Bank of New York is the
custodian, transfer agent and dividend disbursing
agent for the Common Stock of Debt Strategies and
Debt Strategies II. State Street Bank and Trust
Company is the custodian, transfer agent and
dividend disbursing agent for the Common Stock of
Debt Strategies III. The principal business
addresses for The Bank of New York and State Street
Bank and Trust Company are as follows: The Bank of
New York, 90 Washington Street, New York, New York
10286 (for its custodial services) and 101 Barclay
Street, New York, New York 10286 (for its transfer
agency services) and for State Street Bank and
Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110. See "Comparison of the Funds
--Management of the Funds."
Overall Expense Ratio. The table below sets forth
the total annualized operating expense ratio for
each of Debt Strategies, Debt Strategies II, Debt
Strategies III and the Surviving Fund based on
their respective net assets as of February 29,
2000.
<TABLE>
<CAPTION>
Approximate Net
Assets as of Total Annualized Operating Total Annualized Operating
February 29, 2000 Expense Ratio Expense Ratio
(in millions) (excluding leverage) (including leverage)*+
<S> <C> <C> <C>
Debt Strategies $226.5 0.94% 3.14%
Debt Strategies II $538.3 0.77% 2.89%
Debt Strategies III $103.1 0.97% 3.52%
Surviving Fund $867.9 0.73% 2.92%
</TABLE>
______________________
* The annualized operating expenses attributable to leverage for each of the
Funds equals the interest owed over a projected 12 month period based on
the amount of outstanding borrowings for each of the Funds as of February
29, 2000. As of February 29, 2000, the amount of outstanding borrowings
for each of the Funds as a percentage of net assets was as follows: Debt
Strategies (30.9%), Debt Strategies II (29.9%) and Debt Strategies III
(35.9%). The annualized operating expenses attributable to leverage for
the Surviving Fund equals the sum of each of the Fund's projected leverage
costs based on the amount of outstanding borrowings for each of the Funds
as of February 29, 2000. The actual operating expenses attributable to
leverage for the Surviving Fund will be dependent on the amount of
leverage used by the Surviving Fund and the interest rate to be paid on
such borrowings.
+ As of February 29, 2000, the operating expense ratio of the Surviving Fund
(on a pro forma basis) is higher than such ratio for Debt Strategies II as
a result of the higher leverage percentage of Debt Strategies and Debt
Strategies III as of February 29, 2000 and the related costs of such
leverage.
Portfolio Transactions. The portfolio transactions in
which the Funds may engage are substantially similar,
as are the procedures for such transactions. See
"Comparison of the Funds-- Portfolio Transactions."
Dividends and Distributions. The methods of dividend
payment and distributions are substantially similar
for all of the Funds. See "Comparison of the Funds--
Dividends and Distributions."
Net Asset Value. The net asset value per share of
Common Stock of each Fund is determined as of the
close of business on the NYSE (generally, 4:00 p.m.,
Eastern time) on the last business day of each week.
For purposes of determining the net asset value of a
share of Common Stock of each Fund, the value of the
securities held by the Fund plus any cash or other
assets (including interest accrued but not yet
received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the
outstanding shares of preferred stock of the Fund is
divided by the total number of shares of Common Stock
of the Fund outstanding at such time. Expenses,
including fees payable to FAM, are accrued daily. See
"Comparison of the Funds -- Net Asset Value."
Voting Rights. The corresponding voting rights of the
holders of shares of each Fund's Common Stock are
substantially similar. See "Comparison of the Funds--
Capital Stock."
Stockholder Services. An automatic dividend
reinvestment plan is available to holders of shares
of the Common Stock of each Fund. The plans are
substantially similar for each Fund. See "Comparison
of the Funds -- Automatic Dividend Reinvestment
Plan." Other stockholder services, including the
provision of annual and semi-annual reports, are the
same for each Fund.
Outstanding Securities of Debt Strategies, Debt Strategies II
and Debt Strategies III as of February 29, 2000
<TABLE>
<CAPTION>
Amount
Outstanding
Exclusive of
Amount Held by Fund for Amount Shown in
Title of Class Amount Authorized Its Own Account Previous Column
- ------------------------------------------------- ------------------- ------------------------- -----------------
<S> <C> <C> <C>
Debt Strategies
Common Stock................................... 200,000,000 -0- 31,425,226
Debt Strategies II
Common Stock................................... 200,000,000 -0- 62,610,000
Debt Strategies III
Common Stock................................... 200,000,000 -0- 11,010,000
</TABLE>
Tax Considerations..... The Merger has been structured with the intention
that it will qualify for Federal income tax purposes
as a tax-free merger under Section 368(a)(1)(A) of
the Internal Revenue Code of 1986, as amended (the
"Code"). Each of the Funds has elected and qualified
for the special tax treatment afforded regulated
investment companies under the Code through the
Effective Date, and Debt Strategies II intends to
continue to so qualify after the Merger. The Internal
Revenue Service does not issue private letter rulings
in connection with statutory mergers under Section
368(a)(1)(A) of the Code. Consequently, based on
certain representations made by each Fund, the Funds
will receive an opinion of Brown & Wood LLP, counsel
to each of the Funds, with respect to the Merger to
the effect that, among other things, no Fund will
recognize taxable gain or loss on the Merger and no
Debt Strategies or Debt Strategies III stockholder
will recognize taxable gain or loss upon the issuance
of Debt Strategies II Common Stock in the Merger
(except to the extent that a Debt Strategies or Debt
Strategies III stockholder receives cash representing
his or her interest in less than a full share of Debt
Strategies II in the Merger. See "The
Merger--Agreement and Plan of Merger--Terms of the
Agreement and Plan of Merger" and "--Tax Consequences
of the Merger". The consummation of the Merger is
subject to the receipt of such opinion. The Boards of
Directors of the Funds also considered the relative
tax positions of the portfolios of the Funds. See
"Agreement and Plan of Merger --Potential Benefits to
Common Stockholders of the Funds as a Result of the
Merger."
RISK FACTORS AND SPECIAL CONSIDERATIONS
The investment risks associated with an investment in Debt Strategies II
are substantially similar to the investment risks associated with an
investment in Debt Strategies and Debt Strategies III. Such risks include,
without limitation, (a) the risks associated with investments in junk bonds,
high-yield corporate loans and distressed securities and (b) leverage. These
investment risks will apply to an investment in the Surviving Fund after the
Merger. It is expected that the Merger itself will not adversely affect the
rights of holders of shares of Common Stock of any Fund or create additional
risks.
Corporate Loans
The Funds may invest in senior and subordinated corporate loans
("Corporate Loans"), both secured and unsecured. A Corporate Loan which is
unsecured is not supported by any specific pledge of collateral and therefore
constitutes only a general obligation of the borrower. In addition to being
unsecured, a Corporate Loan in which the Funds may invest may be subordinate
in right of payment to the senior debt obligations of the borrower. Upon a
liquidation or bankruptcy of the borrower the senior debt obligations of the
borrower are often required to be paid in full before the subordinated debt
holders are permitted to receive any distribution on behalf of their claim.
Distributions, if any, to subordinated debt holders in such situations may
consist in whole or in part of non-income producing securities, including
common stock. Accordingly, following an event of default or liquidation or
bankruptcy of a borrower, there can be no assurance that the assets of the
borrower will be sufficient to satisfy the claims of unsecured and
subordinated debt holders or that such debt holders will receive income
producing debt securities in satisfaction of their claims. As a result, the
Funds might not receive payments to which they are entitled and thereby may
experience a decline in the value of their investments and possibly, their net
asset value.
Each Fund may invest in Corporate Loans made in connection with highly
leveraged transactions. Corporate Loans made in connection with highly
leveraged transactions are subject to greater credit risks than other
Corporate Loans in which the Funds may invest. These credit risks include a
greater possibility of default or bankruptcy of the borrower and the assertion
that the pledging of collateral, if any, to secure the loan constituted a
fraudulent conveyance or preferential transfer which can be nullified or
subordinated to the rights of other creditors of the borrower under applicable
law. Highly leveraged Corporate Loans also may be less liquid than other
Corporate Loans.
The success of each Fund depends to a great degree, on the skill with
which the agent banks administer the terms of the Corporate Loan agreements,
monitor borrower compliance with covenants, collect principal, interest and
fee payments from borrowers and, where necessary, enforce creditor remedies
against borrowers. Typically, the agent bank will have broad discretion in
enforcing a Corporate Loan agreement. The financial status of the agent bank
and co-lenders and participants interposed between each Fund and a borrower
may affect the ability of each Fund to receive payments of interest and
principal.
Lower-Rated Securities
Junk bonds and high-yield Corporate Loans are regarded as being
predominantly speculative as to the issuer's ability to make payments of
principal and interest. Investment in such securities involves substantial
risk. Issuers of junk bonds and high-yield Corporate Loans may be highly
leveraged and may not have available to them more traditional methods of
financing. Therefore, the risks associated with acquiring the securities of
such issuers generally are greater than is the case with higher-rated
securities. For example, during an economic downturn or a sustained period of
rising interest rates, issuers of junk bonds and high-yield Corporate Loans
may be more likely to experience financial stress, especially if such issuers
are highly leveraged. During periods of economic downturn, such issuers may
not have sufficient revenues to meet their interest payment obligations. The
issuer's ability to service its debt obligations also may be adversely
affected by specific issuer developments, or the issuer's inability to meet
specific projected business forecasts or the unavailability of additional
financing. Therefore, there can be no assurance that in the future there will
not exist a higher junk bond and high-yield Corporate Loan default rate
relative to the rates currently existing in the junk bond and high-yield
Corporate Loan markets. The risk of loss due to default by the issuer is
significantly greater for the holders of junk bond and high-yield Corporate
Loans because such securities may be unsecured and may be subordinate to other
creditors of the issuer. Other than with respect to Distressed Securities, the
junk bonds and high-yield Corporate Loans in which the Funds may invest do not
include instruments which, at the time of investment, are in default or the
issuers of which are in bankruptcy. However, there can be no assurance that
such events will not occur after the Fund purchases a particular security, in
which case the Fund may experience losses and incur costs.
Junk bonds frequently have call or redemption features that would permit
an issuer to repurchase the security from the Fund. If a call were exercised
by the issuer during a period of declining interest rates, the Fund is likely
to have to replace such called security with a lower yielding security, thus
decreasing the net investment income to the Fund and dividends to
shareholders.
Junk bonds and high-yield Corporate Loans tend to be more volatile than
higher-rated debt instruments, so that adverse economic events may have a
greater impact on the prices of junk bonds and high-yield Corporate Loans than
on high-rated debt instruments. Factors adversely affecting the market value
of such securities are likely to affect adversely each Fund's net asset value.
Like higher-rated debt instruments, junk bonds and high-yield Corporate
Loans generally are purchased and sold through dealers who make a market in
such securities for their own accounts. However, there are fewer dealers in
the junk bond and high-yield Corporate Loan markets, which markets may be less
liquid than the market for higher-rated debt instruments, even under normal
economic conditions. Also, there may be significant disparities in the prices
quoted for junk bonds and high-yield Corporate Loans by various dealers. As a
result, during periods of high demand in the junk bond and high-yield
Corporate Loan markets, it may be difficult to acquire junk bonds and
high-yield Corporate Loans appropriate for investment by the Funds. Adverse
economic conditions and investor perceptions thereof (whether or not based on
economic fundamentals) may impair liquidity in the junk bond and high-yield
Corporate Loan markets and may cause the prices each Fund receives for its
junk bonds and high-yield Corporate Loans to be reduced. In addition, each
Fund may experience difficulty in liquidating a portion of its portfolio when
necessary to meet each Fund's liquidity needs or in response to a specific
economic event such as deterioration in the creditworthiness of the issuers.
Under such conditions, judgment may play a greater role in valuing certain of
each Fund's portfolio instruments than in the case of instruments trading in a
more liquid market. In addition, each Fund may incur additional expense to the
extent that it is required to seek recovery upon a default on a portfolio
holding or to participate in the restructuring of the obligation.
Distressed Securities
Debt Strategies may invest up to 35% and Debt Strategies II and Debt
Strategies III may invest up to 20% of their respective total assets in
Distressed Securities. Distressed Securities are high yield/high risk
securities, including Corporate Loans purchased in the secondary market, which
are the subject of bankruptcy proceedings or otherwise in default as to there
payment of principal and/or payment of interest at the time of acquisition by
each Fund or are rated in the lower rating categories (Ca or lower by Moody's
and CC or lower by S&P) or which, if unrated, are in the judgment of the
investment adviser of equivalent quality. Investment in Distressed Securities
is speculative and involves significant risk. Distressed Securities frequently
do not produce income while they are outstanding and may require each Fund to
bear certain extraordinary expenses in order to protect and recover its
investment. Therefore, to the extent each Fund pursues its secondary objective
of capital appreciation through investment in Distressed Securities, each
Fund's ability to achieve current income for its shareholders may be
diminished. Each Fund also will be subject to significant uncertainty as to
when and in what manner and for what value the obligations evidenced by the
Distressed Securities will eventually be satisfied; e.g., through a
liquidation of the obligor's assets, an exchange offer or plan of
reorganization involving the Distressed Securities or a payment of some amount
in satisfaction of the obligation. In addition, even if an exchange offer is
made or plan of reorganization is adopted with respect to Distressed
Securities held by each Fund, there can be no assurance that the securities or
other assets received by each Fund in connection with such exchange offer or
plan of reorganization will not have a lower value or income potential than
may have been anticipated when the investment was made. Moreover, any
securities received by each Fund upon completion of an exchange offer or plan
of reorganization may be restricted as to resale. As a result of each Fund's
participation in negotiations with respect to any exchange offer or plan of
reorganization with respect to an issuer of Distressed Securities, each Fund
may be restricted from disposing of such securities.
Leverage
The use of leverage by each Fund creates an opportunity for increased net
income and capital appreciation for the Common Stock, but, at the same time,
creates special risks. Each Fund intends to utilize leverage to provide the
holders of Common Stock with a potentially higher return. Leverage creates
risks for holders of Common Stock, including the likelihood of greater
volatility of net asset value and market price of shares of the Common Stock,
and the risk that fluctuations in interest rates on borrowings and short-term
debt or in the dividend rates on any preferred stock may affect the return to
holders of Common Stock. To the extent the income or capital appreciation
derived from securities purchased with funds received from leverage exceeds
the cost of leverage, each Fund's return will be greater than if leverage had
not been used. Conversely, if the income or capital appreciation from the
securities purchased with such funds is not sufficient to cover the cost of
leverage, the return to each Fund will be less than if leverage had not been
used, and therefore the amount available for distribution to shareholders as
dividends and other distributions will be reduced. In the latter case, the
investment adviser in its best judgment may nevertheless determine to maintain
each Fund's leveraged position if it expects that the benefits to each Fund's
shareholders of maintaining the leveraged position will outweigh the current
reduced return. Certain types of borrowings by each Fund may result in each
Fund being subject to covenants in credit agreements relating to asset
coverage and portfolio composition requirements. Each Fund may be subject to
certain restrictions on investments imposed by guidelines of one or more
nationally recognized statistical ratings organization which may issue ratings
for the short-term corporate debt securities or preferred stock issued by each
Fund. These covenants and guidelines may impose asset coverage or portfolio
composition requirements that are more stringent than those imposed by the
Investment Company Act. It is not anticipated that these covenants or
guidelines will impede the investment adviser from managing each Fund's
portfolio in accordance with each Fund's investment objectives and policies.
Each Fund at times may borrow from affiliates of the investment adviser,
provided that the terms of such borrowings are no less favorable than those
available from comparable sources of funds in the marketplace. The fee paid to
the investment adviser will be calculated on the basis of each Fund's assets
including proceeds from borrowings for leverage and the issuance of preferred
stock.
Other Investment Management Techniques
Each Fund may use various other investment management techniques that
also involve special considerations, including engaging in interest rate
transactions, utilization of options and futures transactions, utilization of
foreign currency swaps, making forward commitments and lending its portfolio
securities.
Non-U.S. Securities
Each Fund may invest up to 20% of its total assets in financial
instruments of issuers domiciled outside the United States or that are
denominated in various foreign currencies and multinational foreign currency
units, provided that the foreign issuers of any non-U.S. dollar denominated
instruments purchased by each Fund are domiciled in a country that is a member
of the Organization For Economic Co-operation and Development ("OECD").
Investing in securities issued by non-U.S. issuers involves certain special
risks not typically involved in U.S. investments, including fluctuations in
foreign exchange rates, future political and economic developments, the
possible imposition of exchange controls or other foreign or U.S. governmental
laws or restrictions applicable to such loans. With respect to certain
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, currency devaluations, or diplomatic
developments which could affect each Fund's investments in those financial
instruments. Moreover, an individual country's economy may differ favorably or
unfavorably from the U.S. economy in such respects as, but not limited to,
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position. In addition,
information with respect to non-U.S. issuers may differ from that available
with respect to U.S. issuers, since non-U.S. issuers are not generally subject
to uniform accounting, auditing and financial reporting standards, practices
and requirements comparable to those applicable to U.S. issuers. Each Fund
does not currently intend to hedge its non-U.S. dollar denominated portfolio
investments. Additionally, each Fund may invest in Corporate Loans made to
U.S. borrowers with significant non-dollar denominated revenues.
Concentration in Financial Institutions
As a result of each Fund's investment in Corporate Loans, each Fund may
be deemed to be concentrated in securities of issuers in the industry group
consisting of financial institutions and their holding companies, including
commercial banks, thrift institutions, insurance companies and finance
companies. Consequently, each Fund is subject to certain risks associated with
such institutions, including, among other things, changes in governmental
regulation, interest rate levels and general economic conditions.
Illiquid Securities
Each Fund may invest in securities that lack an established secondary
trading market or are otherwise considered illiquid. Some or all of the
Corporate Loans in which each Fund invests may be considered to be illiquid.
Liquidity of a security relates to the ability to easily dispose of the
security and the price to be obtained and does not generally relate to the
credit risk or likelihood of receipt of cash at maturity. Illiquid corporate
bonds, loans and notes may trade at a discount from comparable, more liquid
investments.
Antitakeover Provisions
The Articles of Incorporation, as amended, of each Fund (in each case the
"Charter") include provisions that could limit the ability of other entities
or persons to acquire control of that Fund or to change the composition of its
Board of Directors. Such provisions could discourage a third party from
seeking to obtain control of a Fund.
COMPARISON OF THE FUNDS
Financial Highlights
Debt Strategies
Except as set forth below, the financial information in the table below
has been audited in conjunction with the annual audits of the financial
statements of Debt Strategies by ____, independent auditors for the Fund. The
following per share data and ratios have been derived from information
provided in the financial statements of Debt Strategies.
<TABLE>
<CAPTION>
For the Fiscal Year Ended For the Period
-------------------------------------------- May 30, 1997 + To
February 29, 2000++ February 28, 1999 February 28, 1998
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
<S> <C> <C> <C>
Net asset value, beginning of period............................... $ 8.20 $ 10.15 $ 10.00
------------------- ----------------- -----------------
Investment income -- net........................................... 0.86 0.91 0.71
Realized and unrealized (loss) on investments and
foreign currency transactions -- net............................... (0.99) (1.93) 0.09
------------------- ----------------- -----------------
Total from investment operations................................... (0.13) (1.02) 0.80
------------------- ----------------- -----------------
Less dividends from
investment income -- net........................................ (0.86) (0.93) (0.63)
------------------- ----------------- -----------------
Capital change resulting from issuance of Common Stock............ -- -- (0.02)
------------------- ----------------- -----------------
Net asset value, end of period.................................... $ 7.21 $ 8.20 $ 10.15
------------------- ----------------- -----------------
Market price per share, end of period............................. $ 6.1875 $ 7.625 $ 10.5625
=================== ================= =================
Total Investment Return:**
Based on market price per share................................... (8.30%) (19.90%) 12.38%#
------------------- ----------------- =================
Based on net asset value per share................................ (0.64%) (10.36%) 7.99%#
=================== ================= =================
Ratios to Average Net Assets:
Expenses, net of reimbursement and excluding interest expense..... 1.19% 1.09% 0.61%*
=================== ================= =================
Expenses, net of reimbursement.................................... 3.46% 3.48% 2.28%*
=================== ================= =================
Expenses.......................................................... 3.46% 3.48% 2.56%*
=================== ================= =================
Investment income -- net.......................................... 10.85% 10.03% 9.64%*
=================== ================= =================
Leverage:
Amount of borrowings, end of period (in thousands)................ $ 70,000 $ 112,000 $ 142,600
=================== ================= =================
Average amount of borrowings outstanding
during the period (in thousands)................................. $ 97,120 $ 120,528 $ 85,903
=================== ================= =================
Average amount of borrowings outstanding
per share during the period...................................... $ 3.09 $ 3.84 $ 2.79
=================== ================= =================
Supplemental Data:
Net assets, end of period (in thousands).......................... $ 226,475 $ 257,779 $ 317,735
Portfolio turnover................................................ 48.73% 61.30% 43.79%
------------------- ----------------- -----------------
</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.
++ Based on average shares outstanding.
# Aggregate total investment return.
Debt Strategies II
Except as set forth below, the financial information in the table below
has been audited in conjunction with the annual audits of the financial
statements of Debt Strategies II by ____, independent auditors for the Fund.
The following per share data and ratios have been derived from information
provided in the financial statements of Debt Strategies II.
<TABLE>
<CAPTION>
For the Fiscal For the Period
Year Ended May 27, 1998+ to
February 29, 2000 February 28, 1999
<S> <C> <C>
Increase (Decrease) in Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period....................................... . $ 9.15 $ 10.00
----------------- -----------------
Investment income-- net..................................................... 0.97 0.76
Realized and unrealized loss on investments and
foreign currency transactions-- net........................................ (0.56) (0.91)
----------------- -----------------
Total from investment operations............................................ 0.41 (0.15)
----------------- -----------------
Less dividends from investment income-- net................................. (0.96) (0.69)
----------------- -----------------
Capital charge resulting from issuance of Common Stock...................... -- (0.01)
----------------- -----------------
Net asset value, end of period.............................................. $ 8.60 $ 9.15
================= =================
Market price per share, end of period....................................... $ 7.1875 $ 7.875
================= =================
Total Investment Return:**
Based on market price per share............................................. 3.19% (14.87%)++
================= =================
Based on net asset value per share.......................................... 6.26% (1.09%)++
----------------- -----------------
Ratios to Average Net Assets:
Expenses, net of reimbursement
and excluding interest expense............................................. 0.98% 0.54%*
================= =================
Expenses, net of reimbursement.............................................. 2.87% 0.93%*
================= =================
Expenses.................................................................... 2.87% 1.20%*
================= =================
Investment income -- net.................................................... 10.88% 8.60%*
----------------- -----------------
Leverage:
Amount of borrowings,
end of period (in thousands) $ 161,000 $ 142,000
================= =================
Average amount of borrowings outstanding
during the period (in thousands).......................................... $ 182,404 $ 42,330
================= =================
Average amount of borrowings outstanding
per share during the period $ 2.91 $ 0.69
----------------- -----------------
Supplemental Rate:
Net assets, end of period (in thousands).................................... $ 538,343 $ 572,902
================= =================
Portfolio turnover.......................................................... 61.76% 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.
Debt Strategies III
Except as set forth below, the financial information in the table below
has been audited in conjunction with the annual audits of the financial
statements of Debt Strategies III by ____, independent auditors for the Fund.
The following per share data and ratios have been derived from information
provided in the financial statements of Debt Strategies III.
<TABLE>
<CAPTION>
For the Fiscal For the Period
Year End July 31, 1998+
February 29, 2000 To February 28, 1999
----------------- --------------------
<S> <C> <C>
Increase (Decrease) In Net Asset Value:
Per Share Operating Performance:
Net asset value, beginning of period........................................ $ 10.05 $ 10.00
----------------- --------------------
Investment income -- net.................................................... 1.06 0.47
Realized and unrealized gain (loss) on
investments and foreign currency transactions -- net....................... (0.72) 0.01
----------------- --------------------
Total from investment operations............................................ 0.34 0.48
----------------- --------------------
Less dividends from investment income -- net................................ (1.03) (0.40)
----------------- --------------------
Capital charge resulting from issuance of Common Stock...................... -- (0.03)
----------------- --------------------
Net asset value, end of period.............................................. $ 9.36 $ 10.05
================= ====================
Market price per share, end of period....................................... $ 8.75 $ 8.875
================= ====================
Total Investment Return:**
Based on market price per share............................................. 10.82% (7.37%)++
================= ====================
Based on net asset value per share.......................................... 4.69% 4.89%++
================= ====================
Ratios To Average Net Assets:
Expenses, net of reimbursement and
excluding interest expense................................................. 1.18% 0.31%*
================= ====================
Expenses, net of reimbursement.............................................. 3.36% 0.39%*
================= ====================
Expenses.................................................................... 3.36% 1.09%*
================= ====================
Investment income -- net.................................................... 10.73% 8.02%*
================= ====================
Leverage:
Amount of borrowings, end of
period (in thousands)...................................................... $ 37,000 $ 18,000
================= ====================
Average amount of borrowings outstandings during
during the period (in thousands) $ 40,776 $ 1,737
================= ====================
Average amount of borrowings oustandings per share
during the period.......................................................... $ 3.70 $ 0.16
================= ====================
Supplemental Data:
Net assets, end of period (in thousands).................................... $ 103,079 $ 110,658
================= ====================
Portfolio turnover.......................................................... 50.07% 50.99%
================= ====================
</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.
Per Share Data for Common Stock* of Debt Strategies, Debt Strategies II
and Debt Strategies III (Unaudited)
Traded on the New York Stock Exchange
<TABLE>
<CAPTION>
Debt Strategies Premium
(Discount)
to Net
Market Price** Net Asset Value Asset Value
------------------------- ---------------------- ------------------------
Quarter High Low High Low High Low
Ended* ---------- --------- ---------- --------- ---------- ---------
- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1997+......................... $10.50 $10.00 $10.20 $9.99 2.33% (0.74)%
November 30, 1997........................ 10.875 9.875 10.29 10.00 7.50 (1.09)
February 28, 1998........................ 15.625 10.0625 10.20 9.96 7.89 0.67
May 31, 1998............................. 15.5625 10.0625 10.20 9.96 4.58 0.93
August 31, 1998.......................... 10.375 7.9375 9.98 9.12 3.33 (12.97)
November 30, 1998........................ 9.1875 7.8125 9.06 8.21 8.33 (5.84)
February 28, 1999........................ 8.5625 7.625 8.60 8.20 0.00 (7.19)
May 31, 1999............................. 7.875 7.3125 8.39 8.13 (5.07) (10.92)
August 31, 1999.......................... 7.875 7.0625 8.23 7.84 (3.42) (10.37)
November 30, 1999........................ 7.125 6.1250 7.83 7.46 (9.00) (18.22)
February 29, 2000........................ 6.75 6.00 7.51 7.21 (7.15) (18.51)
</TABLE>
<TABLE>
<CAPTION>
Debt Strategies II Premium
(Discount)
to Net
Market Price** Net Asset Value Asset Value
----------------------- --------------------- ----------------------
Quarter High Low High Low High Low
Ended* ---------- --------- ---------- --------- ---------- ---------
- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
May 31, 1998++........................... $10.4375 $10.00 $10.07 $10.00 3.34% 0.00%
August 31, 1998.......................... 10.125 8.125 10.09 9.55 (0.17) (15.10)
November 30, 1998........................ 8.9375 8.1875 9.52 9.14 (4.57) (11.49)
February 28, 1999........................ 9.75 7.875 9.42 9.15 (10.33) (13.93)
May 31, 1999............................. 8.5625 7.9375 9.43 9.12 (7.71) (13.84)
August 31, 1999.......................... 8.75 7.8125 9.25 8.90 (5.67) (11.90)
November 30, 1999........................ 8.1875 7.000 8.90 8.65 (9.40) (17.91)
February 29, 2000........................ 7.4375 6.9375 8.74 8.57 (14.74) (19.45)
</TABLE>
<TABLE>
<CAPTION>
Debt Strategies III Premium
(Discount)
to Net
Market Price** Net Asset Value Asset Value
----------------------- --------------------- -----------------------
Quarter High Low High Low High Low
Ended* ---------- --------- ---------- --------- ---------- ---------
- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1998+++....................... $10.166 $8.3125 $10.01 $9.98 0.20% (9.91)%
November 30, 1998........................ 10.01 8.875 10.06 9.83 (4.47) (10.17)
February 28, 1999........................ 9.75 8.75 10.15 9.98 (2.69) (12.83)
May 31, 1999............................. 9.8125 8.6875 10.27 10.02 (9.67) (14.40)
August 31, 1999.......................... 9.8125 8.8125 10.15 9.86 (5.71) (10.80)
November 30, 1999........................ 9.0625 7.875 9.86 9.59 (3.62) (18.31)
February 29, 2000........................ 9.0625 7.9375 9.67 9.34 (3.99) (16.75)
</TABLE>
______________________
* Calculations are based upon shares of Common Stock outstanding at
the end of each quarter.
** As reported in the consolidated transaction operating system.
+ For the period May 30, 1997 to August 31, 1997.
++ For the period
March 27, 1998 to May 31, 1998.
+++ For the period July 31, 1998 to
August 31, 1998.
Since Debt Strategies commenced operations on May 30, 1997, share prices
for its Common Stock have fluctuated between a maximum premium to net asset
value of approximately 8.33% and a maximum discount to net asset value of
approximately (18.51%). Since Debt Strategies II commenced operations on March
27, 1998, share prices for its Common Stock have fluctuated between a maximum
premium to net asset value of approximately 3.34% and a maximum discount to
net asset value of approximately (19.45%). Since Debt Strategies III commenced
operations on July 31, 1998, share prices for its Common Stock have fluctuated
between a maximum premium to net asset value of approximately 0.20% and a
maximum discount to net asset value of approximately (18.31%). Although there
is no reason to believe that this pattern should be affected by the Merger, it
is not possible to predict whether shares of the Surviving Fund will trade at
a premium or discount to net asset value following the Merger, or the
magnitude of any such premium or discount.
Investment Objective and Policies
The structure, organization and investment policies of the Funds are
substantially similar. Each Fund seeks as a fundamental investment objective
current income by investing primarily in a diversified portfolio of U.S.
companies' debt instruments, including Corporate Loans, which are rated in the
lower rating categories of the established rating services (Baa or lower by
Moody's or BBB or lower by S&P) or unrated debt instruments which are in the
judgment of the investment adviser of equivalent quality. Such investments
generally involve greater volatility of price and risks to principal and
income than securities in the higher rating categories. As a secondary
objective, each Fund seeks capital appreciation. Up to 35% of the total assets
of Debt Strategies and up to 20% of the total assets of Debt Strategies II and
Debt Strategies III may be invested in Distressed Securities, which includes
publicly offered or privately placed debt securities and Corporate Loans
which, at the time of investment, are the subject of bankruptcy proceedings or
otherwise in default as to the repayment of principal or payment of interest
or are rated in the lowest rating categories (Ca or lower by Moody's and CC or
lower by S&P) or which, if unrated, are in the judgment of the investment
adviser of equivalent quality. Up to 20% of each Fund's total assets may be
invested in financial instruments of issuers domiciled outside the United
States or that are denominated in various foreign currencies and multinational
foreign currency units, provided that the foreign issuers of any non-U.S.
dollar denominated instruments purchased by each Fund are domiciled in a
country that is a member of the OECD. Each Fund does not currently intend to
hedge its non-U.S. dollar denominated portfolio investments. For these
reasons, an investment in each Fund may be speculative in that it involves a
high degree of risk and should not constitute a complete investment program.
See "Risk Factors and Special Considerations." Up to 20% of each Fund's total
assets can be invested in convertible debt instruments and preferred stock,
each of which may be converted into common stock or other securities of the
same or a different issuer, and non-convertible preferred stock. As a result
of conversions of convertible securities or upon an exchange offer or
bankruptcy plan of reorganization, a significant portion of each Fund's total
assets may be invested in common stock at certain points in time. Under normal
market conditions, at least 65% of each Fund's total assets will be invested
in debt instruments. Each Fund's investment objectives are fundamental
policies and may not be changed without the approval of a majority of the
outstanding voting securities of each Fund (as defined in the Investment
Company Act). There can be no assurance that the investment objectives of each
Fund will be realized.
Each Fund's investment policies permit investment in the following asset
classes which are described in greater detail below: (i) senior and
subordinated Corporate Loans, both secured and unsecured, issued either
directly by the borrower or in the form of participation interests in
Corporate Loans made by banks and other financial institutions; (ii) publicly
offered and privately placed high-yield debt securities, senior and
subordinated, both secured and unsecured; and (iii) convertible debt
instruments and preferred stock, each of which may be converted into common
stock or other securities of the same or a different issuer, and
non-convertible preferred stock. The debt securities and Corporate Loans in
which each Fund invests may pay interest at fixed rates or at rates that float
at a margin above a generally recognized base lending rate such as the prime
rate of a designated U.S. bank, or that adjust periodically at a margin above
the CD rate or LIBOR.
Subject to other investment restrictions applicable to each Fund, up to
10% of each Fund's assets may be invested in debt instruments, including
Corporate Loans, of investment companies (which may or may not be registered
under the Investment Company Act) whose portfolio securities consist entirely
of (i) corporate debt or equity securities acceptable to each Fund's
investment adviser or (ii) money market instruments.
Under unusual market or economic conditions or for temporary or defensive
or liquidity purposes, each Fund may invest up to 100% of its assets in
securities issued or guaranteed by the U.S. Government or its
instrumentalities or agencies, certificates of deposits, banker's acceptances,
and other bank obligations, commercial paper rated in the highest category by
a nationally recognized statistical rating organization or other fixed-income
securities deemed by the investment adviser to be consistent with a defensive
posture. The yield on such securities may be lower than the yield on
lower-rated fixed-income securities.
Although each Fund will invest primarily in lower-rated securities, other
than with respect to Distressed Securities (which are discussed below) it will
not invest in securities in the lowest rating categories (Ca or below by
Moody's and CC or below by S&P) unless the investment adviser believes that
the financial condition of the issuer or the protection afforded to the
particular securities is stronger than would otherwise be indicated by such
low ratings.
Each Fund's investment philosophy is based on the belief that, under
varying economic and market conditions, certain debt instruments will perform
better than other debt instruments. Each Fund's fully managed approach puts
maximum emphasis on the flexibility of the investment adviser to analyze
various opportunities among debt instruments and to make judgments regarding
which debt instruments provide, in the opinion of the investment adviser, the
highest potential opportunity for current income and, secondarily, capital
appreciation. This approach distinguishes each Fund from other funds which
often seek either capital growth or current income or are restricted to
fixed-rate securities or floating rate instruments. Consistent with this
approach, when changing economic conditions and other factors cause the yield
difference between lower-rated and higher-rated securities to narrow, each
Fund may purchase higher-rated securities if the investment adviser believes
that the risk of loss of income and principal may be substantially reduced
with only a relatively small reduction in yield.
Investment in the Common Stock of each Fund offers the individual
investor several potential benefits. First, each Fund offers the opportunity
to participate in a portfolio which may contain investments, such as Corporate
Loans, that historically have been available mainly to institutional
investors. In managing such a portfolio, the investment adviser provides
professional management which includes the extensive credit analysis needed to
invest in Corporate Loans, junk bonds and Distressed Securities. Each Fund
also relieves the investor of the burdensome administrative details involved
in managing a portfolio of such investments. Additionally, the investment
adviser may seek to enhance the yield or capital appreciation of each Fund's
Common Stock by leveraging each Fund's capital structure through the borrowing
of money or the issuance of short-term debt securities or shares of preferred
stock. These benefits are at least partially offset by the expenses involved
in running an investment company. Such expenses primarily consist of advisory
fees and operational costs. The use of leverage also involves certain expenses
and risk considerations.
Each Fund may engage in various portfolio strategies to seek to increase
its return and to hedge its portfolio against movements in interest rates or
foreign currencies through the use of interest rate or foreign currency swap
transactions, the purchase of call and put options on securities, the sale of
covered call and put options on its portfolio securities and transactions in
financial futures and related options on such futures. Each of these portfolio
strategies is described below. There can be no assurance that each Fund will
employ these strategies or that, if employed, they will be effective.
Each Fund may invest in, among other things, the types of instruments
described below:
Description of Corporate Loans
The Corporate Loans in which each Fund may invest generally consist of
direct obligations of a borrower undertaken to finance the growth of the
borrower's business internally or externally, or to finance a capital
restructuring. Corporate Loans may also include obligations of a borrower
issued in connection with a restructuring or a bankruptcy. A significant
portion of the Corporate Loans in which each Fund invests are highly leveraged
loans, such as leveraged buy-out loans, leveraged recapitalization loans and
other types of acquisition loans. Such Corporate Loans may be structured to
include both term loans, which are generally fully funded at the time of each
Fund's investment and revolving credit facilities, which would require each
Fund to make additional investments in Corporate Loans as required under the
terms of the credit facility. Such Corporate Loans may also include
receivables purchase facilities, which are similar to revolving credit
facilities secured by a borrower's receivables.
Each Fund may invest in senior and subordinated Corporate Loans, both
secured and unsecured. The Corporate Loans in which each Fund invests may be
senior debt obligations of the borrower and may, in some instances, hold the
most senior position in the capital structure of the borrower (i.e. not
subordinated to other debt obligations in right of payment). Corporate Loans
which are senior debt obligations of the borrower may be wholly or partially
secured by collateral, or may be unsecured. However, even in the case of a
secured Corporate Loan, upon an event of default the ability of a lender to
have access to the collateral, if any, or otherwise recover its investment
maybe limited by bankruptcy and other insolvency laws. The collateral may
decline subsequent to each Fund's investment in the Corporate Loan. Under
certain circumstances, the collateral may be released with the consent of the
syndicate of lenders and the lender which is administering the Corporate Loan
on behalf of the syndicate ("Agent Bank") or pursuant to the terms of the
underlying credit agreement with the borrower. There is no assurance that the
liquidation of the collateral would satisfy the borrower's obligations in the
event of the nonpayment of scheduled interest or principal, or that the
collateral could be readily liquidated. As a result, each Fund might not
receive payments to which it is entitled and thereby may experience a decline
in the value of the investment and possibly, its net asset value.
In addition to senior and secured Corporate Loans, each Fund may invest
in Corporate Loans which are unsecured and subordinated. A Corporate Loan
which is unsecured is not supported by any specific pledge of collateral and
therefore constitutes only a general obligation of the borrower. In addition
to being unsecured a Corporate Loan in which each Fund may invest may be
subordinate in right of payment to the senior debt obligations of the
borrower. Upon a liquidation or bankruptcy of the borrower the senior debt
obligations of the borrower are often required to be paid in full before the
subordinated debt holders are permitted to receive any distribution on behalf
of their claim. Distributions, if any, to subordinated debt holders in such
situations may consist in whole or in part in non-income producing securities,
including common stock. Accordingly, following an event of default or
liquidation or bankruptcy of a borrower, there can be no assurance that the
assets of the borrower will be sufficient to satisfy the claims of unsecured
and subordinated debt holders or that such debt holders will receive income
producing debt securities in satisfaction of their claims. As a result, each
Fund might not receive payments to which it is entitled and thereby may
experience a decline in the value of its investment and possibly, its net
asset value.
Corporate Loans made in connection with highly leveraged transactions are
subject to greater risks than other Corporate Loans in which each Fund may
invest. These credit risks include a greater possibility of default or
bankruptcy of the borrower, and the potential assertion that the pledging of
collateral, if any, to secure the loan constituted a fraudulent conveyance or
preferential transfer which can be nullified or subordinated to the rights of
other creditors of the borrower under applicable law. Highly leveraged
Corporate Loans may also be less liquid than other Corporate Loans.
The rate of interest payable on floating or variable rate Corporate Loans
is established as the sum of a base lending rate used by commercial lenders
plus a specified margin. These base lending rates generally are the Prime Rate
of a designated U.S. bank, London Interbank Offered Rate ("LIBOR"), the
Certificate of Deposit ("CD") rate or another base lending rate used by
commercial lenders. The interest rate on Prime Rate-based Corporate Loans
floats daily as the Prime Rate changes, while the interest rate on LIBOR-based
and CD-based Corporate Loans is reset periodically, typically every 30 days to
one year. Certain of the floating or variable rate Corporate Loans in which
each Fund will invest may permit the borrower to select an interest rate reset
period of up to one year. A portion of each Fund's portfolio may be invested
in Corporate Loans with longer interest rate reset periods or fixed interest
rates which are generally more susceptible to interest rate risks in the event
of fluctuations in prevailing interest rates.
Each Fund may receive and/or pay certain fees in connection with its
investments in Corporate Loans. These fees are in addition to interest
payments received and may include facility fees, commissions and prepayment
penalty fees. When each Fund buys a Corporate Loan it may receive a facility
fee and when it sells a Corporate Loan it may pay a facility fee. In certain
circumstances, each Fund may receive a prepayment penalty fee on the
prepayment of a Corporate Loan by a borrower. These fees are intended to
adjust the yield on such Corporate Loans. In connection with the acquisition
of Corporate Loans, each Fund may also acquire warrants and other debt or
equity securities of the borrower or its affiliates. The acquisition of such
securities will only be incidental to each Fund's purchase of an interest in a
Corporate Loan.
In making an investment in a Corporate Loan, the investment adviser will
consider factors deemed by it to be appropriate to the analysis of the
borrower and the Corporate Loan. Such factors include financial ratios of the
borrower such as pre-tax interest coverage, leverage ratios, and the ratios of
cash flows to total debts and the ratio of tangible assets to debt. In its
analysis of these factors, the investment adviser also will be influenced by
the nature of the industry in which the borrower is engaged, the nature of the
borrower's assets and the investment adviser's assessments of the general
quality of the borrower.
A borrower also may be required to comply with various restrictive
covenants contained in any loan agreement between the borrower and the lending
syndicate ("Corporate Loan Agreement"). Such covenants, in addition to
requiring the scheduled payment of interest and principal, may include
restrictions on dividend payments and other distributions to stockholders,
provisions requiring the borrower to maintain specific financial ratios or
relationships and limits on total debt. In addition, a Corporate Loan
Agreement may contain a covenant requiring the borrower to prepay the
Corporate Loan with any excess cash flow. Excess cash flow generally includes
net cash flow after scheduled debt service payments and permitted capital
expenditures, among other things, as well as the proceeds from asset
dispositions or sales of securities. A breach of covenant (after giving effect
to any cure period) which is not waived by the Agent Bank and the lending
syndicate normally is an event of acceleration, i.e., the Agent Bank has the
right to call the outstanding Corporate Loan, generally at the request of the
lending syndicate.
Each Fund has no restrictions on portfolio maturity, but it is
anticipated that a majority of the Corporate Loans will have stated maturities
ranging from five to ten years. However, such Corporate Loans usually will
require, in addition to scheduled payments of interest and principal, the
prepayment of the Corporate Loans from excess cash flow, as discussed above,
and may permit the borrower to prepay at its election. The degree to which
borrowers prepay Corporate Loans, whether as a contractual requirement or at
their election, may be affected by general business conditions, the financial
condition of the borrower and competitive conditions among lenders, among
other factors. Accordingly, prepayments cannot be predicted with accuracy.
Loans to non-U.S. borrowers or to U.S. borrowers with significant
non-dollar-denominated revenues may provide for conversion of all or part of
the loan from a dollar-denominated obligation into a foreign currency
obligation at the option of the borrower.
Description of Participation Interests
Corporate Loans in which each Fund may invest are typically originated,
negotiated and structured by a syndicate of lenders ("Co-Lenders") consisting
of commercial banks, thrift institutions, insurance companies, finance
companies or other financial institutions, one or more of which acts as Agent
Bank. Co-Lenders may sell Corporate Loans to third parties called
"Participants." Each Fund may invest in a Corporate Loan either by
participating as a Co-Lender at the time the loan is originated or by buying
an interest in the Corporate Loan from a Co-Lender or a Participant.
Co-Lenders and Participants interposed between each Fund and a borrower,
together with Agent Banks, are referred to herein as "Intermediate
Participants."
Each Fund may invest in a Corporate Loan at origination as a Co-Lender or
by purchasing a Corporate Loan from an Intermediate Participant by means of a
novation, an assignment or a participation. In a novation, the Fund would
assume all of the rights of the Intermediate Participant in a Corporate Loan,
including the right to receive payments of principal and interest and other
amounts directly from the borrower and to enforce its rights as lender
directly against the borrower and would assume all of the obligations of the
Intermediate Participant, including any obligation to make future advances to
the borrower. As a result, therefore, each Fund would have the status of a
Co-Lender. As an alternative, each Fund may purchase an assignment of all or a
portion of an Intermediate Participant's interest in a Corporate Loan, in
which case each Fund may be required generally to rely on the assigning lender
to demand payment and enforce its rights against the borrower, but would
otherwise be entitled to all of such lender's rights in the Corporate Loan.
Each Fund also may purchase a participation in a portion of the rights of an
Intermediate Participant in a Corporate Loan by means of a participation
agreement with such Intermediate Participant. A participation in the rights of
an Intermediate Participant is similar to an assignment in that the
Intermediate Participant transfers to each Fund all or a portion of an
interest in a Corporate Loan. Unlike an assignment, however, a participation
does not establish any direct relationship between each Fund and the borrower.
In such a case, each Fund would be required to rely on the Intermediate
Participant that sold the participation not only for the enforcement of each
Fund's rights against the borrower but also for the receipt and processing of
payments due to each Fund under the Corporate Loan. Each Fund will not act as
an Agent Bank, guarantor, sole negotiator or sole structurer with respect to a
Corporate Loan.
Because it may be necessary to assert through an Intermediate Participant
such rights as may exist against the borrower, in the event that the borrower
fails to pay principal and interest when due, each Fund may be subject to
delay, expense and risks that are greater than those that would be involved if
each Fund could enforce its rights directly against the borrower. Moreover,
under the terms of the participation, each Fund may be regarded as a creditor
of the Intermediate Participant (rather than of the borrower), so that each
Fund may also be subject to the risk that the Intermediate Participant may
become insolvent. Similar risks may arise with respect to the Agent Bank, as
described below. Further, in the event of the bankruptcy or insolvency of the
borrower, the obligation of the borrower to repay the Corporate Loan may be
subject to certain defenses that can be asserted by such borrower as result of
improper conduct by the Agent Bank or Intermediate Participant.
Because each Fund will regard the issuer of a Corporate Loan as including
the borrower under a Corporate Loan Agreement, the Agent Bank and any
Intermediate Participant, each Fund may be deemed to be concentrated in
securities of issuers in the industry group consisting of financial
institutions and their holding companies, including commercial banks, thrift
institutions, insurance companies and finance companies. As a result, each
Fund is subject to certain risks associated with such institutions. Banking
and thrift institutions are subject to extensive governmental regulations
which may limit both the amounts and types of loans and other financial
commitments which such institutions may make and the profitability of these
institutions is largely dependent on the availability and cost of capital
funds. In addition, general economic conditions are important to the operation
of these institutions, with exposure to credit losses resulting from possible
financial difficulties of borrowers potentially having an adverse effect.
Insurance companies are also affected by economic and financial conditions and
are subject to extensive government regulation, including rate regulations.
Individual companies may be exposed to material risks, including reserve
inadequacy.
In a typical Corporate Loan, the Agent Bank administers the terms of the
Corporate Loan Agreement and is responsible for the collection of principal
and interest and fee payments from the borrower and the apportionment of these
payments to the credit of all investors which are parties to the Corporate
Loan Agreement. Each Fund generally will rely on the Agent Bank or an
Intermediate Participant to collect its portion of the payments on the
Corporate Loan. Furthermore, each Fund will rely on the appropriate creditor
remedies against the borrower. Typically, under Corporate Loan Agreements, the
Agent Bank is given broad discretion in enforcing the Corporate Loan
Agreement, and it is obliged to use only the same care it would use in the
management of its own property. For these services the borrower compensates
the Agent Bank. Such compensation may include special fees paid on structuring
and funding the Corporate Loan and other fees paid on a continuing basis.
In the event that an Agent Bank becomes insolvent, or has a receiver,
conservator, or similar official appointed for it by the appropriate bank
regulatory authority or becomes a debtor in a bankruptcy proceeding, assets
held by the Agent Bank under the Corporate Loan Agreement should remain
available to holders of Corporate Loans. If, however, assets held by the Agent
Bank for the benefit of each Fund are determined by an appropriate regulatory
authority or court to be subject to the claims of the Agent Bank's general or
secured creditors, each Fund might incur certain costs and delays in realizing
payment on a Corporate Loan, or suffer a loss of principal and/or interest. In
situations involving Intermediate Participants similar risks may arise, as
described above.
Intermediate Participants may have certain obligations pursuant to a
Corporate Loan Agreement, which may include the obligation to make future
advances to the borrower in connection with revolving credit facilities in
certain circumstances. Each Fund currently intends to reserve against such
contingent obligations by segregating sufficient investments in liquid
instruments. Each Fund will not invest in Corporate Loans that would require
each Fund to make any additional investments in connection with such future
advances if such commitments would exceed 20% of each Fund's total assets or
would cause each Fund to fail to meet the diversification requirements
described under "Investment Objectives and Policies."
Description of High-Yield Securities
Each Fund may invest in high-yield corporate debt securities, including
Corporate Loans, which are rated in the lower rating categories of the
established rating services (Baa or lower by Moody's and BBB or lower by S&P),
or in unrated securities considered by the investment adviser to be of
comparable quality. Securities rated below Baa by Moody's or below BBB by S&P,
and unrated securities of comparable quality, are commonly known as "junk
bonds."
Although high-yield securities can be expected to provide higher yields,
such securities may be subject to greater market fluctuations and risk of loss
of income and principal than lower-yielding, higher-rated fixed-income
securities. As described under "Risk Factors and Special Considerations,"
economic conditions and interest rate levels may impact significantly the
values of high-yield securities. In addition, high-yield securities are often
unsecured and subordinated obligations of the issuer. Accordingly, following
an event of default or liquidation or bankruptcy of the issuer, each Fund
might not receive payments to which it is entitled, or may receive
distributions of non-income producing securities, including common stock, and
thereby may experience a decline in the value of its investment and possibly
its net asset value.
Selection and supervision of high-yield securities by the investment
adviser involves continuous analysis of individual issuers, general business
conditions and other factors which may be too time-consuming or too costly for
the average investor. The furnishing of these services does not, of course,
guarantee successful results. The investment adviser's analysis of issuers
includes, among other things, historic and current financial conditions,
current and anticipated cash flow and borrowing requirements, value of assets
in relation to historical costs, strength of management, responsiveness to
business conditions, credit standing and current and anticipated results of
operations. Analysis of general conditions and other factors may include
anticipated change in economic activity and interest rates, the availability
of new investment opportunities and the economic outlook for specific
industries. While the investment adviser considers as one factor in its credit
analysis the ratings assigned by the rating services, the investment adviser
performs its own independent credit analysis of issuers and, consequently,
each Fund may invest, without limit, in unrated securities. As a result, each
Fund's ability to achieve its investment objectives may depend to a greater
extent on the investment adviser's own credit analysis than investment
companies which invest in higher-rated securities. Although each Fund will
invest primarily in lower-rated securities, other than with respect to
Distressed Securities (which are discussed below) it will not invest in
securities in the lowest rating categories (Ca or below by Moody's and CC or
below by S&P) unless the investment adviser believes that the financial
condition of the issuers or the protection afforded to the particular
securities is stronger than would otherwise be indicated by such ratings.
Securities which subsequently are downgraded may continue to be held by each
Fund and will be sold only if, in the judgment of the investment adviser, it
is advantageous to do so.
In connection with its investments in corporate debt securities, or
restructuring of investments owned by each Fund, each Fund may receive
warrants or other non-income producing debt or equity securities. Each Fund
may retain such securities until the investment adviser determines it is
appropriate in light of current market conditions to effect a disposition of
such securities.
When changing economic and other factors cause the yield difference
between lower-rated and higher-rated securities to narrow, each Fund may
purchase higher-rated securities if the investment adviser believes that the
risk of loss of income and principal may be reduced substantially with only a
relatively small reduction in yield.
Description of Distressed Securities
Debt Strategies may invest up to 35% and Debt Strategies II and Debt
Strategies III may invest up to 20% of their respective total assets in
Distressed Securities. Distressed Securities are high yield/high risk
securities, including Corporate Loans purchased in the secondary market, which
are the subject of bankruptcy proceedings or otherwise in default as to the
repayment of principal and/or payment of interest at the time of acquisition
by each Fund or are rated in the lower rating categories (Ca or lower by
Moody's and CC or lower by S&P) or which, if unrated, are in the judgment of
the investment adviser of equivalent quality. Investment in Distressed
Securities is speculative and involves significant risk. Distressed Securities
frequently do not produce income while they are outstanding and may require
each Fund to bear certain extraordinary expenses in order to protect and
recover its investment. Therefore, to the extent each Fund pursues its
secondary objective of capital appreciation through investment in Distressed
Securities, each Fund's ability to achieve current income for its shareholders
may be diminished. Each Fund also will be subject to significant uncertainty
as to when and in what manner and for what value the obligations evidenced by
the Distressed Securities will eventually be satisfied; e.g., through a
liquidation of the obligor's assets, an exchange offer or plan of
reorganization involving the Distressed Securities or a payment of some amount
in satisfaction of the obligation. In addition, even if an exchange offer is
made or plan of reorganization is adopted with respect to Distressed
Securities held by each Fund, there can be no assurance that the securities or
other assets received by each Fund in connection with such exchange offer or
plan of reorganization will not have a lower value or income potential than
may have been anticipated when the investment was made. Moreover, any
securities received by each Fund upon completion of an exchange offer or plan
of reorganization may be restricted as to resale. As a result of each Fund's
participation in negotiations with respect to any exchange offer or plan of
reorganization with respect to an issuer of Distressed Securities, each Fund
may be restricted from disposing of such securities.
Description of Convertible Securities and Preferred Stock
A convertible security is a bond, debenture, note or preferred stock that
may be converted into or exchanged for a prescribed amount of common stock or
other securities of the same or a different issuer within a particular period
of time at a specified price or formula. A convertible security entitles the
holder to receive interest generally paid or accrued on debt or the dividend
paid on preferred stock until the convertible security matures or is redeemed,
converted or exchanged. Convertible securities have several unique investment
characteristics such as (i) higher yields than common stocks, but lower yields
than comparable nonconvertible securities, (ii) a lesser degree of fluctuation
in value than the underlying stock since they have fixed income
characteristics, and (iii) the potential for capital appreciation if the
market price of the underlying common stock increases. Holders of convertible
securities have a claim on the assets of the issuer prior to the common
stockholders but may be subordinated to similar non-convertible securities of
the same issuer. A convertible security might be subject to redemption at the
option of the issuer at a price established in the convertible security's
governing instrument. If a convertible security held by each Fund is called
for redemption, each Fund may be required to permit the issuer to redeem the
security, convert it into the underlying common stock or other securities or
sell it to a third party.
Each Fund may invest in non-convertible preferred stock which generally
entitles the holders to receive a dividend payment. Holders of preferred stock
have a claim on the assets of the issuer prior to the common stockholders but
subordinate to the creditors and holders of debt instruments of the same
issuer. Preferred stock may be subject to redemption at the option of the
issuer at a price established in the preferred stock governing instrument.
Illiquid Securities
Corporate Loans, junk bonds, and other securities held by each Fund may
not be readily marketable and may be subject to restrictions on resale.
Although Corporate Loans are transferred among certain financial institutions,
as described above, the Corporate Loans in which each Fund invests may not
have the liquidity of conventional debt securities traded in the secondary
market and may be considered illiquid. As the market for Corporate Loans
continues to become more seasoned, the investment adviser expects that
liquidity will improve. Each Fund has no limitation on the amount of its
investments which are not readily marketable or are subject to restrictions on
resale.
Other Investment Policies
Each Fund has adopted certain other policies as set forth below:
Leverage. Each Fund is authorized to utilize leverage in amounts up to
33-1/2% of its total assets (including the assets obtained from leverage)
to provide common stockholders with a potentially higher rate of return.
Debt Strategies, Debt Strategies II and Debt Strategies III each has entered
into a separate credit agreement with a syndicate of lenders providing for
an unsecured revolving credit facility under the following terms:
<TABLE>
<CAPTION>
Interest Rate
--------------------------------------------
Prime Rate LIBOR Fed Funds
Commitment Amount Expiration Date Plus Plus Plus
--------------------- ------------------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C>
Debt Strategies $160 million Aug. 1, 2000 0.00% 0.55% 0.55%
Debt Strategies II $225 million July 12, 2000 0.00% 0.55% 0.55%
Debt Strategies III $55 million Dec. 15, 2000 0.00% 0.55% 0.55%
</TABLE>
As part of the Merger, Debt Strategies II will enter into a credit
facility to refinance the outstanding credit facilities of all three Funds in
a principal amount approximately equal to the aggregate commitment amount of
the currently outstanding credit facilities. Each Fund will generally not
utilize leverage if it anticipates that its leveraged capital structure would
result in a lower return to holders of the Common Stock than that obtainable
if the Common Stock were unleveraged for any significant amount of time. Each
Fund may also borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which may otherwise require untimely dispositions of
Fund securities. Each Fund at times may borrow from affiliates of the
investment adviser, provided that the terms of such borrowings are no less
favorable than those available from comparable sources of funds in the
marketplace. The fee paid to the investment adviser will be calculated on the
basis of each Fund's assets, including proceeds from borrowings for leverage
and the issuance of preferred stock.
The concept of leveraging is based on the premise that the cost of the
assets to be obtained from leverage will be based on short-term rates which
normally will be lower than the return earned by each Fund on its longer term
portfolio investments. Since the total assets of each Fund (including the
assets obtained from leverage) will be invested in higher yielding portfolio
investments or portfolio investments with the potential for capital
appreciation, the holders of Common Stock will be the beneficiaries of the
incremental return. Should the differential between the return on the
underlying assets and the cost of leverage narrow, the incremental return
"pick up" will be reduced. Furthermore, if long-term rates rise, the Common
Stock net asset value will reflect the decline in the value of portfolio
holdings resulting therefrom.
Leverage creates risks for the holders of Common Stock, including the
likelihood of greater volatility of net asset value and market price of shares
of the Common Stock, and the risk that fluctuations in interest rates on
borrowings or in the dividend rates on any preferred stock may affect the
return to the holders of Common Stock. To the extent the income or capital
appreciation derived from securities purchased with funds received from
leverage exceeds the cost of leverage, each Fund's return will be greater than
if leverage had not been used. Conversely, if the income or capital
appreciation from the securities purchased with such funds is not sufficient
to cover the cost of leverage, the return of each Fund will be less than if
leverage had not been used, and therefore the amount available to shareholders
as dividends and other distributions will be reduced. In the latter case, the
investment adviser in its best judgment may nevertheless determine to maintain
each Fund's leveraged position if it expects that the benefits to each Fund's
stockholders of maintaining the leveraged position will outweigh the current
reduced return.
Capital raised through leverage will be subject to interest costs or
dividend payments which may or may not exceed the income and appreciation on
the assets purchased. Each Fund also may be required to maintain minimum
average balances in connection with borrowings or to pay a commitment or other
fee to maintain a line of credit. Either of these requirements will increase
the cost of borrowing over the stated interest rate. The issuance of preferred
stock involves offering expenses and other costs and may limit each Fund's
freedom to pay dividends on shares of Common Stock or to engage in other
activities. Borrowings and the issuance of preferred stock having priority
over each Fund's Common Stock create an opportunity for greater return per
share of Common Stock, but at the same time such borrowing or issuance of
preferred stock is a speculative technique in that it will increase each
Fund's exposure to capital risk. Such risks may be reduced through the use of
borrowings and preferred stock that have floating rates of interest. Unless
the income and appreciation, if any, on assets acquired with borrowed funds or
offering proceeds exceeds the cost of borrowing or issuing additional classes
of securities, the use of leverage will diminish the investment performance of
each Fund compared with what it would have been without leverage.
Certain types of borrowings may result in each Fund being subject to
covenants in credit agreements relating to asset coverage and portfolio
composition requirements. Each Fund may be subject to certain restrictions on
investments imposed by guidelines of one or more nationally recognized
statistical rating organizations which may issue ratings for the short-term
corporate debt securities or preferred stock. These covenants or guidelines
may impose asset coverage or portfolio composition requirements that are more
stringent than those imposed by the Investment Company Act. It is not
anticipated that these covenants or guidelines will impede the investment
adviser from managing each Fund's portfolio in accordance with each Fund's
investment objectives and policies.
Under the Investment Company Act, no Fund is permitted to incur
indebtedness unless immediately after such incurrence each Fund has an asset
coverage of 300% of the aggregate outstanding principal balance of
indebtedness (i.e., such indebtedness may not exceed 33 1/3% of each Fund's
total assets). Additionally, under the Investment Company Act no Fund may
declare any dividend or other distribution upon any class of its capital
stock, or purchase any such capital stock, unless the aggregate indebtedness
of such Fund has, at the time of the declaration of any such dividend or
distribution or at the time of any such purchase, an asset coverage of at
least 300% after deducting the amount of such dividend, distribution, or
purchase price, as the case may be. Under the Investment Company Act, no Fund
is permitted to issue shares of preferred stock unless immediately after such
issuance the net asset value of such Fund's portfolio is at least 200% of the
liquidation value of the outstanding preferred stock (i.e., such liquidation
value may not exceed 50% of each Fund's total assets). In addition, no Fund is
permitted to declare any cash dividend or other distribution on its Common
Stock unless, at the time of such declaration, the net asset value of each
Fund's portfolio (determined after deducting the amount of such dividend or
distribution) is a least 200% of such liquidation value. In the event shares
of preferred stock are issued, each Fund intends, to the extent possible, to
purchase or redeem shares of preferred stock from time to time to maintain
coverage of any preferred stock of at least 300%.
Each Fund's willingness to borrow money and issue new securities for
investment purposes, and the amount it will borrow or issue, will depend on
many factors, the most important of which are investment outlook, market
conditions and interest rates. Successful use of a leveraging strategy depends
on the investment adviser's ability to predict correctly interest rates and
market movements, and there is no assurance that a leveraging strategy will be
successful during any period in which it is employed.
Assuming the utilization of leverage by borrowings in the amount of
approximately 33-1/3% of each Fund's total assets, and an annual interest
rate of __________% payable on such leverage based on market rates as of the
date of this Proxy Statement and Prospectus, the annual return that each
Fund's portfolio must experience (net of expenses) in order to cover such
interest payments would be __________.
The following table is designed to illustrate the effect on the return to
a holder of each Fund's Common Stock of the leverage obtained by borrowings in
the amount of approximately 33-1/3% of each Fund's total assets, assuming
hypothetical annual returns of each Fund's portfolio of minus 10% to plus 10%.
As the table shows, leverage generally increases the return to stockholders
when portfolio return is positive and greater than the cost of leverage and
decreases the return when the portfolio return is negative or less than the
cost of leverage. The figures appearing in the table are hypothetical and
actual returns may be greater or less than those appearing in the table.
<TABLE>
<CAPTION>
Debt Strategies
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return (net of expenses)............. ____% ____% ___% ___% ___%
Corresponding Common Stock Return...................... ____% ____% ___% ___% ___%
Debt Strategies II
Assumed portfolio Return (net of expenses)............. ____% ____% ___% ___% ___%
Corresponding Common Stock Return...................... ____% ____% ___% ___% ___%
Debt Strategies III
Assumed Portfolio Return............................... ____% ____% ___% ___% ___%
Corresponding Common Stock Return...................... ____% ____% ___% ___% ___%
</TABLE>
Interest Rate Transactions
In order to hedge the value of each Fund's portfolio against interest
rate fluctuations or to enhance each Fund's income each Fund may enter into
various interest rate transactions, such as interest rate swaps and the
purchase or sale of interest rate caps and floors. Each Fund expects to enter
into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio or to protect against any
increase in the price of securities each Fund anticipates purchasing at a
later date. Each Fund intends to use these transactions primarily as a hedge
and not as a speculative investment. However, each Fund may also invest in
interest rate swaps to enhance income or increase each Fund's yield, for
example, during periods of steep interest rate yield curves (i.e., wide
differences between short term and long term interest rates).
In an interest rate swap, each Fund exchanges with another party their
respective commitments to pay or receive interest, e.g., an exchange of fixed
rate payments for floating rate payments. For example, if each Fund holds a
debt instrument with an interest rate that is reset only once each year, it
may swap the right to receive interest at this fixed rate for the right to
receive interest at a rate that is reset every week. This would enable each
Fund to offset a decline in the value of the debt instrument due to rising
interest rates but would also limit its ability to benefit from falling
interest rates. Conversely, if each Fund holds a debt instrument with an
interest rate that is reset every week and it would like to lock in what it
believes to be a high interest rate for one year, it may swap the right to
receive interest at this variable weekly rate for the right to receive
interest at a rate that is fixed for one year. Such a swap would protect each
Fund from a reduction in yield due to falling interest rates and may permit
each Fund to enhance its income through the positive differential between one
week and one year interest rates, but would preclude it from taking full
advantage of rising interest rates.
Each Fund usually will enter into interest rate swaps on a net basis,
i.e., the two payment streams are netted out, with each Fund receiving or
paying, as the case may be, only the net amount of the two payments. The net
amount of the excess, if any, of each Fund's obligations over its entitlements
with respect to each interest rate swap will be accrued on a daily basis, and
an amount of cash or liquid instruments having an aggregate net asset value at
least equal to the accrued excess will be maintained in a segregated account
by each Fund's custodian. If the interest rate swap transaction is entered
into on other than a net basis, the full amount of each Fund's obligations
will be accrued on a daily basis, and the full amount of each Fund's
obligations will be maintained in a segregated account by each Fund's
custodian.
Each Fund may also engage in interest rate transactions in the form of
purchasing or selling interest rate caps or floors. Each Fund will not sell
interest rate caps or floors that it does not own. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds
a predetermined interest rate, to receive payments of interest equal to the
difference of the index and the predetermined rate on a notional principal
amount (the reference amount with respect to which interest obligations are
determined although no actual exchange of principal occurs) from the party
selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest at the difference
of the index and the predetermined rate on a notional principal amount from
the party selling such interest rate floor. No Fund will enter into caps or
floors if, on a net basis, the aggregate notional principal amount with
respect to such agreements exceeds the net assets of such Fund.
Typically, the parties with which each Fund will enter into interest rate
transactions will be broker-dealers and other financial institutions. Each
Fund will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other
party thereto is rated investment grade quality by at least one nationally
recognized statistical rating organization at the time of entering into such
transaction or whose creditworthiness is believed by the investment adviser to
be equivalent to such rating. If there is a default by the other party to such
a transaction, each Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid in
comparison with other similar instruments traded in the interbank market. Caps
and floors, however, are more recent innovations and are less liquid than
swaps. Certain Federal income tax requirements may limit each Fund's ability
to engage in certain interest rate transactions. Gains from transactions in
interest rate swaps distributed to shareholders will be taxable as ordinary
income or, in certain circumstances, as long-term capital gains to
shareholders.
Foreign Currency Swaps
Each Fund may enter into foreign currency swaps in order to hedge
non-U.S. dollar denominated portfolio investments, although the Funds have no
current intention to do so.
Foreign currency swaps involve the exchange by the lenders, including
each Fund, with another party (the "counterparty") of the right to receive the
currency in which the loan is denominated for the right to receive dollars.
Each Fund will generally enter into a transaction subject to a foreign
currency swap only if, at the time of entering into such swap, the outstanding
debt obligations of the counterparty are investment grade; i.e., rated BBB or
A-3 or higher by S&P, Baa or B3 or higher by Moody's, BBB or F4 or higher by
Fitch IBCA, Inc., or are determined to be of comparable quality in the
judgment of the investment adviser. The amounts of dollar payments to be
received by the lenders and the foreign currency payments to be received by
the counterparty are fixed at the time the swap arrangement is entered into.
Accordingly, the swap protects each Fund from fluctuations in exchange rates
and locks in the right to receive payments under the loan in a predetermined
amount of dollars. If there is a default by the counterparty each Fund will
have contractual remedies pursuant to the swap arrangement. However, the
dollar value of each Fund's right to foreign currency payments under the loan
will be subject to fluctuations in the applicable exchange rate to the extent
that a replacement swap arrangement is unavailable or each Fund is unable to
recover damages from the defaulting counterparty. If the borrower defaults on
or prepays the underlying Corporate Loan, each Fund may be required pursuant
to the swap arrangements to compensate the counterparty to the extent of
fluctuations inexchange rates adverse to the counterparty. In the event of
such a default or prepayment, an amount of cash or liquid instruments having
an aggregate net asset value at least equal to the amount of compensation that
must be paid to the counterparty pursuant to the swap arrangements will be
maintained in a segregated account by each Fund's custodian.
Options on Portfolio Securities
Call Options on Portfolio Securities. Each Fund may purchase call options
on any of the types of securities in which it may invest. A purchased call
option gives each Fund the right to buy, and obligates the seller to sell, the
underlying security at the exercise price at any time during the option
period. Each Fund also is authorized to write (i.e., sell) covered call
options on the securities in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option where each Fund, in return for a premium, gives another
party a right to buy specified securities owned by each Fund at a specified
future date and price set at the time of the contract. The principal reason
for writing call options is attempt to realize, through the receipt of
premiums, a greater return than would be realized on the securities alone. By
writing covered call options, each Fund gives up the opportunity, while the
option is in effect, to profit from any price increase in the underlying
security above the option exercise price. In addition, each Fund's ability to
sell the underlying security will be limited while the option is in effect
unless each Fund effects a closing purchase transaction. A closing purchase
transaction cancels out each Fund's position as the writer of an option by
means of an offsetting purchase of an identical option prior to the expiration
of the option it has written. Covered call options also serve as a partial
hedge against the price of the underlying security declining. Each Fund may
also purchase and sell call options on indices. Index options are similar to
options on securities except that, rather than taking or making delivery of
securities underlying the option at a specified price upon exercise, an index
option gives the holder the right to receive cash upon exercise of the option
if the level of the index upon which the option is based is greater than the
exercise price of the option.
Put Options on Portfolio Securities. Each Fund is authorized to purchase
put options to hedge against a decline in the value of its securities. By
buying a put option, each Fund has a right to sell the underlying security at
the exercise price, thus limiting each Fund's risk of loss through a decline
in the market value of the security until the put option expires. The amount
of any appreciation in the value of the underlying security will be partially
offset by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out each Fund's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option
it has purchased. Each Fund also has authority to write (i.e., sell) put
options on the types of securities which may be held by each Fund, provided
that such put options are covered, meaning that such options are secured by
segregated, liquid instruments. Each Fund will receive a premium for writing a
put option, which increases each Fund's return. Each Fund will not sell puts
if, as a result, more than 50% of each Fund's assets would be required to
cover its potential obligations under its hedging and other investment
transactions. The Fund may purchase and sell put options on indices. Index
options are similar to options on securities except that, rather than taking
or making delivery of securities underlying the option at a specified price
upon exercise, an index option gives the holder the right to receive cash upon
exercise of the option if the level of the index upon which the option is
based is less than the exercise price of the option.
Financial Futures and Options Thereon
Each Fund is authorized to engage in transactions in financial futures
contracts ("futures contracts") and related options on such futures contracts
either as a hedge against adverse changes in the market value of its portfolio
securities and interest rates or to enhance each Fund's income. A futures
contract is an agreement between two parties which obligates the purchaser of
the futures contract to buy and the seller of a futures contract to sell a
security for a set price on a future date or, in the case of an index futures
contract to make and accept a cash settlement based upon the difference in
value of the index between the time the contract was entered into and the time
of its settlement. A majority of transactions in futures contracts, however,
do not result in the actual delivery of the underlying instrument or cash
settlement, but are settled through liquidation, i.e., by entering into an
offsetting transaction. Futures contracts have been designed by boards of
trade which have been designated "contract markets" by the Commodities Futures
Trading Commission ("CFTC"). Transactions by each Fund in futures contracts
and financial futures are subject to limitations as described below under
"Restrictions on the Use of Futures Transactions."
Each Fund may sell financial futures contracts in anticipation of an
increase in the general level of interest rates. Generally, as interest rates
rise, the market values of securities which may be held by each Fund will
fall, thus reducing the net asset value of each Fund. However, as interest
rates rise, the value of each Fund's short position in the futures contract
will also tend to increase, thus offsetting all or a portion of the
depreciation in the market value of each Fund's investments which are being
hedged. While each Fund will incur commission expenses in selling and closing
out futures positions, these commissions are generally less than the
transaction expenses which each Fund would have incurred had the Fund sold
portfolio securities in order to reduce its exposure to increases in interest
rates. Each Fund also may purchase financial futures contracts in anticipation
of a decline in interest rates when it is not fully invested in a particular
market in which it intends to make investments to gain market exposure that
may in part or entirely offset an increase in the cost of securities it
intends to purchase. It is anticipated that, in a substantial majority of
these transactions, each Fund will purchase securities upon termination of the
futures contract.
Each Fund also has authority to purchase and write call and put options
on futures contracts. Generally, these strategies are utilized under the same
market and market sector conditions (i.e., conditions relating to specific
types of investments) in which each Fund enters into futures transactions. The
Fund may purchase put options or write call options on futures contracts
rather than selling the underlying futures contract in anticipation of a
decrease in the market value of securities or an increase in interest rates.
Similarly, each Fund may purchase call options, or write put options on
futures contracts, as a substitute for the purchase of such futures to hedge
against the increased cost resulting from an increase in the market value or a
decline in interest rates of securities which each Fund intends to purchase.
Each Fund may engage in options and futures transactions on exchanges and
options in the over-the-counter markets ("OTC options"). In general,
exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligation is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller.
See "Restrictions on OTC Options" below for information as to restrictions on
the use of OTC options.
Restrictions on the Use of Futures Transactions. Under regulations of the
CFTC, the futures trading activity described herein will not result in the
Fund being deemed a "commodity pool," as defined under such regulations,
provided that each Fund adheres to certain restrictions. In particular, the
Fund may purchase and sell futures contracts and options thereon (i) for
bonafide hedging purposes, and (ii) for non-hedging purposes, if the aggregate
initial margin and premiums required to establish positions in such contracts
and options does not exceed 5% of the liquidation value of each Fund's
portfolio, after taking into account unrealized profits and unrealized losses
on any such contracts and options. Margin deposits may consist of cash or
securities acceptable to the broker and the relevant contract market.
When each Fund purchases a futures contract or writes a put option or
purchases a call option thereon, an amount of cash or liquid instruments will
be deposited in a segregated account with each Fund's custodian so that the
amount so segregated, plus the amount of variation margin held in the account
of its broker, equals the market value of the futures contract, thereby
ensuring that the use of such futures is unleveraged.
An order has been obtained from the SEC which exempts each Fund from
certain provisions of the Investment Company Act in connection with
transactions involving futures contracts and options thereon.
Restrictions on OTC Options. Each Fund will engage in transactions in OTC
options only with banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least
$50 million. OTC options and assets used to cover OTC options written by the
Fund are considered by the staff of the SEC to be illiquid. The illiquidity of
such options or assets may prevent a successful sale of such options or
assets, result in a delay of sale, or reduce the amount of proceeds that might
otherwise be realized.
Risk Factors In Interest Rate Transactions and Options and Futures Transactions
The use of interest rate transactions is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Interest rate transactions
involve the risk of an imperfect correlation between the index used in the
hedging transaction and that pertaining to the securities which are the
subject of such transaction. If the Investment adviser is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of each Fund would diminish compared with what it would
have been if these investment techniques were not used. In addition, interest
rate transactions that may be entered into by each Fund do not involve the
delivery of securities or other underlying assets or principal. Accordingly,
the risk of loss with respect to interest rate swaps is limited to the net
amount of interest payments that each Fund is contractually obligated to make.
If the security underlying an interest rate swap is prepaid and each Fund
continues to be obligated to make payments to the other party to the swap,
each Fund would have to make such payments from another source. If the other
party to an interest rate swap defaults, each Fund's risk of loss consists of
the net amount of interest payments that each Fund contractually is entitled
to receive. In the case of a purchase by each Fund of an interest rate cap or
floor, the amount of loss is limited to the fee paid. Since interest rate
transactions are individually negotiated, the Investment adviser expects to
achieve an acceptable degree of correlation between each Fund's rights to
receive interest on securities and its rights and obligations to receive and
pay interest pursuant to interest rate swaps.
Utilization of options and futures transactions to hedge the portfolio
involves the risk of imperfect correlation in movements in the price of
options and futures and movements in the prices of the securities which are
the subject of the hedge. If the price of the options or futures moves more or
less than the price of the subject of the hedge, each Fund will experience
again or loss which will not be completely offset by movements in the price of
the subject of the hedge. This risk particularly applies to each Fund's use of
futures and options thereon since it will generally use such instruments as
also called "cross-hedge," which means that the security that is the subject
of the futures contract is different from the security being hedged by the
contract.
Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale transaction.
This requires a secondary market on an exchange for call or put options of the
same series. Each Fund intends to enter into options and futures transactions,
on an exchange or in the over-the-counter market, only if there appears to be
a liquid secondary market for such options or futures. However, there can be
no assurance that a liquid secondary market will exist at any specific time.
Thus, it may not be possible to close an options or futures position. The
inability to close options and futures positions also could have an adverse
impact on each Fund's ability to effectively hedge its portfolio. There is
also the risk of loss by each Fund of margin deposits or collateral in the
event of bankruptcy of a broker with whom each Fund has an open position in an
option, a futures contract or an option related to a futures contract.
Other Investment Strategies
Repurchase Agreements. Each Fund may enter into repurchase agreements
with respect to its permitted investments with financial institutions that (i)
have, in the opinion of the investment adviser, substantial capital relative
to each Fund's exposure, or (ii) have provided each Fund with a third-party
guaranty or other credit enhancement. Under a repurchase agreement each Fund
buys a security at one price and simultaneously promises to sell that same
security back to the seller at a higher price. Each Fund's repurchase
agreements will provide that the value of the collateral underlying the
repurchase agreement will always be at least equal to the repurchase price,
including any accrued interest earned on the repurchase agreement, and will be
marked to market daily. The repurchase date usually is within seven days of
the original purchase date. Repurchase agreements are deemed to be loans under
the Investment Company Act. In all cases, the Investment adviser must be
satisfied with the creditworthiness of the other party to the agreement before
entering into a repurchase agreement. In the event of the bankruptcy (or other
insolvency proceeding) of the other party to a repurchase agreement, each Fund
might experience delays in recovering its cash. To the extent that, in the
meantime, the value of the securities each Fund purchases may have declined,
each Fund could experience a loss.
Reverse Repurchase Agreements. Each Fund may enter into reverse
repurchase agreements with respect to its portfolio investments subject to the
investment restrictions set forth herein. Reverse repurchase agreements
involve the sale of securities held by each Fund with an agreement by each
Fund to repurchase the securities at an agreed upon price, date and interest
payment. The use by the Fund of reverse repurchase agreements involves many of
the same risks of leverage described under "Risk Factors and Special
Considerations" and "Other Investment Policies--Leverage" since the proceeds
derived from such reverse repurchase agreements may be invested in additional
securities. At the time each Fund enters into a reverse repurchase agreement,
it may establish and maintain a segregated account with the custodian
containing cash or liquid instruments having a value not less than the
repurchase price (including accrued interest). If each Fund establishes and
maintains such a segregated account, a reverse repurchase agreement will not
be considered a borrowing by each Fund; however, under circumstances in which
each Fund does not establish and maintain such a segregated account, such
reverse repurchase agreement will be considered a borrowing for the purpose of
each Fund's limitation on borrowings. Reverse repurchase agreements involve
the risk that the market value of the securities acquired in connection with
the reverse repurchase agreement may decline below the price of the securities
each Fund has sold but is obligated to repurchase. Also, reverse repurchase
agreements involve the risk that the market value of the securities retained
in lieu of sale by the Fund in connection with the reverse repurchase
agreement may decline in price. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, such
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce each Fund's obligation to repurchase the securities, and
each Fund's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision. Also, each Fund would bear
the risk of loss to the extent that the proceeds of the reverse repurchase
agreement are less than the value of the securities subject to such agreement.
Lending of Portfolio Securities. Each Fund may from time to time lend
securities from its portfolio, with a value not exceeding 33 1/3% of its
total assets, to banks, brokers and other financial institutions and receive
collateral in cash or securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities which will be maintained at all times in an
amount equal to at least 100% of the current market value of the loaned
securities. The purpose of such loans is to permit the borrower to use such
securities for delivery to purchasers when such borrower has sold short. If
cash collateral is received by each Fund, it is invested in short-term money
market securities, and a portion of the yield received in respect of such
investment is retained by each Fund. Alternatively, if securities are
delivered to each Fund as collateral, each Fund and the borrower negotiate a
rate for the loan premium to be received by each Fund for lending its
portfolio securities. In either event, the total yield on each Fund's
portfolio is increased by loans of its portfolio securities. Each Fund will
have the right to regain record ownership of loaned securities to exercise
beneficial rights such as voting rights, subscription rights and rights to
dividends, interest or other distributions. Such loans are terminable at any
time. Each Fund may pay reasonable finder's, administrative and custodial fees
in connection with such loans.
When-Issued and Forward Commitment Securities. Each Fund may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices. When such transactions are negotiated, the price,
which is generally expressed in yield terms, is fixed at the time the
commitment is made, but delivery and payment for the securities take place at
a later date. When-issued securities and forward commitments may be sold prior
to the settlement date, but each Fund will enter into when-issued and forward
commitments only with the intention of actually receiving or delivering the
securities, as the case may be. If each Fund disposes of the right to acquire
a when-issued security prior to its acquisition or disposes of its right to
deliver or receive against a forward commitment, it can incur a gain or loss.
At the time each Fund enters into a transaction on a when-issued or forward
commitment basis, it will segregate with the custodian cash or liquid
instruments with a value not less than the value of the when-issued or forward
commitment securities. The value of these assets will be monitored daily to
ensure that their marked to market value will at all times exceed the
corresponding obligations of each Fund. There is always a risk that the
securities may not be delivered, and each Fund may incur a loss. Settlements
in the ordinary course, which may take substantially more than five business
days for mortgage-related securities, are not treated by each Fund as
when-issued or forward commitment transactions and accordingly are not subject
to the foregoing restrictions.
Investment Restrictions
The Funds have identical investment restrictions. The following are
fundamental investment restrictions of each Fund and may not be changed
without the approval of the holders of a majority of the outstanding shares of
Common Stock. (For this purpose and under the Investment Company Act,
"majority" means the lesser of (i) 67% of the shares of each class of capital
stock represented at a meeting at which more than 50% of the outstanding
shares of each class of capital stock are represented or (ii) more than 50% of
the outstanding shares.) No Fund may:
1. Make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act.
2. Make investments for the purpose of exercising control or management.
3. Purchase or sell real estate, commodities or commodity contracts;
provided that the Fund may invest in securities secured by real estate or
interests therein or issued by companies that invest in real estate or
interests therein, and the Fund may purchase and sell financial futures
contracts and options thereon.
4. Issue senior securities or borrow money except as permitted by Section
18 of the Investment Company Act.
5. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended, in
selling portfolio securities.
6. Make loans to other persons, except (i) to the extent that the Fund
may be deemed to be making loans by purchasing Corporate Loans, as a Co-Lender
or otherwise, and other debt securities and entering into repurchase
agreements in accordance with its investment objectives, policies and
limitations, and (ii) the Fund may lend its portfolio securities in an amount
not in excess of 33 1/3% of its total assets, taken at market value, provided
that such loans shall be made in accordance with the guidelines set forth in
this Prospectus.
7. Invest more than 25% of its total assets in the securities of issuers
in any one industry; provided that this limitation shall not apply with
respect to obligations issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities; and provided further that to the extent that
the Fund invests in Corporate Loans the Fund may invest more than 25% and may
invest up to 100% of its assets in securities of issuers in the industry group
consisting of financial institutions and their holding companies, including
commercial banks, thrift institutions, insurance companies and finance
companies. For purposes of this restriction, the term "issuer" includes the
borrower, the Agent Bank and any Intermediate Participant (as defined under
"Investment Objectives and Policies").
Additional investment restrictions adopted by each Fund, which may be
changed by the Board of Directors without stockholder approval, provide that
no Fund may:
a. Purchase securities of other investment companies, except to the
extent that such purchases are permitted by applicable law. Applicable law
currently prohibits the Fund from purchasing the securities of other
investment companies except if immediately thereafter not more than (i)
3% of the total outstanding voting stock of such company is owned by the
Fund, (ii) 5% of the Fund's total assets, taken at market value, would be
invested in any one such company, (iii) 10% of the Fund's total assets,
taken at market value, would be invested in such securities, and (iv) the
Fund, together with other investment companies having the same investment
adviser and companies controlled by such companies, owns not more than
10% of the total outstanding stock of any one closed-end investment
company.
b. Mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund except
as may be necessary in connection with borrowings mentioned in investment
restriction (4) above or except as may be necessary in connection with
transactions in financial futures contracts and options thereon.
c. Purchase any securities on margin, except that the Fund may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities (the deposit or payment by
the Fund of initial or variation margin in connection with financial
futures contracts and options thereon is not considered the purchase of a
security on margin).
d. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options, except that the Fund may
write, purchase and sell options and futures on portfolio securities and
related indices or otherwise in connection with bona fide hedging
activities.
If a percentage restriction on the investment or use of assets set forth
above is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
FAM and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") are owned and controlled by Merrill Lynch & Co., Inc. ("ML & Co.").
Because of the affiliation of Merrill Lynch with FAM, each Fund is prohibited
from engaging in certain transactions involving Merrill Lynch except pursuant
to an exemptive order or otherwise in compliance with the provisions of the
Investment Company Act and the rules and regulations thereunder. Included
among such restricted transactions will be purchases from or sales to Merrill
Lynch of securities in transactions in which it acts as principal.
The Funds have established procedures for blocking the use of inside
information in securities transactions (commonly referred to as "Chinese Wall
procedures"). As a result, the Fund's purchase of a security in a private
placement may deprive the Fund of investment in certain publicly traded
securities of the same issuer and the Fund's purchase of a publicly traded
security may deprive the Fund of the opportunity to purchase certain privately
placed securities of the same issuer. Also, in relation to other funds managed
by the same portfolio manager as the Fund, if one fund buys a security that is
publicly traded or privately placed, respectively, the other fund may be
deprived of the opportunity to buy a security of the same issuer that is
privately placed or publicly traded, respectively.
Portfolio Composition
Although the investment portfolios of the Funds must satisfy the same
standards with respect to credit quality, the actual securities owned by each
Fund are different. As a result, there are certain differences in the
composition of the three investment portfolios. The tables below set forth
ratings information concerning long-term debt obligations in each Fund's
portfolio as of February 29, 2000.
Debt Strategies
S&P* Number Of Issues Value (In Thousands)** Percent
- -------------- ------------------- ---------------------- ---------
BBB 5 $12,519 4.40%
BB 29 $35,340 12.42%
B 105 $146,984 51.65%
CCC 15 $13,123 4.61%
CC 3 $3,380 1.19%
D 3 $994 0.35%
NR 36 $72,233 25.38%
--- -------- -------
196 $284,573 100.00%
=== ========= =======
______________________
* Ratings: S&P's rating categories may be modified further by a plus (+) or
minus (-) in AA, A and BBB ratings. See Exhibit IV -- "Ratings of Corporate
Bonds."
** Representing 98% of total market value of $291.1 million as of
February 29, 2000.
Debt Strategies II
S&P* Number Of Issues Value (In Thousands)** Percent
- ------------ ------------------- ------------------------ -----------
BBB 4 $11,304 1.69%
BB 47 $156,791 23.41%
B 142 $337,382 50.38%
CCC 20 $45,602 6.81%
D 3 $2,449 0.37%
NR 31 $116,094 17.34%
--- -------- -------
247 $669,622 100.00%
=== ======== =======
______________________
* Ratings: S&P's rating categories may be modified further by a plus (+) or
minus (-) in AA, A and BBB ratings. See Exhibit IV -- "Ratings of
Corporate Bonds."
** Representing 97% of total market value of $689.6 million as of
February 29, 2000.
Debt Strategies III
S&P* Number Of Issues Value (In Thousands)** Percent
- ------------- ------------------- ------------------------ -----------
BBB 2 $1,447 1.09%
BB 39 $38,346 28.81%
B 98 $59,379 44.60%
CCC 10 $7,720 5.80%
D 1 $640 0.48%
NR 18 $25,590 19.22%
--- -------- -------
168 $133,122 100.00%
=== ======== =======
______________________
* Ratings: S&P's rating categories may be modified further by a plus (+) or
minus (-) in AA, A and BBB ratings. See Exhibit IV-- "Ratings of Corporate
Bonds."
** Representing 96% of total market value of $138.9 million as of
February 29, 2000.
Portfolio Transactions
The procedures for engaging in portfolio transactions are the same for
each Fund. Subject to policies established by the Board of Directors of each
Fund, FAM is primarily responsible for the execution of each Fund's portfolio
transactions. In executing such transactions, FAM seeks to obtain the best
results for each Fund, taking into account such factors as price (including
the applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm involved and
the firm's risk in positioning a block of securities. While FAM generally
seeks reasonably competitive commission rates, the Funds do not necessarily
pay the lowest commission or spread available.
None of the Funds has any obligation to deal with any broker or dealer in
the execution of transactions in portfolio securities. Subject to obtaining
the best price and execution, securities firms that provide supplemental
investment research to FAM, including Merrill Lynch, may receive orders for
transactions by a Fund. Information so received will be in addition to, and
not in lieu of, the services required to be performed by FAM under its
investment advisory agreements with the Funds, and the expenses of FAM will
not necessarily be reduced as a result of the receipt of such supplemental
information.
Each Fund purchases Corporate Loans in individually negotiated
transactions with commercial banks, thrifts, insurance companies, finance
companies and other financial institutions. In selecting such financial
institutions, FAM may consider, among other factors, the financial strength,
professional ability, level of service and research capability of the
institution. While such financial institutions generally are not required to
repurchase Corporate Loans which they have sold, they may act as principal or
on an agency basis in connection with the Fund's disposition of Corporate
Loans.
Each Fund invests in securities that are primarily traded in the
over-the-counter markets, and each Fund normally deals directly with the
dealers who make markets in the securities involved, except in those
circumstances where better prices and execution are available elsewhere. Under
the Investment Company Act, except as permitted by exemptive order, persons
affiliated with a Fund are prohibited from dealing with the Fund as principals
in the purchase and sale of securities. Since transactions in the
over-the-counter markets usually involve transactions with dealers acting as
principals for their own account, the Funds do not deal with affiliated
persons, including Merrill Lynch and its affiliates, in connection with such
transactions. An affiliated person of a Fund may serve as its broker in
over-the-counter transactions conducted on an agency basis.
Portfolio Turnover
Generally, no Fund purchases securities for short-term trading profits.
However, any Fund may dispose of securities without regard to the time that
they have been held when such action, for defensive or other reasons, appears
advisable to FAM. (The portfolio turnover rate is calculated by dividing the
lesser of purchases or sales of portfolio securities for the particular fiscal
year by the monthly average of the value of the portfolio securities owned by
a Fund during the particular fiscal year. For purposes of determining this
rate, all securities whose maturities at the time of acquisition are one year
or less are excluded.) A high portfolio turnover rate results in greater
transaction costs, which are borne directly by a Fund, and also has certain
tax consequences for stockholders. The portfolio turnover rate for each Fund
for the periods indicated is set forth below:
Year Ended Year Ended
Debt Strategies February 29, 2000 February 28, 1999
--------------------- ----------------------
48.73% 61.30%
Year Ended Period March 27, 1998+
Debt Strategies II February 29, 2000 To February 28, 1999
--------------------- --------------------------
61.76% 89.76%
Year Ended Period July 31, 1998+
Debt Strategies III February 29, 2000 To February 28, 1999
--------------------- -------------------------
50.07% 50.99%
______________________
+ Commencement of operations
Net Asset Value
The net asset value per share of Common Stock of each Fund is determined
as of the close of business on the NYSE (generally, 4:00 p.m., Eastern time)
on the last business day in each week. For purposes of determining the net
asset value of a share of Common Stock of each Fund, the value of the
securities held by a Fund plus any cash or other assets (including interest
accrued but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of
preferred stock is divided by the total number of shares of Common Stock
outstanding at such time. Expenses, including the fees payable to FAM, are
accrued daily.
Corporate Loans in which each Fund invests will be valued in accordance
with guidelines established by the Board of Directors. Under the Funds'
current guidelines, the Funds will utilize the valuations of corporate loans
furnished by an independent third-party pricing service approved by the
respective Board of Directors. The pricing service typically values Corporate
Loans for which the pricing service can obtain at least two price quotations
from banks or dealers in Corporate Loans by calculating the mean of the last
available bid and asked prices in the market for such Corporate Loans, and
then using the mean of those two means. For those Corporate Loans for which
the pricing service can obtain one price quote, the pricing service will value
the Corporate Loan at the mean between the bid and asked price for such
Corporate Loan. For the limited number of Corporate Loans for which no
reliable price quotes are available, such Corporate Loans will be valued by
the pricing service through the use of pricing matrices to determine
valuations. If the pricing service does not provide a value for a Corporate
Loan, the Investment Adviser will value the Corporate Loan at fair value,
which is intended to be market value. In valuing a Corporate Loan at fair
value, the Investment Adviser will consider, among other factors (i) the
creditworthiness of the borrower and any intermediate participants, (ii) the
current interest rate period until the next interest rate resets and maturity
of the Corporate Loan, (iii) recent prices in the market for similar Corporate
Loans, if any and (iv) recent prices in the market for instruments of similar
quality, rate period until the next interest rate reset and maturity.
Other portfolio securities (other than short-term obligations but
including listed issues) may be valued on the basis of prices furnished by one
or more pricing services which determine 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.
Positions in options are valued at the last sale price on the market where any
such option is principally traded. Obligations with remaining maturities of 60
days or less are valued at amortized cost unless this method no longer
produces fair valuations. Repurchase agreements are valued at cost plus
accrued interest. Rights or warrants to acquire stock, or stock acquired
pursuant to the exercise of a right or warrant, may be valued taking into
account various factors such as original cost to the Fund, earnings and net
worth of the issuer, market prices for securities of similar issuers,
assessment of the issuer's future prosperity, liquidation value or third party
transactions involving the issuer's securities. Securities for which there
exist no price quotations or valuations and all other assets are valued at
fair value as determined in good faith by or on behalf of the Board of
Directors of each Fund.
Each Fund determines and makes available for publication the net asset
value of its Common Stock weekly. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in debt securities
are published in Barron's, the Monday edition of The Wall Street Journal, and
the Monday and Saturday editions of The New York Times.
Capital Stock
Each Fund has outstanding Common Stock. The Common Stock of each Fund is
traded on the NYSE. The shares of Common Stock of Debt Strategies commenced
trading on the NYSE on June 2, 1997. As of February 29, 2000, the net asset
value per share of Common Stock of Debt Strategies was $7.21 and the market
price per share was $6.1875. The shares of Common Stock of Debt Strategies II
commenced trading on the NYSE on March 30, 1998. As of February 29, 2000, the
net asset value per share of Common Stock of Debt Strategies II was $8.60 and
the market price per share was $7.1875. The shares of Common Stock of Debt
Strategies III commenced trading on the NYSE on August 3, 1998. As of February
29, 2000, the net asset value per share of Common Stock of Debt Strategies III
was $9.36 and the market price per share was $8.75.
Each Fund is authorized to issue 200,000,000 shares of capital stock, all
of which shares initially were classified as Common Stock. The Board of
Directors of each Fund is authorized to classify or reclassify any unissued
shares of capital stock by setting or changing the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption.
Common Stock
Holders of each Fund's Common Stock are entitled to share pro rata in the
net assets of a Fund available for distribution to holders of the Common
Stock. See "Voting Rights" below. Holders of a Fund's Common Stock do not have
preemptive or conversion rights and shares of a Fund's Common Stock are not
redeemable. The outstanding shares of Common Stock of each Fund are fully paid
and nonassessable.
In the event that a Fund issues preferred stock and so long as any shares
of that Fund's preferred stock are outstanding, holders of that Fund's Common
Stock will not be entitled to receive any net income of or other distributions
from that Fund unless all accumulated dividends on preferred stock have been
paid, and unless asset coverage (as defined in the Investment Company Act)
with respect to preferred stock would be at least 200% after giving effect to
such distributions.
Certain Provisions of the Charter
Each Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of a Fund
or to change the composition of its Board of Directors and could have the
effect of depriving stockholders of an opportunity to sell their shares at a
premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A Director may be removed from office
with or without cause by vote of the holders of at least 66-2/3% of the
votes entitled to be voted on the matter. A Director elected by all of the
holders of capital stock may be removed only by action of such holders.
In addition, the Charter of each Fund requires the favorable vote of the
holders of at least 66-2/3% of all of a Fund's shares of capital stock,
then entitled to be voted, to approve, adopt or authorize the following:
o a merger or consolidation or statutory share exchange of the
Fund with any other corporation or entity,
o a sale of all or substantially all of the Fund's assets (other
than in the regular course of the Fund's investment activities),
or
o a liquidation or dissolution of the Fund,
unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Directors fixed in
accordance with the by-laws, in which case the affirmative vote of a majority
of all of the votes entitled to be cast by stockholders of the Fund is
required.
In addition, conversion of a Fund to an open-end investment company would
require an amendment to that Fund's Charter. The amendment would have to be
declared advisable by the Board of Directors prior to its submission to
stockholders. Such an amendment would require the affirmative vote of the
holders of at least 66-2/3% of a Fund's outstanding shares of capital stock
(including any other preferred stock) entitled to be voted on the matter,
voting as a single class (or a majority of such shares if the amendment was
previously approved, adopted or authorized by at least two-thirds of the total
number of Directors fixed in accordance with the by-laws), and assuming
preferred stock is issued, the affirmative vote of at least a majority of
outstanding shares of preferred stock of that Fund, voting as a separate
class. Such a vote also would satisfy a separate requirement in the Investment
Company Act that the change be approved by the stockholders. Stockholders of
an open-end investment company may require the company to redeem their shares
of common stock at any time (except in certain circumstances as authorized by
or under the Investment Company Act) at their net asset value, less such
redemption charge, if any, as might be in effect at the time of a redemption.
All redemptions will be made in cash. If the Fund is converted to an open-end
investment company, it could be required to liquidate portfolio securities to
meet requests for redemption and the Common Stock no longer would be listed on
a stock exchange. Conversion to an open-end investment company would also
require redemption of all outstanding shares of preferred stock and would
require changes in certain of a Fund's investment policies and restrictions,
such as those relating to the issuance of senior securities, the borrowing of
money and the purchase of illiquid securities.
The Board of Directors of each Fund has determined that the 66-2/3%
voting requirements described above, which are greater than the minimum
requirements under Maryland law or the Investment Company Act, are in the best
interests of stockholders generally. Reference should be made to the Charter
of each Fund on file with the SEC for the full text of these provisions.
Management of the Funds
Directors and Officers. The Board of Directors of Debt Strategies, Debt
Strategies II and Debt Strategies III currently consists of the same seven
persons, five of whom are not "interested persons," as defined in the
Investment Company Act. The Directors of each Fund are responsible for the
overall supervision of the operations of the Fund and perform the various
duties imposed on the directors of investment companies by the Investment
Company Act and under applicable Maryland law. The Funds have the same slate
of officers. For further information regarding the Directors and officers of
each Fund, see "Item 2. Election of Directors" and Exhibit I -- "Information
Pertaining to Each Fund."
The portfolios of each fund are managed by Richard C. Kilbride and Gilles
Marchand. After the Merger, the Surviving Fund will be managed by the same
management team. The portfolio managers are primarily responsible for the
management of the applicable Fund's portfolio. Biographical information about
Messrs. Kilbride and Marchand is contained in Exhibit I to this Proxy
Statement and Prospectus.
Management and Advisory Arrangements. FAM, which is owned and controlled
by ML & Co., serves as the investment adviser for each Fund pursuant to
separate investment advisory agreements that, except for their termination
dates, are identical. FAM provides each Fund with the same investment advisory
and management services. The Asset Management Group of ML & Co. (which
includes FAM) acts as the investment adviser to more than 100 registered
investment companies and offers services to individuals and institutional
accounts. As of April 2000, the Asset Management Group of ML& Co. had a total
of approximately $568.0 billion in investment company and other portfolio
assets under management. This amount includes assets managed for certain
affiliates of FAM. FAM is a limited partnership, the partners of which are ML
& Co. and Princeton Services, Inc. FAM was organized as an investment adviser
in 1977 and offers investment advisory services to more than 50 registered
investment companies. The principal business address of FAM is 800 Scudders
Mill Road, Plainsboro, New Jersey 08536.
Each Fund's investment advisory agreement with FAM provides that, subject
to the supervision of the Board of Directors of the Fund, FAM is responsible
for the actual management of the Fund's portfolio. The responsibility for
making decisions to buy, sell or hold a particular security for each Fund
rests with FAM, subject to review by the Board of Directors of that Fund.
FAM provides the portfolio management for each Fund. Such portfolio
management considers analyses from various sources (including brokerage firms
with which each Fund does business), makes the necessary investment decisions,
and places orders for transactions accordingly. FAM also is responsible for
the performance of certain administrative and management services for each
Fund.
For the services provided by FAM under each Fund's investment advisory
agreement, each Fund pays a monthly fee at an annual rate of .60 of 1% of its
average weekly net assets plus the proceeds of any outstanding borrowings used
for leverage (i.e., the average weekly value of the total assets of a Fund,
including proceeds from the issuance of preferred stock, minus the sum of
accrued liabilities of the Fund, any accrued and unpaid interest on
outstanding borrowings and accumulated dividends on its shares of preferred
stock). For purposes of this calculation, average weekly net assets are
determined at the end of each month on the basis of the average net assets of
the Fund for each week during the month. The assets for each weekly period are
determined by averaging the net assets at the last business day of a week with
the net assets at the last business day of the prior week. After the Merger,
the Surviving Fund would pay FAM a monthly fee at the annual rate of 0.60% of
its average weekly net assets plus the proceeds of any outstanding borrowings
used for leverage as described above.
Each Fund's investment advisory agreement obligates FAM to provide
investment advisory services and to pay all compensation of and furnish office
space for officers and employees of a Fund connected with investment and
economic research, trading and investment management of a Fund, as well as the
compensation of all Directors of a Fund who are affiliated persons of FAM or
any of its affiliates. Each Fund pays all other expenses incurred in the
operation of the Fund, including, among other things, expenses for legal and
auditing services, taxes, costs of printing proxies, listing fees, stock
certificates and stockholder reports, charges of the custodian and the
transfer agent, dividend disbursing agent and registrar, SEC fees, fees and
expenses of unaffiliated Directors, accounting and pricing costs, insurance,
interest, brokerage costs, litigation and other extraordinary or non-recurring
expenses, mailing and other expenses properly payable by the Fund. FAM
provides accounting services to each Fund, and each Fund reimburses FAM for
its respective costs in connection with such services.
Unless earlier terminated as described below, the investment advisory
agreement between each Fund and FAM will continue from year to year if
approved annually (a) by the Board of Directors of a Fund or by a majority of
the outstanding shares of a Fund and (b) by a majority of the Directors of a
Fund who are not parties to such contract or "interested persons," as defined
in the Investment Company Act, of any such party. The contract is not
assignable and it may be terminated without penalty on 60 days' written notice
at the option of either party thereto or by the vote of the stockholders of
the Fund.
Securities held by a Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which FAM or
its affiliates act as an adviser. Because of different objectives or other
factors, a particular security may be bought for an advisory client when other
clients are selling the same security. If purchases or sales of securities by
FAM for a Fund or other funds for which it acts as investment adviser or for
advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. Transactions
effected by FAM (or its affiliates) on behalf of more than one of its clients
during the same period may increase the demand for securities being purchased
or the supply of securities being sold, causing an adverse effect on price.
Code of Ethics
The Board of Directors of each Fund has approved a Code of Ethics
pursuant to Rule 17j-l under the Investment Company Act that covers each Fund
and FAM (collectively, the "Codes"). The Codes significantly restrict the
personal investing activities of all employees of FAM and, as described below,
impose additional, more onerous, restrictions on Fund investment personnel.
The Codes require that all employees of FAM preclear any personal
securities investment (with limited exceptions, such as mutual funds, high
quality short-term securities and direct obligations of the U.S. Government).
The preclearance requirement and associated procedures are designed to
identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of FAM
include a ban on acquiring any securities in a "hot" initial public offering
and a prohibition from profiting on short-term trading securities. In
addition, no employee may purchase or sell any security that at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by FAM.
Furthermore, the Codes provide for trading "blackout periods" which prohibit
trading by investment personnel of each Fund within seven calendar days before
or after trading by a Fund in the same or equivalent security.
Voting Rights
Voting rights are identical for the holders of shares of each Fund's
Common Stock. Holders of each Fund's Common Stock are entitled to one vote for
each share held. The shares of each Fund's Common Stock do not have cumulative
voting rights, which means that the holders of more than 50% of the shares of
a Fund's Common Stock voting for the election of Directors can elect all of
the Directors standing for election by such holders, and, in such event, the
holders of the remaining shares of a Fund's Common Stock will not be able to
elect any of such Directors.
Stockholder Inquiries
Stockholder inquiries with respect to any Fund may be addressed to such
Fund by telephone at (609) 282-2800 or at the address set forth on the cover
page of this Proxy Statement and Prospectus.
Dividends and Distributions
The Funds' current policies with respect to dividends and distributions
relating to shares of their Common Stock are identical. Each Fund intends to
distribute substantially all of its net investment income monthly. All net
realized long-term or short-term capital gains, if any, are distributed pro
rata at least annually to holders of shares of a Fund's Common Stock. For
Federal tax purposes, a Fund is required to distribute substantially all of
its net investment income for each year. Under the Investment Company Act, a
Fund is not permitted to incur indebtedness unless immediately after such
inccurrence the Fund has an asset coverage of 300% of the aggregate
outstanding principal balance of indebtedness. Additionally, under the
Investment Company Act, a Fund may not declare any dividend or other
distribution upon any class of their capital stock, or purchase any such
capital stock, unless the aggregate indebtedness of such Fund has, at the time
of the declaration of any such dividend or distribution or at the time of any
such purchase, an asset coverage of at least 300% after deducting the amount
of such dividend, distribution, or purchase price, as the case may be. While
any shares of preferred stock are outstanding, a Fund may not declare any cash
dividend or other distribution on its Common Stock, unless at the time of such
declaration, (i) all accumulated preferred stock dividends have been paid and
(ii) the net asset value of such Fund's portfolio (determined after deducting
the amount of such dividend or other distribution) is at least 200% of the
liquidation value of the outstanding preferred stock (expected to be equal to
original purchase price per share plus any accumulated and unpaid dividends
thereon). In addition to the limitations imposed by the Investment Company Act
described in this paragraph, certain lenders may impose additional
restrictions on the payment of dividends or distributions on a Fund's Common
Stock in the event of a default on such Fund's borrowings. Any limitation on a
Fund's ability to make distributions on its Common Stock could under certain
circumstances impair the ability of the Fund to maintain its qualification for
taxation as a regulated investment company, which would have adverse tax
consequences for holders of that Fund's Common Stock. See "Comparison of the
Funds -- Tax Rules Applicable to the Funds and Their Stockholders."
For information concerning the manner in which dividends and
distributions to holders of each Fund's Common Stock may be reinvested
automatically in shares of a Fund's Common Stock, see "Automatic Dividend
Reinvestment Plan" below. Dividends and distributions will be subject to the
tax treatment discussed below, whether they are reinvested in shares of a Fund
or received in cash.
Automatic Dividend Reinvestment Plan
Pursuant to each Fund's Automatic Dividend Reinvestment Plan (each, a
"Plan"), unless a holder of a Fund's Common Stock otherwise elects, all
dividend and capital gains distributions are automatically reinvested by
either The Bank of New York, as agent for Debt Strategies and Debt Strategies
II stockholders in administering the Plan, or State Street Bank and Trust
Company, as agent for stockholders of Debt Strategies III in administering the
Plan (each, a "Plan Agent"), in additional shares of the applicable Fund's
Common Stock. The Bank of New York will be the Plan Agent for the Surviving
Fund after the Merger. Stockholders whose shares are held in the name of a
broker or nominee should contact such broker or nominee to confirm that they
are eligible to participate in a Fund's dividend reinvestment plan. Holders of
a Fund's Common Stock who are eligible or elect not to participate in a Plan
receive all distributions in cash paid by check mailed directly to the
stockholder of record (or, if the shares are held in street or other nominee
name, then to such nominee) by The Bank of New York or State Street Bank and
Trust Company, as applicable, as dividend paying agent. Such stockholders may
elect not to participate in a Plan and to receive all distributions of
dividends and capital gains in cash by sending written instructions to The
Bank of New York or State Street Bank and Trust Company, as applicable, as
dividend paying agent, at the address set forth below. Participation in each
Plan is completely voluntary and may be terminated or resumed at any time
without penalty by written notice if received by the applicable Plan Agent not
less than ten days prior to any dividend record date; otherwise, such
termination or resumption will be effective with respect to any subsequently
declared dividend or capital gains distribution.
Whenever a Fund declares an ordinary income dividend or a capital gain
dividend (collectively referred to as "dividends") payable either in shares or
in cash, non-participants in a Plan receive cash, and participants in the Plan
receive the equivalent in shares of the Fund's Common Stock. The shares are
acquired by the applicable Plan Agent for the participant's account, depending
upon the circumstances described below, either (i) through receipt of
additional unissued but authorized shares of a Fund's Common Stock from that
Fund ("newly-issued shares") or (ii) by purchase of outstanding shares of a
Fund's Common Stock on the open market ("open-market purchases"), on the NYSE
or elsewhere. If on the payment date for the dividend, the net asset value per
share of a Fund's Common Stock is equal to or less than the market price per
share of that Fund's Common Stock plus estimated brokerage commissions (such
condition being referred to herein as "market premium"), the applicable Plan
Agent invests the dividend amount in newly-issued shares on behalf of the
participant. The number of newly-issued shares of a Fund's Common Stock to be
credited to the participant's account is determined by dividing the dollar
amount of the dividend by the net asset value per share on the date the shares
are issued, provided that the maximum discount from the then-current market
price per share on the date of issuance may not exceed 5%. If on the dividend
payment date, the net asset value per share is greater than the market value
(such condition being referred to herein as "market discount"), the applicable
Plan Agent invests the dividend amount in shares acquired on behalf of the
participant in open-market purchases.
In the event of a market discount on the dividend payment date, the
applicable Plan Agent has until the last business day before the next date on
which the shares trade on an "ex-dividend" basis or in no event more than 30
days after the dividend payment date (the "last purchase date") to invest the
dividend amount in shares acquired in open-market purchases. Each Fund intends
to pay monthly income dividends. Therefore, the period during which
open-market purchases can be made exists only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
is approximately ten days. If, before the applicable Plan Agent has completed
its open-market purchases, the market price of a share of a Fund's Common
Stock exceeds the net asset value per share, the average per share purchase
price paid by the applicable Plan Agent may exceed the net asset value of that
Fund's shares, resulting in the acquisition of fewer shares than if the
dividend had been paid in newly-issued shares on the dividend payment date.
Because of the foregoing difficulty with respect to open-market purchases,
each Plan provides that if the applicable Plan Agent is unable to invest the
full dividend amount in open-market purchases during the purchase period or if
the market discount shifts to a market premium during the purchase period, the
applicable Plan Agent ceases making open-market purchases and invests the
uninvested portion of the dividend amount in newly-issued shares at the close
of business on the last purchase date.
The applicable Plan Agent maintains all stockholders' accounts in a Plan
and furnishes written confirmation of all transactions in the account,
including information needed by stockholders for tax records. Shares in the
account of each Plan participant are held by the applicable Plan Agent in
non-certificated form in the name of the participant, and each stockholder's
proxy includes those shares purchased or received pursuant to a Plan. The
applicable Plan Agent will forward all proxy solicitation materials to
participants and vote proxies for shares held pursuant to a Plan in accordance
with the instructions of the participants.
In the case of stockholders such as banks, brokers or nominees which hold
shares for others who are the beneficial owners, the applicable Plan Agent
will administer a Plan on the basis of the number of shares certified from
time to time by the record stockholders as representing the total amount
registered in the record stockholder's name and held for the account of
beneficial owners who are to participate in that Plan.
There are no brokerage charges with respect to shares issued directly by
any Fund as a result of dividends or capital gains distributions payable
either in shares or in cash. However, each participant pays a pro rata share
of brokerage commissions incurred with respect to the applicable Plan Agent's
open-market purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions does not
relieve participants of any Federal, state or local income tax that may be
payable (or required to be withheld) on such dividends. See "Comparison of the
Funds -- Tax Rules Applicable to the Funds and Their Stockholders."
Stockholders participating in a Plan may receive benefits not available
to stockholders not participating in that Plan. If the market price (plus
commissions) of a Fund's shares of Common Stock is higher than the net asset
value of such shares, participants in a Plan receive shares of the Fund's
Common Stock at less than they otherwise could purchase them and have shares
with a cash value greater than the value of any cash distribution they would
have received on their shares. If the market price plus commissions is lower
than the net asset value of such shares, participants receive distributions of
shares with a net asset value greater than the value of any cash distribution
they would have received on their shares. However, there may be insufficient
shares available in the market to make distributions of shares at prices below
the net asset value. Also, since the Funds normally do not redeem their
shares, the price on resale may be more or less than the net asset value. See
"Comparison of the Funds -- Tax Rules Applicable to the Funds and Their
Stockholders" for a discussion of the tax consequences of each Plan.
Each Fund reserves the right to amend or terminate its Plan. There is no
direct service charge to participants in a Plan; however, each Fund reserves
the right to amend its Plan to include a service charge payable by the
participants.
After the Merger, a holder of shares of an Acquired Fund who has elected
to receive dividends in cash will continue to receive dividends in cash; all
other holders will have their dividends automatically reinvested in shares of
the Surviving Fund. However, if a stockholder owns shares in an Acquired Fund
and in Debt Strategies II, after the Merger, the stockholder's election with
respect to the dividends of Debt Strategies II will control unless the
stockholder specifically elects a different option at that time. Following the
Merger, all correspondence should be directed to the Plan Agent for Debt
Strategies II as follows: The Bank of New York, 101 Barclay Street, New York,
New York 10206.
Mutual Fund Investment Option
A holder of Common Stock of any Fund, who purchased his or her shares
through Merrill Lynch in a Fund's initial public offering, has the right to
reinvest the net proceeds from a sale of such shares in Class D shares of
certain Merrill Lynch-sponsored open-end funds without the imposition of an
initial sales charge, if certain conditions are satisfied. A holder of Common
Stock of an Acquired Fund who qualifies for this option will have the same
option with respect to the shares of Debt Strategies II Common Stock received
in the Merger.
Tax Rules Applicable to the Funds and Their Stockholders
The tax consequences of investing in shares of Common Stock of each Fund
are identical. The Funds have elected and qualified for the special tax
treatment afforded RICs under the Code. As a result, in any taxable year in
which they distribute an amount equal to at least 90% of taxable net income
and 90% of tax-exempt net income (see below), the Funds (but not their
stockholders) are not subject to Federal income tax to the extent that they
distribute their net investment income and net realized capital gains. In all
taxable years through the taxable year of the Merger, each Fund has
distributed substantially all of its income. Debt Strategies II intends to
continue to distribute substantially all of its income following the Merger.
Dividends paid by each Fund from its ordinary income or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions made from an excess of net
long-term capital gains over net short-term capital losses (including gains or
losses from certain transactions in swaps, futures and options) ("capital gain
dividends") are taxable to shareholders as long-term capital gains, regardless
of the length of time the shareholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. Distributions in excess of each Fund's earnings and profits
will first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). Certain categories
of capital gains are taxable at different rates. Generally not later than 60
days after the close of its taxable year, each Fund will provide its
shareholders with a written notice designating the amounts of any capital gain
dividends (including the amount of capital gain dividends in the different
categories of capital gain referred to above), as well as any dividends
eligible for the dividends received deduction.
Dividends are taxable to shareholders even though they are reinvested in
additional shares of each Fund. Distributions attributable to any dividend
income earned by each Fund will be eligible for the dividends received
deduction allowed to corporations under the Code, if certain requirements are
met. If a Fund pays a dividend in January which was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend will be treated for tax purposes as
being paid by the Fund and received by its shareholders on December 31 of the
year in which the dividend was declared.
The Internal Revenue Service (the "Service") has taken the position in a
revenue ruling that if a RIC has more than one class of shares, it may
designate distributions made to each class in any year as consisting of no
more than such class's proportionate share of particular types of income,
including the different categories of capital gain referred to above. A
class's proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the RIC during such
year that was paid to such class. Consequently, if both Common Stock and
preferred stock are outstanding, each Fund intends to designate distributions
made to the classes as consisting of particular types of income in accordance
with the classes' proportionate shares of such income. Thus, capital gain
dividends, including the different categories of capital gain referred to
above, will be allocated between the holders of Common Stock and preferred
stock in proportion to the total dividends paid to each class during the
taxable year, or otherwise as required by applicable law.
If at any time when shares of preferred stock are outstanding a Fund does
not meet the asset coverage requirements of the Investment Company Act, the
Fund will be required to suspend distributions to holders of Common Stock
until the asset coverage is restored. See "Dividends and Distributions." This
may prevent the Fund from distributing at least 90% of its net income, and may
therefore jeopardize such Fund's qualification for taxation as a RIC or may
subject the Fund to the 4% excise tax described below. Upon any failure to
meet the asset coverage requirement of the Investment Company Act, each Fund
may, in its sole discretion, redeem shares of preferred stock in order to
maintain or restore the requisite asset coverage and avoid the adverse
consequences to the Fund and its shareholders of failing to qualify as a RIC.
There can be no assurance, however, that any such action would achieve these
objectives.
As noted above, each Fund must distribute annually at least 90% of its
net investment income. A distribution will only be counted for this purpose if
it qualifies for the dividends paid deduction under the Code. Some types of
preferred stock that each Fund has the authority to issue may raise an issue
as to whether distributions on such preferred stock are "preferential" under
the Code and therefore not eligible for the dividends paid deduction. In the
event any Fund determines to issue preferred stock, each Fund intends to issue
preferred stock that counsel advises will not result in the payment of a
preferential dividend. If a Fund ultimately relies solely on a legal opinion
in the event it issues such preferred stock, there is no assurance that the
Service would agree that dividends on the preferred stock are not
preferential. If the Service successfully disallowed the dividends paid
deduction for dividends on the preferred stock, a Fund could be disqualified
as a RIC.
Ordinary income dividends paid to shareholders who are nonresident aliens
or foreign entities will be subject to a 30% United States withholding tax
under existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the United
States withholding tax.
Interest income from non-U.S. securities may be subject to withholding
taxes imposed by the country in which the issuer is located. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with each Fund or who, to each Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute, during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of its capital
gains, determined, in general, on an October 31 year end, plus certain
undistributed amounts from previous years. While each Fund intends to
distribute its income and capital gains in the manner necessary to minimize
imposition of the 4% excise tax, there can be no assurance that sufficient
amounts of each Fund's taxable income and capital gains will be distributed to
avoid entirely the imposition of the tax. In such event, a Fund will be liable
for the tax only on the amount by which it does not meet the foregoing
distribution requirements.
Each Fund will invest in securities rated in the lower rating categories
of nationally recognized rating organizations, in unrated securities (together
with lower rated securities, "junk bonds") and in high yield Corporate Loans,
as previously described. Some of these junk bonds and high yield Corporate
Loans may be purchased at a discount and may therefore cause each Fund to
accrue and distribute income before amounts due under the obligations are
paid. In addition, a portion of the interest payments on such junk bonds and
high yield Corporate Loans may be treated as dividends for Federal income tax
purposes; in such case, if the issuer of the junk bonds or high yield
Corporate Loans is a domestic corporation, dividend payments by each Fund will
be eligible for the dividends received deduction to the extent of the deemed
dividend portion of such interest payments.
Tax Treatment of Options and Futures Transactions
Each Fund may engage in interest rate transactions, write (i.e., sell)
covered call and covered put options on its portfolio securities, purchase
call and put options on securities, and engage in transactions in financial
futures and related options on such futures. In general, unless an election is
available to each Fund or an exception applies, such options and futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year (i.e., each such
options or futures contract will be treated as sold for its fair market value
on the last day of the taxable year), and any gain or loss attributable to
such contracts will be 60% long-term and 40% short-term capital gain or loss.
Application of these rules to Section 1256 contracts held by each Fund may
alter the timing and character of distributions to shareholders. The
mark-to-market rules outlined above, however, will not apply to certain
transactions entered into by each Fund solely to reduce the risk of changes in
price or interest or currency exchange rates with respect to its investments.
The Federal income tax rules governing the taxation of swaps are not
entirely clear and may require each Fund to treat payments received under such
arrangements as ordinary income and to amortize such payments under certain
circumstances. The Funds do not anticipate that their activity in this regard
will affect their qualification as RICs.
Code Section 1092, which applies to certain "straddles," may affect the
taxation of each Fund's sales of securities and options, futures and swap
transactions. Under Section 1092, each Fund may be required to postpone
recognition for tax purposes of losses incurred in certain sales of securities
and certain closing transactions in options, futures and swap transactions.
Special Rules for Certain Foreign Currency Transactions
Under Code Section 988, special rules are provided for certain
transactions in a currency other than the taxpayer's functional currency (i.e,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains and losses in connection with certain of each
Fund's debt instruments and foreign currency swaps will be treated as ordinary
income or loss under Code Section 988 and will increase or decrease the amount
of each Fund's investment company taxable income available to be distributed
to shareholders as ordinary income. Additionally, if Code Section 988 losses
exceed other investment company taxable income during a taxable year for a
Fund, such Fund would not be able to make any ordinary income dividend
distributions, and any distributions made before the losses were realized but
in the same taxable year would be recharacterized as a return of capital to
shareholders, thereby reducing the basis of each shareholder's Fund shares,
and resulting in a capital gain for any shareholder who received a
distribution greater than the shareholder's tax basis in Fund shares (assuming
the shares were held as a capital asset). These rules, however, will not apply
to certain transactions entered into by each Fund solely to reduce the risk of
currency fluctuations with respect to its investments.
AGREEMENT AND PLAN OF MERGER
General
Under the Agreement and Plan of Merger (attached hereto as Exhibit II):
(i) each of Debt Strategies and Debt Strategies III will be merged with and
into Debt Strategies II in accordance with Maryland Law; (ii) the separate
existence of each of Debt Strategies and Debt Strategies III will cease; (iii)
Debt Strategies II will be the surviving corporation; (iv) Debt Strategies II
will change its name to Debt Strategies Fund, Inc. immediately after the
Effective Date; and (v) each share of Common Stock of each of Debt Strategies
and Debt Strategies III will be converted into the right to receive an
equivalent dollar amount (to the nearest one ten-thousandth of one cent) of
full shares of Debt Strategies II Common Stock, plus cash in lieu of any
fractional shares, computed based on the net asset value per share of each
Fund on the Effective Date (as defined below), all upon and subject to the
terms hereinafter set forth (the "Merger"). The currently issued and
outstanding shares of Debt Strategies II will remain issued and outstanding.
Assuming the stockholders of each Fund approve the Merger, the Funds will
collectively file the Articles of Merger with the SDAT. The Merger will become
effective on the Effective Date. Thereafter, each of Acquired Fund will
terminate its registration under the Investment Company Act of 1940.
No sales charge or fee of any kind will be charged to either Acquired
Fund's stockholders in connection with their receipt of Debt Strategies II
Common Stock in the Merger.
Accordingly, as a result of the Merger, every holder of Common Stock of
an Acquired Fund would own shares of Debt Strategies II Common Stock that
(except for cash payments received in lieu of fractional shares) would have an
aggregate net asset value immediately after the Effective Date equal to the
aggregate net asset value of that stockholder's Common Stock immediately prior
to the Effective Date. Since the Debt Strategies II Common Stock would be
issued at net asset value and the shares of Common Stock of the Acquired Funds
would be valued at net asset value for the purposes of the exchange, the
holders of Common Stock of each Fund will not be diluted as a result of the
Merger. However, as a result of the Merger, a stockholder of any Fund likely
will hold a reduced percentage of ownership in the Surviving Fund than he or
she held in Debt Strategies, Debt Strategies II or Debt Strategies III.
Procedure
At a meeting of the Board of Directors of each Fund, the Board of
Directors of each Fund, including all of the Directors who are not "interested
persons," as defined in the Investment Company Act, of the applicable Fund,
determined the merger to be advisable and approved the Agreement and Plan of
Merger and directed the submission of such Agreement and Plan of Merger to the
stockholders of the applicable Fund for approval.
As a result of such Board approvals, the Funds have jointly filed this
Proxy Statement and Prospectus with the SEC soliciting a vote of the
stockholders of each Fund to approve the Merger. The costs of such
solicitation are to be paid by Debt Strategies II after the Merger so as to be
borne equally and exclusively on a per share basis by the holders of Common
Stock of each Fund. Annual meetings of stockholders of each Fund will be held
on August 23, 2000. If the stockholders of all three Funds approve the Merger,
the Merger will take place as soon as practicable after such approval,
provided that the applicable waiting period under the Hart-Scott-Rodino
Anti-Trust Improvements Act of 1976 has expired or been terminated and the
Funds have obtained prior to that time an opinion of counsel relating to the
tax-free treatment of the transaction.
The Boards of Directors of Debt Strategies, Debt Strategies II and Debt
Strategies III recommend that the stockholders of the respective Funds approve
the Agreement and Plan of Merger.
Terms of the Agreement and Plan of Merger
The following is a summary of the significant terms of the Agreement and
Plan of Merger. This summary is qualified in its entirety by reference to the
Agreement and Plan of Merger, attached hereto as Exhibit II.
Conversion to Debt Strategies II Common Stock.
On the Effective Date, each share of Common Stock of each of the Acquired
Funds will be converted into the right to receive an equivalent dollar amount
(to the nearest one ten- thousandth of one cent) of full shares of Debt
Strategies II Common Stock plus cash in lieu of any fractional shares,
computed based on the net asset value per share of each Fund on the Effective
Date. Shares of Debt Strategies II Common Stock issued and outstanding as of
the Effective Date will remain issued and outstanding and in the same number.
The net asset value per share of each Fund shall be determined as of the
Effective Date, and no formula will be used to adjust the net asset value so
determined of a Fund to take into account differences in realized and
unrealized gains and losses. The value of the assets of the Acquired Funds to
be transferred to Debt Strategies II shall be determined by Debt Strategies II
pursuant to the procedures utilized by Debt Strategies II in valuing its own
assets and determining its own liabilities for purposes of the Merger. Such
valuation and determination shall be made by Debt Strategies II in cooperation
with the Acquired Funds and shall be confirmed in writing by Debt Strategies
II to the Acquired Funds. The net asset value per share of Debt Strategies II
Common Stock shall be determined in accordance with such procedures, and Debt
Strategies II shall certify the computations involved. Debt Strategies II
shall issue to the stockholders of the Acquired Funds separate certificates or
share deposit receipts for the Debt Strategies II Common Stock by delivering
the certificates or share deposit receipts evidencing ownership of the Debt
Strategies II Common Stock to The Bank of New York, as the transfer agent and
registrar for Debt Strategies II Common Stock. With respect to any Acquired
Fund stockholder holding certificates evidencing ownership of Common Stock of
the Acquired Fund as of the Effective Date, and subject to Debt Strategies II
being informed thereof in writing by the Acquired Fund, Debt Strategies II
will not permit such stockholder to receive new certificates evidencing
ownership of the Debt Strategies II Common Stock, exchange Common Stock
credited to such stockholder's account for shares of other investment
companies managed by MLAM or any of its affiliates, or pledge or redeem such
Debt Strategies II Common Stock, in any case, until such stockholder has
surrendered his or her outstanding certificates evidencing ownership of the
Common Stock of the Acquired Fund or, in the event of lost certificates,
posted adequate bond. Each of the Acquired Funds, at its own expense, will
request its stockholders to surrender their outstanding certificates
evidencing ownership of the Common Stock of the Acquired Funds or post
adequate bond therefor.
No fractional shares of Debt Strategies II Common Stock will be issued to
the Acquired Funds' stockholders. In lieu thereof, Debt Strategies II's
transfer agent, The Bank of New York, will aggregate all fractional shares of
Debt Strategies II and sell the resulting whole shares on the NYSE at the
current market price for shares of Debt Strategies II for the account of all
holders of fractional interests, and each such holder will receive such
holder's pro rata share of the proceeds of such sale, without interest, upon
surrender of such holder's Debt Strategies II Common Stock certificates.
Although receipt of full shares in the Merger will not result in taxable gain
or loss to the stockholder, his or her receipt of the proceeds of the sale of
fractional shares may result in a small taxable gain or loss.
Expenses. Debt Strategies II shall pay, subsequent to the Effective Date,
all expenses incurred in connection with the Merger including but not limited
to, all costs related to the preparation and distribution of materials
distributed to each Fund's Board of Directors, expenses incurred in connection
with the preparation of the Agreement and Plan of Merger, a registration
statement on Form N-14, SEC and state securities commission filing fees and
legal and audit fees in connection with the Merger, costs of printing and
distributing this Proxy Statement and Prospectus, legal fees incurred
preparing each Fund's board materials, attending each Fund's board meetings
and preparing the minutes, accounting fees associated with each Fund's
financial statements, portfolio transfer taxes (if any) and any similar
expenses incurred in connection with the Merger. In this regard, expenses of
the Merger will be deducted from the assets of the Surviving Fund so as to be
borne equally and exclusively on a per share basis by the holders of Common
Stock of each of the Funds. No Fund shall pay any expenses of its stockholders
arising out of or in connection with the Merger.
Required Approvals. Under the Charter of each Fund, applicable Maryland
law and the rules of the NYSE, stockholder approval of the Agreement and Plan
of Merger requires the affirmative vote of stockholders representing more than
50% of the outstanding shares of Common Stock of a Fund. Because of the
requirement that the Agreement and Plan of Merger be approved by the
stockholders of all three Funds, the Merger will not take place if the
stockholders of any one Fund do not approve the Agreement and Plan of Merger.
Deregistration and Dissolution. Following the Merger, the Acquired Funds
will terminate their registration under the Investment Company Act. Moreover,
as a result of the Merger, the separate existence of the Acquired Funds will
cease. Expenses incurred in connection with the deregistration and winding up
of operations of the Acquired Funds will be paid by the Surviving Fund
following the Merger.
Amendments and Conditions. The Agreement and Plan of Merger may be
amended at any time prior to the Effective Date with respect to any of the
terms therein. The obligations of each Fund pursuant to the Agreement and Plan
of Merger are subject to various conditions, including a registration
statement on Form N-14 being declared effective by the SEC, approval by the
stockholders of each Fund as described above, an opinion of counsel being
received with respect to tax matters, an opinion of counsel as to securities
matters being received, expiration or termination of the applicable waiting
period under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, the
continuing accuracy of various representations and warranties of the Funds
being confirmed by the respective parties and the refinancing of the
outstanding credit facilities of all three Funds in a principal amount
approximately equal to the aggregate commitment amount of the currently
outstanding credit facilities.
Postponement, Termination. Under the Agreement and Plan of Merger, the
Board of Directors of any Fund may cause the Merger to be postponed or
abandoned under certain circumstances should such Board determine that it is
in the best interests of the stockholders of its respective Fund to do so. The
Agreement and Plan of Merger may be terminated, and the Merger abandoned at
any time (whether before or after adoption thereof by the stockholders of any
Fund) prior to the Effective Date, or the Effective Date may be postponed: (i)
by mutual consent of the Boards of Directors of the three Funds and (ii) by
the Board of Directors of any Fund if any condition to that Fund's obligations
set forth in the Agreement and Plan of Merger has not been fulfilled or waived
by such Board.
Potential Benefits to Common Stockholders of the Funds as a Result of the Merger
In approving the Merger, the Board of Directors of each Fund identified
certain benefits that are likely to result from the Merger, including lower
aggregate operating expenses per share (excluding leverage) of Common Stock,
greater efficiency and flexibility in portfolio management and a more liquid
trading market for the shares of Common Stock of the Surviving Fund. With
respect to each Acquired Fund, following the Merger their respective
stockholders will remain invested in a closed-end fund that has investment
objectives and policies substantially similar to those of the Acquired Fund.
The Boards also considered the possible risks and costs of combining the
Funds. The Boards noted the many similarities between the Funds, including
their substantially similar investment objectives and investment policies,
their use of substantially the same management personnel and their similar
portfolios. The Boards also considered the relative tax positions of the
portfolios of the Funds. As of February 29, 2000, each Fund had undistributed
net realized capital losses and net unrealized capital losses, with Debt
Strategies II and Debt Strategies both having significant net realized and
unrealized capital losses. As a result of the Merger and subject to certain
limitations, the stockholders of each Fund may benefit from the ability of the
Surviving Fund to use the net realized capital losses of another Fund to
offset future net realized capital gains of the Surviving Fund, if any. Based
on these factors, the Boards concluded that the Merger will potentially
benefit the stockholders of each Fund because the Merger presents no
significant risks or costs (including legal, accounting and administrative
costs) that would outweigh the benefits discussed.
The Surviving Fund that would result from the Merger would have a larger
asset base than any of the Funds has currently. Based on data presented by
FAM, the Board of Directors of each Fund believes that administrative expenses
for the Surviving Fund would be less than the aggregate expenses for the
individual Funds, resulting in a lower expense ratio for common stockholders
of the Surviving Fund and higher earnings per common share. In particular,
certain fixed costs, such as costs of printing stockholder reports and proxy
statements, legal expenses, audit fees, mailing costs and other expenses will
be spread across a larger asset base, thereby lowering the expense ratio for
the Surviving Fund.
<TABLE>
<CAPTION>
Approximate Net
Assets as of Total Annualized Operating Total Annualized Operating
February 29, 2000 Expense Ratio Expense Ratio
(in millions) (excluding leverage) (including leverage)*
--------------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
Debt Strategies $226.5 0.94% 3.14%
Debt Strategies II $538.3 0.77% 2.89%
Debt Strategies III $103.1 0.97% 3.52%
Surviving Fund $867.9 0.73% 2.92%
</TABLE>
______________________
* The annualized operating expenses attributable to leverage for each of the
Funds equals the interest owed over a projected 12 month period based on the
amount of outstanding borrowings for each of the Funds as of February 29,
2000. As of February 29, 2000, the amount of outstanding borrowings for each
of the Funds as a percentage of net assets was Debt Strategies (30.9%), Debt
Strategies II (29.9%) and Debt Strategies III (35.9%). The annualized
operating expenses attributable to leverage for the Surviving Fund equals the
sum of each of the Fund's projected leverage costs based on the amount of
outstanding borrowings for each of the Funds as of February 29, 2000. The
actual operating expenses attributable to leverage for the Surviving Fund will
be dependent on the amount of leverage used by the Surviving Fund and the
interest rate to be paid on such borrowings.
After the Merger, on a pro forma basis, the total annualized operating
expenses of the Surviving Fund as a percent of net assets would be:
(a) 0.21% lower than Debt Strategies's total annualized operating
expense ratio when leverage is not included and 0.22% lower
when leverage is included;
(b) 0.04% lower than Debt Strategies II's total annualized
operating expense ratio when leverage is not included and 0.03%
higher when leverage is included (this increase of 0.03% is the
result of the higher leverage percentage of Debt Strategies and
Debt Strategies III as of February 29, 2000 and the related
costs of such leverage); and
(c) 0.24% lower than Debt Strategies III's total annualized
operating expense ratio when leverage is not included and 0.60%
lower when leverage is included.
Based on the foregoing, the Boards concluded that the Merger is in the
best interests of the stockholders of each Fund because the Merger presents no
significant risks or costs (including legal, accounting and administrative
costs) that would outweigh the benefits discussed above.
In approving the Merger, the Boards determined that the Merger is in the
best interests of each Fund and, with respect to net asset value, that the
interests of existing stockholders of each Fund would not be diluted as a
result of the Merger.
Surrender and Exchange of Stock Certificates
After the Effective Date, each holder of an outstanding certificate or
certificates formerly representing shares of Common Stock of any Acquired Fund
will be entitled to receive, upon surrender of his or her certificate or
certificates, a certificate or certificates representing the number of shares
of Debt Strategies II Common Stock distributable with respect to such holder's
shares of Common Stock of the Acquired Fund, together with cash in lieu of any
fractional shares of Common Stock. Promptly after the Effective Date, the
transfer agent for the Debt Strategies II Common Stock will mail to each
holder of certificates formerly representing shares of Common Stock of an
Acquired Fund a letter of transmittal for use in surrendering his or her
certificates for certificates representing shares of Debt Strategies II Common
Stock and cash in lieu of any fractional shares of Common Stock.
If Prior To The Merger You Held: After The Merger, You Will Hold:
- ----------------------------------- -----------------------------------
Debt Strategies Common Stock Debt Strategies II Common Stock
Debt Strategies II Common Stock Debt Strategies II Common Stock
Debt Strategies III Common Stock Debt Strategies II Common Stock
Please do not send in any stock certificates at this time. Upon
consummation of the Merger, common stockholders of the Acquired Funds will be
furnished with instructions for exchanging their stock certificates for Debt
Strategies II stock certificates and, if applicable, cash in lieu of
fractional shares.
From and after the Effective Date, certificates formerly representing
shares of Common Stock of an Acquired Fund will be deemed for all purposes to
evidence ownership of the number of full shares of Debt Strategies II Common
Stock distributable with respect to the shares of the Acquired Fund held
before the Merger as described above and as shown in the table above, provided
that, until such stock certificates have been so surrendered, no dividends
payable to the holders of record of Common Stock of an Acquired Fund as of any
date subsequent to the Effective Date will be paid to the holders of such
outstanding stock certificates. Dividends payable to holders of record of
shares of Common Stock of Debt Strategies II as of any date after the
Effective Date and prior to the exchange of certificates by any stockholder of
an Acquired Fund, will be paid to such stockholder, without interest, at the
time such stockholder surrenders his or her stock certificates for exchange.
From and after the Effective Date, there will be no transfers on the
transfer books of any Acquired Fund. If, after the Effective Date,
certificates representing shares of Common Stock of an Acquired Fund are
presented to Debt Strategies II, they will be canceled and exchanged for
certificates representing Common Stock of Debt Strategies II and cash in lieu
of fractional shares of Debt Strategies II Common Stock, if any, distributable
with respect to such Common Stock in the Merger.
Tax Consequences of the Merger
General. The Merger has been structured with the intention that it
qualify for Federal income tax purposes as a tax-free reorganization under
Section 368(a)(1)(A) of the Code. Each Fund has elected and qualified for the
special tax treatment afforded RICs under the Code, and Debt Strategies II
intends to continue to so qualify after the Merger. The Funds will each
receive an opinion from counsel to the effect that for Federal income tax
purposes: (i) the Merger, as described above, will constitute a reorganization
within the meaning of Section 368(a)(1)(A) of the Code, and each Acquired Fund
and Debt Strategies II will be deemed a "party" to a reorganization within the
meaning of Section 368(b) of the Code; (ii) in accordance with Section 361(a)
of the Code, no gain or loss will be recognized to the Acquired Funds as a
result of the Merger or on the distribution of Debt Strategies II Common Stock
to the respective stockholders of the Acquired Funds under Section 361(c)(1)
of the Code; (iii) under Section 1032 of the Code, no gain or loss will be
recognized to Debt Strategies II as a result of the Merger; (iv) in accordance
with Section 354(a)(1) of the Code, no gain or loss will be recognized to the
stockholders of the Acquired Funds on the conversion of their shares into Debt
Strategies II Common Stock (except to the extent that common stockholders
receive cash representing an interest in fractional shares of Debt Strategies
II Common Stock in the Merger); (v) in accordance with Section 362(b) of the
Code, the tax basis of the assets of the Acquired Funds in the hands of Debt
Strategies II will be the same as the tax basis of such assets in the hands of
the Acquired Fund that transferred them immediately prior to the consummation
of the Merger; (vi) in accordance with Section 358 of the Code, immediately
after the Merger, the tax basis of the Debt Strategies II Common Stock
received by the stockholders of the Acquired Funds in the Merger will be equal
to the tax basis of the Common Stock of the Acquired Fund converted pursuant
to the Merger; (vii) in accordance with Section 1223 of the Code, a
stockholder's holding period for the Debt Strategies II Common Stock will be
determined by including the period for which such stockholder held the Common
Stock of the Acquired Fund converted pursuant to the Merger, provided that
such shares were held as a capital asset; (viii) in accordance with Section
1223 of the Code, Debt Strategies II's holding period with respect to the
Acquired Funds' assets transferred will include the period for which such
assets were held by the Acquired Fund; (ix) the payment of cash to common
stockholders of an Acquired Fund in lieu of fractional shares of Debt
Strategies II Common Stock will be treated as though the fractional shares
were distributed as part of the Merger and then redeemed, with the result that
such stockholders will have short- or long-term capital gain or loss to the
extent that the cash distribution differs from the stockholder's basis
allocable to the Debt Strategies II fractional shares; and (x) the taxable
year of each Acquired Fund will end on the Effective Date of the Merger and
pursuant to Section 381(a) of the Code and regulations thereunder, Debt
Strategies II will succeed to and take into account certain tax attributes of
the Acquired Funds, such as earnings and profits, capital loss carryovers and
method of accounting.
Although, under Section 381(a) of the Code, Debt Strategies II will
succeed to and take into account certain tax attributes of the Acquired Funds,
including, but not limited to, earnings and profits, any net operating loss
carryovers, any capital loss carryovers and method of accounting, the Code,
however, contains special limitations with regard to the use of net operating
losses, capital losses and other similar items in the context of certain
reorganizations, including tax-free reorganizations pursuant to Section
368(a)(1)(A) of the Code, which could reduce the benefit of these attributes
to Debt Strategies II.
Stockholders should consult their tax advisers regarding the effect of
the Merger in light of their individual circumstances. As the foregoing
relates only to Federal income tax consequences, stockholders also should
consult their tax advisers as to the foreign, state and local tax consequences
of the Merger.
Regulated Investment Company Status. The Funds have elected and qualified
for taxation as RICs under Sections 851-855 of the Code, and, after the
Merger, Debt Strategies II intends to continue to so qualify.
Capitalization
The following table sets forth as of February 29, 2000 (i) the
capitalization of Debt Strategies, (ii) the capitalization of Debt Strategies
II, (iii) the capitalization of Debt Strategies III and (iv) the
capitalization of the Surviving Fund as adjusted to give effect to the Merger.
<TABLE>
<CAPTION>
Pro Forma Capitalization of Debt Strategies, Debt Strategies II, Debt Strategies III
and Surviving Fund as of February 29, 2000
Debt Debt Debt Pro Forma Surviving Fund
Strategies Strategies II Strategies III Adjustment as Adjusted(a)
-------------- ----------------- ------------------ -------------- ------------------
<S> <C> <C> <C> <C> <C>
Net Assets:
Net Assets Attributable to
Common Stock...................... $226,474,542 $538,342,690 $103,079,422 $
Shares of Common
Stock Outstanding.................. 31,425,226 62,610,000 11,010,000 (b)
Net Asset Value Per Share:
Common Stock....................... $7.21 $8.60 $9.36 - $ (c)
</TABLE>
________________________
(a) The adjusted balances are presented as if the Merger had been
consummated on February 29, 2000 and are for informational purposes
only. Assumes distribution of undistributed net investment income and
accrual of estimated Merger expenses of approximately $790,946. No
assurance can be given about how many shares of Debt Strategies II
Common Stock will be received by holders of Common Stock of Debt
Strategies or Debt Strategies III on the Effective Date, and the
foregoing should not be relied upon to reflect the number of shares
of Debt Strategies II Common Stock that actually will be received on
or after such date.
(b) Assumes the issuance of _________ shares of Debt Strategies II
Common Stock, in exchange for the net assets of each of Debt
Strategies and Debt Strategies III. The estimated number of shares
issued was based on the net asset value of each Fund, net of
distributions, on February 29, 2000.
(c) Net Asset Value Per Share of Common Stock net of Merger-related
expenses and distribution of undistributed net investment income of
$_____ for Debt Strategies II, $_____ for Debt Strategies and $_____
for Debt Strategies III.
ITEM 2.
ELECTION OF DIRECTORS
At the Annual Meeting of each Fund, the Board of Directors for each Fund
will be elected to serve until the next annual meeting of stockholders and
until their successors are elected and qualified. If the stockholders of all
of the Funds approve the Merger, then the current Board of Directors of each
Fund will serve as the Board of the Surviving Fund, until its next annual
meeting of stockholders. If the stockholders of any Fund vote against the
Merger, then the Board of Directors elected at the annual meeting of each Fund
will continue to serve until the next annual meeting of stockholders of each
Fund. With respect to each Fund, it is intended that all properly executed
proxies will be voted (unless such authority has been withheld in the proxy)
in favor of the nine persons designated as Directors to be elected by the
holders of Common Shares.
The Board of Directors of each Fund knows of no reason why any of these
nominees will be unable to serve, but in the event of any such unavailability,
the proxies received will be voted for such substitute nominee or nominees as
the appropriate Board of each Fund may recommend.
Certain information concerning the nominees is set forth below.
Additional information concerning the nominees and other information relevant
to the election of Directors is set forth in Exhibit I.
<TABLE>
<CAPTION>
Principal Occupation During Past
Name and Address Age Five Years and Public Directorships (1)
---------------- --- ---------------------------------------
<S> <C> <C>
Ronald W. Forbes(1)(2)............ 59 Professor of Finance, School of Business, State
1400 Washington Avenue University of New York at Albany, since 1989;
Albany, New York 12222 Consultant, Urban Institute, Washington, D.C.
since 1995.
Terry K. Glenn(1)*................ 59 Executive Vice President of Fund Asset
P. O. Box 9011 Management, L.P. ("FAM") and Merrill Lynch Asset
Princeton, New Jersey 08543-9011 Management, L.P. ("MLAM") (the terms FAM and
MLAM, as used herein, include their corporate
predecessors) since 1983; Executive Vice President
and Director of Princeton Services, Inc.
("Princeton Services") since 1993; President of
Princeton Funds Distributor, Inc. ("PFD") since
1986 and Director thereof since 1991; President of
Princeton Administrators, L.P. since 1988.
Cynthia A. Montgomery(1)(2)....... 47 Professor, Harvard Business School since 1989;
Harvard Business School Associate Professor, J.L. Kellogg Graduate School
Soldiers Field Road of Management, Northwestern University from 1985
Boston, Massachusetts 02163 to 1989; Assistant Professor, Graduate School of
Business Administration, The University of
Michigan from 1979 to 1985; Director, UNUM
Provident Corporation since 1990 and Director,
Newell Rubbermaid since 1995.
Charles C. Reilly(1)(2)........... 68 Self-employed financial consultant since 1990;
9 Hampton Harbor Road President and Chief Investment Officer of Verus
Hampton Bays, New York 11946 Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnhold and S. Bleichroeder, Inc.
from 1973 to 1990; Adjunct Professor, Columbia
University Graduate School of Business from 1990
to 1991; Adjunct Professor, Wharton School, The
University of Pennsylvania from 1989 to 1990;
Partner, Small Cities Cable Television from 1986
to 1997.
Kevin A. Ryan(1)(2)............... 67 Founder and current Director of The Boston
127 Commonwealth Avenue University Center for the Advancement of Ethics
Chestnut Hill, Massachusetts 02167 and Character; Professor of Education at Boston
University since 1982; formerly taught on the
faculties of The University of Chicago, Stanford
University and Ohio State University.
Roscoe S. Suddarth(1)(2).......... 65 President, Middle East Institute since 1995;
1761 N Street, N.W. Foreign Service Officer, United States Foreign
Washington, D.C. 20036 Service, from 1961 to 1995; Career Minister, from
1989 to 1995; U.S. Ambassador to the Hashemite
Kingdom of Jordan from 1987 to 1990; Deputy
Inspector General, U.S. Department of State, from
1991 to 1994.
Richard R. West(1)(2)............. 62 Professor of Finance since 1984, Dean from 1984
Box 604 to 1993, and currently Dean Emeritus of New York
Genoa, Nevada 89411 University, Leonard N. Stern School of Business
Administration; Director of Bowne & Co., Inc.,
Vornado Realty Trust, Inc., Vornado Operating
Company and Alexander's Inc.
Arthur Zeikel(1)*................. 67 Chairman of FAM and MLAM from 1997 to 1999;
300 Woodland Avenue President of FAM and MLAM from 1977 to 1997;
Westfield, New Jersey 07090 Chairman of Princeton Services from 1997 to 1999,
Director thereof from 1993 to 1999 and President
from 1993 to 1997; Executive Vice President of ML
& Co. from 1990 to 1999.
Edward D. Zinbarg(1)(2)........... 65 Self-employed financial consultant since 1994;
5 Hardwell Road Executive Vice President of The Prudential
Short Hills, New Jersey 07078-2117 Insurance Company of America from 1988 to 1994;
former Director of Prudential Reinsurance Company
and former Trustee of the Prudential Foundation.
</TABLE>
______________________
(1) Each of the nominees is a director, trustee or member of an advisory
board of one or more additional investment companies for which FAM, MLAM
or their affiliates act as investment adviser. See "Compensation of
Directors" in Exhibit I hereto.
(2) Member of Audit Committee of the Boards.
* Interested person, as defined in the Investment Company Act, of the
Funds.
Committee and Board Meetings
The Board of each Fund has a standing Audit Committee (the "Committee"),
which consists of Board members who are not "interested persons" of the Fund
within the meaning of the Investment Company Act. The principal purpose of the
Committee is to review the scope of the annual audit conducted by the Fund's
independent auditors and the evaluation by such auditors of the accounting
procedures followed by the Fund. The Committee also reviews and nominates
candidates to serve as non-interested Board members. The Committee generally
will not consider nominees recommended by stockholders of the Fund. The
non-interested Board members have retained independent legal counsel to assist
them in connection with these duties.
During each Fund's most recently completed fiscal year, each of the Board
members then in office attended at least 75% of the aggregate of the total
number of meetings of the Board held during the fiscal year and, if a member,
of the total number of meetings of the Committee held during the period for
which he or she served. See Exhibit I for further information about Committee
and Board meetings.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the officers and Directors of each Fund and persons
who own more than ten percent of a registered class of the Fund's equity
securities, to file reports of ownership and changes in ownership on Forms 3,
4 and 5 with the SEC and the NYSE. Officers, Directors and greater than ten
percent stockholders are required by SEC regulations to furnish the Fund with
copies of all Forms 3, 4 and 5 they file.
Based solely on each Fund's review of the copies of such forms, and
amendments thereto, furnished to it during or with respect to its most recent
fiscal year, and written representations from certain reporting persons that
they were not required to file Form 5 with respect to the most recent fiscal
year, each Fund believes that all of its officers, Directors, greater than ten
percent beneficial owners and other persons subject to Section 16 of the
Exchange Act because of the requirements of Section 30 of the Investment
Company Act (i.e., any advisory board member, investment adviser or affiliated
person of the Fund's investment adviser) have complied with all filing
requirements applicable to them with respect to transactions during the Fund's
most recent fiscal year.
Interested Persons
Each Fund considers Mr. Glenn and Mr. Zeikel to be "interested persons"
of the Fund within the meaning of Section 2(a)(19) of the Investment Company
Act because of the positions each holds or has held with FAM and its
affiliates. Mr. Glenn is the President of each Fund.
Compensation of Directors
FAM, the investment adviser of each Fund, pays all compensation to all
officers of each Fund and all Directors of each Fund who are affiliated with
ML & Co. or its subsidiaries. Each Fund pays each Director not affiliated with
FAM (each a "non-affiliated Director") an annual fee plus a fee for each
meeting attended, and each Fund also pays each member of its Committee, which
consists of all of the non-affiliated Directors, an annual fee plus a fee for
each meeting attended, together with such Director's out-of-pocket expenses
relating to attendance at such meetings. Information with respect to the
aggregate fees and expenses paid by each Fund to its non-affiliated Directors
during each Fund's most recently completed fiscal year is set forth in Exhibit
I hereto.
Officers of the Funds
Information regarding the officers of each Fund is set forth in Exhibit
I. Officers of the Funds are elected and appointed by the Board and hold
office until they resign, are removed or are otherwise disqualified to serve.
ITEM 3. SELECTION OF INDEPENDENT AUDITORS
The Board of each Fund, including a majority of the Directors who are not
interested persons of the Fund, has selected Deloitte & Touche LLP ("D&T") as
the independent auditors, to examine the financial statements of the Fund for
the Fund's current fiscal year. None of the Funds know of any direct or
indirect financial interest of such auditors in any Fund. Such appointment is
subject to ratification or rejection by the stockholders of each respective
Fund. Unless a contrary specification is made, the accompanying proxy will be
voted in favor of ratifying the selection of such Fund's auditors.
D&T also acts as independent auditors for ML & Co. and most of its
subsidiaries, including MLAM and FAM, and for most other investment companies
for which MLAM and FAM act as investment adviser. The fees received by D&T
from these other entities are substantially greater, in the aggregate, than
the total fees received by them from each applicable Fund. The Board of each
Fund considered the fact that D&T have been retained as the independent
auditors for ML & Co. and the other entities described above in its evaluation
of the independence of D&T with respect to each applicable Fund.
Representatives of D&T are expected to be present at the Meetings and
will have the opportunity to make a statement if they so desire and to respond
to questions from stockholders.
INFORMATION CONCERNING THE ANNUAL MEETINGS
Date, Time and Place of Meetings
The Meetings will be held on August 23, 2000 at the offices of MLAM, 800
Scudders Mill Road, Plainsboro, New Jersey at the times listed on Exhibit I to
this Proxy Statement and Prospectus.
Solicitation, Revocation and Use of Proxies
A stockholder executing and returning a proxy has the power to revoke it
at any time prior to its exercise by executing a superseding proxy, by giving
written notice of the revocation to the Secretary of the appropriate Fund or
by voting in person at the Meeting. Although mere attendance at a Meeting will
not revoke a proxy, a stockholder present at a Meeting may withdraw his or her
proxy and vote in person.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Meetings in accordance with
the directions on the proxies; if no direction is indicated, the shares will
be voted (i) "FOR" the proposal to approve of the Agreement and Plan of
Merger, (ii) "FOR" the election of Directors and (iii) "FOR" the ratification
of the selection of Deloitte & Touche LLP as independent accountants.
It is not anticipated that any other matters will be brought before the
Meetings. If, however, any other business properly is brought before the
Meetings, proxies will be voted in accordance with the judgment of the persons
designated on such proxies.
Record Date and Outstanding Shares
Only holders of record of shares of Common Stock of a Fund at the close
of business on the Record Date are entitled to vote at a Meeting or any
adjournment thereof. At the close of business on the Record Date, the Funds
had the number of shares outstanding listed in Exhibit I to this Proxy
Statement and Prospectus.
Security Ownership of Certain Beneficial Owners and Management
To the knowledge of the Funds, as of the date hereof, no person or entity
owns beneficially 5% or more of the shares of the Common Stock of any Fund.
As of the Record Date, none of the nominees held shares of the Funds.
As of the Record Date, the Directors and officers of Debt Strategies as a
group (12 persons) owned an aggregate of less than 1% of the outstanding
shares of Common Stock of Debt Strategies.
As of the Record Date, the Directors and officers of Debt Strategies II
as a group (12 persons) owned an aggregate of less than 1% of the outstanding
shares of Debt Strategies II Common Stock.
As of the Record Date, the Directors and officers of Debt Strategies III
as a group (12 persons) owned an aggregate of less than 1% of the outstanding
shares of Common Stock of Debt Strategies III.
On the Record Date, Mr. Glenn, a Director and an officer of each Fund,
Mr. Zeikel, a Director of each Fund, and the other Directors and officers of
each Fund owned an aggregate of less than 1% of the outstanding shares of
Common Stock of ML & Co.
Voting Rights and Required Vote
For purposes of this Proxy Statement and Prospectus, each share of Common
Stock of each of the Funds is entitled to one vote. Approval of the Agreement
and Plan of Merger requires the approval of the stockholders of each Fund.
With respect to each Fund, approval of the Agreement and Plan of Merger
requires the affirmative vote of stockholders representing a majority of the
outstanding shares of a Fund's Common Stock.
For purposes of any vote at a Meeting which requires the approval of the
outstanding shares of a Fund's Common Stock, a quorum consists of one-third of
the shares entitled to vote at that Meeting. If, by the time scheduled for
each Meeting, a quorum of the applicable Fund's stockholders is not present,
or if a quorum is present but sufficient votes in favor of the Agreement and
Plan of Merger are not received from the stockholders of the applicable Fund,
the persons named as proxies may propose one or more adjournments of a Meeting
to permit further solicitation of proxies from stockholders. Any such
adjournment will require the affirmative vote of a majority of the shares of
the applicable Fund present in person or by proxy and entitled to vote at the
session of a Meeting to be adjourned. The persons named as proxies will vote
in favor of any such adjournment if they determine that adjournment and
additional solicitation are reasonable and in the interests of the applicable
Fund's stockholders.
With respect to each Fund, assuming a quorum is present, election of the
Directors of the Fund will require the affirmative vote of a plurality of the
votes cast.
With respect to each Fund, assuming a quorum is present, approval of the
ratification of the selection of the independent auditors of each Fund, will
require the affirmative vote of a majority of the votes cast.
Appraisal Rights
Under Maryland law, stockholders of a company whose shares are traded
publicly on a national securities exchange, such as each Fund, are not
entitled to demand the fair value of their shares upon a merger; therefore,
the common stockholders of each Fund will be bound by the terms of the Merger,
if approved at the Meetings. However, any common stockholder of a Fund may
sell his or her shares of Common Stock at any time on the NYSE.
ADDITIONAL INFORMATION
The expenses of preparation, printing and mailing of the enclosed form of
proxy, the accompanying Notice and this Proxy Statement and Prospectus will be
borne by Debt Strategies II, the Surviving Fund after the Merger, so as to be
borne equally and exclusively on a per share basis by the holders of Common
Stock of each Fund. If the Merger is not approved, these expenses will be
allocated pro rata among the Funds according to the net asset value of the
Common Stock of each Fund on the Meeting date.
The Funds likewise will reimburse banks, brokers and others for their
reasonable expenses in forwarding proxy solicitation materials to the
beneficial owners of shares of each Fund and certain persons that the Funds
may employ for their reasonable expenses in assisting in the solicitation of
proxies from such beneficial owners of shares of capital stock of the Funds.
In order to obtain the necessary quorums at each Meeting, supplementary
solicitation may be made by mail, telephone, telegraph or personal interview
by officers of the Funds. Each Fund has retained [Shareholder Communications
Corporation, 17 State Street, New York, New York 10004] to aid in the
solicitation of proxies, at a cost to be borne by each Fund of approximately
$_____, plus out-of-pocket expenses of $____________.
Broker-dealer firms, including Merrill Lynch, holding Fund shares in
"street name" for the benefit of their customers and clients will request the
instructions of such customers and clients on how to vote their shares on each
proposal before the Meetings. The Funds understand that, under the rules of
the NYSE, such broker-dealer firms may, without instructions from their
customers and clients, grant authority to the proxies designated to vote on
the election of the Directors of each Fund (Item 2) and the ratification of
the selection of independent auditors for each Fund (Item 3) if no
instructions have been received prior to the date specified in the
broker-dealer firm's request for voting instructions. With respect to shares
of Common Stock of each Fund, broker-dealer firms, including Merrill Lynch,
will not be permitted to grant voting authority without instructions with
respect to the approval of the Agreement and Plan of Merger (Item 1). The
Funds will include shares held of record by broker-dealers as to which such
authority has been granted in its tabulation of the total number of shares
present for purposes of determining whether the necessary quorum of
stockholders of each Fund exists. Proxies that are returned to a Fund but that
are marked "abstain" or on which a broker-dealer has declined to vote on any
proposal ("broker non-votes") will be counted as present for the purposes of
determining a quorum. However, abstentions and broker non-votes will not be
counted as votes cast. Abstentions and broker non-votes will not have an
effect on the vote on Items 2 and 3; however, abstentions and broker non-votes
will have the same effect as a vote against Item 1.
This Proxy Statement and Prospectus does not contain all of the
information set forth in the registration statement and the exhibits relating
thereto which Debt Strategies II has filed with the SEC under the Securities
Act and the Investment Company Act, to which reference is hereby made.
The Funds are subject to the informational requirements of the Exchange
Act and the Investment Company Act and in accordance therewith are required to
file reports, proxy statements and other information with the SEC. Any such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities of the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following regional
offices of the SEC: Regional Office, at Seven World Trade Center, Suite 1300,
New York, New York 10048; Pacific Regional Office, at 5670 Wilshire Boulevard,
11th Floor, Los Angeles, California 90036; and Midwest Regional Office, at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained from the public
reference section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The SEC maintains a Web site at http://www.sec.gov
containing reports, proxy and information statements and other information
regarding registrants, including the Funds, that file electronically with the
SEC. Reports, proxy statements and other information concerning each Fund can
also be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
CUSTODIAN
The Bank of New York acts as the custodian for cash and securities of
Debt Strategies and Debt Strategies II. The principal business address of The
Bank of New York in such capacity is 90 Washington Street, New York, New York
10286. State Street Bank and Trust Company acts as the custodian for cash and
securities of Debt Strategies III. The principal business address of State
Street Bank and Trust Company in such capacity is One Heritage Drive, P2N,
North Quincy, Massachusetts 02171.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The Bank of New York serves as the transfer agent, dividend disbursing
agent and registrar with respect to the Common Stock of Debt Strategies and
Debt Strategies II, pursuant to a registrar, transfer agency and service
agreement with each of the Funds. The principal business address of The Bank
of New York in such capacity is 101 Barclay Street, New York, New York 10286.
State Street Bank and Trust Company serves as the transfer agent,
dividend disbursing agent and registrar with respect to the Common Stock of
Debt Strategies III, pursuant to a separate registrar, transfer agency and
service agreement with Debt Strategies III. The principal business address of
State Street Bank and Trust Company in such capacity is 225 Franklin Street,
Boston, Massachusetts 02110.
LEGAL PROCEEDINGS
There are no material legal proceedings to which any Fund is a party.
LEGAL OPINIONS
Certain legal matters in connection with the Merger will be passed upon
for the Funds by Brown & Wood LLP, New York, New York.
EXPERTS
_______________, independent auditors, have audited the financial
statements and financial highlights of each Fund as of February 29, 2000 as
set forth in their reports which appear in this Proxy Statement and
Prospectus. The financial statements and financial highlights of each Fund are
included in reliance upon their report, given on their authority as experts in
accounting and auditing.
_____ will serve as the independent auditors for the Surviving Fund after
the Merger. The principal business address of _________________________,
Princeton, New Jersey 08540-6400.
STOCKHOLDER PROPOSALS
The 2001 Annual Meetings of Debt Strategies, Debt Strategies II and Debt
Strategies III are expected to be held in ____________, _____________, and
_____________, respectively. If a stockholder of a Fund intends to present a
proposal at the 2001 Annual Meeting of Stockholders of that Fund, and desires
to have the proposal included in that Fund's proxy statement and form of proxy
for that meeting, the stockholder must deliver the proposal to the offices of
Debt Strategies, Debt Strategies II or Debt Strategies III by ___________,
2001 ________________, 2001 and _________________, 2001, respectively.
By Order of the Boards of Directors
BRADLEY J. LUCIDO
Secretary of
Debt Strategies Fund, Inc.,
Debt Strategies Fund II, Inc. and
Debt Strategies Fund III, Inc.
Plainsboro, New Jersey
Dated: May __, 2000
Exhibit I
INDEX TO FINANCIAL STATEMENTS
Page
Audited Financial Statements for Debt Strategies Fund, Inc.
for the Fiscal Year Ended February 29, 2000........................... F-
Audited Financial Statements for Debt Strategies Fund II, Inc.
for the Fiscal Year Ended February 29, 2000........................... F-_
Audited Financial Statements for Debt Strategies Fund III, Inc.
for the Fiscal Year Ended February 29, 2000........................... F-_
Pro Forma Unaudited Financial Statements for the Surviving Fund,
as of February 29, 2000............................................... F-_
EXHIBIT I
INFORMATION PERTAINING TO EACH FUND
o General Information Pertaining to the Funds
<TABLE>
<CAPTION>
Defined Term Fiscal State of Meeting
Fund Used in Exhibit I Year End Organization Time
- ---- ----------------- -------- ------------ ------
<S> <C> <C> <C> <C>
Debt Strategies Fund, Inc................... Debt Strategies 2/28 Maryland .m.
Debt Strategies Fund II, Inc................ Debt Strategies II 2/28 Maryland .m.
Debt Strategies Fund III, Inc............... Debt Strategies III 2/28 Maryland .m.
</TABLE>
Capital Shares of Common Stock
Outstanding as of
Fund the Record Date
- ---- ------------------------------
Debt Strategies.................................
Debt Strategies II..............................
Debt Strategies III.............................
o Information Pertaining to Officers and Directors
<TABLE>
<CAPTION>
Year in Which Each Nominee/Director of Debt Strategies, Debt Strategies
II and Debt Strategies III
Became a Member of the Board
-----------------------------------------------------------------------
Director Debt Strategies Debt Strategies II Debt Strategies III
-------- ------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Terry K. Glenn............................. 1999 1999 1999
Ronald W. Forbes........................... 1997 1997 1998
Cynthia A. Montgomery...................... 1997 1997 1998
Charles C. Reilly.......................... 1997 1997 1998
Kevin A. Ryan.............................. 1997 1997 1998
Roscoe S. Suddarth......................... -- -- --
Richard R. West............................ 1997 1997 1998
Edward D. Zinbarg.......................... -- -- --
Arthur Zeikel.............................. 1997 1997 1998
</TABLE>
Set forth in the table below is information regarding board and committee
meetings held and the aggregate fees and expenses paid by the Fund to
non-affiliated Directors during each Fund's most recently completed fiscal
year.
<TABLE>
<CAPTION>
Board Audit Committee
-------------------------------------------- ------------------------
# # Annual
Meetings Annual Per Meeting Meetings Fee Aggregate
Fund Held* Fee ($) Fee ($)** Held ($)*** Expenses ($)
---- ------------ ----------- --------------- ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C>
Debt Strategies....... 4 3,000 300 4 900
Debt Strategies II.... 4 3,000 300 4 900
Debt Strategies III... 4 3,000 300 4 900
</TABLE>
______________________
* Includes meetings held via teleconferencing equipment.
** The fee is payable for each meeting attended in person. A fee is not paid
for telephonic meetings.
*** The Chairman of the Audit Committee receives an additional annual fee of
$1,000.
Set forth in the table below is information regarding compensation paid
by the Fund to the non-affiliated Directors for the most recently completed
fiscal year.
<TABLE>
<CAPTION>
Compensation From Debt Strategies, Debt Strategies II and Debt Strategies III ($)*
--------------------------------------------------------------------------------------
Director Debt Strategies Debt Strategies II Debt Strategies III
- -------- ------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Forbes......................... 5,100 5,100 5,100
Montgomery..................... 5,100 5,100 5,100
Reilly......................... 6,100 6,100 6,100
Ryan........................... 5,100 5,100 5,100
West........................... 5,100 5,100 5,100
</TABLE>
______________________
* No pension or retirement benefits are accrued as part of Fund expenses.
Set forth in the table below is information regarding the aggregate
compensation paid by all registered investment companies advised by FAM and
its affiliate, MLAM ("FAM/MLAM Advised Funds"), including Debt Strategies,
Debt Strategies II and Debt Strategies III to the non-affiliated Directors for
the year ended December 31, 1999.
<TABLE>
<CAPTION>
Aggregate Compensation From FAM/MLAM Advised Funds
Name of Director/Nominee Paid to Directors ($)(1)
- --------------------------------- ------------------------------------------------------
<S> <C>
Ronald W. Forbes................. 213,900
Cynthia A. Montgomery............ 213,900
Charles C. Reilly................ 400,025
Kevin A. Ryan.................... 213,900
Roscoe S. Suddarth(2)............ --
Richard R. West.................. 388,775
Edward D. Zinbarg................ 140,875
</TABLE>
(1) The Directors serve on the boards of FAM/MLAM advised funds as follows:
Mr. Forbes (__ registered investment companies consisting of __
portfolios); Ms. Montgomery (__ registered investment companies
consisting of ___ portfolios); Mr. Reilly (__ registered investment
companies consisting of __ portfolios); Mr. Ryan (__ registered
investment companies consisting of __ portfolios); Mr. Suddarth (__
registered investment companies consisting of __ portfolios); Mr. West
(__ registered investment companies consisting of __ portfolios) and Mr.
Zinbarg (__ registered investment companies consisting of __ portfolios);
(2) Mr. Suddarth was elected a Director/Trustee of certain FAM/MLAM-advised
funds on January 20, 2000.
Set forth in the table below is information about the officers of each of
the Funds.
<TABLE>
<CAPTION>
Officer Since
-----------------------------------------------
Debt Debt Debt
Name and Biography Age Office Strategies Strategies II Strategiees III
- ---------------------------------------------------------------- ----- -------- ------------ --------------- -----------------
<S> <C> <C> <C> <C> <C>
Terry K. Glenn................................................. 59 President 1997* 1997* 1998*
Executive Vice President of MLAM and FAM since 1983;
Executive Vice President and Director of Princeton
Services Inc. ("Princeton Services") since 1993; President
of Princeton Funds Distributor, Inc. ("PFD") since 1986 and
Director thereof since 1991; President of Princeton
Administrators, L.P. since 1988.
Joseph T. Monagle, Jr.......................................... 51 Senior 1997 1997 1998
Senior Vice President of FAM and MLAM since 1990; Vice
Department Head of the Global Fixed Income Division of President
FAM and MLAM since 1977; Senior Vice President of
Princeton Services since 1993.
Donald C. Burke................................................ 39 Vice 1997 1997 1998
Senior Vice President and Treasurer of MLAM and FAM since President 1999 1999 1999
1999; Senior Vice President and Treasurer of Princeton Treasurer
Services since 1999; Vice President of PFD since 1999;
First Vice President of MLAM from 1997 to 1999; Vice
President of MLAM from 1990 to 1997; Director of Taxation
of MLAM since 1990.
Richard C. Killbride........................................... 44 Vice 1999 1999 1999
First Vice President of MLAM since 1999; Managing Director President
of Merrill Lynch Mercury Asset Management and Hotchkis and
Wiley from 1997 to 1999; Managing Director of Global Fixed
Income at Merrill Lynch Global Asset Management, Ltd. from
1995 to 1997; Vice President of MLAM from 1990 to 1995.
Gilles Marchand................................................ 36 Vice 1999 1999 1999
Vice President of MLAM since 1997; Credit Analyst at MLAM President
from 1996 to 1997; Security Analyst at Massachusetts
Mutual Insurance Company from 1990 to 1996.
Bradley J. Lucido.............................................. 34 Secretary 1999 1999 1999
Vice President of MLAM since 1999; Attorney associated
with MLAM since 1995; Attorney in private practice from
1991 to 1995.
</TABLE>
______________________
* Mr. Glenn was elected President of each Fund in 1999. Prior to that he
served as Executive Vice President of each Fund.
Exhibit II
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made as of the
____ day of ___________, 2000 by and among Debt Strategies Fund, Inc. ("Debt
Strategies"), Debt Strategies Fund II, Inc. ("Debt Strategies II") and Debt
Strategies Fund III, Inc. ("Debt Strategies III"), each a Maryland
corporation.
PLAN OF MERGER
--------------
The merger will comprise the following: (i) each of Debt Strategies and
Debt Strategies III will be merged with and into Debt Strategies II in
accordance with the General Corporation Law of the State of Maryland
("Maryland Law"); (ii) the separate existence of each of Debt Strategies and
Debt Strategies III will cease; (iii) Debt Strategies II will be the surviving
corporation; (iv) Debt Strategies II will change its name to Debt Strategies
Fund, Inc. immediately after the Effective Date (as defined below); and (v)
each share of common stock ("Common Stock") of each of Debt Strategies and
Debt Strategies III, including shares of Common Stock of Debt Strategies and
Debt Strategies III representing the Dividend Reinvestment Plan ("DRIP")
shares held in the book deposit accounts of the holders of Common Stock of
Debt Strategies and Debt Strategies III, will be converted into the right to
receive an equivalent dollar amount (to the nearest one ten-thousandth of one
cent) of full shares of Common Stock of Debt Strategies II, with a par value
of $.10 per share ("Debt Strategies II Common Stock"), plus cash in lieu of
any fractional shares, computed based on the net asset value per share of each
Fund on the Effective Date (as defined below), all upon and subject to the
terms hereinafter set forth (the "Merger"). The currently issued and
outstanding shares of Debt Strategies II will remain issued and outstanding.
As soon as practicable after satisfaction of all conditions to the
Merger, Debt Strategies, Debt Strategies II and Debt Strategies III will
jointly file executed articles of merger (the "Articles of Merger") with the
Department of Assessments and Taxation of the State of Maryland ("SDAT") and
make all other filings or recordings required by Maryland Law in connection
with the Merger. The Merger shall become effective at such time as the
Articles of Merger are accepted for filing by SDAT or at such later time as is
specified in the Articles of Merger (the "Effective Date").
From and after the Effective Date, Debt Strategies II will possess all of
the rights, privileges, purposes, powers and franchises and be subject to all
of the restrictions, liabilities, obligations, disabilities and duties of Debt
Strategies, Debt Strategies II and Debt Strategies III, all as provided under
Maryland Law.
The parties intend that the Merger qualify as a reorganization under
Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended
("Code").
As promptly as practicable after the Merger, the registration of each of
Debt Strategies and Debt Strategies III, under the Investment Company Act of
1940, as amended (the "1940 Act") will terminate.
AGREEMENT
In order to consummate the Merger and in consideration of the premises
and the covenants and agreements hereinafter set forth, and intending to be
legally bound, Debt Strategies, Debt Strategies II and Debt Strategies III
hereby agree as follows:
1. Representations and Warranties of Debt Strategies II.
-----------------------------------------------------
Debt Strategies II represents and warrants to, and agrees with, Debt
Strategies and Debt Strategies III that:
(a) Debt Strategies II is a corporation duly organized, validly
existing and in good standing in conformity with Maryland Law, and has the
power to own all of its assets and to carry out this Agreement. Debt
Strategies II has all necessary Federal, state and local authorizations to
carry on its business as it is now being conducted and to carry out this
Agreement.
(b) Debt Strategies II is duly registered under the 1940 Act as a
diversified, closed-end management investment company (File No. 811-08603),
and such registration has not been revoked or rescinded and is in full force
and effect. Debt Strategies II has elected and qualified for the special tax
treatment afforded regulated investment companies ("RICs") under Sections
851-855 of the Code at all times since its inception, and intends to continue
to so qualify both until consummation of the Merger and thereafter.
(c) Each of Debt Strategies and Debt Strategies III has been
furnished with Debt Strategies II's Annual Report to Stockholders for the year
ended February 29, 2000, and the audited financial statements appearing
therein fairly present the financial position of Debt Strategies II as of the
respective dates indicated, in conformity with generally accepted accounting
principles applied on a consistent basis.
(d) Debt Strategies II has full power and authority to enter into
and perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary action
of its Board of Directors, and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions with
respect thereto.
(e) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Debt Strategies II, threatened against Debt
Strategies II which assert liability on the part of Debt Strategies II or
which materially affect its financial condition or its ability to consummate
the Merger. Debt Strategies II is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or regulation
or administrative ruling relating to any aspect of its business.
(f) Debt Strategies II is not a party to or obligated under any
provision of its Articles of Incorporation, as amended, or its by-laws, as
amended, or any contract or other commitment or obligation (other than the
revolving credit facility with The Bank of New York, as Administrative Agent
for the lenders party thereto, in effect on the Effective Date), and is not
subject to any order or decree which would be violated by its execution of or
performance under this Agreement, except insofar as Debt Strategies, Debt
Strategies II and Debt Strategies III have mutually agreed to amend such
contract or other commitment or obligation to cure any potential violation as
a condition precedent to the Merger.
(g) There are no material contracts outstanding to which Debt
Strategies II is a party that have not been disclosed in the N-14 Registration
Statement (as defined in subsection (k) below) or will not otherwise be
disclosed to each of Debt Strategies and Debt Strategies III prior to the
Effective Date.
(h) Debt Strategies II has no known liabilities of a material
amount, contingent or otherwise, other than those shown on Debt Strategies
II's statements of assets, liabilities and capital referred to above, those
incurred in the ordinary course of its business as an investment company since
February 29, 2000 and those incurred in connection with the Merger. Prior to
the Effective Date, Debt Strategies II will advise each of Debt Strategies and
Debt Strategies III in writing of all known liabilities, contingent or
otherwise, whether or not incurred in the ordinary course of business,
existing or accrued.
(i) Debt Strategies II has filed, or has obtained extensions to
file, all Federal, state and local tax returns which are required to be filed
by it, and has paid or has obtained extensions to pay, all Federal, state and
local taxes shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which the Effective
Date occurs. All tax liabilities of Debt Strategies II have been adequately
provided for on its books, and no tax deficiency or liability of Debt
Strategies II has been asserted and no question with respect thereto has been
raised by the Internal Revenue Service ("IRS") or by any state or local tax
authority for taxes in excess of those already paid, up to and including the
taxable year in which the Effective Date occurs.
(j) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Debt Strategies II
of the Merger, except such as may be required under the Securities Act of
1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and the 1940 Act or state securities laws (which
term as used herein shall include the laws of the District of Columbia and
Puerto Rico) and the laws of the State of Maryland.
(k) The registration statement filed by Debt Strategies II on Form
N-14 relating to the Debt Strategies II Common Stock to be issued pursuant to
this Agreement, and any supplement or amendment thereto or to the documents
therein (as amended, the "N-14 Registration Statement"), on the effective date
of the N-14 Registration Statement, at the time of the stockholders' meetings
referred to in Section 7(a) of this Agreement and at the Effective Date,
insofar as it relates to Debt Strategies II (i) complied or will comply in all
material respects with the provisions of the 1933 Act, the 1934 Act and the
1940 Act and the rules and regulations thereunder and (ii) did not or will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading; and the prospectus included therein did not or will not
contain any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the representations and warranties in this subsection only shall apply to
statements in or omissions from the N-14 Registration Statement made in
reliance upon and in conformity with information furnished by Debt Strategies
II for use in the N-14 Registration Statement as provided in Section 7(e) of
this Agreement.
(l) Debt Strategies II is authorized to issue 200,000,000 shares of
capital stock, par value $.10 per share, all of which shares are initially
classified as Common Stock and each outstanding share of which is fully paid,
nonassessable and has full voting rights.
(m) All of the issued and outstanding shares of Common Stock of Debt
Strategies II were offered for sale and sold in conformity with all applicable
Federal and state securities laws.
(n) The Debt Strategies II Common Stock to be issued pursuant to
this Agreement will have been duly authorized and, when issued and delivered
pursuant to this Agreement, will be legally and validly issued and will be
fully paid and nonassessable and will have full voting rights, and no
stockholder of Debt Strategies II will have any preemptive right of
subscription or purchase in respect thereof.
(o) At or prior to the Effective Date, the Debt Strategies II Common
Stock to be issued pursuant to this Agreement will be duly qualified for
offering to the public in all states of the United States in which the sale of
shares of Common Stock of Debt Strategies and Debt Strategies III presently
are qualified, and there are a sufficient number of shares of Debt Strategies
II Common stock registered under the 1933 Act and with each pertinent state
securities commission to permit the issuance contemplated by this Agreement.
(p) At or prior to the Effective Date, Debt Strategies II will have
obtained any and all regulatory, Director and stockholder approvals necessary
to issue the Debt Strategies II Common Stock.
(q) The books and records of Debt Strategies II made available to
each of Debt Strategies and Debt Strategies III and/or its counsel are
substantially true and correct and contain no material misstatements or
omissions with respect to the operations of Debt Strategies II.
2. Representations and Warranties of Debt Strategies.
--------------------------------------------------
Debt Strategies represents and warrants to, and agrees with, Debt
Strategies II and Debt Strategies III that:
(a) Debt Strategies is a corporation duly organized, validly
existing and in good standing in conformity with Maryland Law, and has the
power to own all of its assets and to carry out this Agreement. Debt
Strategies has all necessary Federal, state and local authorizations to carry
on its business as it is now being conducted and to carry out this Agreement.
(b) Debt Strategies is duly registered under the 1940 Act as a
diversified, closed-end management investment company (File No. 811-08171),
and such registration has not been revoked or rescinded and is in full force
and effect. Debt Strategies has elected and qualified for the special tax
treatment afforded RICs under Sections 851-855 of the Code at all times since
its inception and intends to continue to so qualify for its taxable year
ending upon its liquidation pursuant to the Merger.
(c) Debt Strategies has full power and authority to enter into and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary action
of its Board of Directors, and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions with
respect thereto.
(d) Each of Debt Strategies II and Debt Strategies III has been
furnished with Debt Strategies' Annual Report to Stockholders for the year
ended February 29, 2000, and the audited financial statements appearing
therein fairly present the financial position of Debt Strategies as of the
respective dates indicated, in conformity with generally accepted accounting
principles applied on a consistent basis.
(e) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Debt Strategies, threatened against Debt
Strategies which assert liability on the part of Debt Strategies or which
materially affect its financial condition or its ability to consummate the
Merger. Debt Strategies is not charged with or, to the best of its knowledge,
threatened with any violation or investigation of any possible violation of
any provisions of any Federal, state or local law or regulation or
administrative ruling relating to any aspect of its business.
(f) There are no material contracts outstanding to which Debt
Strategies is a party that have not been disclosed in the N-14 Registration
Statement or will not otherwise be disclosed to each of Debt Strategies II and
Debt Strategies III prior to the Effective Date.
(g) Debt Strategies is not a party to or obligated under any
provision of its Articles of Incorporation, as amended, or its by-laws, as
amended, or any contract or other commitment or obligation (other than the
revolving credit facility with The Bank of New York, as Administrative Agent
for the lenders party thereto, in effect on the Effective Date), and is not
subject to any order or decree which would be violated by its execution of or
performance under this Agreement, except insofar as Debt Strategies, Debt
Strategies II and Debt Strategies III have mutually agreed to amend such
contract or other commitment or obligation to cure any potential violation as
a condition precedent to the Merger.
(h) Debt Strategies has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its statements of assets,
liabilities and capital referred to above, those incurred in the ordinary
course of its business as an investment company since February 29, 2000, and
those incurred in connection with the Merger. Prior to the Effective Date,
Debt Strategies will advise each of Debt Strategies II and Debt Strategies III
in writing of all known liabilities, contingent or otherwise, whether or not
incurred in the ordinary course of business, existing or accrued.
(i) Debt Strategies has filed, or has obtained extensions to file,
all Federal, state and local tax returns which are required to be filed by it,
and has paid or has obtained extensions to pay, all Federal, state and local
taxes shown on said returns to be due and owing and all assessments received
by it, up to and including the taxable year in which the Effective Date
occurs. All tax liabilities of Debt Strategies have adequately been provided
for on its books, and no tax deficiency or liability of Debt Strategies has
been asserted and no question with respect thereto has been raised by the IRS
or by any state or local tax authority for taxes in excess of those already
paid, up to and including the taxable year in which the Effective Date occurs.
(j) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Debt Strategies of
the Merger, except such as may be required under the 1933 Act, the 1934 Act,
and the 1940 Act or state securities laws (which term as used herein shall
include the laws of the District of Columbia and Puerto Rico) and the laws of
the State of Maryland.
(k) The N-14 Registration Statement, on its effective date, at the
time of the stockholders' meetings referred to in Section 7(a) of this
Agreement and on the Effective Date, insofar as it relates to Debt Strategies
(i) complied or will comply in all material respects with the provisions of
the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder, and (ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading; and the prospectus
included therein did not or will not contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the representations and
warranties in this subsection shall apply only to statements in or omissions
from the N-14 Registration Statement made in reliance upon and in conformity
with information furnished by Debt Strategies for use in the N-14 Registration
Statement as provided in Section 7(e) of this Agreement.
(l) Debt Strategies is authorized to issue 200,000,000 shares of
capital stock, par value $.10 per share, all of which shares are initially
classified as Common Stock and each outstanding share of which is fully paid,
nonassessable and has full voting rights.
(m) All of the issued and outstanding shares of Common Stock of Debt
Strategies were offered for sale and sold in conformity with all applicable
Federal and state securities laws.
(n) The books and records of Debt Strategies made available to each
of Debt Strategies II and Debt Strategies III and/or its counsel are
substantially true and correct and contain no material misstatements or
omissions with respect to the operations of Debt Strategies.
3. Representations and Warranties of Debt Strategies III.
------------------------------------------------------
Debt Strategies III represents and warrants to, and agrees with, Debt
Strategies II and Debt Strategies that:
(a) Debt Strategies III is a corporation duly organized, validly
existing and in good standing in conformity with Maryland Law, and has the
power to own all of its assets and to carry out this Agreement. Debt
Strategies III has all necessary Federal, state and local authorizations to
carry on its business as it is now being conducted and to carry out this
Agreement.
(b) Debt Strategies III is duly registered under the 1940 Act as a
diversified, closed-end management investment company (File No. 811-08823),
and such registration has not been revoked or rescinded and is in full force
and effect. Debt Strategies III has elected and qualified for the special tax
treatment afforded RICs under Sections 851-855 of the Code at all times since
its inception and intends to continue to so qualify for its taxable year
ending upon its liquidation pursuant to the Merger.
(c) Debt Strategies III has full power and authority to enter into
and perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary action
of its Board of Directors, and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions with
respect thereto.
(d) Each of Debt Strategies II and Debt Strategies has been
furnished with Debt Strategies III's Annual Report to Stockholders for the
year ended February 29, 2000, and the audited financial statements appearing
therein fairly present the financial position of Debt Strategies III as of the
respective dates indicated, in conformity with generally accepted accounting
principles applied on a consistent basis.
(e) There are no material legal, administrative or other proceedings
pending or, to the knowledge of Debt Strategies III, threatened against Debt
Strategies III which assert liability on the part of Debt Strategies III or
which materially affect its financial condition or its ability to consummate
the Merger. Debt Strategies III is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of any possible
violation of any provisions of any Federal, state or local law or regulation
or administrative ruling relating to any aspect of its business.
(f) There are no material contracts outstanding to which Debt
Strategies III is a party that have not been disclosed in the N-14
Registration Statement or will not otherwise be disclosed to each of Debt
Strategies II and Debt Strategies prior to the Effective Date.
(g) Debt Strategies III is not a party to or obligated under any
provision of its Articles of Incorporation, as amended, or its by-laws, as
amended, or any contract or other commitment or obligation (other than the
revolving credit facility with Fleet National Bank, as Administrative Agent
for the lenders party thereto, in effect on the Effective Date), and is not
subject to any order or decree which would be violated by its execution of or
performance under this Agreement, except insofar as Debt Strategies, Debt
Strategies II and Debt Strategies III have mutually agreed to amend such
contract or other commitment or obligation to cure any potential violation as
a condition precedent to the Merger.
(h) Debt Strategies III has no known liabilities of a material
amount, contingent or otherwise, other than those shown on its statements of
assets, liabilities and capital referred to above, those incurred in the
ordinary course of its business as an investment company since February 29,
2000, and those incurred in connection with the Merger. Prior to the Effective
Date, Debt Strategies III will advise each of Debt Strategies II and Debt
Strategies in writing of all known liabilities, contingent or otherwise,
whether or not incurred in the ordinary course of business, existing or
accrued.
(i) Debt Strategies III has filed, or has obtained extensions to
file, all Federal, state and local tax returns which are required to be filed
by it, and has paid or has obtained extensions to pay, all Federal, state and
local taxes shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which the Effective
Date occurs. All tax liabilities of Debt Strategies III have adequately been
provided for on its books, and no tax deficiency or liability of Debt
Strategies III has been asserted and no question with respect thereto has been
raised by the IRS or by any state or local tax authority for taxes in excess
of those already paid, up to and including the taxable year in which the
Effective Date occurs.
(j) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Debt Strategies III
of the Merger, except such as may be required under the 1933 Act, the 1934
Act, and the 1940 Act or state securities laws (which term as used herein
shall include the laws of the District of Columbia and Puerto Rico) and the
laws of the State of Maryland.
(k) The N-14 Registration Statement, on its effective date, at the
time of the stockholders' meetings referred to in Section 7(a) of this
Agreement and on the Effective Date, insofar as it relates to Debt Strategies
III (i) complied or will comply in all material respects with the provisions
of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder, and (ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading; and the prospectus
included therein did not or will not contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the representations and
warranties in this subsection shall apply only to statements in or omissions
from the N-14 Registration Statement made in reliance upon and in conformity
with information furnished by Debt Strategies III for use in the N-14
Registration Statement as provided in Section 7(e) of this Agreement.
(l) Debt Strategies III is authorized to issue 200,000,000 shares of
capital stock, par value $.10 per share, all of which shares are initially
classified as Common Stock and each outstanding share of which is fully paid,
nonassessable and has full voting rights.
(m) All of the issued and outstanding shares of Common Stock of Debt
Strategies III were offered for sale and sold in conformity with all
applicable Federal and state securities laws.
(n) The books and records of Debt Strategies III made available to
each of Debt Strategies II and Debt Strategies and/or its counsel are
substantially true and correct and contain no material misstatements or
omissions with respect to the operations of Debt Strategies III.
4. The Merger.
-----------
(a) Subject to the requisite approvals of the stockholders of each
of Debt Strategies, Debt Strategies II and Debt Strategies III being given,
and to the other terms and conditions contained herein, Debt Strategies, Debt
Strategies II and Debt Strategies III agree that (i) each of Debt Strategies
and Debt Strategies III will be merged with and into Debt Strategies II, (ii)
the separate existence of each of Debt Strategies and Debt Strategies III will
cease, (iii) Debt Strategies II will be the surviving corporation, (iv) Debt
Strategies II will change its name to Debt Strategies Fund, Inc. immediately
after the Effective Date and (v) each share of Common Stock of each of Debt
Strategies and Debt Strategies III outstanding at the Effective Date will be
converted into the right to receive an equivalent dollar amount (to the
nearest one ten-thousandth of one cent) of full shares of Debt Strategies II
Common Stock, plus cash in lieu of fractional shares, computed based on the
net asset value per share of each Fund at the Effective Date and (v) the
shares of Debt Strategies II outstanding as of the Effective Date will remain
issued and outstanding.
(b) As soon as practicable after satisfaction of all conditions to
the Merger, Debt Strategies, Debt Strategies II and Debt Strategies III will
jointly file the Articles of Merger with SDAT and make all other filings or
recordings required by Maryland Law in connection with the Merger.
(c) From and after the Effective Date, Debt Strategies II will
possess all of the rights, privileges, purposes, powers and franchises and be
subject to all of the restrictions, liabilities, obligations, disabilities and
duties of Debt Strategies, Debt Strategies II and Debt Strategies III, all as
provided under Maryland Law.
5. Conversion to Debt Strategies II Common Stock.
----------------------------------------------
At the Effective Date, each share of Common Stock of each of Debt
Strategies and Debt Strategies III will be converted into the right to receive
an equivalent dollar amount (to the nearest one ten-thousandth of one cent) of
full shares of Debt Strategies II Common Stock, plus cash in lieu of
fractional shares, computed based on the net asset value per share of each
Fund at the Effective Date. The net asset value per share of Debt Strategies,
Debt Strategies II and Debt Strategies III shall be determined as of the
Effective Date, and no formula will be used to adjust the net asset value so
determined of either Debt Strategies, Debt Strategies II or Debt Strategies
III to take into account differences in realized and unrealized gains and
losses. The value of the assets of Debt Strategies and Debt Strategies III to
be transferred to Debt Strategies II shall be determined by Debt Strategies II
pursuant to the procedures utilized by Debt Strategies II in valuing its own
assets and determining its own liabilities for purposes of the Merger. Such
valuation and determination shall be made by Debt Strategies II in cooperation
with Debt Strategies and Debt Strategies III and shall be confirmed in writing
by Debt Strategies II to Debt Strategies and Debt Strategies III. The net
asset value per share of Debt Strategies II Common Stock shall be determined
in accordance with such procedures, and Debt Strategies II shall certify the
computations involved. Debt Strategies II shall issue to the stockholders of
Debt Strategies and Debt Strategies III separate certificates or share deposit
receipts for the Debt Strategies II Common Stock by delivering the
certificates or share deposit receipts evidencing ownership of the Debt
Strategies II Common Stock to The Bank of New York, as the transfer agent and
registrar for Debt Strategies II Common Stock. With respect to any Debt
Strategies or Debt Strategies III stockholder holding certificates evidencing
ownership of either the Common Stock of Debt Strategies or Debt Strategies III
as of the Effective Date, and subject to Debt Strategies II being informed
thereof in writing by Debt Strategies or Debt Strategies III, Debt Strategies
II will not permit such stockholder to receive new certificates evidencing
ownership of Debt Strategies II Common Stock, exchange Debt Strategies II
Common Stock credited to such stockholder's account for shares of other
investment companies managed by Merrill Lynch Asset Management, L.P. or any of
its affiliates, or pledge or redeem such Debt Strategies II Common Stock, in
any case, until such stockholder has surrendered his or her outstanding
certificates evidencing ownership of the Common Stock of Debt Strategies or
Debt Strategies III or, in the event of lost certificates, posted adequate
bond. Each of Debt Strategies and Debt Strategies III, at its own expense,
will request its stockholders to surrender their outstanding certificates
evidencing ownership of the Common Stock of Debt Strategies and Debt
Strategies III or post adequate bond therefor. Dividends payable to holders of
record of shares of Debt Strategies II Common Stock as of any date after the
Effective Date and prior to the exchange of certificates by any stockholder of
Debt Strategies and Debt Strategies III shall be paid to such stockholder,
without interest; however, such dividends shall not be paid unless and until
such stockholder surrenders his or her stock certificates of Debt Strategies
and Debt Strategies III for exchange.
No fractional shares of Debt Strategies II Common Stock will be
issued to Debt Strategies or Debt Strategies III stockholders. In lieu
thereof, Debt Strategies II's transfer agent, The Bank of New York, will
aggregate all fractional shares of Debt Strategies II and sell the resulting
full shares on the New York Stock Exchange at the current market price for
shares of Debt Strategies II for the account of all holders of fractional
interests, and each such holder will receive such holder's pro rata share of
the proceeds of such sale upon surrender of such holder's Debt Strategies II
Common Stock certificates.
6. Payment of Expenses.
--------------------
(a) With respect to expenses incurred in connection with the
Merger (i) each Fund shall pay all expenses incurred that are attributable
solely to such Fund and the conduct of its business, and (ii) Debt Strategies
II shall pay, subsequent to the Exchange Date and pro rata according to each
Fund's net assets at the Valuation Time, all expenses incurred in connection
with the Merger, including, but not limited to, all costs related to the
preparation and distribution of the N-14 Registration Statement. Such fees and
expenses shall include legal and accounting fees, printing costs, filing fees,
stock exchange fees, portfolio transfer taxes (if any) and any similar
expenses incurred in connection with the Merger.
(b) If for any reason the Merger is not consummated, no party shall
be liable to any other party for any damages resulting therefrom, including,
without limitation, consequential damages.
7. Covenants of Debt Strategies, Debt Strategies II and Debt
Strategies III.
----------------------------------------------------------
(a) Debt Strategies, Debt Strategies II and Debt Strategies III each
agrees to call an annual meeting of its respective stockholders as soon as is
practicable after the effective date of the N-14 Registration Statement for
the purpose of considering the Merger as described in this Agreement.
(b) Debt Strategies, Debt Strategies II and Debt Strategies III each
covenants to operate its respective business as presently conducted between
the date hereof and the Effective Date.
(c) Each of Debt Strategies, Debt Strategies II and Debt Strategies
III agrees that, as soon as practicable after satisfaction of all conditions
to the Merger, they will jointly file executed Articles of Merger with SDAT
and make all other filings or recordings required by Maryland Law in
connection with the Merger.
(d) Debt Strategies II undertakes that if the Merger is consummated,
it will file, or cause its agents to file, an application pursuant to Section
8(f) of the 1940 Act for an order declaring that each of Debt Strategies and
Debt Strategies III, respectively, has ceased to be a registered investment
company.
(e) Debt Strategies II will file the N-14 Registration Statement
with the Securities and Exchange Commission (the "Commission") and will use
its best efforts to provide that the N-14 Registration Statement becomes
effective as promptly as practicable. Each of Debt Strategies and Debt
Strategies III, respectively, agrees to cooperate fully with Debt Strategies
II, and each will furnish to Debt Strategies II the information relating to
itself to be set forth in the N-14 Registration Statement as required by the
1933 Act, the 1934 Act, the 1940 Act, and the rules and regulations thereunder
and the state securities laws.
(f) Debt Strategies, Debt Strategies II and Debt Strategies III each
agrees to proceed as promptly as possible to cause to be made the necessary
filings, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (the "HSR Act") with respect to the transactions contemplated by this
Agreement and to ensure that the related waiting period expires or is
otherwise terminated at the earliest possible time.
(g) Debt Strategies II agrees that it has no plan or intention to
sell or otherwise dispose of the assets of Debt Strategies and Debt Strategies
III to be acquired in the Merger, except for dispositions made in the ordinary
course of business.
(h) Debt Strategies, Debt Strategies II and Debt Strategies III each
agrees that by the Effective Date all of its Federal and other tax returns and
reports required to be filed on or before such date shall have been filed and
all taxes shown as due on said returns either have been paid or adequate
liability reserves have been provided for the payment of such taxes. In
connection with this covenant, Debt Strategies, Debt Strategies II and Debt
Strategies III agree to cooperate with each other in filing any tax return,
amended return or claim for refund, determining a liability for taxes or a
right to a refund of taxes or participating in or conducting any audit or
other proceeding in respect of taxes. Debt Strategies II agrees to retain for
a period of ten (10) years following the Effective Date all returns, schedules
and work papers and all material records or other documents relating to tax
matters of Debt Strategies and Debt Strategies III for each of Debt Strategies
and Debt Strategies III's taxable periods first ending after the Effective
Date and for all prior taxable periods. Any information obtained under this
subsection shall be kept confidential except as otherwise may be necessary in
connection with the filing of returns or claims for refund or in conducting an
audit or other proceeding. After the Effective Date, Debt Strategies II shall
prepare, or cause its agents to prepare, any Federal, state or local tax
returns, including any Forms 1099, required to be filed by Debt Strategies or
Debt Strategies III with respect to their final taxable years ending with each
of Debt Strategies and Debt Strategies III's complete liquidation and for any
prior periods or taxable years and further shall cause such tax returns and
Forms 1099 to be duly filed with the appropriate taxing authorities.
Notwithstanding the aforementioned provisions of this subsection, any expenses
incurred by Debt Strategies II (other than for payment of taxes) in connection
with the preparation and filing of said tax returns and Forms 1099 after the
Effective Date shall be borne by Debt Strategies II.
(i) Debt Strategies, Debt Strategies II and Debt Strategies III each
agrees to mail to each of its respective stockholders of record entitled to
vote at the annual meeting of stockholders at which action is to be considered
regarding this Agreement, in sufficient time to comply with requirements as to
notice thereof, a combined Proxy Statement and Prospectus which complies in
all material respects with the applicable provisions of Section 14(a) of the
1934 Act and Section 20(a) of the 1940 Act, and the rules and regulations,
respectively, thereunder.
(j) Debt Strategies II agrees that at the Effective Date it will
have entered into an agreement with one or more financial institutions or
other lenders, in form and substance acceptable to Debt Strategies II in its
sole discretion, providing for a revolving credit facility for Debt Strategies
II in a principal amount approximately equal to the aggregate commitment
amount of the credit facilities then outstanding for Debt Strategies, Debt
Strategies II and Debt Strategies III (the "Outstanding Credit Facilities") at
terms no less advantageous to Debt Strategies, Debt Strategies II and Debt
Strategies III, taking into account current market conditions at the Effective
Date, than the terms at which the Outstanding Credit Facilities can be renewed
or refinanced individually at the Effective Date.
(k) Following the consummation of the Merger, Debt Strategies II
expects to stay in existence and continue its business as a closed-end
management investment company registered under the 1940 Act.
8. Effective Date.
---------------
(a) The Merger shall become effective at such time as the Articles
of Merger are accepted for filing by SDAT or at such later time as is
specified in the Articles of Merger.
(b) Prior to the Effective Date, each of Debt Strategies and Debt
Strategies III shall have made arrangements with its transfer agent to deliver
to Debt Strategies II, as soon as practicable after the Effective Date, a list
of the names and addresses of all of the stockholders of record of Debt
Strategies and Debt Strategies III on the Effective Date and the number of
shares of Common Stock of Debt Strategies and Debt Strategies III owned by
each such stockholder, certified by its transfer agent or by the Fund's
President to the best of their knowledge and belief.
9. Debt Strategies II Conditions.
------------------------------
The obligations of Debt Strategies II hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the Merger
shall have been approved, by the affirmative vote of the holders of more than
fifty percent of the Common Stock of Debt Strategies II issued and outstanding
and entitled to vote thereon; and that each of Debt Strategies and Debt
Strategies III, respectively, shall have delivered to Debt Strategies II a copy
of the resolution approving this Agreement adopted by such Fund's Board of
Directors and stockholders, certified by its Secretary.
(b) That each of Debt Strategies and Debt Strategies III,
respectively, shall have furnished to Debt Strategies II a statement of assets,
liabilities and capital, together with a schedule of investments with their
respective dates of acquisition and tax costs, certified on its behalf by its
respective President (or any Vice President) and its respective Treasurer, and
a certificate of both such officers, dated the Effective Date, certifying that
there has been no material adverse change in its respective financial position
since the date of such Fund's most recent Annual or Semi-Annual Report to
Stockholders, other than changes in its portfolio securities since that date
or changes in the market value of its portfolio securities.
(c) That each of Debt Strategies and Debt Strategies III,
respectively, shall have furnished to Debt Strategies II a certificate signed
by its respective President (or any Vice President) and its respective
Treasurer, dated the Effective Date, certifying that as of the Effective Date
all representations and warranties made in this Agreement are true and correct
in all material respects with the same effect as if made at and as of the
Effective Date and that such Fund has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied at or
prior to such date.
(d) That each of Debt Strategies and Debt Strategies III,
respectively, shall have delivered to Debt Strategies II a letter from Deloitte
& Touche LLP, dated the Effective Date, stating that such firm has performed a
limited review of the Federal, state and local income tax returns for the year
ended February 29, 2000 (which returns originally were prepared and filed by
each of Debt Strategies and Debt Strategies III, respectively), and that based
on such limited review, nothing came to their attention which caused them to
believe that such returns did not properly reflect, in all material respects,
the Federal, state and local income taxes of each of Debt Strategies and Debt
Strategies III, respectively, for the period covered thereby; and that for the
period from March 1, 2000 to and including the Effective Date and for any
taxable year ending upon its dissolution, such firm has performed a limited
review to ascertain the amount of applicable Federal, state and local taxes,
and has determined that either such amount has been paid or reserves
established for payment of such taxes, this review to be based on unaudited
financial data; and that based on such limited review, nothing has come to
their attention which caused them to believe that the taxes paid or reserves
set aside for payment of such taxes were not adequate in all material respects
for the satisfaction of Federal, state and local taxes for the period from
March 1, 2000 to and including the Effective Date and for any taxable year
ending upon its dissolution or that either of Debt Strategies or Debt
Strategies III would not continue to qualify as a regulated investment company
for Federal income tax purposes.
(e) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(f) That Debt Strategies II shall have received an opinion of Brown
& Wood LLP, as counsel to Debt Strategies, Debt Strategies II and Debt
Strategies III, in form and substance satisfactory to Debt Strategies II and
dated the Effective Date, to the effect that (i) each of Debt Strategies, Debt
Strategies II and Debt Strategies III, respectively, is a corporation duly
organized, validly existing and in good standing in conformity with Maryland
Law; (ii) the Debt Strategies II Common Stock to be issued pursuant to this
Agreement is duly authorized and, upon delivery, will be validly issued and
outstanding and fully paid and nonassessable by Debt Strategies II, and no
stockholder of Debt Strategies II has any preemptive right to subscription or
purchase in respect thereof (pursuant to the Articles of Incorporation, as
amended, or the by-laws of Debt Strategies II or, to the best of such
counsel's knowledge, otherwise); (iii) this Agreement has been duly
authorized, executed and delivered by each of Debt Strategies, Debt Strategies
II and Debt Strategies III, respectively, and represents a valid and binding
contract, enforceable in accordance with its terms, except as enforceability
may be limited by bankruptcy, insolvency, reorganization or other similar laws
pertaining to the enforcement of creditors' rights generally and by equitable
principles; (iv) to the best of such counsel's knowledge, no consent,
approval, authorization or order of any United States federal or Maryland
state court or governmental authority is required for the consummation by Debt
Strategies, Debt Strategies II and Debt Strategies III of the Merger, except
such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act
and the published rules and regulations of the Commission thereunder and under
Maryland law and such as may be required under state securities or blue sky
laws; (v) the N-14 Registration Statement has become effective under the 1933
Act, no stop order suspending the effectiveness of the N-14 Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the 1933 Act, and the N-14
Registration Statement, and each amendment or supplement thereto, as of their
respective effective dates, appear on their face to be appropriately
responsive in all material respects to the requirements of the 1933 Act, the
1934 Act and the 1940 Act and the published rules and regulations of the
Commission thereunder; (vi) the descriptions in the N-14 Registration
Statement of statutes, legal and governmental proceedings and contracts and
other documents are accurate and fairly present the information required to be
shown; (vii) such counsel does not know of any statutes, legal or governmental
proceedings or contracts or other documents related to the Merger of a
character required to be described in the N-14 Registration Statement which
are not described therein or, if required to be filed, filed as required;
(viii) the execution and delivery of this Agreement does not, and the
consummation of the Merger will not, violate any material provision of the
Articles of Incorporation, as amended, the by-laws, as amended, or any
agreement (known to such counsel) to which either Debt Strategies, Debt
Strategies II or Debt Strategies III is a party or by which either Debt
Strategies, Debt Strategies II or Debt Strategies III is bound, except insofar
as the parties have agreed to amend such provision as a condition precedent to
the Merger; (ix) neither Debt Strategies, Debt Strategies II nor Debt
Strategies III, to the knowledge of such counsel, is required to qualify to do
business as a foreign corporation in any jurisdiction except as may be
required by state securities or blue sky laws, and except where each has so
qualified or the failure so to qualify would not have a material adverse
effect on Debt Strategies, Debt Strategies II or Debt Strategies III, or their
respective stockholders; (x) to the best of such counsel's knowledge, no
material suit, action or legal or administrative proceeding is pending or
threatened against Debt Strategies, Debt Strategies II or Debt Strategies III;
and (xi) all corporate actions required to be taken by Debt Strategies, Debt
Strategies II and Debt Strategies III to authorize this Agreement and to
effect the Merger have been duly authorized by all necessary corporate actions
on the part of Debt Strategies, Debt Strategies II and Debt Strategies III.
Such opinion also shall state that (x) while such counsel cannot make any
representation as to the accuracy or completeness of statements of fact in the
N-14 Registration Statement or any amendment or supplement thereto, nothing
has come to their attention that would lead them to believe that, on the
respective effective dates of the N-14 Registration Statement and any
amendment or supplement thereto, (1) the N-14 Registration Statement or any
amendment or supplement thereto contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading; and (2) the
prospectus included in the N-14 Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; and (y) such counsel does not express any
opinion or belief as to the financial statements, other financial data,
statistical data or information relating to Debt Strategies, Debt Strategies
II or Debt Strategies III contained or incorporated by reference in the N-14
Registration Statement. In giving the opinion set forth above, Brown & Wood
LLP may state that it is relying on certificates of officers of Debt
Strategies, Debt Strategies II and Debt Strategies III with regard to matters
of fact and certain certificates and written statements of governmental
officials with respect to the good standing of Debt Strategies, Debt
Strategies II and Debt Strategies III.
(g) That Debt Strategies II shall have received an opinion from
Brown & Wood LLP, as counsel to Debt Strategies, Debt Strategies II and Debt
Strategies III, in form and substance satisfactory to Debt Strategies II and
dated the Effective Date, to the effect that for Federal tax purposes (i) the
Merger as provided in this Agreement will constitute a merger within the
meaning of Section 368(a)(1)(A) of the Code and Debt Strategies, Debt
Strategies II and Debt Strategies III will each be deemed a "party" to a
reorganization within the meaning of Section 368(b) of the Code; (ii) in
accordance with Section 361(a) of the Code, no gain or loss will be recognized
to either Debt Strategies or Debt Strategies III as a result of the Merger or
on the distribution of Debt Strategies II Common Stock to Debt Strategies and
Debt Strategies III stockholders under Section 361(c)(1) of the Code; (iii)
under Section 1032 of the Code, no gain or loss will be recognized to Debt
Strategies II as a result of the Merger; (iv) in accordance with Section
354(a)(1) of the Code, no gain or loss will be recognized to the stockholders
of Debt Strategies and Debt Strategies III on the conversion of their Debt
Strategies and Debt Strategies III shares into Debt Strategies II Common Stock
(except to the extent such stockholders are paid cash in lieu of fractional
shares of Debt Strategies II in the Merger); (v) in accordance with Section
362(b) of the Code, the tax basis of the Debt Strategies and Debt Strategies
III assets in the hands of Debt Strategies II will be the same as the tax
basis of such assets in the hands of Debt Strategies and Debt Strategies III
immediately prior to the consummation of the Merger; (vi) in accordance with
Section 358 of the Code, immediately after the Merger, the tax basis of the
Debt Strategies II Common Stock received by the stockholders of Debt
Strategies and Debt Strategies III in the Merger will be equal to the tax
basis of the shares of Debt Strategies and Debt Strategies III converted
pursuant to the Merger; (vii) in accordance with Section 1223 of the Code, a
stockholder's holding period for the Debt Strategies II Common Stock will be
determined by including the period for which he or she held the Common Stock
of Debt Strategies or Debt Strategies III converted pursuant to the Merger,
provided, that such Debt Strategies or Debt Strategies III shares were held as
a capital asset; (viii) in accordance with Section 1223 of the Code, Debt
Strategies II's holding period with respect to the Debt Strategies and Debt
Strategies III assets transferred will include the period for which such
assets were held by Debt Strategies and Debt Strategies III; (ix) the payment
of cash to Debt Strategies and Debt Strategies III stockholders in lieu of
fractional shares of Debt Strategies II will be treated as though the
fractional shares were distributed as part of the Merger and then redeemed by
Debt Strategies II, with the result that each Debt Strategies and Debt
Strategies III stockholder will generally have short- or long-term capital
gain or loss to the extent the cash distribution differs from such
stockholder's basis allocable to the Debt Strategies II fractional shares; and
(x) the taxable years of Debt Strategies and Debt Strategies III will end on
the effective date of the Merger, and pursuant to Section 381(a) of the Code
and regulations thereunder, Debt Strategies II will succeed to and take into
account certain tax attributes of Debt Strategies and Debt Strategies III,
such as earnings and profits, capital loss carryovers and method of
accounting.
(h) That Debt Strategies II shall have received from Deloitte &
Touche LLP a letter dated within three days prior to the effective date of the
N-14 Registration Statement and a similar letter dated within five days prior
to the Effective Date, in form and substance satisfactory to Debt Strategies
II, to the effect that (i) they are independent public accountants with respect
to each of Debt Strategies and Debt Strategies III within the meaning of the
1933 Act and the applicable published rules and regulations thereunder; (ii)
in their opinion, the financial statements and supplementary information of
each of Debt Strategies and Debt Strategies III included or incorporated by
reference in the N-14 Registration Statement and reported on by them comply as
to form in all material respects with the applicable accounting requirements
of the 1933 Act and the published rules and regulations thereunder; (iii) on
the basis of limited procedures agreed upon by Debt Strategies, Debt
Strategies II and Debt Strategies III and described in such letter (but not an
examination in accordance with generally accepted auditing standards)
consisting of a reading of any unaudited interim financial statements and
unaudited supplementary information of each of Debt Strategies and Debt
Strategies III included in the N-14 Registration Statement, and inquiries of
certain officials of each of Debt Strategies and Debt Strategies III
responsible for financial and accounting matters, nothing came to their
attention that caused them to believe that (a) such unaudited financial
statements and related unaudited supplementary information do not comply as to
form in all material respects with the applicable accounting requirements of
the 1933 Act and the published rules and regulations thereunder, (b) such
unaudited financial statements are not fairly presented in conformity with
generally accepted accounting principles, applied on a basis substantially
consistent with that of the audited financial statements, or (c) such
unaudited supplementary information is not fairly stated in all material
respects in relation to the unaudited financial statements taken as a whole;
and (iv) on the basis of limited procedures agreed upon by Debt Strategies,
Debt Strategies II and Debt Strategies III and described in such letter (but
not an examination in accordance with generally accepted auditing standards),
the information relating to each of Debt Strategies and Debt Strategies III
appearing in the N-14 Registration Statement, which information is expressed
in dollars (or percentages derived from such dollars) concerning each of Debt
Strategies and Debt Strategies III (with the exception of performance
comparisons, if any), has been obtained from the accounting records of each of
Debt Strategies and Debt Strategies III or from schedules prepared by
officials of each of Debt Strategies and Debt Strategies III having
responsibility for financial and reporting matters and such information is in
agreement with such records, schedules or computations made therefrom.
(i) That the assets or liabilities of each of Debt Strategies and
Debt Strategies III, respectively, to be transferred to Debt Strategies II
shall not include any assets or liabilities which Debt Strategies II, by
reason of charter limitations or otherwise, may not properly acquire or assume.
(j) That the N-14 Registration Statement shall have become effective
under the 1933 Act and no stop order suspending such effectiveness shall have
been instituted or, to the knowledge of either of Debt Strategies or Debt
Strategies III, contemplated by the Commission.
(k) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of the
Merger under Section 25(c) of the 1940 Act, no other legal, administrative or
other proceeding shall be instituted or threatened which would materially
affect the financial condition of either of Debt Strategies or Debt Strategies
III or would prohibit the Merger.
(l) That Debt Strategies II shall have received from the Commission
such orders or interpretations as Brown & Wood LLP, as counsel to Debt
Strategies II, deems reasonably necessary or desirable under the 1933 Act and
the 1940 Act in connection with the Merger, provided, that such counsel shall
have requested such orders as promptly as practicable, and all such orders
shall be in full force and effect.
(m) That all proceedings taken by either of Debt Strategies or Debt
Strategies III and its counsel in connection with the Merger and all documents
incidental thereto shall be satisfactory in form and substance to Debt
Strategies II.
(n) That prior to the Effective Date, each of Debt Strategies and
Debt Strategies III, respectively, shall have declared a dividend or dividends
which, together with all such previous dividends, shall have the effect of
distributing to its stockholders all of its net investment company taxable
income for the period to and including the Effective Date, if any (computed
without regard to any deduction or dividends paid), and all of its net capital
gain, if any, realized for the period to and including the Effective Date.
(o) That any applicable waiting period under the HSR Act relating to
the transactions contemplated hereby shall have expired or been terminated.
(p) That as of the Effective Date, Debt Strategies II will have
entered into an agreement with one or more financial institutions or other
lenders, in form and substance acceptable to Debt Strategies II in its sole
discretion, providing for a revolving credit facility for Debt Strategies II
in a principal amount approximately equal to the aggregate commitment amount
of the Outstanding Credit Facilities.
10. Debt Strategies Conditions.
---------------------------
The obligations of Debt Strategies hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the Merger
shall have been approved, by the affirmative vote of the holders of more than
fifty percent of the Common Stock of Debt Strategies issued and outstanding
and entitled to vote thereon; and that each of Debt Strategies II and Debt
Strategies III, respectively, shall have delivered to Debt Strategies a copy
of the resolution approving this Agreement adopted by such Fund's respective
Board of Directors and stockholders, certified by its Secretary.
(b) That each of Debt Strategies II and Debt Strategies III,
respectively, shall have furnished to Debt Strategies a statement of assets,
liabilities and capital, together with a schedule of its investments,
certified on its behalf by its respective President (or any Vice President)
and its respective Treasurer, and a certificate of both such officers, dated
as of the Effective Date, certifying that as of the Effective Date there has
been no material adverse change in its respective financial position since the
date of such Fund's most recent Annual or Semi-Annual Report to Stockholders,
other than changes in its portfolio securities since that date or changes in
the market value of its portfolio securities.
(c) That each of Debt Strategies II and Debt Strategies III,
respectively, shall have furnished to Debt Strategies a certificate signed by
its respective President (or any Vice President) and its respective Treasurer,
dated as of the Effective Date, certifying that all representations and
warranties of Debt Strategies II and Debt Strategies III, respectively, as
applicable, made in this Agreement are true and correct in all material
respects with the same effect as if made at and as of the Effective Date, and
that such Fund has complied with all of the agreements and satisfied all of
the conditions on its part to be performed or satisfied at or prior to such
date.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That Debt Strategies shall have received the opinion or opinions
of Brown & Wood LLP, as counsel to Debt Strategies, Debt Strategies II and
Debt Strategies III, in form and substance satisfactory to Debt Strategies and
dated the Effective Date, with respect to the matters specified in Sections
9(f) and (g) of this Agreement and such other matters as Debt Strategies
reasonably may deem necessary or desirable.
(f) That all proceedings taken by Debt Strategies II or Debt
Strategies III and its counsel in connection with the Merger and all documents
incidental thereto shall be satisfactory in form and substance to Debt
Strategies.
(g) That the N-14 Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such effectiveness shall have
been instituted or, to the knowledge of Debt Strategies II or Debt Strategies
III, contemplated by the Commission.
(h) That Debt Strategies shall have received from Deloitte & Touche
LLP a letter dated within three days prior to the effective date of the N-14
Registration Statement and a similar letter dated within five days prior to
the Effective Date, in form and substance satisfactory to Debt Strategies, to
the effect that (i) they are independent public accountants with respect to
each of Debt Strategies II and Debt Strategies III within the meaning of the
1933 Act and the applicable published rules and regulations thereunder; (ii)
in their opinion, the financial statements and supplementary information of
each of Debt Strategies II and Debt Strategies III included or incorporated by
reference in the N-14 Registration Statement and reported on by them comply as
to form in all material respects with the applicable accounting requirements
of the 1933 Act and the published rules and regulations thereunder; (iii) on
the basis of limited procedures agreed upon by Debt Strategies, Debt
Strategies II and Debt Strategies III described in such letter (but not an
examination in accordance with generally accepted auditing standards)
consisting of a reading of any unaudited interim financial statements and
unaudited supplementary information of each of Debt Strategies II and Debt
Strategies III included in the N-14 Registration Statement, and inquiries of
certain officials of Debt Strategies II and Debt Strategies III responsible
for financial and accounting matters, nothing came to their attention that
caused them to believe that (a) such unaudited financial statements and
related unaudited supplementary information do not comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act
and the published rules and regulations thereunder, (b) such unaudited
financial statements are not fairly presented in conformity with generally
accepted accounting principles, applied on a basis substantially consistent
with that of the audited financial statements, or (c) such unaudited
supplementary information is not fairly stated in all material respects in
relation to the unaudited financial statements taken as a whole; (iv) and on
the basis of limited procedures agreed upon by Debt Strategies, Debt
Strategies II and Debt Strategies III and described in such letter (but not an
examination in accordance with generally accepted auditing standards), the
information relating to each of Debt Strategies II and Debt Strategies III
appearing in the N-14 Registration Statement, which information is expressed
in dollars (or percentages derived from such dollars) concerning each of Debt
Strategies II and Debt Strategies III (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting records of
each of Debt Strategies II and Debt Strategies III or from schedules prepared
by officials of each of Debt Strategies II and Debt Strategies III having
responsibility for financial and reporting matters and such information is in
agreement with such records, schedules or computations made therefrom.
(i) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of the
Merger under Section 25(c) of the 1940 Act, no other legal, administrative or
other proceeding shall be instituted or threatened which would materially
affect the financial condition of either of Debt Strategies II or Debt
Strategies III or would prohibit the Merger.
(j) That Debt Strategies shall have received from the Commission
such orders or interpretations as Brown & Wood LLP, as counsel to Debt
Strategies, deems reasonably necessary or desirable under the 1933 Act and the
1940 Act in connection with the Merger, provided, that such counsel shall have
requested such orders as promptly as practicable, and all such orders shall be
in full force and effect.
(k) That any applicable waiting period under the HSR Act relating to
the transactions contemplated hereby shall have expired or been terminated.
(l) That as of the Effective Date, Debt Strategies II will have
entered into an agreement with a financial institution, in form and substance
acceptable to Debt Strategies II in its sole discretion, providing for a
revolving credit facility for Debt Strategies II in a principal amount
approximately equal to the aggregate commitment amount of the Outstanding
Credit Facilities.
11. Debt Strategies III Conditions.
-------------------------------
The obligations of Debt Strategies III hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the Merger
shall have been approved, by the affirmative vote of the holders of more than
fifty percent of the Common Stock of Debt Strategies III issued and
outstanding and entitled to vote thereon; and that each of Debt Strategies II
and Debt Strategies, respectively, shall have delivered to Debt Strategies III
a copy of the resolution approving this Agreement adopted by such Fund's Board
of Directors and stockholders, certified by its Secretary.
(b) That each of Debt Strategies II and Debt Strategies,
respectively, shall have furnished to Debt Strategies III a statement of
assets, liabilities and capital, together with a schedule of its investments,
certified on its behalf by its respective President (or any Vice President)
and its respective Treasurer, and a certificate of both such officers, dated
as of the Effective Date, certifying that as of the Effective Date there has
been no material adverse change in the financial position of Debt Strategies
II since the date of such Fund's most recent Annual or Semi-Annual Report to
Stockholders, other than changes in its portfolio securities since that date
or changes in the market value of its portfolio securities.
(c) That each of Debt Strategies II and Debt Strategies,
respectively, shall have furnished to Debt Strategies III a certificate signed
by its respective President (or any Vice President) and its respective
Treasurer, dated as of the Effective Date, certifying that all representations
and warranties of each of Debt Strategies II and Debt Strategies,
respectively, made in this Agreement are true and correct in all material
respects with the same effect as if made at and as of the Effective Date, and
that such Fund has complied with all of the agreements and satisfied all of
the conditions on its part to be performed or satisfied at or prior to such
date.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That Debt Strategies III shall have received the opinion or
opinions of Brown & Wood LLP, as counsel to Debt Strategies, Debt Strategies
II and Debt Strategies III, in form and substance satisfactory to Debt
Strategies III and dated the Effective Date, with respect to matters specified
in Sections 9(f) and 9(g) of this Agreement and such other matters as Debt
Strategies III reasonably may deem necessary or desirable.
(f) That all proceedings taken by both Debt Strategies II or Debt
Strategies and its counsel in connection with the Merger and all documents
incidental thereto shall be satisfactory in form and substance to Debt
Strategies III.
(g) That the N-14 Registration Statement shall have become effective
under the 1933 Act, and no stop order suspending such effectiveness shall have
been instituted or, to the knowledge of either Debt Strategies II or Debt
Strategies, contemplated by the Commission.
(h) That Debt Strategies III shall have received from Deloitte &
Touche LLP a letter dated within three days prior to the effective date of the
N-14 Registration Statement and a similar letter dated within five days prior
to the Effective Date, in form and substance satisfactory to Debt Strategies
III, to the effect that (i) they are independent public accountants with
respect to each of Debt Strategies II and Debt Strategies within the meaning
of the 1933 Act and the applicable published rules and regulations thereunder;
(ii) in their opinion, the financial statements and supplementary information
of each of Debt Strategies II and Debt Strategies included or incorporated by
reference in the N-14 Registration Statement and reported on by them comply as
to form in all material respects with the applicable accounting requirements
of the 1933 Act and the published rules and regulations thereunder; (iii) on
the basis of limited procedures agreed upon by Debt Strategies, Debt
Strategies II and Debt Strategies III and described in such letter (but not an
examination in accordance with generally accepted auditing standards)
consisting of a reading of any unaudited interim financial statements and
unaudited supplementary information of each of Debt Strategies II and Debt
Strategies included in the N-14 Registration Statement, and inquiries of
certain officials of each of Debt Strategies II and Debt Strategies
responsible for financial and accounting matters, nothing came to their
attention that caused them to believe that (a) such unaudited financial
statements and related unaudited supplementary information do not comply as to
form in all material respects with the applicable accounting requirements of
the 1933 Act and the published rules and regulations thereunder, (b) such
unaudited financial statements are not fairly presented in conformity with
generally accepted accounting principles, applied on a basis substantially
consistent with that of the audited financial statements, or (c) such
unaudited supplementary information is not fairly stated in all material
respects in relation to the unaudited financial statements taken as a whole;
(iv) and on the basis of limited procedures agreed upon by Debt Strategies,
Debt Strategies II and Debt Strategies III and described in such letter (but
not an examination in accordance with generally accepted auditing standards),
the information relating to each of Debt Strategies II and Debt Strategies
appearing in the N-14 Registration Statement, which information is expressed
in dollars (or percentages derived from such dollars) concerning each of Debt
Strategies II and Debt Strategies (with the exception of performance
comparisons, if any), if any, has been obtained from the accounting records of
each of Debt Strategies II and Debt Strategies or from schedules prepared by
officials of each of Debt Strategies II and Debt Strategies having
responsibility for financial and reporting matters and such information is in
agreement with such records, schedules or computations made therefrom.
(i) That the Commission shall not have issued an unfavorable
advisory report under Section 25(b) of the 1940 Act, nor instituted or
threatened to institute any proceeding seeking to enjoin consummation of the
Merger under Section 25(c) of the 1940 Act, no other legal, administrative or
other proceeding shall be instituted or threatened which would materially
affect the financial condition of either of Debt Strategies II or Debt
Strategies or would prohibit the Merger.
(j) That Debt Strategies III shall have received from the Commission
such orders or interpretations as Brown & Wood LLP, as counsel to Debt
Strategies III, deems reasonably necessary or desirable under the 1933 Act and
the 1940 Act in connection with the Merger, provided, that such counsel shall
have requested such orders as promptly as practicable, and all such orders
shall be in full force and effect.
(k) That any applicable waiting period under the HSR Act relating to
the transactions contemplated hereby shall have expired or been terminated.
(l) That as of the Effective Date, Debt Strategies II will have
entered into an agreement with a financial institution, in form and substance
acceptable to Debt Strategies II in its sole discretion, providing for a
revolving credit facility for Debt Strategies II in a principal amount
approximately equal to the aggregate commitment amount of the Outstanding
Credit Facilities.
12. Termination, Postponement and Waivers.
--------------------------------------
(a) Notwithstanding anything contained in this Agreement to the
contrary: (1) this Agreement may be terminated and the Merger abandoned at any
time (whether before or after adoption thereof by the stockholders of each of
Debt Strategies, Debt Strategies II and Debt Strategies III) prior to the
Effective Date, or the Effective Date may be postponed, (i) by mutual consent
of the Boards of Directors of Debt Strategies, Debt Strategies II and Debt
Strategies III; (ii) by the Board of Directors of Debt Strategies II if any
condition of Debt Strategies II's obligations set forth in Section 9 of this
Agreement has not been fulfilled or waived by such Board; (iii) by the Board
of Directors of Debt Strategies if any condition of Debt Strategies'
obligations set forth in Section 10 of this Agreement has not been fulfilled
or waived by such Board; or (iv) by the Board of Directors of Debt Strategies
III if any condition of Debt Strategies III's obligations set forth in Section
11 of this Agreement has not been fulfilled or waived by such Board or (2) the
Merger may be postponed or abandoned by any one of the Board of Directors of
Debt Strategies, Debt Strategies II or Debt Strategies III if such Board of
Directors determines that it is in the best interest of the stockholders of
its fund to do so.
(b) If the transactions contemplated by this Agreement have not been
consummated by _______________, 2000, this Agreement automatically shall
terminate on that date, unless a later date is mutually agreed to by the
Boards of Directors of Debt Strategies, Debt Strategies II and Debt Strategies
III.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no further effect, and
there shall not be any liability on the part of either Debt Strategies, Debt
Strategies II or Debt Strategies III or persons who are their directors,
trustees, officers, agents or stockholders in respect of this Agreement.
(d) At any time prior to the Effective Date, any of the terms or
conditions of this Agreement may be waived by the Board of Directors of either
Debt Strategies, Debt Strategies II or Debt Strategies III, respectively
(whichever is entitled to the benefit thereof), if, in the judgment of such
Board after consultation with its counsel, such action or waiver will not have
a material adverse effect on the benefits intended under this Agreement to the
stockholders of their respective fund, on behalf of which such action is
taken. In addition, the Boards of Directors of Debt Strategies, Debt
Strategies II and Debt Strategies III have delegated to FAM the ability to
make non-material changes to the transaction if it deems it to be in the best
interests of Debt Strategies, Debt Strategies II and Debt Strategies III to do
so.
(e) The respective representations and warranties contained in
Sections 1, 2 and 3 of this Agreement shall expire with, and be terminated by,
the consummation of the Merger, and neither Debt Strategies, Debt Strategies
II nor Debt Strategies III nor any of their officers, directors or trustees,
agents or stockholders shall have any liability with respect to such
representations or warranties after the Effective Date. This provision shall
not protect any officer, director or trustee, agent or stockholder of Debt
Strategies, Debt Strategies II or Debt Strategies III against any liability to
the entity for which that officer, director or trustee, agent or stockholder
so acts or to its stockholders to which that officer, director or trustee,
agent or stockholder otherwise would be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
in the conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Effective Date and shall impose any
terms or conditions which are determined by action of the Boards of Directors
of Debt Strategies, Debt Strategies II and Debt Strategies III to be
acceptable, such terms and conditions shall be binding as if a part of this
Agreement without further vote or approval of the stockholders of Debt
Strategies, Debt Strategies II and Debt Strategies III, unless such terms and
conditions shall result in a change in the method of computing the number of
shares of Debt Strategies II Common Stock to be issued pursuant to this
Agreement in which event, unless such terms and conditions shall have been
included in the proxy solicitation materials furnished to the stockholders of
Debt Strategies, Debt Strategies II and Debt Strategies III prior to the
meetings at which the Merger shall have been approved, this Agreement shall
not be consummated and shall terminate unless Debt Strategies, Debt Strategies
II and Debt Strategies III promptly shall call special meetings of
stockholders at which such conditions so imposed shall be submitted for
approval.
13. Other Matters.
--------------
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with
the issuance of any shares to any person who at the time of the Merger is, to
its knowledge, an affiliate of a party to the Merger pursuant to Rule 145(c),
Debt Strategies II will cause to be affixed upon the certificate(s) issued to
such person (if any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
EXCEPT TO DEBT STRATEGIES FUND II, INC. (OR ITS STATUTORY SUCCESSOR)
OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A REGISTRATION STATEMENT WITH
RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II)
IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH
REGISTRATION IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to Debt
Strategies II's transfer agent with respect to such shares. Each of Debt
Strategies and Debt Strategies III, respectively, will provide Debt Strategies
II on the Effective Date with the name of any Debt Strategies and Debt
Strategies III stockholder who is to the respective knowledge of Debt
Strategies or Debt Strategies III an affiliate of it on such date.
(b) All covenants, agreements, representations and warranties made
under this Agreement and any certificates delivered pursuant to this Agreement
shall be deemed to have been material and relied upon by each of the parties,
notwithstanding any investigation made by them or on their behalf.
(c) Any notice, report or demand required or permitted by any
provision of this Agreement shall be in writing and shall be deemed to have
been given if delivered or mailed, first class postage prepaid, addressed to
Debt Strategies, Debt Strategies II or Debt Strategies III, in any case at 800
Scudders Mill Road, Plainsboro, New Jersey 08536, Attn: Terry K. Glenn,
President.
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the Merger, constitutes the only
understanding with respect to the Merger, may not be changed except by a
letter of agreement signed by each party and shall be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made and to be performed in said state.
(e) Copies of the Articles of Incorporation, and all amendments, if
any, of Debt Strategies, Debt Strategies II and Debt Strategies III are on
file with SDAT, and notice is hereby given that this instrument is executed on
behalf of the Directors of each of Debt Strategies, Debt Strategies II and
Debt Strategies III.
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
DEBT STRATEGIES FUND, INC.
By: __________________________________
Name: Terry K Glenn
Title: President
Attest:
____________________________
Name: Bradley J. Lucido
Title: Secretary
DEBT STRATEGIES FUND II, INC.
By: __________________________________
Name: Terry K Glenn
Title: President
Attest:
____________________________
Name: Bradley J. Lucido
Title: Secretary
DEBT STRATEGIES FUND III, INC.
By: __________________________________
Name: Terry K. Glenn
Title: President
Attest:
____________________________
Name: Bradley J. Lucido
Title: Secretary
Exhibit III
ARTICLES OF MERGER
Debt Strategies Fund, Inc. ("Debt Strategies") and Debt Strategies Fund
III, Inc. ("Debt Strategies III"), each a Maryland corporation (herein
collectively referred to as the "Merging Companies"), and Debt Strategies Fund
II, Inc., a Maryland corporation (herein sometimes referred to as "Debt
Strategies II" or "Successor"), hereby certify to the Department of
Assessments and Taxation of the State of Maryland ("SDAT") that:
FIRST: The Merging Companies and the Successor have agreed that each of
the Merging Companies shall be merged into the Successor.
SECOND: Successor shall survive the merger described in these Articles of
Merger (the "Merger") under the laws of the State of Maryland and shall change
its name immediately after the Effective Time of the Merger (as described in
Article TWELFTH hereof) to:
Debt Strategies Fund, Inc.
THIRD; The names of the corporations that are a party to the Merger are
Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc. and Debt Strategies
Fund III, Inc. and each corporation is organized and existing under the laws
of the State of Maryland.
FOURTH: The principal office of each of the Merging Companies in the
State of Maryland is located in Baltimore City and the principal office of the
Successor in the State of Maryland is located in Baltimore City.
FIFTH: Neither of the Merging Companies nor the Successor owns any
interest in land in the State of Maryland.
SIXTH: The Charter and Bylaws of the Successor in effect on the date of
this Merger shall continue in full force and effect as the Charter and Bylaws
of the corporation surviving the Merger.
SEVENTH: Debt Strategies has an authorized capitalization of Two Hundred
Million (200,000,000) shares, all of which is Common Stock, par value Ten
Cents ($0.10) per share. The aggregate par value of all shares of Common Stock
having a par value is Twenty Million Dollars ($20,000,000). Debt Strategies II
has an authorized capitalization of Two Hundred Million (200,000,000) shares,
all of which is Common Stock, par value Ten Cents ($0.10) per share. The
aggregate par value of all shares of Common Stock having a par value is Twenty
Million Dollars ($20,000,000). Debt Strategies III has an authorized
capitalization of Two Hundred Million (200,000,000) shares, all of which is
Common Stock, par value Ten Cents ($0.10) per share. The aggregate par value
of all shares of Common Stock having a par value is Twenty Million Dollars
($20,000,000). These Articles of Merger make no change in the capitalization
of the Successor or any other amendment to its Charter (other than the change
in the Successor's name).
EIGHTH: The manner and basis of converting the outstanding shares of
Common Stock of each of the Merging Companies into shares of Common Stock of
the Successor and the treatment of outstanding shares of the Merging Companies
not to be exchanged shall be as follows:
(a) At the Effective Time of the Merger, without the necessity of
any action on the part of the holder thereof, each share of Common
Stock of each of the Merging Companies will be converted into the
right to receive an equivalent dollar amount (to the nearest one
ten-thousandth of one cent) of full shares of Debt Strategies II
Common Stock, plus cash in lieu of fractional shares, computed based
on the net asset value per share of each of the Merging Companies
and the Successor at the Effective Time. The net asset value per
share of Debt Strategies, Debt Strategies II and Debt Strategies III
shall be determined as of the Effective Time, and no formula will be
used to adjust the net asset value so determined of either Debt
Strategies, Debt Strategies II or Debt Strategies III to take into
account differences in realized and unrealized gains and losses. The
value of the assets of Debt Strategies and Debt Strategies III to be
transferred to Debt Strategies II pursuant to the Merger shall be
determined by Debt Strategies II pursuant to the procedures utilized
by Debt Strategies II in valuing its own assets and determining its
own liabilities for purposes of the Merger. Such valuation and
determination shall be made by Debt Strategies II in cooperation
with Debt Strategies and Debt Strategies III and shall be confirmed
in writing by Debt Strategies II to Debt Strategies and Debt
Strategies III. The net asset value per share of Debt Strategies II
Common Stock shall be determined in accordance with such procedures,
and Debt Strategies II shall certify the computations involved. Debt
Strategies II shall issue to the stockholders of Debt Strategies and
Debt Strategies III separate certificates or share deposit receipts
for the Debt Strategies II Common Stock by delivering the
certificates or share deposit receipts evidencing ownership of the
Debt Strategies II Common Stock to The Bank of New York, as the
transfer agent and registrar for Debt Strategies II Common Stock.
(b) With respect to any Debt Strategies or Debt Strategies III
stockholder holding certificates evidencing ownership of either the
Common Stock of Debt Strategies or Debt Strategies III as of the
Effective Time, and subject to Debt Strategies II being informed
thereof in writing by Debt Strategies or Debt Strategies III, Debt
Strategies II will not permit such stockholder to receive new
certificates evidencing ownership of the Debt Strategies II Common
Stock, exchange Debt Strategies II Common Stock credited to such
stockholder's account for shares of other investment companies
managed by Merrill Lynch Asset Management, L.P. or any of its
affiliates, or pledge or redeem such Debt Strategies II Common
Stock, in any case, until such stockholder has surrendered his or
her outstanding certificates evidencing ownership of the Common
Stock of Debt Strategies or Debt Strategies III or, in the event of
lost certificates, posted adequate bond. Each of Debt Strategies and
Debt Strategies III, at its own expense, will request its
stockholders to surrender their outstanding certificates evidencing
ownership of the Common Stock of Debt Strategies and Debt Strategies
III or post adequate bond therefor. Until so surrendered, each such
outstanding certificate evidencing ownership of the Common Stock of
Debt Strategies or Debt Strategies II, shall be deemed for all
corporate purposes, to evidence the ownership of the number of
shares of Common Stock of the Successor into which such shares of
Common Stock of the Merging Companies shall have been so converted.
Dividends and other distributions payable to holders of record of
shares of Debt Strategies II Common Stock as of any date after the
Effective Time and prior to the exchange of certificates by any
stockholder of Debt Strategies and Debt Strategies III shall accrue
and be paid to such stockholder, without interest; however, such
dividends shall not be paid unless and until such stockholder
surrenders his or her stock certificates of Debt Strategies and Debt
Strategies III for exchange.
(c) No fractional shares of Debt Strategies II Common Stock will be
issued to Debt Strategies or Debt Strategies III stockholders. In
lieu thereof, Debt Strategies II's transfer agent, The Bank of New
York, will aggregate all fractional shares of Debt Strategies II
otherwise issued pursuant to the Merger and sell the resulting full
shares on the New York Stock Exchange at the current market price
for shares of Debt Strategies II for the account of all such holders
of fractional interests, and each such holder will receive such
holder's pro rata share of the proceeds of such sale, without
interest, upon surrender of such holder's Debt Strategies or Debt
Strategies III Common Stock certificates, as the case may be.
(d) At the Effective Time, the shares of Debt Strategies II
outstanding as of the Effective Time will remain issued and
outstanding and in the same number, and the shares of Debt
Strategies II authorized, unissued and reserved for issuance
pursuant to Debt Strategies II's Automatic Dividend Reinvestment
Plan will remain authorized and reserved in the same number.
NINTH Upon the Effective Time of the Merger, the separate existence of
the Merging Companies shall cease and the Successor shall own and possess any
and all purposes and powers of the Merging Companies; and all leases,
licenses, property, rights, privileges, franchises and powers of whatever
nature and description of the Merging Companies without further act or deed.
Notwithstanding the foregoing, confirmatory deeds or other like instruments,
when deemed desirable to evidence such transfer, vesting or devolution of any
property, rights, privileges or franchises, may, at any time or from time to
time, be made and delivered in the name of each of the Merging Companies by
the last acting officers thereof, or by the corresponding officers of the
Successor.
Upon the Effective Time of the Merger, the Successor shall be liable for
all the debts and obligations of each of the Merging Companies and any claim
existing or action or proceeding pending by or against it may be prosecuted to
judgment or decree as if the Merger had not taken place. The rights of
creditors of the Merging Companies shall in no way be impaired by the Merger.
TENTH: The terms and conditions of the transaction described in these
Articles were duly advised, authorized and approved by each of the Merging
Companies in the manner and by the vote required by the laws of the State of
Maryland and the Charter of each of the Merging Companies, as follows:
(a) The board of directors of each of the Merging Companies, by the
affirmative vote of at least two-thirds of the total number of
directors at respective meetings duly called and held on April 25,
2000, adopted a resolution declaring that the terms and conditions
of the transaction described herein were advisable and directing
that the proposed transaction be submitted for consideration by the
respective stockholders of each of the Merging Companies.
(b) The respective stockholders of the Merging Companies entitled to
vote on the merger, at respective meetings duly called and held on
August 23, 2000, adopted a resolution approving the Merger, in all
respects by the votes required and in the manner prescribed by the
Charter of each Merging Company and Maryland General Corporate Law.
ELEVENTH: The terms and conditions of the transaction described in these
Articles were duly advised, authorized and approved by the Successor, in the
manner and by the vote required by the laws of the State of Maryland and the
charter of the Successor, as follows:
(a) The board of directors of the Successor, by the affirmative vote
of at least two-thirds of the total number of directors at a meeting
duly called and held on April 25, 2000, adopted a resolution
declaring that the terms and conditions of the transaction described
herein were advisable and directing that the proposed transaction be
submitted for consideration by the stockholders of the Successor.
(b) The stockholders of the Successor entitled to vote on the
merger, at a meeting duly called an held on August 23, 2000, adopted
a resolution approving the Merger, in all respects by the votes
required and in the manner prescribed by the Charter of the
Successor and Maryland General Corporate Law.
TWELFTH: These Articles of Merger shall become effective on
_____________, 2000 at 9:00 a.m. (the "Effective Time").
THIRTEENTH: The corporations party to these Articles of Merger have
caused these Articles to be signed in their respective corporate names and on
their respective behalves by their respective President and witnessed by their
respective Secretary, and each undersigned officer acknowledges these Articles
of Merger to be the corporate act of his or respective corporation and that,
as to all matters and facts required to be verified under oath, each
undersigned officer acknowledges that, to the best of his knowledge,
information and belief, these matters and facts are true in all material
respects and that this verification is made under the penalties of perjury.
IN WITNESS WHEREOF, these Articles of Merger have been duly executed by
the parties hereto this _____ day of ______, 2000.
Attest: DEBT STRATEGIES FUND, INC.
___________________________ By:_________________________________
Name: Bradley J. Lucido Name: Terry K. Glenn
Title: Secretary Title: President
Attest: DEBT STRATEGIES FUND II, INC.
___________________________ By:_________________________________
Name: Bradley J. Lucido Name: Terry K. Glenn
Title: Secretary Title: President
Attest: DEBT STRATEGIES FUND III, INC.
___________________________ By:_________________________________
Name: Bradley J. Lucido Name: Terry K. Glenn
Title: Secretary Title: President
EXHIBIT IV
DESCRIPTION OF CORPORATE BOND RATINGS
Description of Moody's Investors Service, Inc.'s ("Moody's") Long-Term Debt
Ratings
Aaa Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often
the protection of interest and principal payments may be very
moderate, and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds in
this class.
B Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any
long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
Description of Moody's Short-Term Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on
debt and ample asset protection. o Broad margins in earnings coverage
of fixed financial charges and high internal cash generation.
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime
rating categories.
Obligations of a branch of a bank are considered to be domiciled in the
country in which the branch is located. Unless noted as an exception, Moody's
rating on a bank's ability to repay senior obligations extends only to
branches located in countries which carry a Moody's Sovereign Rating for Bank
Deposits. Such branch obligations are rated at the lower of the bank's rating
or Moody's Sovereign Rating for Bank Deposits for the country in which the
branch is located.
When the currency in which an obligation is denominated is not the same
as the currency of the country in which the obligation is domiciled, Moody's
ratings do not incorporate an opinion as to whether payment of the obligation
will be affected by actions of the government controlling the currency of
denomination. In addition, risks associated with bilateral conflicts between
an investor's home country and either the issuer's home country or the country
where an issuer's branch is located are not incorporated into Moody's
short-term debt ratings.
Moody's makes no representation that rated bank or insurance company
obligations are exempt from the registration under the U.S. Securities Act of
1933 or issued in conformity with any other applicable law or regulation. Nor
does Moody's represent that any specific bank or insurance company obligation
is legally enforceable or a valid senior obligation of a rated issuer.
If an issuer represents to Moody's that its short-term debt obligations
are supported by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within the parenthesis
beneath the name of the issuer, or there is a footnote referring the reader to
another page for the name or names of the supporting entity or entities. In
assigning ratings to such issuers, Moody's evaluates the financial strength of
the affiliated corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the total rating
assessment. Moody's makes no representation and gives no opinion on the legal
validity or enforceability of any support arrangement.
Moody's ratings are opinions, not recommendations to buy or sell, and
their accuracy is not guaranteed. A rating should be weighed solely as one
factor in an investment decision and you should make your own study and
evaluation of any issuer whose securities or debt obligations you consider
buying or selling.
Description of Moody's Preferred Stock Ratings
Because of the fundamental differences between preferred stocks and
bonds, a variation of our familiar bond rating symbols is used in the quality
ranking of preferred stock. The symbols, presented below, are designed to
avoid comparison with bond quality in absolute terms. It should always be
borne in mind that preferred stock occupies a junior position to bonds within
a particular capital structure and that these securities are rated within the
universe of preferred stocks.
"aaa" An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
"aa" An issue which is rated "aa" is considered a high- grade preferred
stock. This rating indicates that there is a reasonable assurance the
earnings and asset protection will remain relatively well maintained
in the foreseeable future.
"a" An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater then
in the "aaa" and "aa" classification, earnings and asset protection
are, nevertheless, expected to be maintained at adequate levels.
"baa" An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured.
Earnings and asset protection appear adequate at present but may be
questionable over any great length of time.
"ba" An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings
and asset protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position characterizes
preferred stocks in this class.
"b" An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance
of other terms of the issue over any long period of time may be
small.
"caa" An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
"ca" An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of
eventual payments.
"c" This is the lowest rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
Description of Standard & Poor's ("S&P's") Corporate Debt Ratings
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program. It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation.
The issue credit rating is not a recommendation to purchase, sell, or
hold a financial obligation, inasmuch as it does not comment as to market
price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long term or short term. Short-term
ratings are generally assigned to those obligations considered short term in
the relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an
obligor with respect to put features on long-term obligations. The result is a
dual rating, in which the short-term ratings address the put feature, in
addition to the usual long-term rating. Medium-term notes are assigned
long-term ratings.
Description of Standard & Poor's ("S&P's") Corporate Debt Ratings
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment - capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the
terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
The issue ratings definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority
in bankruptcy, as noted above.
AAA An obligation rated 'AAA' has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
AA An obligation rated 'AA' differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's
capacity to meet its financial commitment on the obligation is still
strong.
BBB An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
BB, B, Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as
CCC, CC, having significant speculative characteristics. 'BB' indicates the
And C least degree of speculation and 'C' the highest. While such
obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions,
which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
B An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC An obligation rated 'CCC' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or economic
conditions, the obligor is not likely to have the capacity to meet
its financial commitment on the obligation.
CC An obligation rated 'CC' is currently highly vulnerable to
nonpayment.
C The 'C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but
payments on this obligation are being continued.
D An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during
such grace period. The 'D' rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
Plus (+) The ratings from 'AA' to 'CCC' may be modified by the addition of a
or minus plus or minus sign to show relative standing within the major rating
(-) categories.
c The 'c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase
tendered bonds if the long-term credit rating of the issuer is below
an investment-grade level and/or the issuer's bonds are deemed
taxable.
p The letter 'p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project
financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the
successful, timely completion of the project. This rating, however,
while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the risk of default
upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
r The 'r' highlights derivative, hybrid, and certain other obligations
that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks.
Examples of such obligations are securities with principal or
interest return indexed to equities, commodities, or currencies;
certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an 'r' symbol should not be taken
as an indication that an obligation will exhibit no volatility or
variability in total return.
N.R. Not rated.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
Bond Investment Quality Standards
Under present commercial bank regulations issued by the Comptroller of
the Currency, bonds rated in the top four categories ('AAA', 'AA', 'A', 'BBB',
commonly known as investment-grade ratings) generally are regarded as eligible
for bank investment. Also, the laws of various states governing legal
investments impose certain rating or other standards for obligations eligible
for investment by savings banks, trust companies, insurance companies, and
fiduciaries in general.
Description of S&P's Short-Term Issue Credit Ratings
A-1 A short-term obligation rated 'A-1' is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However, the
obligor's capacity to meet its financial commitment on the obligation
is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity
to meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
C A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial commitment
on the obligation.
D A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not made
on the date due even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized
Notes
A Standard & Poor's note ratings reflects the liquidity factors and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most
likely receive a long-term debt rating. The following criteria will be used in
making that assessment:
o Amortization schedule - the larger the final maturity relative to
other maturities, the more likely it will be treated as a note; and
o Source of payment - the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus
(+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
DEBT STRATEGIES FUND II, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PROXY
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and
Bradley J. Lucido as proxies, each with the power to appoint his substitute,
and hereby authorizes each of them to represent and to vote, as designated
below, all of the shares of common stock of Debt Strategies Fund II, Inc. (the
"Fund"), held of record by the undersigned on June 27, 2000 at the Annual
Meeting of Stockholders of the Fund to be held on August 23, 2000 or any
adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED "FOR" PROPOSALS 1, 2 AND 3.
By signing and dating this card, you authorize the proxies to vote each
proposal as marked, or if not marked, to vote "FOR" each proposal, and to use
their discretion to vote for any other matter as may properly come before the
meeting or any adjournment thereof. If you do not intend to personally attend
the meeting, please complete and return this card at once in the enclosed
envelope.
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney or as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized persons.
To vote by Telephone
1) Read the Proxy Statement and have the proxy card below at hand.
2) Call 1-800-_______________.
3) Enter the 12-digit control number set forth on the proxy card and
follow the simple instructions.
To vote by Internet
1) Read the Proxy Statement and have the proxy card below at hand
2) Go to Website www.proxyvote.com
3) Enter the 12-digit control number set forth on the proxy card and
follow the simple instructions.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK KEEP THIS PORTION FOR
INK AS FOLLOWS: YOUR RECORDS
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DETACH AND RETURN THIS
DATED PORTION ONLY
Please mark boxes |X| or |X| in blue or black ink.
Vote on Proposal
1. To approve the Agreement and Plan of Merger between the Fund, Debt
Strategies Fund, Inc. and Debt Strategies Fund III, Inc.
FOR |_| AGAINST |_| ABSTAIN |_|
2. ELECTION OF FOR all nominees listed below WITHHOLD
DIRECTORS (except as marked to the contrary AUTHORITY
below) |_| to vote for all
nominees listed
below |_|
(INSTRUCTION: To withhold authority to vote for any individual nominee, strike
a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Charles C. Reilly,
Kevin A. Ryan, Roscoe S. Suddarth, Richard R. West, Arthur Zeikel and Edward
D. Zinbarg.
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal
year.
4. To transact such other business as may properly come before the
Meeting or any adjournment thereof.
FOR |_| AGAINST |_| ABSTAIN |_|
Please sign exactly as name appears
hereon. When stock is held by joint
tenants, both should sign. When signing as
attorney or as executor, administrator,
trustee or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by president
or other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
Dated:_____________________________, 2000
X________________________________________
Signature
X________________________________________
Signature, if held jointly
Sign, Date and Return the Proxy Card Promptly Using the Enclosed Envelope.
DEBT STRATEGIES FUND, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PROXY
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and
Bradley J. Lucido as proxies, each with the power to appoint his substitute,
and hereby authorizes each of them to represent and to vote, as designated
below, all of the shares of common stock of Debt Strategies Fund, Inc. (the
"Fund"), held of record by the undersigned on June 27, 2000 at the Annual
Meeting of Stockholders of the Fund to be held on August 23, 2000 or any
adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED "FOR" PROPOSALS 1, 2 AND 3.
By signing and dating this card, you authorize the proxies to vote each
proposal as marked, or if not marked, to vote "FOR" each proposal, and to use
their discretion to vote for any other matter as may properly come before the
meeting or any adjournment thereof. If you do not intend to personally attend
the meeting, please complete and return this card at once in the enclosed
envelope.
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney or as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized persons.
To vote by Telephone
1) Read the Proxy Statement and have the proxy card below at hand.
2) Call 1-800-_______________.
3) Enter the 12-digit control number set forth on the proxy card and
follow the simple instructions.
To vote by Internet
1) Read the proxy Statement and have the proxy card below at hand
2) Go to Website www.proxyvote.com
3) Enter the 12-digit control number set forth on the proxy card and
follow the simple instructions.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK KEEP THIS PORTION FOR
INK AS FOLLOWS: YOUR RECORDS
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DETACH AND RETURN THIS
DATED PORTION ONLY
Please mark boxes |X| or |X| in blue or black ink.
Vote on Proposal
1. To approve the Agreement and Plan of Merger between the Fund, Debt
Strategies Fund II, Inc. and Debt Strategies Fund III, Inc.
FOR |_| AGAINST |_| ABSTAIN |_|
2. ELECTION OF FOR all nominees listed below WITHHOLD
DIRECTORS (except as marked to the contrary AUTHORITY
below) |_| to vote for all
nominees listed
below |_|
(INSTRUCTION: To withhold authority to vote for any individual nominee, strike
a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Charles C. Reilly,
Kevin A. Ryan, Roscoe S. Suddarth, Richard R. West, Arthur Zeikel and Edward
D. Zinbarg.
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal
year.
FOR |_| AGAINST |_| ABSTAIN |_|
4. To transact such other business as may properly come before the
Meeting or any adjournment thereof.
Please sign exactly as name appears
hereon. When stock is held by joint
tenants, both should sign. When signing as
attorney or as executor, administrator,
trustee or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by president
or other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
Dated:______________________________, 2000
X_________________________________________
Signature
X_________________________________________
Signature, if held jointly
Sign, Date and Return the Proxy Card Promptly Using the Enclosed Envelope.
DEBT STRATEGIES FUND III, INC.
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
PROXY
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Terry K. Glenn, Donald C. Burke and
Bradley J. Lucido as proxies, each with the power to appoint his substitute,
and hereby authorizes each of them to represent and to vote, as designated
below, all of the shares of common stock of Debt Strategies Fund III, Inc.
(the "Fund"), held of record by the undersigned on June 27, 2000 at the Annual
Meeting of Stockholders of the Fund to be held on August 23, 2000 or any
adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED "FOR" PROPOSALS 1, 2 AND 3.
By signing and dating this card, you authorize the proxies to vote each
proposal as marked, or if not marked, to vote "FOR" each proposal, and to use
their discretion to vote for any other matter as may properly come before the
meeting or any adjournment thereof. If you do not intend to personally attend
the meeting, please complete and return this card at once in the enclosed
envelope.
Please sign exactly as name appears hereon. When shares are held by joint
tenants, both should sign. When signing as attorney or as executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized persons.
To vote by Telephone
1) Read the Proxy Statement and have the proxy card below at hand.
2) Call 1-800-_______________.
3) Enter the 12-digit control number set forth on the proxy card and
follow the simple instructions.
To vote by Internet
1) Read the Proxy Statement and have the proxy card below at hand
2) Go to Website www.proxyvote.com
3) Enter the 12-digit control number set forth on the proxy card and
follow the simple instructions.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK KEEP THIS PORTION FOR
INK AS FOLLOWS: YOUR RECORDS
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DETACH AND RETURN THIS
DATED PORTION ONLY
Please mark boxes |X| or |X| in blue or black ink.
Vote on Proposal
1. To approve the Agreement and Plan of Merger between the Fund, Debt
Strategies Fund, Inc. and Debt Strategies Fund II, Inc.
FOR |_| AGAINST |_| ABSTAIN |_|
2. ELECTION OF FOR all nominees listed below WITHHOLD
DIRECTORS (except as marked to the contrary AUTHORITY
below) |_| to vote for all
nominees listed
below |_|
(INSTRUCTION: To withhold authority to vote for any individual nominee, strike
a line through the nominee's name in the list below.)
Ronald W. Forbes, Terry K. Glenn, Cynthia A. Montgomery, Charles C. Reilly,
Kevin A. Ryan, Roscoe S. Suddarth, Richard R. West, Arthur Zeikel and Edward
D. Zinbarg.
3. Proposal to ratify the selection of Deloitte & Touche LLP as the
independent auditors of the Fund to serve for the current fiscal
year.
FOR |_| AGAINST |_| ABSTAIN |_|
4. To transact such other business as may properly come before the
Meeting or any adjournment thereof.
Please sign exactly as name appears
hereon. When stock is held by joint
tenants, both should sign. When signing as
attorney or as executor, administrator,
trustee or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by president
or other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
Dated:______________________________, 2000
X_________________________________________
Signature
X_________________________________________
Signature, if held jointly
Sign, Date and Return the Proxy Card Promptly Using the Enclosed Envelope.
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
Section 2-418 of the General Corporation Law of the State of Maryland,
Article VI of the Registrant's Articles of Incorporation, which was previously
filed as an exhibit to the Common Stock Registration Statement (as defined
below), Article VI of the Registrant's By-Laws, which was previously filed as
an exhibit to the Common Stock Registration Statement, and the Investment
Advisory Agreement, a form of which was previously filed as an exhibit to the
Common Stock Registration Statement, provide for indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be provided to directors,
officers and controlling persons of the Registrant, pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the 1933 Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in connection with any
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
Reference is made to Section 6 of the Purchase Agreement relating to the
Registrant's Common Stock, a form of which was previously filed as an exhibit
to the Common Stock Registration Statement, for provisions relating to the
indemnification of the underwriter.
ITEM 16. EXHIBITS.
1 -- Articles of Incorporation of the Registrant (a)
2 -- By-Laws of the Registrant.(a)
3 -- Not Applicable.
4 -- Form of Agreement and Plan of Merger among the Registrant, Debt
Strategies Fund, Inc. and Debt Strategies Fund III, Inc. (included
as Exhibit II to the Proxy Statement and Prospectus contained in
this Registration Statement)
5(a) -- Form of specimen certificate for the Common Stock of the Registrant.
(a)
(b) -- Copies of instruments defining the rights of stockholders, including
the relevant portions of the Articles of Incorporation and the
By-Laws of the Registrant. (b)
6 -- Form of Investment Advisory Agreement between Registrant and Fund
Asset Management, L.P. (c)
7(a) -- Form of Purchase Agreement between the Registrant and the Investment
Adviser and Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") relating to the Registrant's Common Stock.(c)
(b) -- Form of Merrill Lynch Standard Dealer Agreement.(c)
8 -- Not applicable.
9 -- Custodian Contract between the Registrant and The Bank of New
York.(c)
10 -- Not applicable.
11 -- Opinion and Consent of Brown & Wood LLP, counsel for the
Registrant.(d)
12 -- None
13(a)-- Registrar, Transfer Agency and Service Agreement between the
Registrant and The Bank of New York.(c)
14 -- Consent of ___________, independent auditors for the Registrant,
Debt Strategies Fund, Inc. and Debt Strategies Fund III, Inc.
15 -- Not applicable.
16 -- Power of Attorney (included on the signature page).
- -------------
(a) Incorporated herein by reference to the Registrant's registration
statement (the "Registration Statement"), on Form N-2 relating to the
Registrant's Common Stock (File No. 333-44051), filed with the Securities and
Exchange Commission (the "Commission") on January 12, 1998.
(b) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and Article XIII
of the Registrant's Articles of Incorporation, previously filed as Exhibit (a)
to this Registration Statement; and to Article II, Article III (sections 1, 2,
3, 5 and 17), Article VI, Article VII, Article XII, Article XIII and Article
XIV of the Registrant's By-Laws, previously filed as Exhibit (b) to this
Registration Statement.
(c) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Registration Statement, filed with the Commission on February 18, 1998.
(d) To be filed by Pre-Effective Amendment to this Registration Statement on
Form N-14.
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through use of a prospectus which is part of this
Registration Statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
as amended, the reoffering prospectus will contain information called for by
the applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by other items of the
applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, as
amended, each post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and the offering of
securities at that time shall be deemed to be the initial bona fide offering
of them.
(3) The Registrant undertakes to file, by post-effective amendment, an
opinion of counsel as to certain tax matters within a reasonable time after
receipt of such ruling or opinion.
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the Township of Plainsboro and
State of New Jersey, on the 18th day of May, 2000.
DEBT STRATEGIES FUND II, INC.
(Registrant)
By: /s/ Terry K. Glenn
------------------
(Terry K. Glenn, President)
Each person whose signature appears below hereby authorizes Terry K.
Glenn, Donald C. Burke and Bradley J. Lucido, or any of them, as
attorney-in-fact, to sign on his or her behalf, individually and in each
capacity stated below, any amendments to this Registration Statement
(including post-effective amendments) and to file the same, with all exhibits
thereto, with the Securities and Exchange Commission.
As required by the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ Terry K. Glenn President (Principal Executive Officer) May 18, 2000
- -------------------------------- and Director
(Terry K. Glenn)
/s/ Donald C. Burke Vice President and Treasurer (Principal May 18, 2000
- -------------------------------- Financial and Accounting Officer)
(Donald C. Burke)
/s/ Ronald W. Forbes Director May 18, 2000
- --------------------------------
(Ronald W. Forbes)
/s/ Cynthia A. Montgomery Director May 18, 2000
- --------------------------------
(Cynthia A. Montgomery)
/s/ Charles C. Reilly Director May 18, 2000
- --------------------------------
(Charles C. Reilly)
/s/ Kevin A. Ryan Director May 18, 2000
- --------------------------------
(Kevin A. Ryan)
/s/ Richard R. West Director May 18, 2000
- --------------------------------
(Richard R. West)
/s/ Arthur Zeikel Director May 18, 2000
- --------------------------------
(Arthur Zeikel)
</TABLE>
