UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-8603
Name of Fund: Debt Strategies Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President, Debt
Strategies Fund, Inc., 800 Scudders Mill Road, Plainsboro, NJ 08536.
Mailing address: P.O. Box 9011, Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 02/28/03
Date of reporting period: 03/01/02 - 2/28/03
Item 1 - Attach shareholder report
[LOGO] Merrill Lynch Investment Managers
Annual Report
February 28, 2003
Debt Strategies
Fund, Inc.
www.mlim.ml.com
DEBT STRATEGIES FUND, INC.
The Benefits and
Risks of
Leveraging
Debt Strategies Fund, Inc. utilizes leverage through borrowings or issuance of
short-term debt securities or shares of Preferred Stock. The concept of
leveraging is based on the premise that the cost of assets to be obtained from
leverage will be based on short-term interest rates, which normally will be
lower than the return earned by the Fund on its longer-term portfolio
investments. To the extent that the total assets of the Fund (including the
assets obtained from leverage) are invested in higher-yielding portfolio
investments, the Fund's Common Stock shareholders will benefit from the
incremental yield.
Leverage creates risks for holders of Common Stock including the likelihood of
greater net asset value and market price volatility. In addition, there is the
risk that fluctuations in interest rates on borrowings (or in the dividend rates
on any Preferred Stock, if the Fund were to issue Preferred Stock) may reduce
the Common Stock's yield and negatively impact its market price. If the income
derived from securities purchased with assets received from leverage exceeds the
cost of leverage, the Fund's net income will be greater than if leverage had not
been used. Conversely, if the income from the securities purchased is not
sufficient to cover the cost of leverage, the Fund's net income will be less
than if leverage had not been used, and therefore the amount available for
distribution to Common Stock shareholders will be reduced. In this case, the
Fund may nevertheless decide to maintain its leveraged position in order to
avoid capital losses on securities purchased with leverage. However, the Fund
will not generally utilize leverage if it anticipates that its leveraged capital
structure would result in a lower rate of return for its Common Stock than would
be obtained if the Common Stock were unleveraged for any significant amount of
time.
Portfolio Information
As of
February 28, 2003
(unaudited)
Percent of
Ten Largest Holdings Total Assets
- --------------------------------------------------------------------------------
Wyndham International, Inc. ........................................ 1.9%
Charter Communications Holdings LLC ................................ 1.9
CSC Holdings Inc. .................................................. 1.8
Radio Unica Corp. .................................................. 1.8
Coaxial LLC/Coaxial Finance ........................................ 1.7
Spectracite Communications ......................................... 1.6
Crown Castle International Corporation ............................. 1.5
Century Cable Holdings LLC ......................................... 1.5
Ainsworth Lumber Company ........................................... 1.5
Western Resources Inc. ............................................. 1.5
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries Total Assets
- --------------------------------------------------------------------------------
Cable Television Services .................................. 12.8%
Utilities .................................................. 6.7
Gaming ..................................................... 6.1
Wireless Telecommunications ................................ 5.8
Broadcasting ............................................... 5.0
- --------------------------------------------------------------------------------
Quality Ratings by Percent of
S&P/Moody's Long-Term Investments
- --------------------------------------------------------------------------------
BBB/Baa .................................................. 0.7%
BB/Ba .................................................... 9.9
B/B ...................................................... 41.0
CCC/Caa or lower ......................................... 30.9
NR (Not Rated) ........................................... 17.5
- --------------------------------------------------------------------------------
Geographic Allocation Percent of
By Country Long-Term Investments
- --------------------------------------------------------------------------------
United States ........................................... 89.3%
Canada .................................................. 8.4
Kyrgyzstan .............................................. 0.9
Australia ............................................... 0.5
Poland .................................................. 0.2
Bahamas ................................................. 0.2
United Kingdom .......................................... 0.2
Cayman Islands .......................................... 0.2
Netherlands ............................................. 0.1
- --------------------------------------------------------------------------------
Debt Strategies Fund, Inc., February 28, 2003
DEAR SHAREHOLDER
Investment Approach
Debt Strategies Fund, Inc. is comprised of high yield bonds and leveraged bank
loans. The high yield bond and bank loan markets contain similar industry
sectors and often have overlapping issuers. As a result, general economic events
and trends tend to move the two markets in the same direction, although bonds
typically experience greater volatility than bank loans. This can be attributed
to two factors. First, bank loans are usually senior secured obligations, thus
generally offering investors greater principal protection than unsecured bonds.
Second, bank loans are typically floating rate instruments whose principal value
generally does not move inversely with interest rate movements, as is the case
with fixed income bonds.
Market Review
The continued high and unprecedented level of default rates in 2002 was the
dominant factor impacting the high yield markets. Although the default rate for
junk bond-rated companies fell from 10.6% to 8.3%, the actual dollar volume of
defaults increased. Moody's Investors Service is forecasting a decline in the
default rate to 6.9% for 2003.
The high yield bond and leveraged loan markets' returns both crossed into
negative territory in the second and third quarters, but this situation reversed
sharply in the fourth quarter because of the emergence of solid retail and
institutional demand in mid-October. Both markets had positive performance
results for the fourth quarter of 2002 with +5.92% (bonds) and +1.93% (bank
loans), as measured by their respective Credit Suisse First Boston (CSFB)
Indexes.
An important development in the high yield markets occurred in 2002 as we saw
the importance of collateralized bond obligations (CBOs) abate significantly.
The channel for collateralized loan obligations (CLOs) remains open, though
somewhat constricted. The negative impact of high yield bond defaults on the
subordinated investor tranches is the principal reason for the decline of CBO
issues. With non-CBO investor demand channels currently playing a relatively
more important role in the high yield markets, this may increase volatility as
CBOs have a comparatively more stable and longer-term investment horizon than
retail funds.
Fund Performance
For the year ended February 28, 2003, the Common Stock of Debt Strategies Fund,
Inc. had a net annualized yield of 14.61%, based on a year-end per share net
asset value of $5.35 and $.782 per share income dividends. Over the same period,
the total investment return on the Fund's Common Stock was +2.04%, based on a
change in per share net asset value from $6.03 to $5.35, and assuming
reinvestment of $.789 per share ordinary income dividends. For the six-month
period ended February 28, 2003, the total investment return on the Fund's Common
Stock was +11.88%, based on a change in per share net asset value from $5.14 to
$5.35, and assuming reinvestment of $.393 per share income dividends. For the
one-year and six-month periods ended February 28, 2003, the Fund's benchmark,
which is an equal blend of the CSFB High Yield Index and the CSFB Leveraged Loan
Index, had total returns of +5.05% and +6.55%, respectively.
For a description of the Fund's total investment return based on a change in the
per share market value (as measured by the trading price of the Fund's shares on
the New York Stock Exchange), and assuming reinvestment of dividends, please
refer to the Financial Highlights section of the Financial Statements included
in this report. As a closed-end fund, the Fund's shares may trade in the
secondary market at a premium or discount to the Fund's net asset value. As a
result, total investment returns based on changes in the Fund's market value can
vary significantly from total investment return based on changes in the Fund's
net asset value.
There are both general and specific reasons for this performance. First, as we
stated in previous shareholder reports, we maintained an overweighted position
in bonds relative to bank loans in order to maintain the dividend yield and
benefit from a potential rally in the high yield market. The Fund underperformed
in the first half of the fiscal year, and outperformed in the second half, as
the overweighted bond position caused the Fund to move in greater sympathy with
the high yield bond market. Second, there were several specific investments that
hurt performance during the year. Among them was Mission Energy Holdings, where
we saw our $30 million bond position collapse in price from 101 to 28. Mission
Energy is a holding company founded to own Edison International of California,
which in turn bought the non-nuclear generating assets of Exelon Corporation
(formerly Commonwealth Edison). Mission Energy was pressured by two factors.
First, the decision by a major customer not to renew a long-term power purchase
agreement, left Mission Energy more exposed to the vagaries of the spot market.
Second, the downgrading of Edison to below investment grade inhibited its
ability to upstream dividends to Mission Energy. Importantly, a combination of
escrowed coupons and tax sharing arrangements would give the company sufficient
debt service ability through 2004 and time to resolve these problems.
Considering that the price of 28 at February 28, 2003 values these securities
only slightly above the value of these payments, we believe these bonds are
quite undervalued.
Our bank loan and bond exposure in the cable television company Charter
Communications Holdings LLC also hurt Fund performance. Our $11 million in bank
loan positions weakened from 97 to 84, while $19.7 million in various bond
holdings fell in price from the high 90s into the 40s. These positions began to
weaken following the Adelphia Communications Corp. bankruptcy. This situation
was further exacerbated by disclosure that Charter Communication's management
had concealed the true level of subscriber disconnects. This issue has been
addressed and relevant management replaced. Charter Communications is currently
in compliance with its debt agreements but remains relatively highly leveraged.
Nevertheless, we believe our positions are currently undervalued.
Positive developments in the Fund included our holdings in Nextel
Communications, Inc. Our confidence in this wireless provider was rewarded as we
sold $23 million in bonds and bank debt around 80 and purchased 16,000 shares of
Preferred Stock around 60. We subsequently liquidated most of the preferred
position at prices ranging from 94 to par. Our 7,300 remaining shares at
February 28, 2003 were trading above par. Radio Unica Corp. was another positive
holding for the Fund as our $24 million bond position rallied from 41 to 60
during the year. This company is the only national Spanish language radio
network in the United States. Paradoxically, the bond price strengthened on the
prospect of the company missing its coupon payment (which was subsequently made
during the 30-day grace period), highlighting the firm's excellent franchise
value, and ample asset coverage.
Investment Strategy
With the three-month London InterBank Offering Rate near 1.3%, we plan to
continue our high yield bond overweight at around 70% of total assets. We are
maintaining leverage near 33%, and managing the duration of the bond portion of
the Fund's portfolio approximately 3.1 years, compared to a high yield market
duration of 4.0 years. By doing so, we are seeking to lessen the potential
negative impact on high yield bond prices should a rising interest rate outlook
prompt a rebalancing toward bank loans.
In Conclusion
The market is currently dominated by geopolitical risk. We are managing the Fund
somewhat defensively (that is, through shorter duration and broad
diversification), while maintaining the portfolio's yield in this low interest
rate environment. However, we are confident that we will continue to see
well-structured transactions and a declining default rate through 2003.
We thank you for your interest in Debt Strategies Fund, Inc., and we look
forward to serving your investment needs in the months and years ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ Kevin J. Booth
Kevin J. Booth
Vice President and Portfolio Manager
/s/ Joseph P. Matteo
Joseph P. Matteo
Vice President and Portfolio Manager
March 31, 2003
2 & 3
Debt Strategies Fund, Inc., February 28, 2003
AUTOMATIC DIVIDEND REINVESTMENT PLAN
The following description of the Fund's Automatic Dividend Reinvestment Plan
(the "Plan") is sent to you annually as required by the Federal securities laws.
Pursuant to the Fund's Plan, unless a holder of Common Stock otherwise elects,
all dividend and capital gains distributions will be automatically reinvested by
The Bank of New York, as agent for shareholders in administering the Plan (the
"Plan Agent"), in additional shares of Common Stock of the Fund. Holders of
Common Stock who elect not to participate in the Plan will receive all
distributions in cash paid by check mailed directly to the shareholder of record
(or, if the shares are held in street or other nominee name then to such
nominee) by The Bank of New York, as dividend paying agent. Such participants
may elect not to participate in the Plan and to receive all distributions of
dividends and capital gains in cash by sending written instructions to The Bank
of New York, as dividend paying agent, at the address set forth below.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by written notice if received by the Plan
Agent not less than ten days prior to any dividend record date; otherwise such
termination will be effective with respect to any subsequently declared dividend
or distribution.
Whenever the Fund declares an income dividend or capital gains distribution
(collectively referred to as "dividends") payable either in shares or in cash,
non-participants in the Plan will receive cash and participants in the Plan will
receive the equivalent in shares of Common Stock. The shares will be acquired by
the Plan Agent for the participant's account, depending upon the circumstances
described below, either (i) through receipt of additional unissued but
authorized shares of Common Stock from the Fund ("newly issued shares") or (ii)
by purchase of outstanding shares of Common Stock on the open market
("open-market purchases") on the New York Stock Exchange or elsewhere. If on the
payment date for the dividend, the net asset value per share of the Common Stock
is equal to or less than the market price per share of the Common Stock plus
estimated brokerage commissions (such condition being referred to herein as
"market premium"), the Plan Agent will invest the dividend amount in newly
issued shares on behalf of the participant. The number of newly issued shares of
Common Stock to be credited to the participant's account will be 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
Plan Agent will invest 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 Plan Agent
will have 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. It is contemplated that the Fund
will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of Common Stock exceeds the
net asset value per share, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the 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, the Plan provides that if the 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 Plan Agent will cease making open-market purchases and will
invest the uninvested portion of the dividend amount in newly issued shares at
the close of business on the last purchase date determined by dividing the
uninvested portion of the dividend by the net asset value per share.
The Plan Agent maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan. The Plan Agent will forward all
proxy solicitation materials to participants and vote proxies for shares held
pursuant to the Plan in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees that hold shares
of others who are the beneficial owners, the Plan Agent will administer the Plan
on the basis of the number of shares certified from time to time by the record
shareholders as representing the total amount registered in the record
shareholder's name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by the
Fund as a result of dividends or capital gains distributions payable either in
shares or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends.
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus commissions
of the Fund's shares is above the net asset value, participants in the Plan will
receive shares of the Fund at less than they could otherwise purchase them and
will 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 below the net asset value, participants will receive
distributions in 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 in shares
at prices below the net asset value. Also, since the Fund does not redeem
shares, the price on resale may be more or less than the net asset value.
The value of shares acquired pursuant to the Plan will generally be excluded
from gross income to the extent that the cash amount reinvested would be
excluded from gross income. If, when the Fund's shares are trading at a premium
over net asset value, the Fund issues shares pursuant to the Plan that have a
greater fair market value than the amount of cash reinvested, it is possible
that all or a portion of such discount (which may not exceed 5% of the fair
market value of the Fund's shares) could be viewed as a taxable distribution. If
the discount is viewed as a taxable distribution, it is also possible that the
taxable character of this discount would be allocable to all the shareholders,
including shareholders who do not participate in the Plan. Thus, shareholders
who do not participate in the Plan might be required to report as ordinary
income a portion of their distributions equal to their allocable share of the
discount.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan. There is no direct
service charge to participants in the Plan; however, the Fund reserves the right
to amend the Plan to include a service charge payable by the participants.
All correspondence concerning the Plan should be directed to the Plan Agent at
The Bank of New York, Church Street Station, P.O. Box 11258, New York, NY
10286-1258, Telephone: 800-432-8224.
4 & 5
Debt Strategies Fund, Inc., February 28, 2003
SCHEDULE OF INVESTMENTS
S&P Moody's Face
INDUSTRIES Ratings++ Ratings++ Amount Corporate Debt Obligations Value
====================================================================================================================================
Aerospace & CCC+ Caa2 $ 1,250,000 Hexcel Corporation, 9.75% due 1/15/2009 $ 1,062,500
Defense--0.2%
====================================================================================================================================
Air Transportation B B3 10,251,725 American Airlines, 7.379% due 5/23/2016 2,155,548
Service--0.5% D Ca 2,795,000 +USAir Inc., 10.375% due 3/01/2013 614,900
-----------
2,770,448
====================================================================================================================================
Amusement & B+ B1 8,250,000 Intrawest Corporation, 10.50% due 2/01/2010 8,621,250
Recreational NR* NR* 1,800,000 +Loews Cineplex Entertainment, 8.875% due 8/01/2008 173,250
Services--1.8% B B2 1,225,000 Vail Resorts Inc., 8.75% due 5/15/2009 1,249,500
-----------
10,044,000
====================================================================================================================================
Apparel--0.5% Arena Brands, Inc.:**
NR* NR* 16,916 Term A, due 6/01/2003 16,800
NR* NR* 2,802,219 Term B, due 6/01/2003 2,785,756
-----------
2,802,556
====================================================================================================================================
Automotive B+ NR* 3,326,637 Citation Corporation, Term B, due 12/01/2007** 2,927,441
Equipment--1.9% B B2 1,550,000 Dura Operating Corporation, 9% due 5/01/2009 1,325,250
CCC- Caa3 3,200,000 +Holley Performance Products, 12.25% due 9/15/2007 1,216,000
NR* NR* 3,850,000 +Key Plastics, Inc., 10.25% due 3/15/2007 385
B B3 2,500,000 Metaldyne Corporation, 11% due 6/15/2012 1,975,000
CCC+ Caa1 3,375,000 Tenneco Automotive Inc., 11.625% due 10/15/2009 2,531,250
+Venture Holdings Trust:
D Caa1 1,800,000 9.50% due 7/01/2005 450,000
D Caa2 4,450,000 12% due 6/01/2009 178,000
-----------
10,603,326
====================================================================================================================================
Broadcasting--7.1% CCC+ B3 6,400,000 Acme Television/Finance, 10.875% due 9/30/2004 6,544,000
Cumulus Media Inc.:
B- B3 2,000,000 10.375% due 7/01/2008 2,140,000
B+ Ba3 1,000,000 Term B, due 3/28/2010** 1,007,188
NR* NR* 6,471,568 Gocom Communications LLC, Term B, due 12/31/2007** 5,889,127
NR* NR* 2,916,667 Granite Broadcasting, Term A, due 4/15/2004** 2,843,750
B- B3 1,600,000 Nexstar Finance Inc. LLC, 12% due 4/01/2008 1,760,000
NR* Caa3 24,525,000 Radio Unica Corp., 11.75% due 8/01/2006 14,745,656
B- B3 4,650,000 Spanish Broadcasting System, 9.625% due 11/01/2009 4,766,250
-----------
39,695,971
====================================================================================================================================
Building & B B2 10,500,000 Champion Home Builders, 11.25% due 4/15/2007 9,030,000
Construction--1.6%
====================================================================================================================================
Building NR* NR* 5,850,000 +Formica Corporation, 10.875% due 3/01/2009 1,404,000
Materials--0.6% NR* NR* 2,293,267 Trussway Industries Inc., Term B, due 12/31/2006** 1,777,282
-----------
3,181,282
====================================================================================================================================
Cable Television BB- B1 3,450,000 CSC Holdings Inc., 7.25% due 7/15/2008 3,363,750
Services--16.2% Century Cable Holdings LLC:**
D Caa1 10,000,000 Discretionary Term, due 6/30/2009 7,208,330
D Caa1 7,000,000 Term, due 12/31/2009 4,942,777
Charter Communications Holdings LLC:
B+ B2 10,000,000 10% due 4/01/2009 4,800,000
CCC- Ca 2,000,000 0/11.75% due 1/15/2010 (c) 760,000
CCC- Ca 2,000,000 11.125% due 1/15/2011 980,000
CCC- Ca 2,700,000 0/9.92% due 4/01/2011 (c) 1,161,000
CCC- Ca 3,000,000 10% due 5/15/2011 1,440,000
Charter Communications Operating LLC:
BB- B1 1,985,000 Incremental Term, due 9/18/2008** 1,662,713
BB- B1 4,962,500 Term B, due 3/18/2008** 4,178,648
B B3 4,500,000 Coaxial Communications, Phoenix, 10% due 8/15/2006 4,230,000
CCC+ Caa1 20,000,000 Coaxial LLC/Coaxial Finance, 0/12.875% due 8/15/2008 (c) 14,025,000
C Caa2 5,000,000 Comcast UK Cable Partners Ltd., 11.20% due 11/15/2007 3,675,000
B+ B1 6,950,000 Echostar DBS Corporation, 9.375% due 2/01/2009 7,401,750
Insight Midwest:
B+ B2 2,500,000 9.75% due 10/01/2009 2,437,500
BB+ Ba3 8,000,000 Term B, due 12/31/2009** 7,727,000
NR* NR* 8,750,000 +Mallard Cablevision LLC & Sun Tel Comm., Term B,
due 9/30/2008** 4,375,000
D B2 6,000,000 Olympus Cable Holdings LLC, Term B, due 9/30/2010** 4,866,816
B+ B1 3,920,000 Pegasus Media & Communications, Inc., Term, due 4/30/2005** 3,543,241
CCC+ Ca 7,500,000 Pegasus Satellite, 12.375% due 8/01/2006 5,943,750
C Ca 6,100,000 +Telewest Communications PLC, 9.875% due 2/01/2010 1,128,500
D Ca 5,500,000 +United Pan-Europe Communications NV, 11.25% due 2/01/2010 453,750
-----------
90,304,525
====================================================================================================================================
Chemicals--5.0% BB B1 4,000,000 Equistar Chemicals LP, 8.75% due 2/15/2009 3,420,000
B- B3 2,000,000 Geo Specialty Chemicals, 10.125% due 8/01/2008 1,100,000
B- Caa1 2,000,000 Huntsman ICI Chemicals, 10.125% due 7/01/2009 1,695,000
B- Caa2 11,000,000 Huntsman ICI Holdings, 0% due 12/31/2009 (c) 2,530,000
B B3 1,900,000 Huntsman International LLC, 9.875% due 3/01/2009 1,942,750
B+ B2 3,150,000 ISP Holdings, Inc., 10.625% due 12/15/2009 3,008,250
BB Ba3 3,550,000 Lyondell Chemical Company, 9.80% due 2/01/2020 2,733,500
BBB- Ba1 2,400,000 Millennium America Inc., 7.625% due 11/15/2026 2,100,000
NR* NR* 1,450,917 PCI Chemicals, 10% due 12/31/2008 1,102,697
NR* NR* 483,639 Pioneer Companies, Inc., 4.90% due 12/31/2006 357,893
B Caa3 9,125,000 Terra Industries, 10.50% due 6/15/2005 7,893,125
-----------
27,883,215
====================================================================================================================================
Computer-Related NR* NR* 2,230,423 +Bridge Information Systems, Term B, due 5/29/2005** 301,107
Products--0.1%
====================================================================================================================================
Consumer BB+ Ba3 3,500,000 American Greetings, 11.75% due 7/15/2008 3,893,750
Products--4.0% BB- Ba3 800,984 Burhmann NV, Term B, due 10/26/2007** 760,635
NR* Caa3 25,460,000 +Decora Industries Inc., 11% due 5/01/2005 2,546
D C 2,500,000 +Diamond Brands Inc., 0/12.875% due 4/15/2009 (c) 12,500
B- Caa2 2,000,000 Home Products International Inc., 9.625% due 5/15/2008 1,800,000
B- B2 1,475,000 Remington Arms Company, 10.50% due 2/01/2011 (d) 1,552,437
6 & 7
Debt Strategies Fund, Inc., February 28, 2003
SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face
INDUSTRIES Ratings++ Ratings++ Amount Corporate Debt Obligations Value
====================================================================================================================================
Consumer Products CCC Caa2 $ 5,500,000 Remington Product Company LLC, 11% due 5/15/2006 $ 5,060,000
(concluded) CCC Caa2 11,000,000 Samsonite Corporation, 10.75% due 6/15/2008 9,377,500
-----------
22,459,368
====================================================================================================================================
Electronics/Electrical NR* C 10,143,000 +Advanced Glassfiber Yarn, 9.875% due 1/15/2009 519,829
Components--4.1% Amkor Technology Inc.:
B B1 3,500,000 9.25% due 5/01/2006 3,325,000
B B1 6,700,000 9.25% due 2/15/2008 6,298,000
NR* B1 1,661,397 DD Incorporated, Term B, due 4/22/2005** 1,204,513
CCC Caa2 10,145,000 High Voltage Engineering, 10.75% due 8/15/2004 2,942,050
BB Ba3 4,300,000 Mirant Americas Generation LLC, 7.625% due 5/01/2006 2,429,500
B Caa2 1,332,228 ON Semiconductor Corporation (Semiconductor Components),
Term D, due 8/04/2007** 1,212,328
B Caa2 7,500,000 SCG Holdings Corporation, 12% due 8/01/2009 4,275,000
NR* B1 2,498,027 +Trend Technologies, Inc., Term, due 2/28/2007** 686,958
-----------
22,893,178
====================================================================================================================================
Energy--4.7% B+ Ba3 8,925,000 Citgo Petroleum Corporation, 11.375% due 2/01/2011 (d) 8,969,625
CCC+ Caa1 1,900,000 Continental Resources, 10.25% due 8/01/2008 1,776,500
BB- Ba3 2,092,024 Dresser Inc., Term B, due 4/10/2009** 2,097,440
El Paso Energy Partners:
BB- B1 750,000 8.50% due 6/01/2011 723,750
NR* NR* 1,000,000 Term B, due 9/01/2009** 952,500
CCC+ Caa3 3,250,000 Energy Corp. of America, 9.50% due 5/15/2007 1,982,500
B+ Ba3 8,550,000 Fluor Corporation, 6.95% due 3/01/2007 6,669,000
B B2 2,925,000 Lone Star Technologies, 9% due 6/01/2011 2,837,250
-----------
26,008,565
====================================================================================================================================
Environmental D NR* 1,800,000 +IT Group Inc., 11.25% due 4/01/2009 18
Services--0.2% B B2 1,500,000 URS Corporation, 12.25% due 5/01/2009 1,177,500
-----------
1,177,518
====================================================================================================================================
Financial B B2 3,000,000 Ares Leveraged Fund II, Junior Subordinate Secured Note,
Services--1.9% due 10/31/2005 (a)(d) 2,100,000
NR* NR* 8,000,000 Finova Group Inc., 7.50% due 11/15/2009 2,560,000
NR* NR* 1,500,000 Investcorp SA, Term, due 10/21/2008** 1,522,066
NR* Ba3 2,000,000 Pennant CBO Limited, 13.43% due 3/14/2011 (d)(f) 678,125
NR* NR* 3,500,000 Preferred Term Securities VI, 20% due 7/03/2032 (a)(d) 3,543,750
SKM-Libertyview CBO Limited (d)(f):
AAA Ca3 1,500,000 8.71% due 4/10/2011 278,438
AAA Ca 1,000,000 11.91% due 4/10/2011 10,000
-----------
10,692,379
====================================================================================================================================
Food & Kindred NR* NR* 2,807,494 Archibald Candy Corporation, 10% due 11/01/2007 2,526,745
Products--6.1% BB+ Ba2 4,599,381 Dean Foods Company, Term B, due 7/15/2008** 4,604,270
B- B2 2,200,000 Doane Pet Care Company, 10.75% due 3/01/2010 (d) 2,222,000
NR* NR* 22,526,000 +Envirodyne Industries, 10.25% (h) 4,505,200
BB- Ba3 8,000,000 Luigino's Inc., 10% due 2/01/2006 8,160,000
BB- Ba3 3,927,800 Merisant Company, Term B, due 3/30/2007** 3,931,484
NR* Caa2 11,750,000 RAB Enterprises Inc., 10.50% due 5/01/2005 5,875,000
B+ Ba2 2,000,000 SC International Services, Inc., 9.25% due 9/01/2007 2,092,700
-----------
33,917,399
====================================================================================================================================
Forest Products--3.3% Ainsworth Lumber Company:
B- B3 9,000,000 12.50% due 7/15/2007 (b) 9,675,000
B- B3 2,500,000 13.875% due 7/15/2007 2,725,000
B+ B3 6,000,000 Millar Western Forest, 9.875% due 5/15/2008 6,000,000
-----------
18,400,000
====================================================================================================================================
Gaming--8.8% +Aladdin Gaming LLC:
NR* NR* 13,000,000 0/13.50% due 3/01/2010 (c) 146,250
NR* Caa1 2,968,421 Term B, due 2/26/2006** 2,463,789
NR* Caa1 4,455,000 Term C, due 2/26/2008** 3,697,650
Hollywood Park Inc.:
CCC+ Caa1 4,300,000 9.25% due 2/15/2007 (d) 3,827,000
CCC+ Caa1 3,000,000 9.50% due 8/01/2007 2,670,000
B B2 2,000,000 Jacobs Entertainment, 11.875% due 2/01/2009 2,080,000
B+ B2 3,600,000 Marina District Finance Co. (Borgata), Term B,
due 5/31/2007** 3,550,500
BB+ Ba2 7,000,000 Park Place Entertainment, 8.125% due 5/15/2011 7,035,000
B B2 2,150,000 Peninsula Gaming LLC, 12.25% due 7/01/2006 2,193,000
B- B3 7,000,000 Penn National Gaming Inc., 11.125% due 3/01/2008 7,420,000
B+ B2 1,800,000 Sun International Hotels, 8.875% due 8/15/2011 1,809,000
B- B3 4,000,000 Venetian Casino/LV Sands, 11% due 6/15/2010 4,080,000
CCC+ B3 8,000,000 Wynn Las Vegas LLC, 12% due 11/01/2010 8,040,000
-----------
49,012,189
====================================================================================================================================
Health Services--1.2% B+ B1 3,460,956 Medpointe, Term B, due 9/30/2008** 3,158,122
CCC+ B3 3,325,000 Vanguard Health Systems, 9.75% due 8/01/2011 3,233,563
-----------
6,391,685
====================================================================================================================================
Health Care BB- Ba2 5,000,000 Fresenius Medical Capital Trust IV, 7.875% due 6/15/2011 5,000,000
Providers--0.9%
====================================================================================================================================
Hotels & Motels--5.7% B B2 7,000,000 Extended Stay America, 9.15% due 3/15/2008 6,685,000
BB- Ba3 1,800,000 HMH Properties, Inc., 8.45% due 12/01/2008 1,692,000
B B2 1,650,000 John Q. Hammons Hotels, 8.875% due 5/15/2012 1,633,500
B B2 6,500,000 Majestic Star LLC, 10.875% due 7/01/2006 6,565,000
Wyndham Hotel Corporation:**
B NR* 6,543,291 Increasing Rate Term, due 6/30/2004 4,962,681
B NR* 14,015,206 Term, due 6/30/2006 10,183,799
-----------
31,721,980
====================================================================================================================================
Industrial BB- Ba3 1,990,000 Johnson Divessey, Term B, due 9/15/2009** 2,001,817
Services--1.3% B- Caa3 9,375,000 Muzak Holdings LLC, 0/13% due 3/15/2010 (c) 5,074,219
-----------
7,076,036
====================================================================================================================================
8 & 9
Debt Strategies Fund, Inc., February 28, 2003
SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face
INDUSTRIES Ratings++ Ratings++ Amount Corporate Debt Obligations Value
====================================================================================================================================
Leasing & Rental CCC+ Caa2 $ 3,750,000 Anthony Crane Rental LP, Term, due 7/22/2006** $ 1,125,000
Services--2.2% B Caa3 6,800,000 National Equipment Services, 10% due 11/30/2004 2,040,000
BB- B1 3,000,000 United Rentals Inc., 10.75% due 4/15/2008 (d) 2,962,500
B B3 6,400,000 Williams Scotsman, Inc., 9.875% due 6/01/2007 6,016,000
-----------
12,143,500
====================================================================================================================================
Manufacturing--5.6% NR* NR* 4,500,000 AquaChem Inc., 11.25% due 7/01/2008 3,465,000
CCC- NR* 8,350,000 International Utility Structures, 10.75% due 2/01/2008 4,175,000
BB+ Ba2 4,000,000 JLG Industries Inc., 8.375% due 6/15/2012 3,240,000
B- Caa3 5,000,000 Jordan Industries, 10.375% due 8/01/2007 2,506,250
B+ B1 3,749,701 Metokote, Term B, due 11/02/2005** 3,698,143
NR* NR* 8,980,000 +Moll Industries, 10.50% due 7/01/2008 1,077,600
B+ B3 600,000 NMHG Holding Company, 10% due 5/15/2009 624,000
B- B3 700,000 Rexnord Corporation, 10.125% due 12/15/2012 (d) 729,750
B B2 3,775,000 Terex Corporation, 9.25% due 7/15/2011 3,586,250
D Ca 6,000,000 +Thermadyne Manufacturing, 9.875% due 6/01/2008 1,627,500
B B3 1,300,000 Trimas Corporation, 9.875% due 6/15/2012 (d) 1,267,500
B+ B3 5,760,000 U.S. Industries, Inc., 11.25% due 12/31/2005 (d) 5,356,800
-----------
31,353,793
====================================================================================================================================
Metals & NR* NR* 8,185,176 +Acme Metals Inc., Term, due 12/01/2005** 1,227,777
Mining--3.7% BBB Ba2 4,000,000 Great Central Mines Ltd., 8.875% due 4/01/2008 3,830,000
B- B3 5,029,000 Great Lakes Carbon Corp., 10.25% due 5/15/2008 (b) 3,771,750
CCC+ Caa2 5,700,000 Haynes International Inc., 11.625% due 9/01/2004 2,793,000
Ispat Int'l:**
B- Caa2 1,241,500 Term B, due 7/15/2006 806,975
B- Caa1 1,241,500 Term C, due 7/15/2005 806,975
CCC Caa3 5,375,000 Neenah Corporation, 11.125% due 5/01/2007 1,988,750
BB- B1 1,450,000 Oregon Steel Mills Inc., 10% due 7/15/2009 1,402,875
CCC Ca 3,000,000 Ormet Corporation, Term, due 8/15/2008** 1,440,000
NR* Ca 550,000 +Pen Holdings Inc., 9.875% due 6/15/2008 66,000
CCC+ Caa2 9,095,000 WCI Steel Inc., 10% due 12/01/2004 2,546,600
-----------
20,680,702
====================================================================================================================================
Natural Gas-- B+ B1 650,000 Southern Natural Gas, 8.875% due 3/15/2010 (d) 641,667
Pipelines--0.1%
====================================================================================================================================
Packaging--3.7% B+ B2 7,625,000 Anchor Glass Container Corporation, 11% due 2/15/2013 (d) 7,605,937
B- B3 1,575,000 Berry Plastics, 10.75% due 7/15/2012 1,673,437
B B2 4,400,000 Crown Euro Holdings SA, 10.875% due 3/01/2013 (d) 4,433,000
CCC+ NR* 5,700,000 Graham Packaging Company, 10.75% due 1/15/2009 5,500,500
B- Caa1 1,800,000 Pliant Corporation, 13% due 6/01/2010 1,422,000
NR* Ca 2,750,000 +Spinnaker Industries Inc., 10.75% due 10/15/2006 275
-----------
20,635,149
====================================================================================================================================
Paper--4.7% BB+ Ba2 7,250,000 Georgia Pacific Corporation, 9.375% due 2/01/2013 (d) 7,322,500
MDP Acquisitions PLC (d):
B B3 283,563 15.50% due 10/01/2013 306,957
B B3 7,000,000 15.50% due 10/01/2013 (b) 7,577,500
Stone Container Corporation:
B B2 3,600,000 8.375% due 7/01/2012 3,780,000
B+ Ba3 5,480,769 Term B, due 6/30/2009** 5,422,109
B+ Ba3 2,019,231 Term C, due 6/30/2009** 1,997,146
-----------
26,406,212
====================================================================================================================================
Petroleum B+ B3 9,000,000 Giant Industries, 11% due 5/15/2012 7,470,000
Refineries--3.1% Tesoro Petroleum Corp.:
B+ B2 2,000,000 9% due 7/01/2008 1,660,000
BB Ba3 3,332,851 Term B, due 12/31/2007** 3,169,541
B- B3 6,600,000 United Refining Co., 10.75% due 6/15/2007 5,230,500
-----------
17,530,041
====================================================================================================================================
Pharmaceuticals-- B+ NR* 2,000,000 ICN Pharmaceuticals Inc., 6.50% due 7/15/2008 (Convertible) 1,685,000
0.3%
====================================================================================================================================
Printing & B B3 775,000 Houghton Mifflin Company, 9.875% due 2/01/2013 (d) 813,750
Publishing--0.6% NR* B3 2,635,000 Perry-Judd, 10.625% due 12/15/2007 2,569,125
-----------
3,382,875
====================================================================================================================================
Property NR* NR* 4,887,805 Buffington Harbor Parking Associates, LLC, Term B,
Management--1.5% due 7/01/2011** 4,887,805
B- B2 3,200,000 Corrections Corporation of America, 9.875% due 5/01/2009 3,440,000
-----------
8,327,805
====================================================================================================================================
Restaurants--0.7% BB- Ba3 3,980,000 Domino's Pizza, Term B, due 7/30/2008** 3,992,438
====================================================================================================================================
Retail & Retail BBB+ Ba1 4,963,235 Shoppers Drug Mart, Term F, due 2/04/2009** 4,975,023
Specialty--1.9% B B3 5,500,000 Star Gas Partners, LP, 10.25% due 2/15/2013 (d) 5,403,750
-----------
10,378,773
====================================================================================================================================
Shipping--0.1% BB- Ba3 500,000 Stena AB, 9.625% due 12/01/2012 517,500
====================================================================================================================================
Textile Mill NR* NR* 7,900,000 +Galey & Lord, Inc., 9.125% due 3/01/2008 158,000
Products--0.0%
====================================================================================================================================
Tower Construction & CCC B3 1,325,000 American Tower Escrow, 0% due 8/01/2008 (c) 814,875
Leasing--4.3% American Tower Systems Corporation:
B- Caa1 3,000,000 9.375% due 2/01/2009 2,385,000
BB- B2 4,169,966 Term B, due 12/31/2007** 3,951,260
Crown Castle International Corporation:
B B3 1,100,000 9% due 5/15/2011 863,500
CCC B3 3,625,000 9.375% due 8/01/2011 2,936,250
CC B3 14,445,028 Spectrasite Communications, Term B, due 12/31/2007** 12,819,962
-----------
23,770,847
====================================================================================================================================
10 & 11
Debt Strategies Fund, Inc., February 28, 2003
SCHEDULE OF INVESTMENTS (continued)
S&P Moody's Face
INDUSTRIES Ratings++ Ratings++ Amount Corporate Debt Obligations Value
====================================================================================================================================
Transportation CCC Caa2 $10,000,000 +American Commercial LLC, 11.25% due 1/01/2008 $ 2,600,000
Services--1.3% B+ B1 4,549,825 North American Van Lines, Inc., Term B, due 11/18/2007** 4,437,503
-----------
7,037,503
====================================================================================================================================
Utilities--9.7% B- Caa1 2,500,000 The AES Corporation, 8.50% due 11/01/2007 1,425,000
NR* NR* 5,185,072 AES Corporation (formerly AES EDC Funding II LLC),
Term C, due 7/15/2005** 4,978,966
NR* Ba3 1,875,000 AES New York Funding, LLC, Term, due 2/28/2005** 1,765,626
BB- B3 6,000,000 CMS Energy Corporation, 8.50% due 4/15/2011 4,980,000
B+ B1 3,000,000 Calpine Canada Energy Finance, 8.50% due 5/01/2008 1,455,000
Calpine Corporation:
B+ B1 2,700,000 8.50% due 2/15/2011 1,296,000
BBB- Ba3 3,798,260 Term B, due 5/31/2004** 3,470,185
Consumer Energy, Term:**
NR* NR* 833,333 due 5/16/2003 836,979
NR* NR* 833,333 due 7/16/2003 836,979
NR* NR* 833,333 due 8/29/2003 836,979
BB+ Baa2 2,985,000 Michigan Electric Transmission Co., Term B, due 5/01/2007** 2,985,934
B- B3 30,000,000 Mission Energy Holdings, 13.50% due 7/15/2008 8,400,000
CCC+ Caa1 1,950,000 Mission Resources Corporation, 10.875% due 4/01/2007 1,189,500
BB Ba2 5,500,000 Southern California Edison, Term B, due 3/01/2005** 5,512,892
BB+ Ba2 2,228,125 TNP Enterprises, Inc., Term, due 3/30/2006** 2,214,199
Western Resources Inc.:
BB- Ba2 10,100,000 9.75% due 5/01/2007 10,453,500
BBB- Ba1 1,497,436 Term N, due 6/05/2005** 1,482,462
-----------
54,120,201
====================================================================================================================================
Wired B- B3 6,800,000 Fairpoint Communications, 12.50% due 5/01/2010 5,746,000
Telecommunications-- NR* NR* 7,486,509 +Pacific Crossing Ltd., Term B-1, due 7/28/2006** 399,278
3.5% CCC+ Caa1 2,000,000 Qwest Communications International, 7.50% due 11/01/2008 1,680,000
B- B3 8,000,000 Time Warner Telecom LLC, 9.75% due 7/15/2008 5,640,000
B B2 8,200,000 U.S. West Capital Funding Inc., 6.875% due 7/15/2028 5,289,000
NR* Caa3 5,611,040 +WCI Capital (Winstar Communications), Debtor in
Possession, due 12/31/2003** 981,932
-----------
19,736,210
====================================================================================================================================
Wireless Centennial Cellular:**
Telecommunications-- B B3 5,144,157 Term B, due 5/30/2007 4,038,163
6.2% B B3 4,505,393 Term C, due 11/30/2007 3,531,908
CCC C 10,000,000 +Microcell Telecommunications, 0/12% due 6/01/2009 (c) 525,000
Nextel Communications, Inc.:
B B3 425,000 9.50% due 2/01/2011 427,125
BB- Ba3 5,220,778 Term D, due 3/31/2009** 4,877,930
Nextel Partners Inc.:
CCC+ B3 4,000,000 12.50% due 11/15/2009 3,880,000
CCC+ B3 7,100,000 11% due 3/15/2010 6,496,500
B+ B1 475,000 PTC International Finance II SA, 11.25% due 12/01/2009 517,750
B+ B1 605,000 PTC International Finance BV, 10.75% due 7/01/2007 638,275
Rural Cellular:**
B+ Ba3 3,339,569 Term B, due 10/03/2008 2,891,111
B+ Ba3 3,339,569 Term C, due 4/03/2009 2,891,111
Telesystem International Wireless:
B- NR* 3,773,000 14% due 12/30/2003 3,395,700
B- NR* 358,922 14% due 12/30/2003 (d) 323,030
-----------
34,433,603
====================================================================================================================================
Total Investments in Corporate Debt Obligations
(Cost--$926,425,473)--130.9% 729,361,046
====================================================================================================================================
Shares
Held Common Stocks
====================================================================================================================================
Automotive 3,614,601 Cambridge Liquidating Trust 175,308
Equipment--0.0%
====================================================================================================================================
Chemicals--0.0% 93,826 +Pioneer Companies, Inc. 272,096
====================================================================================================================================
Food & Kindred 15,252 +Archibald Candy Corporation 1,418,436
Products--0.3%
====================================================================================================================================
Hotels & Motels-- 83,363 +Lodgian, Inc. 275,932
0.1%
====================================================================================================================================
Metals & 91,399 +Geneva Steel Holdings Corp. 91
Mining--0.0%
====================================================================================================================================
Textile Mill 1,725,000 Global Manufacturing Liquidation Trust 17
Products--0.0%
====================================================================================================================================
Wired 57,455 +WilTel Communications, Inc. 795,177
Telecommunications--
0.1%
====================================================================================================================================
Total Investments in Common Stocks (Cost--$11,974,381)--0.5% 2,937,057
====================================================================================================================================
Preferred Stocks
====================================================================================================================================
Broadcasting--0.1% 77 Paxson Communications (b) 524,076
34 Paxson Communications (Convertible) (b)(d) 141,985
-----------
666,061
====================================================================================================================================
Cable Television 5,000 Adelphia Communications 2,500
Services--2.4% 22,500 CSC Holdings Inc. 2,317,500
89,100 CSC Holdings Inc. (b) 9,132,750
3,500 Pegasus Satellite 1,697,500
-----------
13,150,250
====================================================================================================================================
Financial Services-- 30,000 Sinclair Capital (Convertible) 3,180,000
0.6%
====================================================================================================================================
12 & 13
Debt Strategies Fund, Inc., February 28, 2003
SCHEDULE OF INVESTMENTS (concluded)
Shares
INDUSTRIES Held Preferred Stocks Value
===================================================================================================================================
Hotels & Motels-- 70,359 Lodgian, Inc. $ 1,329,785
0.2%
===================================================================================================================================
Printing & 250,000 NewsCorp Overseas Ltd. 5,150,000
Publishing--1.4% 35,000 Primedia, Inc. 2,765,000
-------------
7,915,000
===================================================================================================================================
Tower Construction 12,184 Crown Castle International Corporation (b) 8,437,420
& Leasing--1.5%
===================================================================================================================================
Wireless 11,023 Dobson Communications (b) 7,275,081
Telecommunications-- 5,267 Nextel Communications, Inc. (b) 5,372,340
2.3% -------------
12,647,421
===================================================================================================================================
Total Investments in Preferred Stocks
(Cost--$51,633,748)--8.5% 47,325,937
===================================================================================================================================
Warrants & Rights
===================================================================================================================================
Broadcasting--0.0% 704 Paxson Communications (Warrants) (d)(g) 1
15,000 Sirius Satellite (Warrants) (g) 150
-------------
151
===================================================================================================================================
Gaming--0.0% 15,140 Peninsula Gaming LLC (Warrants) (g) 90,842
===================================================================================================================================
Metals & 28,660 Geneva Steel Holdings Corp. (Equity Rights) (e) 0
Mining--0.0%
===================================================================================================================================
Paper--0.0% Cellu Tissue Holdings, Inc. (Warrants) (g):
30 Series A 0
15 Series B 0
-------------
0
===================================================================================================================================
Total Investments in Warrants & Rights
(Cost--$875,851)--0.0% 90,993
===================================================================================================================================
Beneficial
Interest Short-Term Securities
===================================================================================================================================
$ 361,669 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (i) 361,669
===================================================================================================================================
Total Investments in Short-Term Securities
(Cost--$361,669)--0.1% 361,669
===================================================================================================================================
Total Investments (Cost--$991,271,122)--140.0% 780,076,702
Liabilities in Excess of Other Assets--(40.0%) (223,008,418)
-------------
Net Assets--100.0% $ 557,068,284
=============
===================================================================================================================================
* Not Rated.
** Floating rate corporate debt in which the Fund invests generally pays
interest at rates that are periodically redetermined by reference to a
base lending rate plus a premium. These base lending rates are generally
(i) the lending rate offered by one or more major European banks, such as
LIBOR (London Inter-Bank Offered Rate), (ii) the prime rate offered by one
or more major United States banks or (iii) the certificate of deposit
rate. Floating rate corporate debt is generally considered to be
restricted in that the Fund ordinarily is contractually obligated to
receive approval from the agent bank and/or borrower prior to its
disposition. Corporate loans represent 36.3% of the Fund's net assets.
+ Non-income producing security.
++ Ratings of issues shown are unaudited.
(a) Floating rate note.
(b) Represents a pay-in-kind security which may pay interest/dividends in
additional face/shares.
(c) Represents a zero coupon or step bond; the interest rate on a step bond
will commence its accrual at a fixed rate of interest on a predetermined
date until maturity.
(d) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(e) Each Equity Right entitles the Fund to purchase one share of new Preferred
Stock at a price of $10.80 per Equity Right.
(f) Mortgage-Backed Obligations are subject to principal paydowns as a result
of prepayments or refinancing of the underlying mortgage instruments. As a
result, the average life may be substantially less than the original
maturity.
(g) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock and are non-income producing. The purchase price and number
of shares are subject to adjustment under certain conditions until the
expiration date.
(h) Maturity of this security is pending as a result of bankruptcy
proceedings.
(i) Investments in companies considered to be an affiliate of the Fund (such
companies are defined as "Affiliated Companies" in Section 2(a)(3) of the
Investment Company Act of 1940) are as follows:
- --------------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
- --------------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $361,669 $ 10,161
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
14 & 15
Debt Strategies Fund, Inc., February 28, 2003
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of February 28, 2003
==============================================================================================================
Assets: Investments, at value (identified cost--$991,271,122) ..... $ 780,076,702
Cash ...................................................... 27,599
Receivables:
Interest ................................................ $ 17,584,821
Securities sold ......................................... 10,317,436
Dividends ............................................... 346,628 28,248,885
------------
Prepaid expenses and other assets ......................... 15,591
---------------
Total assets .............................................. 808,368,777
---------------
==============================================================================================================
Liabilities: Loans ..................................................... 245,900,000
Payables:
Securities purchased .................................... 4,839,303
Investment adviser ...................................... 365,822
Interest on loans ....................................... 60,412
Commitment fees ......................................... 5,417 5,270,954
------------
Deferred income ........................................... 52,762
Accrued expenses .......................................... 76,777
---------------
Total liabilities ......................................... 251,300,493
---------------
==============================================================================================================
Net Assets: Net assets ................................................ $ 557,068,284
===============
==============================================================================================================
Capital: Common Stock, $.10 par value, 200,000,000 shares authorized $ 10,413,927
Paid-in capital in excess of par .......................... 1,054,989,649
Undistributed investment income--net ...................... $ 7,189,935
Accumulated realized capital losses on investments and
foreign currency transactions--net ........................ (304,256,681)
Unrealized depreciation on investments--net ............... (211,268,546)
------------
Total accumulated losses--net ............................. (508,335,292)
---------------
Total Capital--Equivalent to $5.35 per share based on
104,139,273 shares of Capital Stock outstanding
(market price--$5.99) ..................................... $ 557,068,284
===============
==============================================================================================================
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
For the Year Ended February 28, 2003
================================================================================================================
Investment Income: Interest ............................................ $ 88,211,396
Dividends ........................................... 3,438,146
Facility and other fees ............................. 755,457
-------------
Total income ........................................ 92,404,999
-------------
================================================================================================================
Expenses: Investment advisory fees ............................ $ 4,851,140
Loan interest expense ............................... 4,767,895
Borrowing costs ..................................... 425,923
Professional fees ................................... 210,046
Accounting services ................................. 191,864
Transfer agent fees ................................. 103,658
Printing and shareholder reports .................... 74,159
Listing fees ........................................ 70,110
Directors' fees and expenses ........................ 56,051
Custodian fees ...................................... 51,270
Pricing services .................................... 14,978
Other ............................................... 51,145
------------
Total expenses ...................................... 10,868,239
-------------
Investment income--net .............................. 81,536,760
-------------
================================================================================================================
Realized & Unrealized Realized gain (loss) on:
Gain (Loss) on Investments--net .................................. (60,908,014)
Investments & Foreign currency transactions--net ................ 355 (60,907,659)
Foreign Currency ------------
Transactions--Net: Change in unrealized appreciation/depreciation on
investments--net .................................... (9,693,150)
-------------
Total realized and unrealized loss on investments and
foreign currency transactions--net .................. (70,600,809)
-------------
Net Increase in Net Assets Resulting from Operations $ 10,935,951
=============
================================================================================================================
See Notes to Financial Statements.
16 & 17
Debt Strategies Fund, Inc., February 28, 2003
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended
February 28,
-------------------------------
Increase (Decrease) in Net Assets: 2003 2002
============================================================================================================================
Operations: Investment income--net ................................................ $ 81,536,760 $ 93,622,888
Realized loss on investments and foreign currency transactions--net ... (60,907,659) (116,592,237)
Change in unrealized appreciation/depreciation on investments--net .... (9,693,150) (34,776,801)
------------- -------------
Net increase (decrease) in net assets resulting from operations ....... 10,935,951 (57,746,150)
------------- -------------
============================================================================================================================
Dividends to Dividends to shareholders from investment income--net ................. (81,536,390) (94,977,575)
Shareholders: ------------- -------------
============================================================================================================================
Capital Share Write-off of offering costs resulting from the issuance of Common Stock -- 238,476
Transactions: Value of shares issued in reinvestment of dividends ................... 7,626,072 8,693,666
------------- -------------
Net increase in net assets resulting from capital share transactions .. 7,626,072 8,932,142
------------- -------------
============================================================================================================================
Net Assets: Total decrease in net assets .......................................... (62,974,367) (143,791,583)
Beginning of year ..................................................... 620,042,651 763,834,234
------------- -------------
End of year* .......................................................... $ 557,068,284 $ 620,042,651
============= =============
============================================================================================================================
* Undistributed investment income--net .................................. $ 7,189,935 $ 6,798,047
============= =============
============================================================================================================================
See Notes to Financial Statements.
STATEMENT OF CASH FLOWS
For the Year Ended February 28, 2003
==============================================================================================
Cash Provided by Net increase in net assets resulting from operations $ 10,935,951
Operating Activities: Adjustments to reconcile net increase in net assets
resulting from operations to net cash provided by
operating activities:
Increase in receivables .......................... (123,687)
Increase in other assets ......................... (6,765)
Increase in other liabilities .................... 22,597
Realized and unrealized loss on investments and
foreign currency transactions--net ............... 70,600,809
Amortization of premium .......................... (23,549,550)
-------------
Net cash provided by operating activities .......... 57,879,355
-------------
==============================================================================================
Cash Provided by Proceeds from sales of long-term investments ....... 539,628,061
Investing Activities: Purchases of long-term investments ................. (503,690,247)
Proceeds from sales and maturities of short-term
investments--net ................................... 6,854,621
-------------
Net cash provided by investing activities .......... 42,792,435
-------------
==============================================================================================
Cash Used for Cash receipts from borrowings ...................... 196,800,000
Financing Activities: Cash payments on borrowings ........................ (224,500,000)
Dividends paid to shareholders ..................... (73,910,318)
-------------
Net cash used for financing activities ............. (101,610,318)
-------------
==============================================================================================
Cash: Net decrease in cash ............................... (938,528)
Cash at beginning of year .......................... 966,127
-------------
Cash at end of year ................................ $ 27,599
=============
==============================================================================================
Cash Flow Cash paid for interest ............................. $ 4,769,965
Information: =============
==============================================================================================
Non-Cash Capital shares issued in reinvestment of
Financing Activities: dividends paid to shareholders ..................... $ 7,626,072
=============
==============================================================================================
See Notes to Financial Statements.
18 & 19
Debt Strategies Fund, Inc., February 28, 2003
FINANCIAL HIGHLIGHTS
For the
The following per share data and ratios have Period
been derived from information provided in For the Year Ended For the March 27,
the financial statements. February 28, Year Ended 1998+ to
----------------------------------- February 29, February 28,
Increase (Decrease) in Net Asset Value: 2003 2002 2001 2000 1999
===================================================================================================================================
Per Share Net asset value, beginning of period ............ $ 6.03 $ 7.53 $ 8.60 $ 9.15 $ 10.00
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .......................... .79++ .92++ .96++ .97 .76
Realized and unrealized loss on investments and
foreign currency transactions--net .............. (.68) (1.49) (1.07) (.56) (.91)
--------- --------- --------- --------- ---------
Total from investment operations ................ .11 (.57) (.11) .41 (.15)
--------- --------- --------- --------- ---------
Less dividends from investment income--net ...... (.79) (.93) (.96) (.96) (.69)
--------- --------- --------- --------- ---------
Capital write-off (charge) resulting from the
issuance of Common Stock ........................ -- --@@ -- -- (.01)
--------- --------- --------- --------- ---------
Net asset value, end of period .................. $ 5.35 $ 6.03 $ 7.53 $ 8.60 $ 9.15
========= ========= ========= ========= =========
Market price per share, end of period ........... $ 5.99 $ 6.57 $ 7.15 $ 7.1875 $ 7.875
========= ========= ========= ========= =========
==================================================================================================================================
Total Investment Based on market price per share ................. 4.85% 5.69% 13.97% 3.19% (14.87%)@
Return:** ========= ========= ========= ========= =========
Based on net asset value per share .............. 2.04% (7.89%) .31% 6.26% (1.09%)@
========= ========= ========= ========= =========
==================================================================================================================================
Ratios to Average Expenses, net of reimbursement and excluding
Net Assets: interest expense ................................ 1.07% 1.04% 1.20% .98% .54%*
========= ========= ========= ========= =========
Expenses, net of reimbursement .................. 1.91% 2.59% 3.87% 2.87% .93%*
========= ========= ========= ========= =========
Expenses ........................................ 1.91% 2.59% 3.87% 2.87% 1.20%*
========= ========= ========= ========= =========
Investment income--net .......................... 14.32% 13.69% 12.23% 10.88% 8.60%*
========= ========= ========= ========= =========
==================================================================================================================================
Leverage: Amount of borrowings, end of period
(in thousands) .................................. $ 245,900 $ 273,600 $ 301,000 $ 161,000 $ 142,000
========= ========= ========= ========= =========
Average amount of borrowings outstanding during
the period (in thousands) ....................... $ 238,863 $ 280,460 $ 228,640 $ 182,404 $ 42,330
========= ========= ========= ========= =========
Average amount of borrowings outstanding per
share during the period ......................... $ 2.31 $ 2.75 $ 3.07 $ 2.91 $ .69
========= ========= ========= ========= =========
==================================================================================================================================
Supplemental Net assets, end of period (in thousands) ........ $ 557,068 $ 620,043 $ 763,834 $ 538,343 $ 572,902
Data: ========= ========= ========= ========= =========
Portfolio turnover .............................. 64.54% 49.58% 36.86% 61.76% 89.76%
========= ========= ========= ========= =========
===================================================================================================================================
* 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. If applicable, the Fund's Investment Adviser waived a portion of
its management fee. Without such waiver, the Fund's performance would have
been lower.
+ Commencement of operations.
++ Based on average shares outstanding.
@ Aggregate total investment return.
@@ Amount is less than $.01 per share.
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Debt Strategies Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a diversified, closed-end management investment company.
The Fund's financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America, which may require
the use of management accruals and estimates. The Fund determines and makes
available for publication the net asset value of its Common Stock on a weekly
basis. The Fund's Common Stock is listed on the New York Stock Exchange under
the symbol DSU.
(a) Corporate debt obligations -- The Fund invests principally in debt
obligations of companies, including Corporate Loans made by banks and other
financial institutions and both privately and publicly offered corporate bonds
and notes. Because agents and intermediaries are primarily commercial banks, the
Fund's investment in Corporate Loans could be considered concentrated in
financial institutions.
(b) Valuation of investments -- Corporate Loans are valued in accordance with
guidelines established by the Board of Directors. Corporate Loans are valued at
the mean between the last available bid and asked prices from one or more
brokers or dealers as obtained from Loan Pricing Corporation. For the limited
number of Corporate Loans for which no reliable price quotes are available, such
Corporate Loans will be valued by Loan Pricing Corporation through the use of
pricing matrices to determine valuations. If the pricing service does not
provide a value for the Corporate Loan, the Investment Adviser will value the
loan at fair value, which is intended to approximate market value.
Other portfolio securities may be valued on the basis of prices furnished by one
or more pricing services, which determine prices for normal, institutional-size
trading units of such securities using market information, transactions for
comparable securities and various relationships between securities that are
generally recognized by institutional traders. In certain circumstances,
portfolio securities are valued at the last sale price on the exchange that is
the primary market for such securities, or the last quoted bid price for those
securities for which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. The value of
interest rate swaps, caps and floors is determined in accordance with a formula
and then confirmed periodically by obtaining a bank quotation. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their closing prices as of the close of such exchanges. Options written or
purchased are valued at the last sale price in the case of exchange-traded
options. In the case of options traded in the over-the-counter market, valuation
is the last asked price (options written) or the last bid price (options
purchased). Short-term securities with remaining maturities of sixty days or
less are valued at amortized cost, which approximates market value. Securities
and assets for which market price quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Directors of the Fund. Occasionally, events affecting the values of
securities and other assets may occur between the times at which valuations of
such securities are determined (that is, close of the market on which such
security trades) and the close of business on the NYSE. If events (for example,
company announcement, natural disasters, market volatility) occur during such
periods that are expected to materially affect the value for such securities,
those securities may be valued at their fair market value as determined in good
faith by the Fund's Board of Directors or by the investment adviser using a
pricing service and/or procedures approved by the Board of Directors of the
Fund.
(c) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies to increase or decrease the level of risk to which the
Fund is exposed more quickly and efficiently than transactions in other types of
instruments. Losses may arise due to changes in the value of the contract or if
the counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or for the intended purchase of securities.
20 & 21
Debt Strategies Fund, Inc., February 28, 2003
NOTES TO FINANCIAL STATEMENTS (continued)
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
o Forward foreign exchange contracts -- The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. The contract is marked-to-market daily and
the change in market value is recorded by the Fund as an unrealized gain or
loss. When the contract is closed, the Fund records a realized gain or loss
equal to the difference between the value at the time it was opened and the
value at the time it was closed.
o Options -- The Fund is authorized to write covered call and put options and
purchase call and put options. When the Fund writes an option, an amount equal
to the premium received by the Fund is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked to market to
reflect the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium paid (or
received) is added to (or deducted from) the basis of the security acquired or
deducted from (or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund realizes a
gain or loss on the option to the extent of the premiums received or paid (or
gain or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
o Interest rate swaps -- The Fund is authorized to enter into swap agreements
for the purpose of hedging the market risk on existing securities. In a swap
agreement, the Fund exchanges with the counterparty their respective commitments
to pay or receive interest on a specified notional principal amount. If the
counterparty defaults on its obligation, the Fund's ability to receive interest
will be delayed or limited. Furthermore, if the Fund does not have sufficient
income to pay its obligation under the swap agreement, the Fund would be in
default and the counterparty would be able to terminate the swap agreement. When
the swap agreement is closed, the Fund records a realized gain or loss equal to
the difference between the value of the swap agreement at the time it was
entered into and the value at the time it was closed.
(d) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into U.S. dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
(e) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(f) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(g) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(h) Offering expenses -- During the year ended February 28, 2002, overestimated
offering expenses resulting from the issuance of Common Stock were written off
to paid-in capital in excess of par.
(i) Reclassification -- Accounting principles generally accepted in the United
States of America require that certain components of net assets be adjusted to
reflect permanent differences between financial and tax reporting. Accordingly,
the current year's permanent book/tax difference of $391,518 have been
reclassified between accumulated net realized capital losses and undistributed
net investment income. This reclassification has no effect on net assets or net
asset value per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner. FAM has entered into a Sub-Advisory
Agreement with Merrill Lynch Asset Management U.K. Limited ("MLAM U.K."), an
affiliate of FAM, pursuant to which MLAM U.K. provides investment advisory
services to FAM with respect to the Fund. There is no increase in the aggregate
fees paid by the Fund for these services.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to perform the investment advisory function. For such services, the Fund pays a
monthly fee at an annual rate of .60% of the Fund's average weekly net assets
plus the proceeds of any outstanding borrowings used for leverage.
For the year ended February 28, 2003, the Fund paid Merrill Lynch Security
Pricing Service, an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), $553 for security price quotations to compute the net
asset value of the Fund.
In addition, MLPF&S received $11,169 in commissions on the execution of
portfolio security transactions for the Fund for the year ended February 28,
2003.
For the year ended February 28, 2003, the Fund reimbursed FAM $14,049 for
certain accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, MLAM U.K., PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended February 28, 2003 were $508,529,550 and $549,895,857, respectively.
Net realized gains (losses) for the year ended February 28, 2003 and net
unrealized losses as of February 28, 2003 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Losses
- --------------------------------------------------------------------------------
Long-term investments ................ $ (60,908,014) $(211,194,420)
Unfunded corporate loans ............. -- (74,126)
Foreign currency transactions ........ 355 --
------------- -------------
Total ................................ $ (60,907,659) $(211,268,546)
============= =============
- --------------------------------------------------------------------------------
As of February 28, 2003, net unrealized depreciation for Federal income tax
purposes aggregated $210,812,783, of which $22,291,962 related to appreciated
securities and $233,104,745 related to depreciated securities. The aggregate
cost of investments at February 28, 2003 for Federal income tax purposes was
$990,889,485.
4. Capital Share Transactions:
The Fund is authorized to issue 200,000,000 shares of Common Stock, par value
$.10 per share. Shares issued and outstanding during the years ended February
28, 2003 and February 28, 2002 increased by 1,356,882 and 1,332,057,
respectively, as a result of dividend reinvestment.
5. Unfunded Loan Interests:
As of February 28, 2003, the Fund had unfunded loan commitments of approximately
$2,083,000, which would be extended at the option of the borrower, pursuant to
the following loan agreement:
- --------------------------------------------------------------------------------
Unfunded
Commitment
Borrower (in Thousands)
- --------------------------------------------------------------------------------
Granite Broadcasting Corporation ............................ $2,083
- --------------------------------------------------------------------------------
22 & 23
Debt Strategies Fund, Inc., February 28, 2003
NOTES TO FINANCIAL STATEMENTS (concluded)
6. Short-Term Borrowings:
On May 30, 2002, the Fund renewed its one-year $325,000,000 revolving credit and
security agreement with Citibank, N.A. and other lenders (the "Lenders"). Under
the revolving credit and security agreement, the Fund may borrow money through
(i) a line of credit from certain Lenders at the Eurodollar rate plus .75% or
the highest of the Federal Funds rate plus .50%, a Base rate as determined by
Citibank, N.A. and the latest three-week moving average of secondary market
morning offering rates in the United States for three-month certificates of
deposit of major United States money market banks plus .50%, or (ii) the
issuance of commercial paper notes by certain Lenders at rates of interest
derived from the weighted average of the per annum rates paid or payable by such
Lenders in respect of those commercial paper notes. As security for its
obligations to the Lenders under the revolving credit and security agreement,
the Fund has granted a security interest in substantially all of its assets to
and in favor of the Lenders.
For the year ended February 28, 2003, the average amount borrowed was
approximately $238,863,000 and the daily weighted average interest rate was
1.99%. For the year ended February 28, 2003, facility and commitment fees
aggregated approximately $426,000.
7. Distributions to Shareholders:
The Fund paid an ordinary income dividend in the amount of $.061464 per share on
March 31, 2003 to shareholders of record on March 17, 2003.
The tax character of distributions paid during the fiscal years ended February
28, 2003 and February 28, 2002 was as follows:
- --------------------------------------------------------------------------------
2/28/2003 2/28/2002
- --------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ........................ $81,536,390 $94,977,575
----------- -----------
Total taxable distributions .............. $81,536,390 $94,977,575
=========== ===========
- --------------------------------------------------------------------------------
As of February 28, 2003, the components of accumulated losses on a tax basis
were as follows:
- --------------------------------------------------------------------------------
Undistributed ordinary income--net ..................... $ 9,272,063
Undistributed long-term capital gains--net ............. --
-------------
Total undistributed earnings--net ...................... 9,272,063
Capital loss carryforward .............................. (288,233,985)*
Unrealized losses--net ................................. (229,373,370)**
-------------
Total accumulated losses--net .......................... $(508,335,292)
=============
- --------------------------------------------------------------------------------
* On February 28, 2003, the Fund had a net capital loss carryforward of
$288,233,985, of which $263,491 expires in 2005, $12,067,388 expires in
2006, $27,376,921 expires in 2007, $51,234,056 expires in 2008,
$21,442,332 expires in 2009, $90,564,493 expires in 2010 and $85,285,304
expires in 2011. This amount will be available to offset like amounts of
any future taxable gains.
** The difference between book-basis and tax-basis net unrealized losses is
attributable primarily to the tax deferral of losses on wash sales, the
book/tax differences in the accrual of income on securities in default,
the difference between book and tax amortization methods for premiums and
discounts on fixed income securities, the deferral of post-October capital
losses for tax purposes and other book/tax temporary differences.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Debt Strategies Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of Debt Strategies Fund, Inc. as of
February 28, 2003, and the related statements of operations and cash flows for
the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the respective periods then ended. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned at February 28, 2003 by correspondence with the custodian and
financial intermediaries; where replies were not received from financial
intermediaries, we performed other auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Debt Strategies
Fund, Inc. as of February 28, 2003, the results of its operations and its cash
flows, the changes in its net assets and the financial highlights for the
respective stated periods in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
April 24, 2003
IMPORTANT TAX INFORMATION (unaudited)
Of the ordinary income distributions paid monthly by Debt Strategies Fund, Inc.
during the fiscal year ended February 28, 2003, 3.85% qualifies for the
dividends received deduction for corporations.
Please retain this information for your records.
24 & 25
Debt Strategies Fund, Inc., February 28, 2003
OFFICERS AND DIRECTORS
Number of
Portfolios in Other
Position(s) Length Fund Complex Directorships
Held of Time Overseen by Held by
Name Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Interested Director
====================================================================================================================================
Terry K. Glenn* P.O. Box 9011 President 1999 to President and Chairman of Merrill Lynch 120 Funds None
Princeton, NJ and present Investment Managers, L.P. ("MLIM")/Fund Asset 162 Portfolios
08543-9011 Director and 1997 Management, L.P. ("FAM")--Advised Funds since
Age: 62 to present 1999; Chairman (Americas Region) of MLIM from
2000 to 2002; Executive Vice President of MLIM
and FAM (which terms as used herein include
their corporate predecessors) from 1983 to
2002; President of FAM Distributors, Inc.
("FAMD") from 1986 to 2002 and Director
thereof from 1991 to 2002; Executive Vice
President and Director of Princeton Services,
Inc. ("Princeton Services") from 1993 to 2002;
President of Princeton Administrators, L.P.
from 1988 to 2002; Director of Financial Data
Services, Inc. from 1985 to 2002.
====================================================================================================================
* Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which
FAM or MLIM acts as investment adviser. Mr. Glenn is an "interested person," as described in the Investment
Company Act, of the Fund based on his former positions with FAM, MLIM, FAMD, Princeton Services, and Princeton
Administrators, L.P. The Director's term is unlimited. As Fund President, Mr. Glenn serves at the pleasure of the
Board of Directors.
====================================================================================================================================
Number of
Portfolios in Other
Position(s) Length Fund Complex Directorships
Held of Time Overseen by Held by
Name Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Independent Directors
====================================================================================================================================
Ronald W. Forbes P.O. Box 9095 Director 1997 to Professor Emeritus of Finance, School of 47 Funds None
Princeton, NJ present Business, State University of New York at 52 Portfolios
08543- 9095 Albany since 2000 and Professor thereof from
Age: 62 1989 to 2000.
====================================================================================================================================
Cynthia A. P.O. Box 9095 Director 1997 to Professor, Harvard Business School since 1989; 47 Funds Unum Provi-
Montgomery Princeton, NJ present Director, Unum Provident Corporation since 52 Portfolios dent Corp-
08543-9095 1990; Director, Newell Rubbermaid, Inc. oration;
Age: 50 since 1995. Newell Rub-
bermaid Inc.
====================================================================================================================================
Charles C. P.O. Box 9095 Director 1997 to Self-employed financial consultant since 1990. 47 Funds None
Reilly Princeton, NJ present 52 Portfolios
08543-9095
Age: 71
====================================================================================================================================
Kevin A. Ryan P.O. Box 9095 Director 1997 to Founder and Director Emeritus of The Boston 47 Funds None
Princeton, NJ present University Center for the Advancement of 52 Portfolios
08543-9095 Ethics and Character; Professor of Education
Age: 70 at Boston University from 1982 to 1999 and
Professor Emeritus since 1999.
====================================================================================================================================
Roscoe S. P.O. Box 9095 Director 2000 to President, Middle East Institute from 1995 to 47 Funds None
Suddarth Princeton, NJ present 2001; Foreign Service Officer, United States 52 Portfolios
08543-9095 Foreign Service from 1961 to 1995; Career
Age: 67 Minister from 1989 to 1995; Deputy Inspector
General, U.S. Department of State from 1991 to
1994; U.S. Ambassador to the Hashemite Kingdom
of Jordan from 1987 to 1990.
====================================================================================================================================
Richard R. West P.O. Box 9095 Director 1997 to Dean Emeritus of New York University, Leonard 47 Funds Bowne &
Princeton, NJ present N. Stern School of Business Administration 52 Portfolios Co., Inc.;
08543-9095 since 1994. Vornado
Age: 65 Operating
Company;
Vornado
Realty
Trust;
Alexander's
Inc.
====================================================================================================================================
Edward D. P.O. Box 9095 Director 2000 to Self-employed financial consultant since 1994. 47 Funds None
Zinbarg Princeton, NJ present 52 Portfolios
08543-9095
Age: 68
====================================================================================================================
* The Director's term is unlimited.
====================================================================================================================================
Position(s) Length
Held of Time
Name Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers
====================================================================================================================================
Donald C. Burke P.O. Box 9011 Vice 1997 to First Vice President of FAM and MLIM since 1997 and the
Princeton, NJ 08543-9011 President present Treasurer thereof since 1999; Senior Vice President and
Age: 42 and and 1999 Treasurer of Princeton Services since 1999; Vice President of
Treasurer to present FAMD since 1999; Director of MLIM Taxation since 1990.
====================================================================================================================================
Kevin J. Booth P.O. Box 9011 Vice 2001 to Director (Global Fixed Income) of MLIM since 2000; Vice
Princeton, NJ 08543-9011 President present President of MLIM from 1994 to 2000.
Age: 48
====================================================================================================================================
Joseph P. Matteo P.O. Box 9011 Vice 2001 to Director (Global Fixed Income) of MLIM since 2001; Vice
Princeton, NJ 08543-9011 President present President of MLIM from 1997 to 2001.
Age: 39
====================================================================================================================================
Bradley J. Lucido P.O. Box 9011 Secretary 1999 to Director (Legal Advisory) of MLIM since 2002; Vice President of
Princeton, NJ 08543-9011 present MLIM from 1999 to 2002; Attorney associated with MLIM since
Age: 37 1995.
====================================================================================================================
* Officers of the Fund serve at the pleasure of the Board of Directors.
====================================================================================================================================
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agent
The Bank of New York
101 Barclay Street
New York, NY 10286
NYSE Symbol
DSU
26 & 27
[LOGO] Merrill Lynch Investment Managers
[GRAPHICS OMITTED]
Debt Strategies Fund, Inc. seeks to provide 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. or
BBB or lower by Standard & Poor's) or unrated debt instruments of comparable
quality.
This report, including the financial information herein, is transmitted to
shareholders of Debt Strategies Fund, Inc. for their information. It is not a
prospectus. Past performance results shown in this report should not be
considered a representation of future performance. The Fund leverages its Common
Stock to provide Common Stock shareholders with a potentially higher rate of
return. Leverage creates risk for Common Stock shareholders, including the
likelihood of greater volatility of net asset value and market price of Common
Stock shares, and the risk that fluctuations in short-term interest rates may
reduce the Common Stock's yield. Statements and other information herein are as
dated and are subject to change.
Debt Strategies Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
[RECYCLED LOGO] Printed on post-consumer recycled paper #DEBT--2/03
Item 2 - Did registrant adopt a code of ethics, as of the end of the period
covered by this report, that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party? If not, why not? Briefly describe any amendments or
waivers that occurred during the period. State here if code of
ethics/amendments/waivers are on website and give website address-.
State here if fund will send code of ethics to shareholders without
charge upon request-- N/A (not answered until July 15, 2003 and only
annually for funds)
Item 3 - Did the registrant's board of directors determine that the registrant
either: (i) has at least one audit committee financial expert serving
on its audit committee; or (ii) does not have an audit committee
financial expert serving on its audit committee? If yes, disclose name
of financial expert and whether he/she is "independent," (fund may, but
is not required, to disclose name/independence of more than one
financial expert) If no, explain why not. -N/A (not answered until July
15, 2003 and only annually for funds)
Item 4 - Disclose annually only (not answered until December 15, 2003)
(a) Audit Fees - Disclose aggregate fees billed for each of the last two
fiscal years for professional services rendered by the
principal accountant for the audit of the registrant's
annual financial statements or services that are
normally provided by the accountant in connection with
statutory and regulatory filings or engagements for
those fiscal years. N/A.
(b) Audit-Related Fees - Disclose aggregate fees billed in each of the
last two fiscal years for assurance and related
services by the principal accountant that are
reasonably related to the performance of the
audit of the registrant's financial statements
and are not reported under paragraph (a) of this
Item. Registrants shall describe the nature of
the services comprising the fees disclosed under
this category. N/A.
(c) Tax Fees - Disclose aggregate fees billed in each of the last two
fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and
tax planning. Registrants shall describe the nature of the
services comprising the fees disclosed under this category.
N/A.
(d) All Other Fees - Disclose aggregate fees billed in each of the last
two fiscal years for products and services provided
by the principal accountant, other than the services
reported in paragraphs (a) through (c) of this Item.
Registrants shall describe the nature of the
services comprising the fees disclosed under this
category. N/A.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. N/A.
(e)(2) Disclose the percentage of services described in each of paragraphs
(b) through (d) of this Item that were approved by the audit
committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X. N/A.
(f) If greater than 50%, disclose the percentage of hours expended on
the principal accountant's engagement to audit the registrant's
financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal
accountant's full-time, permanent employees. N/A.
(g) Disclose the aggregate non-audit fees billed by the registrant's
accountant for services rendered to the registrant, and rendered to
the registrant's investment adviser (not including any sub-adviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the adviser
that provides ongoing services to the registrant for each of the
last two fiscal years of the registrant. N/A.
(h) Disclose whether the registrant's audit committee has considered
whether the provision of non-audit services that were rendered to
the registrant's investment adviser (not including any subadviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal
accountant's independence. N/A.
Items 5-6 - Reserved
Item 7 - For closed-end funds that contain voting securities in their portfolio,
describe the policies and procedures that it uses to determine how to
vote proxies relating to those portfolio securities. N/A (not answered
until July 1, 2003)
Item 8 -- Reserved
Item 9(a) - Disclose the conclusions of the registrant's principal executive
officer or officers and principal financial officer or officers, or
persons performing similar functions, about the effectiveness of the
registrant's disclosure controls and procedures (as defined in Rule
30a-2(c) under the Act (17 CFR 270.30a-2(c))) based on their
evaluation of these controls and procedures as of a date within 90
days of the filing date of the report that includes the disclosure
required by this paragraph. N/A (not answered until July 15, 2003
and only annually for funds)
Item 9(b) -- There were no significant changes in the registrant's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Item 10 - Exhibits
10(a) - Attach code of ethics or amendments/waivers, unless code of ethics or
amendments/waivers is on website or offered to shareholders upon
request without charge. N/A.
10(b) - Attach certifications (4 in total pursuant to Sections 302 and 906 for
CEO/CFO). Attached hereto.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Debt Strategies Fund, Inc.
By: /s/ Terry K. Glenn
------------------------------
Terry K. Glenn,
President of
Debt Strategies Fund, Inc.
Date: April 21, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Terry K. Glenn
------------------------------
Terry K. Glenn,
President of
Debt Strategies Fund, Inc.
Date: April 21, 2003
By: /s/ Donald C. Burke
------------------------------
Donald C. Burke,
Chief Financial Officer of
Debt Strategies Fund, Inc.
Date: April 21, 2003