<PAGE> 1
HIGH INCOME ADVANTAGE TRUST Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS September 30, 1998
DEAR SHAREHOLDER:
Last year's optimism over the likelihood of continued economic growth in the
United States has been replaced by concerns over foreign market developments and
the potential negative effect on both the U.S. economy and corporate earnings.
These concerns resulted in a sharp correction in the high-yield bond market
during the third quarter. Though corporate credit quality remains strong, the
increased uncertainty regarding the economic environment going forward has
resulted in a dramatic flight to quality in the financial markets, with
investors favoring highly rated U.S. government securities over other asset
classes, including high-yield bonds. As a result, the high-yield bond sector
significantly underperformed the lower-yielding but higher-quality sectors of
the fixed-income markets over the past 12 months.
PERFORMANCE
During the fiscal year ended September 30, 1998, High Income Advantage Trust
produced a total return of - 4.61 percent, based on a change in net asset value
(NAV) from $5.18 per share to $4.44 per share and reinvestment of distributions.
Based on a change in market price on the New York Stock Exchange (NYSE) from
$6.25 per share to $5.25 per share and reinvestment of distributions, the
Trust's total return for the fiscal year was - 6.52 percent.
Over the past 12 months, the Trust continued to distribute regular income
dividends at a rate of $0.05 per share per month. For the fiscal year ended
September 30, 1998, the Trust's distributions totaled $0.6433 per share,
including an extra income dividend of $0.0433 per share paid on December 19,
1997. On September 30, 1998, the Trust had net assets in excess of $133 million.
PORTFOLIO STRATEGY
The Trust has maintained a relatively conservative posture over the past 12
months for two primary reasons: declining yields in the high-yield market and
the possibility of a market correction. As a result, we have
<PAGE> 2
HIGH INCOME ADVANTAGE TRUST
LETTER TO THE SHAREHOLDERS September 30, 1998, continued
maintained a core position in the shorter-term, higher-quality end of the
fixed-income markets (BB-rated issues or higher). These more conservative
investments have held up well in this increasingly volatile market environment.
In addition, we continue to concentrate on areas of the economy that
historically have proven more predictable, recession resistant and growth
oriented. These sectors include food and beverages, health care,
telecommunications, media and cable television. We believe that these industry
groups are positioned to outperform the more cyclical areas of the economy over
the next year, given the slowing of many of the world's markets.
Consistent with our now more cautious posture, we have continued to avoid the
foreign emerging high-yield markets. This more defensive approach is expected to
provide important flexibility as we work to take advantage of today's more
attractive yields and lower price levels, which are the result of the recent
high-yield market correction.
LOOKING AHEAD
Despite the current volatility, our one- to two-year outlook for the high-yield
market is positive, given our expectations for additional easing steps by the
Federal Reserve Board, continued U.S. economic growth and a favorable
interest-rate environment. If domestic economic growth continues and interest
rates remain low, we would expect general investor sentiment in the financial
markets to improve gradually over the coming months, with the high-yield market
rebounding from today's depressed levels.
We would like to remind you that the Trustees have approved a procedure whereby
the Trust, when appropriate, may repurchase shares in the open market or in
privately negotiated transactions at a price not above market value or net asset
value, whichever is lower at the time of purchase.
We thank you for your continued support of High Income Advantage Trust and look
forward to continuing to serve your investment needs.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO
CHARLES A. FIUMEFREDDO
Chairman of the Board
2
<PAGE> 3
HIGH INCOME ADVANTAGE TRUST
PORTFOLIO OF INVESTMENTS September 30, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (92.7%)
Aerospace (1.4%)
$ 2,000 Sabreliner Corp. - 144A*............. 11.00% 06/15/08 $ 1,880,000
------------
Broadcast Media (2.2%)
4,500 Australis Holdings Ltd. (Australia)
(a)................................. 15.00++ 11/01/02 270,000
1,000 Paxson Communications Corp. ......... 11.625 10/01/02 1,005,000
1,500 Spanish Broadcasting System, Inc. ... 12.50 06/15/02 1,635,000
------------
2,910,000
------------
Business Services (4.5%)
1,000 Anacomp, Inc. (Series B)............. 10.875 04/01/04 1,000,000
1,000 Comforce Corp. (Series B)............ 15.00+ 12/01/09 1,040,000
3,000 Comforce Operating Inc. ............. 12.00 12/01/07 3,000,000
1,000 Entex Information Services,
Inc. - 144A*........................ 12.50 08/01/06 950,000
------------
5,990,000
------------
Cellular Telephone (3.7%)
1,000 American Cellular Corp. - 144A*...... 10.50 05/15/08 970,000
2,000 Clearnet Communications, Inc.
(Canada)............................ 14.75++ 12/15/05 1,680,000
2,000 Price Communications Cellular
Holdings............................ 11.25+ 08/15/08 1,840,000
1,000 Triton Communications LLC - 144A*.... 11.00++ 05/01/08 450,000
------------
4,940,000
------------
Computers (4.4%)
2,000 CHS Electronics, Inc. ............... 9.875 04/15/05 1,840,000
2,800 IBM Credit Corp. .................... 15.00 02/02/99 2,889,880
1,000 Unisys Corp. (Series B).............. 12.00 04/15/03 1,110,000
------------
5,839,880
------------
Consumer Sundries (2.4%)
2,317 J.B. Williams Holdings, Inc. ........ 12.00 03/01/04 2,386,510
1,000 Samsonite Corp. ..................... 10.75 06/15/08 770,000
------------
3,156,510
------------
Containers/Packaging (1.2%)
1,500 Berry Plastics Corp. ................ 12.25 04/15/04 1,575,000
------------
Diversified Manufacturing (5.7%)
1,500 Interlake Corp. ..................... 12.125 03/01/02 1,507,500
1,500 J.B. Poindexter & Co., Inc. ......... 12.50 05/15/04 1,380,000
7,050 Jordan Industries, Inc. (Series B)... 11.75++ 04/01/09 4,653,000
------------
7,540,500
------------
Entertainment (10.1%)
3,500 Aladdin Gaming Holdings/Capital
Corp. LLC........................... 13.50++ 03/01/10 980,000
1,000 Epic Resorts LLC - 144A*............. 13.00 06/15/05 965,000
3,000 Fitzgeralds Gaming Corp. (Series
B).................................. 12.25 12/15/04 2,100,000
3,000 Lady Luck Gaming Finance Corp. ...... 11.875 03/01/01 3,037,500
3,750 Motels of America, Inc. (Series B)... 12.00 04/15/04 3,187,500
1,059 Resort At Summerlin.................. 13.00+ 12/15/07 1,066,943
1,400 Stuart Entertainment, Inc. (Series
B).................................. 12.50 11/15/04 658,000
1,500 Walt Disney Co. ..................... 15.00 12/14/98 1,529,235
------------
13,524,178
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE> 4
HIGH INCOME ADVANTAGE TRUST
PORTFOLIO OF INVESTMENTS September 30, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ---------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Finance Companies (2.2%)
$ 2,800 General Electric Capital Corp. ...... 15.00% 01/21/99 $ 2,882,292
------------
Foods & Beverages (8.3%)
1,000 Envirodyne Industries, Inc. ......... 10.25 12/01/01 930,000
2,800 General Mills, Inc. ................. 15.00 01/29/99 2,885,624
1,000 Mrs. Fields Original................. 10.125 12/01/04 940,000
3,000 PepsiCo, Inc. ....................... 15.00 08/06/99 3,258,240
1,000 Sparkling Spring Water (Canada)...... 11.50 11/15/07 1,000,000
8,350 Specialty Foods Acquisition Corp.
(Series B).......................... 13.00++ 08/15/05 2,087,500
------------
11,101,364
------------
Healthcare (4.9%)
3,000 Pediatric Services of America, Inc.
(Series A).......................... 10.00 04/15/08 1,980,000
1,500 Unilab Corp. ........................ 11.00 04/01/06 1,545,000
3,025 Unison Healthcare Corp. - 144A*
(b)................................. 12.25 11/01/06 1,470,906
2,000 Vencor, Inc. ........................ 9.875 05/01/05 1,570,000
------------
6,565,906
------------
Industrial Specialties (2.7%)
9,000 International Semi-Tech
Microelectronics, Inc. (Canada)..... 11.50++ 08/15/03 1,575,000
1,000 International Wire Group, Inc. ...... 11.75 06/01/05 1,025,000
1,000 Outsourcing Services Group,
Inc. - 144A*........................ 10.875 03/01/06 950,000
------------
3,550,000
------------
Office Equipment/Supplies (1.2%)
2,000 Mosler, Inc. ........................ 11.00 04/15/03 1,600,000
------------
Oil, Gas, Equipment & Services (2.9%)
1,000 Texaco Capital LLC................... 15.00 01/13/99 1,026,480
3,000 Transamerican Refining Corp. (Series
A) - 144A* (Units)++................ 16.00 06/30/03 2,835,000
------------
3,861,480
------------
Printing Publishing & Advertising (0.7%)
1,000 American Media Operations, Inc. ..... 11.625 11/15/04 1,000,000
------------
Restaurants (6.0%)
12,252 American Restaurant Group Holdings,
Inc. - 144A* (c).................... 0.00 12/15/05 3,277,276
3,000 FRD Acquisition Corp. (Series B)..... 12.50 07/15/04 3,000,000
3,000 Planet Hollywood International,
Inc. ............................... 12.00 04/01/05 1,680,000
------------
7,957,276
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 5
HIGH INCOME ADVANTAGE TRUST
PORTFOLIO OF INVESTMENTS September 30, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Retail - Food & Drug (1.7%)
$ 250 Pueblo Xtra International, Inc. ..... 9.50% 08/01/03 $ 230,000
2,250 Pueblo Xtra International, Inc.
(Series C).......................... 9.50 08/01/03 2,070,000
------------
2,300,000
------------
Telecommunications Equipment (2.3%)
4,300 FWT, Inc. ........................... 9.875 11/15/07 3,096,000
------------
Transportation (0.5%)
1,000 Alpha Shipping PLC (United
Kingdom)............................ 9.50 02/15/08 650,000
------------
U.S. Telecommunications (13.8%)
2,000 21st Century Telecom Group, Inc. .... 12.25++ 02/15/08 960,000
2,000 Birch Telecom Inc. - 144A*
(Units)++........................... 14.00 06/15/08 1,760,000
1,000 Caprock Communications
Corp. - 144A*....................... 12.00 07/15/08 900,000
1,000 e. Spire Communications, Inc. ....... 13.75 07/15/07 1,070,000
1,000 Esprit Telecom Group PLC - 144A*
(United Kingdom).................... 10.875 06/15/08 905,000
2,000 Facilicom International, Inc. (Series
B).................................. 10.50 01/15/08 1,740,000
5,500 Firstworld Communications,
Inc. - 144A (Units)++............... 13.00++ 04/15/08 1,705,000
1,000 GST Equipment Funding , Inc. ........ 13.25 05/01/07 1,040,000
1,000 Hyperion Telecommunication, Inc.
(Series A).......................... 13.00++ 04/15/03 695,000
1,000 Hyperion Telecommunication, Inc.
(Series B).......................... 12.25 09/01/04 980,000
17,700 In-Flight Phone Corp. (Series
B)(d)............................... 14.00 05/15/02 1,858,500
1,000 Level 3 Communications, Inc. ........ 9.125 05/01/08 945,000
1,000 NextLink Communications, Inc. ....... 12.50 04/15/06 1,077,500
1,000 Optel, Inc. - 144A* 11.50 07/01/08 970,000
1,500 Peoples Telephone Co., Inc. ......... 12.25 07/15/02 1,738,125
------------
18,344,125
------------
Wireless Communication (9.9%)
3,000 Advanced Radio Telecom Corp. ........ 14.00 02/15/07 2,640,000
5,000 Cellnet Data Systems, Inc. .......... 14.00++ 10/01/07 1,900,000
2,000 Echostar DBS Corp. .................. 12.50 07/01/02 2,110,000
1,000 Globalstar LP/Capital Corp. ......... 11.375 02/15/04 675,000
1,000 Globalstar LP/Capital Corp. ......... 11.50 06/01/05 680,000
3,500 TCI Satellite Entertainment Corp. ... 12.25++ 02/15/07 2,100,000
2,000 USA Mobile Communications Holdings,
Inc. 14.00 11/01/04 2,120,000
1,500 Winstar Communications, Inc. ........ 14.00++ 10/15/05 975,000
------------
13,200,000
------------
TOTAL CORPORATE BONDS
(Identified Cost $143,911,234)............................ 123,464,511
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
HIGH INCOME ADVANTAGE TRUST
PORTFOLIO OF INVESTMENTS September 30, 1998, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (e) (3.3%)
Automotive (0.0%)
113 Northern Holdings Industrial Corp. (c)*................... --
------------
Entertainment (0.0%)
4,000 Motels of America, Inc. - 144A*........................... $ 40,000
------------
Foods & Beverages (0.1%)
180,000 Specialty Foods Acquisition Corp. - 144A*................. 180,095
------------
Restaurants (0.0%)
9,500 American Restaurant Group Holdings, Inc. - 144A*.......... --
------------
Retail - Chain (2.3%)
1,004,150 County Seat Stores, Inc. (c)(f)........................... 2,993,371
------------
Textiles (0.9%)
223,846 United States Leather, Inc. (c)........................... 1,217,275
------------
TOTAL COMMON STOCKS
(Identified Cost $16,789,961)............................. 4,430,741
------------
</TABLE>
<TABLE>
<CAPTION>
EXPIRATION
NUMBER OF DATE
WARRANTS ----------
<C> <S> <C> <C>
WARRANTS (e) (0.2%)
Aerospace (0.2%)
5,000 Sabreliner Corp. - 144A*...................... 04/15/03 225,000
------------
Entertainment/Gaming & Lodging (0.0%)
35,000 Aladdin Gaming Enterprises, Inc. - 144A*...... 03/01/10 350
1,000 Epic Resorts LLC - 144A*...................... 06/15/05 --
2,000 Fitzgeralds Gaming Corp. ..................... 12/19/98 4,042
2,250 Fitzgeralds South Inc. - 144A*................ 03/15/99 --
1,000 Resort At Summerlin - 144A*................... 12/15/07 --
------------
4,392
------------
TOTAL WARRANTS
(Identified Cost $131,870)................................ 229,392
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
HIGH INCOME ADVANTAGE TRUST
PORTFOLIO OF INVESTMENTS September 30, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C>
SHORT-TERM INVESTMENT (1.5%)
REPURCHASE AGREEMENT
$1,960 The Bank of New York
(dated 09/30/98; proceeds $1,960,629) (g)
(Identified Cost $1,960,357)....... 5.00% 10/01/98 $ 1,960,357
------------
TOTAL INVESTMENTS
(Identified Cost $162,793,422) (h).............. 97.7% 130,085,001
OTHER ASSETS IN EXCESS OF LIABILITIES........... 2.3 3,136,796
----- ------------
NET ASSETS...................................... 100.0% $133,221,797
===== ============
</TABLE>
- ---------------------
* Resale is restricted to qualified institutional investors.
++ Consists of one or more classes of securities traded together as a unit;
bonds with attached warrants.
+ Payment-in-kind security.
++ Currently a zero coupon bond and will pay interest at the rate shown at a
future specified date.
(a) Issuer in bankruptcy.
(b) Non-income producing security; bond in default.
(c) Acquired through exchange offer.
(d) Non-income producing security; issuer in bankruptcy.
(e) Non-income producing securities.
(f) Includes 360,265 shares which are due from the issuer pursuant to a
reorganization.
(g) Collateralized by $1,372,520 U.S. Treasury Note 5.75% due 11/30/02 valued
at $1,468,310 and $496,479 U.S. Treasury Note 6.625% due 07/31/01 valued at
$531,254.
(h) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $1,987,215 and the
aggregate gross unrealized depreciation is $34,695,636, resulting in net
unrealized depreciation of $32,708,421.
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
HIGH INCOME ADVANTAGE TRUST
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
ASSETS:
Investments in securities, at value
(identified cost $162,793,422)......... $ 130,085,001
Interest receivable..................... 3,417,080
Prepaid expenses and other assets....... 13,728
-------------
TOTAL ASSETS........................ 133,515,809
-------------
LIABILITIES:
Payable for:
Investment management fee........... 91,630
Investments purchased............... 75,010
Accrued expenses and other payables..... 127,372
-------------
TOTAL LIABILITIES................... 294,012
-------------
NET ASSETS.......................... $ 133,221,797
=============
COMPOSITION OF NET ASSETS:
Paid-in-capital......................... $ 282,056,353
Net unrealized depreciation............. (32,708,421)
Accumulated undistributed net investment
income................................. 2,857,786
Accumulated net realized loss........... (118,983,921)
-------------
NET ASSETS.......................... $ 133,221,797
=============
NET ASSET VALUE PER SHARE,
30,017,252 shares outstanding
(unlimited shares authorized of $.01
par value)............................. $4.44
=============
</TABLE>
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended September 30, 1998
NET INVESTMENT INCOME:
INTEREST INCOME.......................... $ 20,224,117
------------
EXPENSES
Investment management fee................ 1,121,550
Transfer agent fees and expenses......... 127,938
Professional fees........................ 52,781
Shareholder reports and notices.......... 37,808
Registration fees........................ 32,677
Trustees' fees and expenses.............. 17,722
Custodian fees........................... 16,692
Other.................................... 11,741
------------
TOTAL EXPENSES........................ 1,418,909
------------
NET INVESTMENT INCOME................. 18,805,208
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................ (4,246,898)
Net change in unrealized depreciation.... (17,566,403)
------------
NET LOSS.............................. (21,813,301)
------------
NET DECREASE............................. $ (3,008,093)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
HIGH INCOME ADVANTAGE TRUST
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................ $ 18,805,208 $ 19,032,438
Net realized loss................................ (4,246,898) (20,234,354)
Net change in unrealized depreciation............ (17,566,403) 20,213,922
------------ ------------
NET INCREASE (DECREASE)...................... (3,008,093) 19,012,006
Dividends from net investment income............. (19,309,716) (20,210,193)
------------ ------------
NET DECREASE................................. (22,317,809) (1,198,187)
NET ASSETS:
Beginning of period.............................. 155,539,606 156,737,793
------------ ------------
END OF PERIOD
(Including undistributed net investment
income of $2,857,786 and $3,362,294,
respectively).............................. $133,221,797 $155,539,606
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
HIGH INCOME ADVANTAGE TRUST
NOTES TO FINANCIAL STATEMENTS September 30, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
High Income Advantage Trust (the "Trust") is registered under the Investment
Company Act of 1940, as amended, as a diversified, closed-end management
investment company. The Trust's primary investment objective is to earn a high
level of current income and, as a secondary objective, capital appreciation, but
only when consistent with its primary objective. The Trust was organized as a
Massachusetts business trust on June 17, 1987 and commenced operations on
October 29, 1987.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) an equity security listed or traded on the
New York, American or other domestic or foreign stock exchange is valued at its
latest sale price on that exchange prior to the time when assets are valued; if
there were no sales that day, the security is valued at the latest bid price (in
cases where a security is traded on more than one exchange, the security is
valued on the exchange designated as the primary market pursuant to procedures
adopted by the Trustees); (2) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (3) when market
quotations are not readily available, including circumstances under which it is
determined by Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager"), formerly Dean Witter InterCapital Inc., that sale and bid prices are
not reflective of a security's market value, portfolio securities are valued at
their fair value as determined in good faith under procedures established by and
under the general supervision of the Trustees; (4) certain of the portfolio
securities may be valued by an outside pricing service approved by the Trustees.
The pricing service may utilize a matrix system incorporating security quality,
maturity and coupon as the evaluation model parameters, and/or research and
evaluations by its staff, including review of broker-dealer market price
quotations, if available, in determining what it believes is the fair valuation
of the portfolio securities valued by such pricing service; and (5) short-term
debt securities having a maturity date of more than sixty days at time of
purchase are valued on a mark-to-market basis until sixty days prior to
maturity and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
10
<PAGE> 11
HIGH INCOME ADVANTAGE TRUST
NOTES TO FINANCIAL STATEMENTS September 30, 1998, continued
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily except where collection is not expected.
C. FEDERAL INCOME TAX STATUS -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Trust records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with the Investment Manager, the
Trust pays a management fee, accrued weekly and payable monthly, by applying the
following annual rates to the Trust's weekly net assets: 0.75% to the portion of
weekly net assets not exceeding $250 million; 0.60% to the portion of weekly net
assets exceeding $250 million but not exceeding $500 million; 0.50% to the
portion of weekly net assets exceeding $500 million but not exceeding $750
million; 0.40% to the portion of weekly net assets exceeding $750 million but
not exceeding $1 billion; and 0.30% to the portion of weekly net assets
exceeding $1 billion.
Under the terms of the Agreement, in addition to managing the Trust's
investments, the Investment Manager maintains certain of the Trust's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Trust who are employees of the Investment
Manager. The
11
<PAGE> 12
HIGH INCOME ADVANTAGE TRUST
NOTES TO FINANCIAL STATEMENTS September 30, 1998, continued
Investment Manager also bears the cost of telephone services, heat, light, power
and other utilities provided to the Trust.
3. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended September 30, 1998 aggregated
$150,992,857 and $153,034,609, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Trust's transfer agent. At September 30, 1998, the Trust had transfer agent
fees and expenses payable of approximately $4,800.
The Trust has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Trust who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended September 30, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $5,761. At September 30, 1998, the Trust had an accrued pension liability of
$50,536 which is included in accrued expenses in the Statement of Assets and
Liabilities.
4. SHARES OF BENEFICIAL INTEREST
<TABLE>
<CAPTION>
CAPITAL
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
---------- --------- ------------
<S> <C> <C> <C>
Balance, September 30, 1996................................. 30,017,252 $300,172 $288,583,500
Reclassification due to permanent book/tax differences...... -- -- (1,104,362)
---------- -------- ------------
Balance, September 30, 1997................................. 30,017,252 300,172 287,479,138
Reclassification due to permanent book/tax differences...... -- -- (5,722,957)
---------- -------- ------------
Balance, September 30, 1998................................. 30,017,252 $300,172 $281,756,181
========== ======== ============
</TABLE>
12
<PAGE> 13
HIGH INCOME ADVANTAGE TRUST
NOTES TO FINANCIAL STATEMENTS September 30, 1998, continued
5. DIVIDENDS
The Trust declared the following dividends from net investment income:
<TABLE>
<CAPTION>
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
- ------------------ --------- ----------------- ------------------
<S> <C> <C> <C>
September 29,1998.. $0.05 October 9, 1998 October 23, 1998
October 27, 1998... $0.05 November 6, 1998 November 20, 1998
</TABLE>
6. FEDERAL INCOME TAX STATUS
At September 30, 1998, the Trust had a net capital loss carryover of
approximately $113,360,000, to offset future capital gains to the extent
provided by regulations, available through September 30 of the following years:
<TABLE>
<CAPTION>
AMOUNT IN THOUSANDS
- ---------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2005 2006
- --------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$27,667 $23,411 $109 $15,205 $26,684 $6,214 $14,070
======= ======= ==== ======= ======= ====== =======
</TABLE>
Capital losses incurred after October 31 ("post-October" losses) within the
taxable year are deemed to arise on the first business day of the Trust's next
taxable year. The Trust incurred and will elect to defer net capital losses of
approximately $2,983,000 during fiscal 1998.
At September 30, 1998, the Trust had temporary book/tax differences primarily
attributable to post-October losses and capital loss deferrals on wash sales and
permanent book/tax differences attributable to an expired net capital loss
carryover. To reflect reclassification arising from the permanent differences,
paid-in-capital was charged and accumulated net realized loss was credited
$5,722,957.
13
<PAGE> 14
HIGH INCOME ADVANTAGE TRUST
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30
----------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 5.18 $ 5.22 $ 5.30 $ 5.32 $ 5.99
-------- -------- -------- -------- --------
Net investment income....................................... 0.62 0.63 0.66 0.61 0.62
Net realized and unrealized gain (loss)..................... (0.72) -- (0.14) 0.01 (0.62)
-------- -------- -------- -------- --------
Total from investment operations............................ (0.10) 0.63 0.52 0.62 --
Dividends from net investment income........................ (0.64) (0.67) (0.60) (0.64) (0.67)
-------- -------- -------- -------- --------
Net asset value, end of period.............................. $ 4.44 $ 5.18 $ 5.22 $ 5.30 $ 5.32
======== ======== ======== ======== ========
Market value, end of period................................. $ 5.25 $ 6.25 $ 6.00 $ 5.75 $ 5.625
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN+.................................... (6.52)% 16.26% 15.53% 14.59% 2.56%
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 0.95% 0.92% 0.92% 1.01% 0.98%
Net investment income....................................... 12.58% 12.43% 12.50% 11.79% 10.52%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $133,222 $155,540 $156,738 $159,167 $159,835
Portfolio turnover rate..................................... 105% 124% 117% 63% 102%
</TABLE>
- ---------------------
+ Total investment return is based upon the current market value on the last
day of each period reported. Dividends are assumed to be reinvested at the
prices obtained under the Trust's dividend reinvestment plan. Total
investment return does not reflect brokerage commissions.
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE> 15
HIGH INCOME ADVANTAGE TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF HIGH INCOME ADVANTAGE TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of High Income Advantage Trust (the
"Trust") at September 30, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the period
then ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
September 30, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
November 6, 1998
15
<PAGE> 16
TRUSTEES
- ------------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
- ------------------------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Peter M. Avelar
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
- ------------------------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- ------------------------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
- ------------------------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
HIGH
INCOME
ADVANTAGE
TRUST
Annual Report
September 30,1998
