<PAGE> 1
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST Two World Trade Center
LETTER TO THE SHAREHOLDERS September 30, 2000 New York, New York 10048
DEAR SHAREHOLDER:
The 12-month period ended September 30, 2000, proved to be an extremely
difficult one for high-yield bond investors, as the high-yield market remained
mired in one of its worst slumps in the past 20 years. Concern over a rapidly
growing U.S. economy and the threat of inflation prompted the Federal Reserve
Board to continue its policy of raising short-term interest rates. As a result
of the Fed's actions and the ensuing higher-interest-rate environment, the
financial markets became worried about a potential hard landing for the U.S.
economy and its effect on future corporate earnings. These fears resulted in an
extremely weak fixed-income market during 1999 and an increasingly volatile
equity market in the first half of 2000. As investors became more risk averse,
we witnessed a severe flight to quality in the fixed-income markets, with the
high-yield sector being hit exceptionally hard. Much as in the last major
high-yield market correction ten years ago, significant investor outflows have
greatly exaggerated the decline, creating an extremely oversold market.
Credit spreads within the fixed-income markets widened dramatically over the
past year and a half as investors came to favor higher-quality securities. As a
result of this flight to quality, the yield spread between high-yield bonds and
comparable U.S. government securities is now approaching its widest margin in
history. Spreads have also broadened between the different tiers within the
high-yield sector as investors have gravitated toward the highest-quality end of
the marketplace. As a result of this trend, lower-yielding, higher-quality
BB-rated bonds have held up significantly better than those in the
higher-yielding, lower-quality B-rated sector. Much as we saw in the high-yield
bear market of 1989 and 1990, investors' reactions have resulted in a sharp
decline in the prices of many high-yield bonds, driving market yields
substantially higher in the process so that yield spreads on many B-rated bonds
are approaching their highest levels on record.
<PAGE> 2
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
LETTER TO THE SHAREHOLDERS September 30, 2000, continued
PERFORMANCE AND PORTFOLIO STRATEGY
For the 12-month period ended September 30, 2000, Morgan Stanley Dean Witter
High Income Advantage Trust produced a total return of -17.25 percent, based on
a change in net asset value (NAV) and reinvestment of distributions totaling
$0.54 per share. For the same period, the Trust's total return was -4.71
percent, based on a change in its market price on the New York Stock Exchange
(NYSE) and reinvestment of distributions.
During the twelve-month period ended September 30, 2000, the Trust continued to
distribute regular monthly income dividends, at a rate of $0.045 per share.
Beginning with the income dividend payable on October 20, 2000, the Trust's
monthly income dividend was lowered to $0.04 per share. We believe that the new
dividend rate should provide the Trust with greater investment flexibility.
As discussed, the past year and a half has been one of the most difficult
periods for the high-yield market, particularly the B-rated sector, the market's
largest one. As a result of the substantial weakness in the high-yield market,
we have seen high-yield bond prices decline sharply and yields rise dramatically
over this period. Although the Trust's position in the more defensive,
higher-quality end of the market held up relatively well in the turbulent market
environment, its long-term core position in the B-rated sector was adversely
affected over the past year. With yields on many high-yield issues at or near
10-year highs and currently trading at significant discounts to their stated
maturity value, we currently view the high-yield sector as extremely
undervalued, although the timing of a recovery is still very uncertain at this
point. As the market outlook improves over time, we would expect to see investor
flows turn positive once again, creating strong demand for many of today's
depressed high-yield bonds.
In light of the increasingly volatile market environment, however, the Trust's
portfolio manager has indicated his intention to gradually reposition the
Trust's portfolio. Over time, the Trust anticipates balancing the portfolio
across high-yield sectors -- particularly among B-rated and BB-rated issues.
This strategy should better enable the Trust to provide competitive long-term
returns with less overall performance volatility.
From an industry perspective, we view the telecommunications sector as a
potentially rewarding investment opportunity, given the worldwide movement
toward providing expanded global telecommunications services, including voice,
video and data services over a combination of hardline and wireless networks.
The powerful combination of exciting growth prospects for the industry over the
next few years, along with the likelihood of the formation of strategic
partnerships with other major
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
LETTER TO THE SHAREHOLDERS September 30, 2000, continued
players, provides a fundamental backdrop for strong revenue growth, higher
profitability and future significant credit improvement. Included among the
Trust's current holdings are a number of telecom companies that over the past
year have either announced important strategic partnerships or have raised
equity capital to fuel future growth and profits. With the recent high-yield
market weakness we have seen many of these telecom bonds decline sharply in
price as investor nervousness spread to this large but volatile sector of the
market. Despite the recent sector weakness, we view the longer-term prospects of
this important industry very positively and feel that at today's currently
depressed levels many of these bonds represent outstanding investment
opportunities.
LOOKING AHEAD
Given today's substantially higher yields, near-record yield spreads over U.S.
government bonds and significantly discounted bond prices, we view the
high-yield market as a potentially rewarding long-term investment opportunity.
Assuming a soft landing in the economy with growth continuing into 2001, we
would expect the high-yield market to recover over time and bond prices to
rebound from their current extremely depressed levels, much as they did in the
early 1990s period following the last high-yield bear market.
We would like to remind you that the Trustees have approved a procedure whereby
the Trust may, when appropriate, repurchase shares in the open market or in
privately negotiated transactions at a price not above market value or net asset
value, whichever is lowest at the time of purchase.
We appreciate your ongoing support of Morgan Stanley Dean Witter High Income
Advantage Trust and look forward to continuing to serve your investment needs.
<TABLE>
<S> <C>
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO /s/ MITCHELL M. MERIN
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
</TABLE>
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
PORTFOLIO OF INVESTMENTS September 30, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (94.2%)
Aerospace & Defense (1.7%)
$ 600 Loral Space & Communications
Ltd. .............................. 9.50 % 01/15/06 $ 435,000
1,000 Sabreliner Corp. - 144A*............ 11.00 06/15/08 827,500
----------
1,262,500
----------
Beverages: Non-Alcoholic (2.1%)
2,000 Sparkling Spring Water (Canada)..... 11.50 11/15/07 1,560,000
----------
Broadcast/Media (0.7%)
600 Tri-State Outdoor Mediagroup,
Inc. .............................. 11.00 05/15/08 519,000
----------
Broadcasting (0.9%)
350 STC Broadcasting, Inc. ............. 11.00 03/15/07 346,500
500 XM Satellite Radio Inc. - 144A*..... 14.00 03/15/10 350,000
----------
696,500
----------
Cable/Satellite TV (0.7%)
7,000 Australis Holdings Property Ltd.
(Australia) (a).................... 15.00 ++ 11/01/02 70,000
1,000 Knology Holdings, Inc. ............. 11.875++ 10/15/07 480,000
----------
550,000
----------
Casino/Gaming (5.8%)
5,500 Aladdin Gaming Capital Corp. (Series
B)................................. 13.50 ++ 03/01/10 3,025,000
3,000 Fitzgeralds Gaming Corp. (Series B)
(b)................................ 12.25 12/15/04 1,350,000
----------
4,375,000
----------
Cellular Telephone (1.2%)
550 Dobson/Sygnet Communications........ 12.25 12/15/08 547,250
1,000 Dolphin Telecom PLC
(United Kingdom)................... 11.50 ++ 06/01/08 200,000
900 Dolphin Telecom PLC (United Kingdom)
(Series B)......................... 14.00 ++ 05/15/09 180,000
----------
927,250
----------
Commercial Printing/Forms (0.1%)
1,000 Premier Graphics Inc. (b)........... 11.50 12/01/05 70,000
----------
Consumer/Business Services (3.0%)
600 Anacomp, Inc. (Series B)............ 10.875 04/01/04 129,000
700 Anacomp, Inc. (Series D)............ 10.875 04/01/04 150,500
1,335 Comforce Corp. (Series B)........... 15.00 + 12/01/09 400,640
3,000 Comforce Operating, Inc. ........... 12.00 12/01/07 1,560,000
----------
2,240,140
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
PORTFOLIO OF INVESTMENTS September 30, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Containers/Packaging (3.2%)
$ 400 Berry Plastics Corp. ............... 12.25 % 04/15/04 $ 376,000
3,000 Envirodyne Industries, Inc. ........ 10.25 12/01/01 2,070,000
----------
2,446,000
----------
Diversified Manufacturing (7.4%)
1,100 Eagle-Picher Industries, Inc. ...... 9.375 03/01/08 913,000
7,050 Jordan Industries, Inc. (Series
B)................................. 11.75 ++ 04/01/09 4,653,000
----------
5,566,000
----------
Electronic Distributors (0.1%)
2,000 CHS Electronics, Inc. (a)(b)........ 9.875 04/15/05 40,000
----------
Electronic Equipment/Instruments (0.9%)
1,000 High Voltage Engineering, Inc. ..... 10.75 08/15/04 650,000
----------
Electronics/Appliances (0.8%)
9,000 International Semi-Tech
Microelectronics, Inc.(Canada)(a)(b) 11.50 08/15/03 90,000
500 Windmere-Durable Holdings, Inc. .... 10.00 07/31/08 480,000
----------
570,000
----------
Environmental Services (1.3%)
1,100 Allied Waste North America Inc.
(Series B)......................... 10.00 08/01/09 957,000
----------
Food Distributors (1.9%)
1,000 Fleming Companies, Inc. (Series
B)................................. 10.625 07/31/07 800,000
650 Volume Services America, Inc. ...... 11.25 03/01/09 594,750
----------
1,394,750
----------
Food Retail (1.7%)
425 Eagle Food Centers, Inc. ........... 11.00 04/15/05 212,500
2,250 Pueblo Xtra International, Inc.
(Series C)......................... 9.50 08/01/03 1,057,500
----------
1,270,000
----------
Food: Specialty/Candy (1.2%)
15,356 SFAC New Holdings Inc. (a)(c)....... 13.00 ++ 06/15/09 921,379
----------
Hotels/Resorts/Cruiselines (0.4%)
1,000 Epic Resorts LLC (Series B)......... 13.00 06/15/05 300,000
----------
Household/Personal Care (2.4%)
1,868 J.B. Williams Holdings, Inc. ....... 12.00 03/01/04 1,830,640
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
PORTFOLIO OF INVESTMENTS September 30, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Industrial Specialties (2.2%)
$ 600 Indesco International, Inc. ........ 9.75 % 04/15/08 $ 222,000
600 International Wire Group, Inc. ..... 11.75 06/01/05 604,500
1,000 Outsourcing Services Group, Inc.
(Series B)......................... 10.875 03/01/06 820,000
----------
1,646,500
----------
Internet Software/Services (1.9%)
900 Cybernet Internet Services Inc. .... 14.00 07/01/09 414,000
1,000 Globix Corp. ....................... 12.50 02/01/10 700,000
500 PSINet, Inc. ....................... 10.50 12/01/06 325,000
----------
1,439,000
----------
Medical Specialties (2.8%)
1,765 Mediq/PRN Life Support Services,
Inc. (b)........................... 11.00 06/01/08 52,950
2,000 Universal Hospital Services, Inc.
(issued 02/25/98).................. 10.25 03/01/08 1,380,000
1,000 Universal Hospital Services, Inc.
(issued 01/26/99).................. 10.25 03/01/08 690,000
----------
2,122,950
----------
Medical/Nursing Services (2.8%)
3,000 Pediatric Services of America, Inc.
(Series A)......................... 10.00 04/15/08 2,100,000
----------
Movies/Entertainment (0.2%)
1,500 Regal Cinemas Inc. ................. 9.50 06/01/08 180,000
----------
Office Equipment/Supplies (1.9%)
2,400 Mosler, Inc. ....................... 11.00 04/15/03 1,440,000
----------
Other Consumer Specialties (2.1%)
2,000 Samsonite Corp. .................... 10.75 06/15/08 1,590,000
----------
Publishing: Books/Magazines (0.6%)
500 Perry-Judds, Inc. .................. 10.625 12/15/07 445,000
----------
Restaurants (6.4%)
12,252 American Restaurant Group Holdings,
Inc. - 144A* (c)................... 0.00 12/15/05 3,246,648
3,000 FRD Acquisition Corp. (Series B).... 12.50 07/15/04 1,080,000
600 Friendly Ice Cream Corp. ........... 10.50 12/01/07 480,000
----------
4,806,648
----------
Retail - Specialty (1.3%)
600 Pantry, Inc. ....................... 10.25 10/15/07 576,000
500 Petro Stopping Centers L.P. ........ 10.50 02/01/07 435,000
----------
1,011,000
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
PORTFOLIO OF INVESTMENTS September 30, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Specialty Telecommunications (10.4%)
$ 2,000 Birch Telecom Inc. ................. 14.00 % 06/15/08 $1,200,000
1,000 DTI Holdings, Inc. (Series B)....... 12.50 ++ 03/01/08 430,000
550 Esprit Telecom Group PLC
(United Kingdom)................... 11.50 12/15/07 192,500
1,000 Esprit Telecom Group PLC
(United Kingdom)................... 10.875 06/15/08 350,000
3,400 Firstworld Communications, Inc. .... 13.00 ++ 04/15/08 816,000
600 Pac-West Telecomm Inc. (Series B)... 13.50 02/01/09 540,000
400 Primus Telecommunications
Group, Inc. ....................... 12.75 10/15/09 204,000
1,000 Primus Telecommunications
Group, Inc. (Series B)............. 9.875 05/15/08 470,000
500 Versatel Telecom International NV
(Netherlands)...................... 13.25 05/15/08 450,000
1,400 Viatel, Inc. ....................... 11.25 04/15/08 742,000
500 Viatel, Inc. (issued 03/19/99)...... 11.50 03/15/09 270,000
400 Viatel, Inc. (issued 02/08/99)...... 11.50 03/15/09 216,000
2,000 World Access, Inc. (c).............. 13.25 01/15/08 1,480,000
500 Worldwide Fiber Inc. (Canada)....... 12.00 08/01/09 440,000
----------
7,800,500
----------
Telecommunications (11.1%)
500 CapRock Communications Corp. ....... 11.50 05/01/09 300,000
550 CapRock Communications Corp. (Series
B)................................. 12.00 07/15/08 341,000
500 Covad Communications Group, Inc. ... 12.50 02/15/09 380,000
500 Covad Communications Group, Inc.
(Series B)......................... 12.00 02/15/10 370,000
2,500 e. Spire Communications, Inc. ...... 13.75 07/15/07 1,350,000
1,000 Focal Communications Corp.
(Series B)......................... 12.125++ 02/15/08 500,000
500 Hyperion Telecommunication, Inc.
(Series B)......................... 12.25 09/01/04 492,500
600 Level 3 Communications, Inc. ....... 9.125 05/01/08 518,250
500 MGC Communications, Inc. ........... 13.00 04/01/10 335,000
550 Nextlink Communications LLC......... 12.50 04/15/06 539,000
17,700 Normex Technologies Corp. (Series B)
(a)(b)............................. 14.00 05/15/02 885,000
1,800 Rhythms Netconnections, Inc. ....... 12.75 04/15/09 1,134,000
500 Startec Global Communications
Corp. ............................. 12.00 05/15/08 400,000
1,000 Talton Holdings, Inc. (Series B).... 11.00 06/30/07 830,000
----------
8,374,750
----------
Trucks/Construction/Farm Machinery (1.9%)
1,500 J.B. Poindexter & Co., Inc. ........ 12.50 05/15/04 1,395,000
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
PORTFOLIO OF INVESTMENTS September 30, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Wireless Communications (11.1%)
$ 4,000 Advanced Radio Telecom Corp. ....... 14.00 % 02/15/07 $ 3,080,000
500 AMSC Aquisition Co., Inc. (Series
B)................................. 12.25 04/01/08 362,500
300 Arch Escrow Corp. .................. 13.75 04/15/08 219,000
8,000 CellNet Data Systems, Inc. (a)...... 14.00 ++ 10/01/07 560,000
1,000 Globalstar LP/Capital Corp. ........ 11.50 06/01/05 300,000
1,200 Orbcomm Global LP/Capital Corp.
(Series B) (b)..................... 14.00 08/15/04 180,000
1,600 Paging Network, Inc. (b)............ 10.125 08/01/07 592,000
2,300 Paging Network, Inc. (b)............ 10.00 10/15/08 851,000
2,000 USA Mobile Communications Holdings,
Inc. .............................. 14.00 11/01/04 1,600,000
1,000 WinStar Communications, Inc. - 144A* 12.75 04/15/10 730,000
----------
8,474,500
----------
TOTAL CORPORATE BONDS
(Cost $130,141,600)....................................... 70,972,007
----------
<CAPTION>
NUMBER OF
SHARES
---------
<C> <S> <C>
COMMON STOCKS (d) (0.5%)
Apparel/Footwear Retail (0.0%)
946,890 County Seat Stores, Inc. (c).............................. $ 8,522
----------
Casino/Gaming (0.0%)
2,000 Fitzgeralds Gaming Corp. ................................. 2
----------
Food Retail (0.0%)
3,217 Eagle Food Centers, Inc. ................................. 3,217
----------
Food: Specialty/Candy (0.0%)
835 SFAC New Holdings Inc. (c)................................ 209
180,000 Specialty Foods Acquisition Corp. - 144A*................. 1,800
----------
2,009
----------
Hotels/Resorts/Cruiselines (0.0%)
4,000 Motels of America, Inc. - 144A*........................... 1,000
----------
Medical/Nursing Services (0.0%)
211,076 Raintree Healthcare Corp. (c)............................. 1,900
----------
Motor Vehicles (0.0%)
113 Northern Holdings Industrial Corp. (c).................... --
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
PORTFOLIO OF INVESTMENTS September 30, 2000, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
------------------------------------------------------------------------------------
<C> <S> <C>
Restaurants (0.0%)
9,500 American Restaurant Group Holdings, Inc. - 144A*.......... $ 2,375
----------
Specialty Telecommunications (0.5%)
13,334 Versatel Telecom International NV (ADR) (Netherlands)..... 314,182
6,284 World Access, Inc. (c).................................... 33,973
----------
348,155
----------
Telecommunication Equipment (0.0%)
80,266 FWT, Inc. (Class A) (c)................................... 803
----------
Textiles (0.0%)
223,846 United States Leather, Inc. (c)........................... 2,238
----------
TOTAL COMMON STOCKS
(Cost $19,792,894)........................................ 370,221
----------
PREFERRED STOCK (0.5%)
Telecommunication Equipment
802,666 FWT, Inc. (Series A) (c) (Cost $3,242,428)................ 401,333
----------
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
--------- ----------
<C> <S> <C> <C>
WARRANTS (d) (0.6%)
Aerospace & Defense (0.1%)
5,000 Sabreliner Corp. - 144A*...................... 04/15/03 50,000
----------
Broadcasting (0.1%)
500 XM Satellite Radio Holdings Inc. - 144A*...... 03/15/10 75,000
----------
Casino/Gaming (0.0%)
45,000 Aladdin Gaming Enterprises, Inc. - 144A*...... 03/01/10 450
----------
Hotels/Resorts/Cruiselines (0.0%)
1,000 Epic Resorts LLC - 144A*...................... 06/15/05 10
----------
Internet Software/Services (0.0%)
900 Cybernet Internet Services Inc. - 144A*....... 07/01/09 4,500
----------
Specialty Telecommunications (0.4%)
2,000 Birch Telecom Inc. - 144A*.................... 06/15/08 200,000
5,000 DTI Holdings Inc. - 144A*..................... 03/01/08 50
3,400 Firstworld Communications, Inc. - 144A*....... 04/15/08 68,000
----------
268,050
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
PORTFOLIO OF INVESTMENTS September 30, 2000, continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
-------------------------------------------------------------------------------------
<C> <S> <C> <C>
Telecommunications (0.0%)
500 Startec Global Communications Corp. - 144A*... 05/15/08 $ 500
----------
Wireless Communications (0.0%)
500 Motient Corp. - 144A*......................... 04/01/08 19,000
----------
TOTAL WARRANTS
(Cost $551,073)............................................ 417,510
----------
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
--------- -------- ----------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENT (0.2%)
REPURCHASE AGREEMENT
$ 159 The Bank of New York (dated 09/29/00;
proceeds $159,091) (e)
(Cost $159,008)..................... 6.25 % 10/02/00 159,008
----------
TOTAL INVESTMENTS
(Cost $153,887,003) (f)........................... 96.0% 72,320,079
OTHER ASSETS IN EXCESS OF LIABILITIES............. 4.0 3,050,031
----- ----------
NET ASSETS........................................ 100.0% $75,370,110
===== ==========
</TABLE>
---------------------
<TABLE>
<C> <S>
ADR American Depository Receipt.
* Resale is restricted to qualified institutional investors.
+ Payment-in-kind security.
++ Currently a zero coupon bond that 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 securities.
(e) Collateralized by $152,764 U.S. Treasury Note 6.75% due
05/15/05 valued at $162,188.
(f) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes. The
aggregate gross unrealized appreciation is $824,664 and the
aggregate gross unrealized depreciation is $82,391,588,
resulting in net unrealized depreciation of $81,566,924.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2000
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(cost $153,887,003)..................... $ 72,320,079
Receivable for:
Interest.............................. 2,469,599
Investments sold...................... 945,134
Prepaid expenses and other assets........ 12,704
-----------
TOTAL ASSETS.......................... 75,747,516
-----------
LIABILITIES:
Payable for:
Investments purchased................. 180,000
Investment management fee............. 58,930
Accrued expenses and other payables...... 138,476
-----------
TOTAL LIABILITIES..................... 377,406
-----------
NET ASSETS............................ $ 75,370,110
===========
COMPOSITION OF NET ASSETS:
Paid-in-capital.......................... $230,913,160
Net unrealized depreciation.............. (81,566,924)
Accumulated undistributed net investment
income.................................. 887,228
Accumulated net realized loss............ (74,863,354)
-----------
NET ASSETS............................ $ 75,370,110
===========
NET ASSET VALUE PER SHARE,
29,997,052 shares outstanding
(unlimited shares authorized of $.01 par
value).................................. $ 2.51
===========
</TABLE>
STATEMENT OF OPERATIONS
For the year ended September 30, 2000
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME.......................... $ 16,319,545
-----------
EXPENSES
Investment management fee................ 699,767
Transfer agent fees and expenses......... 90,129
Professional fees........................ 72,968
Shareholder reports and notices.......... 50,189
Registration fees........................ 32,710
Trustees' fees and expenses.............. 20,240
Custodian fees........................... 8,597
Other.................................... 6,612
-----------
TOTAL EXPENSES........................ 981,212
-----------
NET INVESTMENT INCOME................. 15,338,333
-----------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................ (3,163,815)
Net change in unrealized depreciation.... (25,856,377)
-----------
NET LOSS.............................. (29,020,192)
-----------
NET DECREASE............................. $(13,681,859)
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................ $ 15,338,333 $ 17,091,069
Net realized loss................................ (3,163,815) (3,793,847)
Net change in unrealized depreciation............ (25,856,377) (23,002,126)
------------ ------------
NET DECREASE................................. (13,681,859) (9,704,904)
Dividends to shareholders from net investment
income.......................................... (16,200,839) (18,199,121)
Decrease from transactions in shares of
beneficial interest............................. (64,964) --
------------ ------------
NET DECREASE................................. (29,947,662) (27,904,025)
NET ASSETS:
Beginning of period.............................. 105,317,772 133,221,797
------------ ------------
END OF PERIOD
(Including undistributed net investment
income of $887,228 and $1,749,734,
respectively)................................ $ 75,370,110 $105,317,772
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
NOTES TO FINANCIAL STATEMENTS September 30, 2000
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter 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 portfolio security listed or traded
on the New York or American Stock Exchange, NASDAQ, or other exchange is valued
at its latest sale price, 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 securities are 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; (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") 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.
13
<PAGE> 14
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
NOTES TO FINANCIAL STATEMENTS September 30, 2000, 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 tax purposes 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.
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, 2000 aggregated
$13,966,163 and $20,947,812, respectively.
14
<PAGE> 15
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
NOTES TO FINANCIAL STATEMENTS September 30, 2000, continued
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Trust's transfer agent. At September 30, 2000, the Trust had transfer agent
fees and expenses payable of approximately $200.
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, 2000
included in Trustees' fees and expenses in the Statement of Operations amounted
to $5,838. At September 30, 2000, the Trust had an accrued pension liability of
$55,761 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, 1998................................. 30,017,252 $300,172 $281,756,181
Reclassification due to permanent book/tax differences...... -- -- (27,666,751)
---------- -------- ------------
Balance, September 30, 1999................................. 30,017,252 300,172 254,089,430
Treasury shares purchased and retired (weighted average
discount 2.25%)*........................................... (20,200) (202) (64,762)
Reclassification due to permanent book/tax differences...... -- -- (23,411,478)
---------- -------- ------------
Balance, September 30, 2000................................. 29,997,052 $299,970 $230,613,190
========== ======== ============
</TABLE>
---------------------
* The Trustees have voted to retire the shares purchased.
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 26, 2000 $0.04 October 6, 2000 October 20, 2000
October 24, 2000 $0.04 November 3, 2000 November 17, 2000
</TABLE>
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
NOTES TO FINANCIAL STATEMENTS September 30, 2000, continued
6. FEDERAL INCOME TAX STATUS
At September 30, 2000, the Trust had a net capital loss carryover of
approximately $68,700,000, to offset future capital gains to the extent provided
by regulations, available through September 30 of the following years:
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS
--------------------------------------------------------------------------------------
2001 2002 2003 2005 2006 2007 2008
---- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$109 $15,205 $26,684 $6,214 $14,070 $3,307 $3,111
==== ======= ======= ====== ======= ====== ======
</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 $3,451,000 during fiscal 2000.
As of September 30, 2000, the Trust had temporary book/tax differences primarily
attributable to post-October losses, capital loss deferrals on wash sales and
interest on bonds in default and permanent book/tax differences attributable to
an expired net capital loss carryover. To reflect reclassifications arising from
the permanent differences, paid-in-capital was charged and accumulated net
realized loss was credited $23,411,478.
16
<PAGE> 17
MORGAN STANLEY DEAN WITTER 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
----------------------------------------------------
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA:
Net asset value, beginning of period........................ $ 3.51 $ 4.44 $ 5.18 $ 5.22 $ 5.30
------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income...................................... 0.51 0.57 0.62 0.63 0.66
Net realized and unrealized loss........................... (0.97) (0.89) (0.72) -- (0.14)
------- -------- -------- -------- --------
Total income (loss) from investment operations.............. (0.46) (0.32) (0.10) 0.63 0.52
------- -------- -------- -------- --------
Dividends from net investment income........................ (0.54) (0.61) (0.64) (0.67) (0.60)
------- -------- -------- -------- --------
Net asset value, end of period.............................. $ 2.51 $ 3.51 $ 4.44 $ 5.18 $ 5.22
======= ======== ======== ======== ========
Market value, end of period................................. $ 3.50 $ 4.25 $ 5.25 $ 6.25 $ 6.00
======= ======== ======== ======== ========
TOTAL RETURN+............................................... (4.71)% (8.83)% (6.52)% 16.26% 15.53%
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 1.05% 1.00% 0.95% 0.92% 0.92%
Net investment income....................................... 16.44% 14.36% 12.58% 12.43% 12.50%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $75,370 $105,318 $133,222 $155,540 $156,738
Portfolio turnover rate..................................... 16% 51% 105% 124% 117%
</TABLE>
---------------------
+ Total 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 return does not
reflect brokerage commissions.
SEE NOTES TO FINANCIAL STATEMENTS
17
<PAGE> 18
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
OF MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Dean Witter High Income Advantage Trust (the "Trust"), including the
portfolio of investments, as of September 30, 2000, and the related statements
of operations and changes in net assets, and the financial highlights for the
year then ended. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets for the year ended September 30,
1999 and the financial highlights for each of the respective periods ended
September 30, 1999 were audited by other independent accountants whose report,
dated November 9, 1999, expressed an unqualified opinion on that statement and
financial highlights.
We conducted our audit 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 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 as of September 30, 2000, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Dean Witter High Income Advantage Trust as of September 30, 2000, the
results of its operations, the changes in its net assets, and the financial
highlights for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche LLP
New York, New York
November 8, 2000
18
<PAGE> 19
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST
CHANGE IN INDEPENDENT ACCOUNTANTS
On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Trust.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Trust for the past two fiscal years contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
The Trust, with the approval of its Board of Trustees and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent accountants as of July 1,
2000.
19
<PAGE> 20
TRUSTEES
----------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
----------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Mitchell M. Merin
President
Barry Fink
Vice President, Secretary and General Counsel
Peter 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
----------------------------------
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
----------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
MORGAN STANLEY
DEAN WITTER
HIGH INCOME
ADVANTAGE
TRUST
Annual Report
September 30, 2000
