<PAGE> 1
HIGH INCOME ADVANTAGE TRUST II Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS July 31, 1997
DEAR SHAREHOLDER:
During the twelve-month period ended July 31, 1997, the high-yield market,
benefiting from a healthy economy, improved credit quality and a relatively
favorable interest-rate environment, posted strong returns relative to other
sectors of the fixed-income market. This sector's overall vitality came despite
some market weakness in March and April following the Federal Reserve Board's
rate hike.
Continued strength in the economy has resulted in solid earnings improvements on
the part of many high-yield companies during the first two quarters of 1997, and
has provided the fuel for the sharp equity market advance experienced over the
past year. Many high-yield companies have taken advantage of higher equity
valuations to raise equity and strengthen their individual balance sheets. The
resulting credit quality improvement has helped keep the high-yield market's
performance strong relative to many of the other fixed-income markets.
PERFORMANCE AND PORTFOLIO STRATEGY
In this context, High Income Advantage Trust II produced a total return of 22.75
percent for the twelve-month period ended July 31, 1997, based on its closing
market price on the New York Stock Exchange (NYSE) that day of $6.6875 per
share. Based on its net asset value (NAV) of $5.83 per share, the Trust's total
return for the same period was 9.79 percent. Over the past twelve months, the
Trust continued to distribute regular income dividends at a rate of $0.0525 per
share per month. For the fiscal year, the Trust's distributions totaled $0.7577
per share, including an extra income dividend of $0.1277 per share paid on
December 20, 1996. On July 31, 1997, the Trust's net assets exceeded $207
million.
As the economy has continued to expand over the past few years, the Trust has
tended to concentrate on B-rated issues. In a growing economy one can generally
find undervalued, upgrade candidates in this sector of the market that provide
attractive yields as well as appreciation potential.
<PAGE> 2
HIGH INCOME ADVANTAGE TRUST II
LETTER TO THE SHAREHOLDERS July 31, 1997, continued
Thus, we continue to feel that many of these issues are very attractive
long-term investments. However, given the lower market yields available today
and the potential for a modest Federal Reserve rate tightening down the road, we
have taken some defensive steps for the portfolio. These include increasing our
allocation to the higher-quality end of the market (BB-rated issues or higher).
We feel that these holdings will better protect shareholders during a
potentially nervous market environment as well as provide the liquidity and
portfolio flexibility needed to take advantage of future opportunities. In
addition, the Fund has sold many of its heavy cyclical positions and is now
focused mainly on more-predictable, recession-resistant and growth sectors of
the economy. In some of these sectors, such as media and telecommunications, we
expect to see continued consolidation, which should bode well for many of the
Trust's individual holdings.
LOOKING AHEAD
The one- to two-year outlook for the high-yield market remains favorable, given
our expectations for continued economic growth. We caution, however, that during
this period the possibility exists for another round of investor nervousness as
investors react to potential Federal Reserve Board moves.
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 lower at the time of purchase.
We thank you for your continued support of High Income Advantage Trust II and
look forward to continuing to serve your investment needs.
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE> 3
HIGH INCOME ADVANTAGE TRUST II
RESULTS OF SPECIAL MEETING (unaudited)
* * *
On May 20, 1997, a special meeting of the Trust's shareholders was held for the
purpose of voting on two separate matters, the results of which were as follows:
(1) ELECTION OF TRUSTEES:
<TABLE>
<S> <C>
Wayne E. Hedien
For................................................................ 26,995,566
Withheld........................................................... 758,996
</TABLE>
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Edwin J. Garn, John R. Haire,
Dr. Manuel H. Johnson, Michael E. Nugent, Philip J. Purcell and John L.
Schroeder.
(2) APPROVAL OF A NEW INVESTMENT MANAGEMENT AGREEMENT BETWEEN THE TRUST AND DEAN
WITTER INTERCAPITAL INC., IN CONNECTION WITH THE PROPOSED MERGER OF MORGAN
STANLEY GROUP INC. WITH DEAN WITTER, DISCOVER & CO.:
<TABLE>
<S> <C>
For................................................................ 26,065,240
Against............................................................ 539,534
Abstain............................................................ 1,149,788
</TABLE>
<PAGE> 4
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (89.0%)
Aerospace (1.0%)
$ 2,000 Sabreliner Corp. (Series B).......... 12.50% 04/15/03 $ 2,095,000
------------
Automotive (3.8%)
4,000 APS, Inc. ........................... 11.875 01/15/06 3,870,000
4,000 Toyota Motor Credit Corp. ........... 15.00 09/26/97 4,052,480
------------
7,922,480
------------
Broadcast Media (5.8%)
2,000 Adams Outdoor Advertising L.P........ 10.75 03/15/06 2,190,000
2,000 Australis Holdings Ltd.
(Australia)......................... 15.00++ 11/01/02 1,620,000
1,000 Echostar DBS Corp. - 144A*........... 12.50 07/01/02 1,012,500
2,000 Echostar Satellite Broadcasting...... 13.125++ 03/15/04 1,465,000
2,000 Paxson Communications Corp. ......... 11.625 10/01/02 2,190,000
2,000 Spanish Broadcasting System, Inc. ... 12.50 06/15/02 2,260,000
2,000 TCI Satellite Entertainment,
Inc. - 144A*........................ 12.25++ 02/15/07 1,210,000
------------
11,947,500
------------
Business Services (2.0%)
4,000 Anacomp, Inc. - 144A*................ 10.875 04/01/04 4,200,000
------------
Cable & Telecommunications (17.4%)
2,000 Adelphia Communications,
Inc. - 144A*........................ 9.875 03/01/07 2,025,000
6,500 American Communications Services,
Inc. ............................... 12.75++ 04/01/06 3,867,500
500 American Communications Services,
Inc. - 144A*........................ 13.75 07/15/07 530,000
2,000 Cablevision Systems Corp. ........... 9.875 04/01/23 2,115,000
2,000 Charter Communication South East L.P.
(Series B).......................... 11.25 03/15/06 2,190,000
2,000 Falcon Holdings Group L.P. (Series
B).................................. 11.00+ 09/15/03 2,079,532
2,000 FrontierVision Operating Partners,
L.P. ............................... 11.00 10/15/06 2,140,000
1,000 GST Equipment Funding
Corp. - 144A*....................... 13.25 05/01/07 1,100,000
6,500 Hyperion Telecommunication, Inc.
(Series B).......................... 13.00++ 04/15/03 3,965,000
25,050 In-Flight Phone Corp. (Series B)
(a)................................. 14.00++ 05/15/02 2,379,750
2,000 IXC Communications, Inc. (Series
B).................................. 12.50 10/01/05 2,260,000
2,000 NextLink Communications, Inc. ....... 12.50 04/15/06 2,240,000
3,000 Paging Network, Inc. ................ 10.125 08/01/07 3,082,500
2,000 Peoples Telephone Co., Inc. ......... 12.25 07/15/02 2,085,000
2,000 Rifkin Acquisition Partners L.P...... 11.125 01/15/06 2,160,000
2,000 Shared Technology/Fairchild, Inc. ... 12.25++ 03/01/06 1,920,000
------------
36,139,282
------------
Consumer Products (2.2%)
2,500 J.B. Williams Holdings, Inc. ........ 12.00 03/01/04 2,625,000
2,000 Renaissance Cosmetics, Inc. ......... 11.75 02/15/04 2,030,000
------------
4,655,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 5
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Containers (2.0%)
$ 2,000 Mail-Well Corp. ..................... 10.50% 02/15/04 $ 2,135,000
2,000 Packaging Resources, Inc. ........... 11.625 05/01/03 2,060,000
------------
4,195,000
------------
Electrical & Alarm Systems (1.8%)
4,500 Mosler, Inc. ........................ 11.00 04/15/03 3,825,000
------------
Entertainment/Gaming & Lodging (13.1%)
2,000 AMF Group Inc. (Series B)............ 10.875 03/15/06 2,220,000
3,750 Fitzgeralds Gaming Corp. (Units)++... 13.00 12/31/02 3,562,500
4,000 Lady Luck Gaming Finance Corp. ...... 11.875 03/01/01 3,970,000
7,800 Motels of America, Inc. (Series B)... 12.00 04/15/04 7,566,000
2,000 Players International, Inc. ......... 10.875 04/15/05 2,100,000
2,000 Plitt Theaters, Inc. (Canada)........ 10.875 06/15/04 2,120,000
2,000 Station Casinos, Inc. ............... 9.625 06/01/03 1,965,000
4,000 Stuart Entertainment, Inc. (Series
B).................................. 12.50 11/15/04 3,680,000
------------
27,183,500
------------
Financial (4.0%)
4,000 General Electric Capital Corp.**..... 13.50 01/20/98 4,142,440
4,000 Household Finance Corp.**............ 15.00 09/25/97 4,051,120
------------
8,193,560
------------
Foods & Beverages (8.8%)
2,000 Envirodyne Industries, Inc. ......... 10.25 12/01/01 2,010,000
2,000 General Mills, Inc. ................. 13.50 01/21/98 2,071,420
5,750 PepsiCo, Inc. (WI)................... 15.00 08/06/98 6,274,457
19,050 Specialty Foods Acquisition Corp.
(Series B).......................... 13.00++ 08/15/05 7,905,750
------------
18,261,627
------------
Healthcare (3.6%)
3,250 Unilab Corp. ........................ 11.00 04/01/06 3,120,000
5,125 Unison Healthcare Corp. - 144A*...... 12.25 11/01/06 4,356,250
------------
7,476,250
------------
Manufacturing (4.3%)
2,000 Berry Plastics Corp. ................ 12.25 04/15/04 2,210,000
1,750 Exide Electronics Group, Inc. (Series
B).................................. 11.50 03/15/06 2,030,000
2,000 International Wire Group, Inc. ...... 11.75 06/01/05 2,190,000
2,500 Uniroyal Technology Corp............. 11.75 06/01/03 2,500,000
------------
8,930,000
------------
Manufacturing - Diversified (5.4%)
2,000 Foamex L.P........................... 11.875 10/01/04 2,150,000
2,000 Interlake Corp. ..................... 12.125 03/01/02 2,095,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 2,000 J.B. Poindexter & Co., Inc. ......... 12.50% 05/15/04 $ 2,095,000
8,536 Jordan Industries, Inc. - 144A*...... 11.75++ 04/01/09 4,822,840
2,500 Starcraft Industrial Corp. (a)....... 16.50 01/15/98 100,000
------------
11,262,840
------------
Publishing (2.1%)
2,000 American Media Operations, Inc. ..... 11.625 11/15/04 2,200,000
2,000 United States Banknote Corp.......... 10.375 06/01/02 2,060,000
------------
4,260,000
------------
Restaurants (5.5%)
12,025 American Restaurant Group Holdings,
Inc. ............................... 14.00++ 12/15/05 4,389,125
2,085 Boston Chicken, Inc. (Conv.)......... 4.50 02/01/04 1,529,869
2,000 Carrols Corp......................... 11.50 08/15/03 2,150,000
3,000 FRD Acquisition Corp. (Series B)..... 12.50 07/15/04 3,202,500
------------
11,271,494
------------
Retail (2.7%)
10,375 County Seat Stores Co. (b)........... 12.00 10/01/02 5,602,500
------------
Retail - Food Chains (2.0%)
2,000 Jitney-Jungle Stores of America,
Inc. ............................... 12.00 03/01/06 2,300,000
2,000 Pathmark Stores, Inc. ............... 9.625 05/01/03 1,930,000
------------
4,230,000
------------
Textiles (1.5%)
4,000 U.S. Leather, Inc. .................. 10.25 07/31/03 3,000,000
------------
TOTAL CORPORATE BONDS
(Identified Cost $196,848,875)................................ 184,651,033
------------
<CAPTION>
NUMBER OF
SHARES
<S> <C> <C>
COMMON STOCKS (c) (1.0%)
Automotive (0.0%)
91 Northern Holdings Industrial Corp. (d)*....................... --
------------
Entertainment/Gaming & Lodging (0.0%)
5,000 Motels of America, Inc. - 144A*............................... 75,000
------------
Foods & Beverages (0.1%)
225,000 Specialty Foods Acquisition Corp. - 144A*..................... 225,000
------------
Manufacturing - Diversified (0.9%)
61,500 Thermadyne Holdings Corp. (d)................................. 1,891,125
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1997, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- --------------------------------------------------------------------------------------------
<C> <S> <C>
Restaurants (0.0%)
12,500 American Restaurant Group Holdings,
Inc. - 144A*........................ $ 12,500
------------
TOTAL COMMON STOCKS
(Identified Cost $8,188,862).................................. 2,203,625
------------
PREFERRED STOCK (1.1%)
Entertainment/Gaming & Lodging
80,000 Fitzgeralds Gaming Corp. (Units)++
(Identified Cost $2,000,000).................................. 2,240,000
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
- --------- ---------
<C> <S> <C> <C>
WARRANTS (c) (0.1%)
Aerospace (0.1%)
6,000 Sabreliner Corp. - 144A*...................... 04/15/03 60,120
------------
Broadcast Media (0.0%)
2,000 Australis Holdings Ltd. - 144A* (Australia)... 10/30/01 --
------------
Cable & Telecommunications (0.0%)
2,000 Hyperion Telecommunication, Inc. (Series
B) - 144A*................................... 04/01/01 60,000
------------
Containers (0.0%)
5,000 Crown Packaging Holdings, Ltd. - 144A*........ 11/01/03 --
------------
Entertainment/Gaming & Lodging (0.0%)
3,000 Fitzgeralds Gaming Corp....................... 12/19/98 3,029
2,900 Fitzgeralds Gaming Corp. - 144A*.............. 12/31/02 --
------------
3,029
------------
Manufacturing (0.0%)
25,000 Uniroyal Technology Corp...................... 06/01/03 37,500
------------
Retail (0.0%)
5,000 County Seat Holdings Co....................... 10/15/98 --
------------
TOTAL WARRANTS
(Identified Cost $605,920)................................. 160,649
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1997, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
SHORT-TERM INVESTMENTS (e) (10.4%)
U.S. GOVERNMENT AGENCIES
$17,600 Federal Home Loan
Mortgage Corp......... 5.37 - 5.75% 08/01/97 - 08/07/97 $ 17,589,260
4,000 Federal National
Mortgage
Association........... 5.42 08/05/97 3,997,591
------------
TOTAL SHORT-TERM INVESTMENTS
(Amortized Cost $21,586,851)................................... 21,586,851
------------
TOTAL INVESTMENTS
(Identified Cost $229,230,508) (f)..................... 101.6% 210,842,158
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS........ (1.6) (3,386,632)
---- ------------
NET ASSETS............................................. 100.0% $207,455,526
====== ==============
</TABLE>
- ---------------------
<TABLE>
<C> <S>
* Resale is restricted to qualified institutional investors.
** Some or all of these securities are segregated in connection with the purchase
of when issued securities.
+ Payment-in-kind security.
++ Currently a zero coupon bond that will pay interest at the rate shown at a
future specified date.
++ Consists of one or more class of securities traded together as a unit; stocks
and bonds with attached warrants.
WI Security purchased on a when issued basis.
(a) Non-income producing security; issuer in bankruptcy.
(b) Non-income producing security; bond in default.
(c) Non-income producing security.
(d) Acquired through exchange offer.
(e) Securities were purchased on a discount basis. The interest rates shown have
been adjusted to reflect a money market equivalent yield.
(f) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $10,357,003 and the
aggregate gross unrealized depreciation is $28,745,353, resulting in net
unrealized depreciation of $18,388,350.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
HIGH INCOME ADVANTAGE TRUST II
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1997
ASSETS:
Investments in securities, at value
(identified cost $229,230,508)......... $ 210,842,158
Cash.................................... 75,754
Interest receivable..................... 4,038,194
Prepaid expenses and other assets....... 17,778
-------------
TOTAL ASSETS........................ 214,973,884
-------------
LIABILITIES:
Payable for:
Investments purchased............... 7,240,071
Investment management fee........... 143,690
Accrued expenses and other payables..... 134,597
-------------
TOTAL LIABILITIES................... 7,518,358
-------------
NET ASSETS.......................... $ 207,455,526
=============
COMPOSITION OF NET ASSETS:
Paid-in-capital......................... $ 344,428,742
Net unrealized depreciation............. (18,388,350)
Accumulated undistributed net investment
income................................. 3,914,257
Accumulated net realized loss........... (122,499,123)
-------------
NET ASSETS.......................... $ 207,455,526
=============
NET ASSET VALUE PER SHARE,
35,611,307 shares outstanding
(unlimited shares authorized of $.01
par value)............................. $5.83
STATEMENT OF OPERATIONS
For the year ended July 31, 1997
NET INVESTMENT INCOME:
INTEREST INCOME......................... $ 27,682,793
-------------
EXPENSES:
Investment management fee............... 1,542,329
Transfer agent fees and expenses........ 131,587
Professional fees....................... 51,304
Shareholder reports and notices......... 37,471
Registration fees....................... 21,452
Custodian fees.......................... 20,156
Trustees' fees and expenses............. 15,223
Other................................... 10,101
-------------
TOTAL EXPENSES...................... 1,829,623
-------------
NET INVESTMENT INCOME............... 25,853,170
-------------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
Net realized loss....................... (20,201,090)
Net change in unrealized depreciation... 16,026,797
-------------
NET LOSS............................ (4,174,293)
-------------
NET INCREASE............................ $ 21,678,877
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
HIGH INCOME ADVANTAGE TRUST II
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JULY 31, JULY 31,
1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.................................. $ 25,853,170 $ 25,723,845
Net realized loss...................................... (20,201,090) (6,348,564)
Net change in unrealized depreciation.................. 16,026,797 513,141
----------- -----------
NET INCREASE....................................... 21,678,877 19,888,422
Dividends from net investment income................... (26,982,213) (23,734,936)
----------- -----------
NET DECREASE....................................... (5,303,336) (3,846,514)
NET ASSETS:
Beginning of period.................................... 212,758,862 216,605,376
----------- -----------
END OF PERIOD
(Including undistributed net investment income of
$3,914,257 and $5,071,593, respectively)........... $207,455,526 $212,758,862
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS July 31, 1997
1. ORGANIZATION AND ACCOUNTING POLICIES
High Income Advantage Trust II (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 seeks to achieve its
objective by investing primarily in lower-rated fixed income securities. The
Trust was organized as a Massachusetts business trust on July 7, 1988 and
commenced operations on September 30, 1988.
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 securities are traded on more than one exchange; the securities are
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 Dean Witter InterCapital, Inc. (the "Investment Manager") that
sale or 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.
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.
<PAGE> 12
HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS July 31, 1997, continued
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 the Investment Manager a management fee, calculated 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 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 July 31, 1997, aggregated
$177,459,788 and $194,820,054, respectively.
Dean Witter Trust Company, an affiliate of the Investment Manager, is the
Trust's transfer agent. At July 31, 1997, the Trust had transfer agent fees and
expenses payable of approximately $7,500.
<PAGE> 13
HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS July 31, 1997, continued
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 July 31, 1997 included in
Trustees' fees and expenses in the Statement of Operations amounted to $2,098.
At July 31, 1997, the Trust had an accrued pension liability of $48,528 which is
included in accrued expenses in the Statement of Assets and Liabilities.
4. SHARES OF BENEFICIAL INTEREST
<TABLE>
<CAPTION>
CAPITAL
PAID IN
EXCESS OF
SHARES PAR VALUE PAR VALUE
---------- --------- ------------
<S> <C> <C> <C>
Balance, July 31, 1995, 1996 and 1997........................................... 35,611,307 $356,113 $344,072,629
========== ======== ============
</TABLE>
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>
July 29, 1997 $0.0525 August 8, 1997 August 22, 1997
August 26, 1997 $0.0525 September 5, 1997 September 19, 1997
</TABLE>
6. FEDERAL INCOME TAX STATUS
At July 31, 1997, the Trust had a net capital loss carryover of approximately
$111,434,000, which may be used to offset future capital gains to the extent
provided by regulations, which is available through July 31 of the following
years:
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS
- --------------------------------------------------------------------------
1998 1999 2000 2002 2003 2004 2005
- ---- ------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
$213 $20,947 $29,353 $8,278 $23,309 $20,038 $9,296
===== ======== ======== ======= ======== ======== =======
</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 $7,755,000 during fiscal 1997. As of July 31, 1997, the Trust had
temporary book/tax differences primarily attributable to post-October losses and
capital loss deferrals on wash sales.
<PAGE> 14
HIGH INCOME ADVANTAGE TRUST II
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JULY 31
------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................. $ 5.97 $ 6.08 $ 6.31 $ 6.60 $ 6.43
------ ------ ------ ------ ------
Net investment income............................................ 0.73 0.73 0.70 0.69 0.77
Net realized and unrealized gain (loss).......................... (0.11) (0.17) (0.21) (0.28) 0.31
------ ------ ------ ------ ------
Total from investment operations................................. 0.62 0.56 0.49 0.41 1.08
------ ------ ------ ------ ------
Less dividends from net investment income........................ (0.76) (0.67) (0.72) (0.70) (0.91)
------ ------ ------ ------ ------
Net asset value, end of period................................... $ 5.83 $ 5.97 $ 6.08 $ 6.31 $ 6.60
====== ====== ====== ====== ======
Market value, end of period...................................... $ 6.688 $ 6.125 $ 6.125 $ 6.25 $ 6.875
====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN+......................................... 22.75% 11.31% 10.29% 0.90% 22.16%
RATIOS TO AVERAGE NET ASSETS:
Expenses......................................................... 0.89% 0.91% 0.93% 0.94% 0.95%
Net investment income............................................ 12.57% 12.06% 11.81% 10.33% 12.17%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.......................... $207,456 $212,759 $216,605 $224,681 $235,039
Portfolio turnover rate.......................................... 90% 89% 70% 113% 138%
</TABLE>
- ---------------------
+ Total investment return is based upon the current market value on the last day
of each period reported. Dividends and distributions 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
<PAGE> 15
HIGH INCOME ADVANTAGE TRUST II
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF HIGH INCOME ADVANTAGE TRUST II
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 II (the
"Trust") at July 31, 1997, 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 July
31, 1997 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
September 12, 1997
<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
- -----------------------------------------------------
Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- -----------------------------------------------------
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
- -----------------------------------------------------
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048
HIGH
INCOME
ADVANTAGE
TRUST II
Annual Report
July 31, 1997
