<PAGE> 1
HIGH INCOME ADVANTAGE TRUST II Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS January 31, 1998
DEAR SHAREHOLDER:
Continuing the trend of recent years, high-yield bonds remained one of the
better-performing sectors of the fixed-income market for calendar 1997.
Benefiting from a healthy economy, improved credit quality and a relatively
favorable interest-rate environment, the high-yield market posted a strong
double-digit return for the year. This performance compares favorably with the
single-digit returns generated by the high-quality end of the fixed-income
market for the same period.
Reviewing the past six-month period, despite some market weakness in October and
November, as a result of the emerging market crisis, the sector finished on a
high note. Continued strength in the economy has resulted in solid earnings
improvements on the part of many high-yield companies during the year, and
provided the fuel for the sharp equity market advance experienced in 1997. Many
high-yield companies have taken advantage of higher equity valuations to raise
equity and strengthen their own balance sheets. The resulting credit quality
improvement has helped keep the high-yield market's performance strong relative
to that of many of the other fixed-income markets.
PERFORMANCE AND PORTFOLIO STRATEGY
In this context, High Income Advantage Trust II produced a total return of 3.66
percent for the six-month period ended January 31, 1998, based on its month end
closing market price on the New York Stock Exchange (NYSE) of $6 1/2 per share.
Based on its net asset value (NAV) of $5.68 per share, the Trust's total return
for the same period was 3.90 percent. Over the past six months, the Trust
continued to distribute regular income dividends at a rate of $0.0525 per share
per month. For the full six-month period, the Trust's distributions totaled
$0.4217 per share, including an extra income dividend of $0.1067 per share paid
on December 19, 1997. On January 31, 1998, the Trust's net assets exceeded
$202.4 million.
<PAGE> 2
HIGH INCOME ADVANTAGE TRUST II
LETTER TO THE SHAREHOLDERS January 31, 1998, continued
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. Given our expectation for
continued growth in the economy this year, we continue to feel that many of
these issues are very attractive investments. However, in light of the lower
market yields available today and the potential for a modest correction in the
market, we have taken some defensive steps for the portfolio over the past year.
This includes 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 Trust has sold many of its heavily cyclical
positions and is now focused mainly on more predictable, recession-resistant and
growth sectors of the economy, such as food/beverage, health care,
telecommunications, media and cable. 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. Finally, in keeping with our
more conservative posture, we continue to limit our exposure to the foreign
emerging high-yield markets, given the potential risk associated with the
ongoing emerging market crisis.
LOOKING AHEAD
The one- to two-year outlook for the high-yield market remains favorable, with
our expectations for continued economic growth. We caution, however, that during
this period the possibility exists for another round of investor nervousness in
reaction to potential Federal Reserve Board moves or another disruption in
foreign emerging markets.
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 II
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On December 18, 1997, an annual meeting of the Trust's shareholders was held for
the purpose of voting on three separate matters, the results of which were as
follows:
(1) ELECTION OF TRUSTEES:
<TABLE>
<S> <C>
Wayne E. Hedien
For......................................................... 26,610,516
Withheld.................................................... 617,207
Manuel H. Johnson
For......................................................... 26,633,806
Withheld.................................................... 593,917
John L. Schroeder
For......................................................... 26,576,603
Withheld.................................................... 651,120
</TABLE>
The following Trustees were not standing for reelection at this meeting:
Michael Bozic, Charles A. Fiumefreddo, Edwin J. Garn, John R. Haire,
Michael E. Nugent, and Philip J. Purcell.
(2) RATIFICATION OF THE SELECTION OF PRICE WATERHOUSE LLP AS THE TRUST'S
INDEPENDENT ACCOUNTANTS:
<TABLE>
<S> <C>
For......................................................... 26,263,715
Against..................................................... 230,881
Abstain..................................................... 733,127
</TABLE>
(3) ELIMINATION OF THE TRUST'S FUNDAMENTAL POLICY REGARDING INVESTMENTS IN
RESTRICTED SECURITIES:
<TABLE>
<S> <C>
For......................................................... 15,220,440
Against..................................................... 1,297,240
Abstain..................................................... 2,123,115
</TABLE>
The shareholders of the Trust voted to eliminate a fundamental policy of the
Trust which provided that the Trust could not invest more than 10% of its total
assets in restricted securities which policy could only be changed by
shareholder vote. The elimination of this fundamental policy enables the Trust
to participate more fully in investment opportunities in the high-yield market.
The Trust's current policy with respect to restricted securities is
non-fundamental with investment limits in such securities set by the Board of
Trustees of the Trust in response to changes in the markets for such securities.
<PAGE> 4
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 1998 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (92.4%)
Aerospace (1.0%)
$ 2,000 Sabreliner Corp. (Series B).......... 12.50% 04/15/03 $ 2,110,000
-----------
Automotive (2.6%)
5,000 Toyota Motor Credit Corp............. 15.00 09/25/98 5,295,150
-----------
Broadcast Media (6.9%)
1,500 Adams Outdoor Advertising L.P........ 10.75 03/15/06 1,672,500
2,000 Australis Holdings Ltd.
(Australia).......................... 15.00++ 11/01/02 1,000,000
2,000 Echostar DBS Corp.................... 12.50 07/01/02 2,232,500
2,000 Echostar Satellite Broadcasting...... 13.125++ 03/15/04 1,760,000
2,000 Paxson Communications Corp........... 11.625 10/01/02 2,152,619
2,000 Spanish Broadcasting System, Inc..... 12.50 06/15/02 2,302,500
4,000 TCI Satellite Entertainment,
Inc. - 144A*........................ 12.25++ 02/15/07 2,770,000
-----------
13,890,119
-----------
Business Services (5.7%)
4,000 Anacomp, Inc. (Series B)............. 10.875 04/01/04 4,210,000
2,000 Comforce Operating Inc. - 144A*...... 12.00 12/01/07 2,080,000
5,000 Xerox Credit Corp.................... 15.00 10/07/98 5,311,850
-----------
11,601,850
-----------
Cable & Telecommunications (16.5%)
1,500 Adelphia Communications, Inc. (Series
B).................................. 9.875 03/01/07 1,642,500
4,000 Advanced Radio Telecommunications
(Units)++........................... 14.00 02/15/07 4,040,000
1,500 American Communications Services,
Inc................................. 13.75 07/15/07 1,822,500
1,500 Cablevision Systems Corp............. 9.875 04/01/23 1,665,000
1,500 Charter Communication South East L.P.
(Series B).......................... 11.25 03/15/06 1,672,500
1,510 Falcon Holdings Group L.P. (Series
B)................................. 11.00+ 09/15/03 1,690,668
1,500 FrontierVision Operating Partners,
L.P................................ 11.00 10/15/06 1,680,000
1,000 GST Equipment Funding Corp........... 13.25 05/01/07 1,187,500
3,000 Hyperion Telecommunication, Inc.
(Series B).......................... 12.25 09/01/04 3,435,000
25,050 In-Flight Phone Corp. (Series B)
(a).................................. 14.00++ 05/15/02 3,507,000
1,500 IXC Communications, Inc. (Series
B)................................. 12.50 10/01/05 1,740,000
1,500 NextLink Communications, Inc......... 12.50 04/15/06 1,740,000
2,000 Paging Network, Inc.................. 10.125 08/01/07 2,090,000
2,000 Peoples Telephone Co., Inc........... 12.25 07/15/02 2,150,000
1,500 Rifkin Acquisition Partners L.P...... 11.125 01/15/06 1,659,375
2,000 Winstar Communications, Inc.......... 14.00++ 10/15/05 1,670,000
-----------
33,392,043
-----------
Computer Equipment (2.0%)
3,700 IBM Credit Corp...................... 15.00 02/02/99 4,044,174
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 5
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Consumer Products (2.8%)
$ 2,500 J.B. Williams Holdings, Inc. ........ 12.00% 03/01/04 $ 2,587,500
4,000 Renaissance Cosmetics, Inc. ......... 11.75 02/15/04 3,000,000
-----------
5,587,500
-----------
Containers (2.1%)
2,000 Mail - Well Corp. ................... 10.50 02/15/04 2,160,000
2,000 Packaging Resources, Inc. ........... 11.625 05/01/03 2,120,000
-----------
4,280,000
-----------
Electrical & Alarm Systems (1.7%)
4,500 Mosler, Inc. ........................ 11.00 04/15/03 3,510,000
-----------
Entertainment/Gaming & Lodging (14.1%)
1,500 AMF Group Inc. (Series B)............ 10.875 03/15/06 1,663,125
2,000 Fitzgeralds Gaming Corp. - 144A*..... 12.25 12/15/04 2,080,000
4,000 Lady Luck Gaming Finance Corp. ...... 11.875 03/01/01 4,120,000
5,800 Motels of America, Inc. (Series B)... 12.00 04/15/04 5,626,000
2,000 Players International, Inc. ......... 10.875 04/15/05 2,190,000
2,000 Plitt Theaters, Inc. (Canada)........ 10.875 06/15/04 2,167,500
2,000 Station Casinos, Inc. ............... 9.625 06/01/03 2,087,500
4,000 Stuart Entertainment, Inc. (Series
B)................................. 12.50 11/15/04 3,240,000
5,000 Walt Disney Co. ..................... 15.00 12/14/98 5,402,400
-----------
28,576,525
-----------
Finance (4.6%)
3,700 General Electric Capital Corp. ...... 15.00 01/21/99 4,028,005
5,000 Household Finance Corp. ............. 15.00 09/25/98 5,286,900
-----------
9,314,905
-----------
Foods & Beverages (10.6%)
4,000 Envirodyne Industries, Inc. ......... 10.25 12/01/01 3,980,000
3,700 General Mills, Inc. ................. 15.00 01/29/99 4,040,363
5,750 PepsiCo, Inc. ....................... 15.00 08/06/98 6,026,000
1,500 Sparking Spring Water - 144A*
(Canada)........................... 11.50 11/15/07 1,560,000
13,205 Specialty Foods Acquisition Corp.
(Series B)......................... 13.00++ 08/15/05 5,810,200
-----------
21,416,563
-----------
Healthcare (2.8%)
2,000 Unilab Corp. ........................ 11.00 04/01/06 2,055,000
4,125 Unison Healthcare Corp. - 144A*...... 12.25 11/01/06 3,547,500
-----------
5,602,500
-----------
Manufacturing (3.2%)
2,000 Berry Plastics Corp. ................ 12.25 04/15/04 2,200,000
1,500 International Wire Group, Inc. ...... 11.75 06/01/05 1,665,000
2,500 Uniroyal Technology Corp. ........... 11.75 06/01/03 2,606,250
-----------
6,471,250
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 6
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C>
Manufacturing - Diversified (4.6%)
$ 2,000 Interlake Corp. ..................... 12.125% 03/01/02 $ 2,067,500
2,000 J.B. Poindexter & Co., Inc. ......... 12.50 05/15/04 1,900,000
8,536 Jordan Industries, Inc. (Series B)... 11.75++ 04/01/09 5,292,320
-----------
9,259,820
-----------
Oil & Gas (0.8%)
1,500 Texaco Capital, Inc. ................ 15.00 01/13/99 1,629,210
-----------
Publishing (1.7%)
1,500 American Media Operations, Inc. ..... 11.625 11/15/04 1,627,500
1,875 United States Banknote Corp. ........ 10.375 06/01/02 1,886,719
-----------
3,514,219
-----------
Restaurants (5.0%)
12,025 American Restaurant Group Holdings,
Inc. .............................. 14.00 12/15/05 3,487,250
2,000 Carrols Corp. ....................... 11.50 08/15/03 2,120,000
4,000 FRD Acquisition Corp. (Series B)..... 12.50 07/15/04 4,460,000
-----------
10,067,250
-----------
Retail - Food Chains (2.8%)
2,000 Mrs. Fields Original - 144A*......... 10.125 12/01/04 2,025,000
1,000 Pantry Inc. - 144A*.................. 10.25 10/15/07 1,040,000
750 Pueblo Xtra International (Series
C)................................. 9.50 08/01/03 712,500
2,000 Pueblo Xtra International............ 9.50 08/01/03 1,900,000
-----------
5,677,500
-----------
Textiles (0.9%)
4,000 U.S. Leather, Inc. (b)............... 10.25 07/31/03 1,880,000
-----------
TOTAL CORPORATE BONDS
(Identified Cost $196,805,949)............................ 187,120,578
-----------
NUMBER OF
SHARES
- --------
COMMON STOCKS (c) (4.7%)
Automotive (0.0%)
91 Northern Holdings Industrial Corp. - 144A* (d)............ --
-----------
Entertainment/Gaming & Lodging (0.1%)
5,000 Motels of America, Inc. - 144A*........................... 250,000
-----------
Foods & Beverages (0.1%)
225,000 Specialty Foods Acquisition Corp. - 144A*................. 225,000
-----------
Manufacturing - Diversified (1.1%)
67,300 Thermadyne Holdings Corp. (d)............................. 2,271,375
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------------
<S> <C> <C>
Restaurants (0.0%)
12,500 American Restaurant Group Holdings, Inc. - 144A*.......... $ 12,500
-----------
Retail (3.4%)
1,379,875 County Seat Stores Corp. (d)(e)........................... 6,830,381
-----------
TOTAL COMMON STOCKS(Identified Cost $16,268,616).......... 9,589,256
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
- --------- ----------
<C> <S> <C> <C>
WARRANTS (c) (0.1%)
Aerospace (0.0%)
6,000 Sabreliner Corp. - 144A*...................... 04/15/03 60,000
-----------
Broadcast Media (0.0%)
2,000 Australis Holdings Ltd. - 144A* (Australia)... 10/30/01 --
-----------
Cable & Telecommunications (0.1%)
2,000 Hyperion Telecommunication, Inc. (Series B) -
144A*........................................ 04/01/01 180,075
-----------
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 13,529
2,900 Fitzgeralds South Inc. - 144A*................ 03/15/99 --
-----------
13,529
-----------
Retail (0.0%)
5,000 County Seat Holdings Co. (a).................. 10/15/98 --
-----------
TOTAL WARRANTS
(Identified Cost $556,420)................................ 253,604
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 1998 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENTS (2.1%)
U.S. GOVERNMENT AGENCY (f) (2.0%)
$ 4,000 Federal Home Loan Mortgage Corp.
(Amortized Cost $3,999,381).......... 5.57 % 02/02/98 $ 3,999,381
------------
REPURCHASE AGREEMENT (0.1%)
125 The Bank of New York (dated 01/30/98;
proceeds $124,898) (g)
(Identified Cost $124,861)........... 5.375 02/02/98 124,861
------------
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $4,124,242).............................. 4,124,242
------------
TOTAL INVESTMENTS
(Identified Cost $217,755,227) (h)................. 99.3% 201,087,680
OTHER ASSETS IN EXCESS OF LIABILITIES.............. 0.7 1,353,992
----- ------------
NET ASSETS........................................ 100.0% $202,441,672
===== ============
</TABLE>
- ---------------------
* 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.
++ Consists of one or more class of securities traded together as a unit;
bonds with attached stocks and warrants.
(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) Includes 495,066 shares which are due from the issuer pursuant to a
reorganization.
(f) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(g) Collateralized by $91,474 U.S. Treasury Bond 8.75% due 08/15/20 valued at
$127,358.
(h) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $10,948,392 and the
aggregate gross unrealized depreciation is $27,615,939, resulting in net
unrealized depreciation of $16,667,547.
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9
HIGH INCOME ADVANTAGE TRUST II
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1998 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $217,755,227)......... $ 201,087,680
Receivable for:
Interest............................ 5,088,865
Investments sold.................... 1,279,541
Prepaid expenses and other assets....... 4,285
-------------
TOTAL ASSETS........................ 207,460,371
-------------
LIABILITIES:
Payable for:
Investments purchased............... 4,750,309
Investment management fee........... 149,353
Accrued expenses and other payables..... 119,037
-------------
TOTAL LIABILITIES................... 5,018,699
-------------
NET ASSETS.......................... $ 202,441,672
=============
COMPOSITION OF NET ASSETS:
Paid-in-capital......................... $ 344,428,742
Net unrealized depreciation............. (16,667,547)
Accumulated undistributed net investment
income................................. 2,556,617
Accumulated net realized loss........... (127,876,140)
-------------
NET ASSETS.......................... $ 202,441,672
=============
NET ASSET VALUE PER SHARE,
35,611,307 shares outstanding
(unlimited shares authorized of $.01
par value)............................. $5.68
=============
STATEMENT OF OPERATIONS
For the six months ended January 31, 1998 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME......................... $ 14,584,590
-------------
EXPENSES
Investment management fee............... 775,628
Transfer agent fees and expenses........ 64,012
Professional fees....................... 30,329
Shareholder reports and notices......... 17,512
Registration fees....................... 13,718
Custodian fees.......................... 9,406
Trustees' fees and expenses............. 8,940
Other................................... 5,615
-------------
TOTAL EXPENSES...................... 925,160
-------------
NET INVESTMENT INCOME............... 13,659,430
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized loss....................... (5,377,017)
Net change in unrealized depreciation... 1,720,803
-------------
NET LOSS............................ (3,656,214)
-------------
NET INCREASE............................ $ 10,003,216
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10
HIGH INCOME ADVANTAGE TRUST II
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR
FOR THE SIX ENDED
MONTHS ENDED JULY 31,
JANUARY 31, 1998 1997
- ---------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................. $ 13,659,430 $ 25,853,170
Net realized loss..................................... (5,377,017) (20,201,090)
Net change in unrealized depreciation................. 1,720,803 16,026,797
------------ ------------
NET INCREASE...................................... 10,003,216 21,678,877
Dividends from net investment income.................. (15,017,070) (26,982,213)
------------ ------------
NET DECREASE...................................... (5,013,854) (5,303,336)
NET ASSETS:
Beginning of period................................... 207,455,526 212,758,862
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$2,556,617 and $3,914,257, respectively).......... $202,441,672 $207,455,526
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11
HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS January 31, 1998 (unaudited)
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.
<PAGE> 12
HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS January 31, 1998 (unaudited) 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 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
<PAGE> 13
HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS January 31, 1998 (unaudited) 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 six months ended January 31, 1998, aggregated
$89,609,919 and $82,782,505, respectively.
Dean Witter Trust FSB, an affiliate of the Investment Manager, is the Trust's
transfer agent. At January 31, 1998, the Trust had transfer agent fees and
expenses payable of approximately $12,800.
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 six months ended January 31, 1998
included in Trustees' fees and expenses in the Statement of Operations amounted
to $1,614. At January 31, 1998, the Trust had an accrued pension liability of
$48,567 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, 1996, 1997 and January 31, 1998........... 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>
January 27, 1998 $0.0525 February 6, 1998 February 20, 1998
February 24, 1998 $0.0525 March 6, 1998 March 20, 1998
</TABLE>
<PAGE> 14
HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS January 31, 1998 (unaudited) continued
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> 15
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 SIX FOR THE YEAR ENDED JULY 31
MONTHS ENDED ----------------------------------------------------
JANUARY 31, 1998 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................. $ 5.83 $ 5.97 $ 6.08 $ 6.31 $ 6.60 $ 6.43
------ ------ ------ ------ ------ ------
Net investment income................................ 0.38 0.73 0.73 0.70 0.69 0.77
Net realized and unrealized gain (loss).............. (0.11) (0.11) (0.17) (0.21) (0.28) 0.31
------ ------ ------ ------ ------ ------
Total from investment operations..................... 0.27 0.62 0.56 0.49 0.41 1.08
------ ------ ------ ------ ------ ------
Less dividends from net investment income............ (0.42) (0.76) (0.67) (0.72) (0.70) (0.91)
------ ------ ------ ------ ------ ------
Net asset value, end of period....................... $ 5.68 $ 5.83 $ 5.97 $ 6.08 $ 6.31 $ 6.60
====== ====== ====== ====== ====== ======
Market value, end of period.......................... $ 6.50 $6.688 $6.125 $6.125 $ 6.25 $6.875
====== ====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN+............................. 3.66%(1) 22.75% 11.31% 10.29% 0.90% 22.16%
RATIOS TO AVERAGE NET ASSETS:
Expenses............................................. 0.89%(2) 0.89% 0.91% 0.93% 0.94% 0.95%
Net investment income................................ 13.21%(2) 12.57% 12.06% 11.81% 10.33% 12.17%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.............. $202,442 $207,456 $212,759 $216,605 $224,681 $235,039
Portfolio turnover rate.............................. 42%(1) 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.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
<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
The financial statements included herein have been taken from the records of
the Trust without examination by the independent accountants and accordingly
they do not express an opinion thereon.
HIGH
INCOME
ADVANTAGE
TRUST II
Semiannual Report
January 31, 1998
