<PAGE> 1
HIGH INCOME ADVANTAGE TRUST II Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS July 31, 1998
DEAR SHAREHOLDER:
We are pleased to present the annual report on the operations of High Income
Advantage Trust II for the fiscal year ended July 31, 1998.
As High Income Advantage Trust II's fiscal year began, optimism over continued
economic growth in the United States, along with a favorable interest-rate
environment, combined to produce a solid start to the period. However, more
recently, concerns over the foreign market crisis and its impact on the U.S.
economy have begun to surface, resulting in a 1998 mid-year market correction.
Though corporate credit quality remains strong, these concerns resulted in a
"flight-to-quality" in the financial markets, with investors favoring highly
rated U.S. government securities over more volatile asset classes, such as
equities or high-yield bonds. For the full fiscal year, high-yield bond returns
remained competitive with other sectors of the fixed-income markets as higher
income levels helped to offset weaker prices.
PERFORMANCE
As discussed above, the high-yield market's 1998 mid-year correction, a direct
result of the foreign market crisis, did depress results somewhat during the
period under review. For the fiscal year ended July 31, 1998, the Trust's market
price on the New York Stock Exchange (NYSE) moved from $6.6875 per share to
$6.00 per share. Based on this change in NYSE market price, and including
dividend distributions totaling $0.7367 per share, the Trust produced a total
return of 0.52 percent. Over the same period, the Trust's net asset value (NAV)
moved from $5.83 per share to $5.56 per share. Based on this change in NAV, and
including dividend distributions, the Trust's total return for the fiscal year
was 6.85 percent.
Over the past 12 months, the Trust continued to distribute regular income
dividends at a rate of $0.0525 per share per month. On July 31, 1998, net assets
exceeded $198 million.
<PAGE> 2
HIGH INCOME ADVANTAGE TRUST II
LETTER TO THE SHAREHOLDERS July 31, 1998, continued
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.
PORTFOLIO STRATEGY
We have maintained a relatively conservative posture over the past 12 months, in
light of the market's declining yield levels over the past few years and the
increasing potential for a correction in the marketplace. As a result, we have
maintained a core position in the shorter-term, higher-quality end of the
high-yield market (BB-rated issues or higher), which has held up well in this
increasingly nervous market environment. In addition, we continue to concentrate
on sectors of the economy that historically are more predictable,
recession-resistant and growth oriented, such as food and beverage, healthcare,
telecommunications, media and cable television. These groups are expected to
outperform the riskier, more cyclical areas of the economy over the next year,
given the slowing of many of the world's markets.
Consistent with our more cautious posture, we have continued to avoid foreign
emerging high-yield markets. This defensive approach is expected to provide
important portfolio flexibility as we work to take advantage of today's more
attractive market yields.
LOOKING AHEAD
Despite the current volatility, our one- to two-year outlook for the high-yield
market remains favorable, given our expectations for continued U.S. economic
growth and a favorable interest- rate environment. If domestic economic growth
continues and interest rates remain low, we would expect general investor
sentiment in the financial markets to improve, with the high-yield market
rebounding from today's depressed levels. Should this scenario materialize, and
investor confidence grows, high-yield performance is expected to be strong over
the next few years.
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
2
<PAGE> 3
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (92.4%)
Aerospace (0.7%)
$ 1,500 Sabreliner Corp. (Series
B) - 144A*.......................... 11.00 % 06/15/08 $ 1,500,000
-----------
Automotive (2.6%)
5,000 Toyota Motor Credit Corp. ........... 15.00 09/25/98 5,064,650
-----------
Broadcast Media (2.0%)
1,500 Paxson Communications Corp. ......... 11.625 10/01/02 1,608,750
2,000 Spanish Broadcasting System, Inc. ... 12.50 06/15/02 2,280,000
-----------
3,888,750
-----------
Business Services (5.3%)
1,500 Anacomp, Inc. (Series B)............. 10.875 04/01/04 1,582,500
4,000 Comforce Operating Inc. ............. 12.00 12/01/07 4,300,000
1,500 Entex Information Services,
Inc. - 144A*........................ 12.50 08/01/06 1,515,000
3,000 Xerox Credit Corp. .................. 15.00 10/07/98 3,047,910
-----------
10,445,410
-----------
Cable/Cellular (4.5%)
2,000 Australis Holdings Ltd. (Australia)
(b)................................. 15.00++ 11/01/02 200,000
3,000 Clearnet Communications Inc.
(Canada)............................ 14.75++ 12/15/05 2,610,000
1,510 Falcon Holdings Group L.P. (Series
B).................................. 11.00+ 09/15/03 1,611,418
1,500 Price Communications Cellular
Holdings............................ 11.25+ 08/15/08 1,496,250
3,000 Price Communications Cellular
Holdings (Series B)................. 13.50++ 08/01/07 2,133,750
1,500 Triton Communications LLC - 144A*.... 11.00++ 05/01/08 858,750
-----------
8,910,168
-----------
Chemicals (0.8%)
1,500 Harris Chemical North America,
Inc. ............................... 10.75 10/15/03 1,571,250
-----------
Computer Equipment (4.3%)
3,000 CHS Electronics, Inc. ............... 9.875 04/15/05 2,985,000
3,700 IBM Credit Corp. .................... 15.00 02/02/99 3,868,387
1,500 Unisys Corp. (Series B).............. 12.00 04/15/03 1,704,375
-----------
8,557,762
-----------
Consumer Products (2.1%)
2,500 J.B. Williams Holdings, Inc. ........ 12.00 03/01/04 2,625,000
1,500 Samsonite Corp. - 144A*.............. 10.75 06/15/08 1,470,000
-----------
4,095,000
-----------
Electrical & Alarm Systems (1.2%)
2,500 Mosler, Inc. ........................ 11.00 04/15/03 2,300,000
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE> 4
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Entertainment/Gaming & Lodging (8.7%)
$ 4,500 Aladdin Gaming/Capital Corp. - 144A*
(Units)++........................... 13.50++% 03/01/10 $ 2,070,000
1,500 Epic Resorts LLC - 144A*............. 13.00 06/15/05 1,522,500
3,000 Fitzgeralds Gaming Corp. ............ 12.25 12/15/04 2,670,000
4,000 Lady Luck Gaming Finance Corp. ...... 11.875 03/01/01 4,140,000
4,350 Motels of America, Inc. (Series B)... 12.00 04/15/04 4,241,250
1,589 Resort At Summerlin.................. 13.00+ 12/15/07 1,645,002
1,000 Walt Disney Co. ..................... 15.00 12/14/98 1,035,770
-----------
17,324,522
-----------
Finance (4.5%)
3,700 General Electric Capital Corp. ...... 15.00 01/21/99 3,859,618
5,000 Household Finance Corp. ............. 15.00 09/25/98 5,062,850
-----------
8,922,468
-----------
Foods & Beverages (7.4%)
1,500 Envirodyne Industries, Inc. ......... 10.25 12/01/01 1,503,750
3,700 General Mills, Inc. ................. 15.00 01/29/99 3,870,940
3,750 PepsiCo, Inc. ....................... 15.00 08/06/98 3,750,975
1,500 Sparkling Spring Water (Canada)...... 11.50 11/15/07 1,560,000
9,205 Specialty Foods Acquisition Corp.
(Series B).......................... 13.00++ 08/15/05 3,912,125
-----------
14,597,790
-----------
Healthcare (3.0%)
500 Pediatric Services of America, Inc.
(Series A).......................... 10.00 04/15/08 395,000
2,000 Unilab Corp. ........................ 11.00 04/01/06 2,140,000
4,125 Unison Healthcare
Corp. - 144A* (a)................... 12.25 11/01/06 2,052,188
1,500 Vencor, Inc. - 144A*................. 9.875 05/01/05 1,275,000
-----------
5,862,188
-----------
Manufacturing (4.0%)
2,000 Berry Plastics Corp. ................ 12.25 04/15/04 2,180,000
9,945 International Semi-Tech
Microelectronics, Inc. (Canada)..... 11.50++ 08/15/03 2,635,425
1,500 International Wire Group, Inc. ...... 11.75 06/01/05 1,646,250
1,500 Outsourcing Services Group,
Inc. - 144A*........................ 10.875 03/01/06 1,560,000
-----------
8,021,675
-----------
Manufacturing -- Diversified (4.9%)
2,000 Interlake Corp. ..................... 12.125 03/01/02 2,062,500
2,000 J.B. Poindexter & Co., Inc. ......... 12.50 05/15/04 1,990,000
8,536 Jordan Industries, Inc. (Series B)... 11.75++ 04/01/09 5,633,760
-----------
9,686,260
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 5
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Oil & Gas (2.9%)
$ 1,500 Texaco Capital, Inc. ................ 15.00 % 01/13/99 $ 1,561,275
4,000 Transamerican Refining Corp. - 144A*
(Units)++........................... 16.00 06/30/03 4,220,000
-----------
5,781,275
-----------
Publishing (0.8%)
1,500 American Media Operations, Inc. ..... 11.625 11/15/04 1,605,000
-----------
Restaurants (6.9%)
31,577 American Restaurant Group Holdings,
Inc. - 144A*........................ 0.00 12/15/05 7,973,294
4,000 FRD Acquisition Corp. (Series B)..... 12.50 07/15/04 4,400,000
1,500 Planet Hollywood International,
Inc. ............................... 12.00 04/01/05 1,275,000
-----------
13,648,294
-----------
Retail -- Food Chains (2.1%)
1,500 Mrs. Fields Original................. 10.125 12/01/04 1,485,000
2,000 Pueblo Xtra International, Inc. ..... 9.50 08/01/03 1,965,000
750 Pueblo Xtra International, Inc.
(Series C).......................... 9.50 08/01/03 736,875
-----------
4,186,875
-----------
Telecommunications (16.7%)
3,100 21st Century Telecom Group........... 12.25++ 02/15/08 1,728,250
4,000 Advanced Radio Telecommunications
Corp................................ 14.00 02/15/07 4,260,000
1,500 Birch Telecom Inc. - 144A*
(Units)++........................... 14.00 06/15/08 1,500,000
1,500 Caprock Communications
Corp. - 144A*....................... 12.00 07/15/08 1,522,500
3,000 Cellnet Data Systems, Inc. .......... 14.00++ 10/01/07 1,620,000
1,500 e. Spire Communications, Inc. ....... 13.75 07/15/07 1,755,000
1,500 Facilicom International, Inc. (Series
B).................................. 10.50 01/15/08 1,515,000
4,500 Firstworld Communications,
Inc. - 144A* (Units)++.............. 13.00++ 04/15/08 2,036,250
1,500 GST Equipment Funding Corp. ......... 13.25 05/01/07 1,740,000
1,500 Hyperion Telecommunication, Inc.
(Series B).......................... 12.25 09/01/04 1,638,750
25,050 In-Flight Phone Corp. (Series
B) (b).............................. 14.00++ 05/15/02 3,507,000
1,500 NextLink Communications, Inc. ....... 12.50 04/15/06 1,710,000
1,500 Optel, Inc. - 144A*.................. 11.50 07/01/08 1,552,500
2,000 Peoples Telephone Co., Inc. ......... 12.25 07/15/02 2,180,000
2,920 USA Mobile Communications Holdings,
Inc. ............................... 14.00 11/01/04 3,226,600
2,000 Winstar Communications, Inc. ........ 14.00++ 10/15/05 1,660,000
-----------
33,151,850
-----------
Telecommunications -- Equipment (1.4%)
3,100 FWT, Inc. ........................... 9.875 11/15/07 2,867,500
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1998, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Textiles (0.9%)
$ 4,000 U.S. Leather, Inc. (a)............... 10.25 % 07/31/03 $ 1,780,000
-----------
Transportation (0.7%)
1,500 Alpha Shipping PLC (United
Kingdom)............................ 9.50 02/15/08 1,335,000
-----------
Wireless Communication (4.0%)
1,500 Echostar DBS Corp. .................. 12.50 07/01/02 1,691,250
1,500 Globalstar LP/Capital Corp. ......... 11.375 02/15/04 1,395,000
1,500 Globalstar LP/Capital
Corp. - 144A*....................... 11.50 06/01/05 1,395,000
5,000 TCI Satellite Entertainment, Inc. ... 12.25++ 02/15/07 3,362,500
-----------
7,843,750
-----------
TOTAL CORPORATE BONDS
(Identified Cost $197,719,167)............................ 182,947,437
-----------
NUMBER OF
SHARES
- ----------
COMMON STOCKS (c) (3.4%)
Automotive (0.0%)
91 Northern Holdings Industrial Corp.* (d)................... --
-----------
Entertainment/Gaming & Lodging (0.1%)
5,000 Motels of America, Inc. - 144A*........................... 275,000
-----------
Foods & Beverages (0.1%)
225,000 Specialty Foods Acquisition Corp. - 144A*................. 225,000
-----------
Restaurants (0.0%)
12,500 American Restaurant Group Holdings, Inc. - 144A*.......... 125
-----------
Retail (3.2%)
1,379,875 County Seat Stores Corp. (d)(e)........................... 6,267,392
-----------
TOTAL COMMON STOCKS
(Identified Cost $14,538,503)............................. 6,767,517
-----------
PREFERRED STOCK (c) (0.5%)
Restaurants
1,000 American Restaurant Group Holdings, Inc. - 144A* (Units)++
(Identified Cost $1,000,000)............................. 1,030,000
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1998, continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C>
WARRANTS (c) (0.2%)
Aerospace (0.2%)
6,000 Sabreliner Corp. - 144A*...................... 04/15/03 $ 300,000
-----------
Cable/Cellular (0.0%)
2,000 Australis Holdings Ltd. - 144A* (Australia)... 10/30/01 --
-----------
Containers (0.0%)
5,000 Crown Packaging Holdings, Ltd. - 144A*........ 11/01/03 --
-----------
Entertainment/Gaming & Lodging (0.0%)
1,500 Epic Resorts LLC - 144A*...................... 06/15/05 --
3,000 Fitzgeralds Gaming Corp. ..................... 12/19/98 13,634
2,900 Fitzgeralds South Inc. - 144A*................ 03/15/99 --
1,500 Resort At Summerlin - 144A*................... 12/15/07 --
-----------
13,634
-----------
Retail (0.0%)
5,000 County Seat Holdings Co. ..................... 10/15/98 --
-----------
TOTAL WARRANTS
(Identified Cost $536,450)................................ 313,634
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------- ------- ---------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENT (1.8%)
REPURCHASE AGREEMENT
$ 3,634 The Bank of New York (dated 07/31/98;
proceeds $3,636,116) (f)
(Identified Cost $3,634,450)........ 5.50 % 08/03/98 3,634,450
-----------
TOTAL INVESTMENTS
(Identified Cost $217,428,570) (g)............... 98.3% 194,693,038
OTHER ASSETS IN EXCESS OF LIABILITIES............... 1.7 3,378,803
----- -----------
NET ASSETS........................................ 100.0% $198,071,841
===== ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1998, continued
- ---------------------
<TABLE>
<C> <S>
* 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 classes of securities traded
together as a unit; bonds or preferred stock with attached
warrants.
(a) Non-income producing security; bond in default.
(b) Non-income producing security; issuer in bankruptcy.
(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) Collateralized by $2,279,248 U.S. Treasury Bond 13.25% due
05/15/14 valued at $3,707,139.
(g) The aggregate cost for federal income tax purposes
approximates identified cost. The aggregate unrealized
appreciation is $6,653,285 and the aggregate gross
unrealized depreciation is $29,388,817, resulting in net
unrealized depreciation of $22,735,532.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
HIGH INCOME ADVANTAGE TRUST II
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1998
ASSETS:
Investments in securities, at value
(identified cost $217,428,570)............................. $ 194,693,038
Receivable for:
Interest................................................ 4,105,772
Investments sold........................................ 2,201,111
Prepaid expenses and other assets........................... 23,185
-------------
TOTAL ASSETS............................................ 201,023,106
-------------
LIABILITIES:
Payable for:
Investments purchased................................... 2,685,431
Investment management fee............................... 143,051
Accrued expenses and other payables......................... 122,783
-------------
TOTAL LIABILITIES....................................... 2,951,265
-------------
NET ASSETS.............................................. $ 198,071,841
=============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $ 344,215,488
Net unrealized depreciation................................. (22,735,532)
Accumulated undistributed net investment income............. 3,435,013
Accumulated net realized loss............................... (126,843,128)
-------------
NET ASSETS.............................................. $ 198,071,841
=============
NET ASSET VALUE PER SHARE,
35,611,307 shares outstanding
(unlimited shares authorized of $.01 par value)............ $5.56
=====
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
HIGH INCOME ADVANTAGE TRUST II
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended July 31, 1998
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $27,581,569
-----------
EXPENSES
Investment management fee................................... 1,521,874
Transfer agent fees and expenses............................ 143,891
Professional fees........................................... 53,437
Registration fees........................................... 28,677
Shareholder reports and notices............................. 28,052
Custodian fees.............................................. 21,052
Trustees' fees and expenses................................. 17,201
Other....................................................... 12,191
-----------
TOTAL EXPENSES.......................................... 1,826,375
-----------
NET INVESTMENT INCOME................................... 25,755,194
-----------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................................... (4,557,259)
Net change in unrealized depreciation....................... (4,347,182)
-----------
NET LOSS................................................ (8,904,441)
-----------
NET INCREASE................................................ $16,850,753
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
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, 1998 JULY 31, 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.................................. $ 25,755,194 $ 25,853,170
Net realized loss...................................... (4,557,259) (20,201,090)
Net change in unrealized depreciation.................. (4,347,182) 16,026,797
------------ ------------
NET INCREASE....................................... 16,850,753 21,678,877
Dividends from net investment income................... (26,234,438) (26,982,213)
------------ ------------
NET DECREASE....................................... (9,383,685) (5,303,336)
NET ASSETS:
Beginning of period.................................... 207,455,526 212,758,862
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$3,435,013 and $3,914,257, respectively)........... $198,071,841 $207,455,526
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS July 31, 1998
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 Morgan Stanley Dean Witter Advisors Inc. (the "Investment
Manager"), formerly Dean Witter InterCapital Inc., 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.
12
<PAGE> 13
HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS July 31, 1998, continued
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily except where collection is not expected.
C. FEDERAL INCOME TAX STATUS -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Trust records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with the Investment Manager, the
Trust pays 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
13
<PAGE> 14
HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS July 31, 1998, continued
Investment Manager also bears the cost of telephone services, heat, light, power
and other utilities provided to the Trust.
3. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended July 31, 1998, aggregated
$208,753,237 and $202,416,761, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Trust's transfer agent. At July 31, 1998, the Trust had transfer agent fees
and expenses payable of approximately $5,800.
The Trust has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Trust who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended July 31, 1998 included in
Trustees' fees and expenses in the Statement of Operations amounted to $4,922.
At July 31, 1998, the Trust had an accrued pension liability of $50,302 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 and 1997............................. 35,611,307 $356,113 $344,072,629
Reclassification due to permanent book/tax differences...... -- -- (213,254)
---------- -------- ------------
Balance, July 31, 1998...................................... 35,611,307 $356,113 $343,859,375
========== ======== ============
</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 28, 1998 $0.0525 August 7, 1998 August 21, 1998
August 25, 1998 $0.0525 September 4, 1998 September 18, 1998
</TABLE>
14
<PAGE> 15
HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS July 31, 1998, continued
6. FEDERAL INCOME TAX STATUS
At July 31, 1998, the Trust had a net capital loss carryover of approximately
$122,699,000, 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>
AMOUNT IN THOUSANDS
-------------------------------------------------------------------------
1999 2000 2002 2003 2004 2005 2006
------- ------- ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
$20,947 $29,353 $8,278 $23,309 $20,038 $9,296 $11,478
======= ======= ====== ======= ======= ====== =======
</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 $834,000 during fiscal 1998.
As of July 31, 1998, 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 capital loss carryover. To reflect reclassifications arising from the
permanent differences, paid-in-capital was charged and accumulated net realized
loss was credited $213,254.
15
<PAGE> 16
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
----------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <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
-------- -------- -------- -------- --------
Net investment income....................................... 0.73 0.73 0.73 0.70 0.69
Net realized and unrealized loss............................ (0.26) (0.11) (0.17) (0.21) (0.28)
-------- -------- -------- -------- --------
Total from investment operations............................ 0.47 0.62 0.56 0.49 0.41
-------- -------- -------- -------- --------
Less dividends from net investment income................... (0.74) (0.76) (0.67) (0.72) (0.70)
-------- -------- -------- -------- --------
Net asset value, end of period.............................. $ 5.56 $ 5.83 $ 5.97 $ 6.08 $ 6.31
======== ======== ======== ======== ========
Market value, end of period................................. $ 6.00 $ 6.688 $ 6.125 $ 6.125 $ 6.25
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN+.................................... 0.52% 22.75% 11.31% 10.29% 0.90%
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 0.90% 0.89% 0.91% 0.93% 0.94%
Net investment income....................................... 12.69% 12.57% 12.06% 11.81% 10.33%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $198,072 $207,456 $212,759 $216,605 $224,681
Portfolio turnover rate..................................... 104% 90% 89% 70% 113%
</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
16
<PAGE> 17
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, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the period
then ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at July
31, 1998 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
September 11, 1998
17
<PAGE> 18
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<PAGE> 19
(This Page Intentionally Left Blank)
<PAGE> 20
TRUSTEES
- --------------------------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Dr. Manuel H. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
- --------------------------------------------------
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Peter M. Avelar
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
- --------------------------------------------------
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
- --------------------------------------------------
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, New York 10048
HIGH
INCOME
ADVANTAGE
TRUST II
Annual Report
July 31, 1998
