<PAGE> 1
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II Two World Trade Center
LETTER TO THE SHAREHOLDERS January 31, 1999 New York, New York 10048
DEAR SHAREHOLDER:
Nineteen ninety-eight was unquestionably a difficult year for the high-yield
bond market, primarily because of a dramatic "flight-to-quality" in the second
half of the year. In response to concerns about sharply declining overseas
markets, investors sought the relative safety of U.S. government securities over
riskier investments, such as equities and high-yield bonds. While equities
rebounded during the fourth quarter, at year-end the high-yield market remained
near its lows as investors continued to be very risk averse, apparently awaiting
further evidence of continued economic growth in 1999.
Reviewing the year, after a rather quiet first half, serious concerns began to
emerge over the rapidly escalating foreign market crisis, raising questions as
to the extent of the impact on both the U.S. economy and corporate earnings.
This resulted in a sharp correction in the high-yield bond market during the
second half, causing high-yield bond prices to decline as much as 15 percent in
many cases and driving yields from their first-half range of 9 percent to the 12
percent area. The high-yield market itself witnessed a flight-to-quality as
well, with the middle tier of the market (B-rated issues) significantly
underperforming the upper tier (BB-rated issues), again attributable to
investors' severe risk aversion. As a result, high-yield market yields began
1999 near their highest level in relation to Treasuries in nearly 10 years.
PERFORMANCE
During the six-month period ended January 31, 1999, Morgan Stanley Dean Witter
High Income Advantage Trust II produced a total return of -11.49 percent, based
on a change in net asset value (NAV) and reinvestment of distributions. Based on
a change in the Trust's market price on the New York Stock Exchange (NYSE) and
reinvestment of distributions, the Trust's total return for the period was
- -12.15 percent.
<PAGE> 2
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
LETTER TO THE SHAREHOLDERS January 31, 1999, continued
Over the past six months, the Trust continued to distribute regular monthly
income dividends at a rate of $0.0525 per share. For the six-month period ended
January 31, 1999, the Trust's distributions totaled $0.3634, including an extra
income dividend of $0.0484 per share paid on December 18, 1998 to shareholders
of record on December 4, 1998. On January 31, 1999, the Trust had net assets in
excess of $164 million.
PORTFOLIO STRATEGY
During the period under review, the Trust maintained a substantial position in
the more defensive, higher-quality end of the fixed-income market, which held up
well in an extremely volatile environment. Despite these defensive holdings,
however, the Trust's more significant, long-term core position in the B-rated
sector of the market was sharply affected by the market's second half
correction, as described above.
In an effort to minimize the risk of an economic slowdown, we continue to
concentrate on sectors that have historically proven to be more predictable,
recession resistant and growth oriented, such as cellular communications, foods
and beverages, telecommunications, media and cable television. We believe that
these industry groups are poised to perform well over the next year, despite the
slowing of many of the world's markets. In addition, we expect to see continued
consolidation and merger activity within these industries, which should lead to
improved credit quality. We continue to focus primarily on domestic companies,
given the outlook for continued growth in the U.S. economy and are avoiding
emerging foreign high-yield markets because of the higher degree of uncertainty
associated with many of these markets.
LOOKING AHEAD
Despite the high-yield market's recent weakness, we consider today's
substantially higher, more attractive yields and significantly discounted bond
prices an investment opportunity, especially in view of the still relatively low
interest rate environment. Given a soft landing in the economy with growth
continuing into 1999, we expect the high-yield market to follow the lead of the
equity markets and rebound to more normal levels relative to U.S. Treasury
securities. Should this scenario materialize and high-yield bond prices recover,
the Trust would participate not only in today's exceptionally high income levels
but could potentially provide a degree of capital appreciation as well. Although
the B-rated segment of the market was not a good investment performer in 1998,
we are confident that its attractive yield and appreciation potential remains
intact for long-term high-yield investors.
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
LETTER TO THE SHAREHOLDERS January 31, 1999, 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 lowest at the time of purchase.
We thank you for your continued support of Morgan Stanley Dean Witter 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
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On December 17, 1998, an annual 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>
Edwin J. Garn
For.................... 24,112,518
Withheld............... 565,282
Michael E. Nugent
For.................... 24,125,226
Withheld............... 552,574
Philip J. Purcell
For.................... 24,076,445
Withheld............... 601,355
John R. Haire
For.................... 24,093,201
Withheld............... 584,599
</TABLE>
The following Trustees were not standing for reelection at this meeting: Michael
Bozic, Charles A. Fiumefreddo, Wayne E. Hedien, Dr. Manuel H. Johnson and John
L. Schroeder.
(2) RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT
ACCOUNTANTS:
<TABLE>
<S> <C>
For..................................................... 23,984,886
Against................................................. 129,993
Abstain................................................. 562,921
</TABLE>
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 1999 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (96.5%)
Aerospace (0.8%)
$ 1,500 Sabreliner Corp. - 144A*............. 11.00 % 06/15/08 $ 1,320,000
-----------
Broadcast/Media (2.3%)
1,500 Paxson Communications Corp. ......... 11.625 10/01/02 1,530,000
2,000 Spanish Broadcasting System, Inc. ... 12.50 06/15/02 2,230,000
-----------
3,760,000
-----------
Cable Television (0.3%)
9,000 Australis Holdings Property Ltd.
(Australia) (a)..................... 15.00++ 11/01/02 450,000
-----------
Casinos/Gambling (3.6%)
7,500 Aladdin Gaming/Capital Corp.
(Series B).......................... 13.50++ 03/01/10 2,100,000
4,500 Fitzgeralds Gaming Corp. ............ 12.25 12/15/04 2,340,000
1,500 Lady Luck Gaming Finance Corp. ...... 11.875 03/01/01 1,524,375
-----------
5,964,375
-----------
Cellular Telephone (4.5%)
800 American Cellular Corp. - 144A*...... 10.50 05/15/08 840,000
1,500 Clearnet Communications, Inc.
(Canada) 14.75++ 12/15/05 1,312,500
800 Dobson/Sygnet
Communications - 144A*............... 12.25 12/15/08 856,000
3,000 Price Communications Cellular
Holdings 11.25+ 08/15/08 2,805,000
3,000 Triton Communications LLC............ 11.00++ 05/01/08 1,650,000
-----------
7,463,500
-----------
Computers (1.8%)
3,000 CHS Electronics, Inc. ............... 9.875 04/15/05 2,880,000
-----------
Consumer Specialties (1.0%)
2,000 Samsonite Corp. ..................... 10.75 06/15/08 1,620,000
-----------
Consumer Sundries (2.4%)
2,500 J.B. Williams Holdings, Inc. ........ 12.00 03/01/04 2,590,625
1,500 Windmere-Durable Holdings, Inc. ..... 10.00 07/31/08 1,361,250
-----------
3,951,875
-----------
Consumer/Business Services (6.5%)
1,500 Anacomp, Inc. (Series B)............. 10.875 04/01/04 1,560,000
2,300 CEX Holdings, Inc. (Series B)........ 9.625 06/01/08 2,104,500
1,613 Comforce Corp. (Series B)............ 15.00+ 12/01/09 1,628,625
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 4,000 Comforce Operating Inc. (Series B)... 12.00 % 12/01/07 $ 4,000,000
2,100 Entex Information Services,
Inc. - 144A* 12.50 08/01/06 1,365,000
-----------
10,658,125
-----------
Containers/Packaging (2.2%)
2,000 Berry Plastics Corp. ................ 12.25 04/15/04 2,110,000
1,500 Premier Graphics, Inc. - 144A*....... 11.50 12/01/05 1,507,500
-----------
3,617,500
-----------
Diversified Manufacturing (5.8%)
800 Eagle-Picher Industries, Inc. ....... 9.375 03/01/08 768,000
1,500 High Voltage Engineering Co. ........ 10.50 08/15/04 1,440,000
2,000 J.B. Poindexter & Co., Inc. ......... 12.50 05/15/04 1,960,000
8,536 Jordan Industries, Inc. (Series B)... 11.75++ 04/01/09 5,377,680
-----------
9,545,680
-----------
Energy (2.8%)
1,500 Northern Offshore ASA - 144A*
(Norway)............................ 10.00 05/15/05 750,000
4,000 Transamerican Refining Corp. - 144A*
(Units)++........................... 16.00 06/30/03 3,520,000
300 Transamerican Refining
Corp. - 144A*........................ 15.00+ 12/01/03 297,000
-----------
4,567,000
-----------
Food Chains (0.9%)
750 Pueblo Xtra International, Inc. ..... 9.50 08/01/03 720,000
750 Pueblo Xtra International, Inc.
(Series C)........................... 9.50 08/01/03 720,000
-----------
1,440,000
-----------
Food Distributors (0.8%)
1,500 Fleming Companies, Inc. (Series B)... 10.625 07/31/07 1,387,500
-----------
Foods & Beverages (6.8%)
3,000 Envirodyne Industries, Inc. ......... 10.25 12/01/01 2,400,000
4,000 PepsiCo, Inc. ....................... 15.00 08/06/99 4,210,440
3,000 Sparkling Spring Water (Canada) 11.50 11/15/07 2,580,000
11,205 Specialty Foods Acquisition Corp.
(Series B).......................... 13.00++ 08/15/05 2,016,900
-----------
11,207,340
-----------
Healthcare (6.5%)
1,600 Mediq/PRN Life Support Service
Inc. ................................ 11.00 06/01/08 1,536,000
3,125 Pediatric Services of America, Inc.
(Series A).......................... 10.00 04/15/08 2,218,750
1,500 Unilab Corp. ........................ 11.00 04/01/06 1,571,250
4,125 Unison Healthcare Corp. - 144A*
(b).................................. 12.25 11/01/06 1,608,750
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,500 Universal Hospital Services, Inc. ... 10.25 % 03/01/08 $ 1,335,000
1,500 Universal Hospital Services,
Inc. - 144A* 10.25 03/01/08 1,282,500
1,500 Vencor Operating, Inc. .............. 9.875 05/01/05 1,080,000
-----------
10,632,250
-----------
Hotels/Resorts (4.1 %)
1,500 Epic Resorts LLC (Series B).......... 13.00 06/15/05 1,470,000
4,350 Motels of America, Inc. (Series B)... 12.00 04/15/04 3,632,250
1,692 Resort At Summerlin (Series B)....... 13.00+ 12/15/07 1,607,671
-----------
6,709,921
-----------
Industrial Specialties (2.6%)
9,945 International Semi-Tech
Microelectronics, Inc. (Canada)..... 11.50++ 08/15/03 1,243,125
1,500 International Wire Group, Inc. ...... 11.75 06/01/05 1,597,500
1,500 Outsourcing Services Group,
Inc. - 144A* 10.875 03/01/06 1,440,000
-----------
4,280,625
-----------
Office Equipment/Supplies (1.3%)
2,500 Mosler, Inc. ........................ 11.00 04/15/03 2,200,000
-----------
Other Telecommunications (1.9%)
1,500 Esprit Telecom Group PLC
(United Kingdom).................... 10.875 06/15/08 1,560,000
1,500 Versatel Telecom BV - 144A*
(Netherlands) (Units)++............. 13.25 05/15/08 1,552,500
-----------
3,112,500
-----------
Printing/Publishing (0.5%)
800 American Media Operations, Inc. ..... 11.625 11/15/04 840,000
-----------
Restaurants (7.2%)
16,077 American Restaurant Group
Holdings, Inc. - 144A* (c).......... 0.00 12/15/05 4,823,220
4,000 FRD Acquisition Corp. (Series B)..... 12.50 07/15/04 4,255,000
800 Friendly Ice Cream Corp. ............ 10.50 12/01/07 716,000
6,240 Planet Hollywood International,
Inc. ................................ 12.00 04/01/05 2,121,600
-----------
11,915,820
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Telecommunications (17.5%)
$ 3,100 21st Century Telecom Group........... 12.25 %++ 02/15/08 $ 1,147,000
1,500 Birch Telecom Inc. - 144A*
(Units)++............................ 14.00 06/15/08 1,365,000
1,500 Caprock Communications Corp.
(Series B).......................... 12.00 07/15/08 1,492,500
3,000 e. Spire Communications, Inc. ....... 13.75 07/15/07 2,730,000
3,000 Facilicom International, Inc. (Series
B)................................... 10.50 01/15/08 2,415,000
7,500 Firstworld Communications, Inc. ..... 13.00++ 04/15/08 3,037,500
1,500 Focal Communications (Series B)...... 12.125++ 02/15/08 765,000
1,500 GST Equipment Funding Corp. ......... 13.25 05/01/07 1,552,500
1,500 GST Telecom/GST Network
Funding - 144A*..................... 10.50++ 05/01/08 697,500
1,500 Hyperion Telecommunication, Inc.
(Series B).......................... 12.25 09/01/04 1,597,500
1,500 Hyperion Telecommunication, Inc.
(Series B).......................... 13.00++ 04/15/03 1,162,500
26,300 In-Flight Phone Corp. (Series B)
(d).................................. 14.00 05/15/02 3,945,000
800 Level 3 Communications, Inc. ........ 9.125 05/01/08 796,000
1,500 NextLink Communications, Inc. ....... 12.50 04/15/06 1,631,250
1,500 Optel, Inc. (Series B)............... 11.50 07/01/08 1,485,000
1,500 Pac-West Telecomm Inc. - 144A*....... 13.50 02/01/09 1,503,750
1,500 Primus Telecommunications Group
(Series B).......................... 9.875 05/15/08 1,417,500
-----------
28,740,500
-----------
Telecommunication Equipments (1.5%)
6,000 FWT, Inc. ........................... 9.875 11/15/07 2,400,000
-----------
Wireless Communications (10.9%)
5,500 Advanced Radio Telecommunications
Corp. .............................. 14.00 02/15/07 4,125,000
10,000 Cellnet Data Systems, Inc. .......... 14.00++ 10/01/07 3,100,000
1,500 Globalstar LP/Capital Corp. ......... 11.375 02/15/04 1,125,000
1,500 Globalstar LP/Capital Corp. ......... 11.50 06/01/05 1,128,750
800 Paging Network, Inc. ................ 10.00 10/15/08 760,000
5,000 TCI Satellite Entertainment, Inc. ... 12.25++ 02/15/07 2,550,000
2,920 USA Mobile Communications Holdings,
Inc................................. 14.00 11/01/04 3,007,600
3,000 Winstar Communications, Inc. ........ 14.00++ 10/15/05 2,175,000
-----------
17,971,350
-----------
TOTAL CORPORATE BONDS
(Identified Cost $192,387,856)............................ 158,635,861
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (e) (1.0%)
Casino/Gambling (0.0%)
3,000 Fitzgerald Gaming Corp. .................................. $ 6,000
-----------
Foods & Beverages (0.1%)
225,000 Specialty Foods Acquisition Corp. - 144A*................. 225,000
-----------
Hotels/Resorts (0.0%)
5,000 Motels of America, Inc. - 144A*........................... 5,000
-----------
Motor Vehicle (0.0%)
91 Northern Holdings Industrial Corp.* (c)................... --
-----------
Restaurants (0.0%)
12,500 American Restaurant Group Holdings, Inc. - 144A*.......... 125
-----------
Retail (0.6%)
1,220,588 County Seat Stores, Inc. (c).............................. 915,441
-----------
Textiles (0.3%)
298,462 U.S. Leather, Inc. (c).................................... 447,693
-----------
TOTAL COMMON STOCKS (Identified Cost $18,056,859)......... 1,599,259
-----------
PREFERRED STOCKS (e) (0.7%)
Energy (0.0%)
7,162 Transcontinental Refining Corp.* (Conv.).................. 430
13,021 Transcontinental Refining Corp.* (Conv.).................. 781
18,880 Transcontinental Refining Corp.* (Conv.).................. 1,133
39,063 Transcontinental Refining Corp.* (Conv.).................. 2,344
12,000 Transcontinental Refining Corp.* (Conv.).................. 8,160
-----------
12,848
-----------
Restaurants (0.7%)
1,057 American Restaurants Group Holdings, Inc. (Series B)...... 1,057,000
-----------
TOTAL PREFERRED STOCKS (Identified Cost $1,069,829)....... 1,069,848
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
- --------- ----------
<C> <S> <C> <C>
WARRANTS (e) (0.0%)
Aerospace (0.0%)
6,000 Sabreliner Corp. - 144A*...................... 04/15/03 60,000
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C>
Casino/Gambling (0.0%)
60,000 Aladdin Gaming/Capital Corp. - 144A*.......... 03/01/10 $ 628
2,900 Fitzgeralds South Inc. - 144A*................ 03/15/99 --
-----------
628
-----------
Hotels/Resorts (0.0%)
1,500 Epic Resorts LLC - 144A*...................... 06/15/05 --
1,500 Resort At Summerlin - 144A*................... 12/15/07 --
-----------
Restaurants (0.0%)
1,000 American Restaurant Group Holdings,
Inc. - 144A*.................................. 08/15/00 --
-----------
Telecommunications (0.0%)
7,500 Firstworld Communications, Inc. - 144A*....... 04/15/08 --
-----------
Other Telecommunications (0.0%)
1,500 Versatel Telecom BV - 144A* (Netherlands)..... 05/15/08 15,115
-----------
TOTAL WARRANTS
(Identified Cost $164,715)................................. 75,743
-----------
TOTAL INVESTMENTS
(Identified Cost $211,679,259) (f)............ 98.2% 161,380,711
CASH AND OTHER ASSETS IN EXCESS OF
LIABILITIES................................... 1.8 2,997,754
----- -----------
NET ASSETS.................................... 100.0% $164,378,465
====== ===========
</TABLE>
- ---------------------
<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 class of securities traded together
as a unit; generally stocks or bonds with attached warrants.
(a) Issuer in bankruptcy.
(b) Non-income producing security; bond in default.
(c) Acquired through exchange offer.
(d) Non-income producing security; issuer in bankruptcy.
(e) Non-income producing securities.
(f) The aggregate cost for federal income tax purposes
approximates identified cost. The aggregate gross unrealized
appreciation is $2,826,282 and the aggregate gross
unrealized depreciation is $53,124,830, resulting in net
unrealized depreciation of $50,298,548.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
January 31, 1999 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $211,679,259)............................. $161,380,711
Cash........................................................ 84,549
Receivable for:
Interest................................................ 3,734,876
Investments sold........................................ 1,584,679
Prepaid expenses and other assets........................... 4,871
------------
TOTAL ASSETS............................................ 166,789,686
------------
LIABILITIES:
Payable for:
Investments purchased................................... 2,200,750
Investment management fee............................... 104,316
Accrued expenses and other payables......................... 106,155
------------
TOTAL LIABILITIES....................................... 2,411,221
------------
NET ASSETS.............................................. $164,378,465
============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $344,215,488
Net unrealized depreciation................................. (50,298,548)
Accumulated undistributed net investment income............. 2,294,873
Accumulated net realized loss............................... (131,833,348)
------------
NET ASSETS.............................................. $164,378,465
============
NET ASSET VALUE PER SHARE,
35,611,307 shares outstanding
(unlimited shares authorized of $.01 par value)............ $4.62
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended January 31, 1999 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $ 12,622,644
------------
EXPENSES
Investment management fee................................... 657,783
Transfer agent fees and expenses............................ 68,747
Professional fees........................................... 25,751
Registration fees........................................... 20,671
Shareholder reports and notices............................. 19,433
Custodian fees.............................................. 10,221
Trustees' fees and expenses................................. 9,511
Other....................................................... 9,713
------------
TOTAL EXPENSES.......................................... 821,830
------------
NET INVESTMENT INCOME................................... 11,800,814
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................................... (4,990,220)
Net change in unrealized depreciation....................... (27,563,016)
------------
NET LOSS................................................ (32,553,236)
------------
NET DECREASE................................................ $(20,752,422)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
FINANCIAL STATEMENTS, continued
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
JANUARY 31, 1999 JULY 31, 1998
- ----------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................. $ 11,800,814 $ 25,755,194
Net realized loss..................................... (4,990,220) (4,557,259)
Net change in unrealized depreciation................. (27,563,016) (4,347,182)
------------ ------------
NET INCREASE (DECREASE)........................... (20,752,422) 16,850,753
Dividends from net investment income.................. (12,940,954) (26,234,438)
------------ ------------
NET DECREASE...................................... (33,693,376) (9,383,685)
NET ASSETS:
Beginning of period................................... 198,071,841 207,455,526
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$2,294,873 and $3,435,013, respectively).......... $164,378,465 $198,071,841
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE> 14
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS January 31, 1999 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter High Income Advantage Trust II (the "Trust"),
formerly High Income Advantage Trust II, 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"), 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.
14
<PAGE> 15
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS January 31, 1999 (unaudited) continued
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.
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.
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS January 31, 1999 (unaudited) continued
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 six months ended January 31, 1999, aggregated
$63,693,160 and $65,127,804, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Trust's transfer agent. At January 31, 1999, the Trust had transfer agent
fees and expenses payable of approximately $14,600.
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, 1999
included in Trustees' fees and expenses in the Statement of Operations amounted
to $3,106. At January 31, 1999, the Trust had an accrued pension liability of
$51,833 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, 1997, 1998 and January 31, 1999........... 35,611,307 $356,113 $343,859,375
========== ======== ============
</TABLE>
16
<PAGE> 17
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS January 31, 1999 (unaudited) continued
5. DIVIDENDS
The Trust declared the following dividends from net investment income:
<TABLE>
<CAPTION>
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
----------- --------- ------ -------
<S> <C> <C> <C>
January 26, 1999 $0.0525 February 5, 1999 February 19, 1999
February 23, 1999 $0.0525 March 5, 1999 March 19, 1999
</TABLE>
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.
17
<PAGE> 18
MORGAN STANLEY DEAN WITTER 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, 1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................... $ 5.56 $ 5.83 $ 5.97 $ 6.08 $ 6.31 $ 6.60
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income.................................. 0.33 0.73 0.73 0.73 0.70 0.69
Net realized and unrealized gain (loss)................ (0.91) (0.26) (0.11) (0.17) (0.21) (0.28)
------ ------ ------ ------ ------ ------
Total income (loss) from investment operations.......... (0.58) 0.47 0.62 0.56 0.49 0.41
------ ------ ------ ------ ------ ------
Less dividends from net investment income............... (0.36) (0.74) (0.76) (0.67) (0.72) (0.70)
------ ------ ------ ------ ------ ------
Net asset value, end of period.......................... $ 4.62 $ 5.56 $ 5.83 $ 5.97 $ 6.08 $ 6.31
====== ====== ====== ====== ====== ======
Market value, end of period............................. $4.938 $ 6.00 $6.688 $6.125 $6.125 $ 6.25
====== ====== ====== ====== ====== ======
TOTAL RETURN+........................................... (12.15)%(1) 0.52% 22.75% 11.31% 10.29% 0.90%
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................ 0.94%(2) 0.90% 0.89% 0.91% 0.93% 0.94%
Net investment income................................... 13.46%(2) 12.69% 12.57% 12.06% 11.81% 10.33%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands................. $164,378 $198,072 $207,456 $212,759 $216,605 $224,681
Portfolio turnover rate................................. 37%(1) 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.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
18
<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
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.
MORGAN STANLEY
DEAN WITTER
HIGH INCOME
ADVANTAGE
TRUST II
Semiannual Report
January 31, 1999
