<PAGE> 1
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II Two World Trade Center
LETTER TO THE SHAREHOLDERS July 31, 1999 New York, New York 10048
DEAR SHAREHOLDER:
The twelve-month period ended July 31, 1999 has been a difficult one for the
high-yield bond market, beginning with the fixed-income market's dramatic flight
to quality during the second half of 1998. In response to concerns about the
rapidly escalating foreign-market crisis and its potential effect on the U.S.
economy, investors sought the relative safety of U.S. government securities over
more economically sensitive investments such as equities and high-yield bonds.
This action resulted in a sharp correction in the high-yield bond market during
the second half of 1998. High-yield bond prices declined as much as 15 percent
and yields rose from approximately 9 percent to the 12 percent range. The
high-yield market also experienced its own flight to quality during late 1998,
with the middle tier of the market (B-rated issues) significantly
underperforming the upper tier (BB-rated issues), due to investors' severe risk
aversion.
As we enter the second half of 1999, the high-yield market has yet to rebound
from its woes of late last year. Fears about the foreign-market crisis have now
been replaced by concerns over potential inflation and ongoing credit-tightening
actions by the Federal Reserve Board. These concerns drove interest rates
sharply higher during the first half of 1999, resulting in a very weak
fixed-income market environment. While the high-yield market held up better than
most other fixed-income markets during the first half of 1999, it clearly
remains quite weak, due to the depressed bond market environment that exists
today. As a result, as we enter the second half of 1999, high-yield market
yields are approaching their highest and most attractive levels since the early
1990s, providing an unusually high yield advantage over U.S. Treasuries.
PERFORMANCE
During the fiscal year ended July 31, 1999, Morgan Stanley Dean Witter High
Income Advantage Trust II produced a total return of -12.89 percent, based on a
change in net asset value (NAV) and reinvestment of distributions. Based on a
change in the Trust's market
<PAGE> 2
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
LETTER TO THE SHAREHOLDERS July 31, 1999, continued
price on the New York Stock Exchange (NYSE) and reinvestment of distributions,
the Trust's total return for the fiscal year was 2.79 percent.
Over the past twelve months, the Trust continued to distribute regular monthly
income dividends, at a rate of $0.0525 per share. For the fiscal year ended July
31, 1999, the Trust's distributions totaled $0.6784 per share, including an
extra income dividend paid on December 18, 1998. On July 31, 1999, the Trust had
net assets in excess of $152 million.
PORTFOLIO STRATEGY
During the fiscal year, the Trust maintained a position in the more defensive,
higher-quality end of the high-yield market, which held up well in the period's
recent 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 recent market correction, as bond prices
declined sharply and yields rose dramatically. In terms of investment strategy,
we continue to concentrate on industry sectors that have historically proven to
be more predictable, recession resistant and/or growth oriented, such as cable
television, cellular communications, food and beverages, media, supermarkets and
telecommunications. We believe that these industry groups are poised to perform
well over the next year. We also expect to see continued consolidation and
merger activity within these industries, which should result in improved credit
quality for many of the industry's players. We continue to focus primarily on
domestic companies, given the favorable outlook for continued growth in the U.S.
economy, and are avoiding the emerging foreign high-yield markets at this time,
because of the higher degree of uncertainty and volatility associated with many
of these markets over the past few years.
LOOKING AHEAD
Despite the high-yield market's weakness over the past year, we consider today's
substantially higher, more attractive yields and significantly discounted bond
prices an excellent investment opportunity, particularly given the relatively
low interest-rate environment and the favorable outlook for the economy.
Assuming a soft landing in the economy with growth continuing into next year, we
would expect the high-yield market to recover, following the lead of the equity
markets, which have rebounded sharply over the past six months. 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 has not been a good investment performer over the
past year, 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 July 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.
On May 1, 1999, Mitchell M. Merin was named President of the Morgan Stanley Dean
Witter Funds. Mr. Merin is the President and Chief Operating Officer of Asset
Management for Morgan Stanley Dean Witter & Co. and President, Chief Executive
Officer and Director of Morgan Stanley Dean Witter Advisors Inc. He also serves
as Chairman, Chief Executive Officer and Director of Morgan Stanley Dean Witter
Distributors Inc. and Morgan Stanley Dean Witter Trust FSB.
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.
<TABLE>
<S> <C>
Very truly yours,
/s/ CHARLES A. FIUMEFREDDO /s/ MITCHELL M. MERIN
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
</TABLE>
3
<PAGE> 4
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (94.1%)
Aerospace (0.7%)
$ 1,500 Sabreliner Corp. - 144A*............. 11.00 % 06/15/08 $ 1,140,000
-----------
Beverages - Non-Alcoholic (1.6%)
3,000 Sparkling Spring Water (Canada)...... 11.50 11/15/07 2,430,000
-----------
Broadcast Media (1.1%)
800 Tri-State Outdoor Media Group........ 11.00 05/15/08 806,000
800 Spanish Broadcasting System, Inc..... 12.50 06/15/02 888,000
-----------
1,694,000
-----------
Cable Television (2.4%)
9,000 Australis Holdings Property Ltd.
(Australia) (a)..................... 15.00++ 11/01/02 225,000
1,500 Knology Holdings Inc................. 11.875++ 10/15/07 855,000
3,700 Optel, Inc. (Series B)............... 11.50 07/01/08 2,553,000
-----------
3,633,000
-----------
Casino/Gambling (3.7%)
7,500 Aladdin Gaming/Capital Corp. (Series
B).................................. 13.50++ 03/01/10 3,075,000
4,500 Fitzgeralds Gaming Corp. (Series B)
(b)................................. 12.25 12/15/04 2,475,000
-----------
5,550,000
-----------
Cellular Telephone (1.8%)
800 American Cellular Corp............... 10.50 05/15/08 820,000
800 Clearnet Communications, Inc.
(Canada)............................ 14.75++ 12/15/05 740,000
800 Dobson/Sygnet Communications......... 12.25 12/15/08 840,000
600 Dolphin Telecom PLC - 144A*
(United Kingdom).................... 14.00++ 05/15/09 258,000
-----------
2,658,000
-----------
Construction/Agricultural Equipment/
Trucks (1.2%)
2,000 J.B. Poindexter & Co., Inc........... 12.50 05/15/04 1,890,000
-----------
Consumer Business Services (6.9%)
800 Anacomp, Inc. (Series B)............. 10.875 04/01/04 828,000
2,300 CEX Holdings, Inc. (Series B)........ 9.625 06/01/08 2,328,750
1,733 Comforce Corp. (Series B)............ 15.00+ 12/01/09 1,525,425
4,000 Comforce Operating Inc. (Series B)... 12.00 12/01/07 3,400,000
3,500 Entex Information Services, Inc...... 12.50 08/01/06 2,380,000
-----------
10,462,175
-----------
Consumer Electronics/Appliances (2.1%)
9,945 International Semi-Tech
Microelectronics, Inc. (Canada)..... 11.50++ 08/15/03 1,790,100
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1999, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,500 Windmere-Durable Holdings, Inc....... 10.00 % 07/31/08 $ 1,447,500
-----------
3,237,600
-----------
Consumer Specialties (1.1%)
2,000 Samsonite Corp....................... 10.75 06/15/08 1,720,000
-----------
Containers/Packaging (2.7%)
800 Berry Plastics Corp. - 144A*......... 11.00 07/15/07 810,000
3,000 Envirodyne Industries, Inc........... 10.25 12/01/01 2,475,000
800 Impac Group Inc. (Series B).......... 10.125 03/15/08 752,000
-----------
4,037,000
-----------
Contract Drilling (1.1%)
2,725 Northern Offshore ASA (Norway)....... 10.00 05/15/05 1,662,250
-----------
Diversified Electronic Products
(0.9%)
1,500 High Voltage Engineering Co.......... 10.50 08/15/04 1,387,500
-----------
Diversified Manufacturing (4.1%)
800 Eagle-Picher Industries, Inc......... 9.375 03/01/08 756,000
8,536 Jordan Industries, Inc. (Series B)... 11.75++ 04/01/09 5,548,400
-----------
6,304,400
-----------
Electronic Distributors (1.4%)
3,000 CHS Electronics, Inc................. 9.875 04/15/05 2,070,000
-----------
Food Chains (0.9%)
800 Pueblo Xtra International, Inc....... 9.50 08/01/03 720,000
750 Pueblo Xtra International, Inc.
(Series C).......................... 9.50 08/01/03 675,000
-----------
1,395,000
-----------
Food Distributors (0.9%)
1,500 Fleming Companies, Inc. (Series B)... 10.625 07/31/07 1,383,750
-----------
Hotels/Resorts (3.2%)
1,500 Epic Resorts LLC (Series B).......... 13.00 06/15/05 1,320,000
3,150 Motels of America, Inc. (Series B)... 12.00 04/15/04 1,953,000
1,802 Resort At Summerlin (Series B)....... 13.00+ 12/15/07 1,549,703
-----------
4,822,703
-----------
Industrial Specialties (1.8%)
800 Indesco International Inc............ 9.75 04/15/08 520,000
800 International Wire Group, Inc........ 11.75 06/01/05 832,000
1,500 Outsourcing Services Group, Inc.
(Series B).......................... 10.875 03/01/06 1,432,500
-----------
2,784,500
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1999, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Media Conglomerates (2.4%)
$ 3,500 Disney (Walt) & Co................... 13.50 % 03/10/00 $ 3,674,475
-----------
Medical Specialties (2.5%)
1,600 Mediq/PRN Life Support Service
Inc................................. 11.00 06/01/08 1,264,000
1,500 Universal Hospital Services, Inc..... 10.25 03/01/08 1,320,000
1,500 Universal Hospital Services, Inc..... 10.25 03/01/08 1,260,000
-----------
3,844,000
-----------
Medical/Nursing Services (1.1%)
3,125 Pediatric Services of America, Inc.
(Series A).......................... 10.00 04/15/08 1,625,000
-----------
Military/Gov't/Technical (0.5%)
800 Loral Space & Communications Ltd..... 9.50 01/15/06 708,000
-----------
Office Equipment & Supplies (1.4%)
2,500 Mosler, Inc.......................... 11.00 04/15/03 2,112,500
-----------
Oil Refining/Marketing (0.7%)
4,000 Transamerican Refining Corp. (Series
B) (Units)++(a)(b).................. 16.00 06/30/03 1,080,000
-----------
Other Telecommunications (2.4%)
300 Cybernet Internet Services
International, Inc. - 144A*......... 14.00 07/01/09 301,500
800 Globenet Communications Group
Ltd. - 144A* (Bermuda).............. 13.00 07/15/07 804,000
800 Esprit Telecom Group PLC
(United Kingdom).................... 10.875 06/15/08 824,000
800 Versatel Telecom BV (Netherlands)
(Units)++........................... 13.25 05/15/08 832,000
800 Worldwide Fiber Inc. - 144A*
(Canada)............................. 12.00 08/01/09 796,000
-----------
3,557,500
-----------
Packaged Goods/Cosmetics (1.6%)
2,500 J.B. Williams Holdings, Inc.......... 12.00 03/01/04 2,500,000
-----------
Printing/Forms (0.9%)
1,500 Premier Graphics Inc................. 11.50 12/01/05 1,380,000
-----------
Restaurants (7.3%)
16,077 American Restaurant Group Holdings,
Inc. - 144A* (c).................... 0.00 12/15/05 5,466,316
4,000 FRD Acquisition Corp. (Series B)..... 12.50 07/15/04 3,660,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1999, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 800 Friendly Ice Cream Corp.............. 10.50 % 12/01/07 $ 732,000
6,240 Planet Hollywood International, Inc.
(a)(b).............................. 12.00 04/01/05 1,310,400
-----------
11,168,716
-----------
Retail - Specialty (0.5%)
800 Pantry Inc........................... 10.25 10/15/07 812,000
-----------
Services To The Health Industry
(0.6%)
800 Unilab Corp.......................... 11.00 04/01/06 876,000
-----------
Specialty Foods/Candy (1.5%)
20,607 Specialty Foods Acquisition Corp.
(Series B) (c)...................... 13.00++ 06/15/09 2,353,039
-----------
Telecommunications (17.7%)
3,100 21st Century Telecom Group, Inc...... 12.25++ 02/15/08 1,395,000
3,000 Birch Telecom Inc. (Units)++......... 14.00 06/15/08 3,030,000
800 Caprock Communications Corp. (Series
B).................................. 12.00 07/15/08 824,000
1,600 Covad Communications Group Inc....... 12.50 02/15/09 1,528,000
1,500 DTI Holdings Inc. (Series B)......... 12.50++ 03/01/08 600,000
3,000 e. spire Communications, Inc......... 13.75 07/15/07 2,670,000
3,000 Facilicom International, Inc. (Series
B).................................. 10.50 01/15/08 2,130,000
4,600 Firstworld Communications, Inc....... 13.00++ 04/15/08 2,599,000
1,500 Focal Communications (Series B)...... 12.125++ 02/15/08 877,500
800 GST Equipment Funding Corp........... 13.25 05/01/07 868,000
800 Hyperion Telecommunication, Inc.
(Series B).......................... 12.25 09/01/04 840,000
26,300 In-Flight Phone Corp. (Series B)
(a)(b).............................. 14.00 05/15/02 2,893,000
800 Level 3 Communications, Inc.......... 9.125 05/01/08 760,000
800 NextLink Communications, Inc......... 12.50 04/15/06 848,000
1,500 Pac-West Telecomm Inc. - 144A*....... 13.50 02/01/09 1,500,000
1,500 Primus Telecommunications Group
(Series B).......................... 9.875 05/15/08 1,380,000
1,600 Rhythms NetConnections
Inc. - 144A*......................... 12.75 04/15/09 1,472,000
800 Talton Holdings Inc. (Series B)...... 11.00 06/30/07 746,000
-----------
26,960,500
-----------
Telecommunication Equipment (0.4%)
6,000 FWT, Inc. (a)(b)..................... 9.875 11/15/07 540,000
-----------
Wireless Communications (13.0%)
5,500 Advanced Radio Telecommunications
Corp................................ 14.00 02/15/07 4,950,000
1,300 AMSC Aquisition Co. Inc. (Series
B).................................. 12.25 04/01/08 1,014,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1999, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 400 Arch Escrow Corp. - 144A*............ 13.75 % 04/15/08 $ 368,000
10,000 Cellnet Data Systems, Inc............ 14.00++ 10/01/07 4,300,000
1,500 Globalstar LP/Capital Corp........... 11.375 02/15/04 1,065,000
1,500 Globalstar LP/Capital Corp........... 11.50 06/01/05 997,500
1,600 Orbcomm Global LP.................... 14.00 08/15/04 1,488,000
800 Paging Network, Inc.................. 10.125 08/01/07 632,000
1,600 Paging Network, Inc.................. 10.00 10/15/08 1,264,000
2,920 USA Mobile Communications Holdings,
Inc................................. 14.00 11/01/04 2,832,400
800 Winstar Equipment Corp............... 12.50 03/15/04 840,000
-----------
19,750,900
-----------
TOTAL CORPORATE BONDS
(Identified Cost $186,740,489)............................ 143,204,508
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER
OF
SHARES
- --------
<C> <S> <C>
COMMON STOCKS (d) (0.6%)
Casino/Gambling (0.0%)
3,000 Fitzgerald Gaming Corp.................................... --
-----------
Cellular Telephone (0.0%)
1 Price Communications Corp................................. --
-----------
Clothing/Shoe/Accessory Stores (0.0%)
1,301,189 County Seat Stores, Inc. (c).............................. 11,758
-----------
Hotels/Resorts (0.0%)
5,000 Motels of America, Inc. - 144A*........................... 5,000
-----------
Medical/Nursing Services (0.2%)
287,831 Raintree Healthcare Corp. (c)............................. 323,810
-----------
Motor Vehicles (0.0%)
91 Northern Holdings Industrial Corp.* (c)................... --
-----------
Restaurants (0.0%)
12,500 American Restaurant Group Holdings, Inc. - 144A*.......... 125
-----------
Specialty Foods/Candy (0.1%)
226,121 Specialty Foods Acquisition Corp. - 144A*................. 112,511
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1999, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C>
Textiles (0.3%)
298,462 U.S. Leather, Inc. (c).................................... $ 447,693
-----------
TOTAL COMMON STOCKS
(Identified Cost $21,940,623)............................. 900,897
-----------
PREFERRED STOCKS (0.8%)
Oil Refining/Marketing (0.0%)
3,862 Transcontinental Refining Corp.* (Conv.) (Class C)........ 216
10,180 Transcontinental Refining Corp.* (Conv.) (Class D)........ 540
7,021 Transcontinental Refining Corp.* (Conv.) (Class B)........ 421
21,063 Transcontinental Refining Corp.* (Conv.) (Class E)........ 1,327
-----------
2,504
-----------
Restaurants (0.8%)
1,120 American Restaurants Group Holdings, Inc. (Series B)...... 1,120,000
-----------
TOTAL PREFERRED STOCKS
(Identified Cost $1,122,494).............................. 1,122,504
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
- --------- ----------
<C> <S> <C> <C>
WARRANTS (d) (0.5%)
Aerospace (0.0%)
6,000 Sabreliner Corp. - 144A*...................... 04/15/03 30,000
-----------
Casino/Gambling (0.0%)
60,000 Aladdin Gaming/Capital Corp. - 144A*.......... 03/01/10 600
-----------
Hotels/Resorts (0.0%)
1,500 Epic Resorts LLC - 144A*...................... 06/15/05 --
1,500 Resort At Summerlin - 144A*................... 12/15/07 --
-----------
--
-----------
Oil Refining/Marketing (0.0%)
4,000 Transamerican Refining Corp. - 144A*.......... 06/30/03 --
-----------
Other Telecommunications (0.2%)
1,500 Versatel Telecom BV - 144A* (Netherlands)..... 05/15/08 247,580
-----------
Restaurants (0.0%)
1,000 American Restaurant Group Holdings,
Inc. - 144A*................................. 08/15/00 --
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1999, continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C>
Telecommunications (0.3%)
3,000 Birch Telecom Inc. - 144A*.................... 06/15/08 $ 165,000
7,500 DTI Holdings Inc. - 144A*..................... 03/01/08 --
4,600 Firstworld Communications, Inc. - 144A*....... 04/15/08 299,075
-----------
464,075
-----------
Wireless Communications (0.0%)
1,300 American Mobile Satellite Corp. - 144A*....... 04/01/08 65,000
-----------
TOTAL WARRANTS
(Identified Cost $175,816)................................ 807,255
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
- --------- ------- ---------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENT
REPURCHASE AGREEMENT (1.8%)
$2,792 The Bank of New York (dated 07/30/99;
proceeds $2,792,397) (e)
(Identified Cost $2,791,622)......... 5.00% 08/02/99 2,791,622
-----------
TOTAL INVESTMENTS
(Identified Cost $212,771,044) (f)................. 97.8% 148,826,786
OTHER ASSETS IN EXCESS OF LIABILITIES.............. 2.2 3,355,209
----- -----------
NET ASSETS........................................ 100.0% $152,181,995
===== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 1999, continued
- ---------------------
* 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 securities.
(e) Collateralized by $1,697,081 GNMA 7.00% due 01/15/24 valued at $985,307 and
$1,507,322 U.S. Treasury Bond 8.125% due 08/15/21 valued at $1,868,847.
(f) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $3,646,432 and the
aggregate gross unrealized depreciation is $67,590,690, resulting in net
unrealized depreciation of $63,944,258.
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 1999
ASSETS:
Investments in securities, at value
(identified cost $212,771,044)......... $ 148,826,786
Interest receivable..................... 3,888,865
Prepaid expenses and other assets....... 21,354
-------------
TOTAL ASSETS........................ 152,737,005
-------------
LIABILITIES:
Investment management fee payable....... 114,442
Payable to bank......................... 320,000
Accrued expenses and other payables..... 120,568
-------------
TOTAL LIABILITIES................... 555,010
-------------
NET ASSETS.......................... $ 152,181,995
=============
COMPOSITION OF NET ASSETS:
Paid-in-capital......................... $ 323,268,582
Net unrealized depreciation............. (63,944,258)
Accumulated undistributed net investment
income................................. 2,331,606
Accumulated net realized loss........... (109,473,935)
-------------
NET ASSETS.......................... $ 152,181,995
=============
NET ASSET VALUE PER SHARE,
35,611,307 shares outstanding
(unlimited shares authorized of $.01
par value)............................. $4.27
=============
</TABLE>
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended July 31, 1999
NET INVESTMENT INCOME:
INTEREST INCOME.......................... $ 24,644,065
------------
EXPENSES
Investment management fee................ 1,244,215
Transfer agent fees and expenses......... 121,117
Shareholder reports and notices.......... 71,280
Professional fees........................ 61,334
Registration fees........................ 36,746
Trustees' fees and expenses.............. 20,036
Custodian fees........................... 16,790
Other.................................... 17,586
------------
TOTAL EXPENSES....................... 1,589,104
------------
NET INVESTMENT INCOME................ 23,054,961
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................ (3,577,713)
Net change in unrealized depreciation.... (41,208,726)
------------
NET LOSS............................. (44,786,439)
------------
NET DECREASE............................. $(21,731,478)
============
</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 YEAR FOR THE YEAR
ENDED ENDED
JULY 31, JULY 31,
1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.................................. $ 23,054,961 $ 25,755,194
Net realized loss...................................... (3,577,713) (4,557,259)
Net change in unrealized depreciation.................. (41,208,726) (4,347,182)
------------ ------------
NET INCREASE (DECREASE)............................ (21,731,478) 16,850,753
Dividends from net investment income................... (24,158,368) (26,234,438)
------------ ------------
NET DECREASE....................................... (45,889,846) (9,383,685)
NET ASSETS:
Beginning of period.................................... 198,071,841 207,455,526
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$2,331,606 and $3,435,013, respectively)........... $152,181,995 $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 July 31, 1999
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 July 31, 1999, 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, 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
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS July 31, 1999, continued
space, facilities, equipment, clerical, bookkeeping and certain legal services
and pays the salaries of all personnel, including officers of the Trust who are
employees of the Investment Manager. The Investment Manager also bears the cost
of telephone services, heat, light, power and other utilities provided to the
Trust.
3. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended July 31, 1999, aggregated $97,839,291
and $107,633,393, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Trust's transfer agent.
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, 1999 included in
Trustees' fees and expenses in the Statement of Operations amounted to $5,896.
At July 31, 1999, the Trust had an accrued pension liability of $52,281, 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...................................... 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
Reclassification due to permanent book/tax differences...... -- -- (20,946,906)
---------- -------- ------------
Balance, July 31, 1999...................................... 35,611,307 $356,113 $322,912,469
========== ======== ============
</TABLE>
16
<PAGE> 17
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS July 31, 1999, 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>
July 27, 1999 $0.0525 August 6, 1999 August 20, 1999
August 24, 1999 $0.0525 September 3, 1999 September 17, 1999
</TABLE>
6. FEDERAL INCOME TAX STATUS
At July 31, 1999, the Trust had a net capital loss carryover of approximately
$106,083,000, 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
- --------------------------------------------------------------------------------------
2000 2002 2003 2004 2005 2006 2007
------- ------ ------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
$29,353 $8,278 $23,309 $20,038 $9,296 $11,478 $4,331
======= ====== ======= ======= ====== ======= ======
</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 $82,000 during fiscal 1999.
As of July 31, 1999, 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 $20,946,906.
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 YEAR ENDED JULY 31
----------------------------------------------------
1999 1998 1997 1996 1995
<S> <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
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income...................................... 0.65 0.73 0.73 0.73 0.70
Net realized and unrealized loss........................... (1.26) (0.26) (0.11) (0.17) (0.21)
-------- -------- -------- -------- --------
Total income (loss) from investment operations.............. (0.61) 0.47 0.62 0.56 0.49
-------- -------- -------- -------- --------
Less dividends from net investment income................... (0.68) (0.74) (0.76) (0.67) (0.72)
-------- -------- -------- -------- --------
Net asset value, end of period.............................. $ 4.27 $ 5.56 $ 5.83 $ 5.97 $ 6.08
======== ======== ======== ======== ========
Market value, end of period................................. $ 5.438 $ 6.00 $ 6.688 $ 6.125 $ 6.125
======== ======== ======== ======== ========
TOTAL RETURN+............................................... 2.79% 0.52% 22.75% 11.31% 10.29%
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 0.96% 0.90% 0.89% 0.91% 0.93%
Net investment income....................................... 13.90% 12.69% 12.57% 12.06% 11.81%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $152,182 $198,072 $207,456 $212,759 $216,605
Portfolio turnover rate..................................... 61% 104% 90% 89% 70%
</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
18
<PAGE> 19
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF MORGAN STANLEY DEAN WITTER
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 Morgan Stanley Dean Witter High
Income Advantage Trust II (the "Trust"), formerly High Income Advantage Trust
II, at July 31, 1999, 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, 1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
September 10, 1999
19
<PAGE> 20
TRUSTEES
- ----------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
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
Mitchell M. Merin
President
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
MORGAN STANLEY
DEAN WITTER
HIGH INCOME
ADVANTAGE
TRUST II
Annual Report
July 31, 1999
