<PAGE> 1
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II Two World Trade Center
LETTER TO THE SHAREHOLDERS January 31, 2000 New York, New York 10048
DEAR SHAREHOLDER:
The 6-month period ended January 31, 2000, was a difficult one for high-yield
bond investors. For much of the period the market struggled to recover from the
woes that had plagued it in late 1998. At that time, concerns about the effect
of foreign-market crises on the U.S. economy sparked fears of a possible
recession. These fears led investors to seek the relative safety of U.S.
government securities over more economically sensitive investments such as
equities and high-yield bonds, which resulted in a sharp correction in the
high-yield marketplace.
The weak market conditions continued into and throughout much of calendar 1999
as investor concerns over the foreign-market crises and a possible recession
were replaced with ones over sharply rising interest rates, the Federal Reserve
Board's credit-tightening actions, the looming threat of inflation and the
uncertainty of the Y2K bug's effect on corporate earnings and the financial
markets. These fears affected all of the fixed-income markets during 1999, with
Treasuries and municipal bonds also suffering significant losses.
On a more positive note, as a result of the weakness in the market over the past
year and a half, yields on lower-rated corporate bonds are now approaching their
highest levels in nearly a decade. Today, high-yield bonds are providing an
unusually large yield advantage over Treasuries. Historically, abnormally high
yield advantages have signaled turning points in the high-yield market,
resulting in strong total returns as bond prices recover.
PERFORMANCE
For the 6-month period ended January 31, 2000, Morgan Stanley Dean Witter High
Income Advantage Trust II produced a total return of -6.08 percent, based on a
change in net asset value (NAV) and reinvestment of distributions. For the same
period, the Trust's total return for the fiscal year was -26.69 percent, based
on a change in its market price on the New York Stock Exchange (NYSE) and
reinvestment of distributions.
<PAGE> 2
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
LETTER TO THE SHAREHOLDERS January 31, 2000, continued
After eight years of the Trust maintaining a steady monthly dividend, its
Trustees recommended adjusting the Trust's distribution rate to better reflect
the current income-earning potential of its portfolio securities. Beginning with
the dividend declared on September 28, 1999, and payable on October 22, 1999,
the Trust's monthly income dividend was set at $0.0475 per share, down from the
previous month's rate of $0.0525 per share. We believe that the new target
dividend rate will provide the Trust with added investment flexibility. For the
6-month period under review, the Trust paid distributions totaling $0.3245 per
share, including a special income dividend of $0.0295 per share, paid on
December 17, 1999.
PORTFOLIO STRATEGY
As discussed, the past year and a half has been an extremely difficult period
for the high-yield market, particularly the B-rated sector, the market's largest
sector. The result has been prolonged weakness in the high-yield market, causing
high-yield bond prices to decline sharply and yields to rise dramatically.
Although the Trust's position in the more defensive, higher quality end of the
market held up relatively well during the turbulent market environment, its
long-term core position in the B-rated sector was adversely affected. However,
with yields on B-rated issues at or near 10-year highs and with many issues
trading at significant discounts to their stated maturity value, we view the
B-rated sector as extremely undervalued. In light of our positive long-term
outlook, we are maintaining our focus on this large sector of the market, which
we believe offers the Trust strong long-term total return potential.
From an industry perspective we presently view the telecommunications sector to
be an excellent investment opportunity, given the overwhelming trend toward
providing expanded worldwide telecommunications services, including voice, video
and data services over a combination of hardline and wireless networks. The
combination of very strong growth prospects for the industry, along with an
incentive to form strategic partnerships with other major players, provides the
fundamental backdrop for higher profitability and future significant credit
improvement. Included among the Trust's current holdings are a number of telecom
companies, which recently have either announced important strategic partnerships
or have raised equity capital to fuel future growth and profits. These holdings
include Advanced Radio Telecom, American Mobile Satellite, Arch Communications,
Caprock Communications, Covad Communications, Dobson Communications, Level 3
Communications, NextLink Communications, Primus Telecommunications, Versatel
Telecommunications, Viatel and Winstar Communications.
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
LETTER TO THE SHAREHOLDERS January 31, 2000, continued
LOOKING AHEAD
In light of today's substantially higher yields and significantly discounted
bond prices, we view the high-yield market as an excellent long-term investment
opportunity, particularly given the favorable economic outlook. Assuming a soft
landing in the economy with growth continuing into the second half of the year,
we would expect the high-yield market to recover and high-yield bond prices to
rebound from their currently depressed levels. Although the B-rated segment of
the market has not been a good investment performer over the past year and a
half, we remain confident that its attractive yield and appreciation potential
remain intact for long-term investors.
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 appreciate your ongoing support of Morgan Stanley Dean Witter High Income
Advantage Trust II and look forward to serving 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
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On December 21, 1999, 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>
Michael Bozic
For......................................................... 28,415,569
Withheld.................................................... 1,257,476
Charles A. Fiumefreddo
For......................................................... 28,394,425
Withheld.................................................... 1,278,620
</TABLE>
The following Trustees were not standing for reelection at this meeting:
Wayne E. Hedien, Edwin J. Garn, Dr. Manuel H. Johnson, Michael E. Nugent,
Philip J. Purcell and John L. Schroeder
(2) RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT
ACCOUNTANTS:
<TABLE>
<S> <C>
For......................................................... 28,801,601
Against..................................................... 354,606
Abstain..................................................... 516,838
</TABLE>
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 2000 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (95.2%)
Aerospace (0.9%)
$ 1,500 Sabreliner Corp. - 144A*............. 11.00 % 06/15/08 $ 1,215,000
------------
Beverages - Non-Alcoholic (1.8%)
3,000 Sparkling Spring Water (Canada)...... 11.50 11/15/07 2,370,000
------------
Books/Magazines (0.5%)
750 Perry-Judds, Inc. ................... 10.625 12/15/07 630,000
------------
Broadcast/Media (0.6%)
800 Tri-State Outdoor Media Group........ 11.00 05/15/08 776,000
------------
Broadcasting (0.4%)
450 STC Broadcasting, Inc. .............. 11.00 03/15/07 446,625
------------
Cable Television (6.6%)
3,100 21st Century Telecom Group, Inc. .... 12.25 ++ 02/15/08 2,135,125
9,000 Australis Holdings Ltd. (Australia)
(a)................................. 15.00 ++ 11/01/02 90,000
1,500 Knology Holdings Inc. ............... 11.875++ 10/15/07 975,000
200 Optel Inc. (Series B) (a)............ 13.00 02/15/05 180,000
6,200 Optel Inc. (Series B) (a)(b)......... 11.50 07/01/08 5,332,000
------------
8,712,125
------------
Casino/Gambling (4.5%)
7,500 Aladdin Gaming Holdings/Capital Corp.
(Series B).......................... 13.50 ++ 03/01/10 3,450,000
4,500 Fitzgeralds Gaming Corp. (Series B)
(b)................................. 12.25 12/15/04 2,475,000
------------
5,925,000
------------
Cellular Telephone (1.2%)
650 Clearnet Communications Inc.
(Canada)............................ 14.75 ++ 12/15/05 643,500
650 Dobson/Sygnet Communications......... 12.25 12/15/08 705,250
600 Dolphin Telecom PLC (United
Kingdom)............................ 14.00 ++ 05/15/09 240,000
------------
1,588,750
------------
Construction/Agricultural Equipment/Trucks
(1.5%)
2,000 J.B. Poindexter & Co., Inc. ......... 12.50 05/15/04 1,920,000
------------
Consumer Electronics/Appliances (1.5%)
9,945 International Semi-Tech
Microelectronics, Inc. (Canada)
(a)................................. 11.50 ++ 08/15/03 497,250
1,500 Windmere-Durable Holdings, Inc. ..... 10.00 07/31/08 1,462,500
------------
1,959,750
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Consumer Specialties (1.3%)
$ 2,000 Samsonite Corp. ..................... 10.75 % 06/15/08 $ 1,700,000
------------
Consumer/Business Services (4.1%)
800 Anacomp, Inc. (Series B)............. 10.875 04/01/04 796,000
1,863 Comforce Corp. (Series B)............ 15.00 12/01/09 838,550
4,000 Comforce Operating, Inc. ............ 12.00 12/01/07 2,200,000
3,500 Entex Information Services, Inc. .... 12.50 08/01/06 1,575,000
------------
5,409,550
------------
Containers/Packaging (2.3%)
650 Berry Plastics Corp. - 144A*......... 11.00 07/15/07 648,375
3,000 Envirodyne Industries, Inc. ......... 10.25 12/01/01 1,650,000
800 Impac Group Inc. (Series B).......... 10.125 03/15/08 688,000
------------
2,986,375
------------
Contract Drilling (1.3%)
2,725 Northern Offshore ASA (Series B)
(Norway)............................ 10.00 05/15/05 1,662,250
------------
Diversified Electronic Products (0.9%)
1,500 High Voltage Engineering, Inc. ...... 10.75 08/15/04 1,230,000
------------
Diversified Manufacturing (4.9%)
800 Eagle-Picher Industries, Inc. ....... 9.375 03/01/08 687,000
8,536 Jordan Industries, Inc. (Series B)... 11.75 ++ 04/01/09 5,804,480
------------
6,491,480
------------
Electronic Distributors (0.2%)
3,000 CHS Electronics, Inc. ............... 9.875 04/15/05 240,000
------------
Environmental Services (0.5%)
750 Allied Waste North America
Inc. - 144A*........................ 10.00 08/01/09 658,125
------------
Food Chains (0.9%)
650 Eagle Food Centers, Inc. ............ 8.625 04/15/00 312,000
800 Pueblo Xtra International, Inc. ..... 9.50 08/01/03 464,000
750 Pueblo Xtra International, Inc.
(Series C).......................... 9.50 08/01/03 435,000
------------
1,211,000
------------
Food Distributors (1.0%)
1,500 Fleming Companies, Inc. (Series B)... 10.625 07/31/07 1,350,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Hotels/Resorts (1.8%)
$ 1,500 Epic Resorts LLC (Series B).......... 13.00 % 06/15/05 $ 1,125,000
1,802 Resort At Summerlin (Series B)....... 13.00 + 12/15/07 1,261,386
------------
2,386,386
------------
Industrial Specialties (1.9%)
800 Indesco International Inc. .......... 9.75 04/15/08 328,000
800 International Wire Group, Inc. ...... 11.75 06/01/05 822,000
1,500 Outsourcing Services Group, Inc.
(Series B).......................... 10.875 03/01/06 1,305,000
------------
2,455,000
------------
Internet Services (1.2%)
300 Cybernet Internet Services Inc. ..... 14.00 07/01/09 261,000
650 Globix Corp. - 144A*................. 12.50 02/01/10 656,500
650 PSINet, Inc. - 144A*................. 10.50 12/01/06 659,750
------------
1,577,250
------------
Medical Specialties (2.5%)
2,300 Mediq/PRN Life Support Services
Inc. ............................... 11.00 06/01/08 575,000
2,500 Universal Hospital Services, Inc.
(issued 02/25/98)................... 10.25 03/01/08 1,700,000
1,500 Universal Hospital Services, Inc.
(issued 01/26/99)................... 10.25 03/01/08 975,000
------------
3,250,000
------------
Medical/Nursing Services (1.1%)
3,125 Pediatric Services of America, Inc.
(Series A).......................... 10.00 04/15/08 1,437,500
------------
Military/Gov't/Technical (0.6%)
800 Loral Space & Communications Ltd. ... 9.50 01/15/06 728,000
------------
Movies/Entertainment (0.3%)
650 Regal Cinemas Inc. .................. 9.50 06/01/08 445,250
------------
Office Equipment/Supplies (1.5%)
3,200 Mosler, Inc. ........................ 11.00 04/15/03 2,016,000
------------
Oil Refining/Marketing (0.0%)
4,000 Transamerican Refining Corp. (Series
B) (a)(b)........................... 16.00 06/30/03 50,000
------------
Other Telecommunications (11.8%)
3,000 Birch Telecom Inc. .................. 14.00 06/15/08 3,030,000
1,500 DTI Holdings Inc. (Series B)......... 12.50 ++ 03/01/08 690,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 800 Esprit Telecom Group PLC
(United Kingdom).................... 10.875% 06/15/08 $ 764,000
4,600 Firstworld Communications, Inc. ..... 13.00 ++ 04/15/08 2,300,000
800 Globenet Comm Group Ltd. - 144A*..... 13.00 07/15/07 784,000
800 Pac-West Telecom Inc. ............... 13.50 02/01/09 844,000
1,500 Primus Telecommunication Group, Inc.
(Series B).......................... 9.875 05/15/08 1,350,000
800 Versatel Telecom International NV
(Netherlands)....................... 13.25 05/15/08 846,000
800 Viatel Inc. ......................... 11.25 04/15/08 752,000
650 Viatel Inc. ......................... 11.50 03/15/09 620,750
3,000 World Access, Inc. (c)............... 13.25 01/15/08 2,670,000
800 Worldwide Fiber Inc. - 144A*
(Canada)............................ 12.00 08/01/09 840,000
------------
15,490,750
------------
Package Goods/Cosmetics (1.9%)
2,500 J.B. Williams Holdings, Inc. ........ 12.00 03/01/04 2,503,125
------------
Printing/Forms (0.6%)
1,500 Premier Graphics Inc. ............... 11.50 12/01/05 825,000
------------
Restaurants (5.8%)
16,077 American Restaurant Group Holdings,
Inc. - 144A* (c).................... 0.00 12/15/05 5,064,381
4,000 FRD Acquisition Corp. (Series B)..... 12.50 07/15/04 1,800,000
800 Friendly Ice Cream Corp. ............ 10.50 12/01/07 676,000
------------
7,540,381
------------
Retail - Specialty (1.1%)
800 Pantry, Inc. ........................ 10.25 10/15/07 768,000
750 Petro Stopping Centers L.P........... 10.50 02/01/07 678,750
------------
1,446,750
------------
Specialty Foods/Candy (2.4%)
20,607 SFAC New Holdings Inc. .............. 13.00 ++ 06/15/09 3,091,033
------------
Telecommunications (11.4%)
650 Caprock Communications Corp. (Series
B).................................. 12.00 07/15/08 667,875
750 Covad Communications Group, Inc. .... 12.50 02/15/09 772,500
3,000 e. Spire Communications, Inc. ....... 13.75 07/15/07 2,490,000
1,500 Focal Communications, Corp. (Series
B).................................. 12.125++ 02/15/08 993,750
800 GST Equipment Funding, Inc. ......... 13.25 05/01/07 804,000
650 Hyperion Telecommunication, Inc.
(Series B).......................... 12.25 09/01/04 698,750
800 Level 3 Communications, Inc. ........ 9.125 05/01/08 744,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 800 NextLink Communications, Inc. ....... 12.50 %++ 04/15/06 $ 844,000
26,300 Normex Technologies Corp. (Series B)
(a)(b).............................. 14.00 ++ 05/15/02 2,893,000
2,400 Rhythms Netconnections, Inc. ........ 12.75 04/15/09 2,280,000
650 Startec Global Communications
Corp. .............................. 12.00 05/15/08 542,750
1,400 Talton Holdings, Inc. (Series B)..... 11.00 06/30/07 1,288,000
------------
15,018,625
------------
Wireless Communications (12.4%)
5,500 Advanced Radio Telecom Corp. ........ 14.00 02/15/07 5,115,000
1,300 AMSC Acquisition Co., Inc. (Series
B).................................. 12.25 04/01/08 994,500
400 Arch Escrow Corp. ................... 13.75 04/15/08 324,000
10,000 Cellnet Data Systems, Inc. (a)....... 14.00 ++ 10/01/07 1,200,000
555 Cellnet Data Systems, Inc. (a)....... 15.00 01/31/00 555,000
500 Globalstar LP/Capital Corp. ......... 10.75 11/01/04 340,000
1,000 Globalstar LP/Capital Corp. ......... 11.50 06/01/05 690,000
1,600 Orbcomm Global LP/Capital Corp.
(Series B).......................... 14.00 08/15/04 1,392,000
2,300 Paging Network, Inc. ................ 10.125 08/01/07 943,000
3,400 Paging Network, Inc. ................ 10.00 10/15/08 1,394,000
2,920 USA Mobile Communications Holdings,
Inc. ............................... 14.00 11/01/04 2,482,000
800 Winstar Equipment Corp. ............. 12.50 03/15/04 848,000
------------
16,277,500
------------
TOTAL CORPORATE BONDS
(Identified Cost $179,525,090)........................... 125,020,580
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES
- ----------
<C> <S> <C>
COMMON STOCKS (d) (0.2%)
Casino/Gambling (0.0%)
3,000 Fitzgerald Gaming Corp. ................................. 3
------------
Clothing/Shoe/Accessory Stores (0.0%)
1,301,189 County Seat Stores, Inc. (c)............................. 11,711
------------
Hotels/Resorts (0.0%)
5,000 Motels of America, Inc. - 144A*.......................... 1,250
------------
Medical/Nursing Services (0.0%)
287,831 Raintree Healthcare Corp. (c)............................ 2,591
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 2000 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------------------------------------
<C> <S> <C>
Motor Vehicles (0.0%)
91 Northern Holdings Industrial Corp.* (c).................. $ --
------------
Other Telecommunications (0.1%)
9,426 World Access, Inc. (c)................................... 162,009
------------
Restaurants (0.0%)
12,500 American Restaurant Group Holdings, Inc. - 144A*......... 3,125
------------
Specialty Foods/Candy (0.1%)
1,121 SFAC New Holdings Inc. (c)............................... 280
225,000 Specialty Foods Acquisition Corp. - 144A*................ 56,250
------------
56,530
------------
Telecommunications Equipment (0.0%)
112,000 FWT Inc. (Class A) (c)................................... 1,120
------------
Textiles (0.0%)
298,462 United States Leather, Inc. (c).......................... 2,985
------------
TOTAL COMMON STOCKS
(Identified Cost $22,119,217)............................ 241,324
------------
PREFERRED STOCKS (1.2%)
Oil Refining/Marketing (0.0%)
7,021 Transamerica Refining Corp. (Conv.) (Class B)*........... 70
3,862 Transamerica Refining Corp. (Conv.) (Class C)*........... 38
10,180 Transamerica Refining Corp. (Conv.) (Class D)*........... 102
21,063 Transamerica Refining Corp. (Conv.) (Class E)*........... 211
------------
421
------------
Restaurants (0.7%)
1,187 American Restaurant Group Holdings, Inc. (Series B)...... 949,600
------------
Telecommunications Equipment (0.5%)
1,120,000 FWT Inc. (Series A) (c).................................. 560,000
------------
TOTAL PREFERRED STOCKS
(Identified Cost $5,854,069)............................. 1,510,021
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 2000 (unaudited) continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------
<C> <S> <C> <C>
WARRANTS (d) (1.2%)
Aerospace (0.1%)
6,000 Sabreliner Corp. - 144A*...................... 04/15/03 $ 60,000
------------
Casino/Gambling (0.0%)
60,000 Aladdin Gaming Enterprises, Inc. - 144A*...... 03/01/10 600
------------
Hotels/Resorts (0.0%)
1,500 Epic Resorts LLC - 144A*...................... 06/15/05 15
1,500 Resort At Summerlin - 144A*................... 12/15/07 15
------------
30
------------
Internet Services (0.0%)
300 Cybernet Internet Services Inc. - 144A*....... 07/01/09 45,000
------------
Oil Refining/Marketing (0.0%)
4,000 Transamerican Refining Corp. - 144A*.......... 06/30/03 4
------------
Other Telecommunications (1.1%)
3,000 Birch Telecom Inc. - 144A*.................... 06/15/08 165,000
7,500 DTI Holdings Inc. - 144A*..................... 03/01/08 75
4,600 Firstworld Communications, Inc. - 144A*....... 04/15/08 690,000
1,500 Versatel Telecom BV - 144A* (Netherlands)..... 05/15/08 585,000
------------
1,440,075
------------
Restaurants (0.0%)
1,000 American Restaurant Group Holdings,
Inc. - 144A*................................. 08/15/08 10
------------
Telecommunications (0.0%)
650 Startec Global Communications Corp. - 144A*... 05/15/08 11,700
------------
Wireless Communications (0.0%)
1,300 American Mobile Satellite Corp. - 144A*....... 04/01/08 45,500
------------
TOTAL WARRANTS
(Identified Cost $294,935)................................ 1,602,919
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
11
<PAGE> 12
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS January 31, 2000 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENT (0.3%)
REPURCHASE AGREEMENT
$ 445 The Bank of New York
(dated 01/31/00; proceeds $445,259) (e)
(Identified Cost $445,188).......... 5.75% 02/01/00 $ 445,188
------------
TOTAL INVESTMENTS
(Identified Cost $208,238,499) (f)............... 98.1% 128,820,032
OTHER ASSETS IN EXCESS OF LIABILITIES............ 1.9 2,464,842
----- ------------
NET ASSETS...................................... 100.0% $131,284,874
===== ============
</TABLE>
- ---------------------
* Resale is restricted to qualified institutional investors.
+ Payment-in-kind security.
++ Currently a zero coupon bond and will pay interest at the rate shown at a
future specified date.
(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 $427,463 U.S. Treasury Bond 7.875% due 11/15/07 valued at
$444,736 and $9,627 U.S. Treasury Note 5.625% due 02/15/06 valued at
$9,357.
(f) The aggregate cost for federal income tax purposes approximates identified
cost. The aggregate gross unrealized appreciation is $4,571,823 and the
aggregate gross unrealized depreciation is $83,990,290, resulting in net
unrealized depreciation of $79,418,467.
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
January 31, 2000 (unaudited)
ASSETS:
Investments in securities, at value
(identified cost $208,238,499)......... $128,820,032
Interest receivable..................... 3,333,953
Prepaid expenses and other assets....... 7,001
------------
TOTAL ASSETS........................ 132,160,986
------------
LIABILITIES:
Payable for:
Investments purchased............... 650,000
Investment management fee........... 83,743
Payable to bank......................... 2,717
Accrued expenses and other payables..... 139,652
------------
TOTAL LIABILITIES................... 876,112
------------
NET ASSETS.......................... $131,284,874
============
COMPOSITION OF NET ASSETS:
Paid-in-capital......................... $322,366,860
Net unrealized depreciation............. (79,418,467)
Accumulated undistributed net investment
income................................. 1,209,602
Accumulated net realized loss........... (112,873,121)
------------
NET ASSETS.......................... $131,284,874
============
NET ASSET VALUE PER SHARE,
35,355,707 shares outstanding
(unlimited shares authorized of $.01
par value)............................. $3.71
============
</TABLE>
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the six months ended January 31, 2000 (unaudited)
NET INVESTMENT INCOME:
INTEREST INCOME.......................... $ 11,111,555
------------
EXPENSES
Investment management fee................ 521,938
Transfer agent fees and expenses......... 54,867
Professional fees........................ 38,290
Shareholder reports and notices.......... 32,629
Registration fees........................ 16,341
Custodian fees........................... 7,513
Trustees' fees and expenses.............. 7,271
Other.................................... 6,672
------------
TOTAL EXPENSES....................... 685,521
------------
NET INVESTMENT INCOME................ 10,426,034
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................ (3,399,186)
Net change in unrealized depreciation.... (15,474,209)
------------
NET LOSS............................. (18,873,395)
------------
NET DECREASE............................. $ (8,447,361)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
13
<PAGE> 14
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, 2000 JULY 31, 1999
- -------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income................................. $ 10,426,034 $ 23,054,961
Net realized loss..................................... (3,399,186) (3,577,713)
Net change in unrealized depreciation................. (15,474,209) (41,208,726)
------------ ------------
NET DECREASE...................................... (8,447,361) (21,731,478)
Dividends from net investment income.................. (11,548,038) (24,158,368)
Decrease from transactions in shares of beneficial
interest............................................. (901,722) --
------------ ------------
NET DECREASE...................................... (20,897,121) (45,889,846)
NET ASSETS:
Beginning of period................................... 152,181,995 198,071,841
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$1,209,602 and $2,331,606, respectively).......... $131,284,874 $152,181,995
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE> 15
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS January 31, 2000 (unaudited)
1. ORGANIZATION AND ACCOUNTING POLICIES
Morgan Stanley Dean Witter 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"), 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
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS January 31, 2000 (unaudited) continued
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.
16
<PAGE> 17
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS January 31, 2000 (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, 2000, aggregated
$23,349,867 and $26,202,149, respectively.
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Trust's transfer agent. At January 31, 2000, the Trust had transfer agent
fees and expenses payable of approximately $300.
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, 2000
included in Trustees' fees and expenses in the Statement of Operations amounted
to $2,937. At January 31, 2000, the Trust had an accrued pension liability of
$52,723, 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, 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
Treasury shares purchased and retired (weighted average
discount 5.06%)*........................................... (255,600) (2,556) (899,166)
---------- -------- ------------
Balance, January 31, 2000................................... 35,355,707 $353,557 $322,013,303
========== ======== ============
</TABLE>
- ---------------------
* The Trustees have voted to retire the shares purchased.
17
<PAGE> 18
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS January 31, 2000 (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 25, 2000 $0.0475 February 4, 2000 February 18, 2000
February 22, 2000 $0.0475 March 3, 2000 March 17, 2000
</TABLE>
6. FEDERAL INCOME TAX STATUS
At July 31, 1999, the Trust a had 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.
At 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.
18
<PAGE> 19
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, 2000 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period.................... $ 4.27 $ 5.56 $ 5.83 $ 5.97 $ 6.08 $ 6.31
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income.................................. 0.29 0.65 0.73 0.73 0.73 0.70
Net realized and unrealized loss....................... (0.53) (1.26) (0.26) (0.11) (0.17) (0.21)
------ ------ ------ ------ ------ ------
Total income (loss) from investment operations.......... (0.24) (0.61) 0.47 0.62 0.56 0.49
------ ------ ------ ------ ------ ------
Less dividends from net investment income............... (0.32) (0.68) (0.74) (0.76) (0.67) (0.72)
------ ------ ------ ------ ------ ------
Net asset value, end of period.......................... $ 3.71 $ 4.27 $ 5.56 $ 5.83 $ 5.97 $ 6.08
====== ====== ====== ====== ====== ======
Market value, end of period............................. $3.688 $5.438 $ 6.00 $6.688 $6.125 $6.125
====== ====== ====== ====== ====== ======
TOTAL RETURN+........................................... (26.69)%(1) 2.79% 0.52% 22.75% 11.31% 10.29%
RATIOS TO AVERAGE NET ASSETS:
Expenses................................................ 0.99%(2) 0.96% 0.90% 0.89% 0.91% 0.93%
Net investment income................................... 14.98%(2) 13.90% 12.69% 12.57% 12.06% 11.81%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands................. $131,285 $152,182 $198,072 $207,456 $212,759 $216,605
Portfolio turnover rate................................. 17%(1) 61% 104% 90% 89% 70%
</TABLE>
- ---------------------
+ Total 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
return does not reflect brokerage commissions.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
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
Semiannual Report
January 31, 2000
