<PAGE> 1
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II Two World Trade Center
LETTER TO THE SHAREHOLDERS July 31, 2000 New York, New York 10048
DEAR SHAREHOLDER:
The 12-month period ended July 31, 2000, proved to be an extremely difficult one
for high-yield bond investors, as the high-yield market remained mired in one of
its worst slumps in the past 20 years. Concern over a rapidly growing U.S.
economy and the threat of inflation prompted the Federal Reserve Board to
continue its policy of raising short-term interest rates. As a result of the
Fed's actions and the ensuing higher-interest-rate environment, the financial
markets became worried about a potential hard landing for the U.S. economy and
its effect on future corporate earnings. These fears resulted in an extremely
weak fixed-income market during 1999 and an increasingly volatile equity market
in the first half of 2000. As investors became more risk averse, we witnessed a
severe flight to quality in the fixed-income markets, with the high-yield sector
being hit exceptionally hard. Much as in the last major high-yield market
correction ten years ago, significant investor outflows have greatly exaggerated
the decline, creating an extremely oversold market.
Credit spreads within the fixed-income markets widened dramatically over the
past year and a half as investors came to favor higher-quality securities. As a
result of this flight to quality, the yield spread between high-yield bonds and
comparable U.S. government securities is now approaching its widest margin in
history. Spreads have also broadened between the different tiers within the
high-yield sector as investors have gravitated toward the highest-quality end of
the marketplace. As a result of this trend, lower-yielding, higher-quality
BB-rated bonds have held up significantly better than those in the
higher-yielding, lower-quality B-rated sector. Much as we saw in the high-yield
bear market of 1989 and 1990, investors' reactions have resulted in a sharp
decline in the prices of many high-yield bonds, driving market yields
substantially higher in the process so that yield spreads on many B-rated bonds
are approaching their highest levels on record.
<PAGE> 2
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
LETTER TO THE SHAREHOLDERS July 31, 2000, continued
PERFORMANCE
For the 12-month period ended July 31, 2000, Morgan Stanley Dean Witter High
Income Advantage Trust II produced a total return of -13.46 percent, based on a
change in net asset value (NAV) and reinvestment of distributions totaling
$0.6095 per share. For the same period, the Trust's total return was -14.25
percent, based on a change in its market price on the New York Stock Exchange
(NYSE) and reinvestment of distributions.
PORTFOLIO STRATEGY
As discussed, the past year and a half has been one of the most difficult
periods for the high-yield market, particularly the B-rated sector, the market's
largest one. As a result of the substantial weakness in the high-yield market,
we have seen high-yield bond prices decline sharply and yields rise dramatically
over this period. Although the Trust's position in the more defensive,
higher-quality end of the market held up relatively well in the turbulent market
environment, its long-term core position in the B-rated sector was adversely
affected over the past year. With yields on many high-yield issues at or near
10-year highs and currently trading at significant discounts to their stated
maturity value, we currently view the high-yield sector as extremely
undervalued, although the timing of a recovery is still very uncertain at this
point. As the market outlook improves over time, we would expect to see investor
flows turn positive once again, creating strong demand for many of today's
depressed high-yield bonds. In light of our positive long-term outlook based on
historically low valuations, we are maintaining our focus on this sector of the
market, which we believe offers the Trust long-term total return potential.
From an industry perspective we view the telecommunications sector as a
potentially rewarding investment opportunity, given the worldwide movement
toward providing expanded global telecommunications services, including voice,
video and data services over a combination of hardline and wireless networks.
The powerful combination of exciting growth prospects for the industry over the
next few years, along with the likelihood of the formation of strategic
partnerships with other major players, provides a fundamental backdrop for
strong revenue growth, higher profitability and future significant credit
improvement. Included among the Trust's current holdings are a number of telecom
companies that over the past year have either announced important strategic
partnerships or have raised equity capital to fuel future growth and profits.
With the recent high-yield market weakness we have seen many of these telecom
bonds decline sharply in price as investor nervousness spreads to this large but
volatile sector of the market. Despite the recent sector weakness, we view the
2
<PAGE> 3
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
LETTER TO THE SHAREHOLDERS July 31, 2000, continued
longer-term prospects of this important industry very positively and feel that
at today's currently depressed levels many of these bonds represent outstanding
investment opportunities.
LOOKING AHEAD
In light of today's substantially higher yields, near-record yield spreads over
U.S. government bonds and significantly discounted bond prices, we view the
high-yield market as a potentially rewarding long-term investment opportunity.
Assuming a soft landing in the economy with growth continuing into 2001, we
would expect the high-yield market to recover over time and bond prices to
rebound from their current extremely depressed levels, much as they did in the
early 1990s period following the last high-yield bear market. Although the
B-rated segment of the market has clearly not been a good investment performer
over the past 18 months, we remain confident that its attractive yield and
capital 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 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, 2000
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS (95.5%)
Aerospace (1.1%)
$ 1,500 Sabreliner Corp. - 144A*............. 11.00 % 06/15/08 $ 1,241,250
------------
Beverages-Non-Alcoholic (2.1%)
3,000 Sparkling Spring Water (Canada)...... 11.50 11/15/07 2,340,000
------------
Books/Magazines (0.6%)
750 Perry-Judds, Inc. ................... 10.625 12/15/07 645,000
------------
Broadcast/Media (0.6%)
800 Tri-State Outdoor Mediagroup,
Inc. ................................ 11.00 05/15/08 720,000
------------
Broadcasting (0.9%)
450 STC Broadcasting, Inc. .............. 11.00 03/15/07 445,500
650 XM Satellite Radio Inc. - 144A*
(Units)++........................... 14.00 03/15/10 607,750
------------
1,053,250
------------
Cable Television (0.8%)
9,000 Australis Holdings Property Ltd.
(Australia) (a)...................... 15.00++ 11/01/02 90,000
1,500 Knology Holdings, Inc. .............. 11.875++ 10/15/07 795,000
------------
885,000
------------
Casino/Gambling (6.1%)
7,500 Aladdin Gaming Capital Corp. (Series
B).................................. 13.50++ 03/01/10 4,500,000
4,500 Fitzgeralds Gaming Corp. (Series B)
(b)................................. 12.25 12/15/04 2,385,000
------------
6,885,000
------------
Cellular Telephone (1.1%)
650 Dobson/Sygnet Communications......... 12.25 12/15/08 669,500
1,750 Dolphin Telecom PLC (United
Kingdom)............................ 14.00++ 05/15/09 577,500
------------
1,247,000
------------
Construction/Agricultural Equipment/Trucks
(1.7%)
2,000 J.B. Poindexter & Co., Inc. ......... 12.50 05/15/04 1,890,000
------------
Consumer Electronics/Appliances
(0.7%)
9,945 International Semi-Tech
Microelectronics, Inc. (Canada)
(a)................................. 11.50++ 08/15/03 99,450
650 Windmere-Durable Holdings, Inc. ..... 10.00 07/31/08 637,000
------------
736,450
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE> 5
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Consumer Specialties (1.5%)
$ 2,000 Samsonite Corp. ..................... 10.75 % 06/15/08 $ 1,655,000
------------
Consumer/Business Services (3.5%)
800 Anacomp, Inc. (Series B)............. 10.875 04/01/04 540,000
1,000 Anacomp, Inc. (Series D)............. 10.875 04/01/04 675,000
2,003 Comforce Corp. (Series B)............ 15.00+ 12/01/09 600,961
4,000 Comforce Operating, Inc. ............ 12.00 12/01/07 2,160,000
------------
3,975,961
------------
Containers/Packaging (2.3%)
650 Berry Plastics Corp. ................ 11.00 07/15/07 596,375
3,000 Envirodyne Industries, Inc. ......... 10.25 12/01/01 2,025,000
------------
2,621,375
------------
Diversified Electronic Products
(0.9%)
1,500 High Voltage Engineering, Inc. ...... 10.75 08/15/04 1,035,000
------------
Diversified Manufacturing (5.9%)
1,400 Eagle-Picher Industries, Inc. ....... 9.375 03/01/08 1,169,000
8,536 Jordan Industries, Inc. (Series B)... 11.75++ 04/01/09 5,463,040
------------
6,632,040
------------
E.D.P. Services (0.9%)
1,300 Globix Corp. ........................ 12.50 02/01/10 1,027,000
------------
Electronic Distributors (0.1%)
3,000 CHS Electronics, Inc. (a)(b)......... 9.875 04/15/05 60,000
------------
Environmental Services (1.1%)
1,400 Allied Waste North America Inc.
(Series B).......................... 10.00 08/01/09 1,221,500
------------
Food Chains (1.0%)
650 Eagle Food Centers, Inc. (a)(b)...... 8.625 04/15/00 338,000
800 Pueblo Xtra International, Inc. ..... 9.50 08/01/03 400,000
750 Pueblo Xtra International, Inc.
(Series C)........................... 9.50 08/01/03 375,000
------------
1,113,000
------------
Food Distributors (1.9%)
1,500 Fleming Companies, Inc. (Series B)... 10.625 07/31/07 1,293,750
900 Volume Services America, Inc. ....... 11.25 03/01/09 823,500
------------
2,117,250
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 6
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Hotels/Resorts (1.6%)
$ 1,500 Epic Resorts LLC (Series B).......... 13.00 % 06/15/05 $ 525,000
1,802 Resort At Summerlin (Series B)....... 13.00 12/15/07 1,261,386
------------
1,786,386
------------
Industrial Specialties (2.1%)
800 Indesco International, Inc. ......... 9.75 04/15/08 304,000
800 International Wire Group, Inc. ...... 11.75 06/01/05 800,000
1,500 Outsourcing Services Group, Inc.
(Series B).......................... 10.875 03/01/06 1,200,000
------------
2,304,000
------------
Internet Services (0.6%)
300 Cybernet Internet Services Inc. ..... 14.00 07/01/09 126,000
650 PSINet, Inc. ........................ 10.50 12/01/06 526,500
------------
652,500
------------
Medical Specialties (2.2%)
2,300 Mediq/PRN Life Support Services, Inc.
(b)................................. 11.00 06/01/08 115,000
2,500 Universal Hospital Services, Inc.
(issued 02/25/98)................... 10.25 03/01/08 1,450,000
1,500 Universal Hospital Services, Inc.
(issued 01/26/99)................... 10.25 03/01/08 870,000
------------
2,435,000
------------
Medical/Nursing Services (1.9%)
3,125 Pediatric Services of America, Inc.
(Series A).......................... 10.00 04/15/08 2,140,625
------------
Military/Gov't/Technical (0.5%)
800 Loral Space & Communications Ltd. ... 9.50 01/15/06 600,000
------------
Movies/Entertainment (0.4%)
2,000 Regal Cinemas Inc. .................. 9.50 06/01/08 400,000
------------
Office Equipment/Supplies (1.7%)
3,200 Mosler, Inc. ........................ 11.00 04/15/03 1,920,000
------------
Oil Refining/Marketing (0.0%)
4,000 Transamerican Refining Corp. (Series
B) (a)(b)........................... 16.00 06/30/03 50,000
------------
Other Telecommunications (13.2%)
3,000 Birch Telecom Inc. .................. 14.00 06/15/08 2,400,000
1,500 DTI Holdings, Inc. (Series B)........ 12.50++ 03/01/08 585,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE> 7
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 750 Esprit Telecom Group PLC (United
Kingdom)............................ 11.50 % 12/15/07 $ 540,000
1,400 Esprit Telecom Group PLC (United
Kingdom)............................ 10.875 06/15/08 938,000
4,600 Firstworld Communications, Inc. ..... 13.00++ 04/15/08 1,426,000
650 Globenet Comm Group Ltd. (Bermuda)... 13.00 07/15/07 659,750
800 Pac-West Telecomm Inc. .............. 13.50 02/01/09 808,000
1,500 Primus Telecommunication Group, Inc.
(Series B).......................... 9.875 05/15/08 825,000
1,100 Primus Telecommunications Group,
Inc. ................................ 12.75 10/15/09 671,000
650 Versatel Telecom International NV
(Netherlands)....................... 13.25 05/15/08 666,250
1,900 Viatel, Inc. ........................ 11.25 04/15/08 1,178,000
650 Viatel, Inc. (issued 03/19/99) ...... 11.50 03/15/09 403,000
600 Viatel, Inc. (issued 12/08/99) ...... 11.50 03/15/09 372,000
3,000 World Access, Inc. (c)............... 13.25 01/15/08 2,670,000
650 Worldwide Fiber Inc. (Canada)........ 12.00 08/01/09 604,500
------------
14,746,500
------------
Package Goods/Cosmetics (1.8%)
2,015 J.B. Williams Holdings, Inc. ........ 12.00 03/01/04 1,994,850
------------
Printing/Forms (0.1%)
1,500 Premier Graphics Inc. (b)............ 11.50 12/01/05 105,000
------------
Restaurants (6.0%)
16,077 American Restaurant Group Holdings,
Inc. - 144A* (c).................... 0.00 12/15/05 4,582,059
4,000 FRD Acquisition Corp. (Series B)..... 12.50 07/15/04 1,480,000
800 Friendly Ice Cream Corp. ............ 10.50 12/01/07 666,000
------------
6,728,059
------------
Retail-Specialty (1.3%)
800 Pantry, Inc. ........................ 10.25 10/15/07 772,000
750 Petro Stopping Centers L.P. ......... 10.50 02/01/07 671,250
------------
1,443,250
------------
Specialty Foods/Candy (2.6%)
20,607 SFAC New Holdings Inc. (c)........... 13.00++ 06/15/09 2,884,965
------------
Telecommunications (12.3%)
650 Caprock Communications Corp. ........ 11.50 05/01/09 474,500
650 Caprock Communications Corp. (Series
B).................................. 12.00 07/15/08 487,500
750 Covad Communications Group, Inc. .... 12.50 02/15/09 570,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE> 8
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 2000, continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
-------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 700 Covad Communication Group, Inc.
(Series B).......................... 12.00 % 02/15/10 $ 518,000
3,700 e. Spire Communications, Inc. ....... 13.75 07/15/07 2,405,000
1,500 Focal Communications Corp. (Series
B)................................... 12.125++ 02/15/08 1,012,500
800 GST Equipment Funding, Inc. (a)...... 13.25 05/01/07 420,000
650 Hyperion Telecommunication, Inc.
(Series B).......................... 12.25 09/01/04 637,000
650 Level 3 Communications, Inc. ........ 9.125 05/01/08 562,250
650 MGC Communications, Inc. - 144A*..... 13.00 04/01/10 604,500
650 Nextlink Communications LLC.......... 12.50 04/15/06 669,500
26,300 Normex Technologies Corp. (Series B)
(a)(b).............................. 14.00 05/15/02 2,104,000
2,400 Rhythms Netconnections, Inc. ........ 12.75 04/15/09 1,584,000
650 Startec Global Communications
Corp. ............................... 12.00 05/15/08 520,000
1,400 Talton Holdings, Inc. (Series B)..... 11.00 06/30/07 1,190,000
------------
13,758,750
------------
Wireless Communications (12.4%)
5,500 Advanced Radio Telecom Corp. ........ 14.00 02/15/07 4,840,000
1,300 AMSC Acquisition Co., Inc. (Series
B)................................... 12.25 04/01/08 968,500
400 Arch Escrow Corp. ................... 13.75 04/15/08 320,000
10,000 CellNet Data Systems, Inc. (a)....... 14.00++ 10/01/07 700,000
500 Globalstar LP/Capital Corp. ......... 10.75 11/01/04 135,000
1,000 Globalstar LP/Capital Corp. ......... 11.50 06/01/05 280,000
1,600 Orbcomm Global LP/Capital Corp.
(Series B).......................... 14.00 08/15/04 560,000
2,300 Paging Network, Inc. (b)............. 10.125 08/01/07 920,000
3,400 Paging Network, Inc. (b)............. 10.00 10/15/08 1,360,000
2,920 USA Mobile Communications Holdings,
Inc. ............................... 14.00 11/01/04 2,511,200
1,350 Winstar Communications,
Inc. - 144A*......................... 12.75 04/15/10 1,255,500
------------
13,850,200
------------
TOTAL CORPORATE BONDS
(Cost $179,353,925)....................................... 106,901,161
------------
<CAPTION>
NUMBER OF
SHARES
---------
<C> <S> <C>
COMMON STOCKS (d) (0.7%)
Casino/Gambling (0.0%)
3,000 Fitzgeralds Gaming Corp. ................................. 3
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE> 9
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 2000, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------------------------------------------------------------------------------------
<C> <S> <C>
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)............................. 2,590
------------
Motor Vehicles (0.0%)
91 Northern Holdings Industrial Corp. (c).................... --
------------
Other Telecommunications (0.6%)
20,001 Versatel Telecom International NV (ADR) Netherlands....... 640,032
9,426 World Access, Inc. (c).................................... 84,834
------------
724,866
------------
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
------------
Telecommunication 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
(Cost $22,157,463)........................................ 804,180
------------
PREFERRED STOCKS (0.7%)
Oil Refining/Marketing (0.0%)
7,021 Transamerica Refining Corp. (Conv.) (Class B)*............ 70
3,862 Transamerica Refining Corp. (Conv.) (Class C)*............ 39
10,180 Transamerica Refining Corp. (Conv.) (Class D)*............ 102
21,063 Transamerica Refining Corp. (Conv.) (Class E)*............ 210
------------
421
------------
Restaurants (0.2%)
1,258 American Restaurant Group Holdings, Inc. (Series B)....... 251,600
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE> 10
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 2000, continued
<TABLE>
<CAPTION>
NUMBER OF
SHARES VALUE
-------------------------------------------------------------------------------------
<C> <S> <C>
Telecommunication Equipment (0.5%)
1,120,000 FWT, Inc. (Series A) (c).................................. $ 560,000
------------
TOTAL PREFERRED STOCKS
(Cost $5,925,068)......................................... 812,021
------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE
--------- ----------
<C> <S> <C> <C>
WARRANTS (d) (0.3%)
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 3,000
-----------
Oil Refining/Marketing (0.0%)
4,000 Transamerican Refining Corp. - 144A*.......... 06/30/03 4
-----------
Other Telecommunications (0.2%)
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 92,000
-----------
257,075
-----------
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 2,275
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE> 11
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
PORTFOLIO OF INVESTMENTS July 31, 2000, continued
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION
WARRANTS DATE VALUE
-------------------------------------------------------------------------------------
<C> <S> <C> <C>
Wireless Communications (0.0%)
1,300 Motient Corp. - 144A*......................... 04/01/08 $ 52,000
-----------
TOTAL WARRANTS
(Cost $279,935)........................................... 374,994
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE
--------- ------- ---------
<C> <S> <C> <C> <C>
SHORT-TERM INVESTMENT (0.3%)
REPURCHASE AGREEMENT
$ 284 The Bank of New York (dated 07/31/00;
proceeds $283,578) (e)
(Cost $283,527)...................... 6.50% 08/01/00 283,527
-----------
TOTAL INVESTMENTS
(Cost $207,999,918) (f)......................... 97.5% 109,175,883
OTHER ASSETS IN EXCESS OF LIABILITIES............ 2.5 2,838,173
---- -----------
NET ASSETS....................................... 100.0% $112,014,056
====== ===========
</TABLE>
---------------------
<TABLE>
<C> <S>
ADR American Depository Receipt.
* Resale is restricted to qualified institutional investors.
++ Consists of one or more class of securities traded together
as a unit; stocks or bonds with attached warrants.
+ 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 $285,122 U.S. Treasury Note 5.875% due
02/15/04 valued at $289,198.
(f) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes. The
aggregate gross unrealized appreciation is $1,872,423 and
the aggregate gross unrealized depreciation is $100,696,458,
resulting in net unrealized depreciation of $98,824,035.
</TABLE>
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, 2000
ASSETS:
Investments in securities, at value
(cost $207,999,918)........................................ $ 109,175,883
Interest receivable......................................... 3,034,833
Prepaid expenses and other assets........................... 22,358
-------------
TOTAL ASSETS............................................ 112,233,074
-------------
LIABILITIES:
Investment management fee payable........................... 73,273
Accrued expenses and other payables......................... 145,745
-------------
TOTAL LIABILITIES....................................... 219,018
-------------
NET ASSETS.............................................. $ 112,014,056
=============
COMPOSITION OF NET ASSETS:
Paid-in-capital............................................. $ 292,813,703
Net unrealized depreciation................................. (98,824,035)
Accumulated undistributed net investment income............. 1,122,168
Accumulated net realized loss............................... (83,097,780)
-------------
NET ASSETS.............................................. $ 112,014,056
=============
NET ASSET VALUE PER SHARE,
35,300,507 shares outstanding
(unlimited shares authorized of $.01 par value)............ $3.17
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
12
<PAGE> 13
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
FINANCIAL STATEMENTS, continued
<TABLE>
<S> <C>
STATEMENT OF OPERATIONS
For the year ended July 31, 2000
NET INVESTMENT INCOME:
INTEREST INCOME............................................. $ 21,664,724
------------
EXPENSES
Investment management fee................................... 982,844
Transfer agent fees and expenses............................ 98,942
Professional fees........................................... 76,474
Shareholder reports and notices............................. 34,924
Registration fees........................................... 32,519
Trustees' fees and expenses................................. 17,240
Custodian fees.............................................. 12,350
Other....................................................... 6,737
------------
TOTAL EXPENSES.......................................... 1,262,030
------------
NET INVESTMENT INCOME................................... 20,402,694
------------
NET REALIZED AND UNREALIZED LOSS:
Net realized loss........................................... (2,977,153)
Net change in unrealized depreciation....................... (34,879,777)
------------
NET LOSS................................................ (37,856,930)
------------
NET DECREASE................................................ $(17,454,236)
============
</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 YEAR FOR THE YEAR
ENDED ENDED
JULY 31, 2000 JULY 31, 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.................................. $ 20,402,694 $ 23,054,961
Net realized loss...................................... (2,977,153) (3,577,713)
Net change in unrealized depreciation.................. (34,879,777) (41,208,726)
------------ ------------
NET DECREASE....................................... (17,454,236) (21,731,478)
Dividends to shareholders from net investment income... (21,612,132) (24,158,368)
Decrease from transactions in shares of beneficial
interest.............................................. (1,101,571) --
------------ ------------
NET DECREASE....................................... (40,167,939) (45,889,846)
NET ASSETS:
Beginning of period.................................... 152,181,995 198,071,841
------------ ------------
END OF PERIOD
(Including undistributed net investment income of
$1,122,168 and $2,331,606, respectively)........... $112,014,056 $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 July 31, 2000
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 portfolio security listed or traded
on the New York or American Stock Exchange, NASDAQ, or other exchange is valued
at its latest sale price, 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; (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 securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
15
<PAGE> 16
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS July 31, 2000, continued
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted over the life of the respective securities. Interest
income is accrued daily except where collection is not expected.
C. FEDERAL INCOME TAX STATUS -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Trust records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their federal tax-basis treatment;
temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
2. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an Investment Management Agreement with the Investment Manager, the
Trust pays the Investment Manager a management fee, calculated weekly and
payable monthly, by applying the following annual rates to the Trust's weekly
net assets: 0.75% to the portion of weekly net assets not exceeding $250
million; 0.60% to the portion of weekly net assets exceeding $250 million but
not exceeding $500 million; 0.50% to the portion of weekly net assets exceeding
$500 million but not exceeding $750 million; 0.40% to the portion of weekly net
assets exceeding $750 million but not exceeding $1 billion; and 0.30% to the
portion of weekly net assets exceeding $1 billion.
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, 2000, aggregated $34,505,367
and $42,633,013, respectively.
16
<PAGE> 17
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS July 31, 2000, continued
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Investment Manager, is
the Trust's transfer agent. At July 31, 2000, the Trust had transfer agent fees
and expenses payable of approximately $200.
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, 2000 included in
Trustees' fees and expenses in the Statement of Operations amounted to $5,841.
At July 31, 2000, the Trust had an accrued pension liability of $53,132, 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 4.65%)*........................................... (310,800) (3,108) (1,098,463)
Reclassification due to permanent book/tax differences...... -- -- (29,353,308)
---------- -------- ------------
Balance, July 31, 2000...................................... 35,300,507 $353,005 $292,460,698
========== ======== ============
</TABLE>
---------------------
* The Trustees have voted to retire the shares purchased.
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 25, 2000 $0.0475 August 4, 2000 August 18, 2000
August 29, 2000 $0.0475 September 8, 2000 September 22, 2000
</TABLE>
17
<PAGE> 18
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
NOTES TO FINANCIAL STATEMENTS July 31, 2000, continued
6. FEDERAL INCOME TAX STATUS
At July 31, 2000, the Trust had a net capital loss carryover of approximately
$79,388,000, which may be used to offset future capital gains to the extent
provided by regulations, which is available through July 31 of the following
years:
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS
---------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007 2008
--------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$8,278 $23,309 $20,038 $9,296 $11,478 $4,331 $2,658
====== ======= ======= ====== ======= ====== ======
</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 $401,000 during fiscal 2000.
As of July 31, 2000, 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 $29,353,308.
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 YEAR ENDED JULY 31
----------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------
<S> <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
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income...................................... 0.58 0.65 0.73 0.73 0.73
Net realized and unrealized loss........................... (1.07) (1.26) (0.26) (0.11) (0.17)
-------- -------- -------- -------- --------
Total income (loss) from investment operations.............. (0.49) (0.61) 0.47 0.62 0.56
-------- -------- -------- -------- --------
Less dividends from net investment income................... (0.61) (0.68) (0.74) (0.76) (0.67)
-------- -------- -------- -------- --------
Net asset value, end of period.............................. $ 3.17 $ 4.27 $ 5.56 $ 5.83 $ 5.97
======== ======== ======== ======== ========
Market value, end of period................................. $ 4.00 $ 5.438 $ 6.00 $ 6.688 $ 6.125
======== ======== ======== ======== ========
TOTAL RETURN+............................................... (14.25)% 2.79% 0.52% 22.75% 11.31%
RATIOS TO AVERAGE NET ASSETS:
Expenses.................................................... 0.96% 0.96% 0.90% 0.89% 0.91%
Net investment income....................................... 15.59% 13.90% 12.69% 12.57% 12.06%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands..................... $112,014 $152,182 $198,072 $207,456 $212,759
Portfolio turnover rate..................................... 27% 61% 104% 90% 89%
</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.
SEE NOTES TO FINANCIAL STATEMENTS
19
<PAGE> 20
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF MORGAN STANLEY DEAN WITTER HIGH
INCOME ADVANTAGE TRUST II
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Dean Witter High Income Advantage Trust II (the "Trust"), including the
portfolio of investments, as of July 31, 2000, and the related statements of
operations and changes in net assets, and financial highlights for the year then
ended. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets for the year ended July 31, 1999
and the financial highlights for each of the respective stated periods ended
July 31, 1999 were audited by other auditors whose report, dated September 10,
1999, expressed an unqualified opinion on that statement and the financial
highlights.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. Our procedures included confirmation of securities owned at July 31,
2000 by correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Morgan Stanley Dean
Witter High Income Advantage Trust II as of July 31, 2000, the results of its
operations, the changes in its net assets and the financial highlights for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
Deloitte & Touche LLP
New York, New York
September 8, 2000
20
<PAGE> 21
MORGAN STANLEY DEAN WITTER HIGH INCOME ADVANTAGE TRUST II
CHANGE IN INDEPENDENT ACCOUNTANTS
On July 1, 2000 PricewaterhouseCoopers LLP resigned as independent accountants
of the Trust.
The reports of PricewaterhouseCoopers LLP on the financial statements of the
Trust for the past two fiscal years contained no adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle.
In connection with its audits for the two most recent fiscal years and through
July 1, 2000, there have been no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
The Trust, with the approval of its Board of Trustees and its Audit Committee,
engaged Deloitte & Touche LLP as its new independent accountants as of July 1,
2000.
21
<PAGE> 22
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<PAGE> 23
(This Page Intentionally Left Blank)
<PAGE> 24
TRUSTEES
----------------------------------
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
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
----------------------------------
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
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, 2000
