UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-21842
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First Trust Strategic High Income Fund II
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
Registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: October 31
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Date of reporting period: April 30, 2012
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
STRATEGIC
HIGH INCOME
FUND II
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
APRIL 30, 2012
FIRST TRUST BROOKFIELD
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TABLE OF CONTENTS
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
SEMI-ANNUAL REPORT
APRIL 30, 2012
Shareholder Letter......................................................... 1
At A Glance................................................................ 2
Portfolio Commentary ...................................................... 3
Portfolio of Investments................................................... 6
Statement of Assets and Liabilities........................................ 14
Statement of Operations.................................................... 15
Statements of Changes in Net Assets........................................ 16
Statement of Cash Flows.................................................... 17
Financial Highlights....................................................... 18
Notes to Financial Statements.............................................. 19
Additional Information..................................................... 28
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Brookfield Investment Management Inc.
("Brookfield" or the "Sub-Advisor") and their respective representatives, taking
into account the information currently available to them. Forward-looking
statements include all statements that do not relate solely to current or
historical fact. For example, forward-looking statements include the use of
words such as "anticipate," "estimate," "intend," "expect," "believe," "plan,"
"may," "should," "would" or other words that convey uncertainty of future events
or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Strategic High Income Fund II (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and/or
Sub-Advisor and their respective representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of certain other risks of investing in the
Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Brookfield are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2012
Dear Shareholders:
I am pleased to present you with the semi-annual report for your investment in
First Trust Strategic High Income Fund II (the "Fund").
The report you hold contains detailed information about your investment; a
portfolio commentary from the Fund's management team that provides a recap of
the period; a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the period this report covers.
I encourage you to read this document and discuss it with your financial
advisor. A successful investor is also typically a knowledgeable one, as we have
found to be the case at First Trust.
First Trust remains committed to being a long-term investor and investment
manager and to bringing you quality financial solutions regardless of market ups
and downs. We have always believed, as I have written previously, that there are
two ways to attain success in reaching your financial goals: staying invested in
quality products and having a long-term investment horizon. We are committed to
this approach in the products we manage or supervise and offer to investors.
As you know, First Trust offers a variety of products that we believe could fit
many financial plans to help investors seeking long-term investment success. We
encourage you to talk to your advisor about the other investments First Trust
offers that might also fit your financial goals and to discuss those goals with
your advisor regularly so that he or she can help keep you on track.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals. I look forward to
the remainder of 2012 and to the next edition of your Fund's report.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees of First Trust Strategic High Income Fund II
and Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST STRATEGIC HIGH INCOME FUND II
"AT A GLANCE"
AS OF APRIL 30, 2012 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FHY
Common Share Price $17.34
Common Share Net Asset Value ("NAV") $16.69
Premium (Discount) to NAV 3.89%
Net Assets Applicable to Common Shares $135,437,434
Current Monthly Distribution per Common Share (1) $0.1300
Current Annualized Distribution per Common Share $1.5600
Current Distribution Rate on Closing Common Share Price (2) 9.00%
Current Distribution Rate on NAV (2) 9.35%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)(5)
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Common Share Price NAV
4/11 15.48 17.16
15.15 17.16
15.69 17.22
15.66 17.34
5/11 15.87 17.28
15.63 17.10
15.54 16.95
15.12 16.80
6/11 15.60 16.77
15.45 16.80
15.60 16.98
15.39 16.95
15.54 17.04
7/11 15.27 17.01
14.40 16.47
14.10 15.78
14.10 15.99
8/11 14.22 15.78
14.52 15.99
14.22 15.96
14.43 15.90
14.10 15.48
9/11 13.83 15.09
13.12 14.84
13.46 15.29
13.75 15.65
14.53 16.18
10/11 14.51 16.17
14.22 16.03
14.44 15.88
14.35 15.73
11/11 14.23 15.48
14.44 15.68
14.57 15.81
14.50 15.81
15.12 15.91
12/11 15.28 16.00
15.08 16.02
15.15 16.14
15.71 16.28
1/12 16.20 16.51
16.63 16.49
16.89 16.42
16.60 16.53
2/12 17.66 16.64
17.48 16.62
17.41 16.52
17.06 16.56
17.15 16.56
3/12 17.31 16.62
17.07 16.49
17.09 16.45
17.36 16.54
17.35 16.67
4/12 17.34 16.69
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PERFORMANCE
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Average Annual Total Return
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6 Months Ended 1 Year Ended 5 Years Ended Inception (3/28/2006)
4/30/2012 4/30/2012 4/30/2012 to 4/30/2012
FUND PERFORMANCE (3)
NAV 8.34% 8.89% -10.30% -6.28%
Market Value 25.44% 25.41% -10.36% -6.40%
INDEX PERFORMANCE
Barclays Capital Ba U.S. High Yield Index 6.46% 7.53% 9.03% 9.16%
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Corporate Bonds and Notes 79.3%
Residential Mortgage-Backed Securities 8.8
Foreign Corporate Bonds and Notes 5.6
Manufactured Housing Loans 3.1
Commercial Mortgage-Backed Securities 2.9
Senior Floating-Rate Loan Interests 0.3
Collateralized Debt Obligations 0.0*
Equity 0.0*
U.S. Government Agency Mortgage-Backed Securities 0.0*
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Total 100.0%
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* Amount is less than 0.1%.
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% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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AAA 1.0%
A- 1.1
BBB- 4.0
BB+ 6.4
BB 9.7
BB- 13.4
B+ 14.6
B 14.1
B- 17.2
CCC+ 9.8
CCC 1.3
CCC- 0.4
CC 3.7
C 1.8
D 1.1
NR 0.4
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Total 100.0%
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(1) Most recent distribution paid or declared through 4/30/2012. Subject to
change in the future. The distribution was increased subsequent to
4/30/2012. See Note 10-Subsequent Events in the Notes to Financial
Statements.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 4/30/2012. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.
(4) The credit quality and ratings information presented above reflects the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of the McGraw Hill Companies, Inc., Moody's Investors Service,
Inc. or a comparably rated NRSRO. For situations in which a security is
rated by more than one NRSRO and the ratings are not equivalent, the
highest ratings are used. Sub-investment grade ratings are those rated
BB+/Ba1 or lower. Investment grade ratings are those rated BBB-/Baa3 or
higher.
(5) All Common Share prices and NAVs have been adjusted as a result of the
1-for-3 reverse share split on September 30, 2011.
NR Not rated.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
SEMI-ANNUAL REPORT
APRIL 30, 2012
SUB-ADVISOR
BROOKFIELD INVESTMENT MANAGEMENT INC.
Brookfield Investment Management Inc. ("Brookfield") serves as the Fund's
Sub-Advisor. Brookfield is a wholly-owned subsidiary of Brookfield Asset
Management, a global alternative asset manager with approximately $150 billion
in assets under management as of March 31, 2012. Brookfield Asset Management has
over a 100-year history of owning and operating assets with a focus on property,
renewable power, infrastructure and private equity and also offers a range of
public and private investment products and services. On behalf of its clients,
Brookfield Asset Management is also an active investor in the public securities
markets.
The public market activities of Brookfield, an SEC-registered investment
advisor, complement the firm's core competencies as a direct investor. These
activities encompass global listed real estate and infrastructure equities,
corporate high-yield investments, opportunistic credit strategies and a
dedicated insurance asset management division. Headquartered in New York, NY,
Brookfield maintains offices and investment teams in Toronto, Chicago, Boston
and London.
PORTFOLIO MANAGEMENT TEAM
DANA E. ERIKSON, CFA
MANAGING DIRECTOR
Mr. Erikson, Senior Portfolio Manager and the Head of the Global High Yield
Team, is responsible for the firm's corporate high-yield exposures and the
establishment of portfolio objectives and strategies. Mr. Erikson joined
Brookfield in 2006 and has 25 years of investment experience. Prior to joining
the firm, he was with Evergreen Investments or one of its predecessor firms
since 1996. He was a senior portfolio manager and the Head of the High Yield
team. Prior to that, he was Head of High Yield Research. Mr. Erikson received a
Bachelor of Arts in Economics from Brown University and an MBA, with honors,
from Northeastern University. He is a member of the Boston Security Analysts
Society. He holds the Chartered Financial Analyst ("CFA") designation.
ANTHONY BREAKS, CFA
DIRECTOR
Mr. Breaks is a Portfolio Manager on the Securitized Products Investments team.
Mr. Breaks joined Brookfield in 2002 and is one of four team leaders in
mortgage-backed securities ("MBS") and asset-backed securities ("ABS") and is a
member of the team's securities analysis committee. In his role, Mr. Breaks is
one of the team's portfolio managers. Mr. Breaks also has managed securitized
product vehicles, such as structured investment vehicles ("SIVs"), asset-backed
commercial paper ("ABCP") and collateralized debt obligations ("CDOs") for
Brookfield and has experience in insurance company asset management. Mr. Breaks
earned a Bachelor of Science degree in Electrical Engineering from the
Massachusetts Institute of Technology. He holds the CFA designation.
COMMENTARY
FIRST TRUST STRATEGIC HIGH INCOME FUND II
The primary investment objective of the First Trust Strategic High Income Fund
II ("FHY" or the "Fund") is to seek a high level of current income. The Fund
seeks capital growth as a secondary objective. The Fund seeks to achieve its
investment objectives by investing in a diversified portfolio of
below-investment grade and investment grade debt securities and equity
securities that the Sub-Advisor believes offer attractive yield and/or capital
appreciation potential. There can be no assurance that the Fund will achieve its
investment objectives. The Fund may not be appropriate for all investors.
MARKET RECAP AND OUTLOOK
High Yield
Following a challenging summer, markets turned decidedly positive, producing
strong returns for the six-month period ended April 30, 2012. High-yield bonds
returned 6.5% as the spread narrowed from 707 basis points to 604 basis points.
In addition to spread narrowing, the yield on the benchmark 10-year U.S.
Treasury bond fell from 2.35% to 1.91%, which provided a tailwind for the
high-yield market. Equity returns, as measured by the Russell 2000 Index, were
positive at 11.03%. High-yield bonds tend to be positively correlated to the
Russell 2000 Index; therefore, we monitor the index closely.
In the fourth calendar quarter of 2011, markets recovered from a summer sell-off
which had been triggered by yet another bout of concern over the health of the
weaker European countries, particularly Greece. In the first calendar quarter of
2012, investors remained positive as fears of a double-dip recession in the U.S.
receded. At the end of the period, we saw a modest short-lived scare that the
Federal Reserve might not be able to keep interest rates low through 2014 as
promised. Despite this, the high-yield market turned in its strongest first
quarter performance since 2003.
Page 3
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PORTFOLIO COMMENTARY - (CONTINUED)
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The spread between high-yield bonds and the 10-year U.S. Treasury, which had
risen with recession fears in mid-2011, continued their recovery as confidence
in the U.S. economy returned. Current spreads of 604 basis points remain much
wider than the 400 - 500 basis points we would normally expect to see at this
point in the credit cycle. As such, we believe the market continues to represent
value to investors. Although, with the market as a whole now trading above par,
further price appreciation is likely to be limited. As is typical in a bull
market, the more volatile CCC-rated securities outperformed over the period,
returning 8.5%, compared with 5.9% from the more conservative BB-rated
securities.
Corporate credit has been sound for the past two years, and remained so, with
the default rate steady at 2.1%.(1) Note that this year's default rate of 2.1%
remains well below the market's 25-year average default rate of 4.2%.(2)
Credit ratings agencies confirmed the improving trend in corporate credit, by
upgrading 1.1 times as many high-yield companies as were downgraded in the past
12 months.(3) This means that credit is still improving, albeit at a slower rate
than before. We noted that companies reported generally good earnings through
the fourth quarter of 2011 (the latest reporting period); however, we saw some
decline in the rate of improvement, with more companies reporting pressure on
their costs.
Supply and demand was generally positive during the six-month reporting period
and high-yield mutual funds continued to experience strong inflows.(4) New issue
volume was strong as well, accelerating to an all-time quarterly record of $96.8
billion, up from $35.5 billion last quarter and above the previous record of
$81.8 billion posted in the second quarter of last year. Overall, with money
flooding into mutual funds, deals were oversubscribed and traded higher in the
aftermarket. Traders report that there seems to be ample cash available for
reasonably creditworthy names and report some challenges buying good quality
paper in the secondary market. The bulk of new issues are used to refinance debt
which has the effect of improving credit quality by eliminating near-term
maturities.
Brookfield has been positive on the high-yield market, noting the robust credit
quality, good corporate liquidity, and excellent progress on the part of
corporate treasurers in managing their debt structures. The high-yield market
agreed and returns were positive. As these fundamentals remain in place, we
continue to view the market favorably over the medium term, absent any changes
in the macro environment. Nonetheless, we also believe that significant further
potential upside appreciation is limited due to the decline in spreads and the
return of the average price of the market to above par. While we would typically
expect the spread to be 100 - 150 basis points narrower than current levels, we
note the unusually depressed level of the benchmark Treasury yields, which may
be artificially depressed due to actions by the Federal Reserve. With the market
trading at yield levels within 50 basis points of all-time lows, our enthusiasm
is somewhat tempered at this point.
Given our expectation of moderate economic growth, modestly increasing defaults,
although no general recession, we believe that high-yield investors are
adequately, although not generously compensated, at current yield spread levels.
We remain skeptical that the problems in Europe are permanently addressed, and
wonder if investors might not question the health of the United States' balance
sheet after the November election. With these risks outstanding, we expect
high-yield investors will continue to demand a premium to historical spreads, at
least for the next few quarters. For investors seeking to clip the current
coupon offered in the high-yield market, the investment landscape remains
attractive.
Securitized Products
Securitized Products performed well during the six-month period, with "Risk On"
being the dominant theme. Trading activity was brisk for the period as large
amounts of supply met strong demand from insurance companies and money managers.
Supply included the last of Maiden Lane II, the Fed's Special Purpose Vehicle
("SPV") that purchased AIG's structured assets during the 2008 crisis. Although
issuance of Residential Mortgage-Backed Securities ("RMBS") continued to be
light, there were three new issue deals announced in the first quarter, two with
new prime collateral and one with re-performing subprime collateral. Commercial
mortgage-backed securities ("CMBS") issuance continued its recovery with $4
billion in new deals this quarter.
Economic signs have been stronger in the U.S., especially as warm weather seems
to have pulled forward some of the consumption typically associated with a
second quarter spring thaw. Unemployment continues to fall and consumer
confidence is rising. Given the data and minutes from the Federal Open Market
Committee meeting, a third round of Fed bond buying, so called "QE3", now seems
unlikely. Government policy remains accommodative and the low-yield environment
is drawing investors toward higher yielding sectors such as RMBS and CMBS.
European news was generally mixed but the strong uptake of Long-Term Refinancing
Operations II ("LTRO") buoyed European markets and kept global investors feeling
bullish. This bullish sentiment has also caused yields to converge as the
premium for riskier assets has narrowed, which has increased our preference for
stability and income.
From a real estate fundamental perspective, our current projection for home
prices is a further decline of 6.2% for the 2012 year-end. This is a reduction
from our 9.2% decline projection at year-end. As we approach a nadir in the
national averages, we expect to see more regional real estate markets tighten
and for strategic default to look less appealing to underwater borrowers.
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(1) JP Morgan, High Yield Default Monitor, May 1, 2012 p. 2.
(2) JP Morgan, High Yield Default Monitor, May 1, 2012 p. 2.
(3) JP Morgan, High Yield Default Monitor, May 1, 2012 p. 10.
(4) Credit Suisse "Leveraged Finance Strategy Update," April 2, 2012, p. 2.
Page 4
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PORTFOLIO COMMENTARY - (CONTINUED)
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More than 90% of new mortgages, including refinancing, are now guaranteed by
Fannie Mae, Freddie Mac or Ginnie Mae, so any changes to government programs
could be an important driver of performance. Based on the published score card
memo, we now believe that the Federal Housing Finance Agency will begin
attempting to combine Fannie Mae and Freddie Mac and to sell first loss
protection in some future RMBS transactions. We also expect continued increases
in Ginnie Mae's insurance premiums as this is the only source of funds to
replenish its dwindling reserve fund. These dynamics work against the White
House's policies expanding credit access. On the margin, this will most likely
result in a stalemate and a low chance of greatly expanded credit.
Last quarter, we posted positive returns in structured products on improving
forecasts for collateral performance and lower required yields from investors.
These dynamics are still intact as we enter the second quarter. With a
contraction in the premium for risk, we remain focused on stability and income.
We believe bonds with these characteristics will be the first choice for more
conventional investors dipping a toe back into this market. By contrast, more
volatile bonds tend to rally more with a "risk on" market; however, if their
fundamental risks remain unresolved, it will be difficult to harvest the paper
gain. For these reasons, we continue to emphasize senior Prime RMBS, CMBS and
seasoned Manufactured Housing.
PERFORMANCE ANALYSIS
For the six months ended April 30, 2012, the Fund had a total return(5) of
8.34% based on net asset value ("NAV"). For the period, the Fund traded from a
discount to NAV of -10.27% to a premium to NAV of 3.89%, resulting in a total
return5 of 25.44%, based on market price.
The total return for the Fund's benchmark, the Barclays Capital Ba U.S. High
Yield Index, was 6.46% for the six months ended April 30, 2012. While the
benchmark contains mostly corporate debt, it is important to note that the Fund
maintained exposure to structured finance and mortgage-related securities during
the period.
Contributors to the Fund's performance included USG Corp, Pulte Group and
American Reprographics. USG Corp, a building products company, and Pulte Group,
a homebuilder, both benefitted from an improved outlook for residential home
construction. American Reprographics, a printing company, recovered after
underperforming in the prior period. Within the Fund's securitized products
allocation, CMBS was a strong contributor, including the AJ class of Greenwich
Capital Commercial Fund Corp. Series 2007-GG11, a Vornado CMBS class D Note and
an RMBS bond, Residential Accredit Loans, Inc. Series 2007-QS6 A2, which has a
particularly high inverse floating coupon.
Detractors from performance included Niska Gas, a natural gas storage company,
whose bonds fell on weakness in natural gas prices. An additional detractor from
performance included BALL 2005-MIB L, a junior CMBS that has suffered as more
loans fell delinquent but which we feel will recover well.
An important factor impacting the return of the Fund relative to its benchmarks
was the Fund's use of financial leverage through the use of bank borrowings. The
Fund uses leverage because its managers believe that, over time, leverage
provides opportunities for additional income and total return for common
shareholders. However, the use of leverage can also expose common shareholders
to additional volatility. For example, as the prices of securities held by the
Fund decline, the negative impact of the evaluation changes on Common Share NAV
and Common shareholder total return is magnified by the use of leverage.
Conversely, leverage may enhance Common Share returns during periods when the
prices of securities held by the Fund generally are rising. Leverage had a
positive impact on the performance of the Fund over this reporting period.
DISCLOSURE
Fixed-income investing entails credit risks and interest rate risks. When
interest rates rise, bond prices generally fall, and the Fund's share prices can
fall. Investments in below-investment grade ("high-yield" or "junk") bonds are
more at risk of default and are subject to liquidity risk. Mortgage-backed
securities are subject to prepayment risk.
This management discussion contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements that are based on various assumptions (some of which are beyond our
control) may be identified by reference to a future period or periods or by the
use of forward-looking terminology, such as "may," "will," "believe," "expect,"
"anticipate," "continue," "should," "intend," or similar terms or variations on
those terms or the negative of those terms. Although we believe that the
expectations contained in any forward-looking statement are based on reasonable
assumptions, we can give no assurance that our expectations will be attained. We
do not undertake, and specifically disclaim any obligation, to publicly release
any update or supplement to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
Opinions expressed herein are as of April 30, 2012 and subject to change.
-----------------------
(5) Total return is based on the combination of reinvested dividend,
capital gain and return of capital distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per share
for net asset value returns and changes in Common Share price for
market value returns. Total returns do not reflect sales load and are
not annualized for periods less than one year. Past performance is not
indicative of future results.
Page 5
FIRST TRUST STRATEGIC HIGH INCOME FUND II
PORTFOLIO OF INVESTMENTS
APRIL 30, 2012 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
________________ _____________________________________________ _________ ____________ ____________
CORPORATE BONDS AND NOTES - 107.2%
AUTOMOTIVE - 5.3%
$ 1,750,000 American Axle & Manufacturing, Inc. (a)...... 7.88% 03/01/17 $ 1,815,625
1,500,000 Ford Motor Co. (a)........................... 6.50% 08/01/18 1,695,000
1,950,000 Pittsburgh Glass Works LLC (a) (b)........... 8.50% 04/15/16 1,930,500
425,000 Tenneco, Inc. ............................... 6.88% 12/15/20 459,000
1,270,000 Visteon Corp. (a)............................ 6.75% 04/15/19 1,314,450
------------
7,214,575
------------
BASIC INDUSTRY - 18.5%
1,715,000 AK Steel Corp. (a)........................... 7.63% 05/15/20 1,654,975
1,675,000 Arch Coal, Inc. (a).......................... 8.75% 08/01/16 1,687,563
1,750,000 Associated Materials LLC (a)................. 9.13% 11/01/17 1,583,750
500,000 Building Materials Corp. of America (b)...... 6.75% 05/01/21 521,875
775,000 Consol Energy, Inc. (a)...................... 8.25% 04/01/20 817,625
1,160,000 Georgia-Pacific LLC (a)...................... 7.38% 12/01/25 1,459,413
415,000 Georgia-Pacific LLC (a)...................... 7.25% 06/01/28 498,588
1,750,000 Hexion U.S. Finance Corp./Hexion Nova
Scotia Finance ULC (a).................... 8.88% 02/01/18 1,841,875
1,100,000 Huntsman International LLC (a)............... 8.63% 03/15/21 1,260,875
1,750,000 Ply Gem Industries, Inc. (a)................. 8.25% 02/15/18 1,728,125
1,700,000 Polymer Group, Inc. (a)...................... 7.75% 02/01/19 1,823,250
1,600,000 Steel Dynamics, Inc. (a)..................... 7.63% 03/15/20 1,768,000
1,250,000 United States Steel Corp. (a)................ 7.00% 02/01/18 1,287,500
675,000 United States Steel Corp. (a)................ 7.38% 04/01/20 693,563
2,100,000 USG Corp. (a) (c)............................ 9.75% 01/15/18 2,157,750
1,225,000 Verso Paper Holdings LLC/Verso Paper,
Inc. (b).................................. 11.75% 01/15/19 1,318,406
1,725,000 Westlake Chemical Corp. (a).................. 6.63% 01/15/16 1,768,125
1,355,000 Xerium Technologies, Inc. (a)................ 8.88% 06/15/18 1,138,200
------------
25,009,458
------------
CAPITAL GOODS - 10.3%
1,750,000 Berry Plastics Corp. (a)..................... 9.50% 05/15/18 1,863,750
1,750,000 Coleman Cable, Inc. (a)...................... 9.00% 02/15/18 1,855,000
1,700,000 Crown Cork & Seal Co., Inc. (a).............. 7.38% 12/15/26 1,785,000
1,255,000 Mueller Water Products, Inc. (a)............. 7.38% 06/01/17 1,264,412
1,750,000 Owens-Illinois, Inc. (a)..................... 7.80% 05/15/18 1,986,250
2,100,000 Reynolds Group Issuer, Inc./Reynolds Group
Issuer LLC (a) (b)......................... 9.00% 04/15/19 2,121,000
1,100,000 Terex Corp. (a).............................. 8.00% 11/15/17 1,157,750
650,000 Terex Corp. ................................. 6.50% 04/01/20 669,500
1,125,000 Trimas Corp. (a)............................. 9.75% 12/15/17 1,254,375
------------
13,957,037
------------
CONSUMER CYCLICAL - 6.9%
1,100,000 ACCO Brands Corp. (a)........................ 10.63% 03/15/15 1,202,245
750,000 ACE Hardware Corp. (a) (b)................... 9.13% 06/01/16 789,383
1,750,000 Levi Strauss & Co. (a)....................... 7.63% 05/15/20 1,887,812
1,775,000 Limited Brands, Inc. (a)..................... 7.60% 07/15/37 1,801,625
560,000 Neiman Marcus Group, Inc. (a)................ 10.38% 10/15/15 589,406
Page 6 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2012 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
________________ _____________________________________________ _________ ____________ ____________
CORPORATE BONDS AND NOTES - (Continued)
CONSUMER CYCLICAL - (Continued)
$ 1,725,000 Pharmaceutical Product Development,
Inc. (b).................................. 9.50% 12/01/19 $ 1,897,500
550,000 Phillips-Van Heusen Corp. (a)................ 7.38% 05/15/20 610,500
550,000 Rite Aid Corp. (a)........................... 9.75% 06/12/16 614,625
------------
9,393,096
------------
CONSUMER NON-CYCLICAL - 3.4%
1,700,000 B&G Foods, Inc. (a).......................... 7.63% 01/15/18 1,836,000
1,069,000 C&S Group Enterprises LLC (b)................ 8.38% 05/01/17 1,138,485
425,000 Cott Beverages, Inc. (a)..................... 8.13% 09/01/18 462,187
1,000,000 Easton-Bell Sports, Inc. (a)................. 9.75% 12/01/16 1,111,250
------------
4,547,922
------------
ENERGY - 19.1%
1,700,000 Breitburn Energy Partners LP/Breitburn
Finance Corp. (a)......................... 8.63% 10/15/20 1,819,000
425,000 Calfrac Holdings LP (a) (b).................. 7.50% 12/01/20 418,625
1,475,000 Chaparral Energy, Inc. ...................... 8.88% 02/01/17 1,547,835
1,675,000 Crosstex Energy LP/Crosstex Energy
Finance Corp. (a)......................... 8.88% 02/15/18 1,804,812
2,060,000 EV Energy Partners LP/EV Energy
Finance Corp. ............................ 8.00% 04/15/19 2,111,500
787,000 GMX Resources, Inc. (a) (b).................. 11.00% 12/01/17 672,885
1,050,000 Hercules Offshore LLC (a) (b)................ 10.50% 10/15/17 1,102,500
1,700,000 Hilcorp Energy I LP/Hilcorp Finance
Co. (a) (b)............................... 8.00% 02/15/20 1,865,750
1,750,000 Key Energy Services, Inc. (a)................ 6.75% 03/01/21 1,811,250
800,000 Linn Energy LLC Linn Energy Finance
Corp. .................................... 7.75% 02/01/21 848,000
945,000 Linn Energy LLC/Linn Energy Finance
Corp. (a)................................ 8.63% 04/15/20 1,037,138
1,750,000 McJunkin Red Man Corp. (a)................... 9.50% 12/15/16 1,938,125
1,840,000 Niska Gas Storage US LLC/Niska Gas
Storage Canada ULC (a).................... 8.88% 03/15/18 1,743,400
1,275,000 Pioneer Natural Resources Co. (a)............ 6.65% 03/15/17 1,452,819
1,675,000 Plains Exploration & Production Co. (a)...... 7.63% 06/01/18 1,792,250
650,000 Quicksilver Resources, Inc. (a).............. 11.75% 01/01/16 687,375
600,000 Sesi LLC (a)................................. 6.88% 06/01/14 604,500
250,000 Vanguard Natural Resources LLC/VNR
Finance Corp. ............................ 7.88% 04/01/20 250,938
2,100,000 Venoco, Inc. (a)............................. 8.88% 02/15/19 1,979,250
415,000 W&T Offshore, Inc. .......................... 8.50% 06/15/19 439,900
------------
25,927,852
------------
FINANCIAL SERVICES - 1.1%
1,475,000 Level 3 Financing, Inc. (b).................. 8.63% 07/15/20 1,548,750
-------------
HEALTHCARE - 2.8%
1,750,000 HCA, Inc. (a)................................ 8.00% 10/01/18 1,953,437
900,000 Health Management Associates, Inc. (b)....... 7.38% 01/15/20 941,625
See Notes to Financial Statements Page 7
FIRST TRUST STRATEGIC HIGH INCOME FUND II
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2012 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
________________ _____________________________________________ _________ ____________ ____________
CORPORATE BONDS AND NOTES - (Continued)
HEALTHCARE - (Continued)
$ 1,045,000 Inventiv Health, Inc. (b).................... 10.00% 08/15/18 $ 943,113
------------
3,838,175
------------
MEDIA - 9.3%
1,700,000 American Reprographics Co. (a)............... 10.50% 12/15/16 1,721,250
1,700,000 Cablevision Systems Corp. (a)................ 8.63% 09/15/17 1,874,250
1,700,000 CCO Holdings LLC/CCO Holdings Capital
Corp. (a).................................. 8.13% 04/30/20 1,912,500
1,700,000 Clear Channel Communications, Inc. (a)....... 9.00% 03/01/21 1,547,000
1,700,000 Deluxe Corp. (a)............................. 7.38% 06/01/15 1,738,250
1,700,000 Lamar Media Corp. (a)........................ 7.88% 04/15/18 1,867,875
1,700,000 Mediacom LLC/Mediacom Capital Corp. (a)...... 9.13% 08/15/19 1,861,500
------------
12,522,625
------------
REAL ESTATE - 1.3%
1,750,000 Realogy Corp. (a) (b)........................ 7.88% 02/15/19 1,723,750
------------
SERVICES - 18.3%
1,650,000 AMC Entertainment, Inc. (a).................. 8.75% 06/01/19 1,767,562
1,750,000 Avis Budget Car Rental LLC/Avis Budget
Finance, Inc. (a)......................... 8.25% 01/15/19 1,841,875
850,000 Beazer Homes USA, Inc. (a)................... 9.13% 06/15/18 726,750
1,400,000 Caesars Entertainment Operating Co., Inc. (a). 11.25% 06/01/17 1,554,000
650,000 Caesars Entertainment Operating Co., Inc. (b). 8.50% 02/15/20 671,125
800,000 Cenveo Corp. ................................ 8.88% 02/01/18 740,000
1,750,000 Citycenter Holdings LLC/Citycenter
Finance Corp. (a)......................... 7.63% 01/15/16 1,863,750
600,000 FireKeepers Development Authority (a) (b).... 13.88% 05/01/15 663,000
1,650,000 Iron Mountain, Inc. (a)...................... 8.75% 07/15/18 1,722,188
1,700,000 Marina District Finance Co., Inc. (a)........ 9.88% 08/15/18 1,640,500
1,750,000 MGM Resorts International (a)................ 7.63% 01/15/17 1,824,375
525,000 MGM Resorts International (b)................ 8.63% 02/01/19 572,906
542,700 MTR Gaming Group, Inc. ...................... 11.50% 08/01/19 545,414
1,000,000 National Cinemedia LLC (b)................... 6.00% 04/15/22 1,022,500
1,700,000 Palace Entertainment Holdings LLC/Palace
Entertainment Holdings Corp. (a) (b)...... 8.88% 04/15/17 1,759,500
2,100,000 Pulte Group, Inc. (a)........................ 6.38% 05/15/33 1,758,750
875,000 RSC Equipment Rental, Inc./RSC
Holdings III LLC (a)...................... 10.25% 11/15/19 988,750
875,000 RSC Equipment Rental, Inc./RSC
Holdings LLC ............................. 8.25% 02/01/21 949,375
2,100,000 Standard Pacific Corp. (a)................... 8.38% 05/15/18 2,231,250
------------
24,843,570
------------
TECHNOLOGY & ELECTRONICS - 2.7%
88,000 First Data Corp. ............................ 9.88% 09/24/15 89,100
1,750,000 First Data Corp. (a) (b)..................... 8.25% 01/15/21 1,732,500
1,775,000 Freescale Semiconductor, Inc. (a)............ 8.05% 02/01/20 1,797,187
------------
3,618,787
------------
Page 8 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2012 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
________________ _____________________________________________ _________ ____________ ____________
CORPORATE BONDS AND NOTES - (Continued)
TELECOMMUNICATIONS - 6.4%
$ 860,000 Cincinnati Bell, Inc. (a).................... 8.25% 10/15/17 $ 894,400
900,000 Cincinnati Bell, Inc. (a).................... 8.75% 03/15/18 848,250
1,750,000 Frontier Communications (a).................. 7.13% 03/15/19 1,754,375
1,700,000 PAETEC Holding Corp. (a)..................... 9.88% 12/01/18 1,933,750
1,450,000 Qwest Corp. (a).............................. 6.88% 09/15/33 1,462,687
1,725,000 Windstream Corp. (a)......................... 7.00% 03/15/19 1,768,125
------------
8,661,587
------------
UTILITY - 1.8%
1,700,000 Calpine Corp. (a) (b)........................ 7.25% 10/15/17 1,823,250
875,000 Edison Mission Energy (a).................... 7.00% 05/15/17 551,250
------------
2,374,500
------------
TOTAL CORPORATE BONDS AND NOTES ......................................... 145,181,685
------------
(Cost $140,322,705)
MORTGAGE-BACKED SECURITIES - 12.3%
COLLATERALIZED MORTGAGE OBLIGATIONS - 9.9%
Banc of America Mortgage Securities
299,507 Series 2007-1, Class 1A26 ................. 6.00% 03/25/37 269,502
Citicorp Mortgage Securities, Inc.
2,520,358 Series 2007-2, Class 1A3 .................. 6.00% 02/25/37 2,449,383
Citigroup Mortgage Loan Trust, Inc.
846,481 Series 2006-AR6, Class 1A1 (d)............. 5.85% 08/25/36 744,398
885,401 Series 2007-AR4, Class 1A1A (d)............ 5.81% 03/25/37 773,578
Countrywide Alternative Loan Trust
292,679 Series 2006-41CB, Class 2A14 .............. 6.00% 01/25/37 192,774
Countrywide Home Loan Mortgage Pass
Through Trust
1,418,365 Series 2005-27, Class 2A1 ................. 5.50% 12/25/35 1,281,969
371,354 Series 2006-21, Class A8 .................. 5.75% 02/25/37 298,881
1,052,733 Series 2007-10, Class A5 .................. 6.00% 07/25/37 790,634
HarborView Mortgage Loan Trust
3,597,355 Series 2005-9, Class B10 (d) (e)........... 1.99% 06/20/35 176,006
MASTR Asset Securitization Trust
366,747 Series 2006-2, Class 1A10 (d).............. 6.00% 06/25/36 319,254
Residential Accredit Loans, Inc.
237,760 Series 2007-Q56, Class A2 (d).............. 53.60% 04/25/37 550,854
Residential Asset Securitization Trust
1,366,975 Series 2005-A8CB, Class A11 ............... 6.00% 07/25/35 1,151,381
Structured Asset Securities Corp.
186,808 Series 2003-10, Class A ................... 6.00% 04/25/33 196,099
See Notes to Financial Statements Page 9
FIRST TRUST STRATEGIC HIGH INCOME FUND II
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2012 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
________________ _____________________________________________ _________ ____________ ____________
MORTGAGE-BACKED SECURITIES - (Continued)
COLLATERALIZED MORTGAGE OBLIGATIONS - (Continued)
Wells Fargo Mortgage Backed Securities Trust
$ 1,392,007 Series 2006-8, Class A15 .................. 6.00% 07/25/36 $ 1,290,312
161,000 Series 2006-AR1, Class 2A5 (d)............. 5.37% 03/25/36 150,113
1,264,365 Series 2007-3, Class 1A10 ................. 5.50% 04/25/37 1,155,363
92,223 Series 2007-6, Class A6 ................... 6.00% 05/25/37 79,165
522,981 Series 2007-7, Class A38 .................. 6.00% 06/25/37 485,348
385,791 Series 2007-7, Class A6 ................... 6.00% 06/25/37 375,083
131,710 Series 2007-8, Class 1A16 ................. 6.00% 07/25/37 122,350
571,628 Series 2007-8, Class 2A2 .................. 6.00% 07/25/37 561,319
------------
13,413,766
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 2.4%
Banc of America Large Loan, Inc.
3,000,000 Series 2005-MIB1, Class L (d) (f) (g)...... 3.24% 03/15/22 975,321
Countrywide Alternative Loan Trust
239,345 Series 2007-11T1, Class A37 (d)............ 38.59% 05/25/37 411,567
Greenwich Capital Commercial Funding Corp.
1,180,000 Series 2007-GG11, Class AJ (d)............. 6.00% 12/10/49 767,292
Vornado DP LLC
930,000 Series 2010-VNO, Class D (b)............... 6.36% 09/13/28 983,200
Washington Mutual Alternative Mortgage
Pass-Through Certificates
75,190 Series 2007-5, Class A11 (d)............... 38.05% 06/25/37 123,614
------------
3,260,994
------------
TOTAL MORTGAGE-BACKED SECURITIES ........................................ 16,674,760
------------
(Cost $17,671,456)
ASSET-BACKED SECURITIES - 7.8%
Ace Securities Corp.
1,220,000 Series 2003-MH1, Class A4 (b).............. 6.50% 08/15/30 1,301,051
BankAmerica Manufactured Housing Contract
Trust II
2,300,000 Series 1997-1, Class B1 (e)................ 6.94% 06/10/21 2,017,638
Bombardier Capital Mortgage Securitization
Corp.......................................
295,600 Series 1999-B, Class A1B .................. 6.61% 12/15/29 173,810
1,701,430 Series 1999-B, Class A3 ................... 7.18% 12/15/29 1,023,878
Citigroup Mortgage Loan Trust, Inc.
2,301,000 Series 2003-HE3, Class M4 (d).............. 3.24% 12/25/33 700,255
Conseco Finance Securitizations Corp.
2,258,312 Series 2000-6, Class M1 ................... 7.72% 09/01/31 564,105
1,363,233 Series 2001-3, Class M1 ................... 7.15% 05/01/33 783,133
Countrywide Asset-Backed Certificates
26,791 Series 2004-6, Class 2A5 (d)............... 0.63% 11/25/34 24,821
752,166 Series 2006-13, Class 3AV2 (d)............. 0.39% 01/25/37 518,902
Credit Suisse First Boston Mortgage
Securities Corp.
256,084 Series 2002-MH3, Class A .................. 6.70% 12/25/31 273,187
Page 10 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2012 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
________________ _____________________________________________ _________ ____________ ____________
ASSET-BACKED SECURITIES - (Continued)
Green Tree Financial Corp.
$ 1,191,582 Series 1996-6, Class B1 ................... 8.00% 09/15/27 $ 270,810
133,943 Series 1997-4, Class B1 ................... 7.23% 02/15/29 10,880
764,333 Series 1998-4, Class M1 ................... 6.83% 04/01/30 373,799
2,746,223 Series 1999-3, Class M1 ................... 6.96% 02/01/31 294,915
GSAMP Trust
2,871,671 Series 2006-S3, Class A2 (g)............... 6.27% 05/25/36 120,313
2,949,839 Series 2006-S5, Class A1 (d)............... 0.33% 09/25/36 53,068
IMC Home Equity Loan Trust
2,679,129 Series 1997-3, Class B .................... 7.87% 08/20/28 1,152,510
2,564,135 Series 1997-5, Class B .................... 7.59% 11/20/28 517,203
Independence III CDO, Ltd.
7,000,000 Series 3A, Class C1 (d) (f) (h)............ 2.97% 10/03/37 26,950
New Century Home Equity Loan Trust
198,000 Series 2005-A, Class A5 ................... 5.14% 08/25/35 108,319
Oakwood Mortgage Investors, Inc.
931,923 Series 1999-B, Class M1 ................... 7.18% 12/15/26 200,918
Park Place Securities, Inc.
212,569 Series 2004-WCW1, Class M8 (d)............. 3.74% 09/25/34 984
1,268,721 Series 2004-WCW2, Class M10 (d) (f)........ 2.99% 10/25/34 28,441
Summit CBO I, Ltd.
4,093,795 Series 1A, Class B (d) (f) (e)............. 1.71% 05/23/12 41
------------
TOTAL ASSET-BACKED SECURITIES ........................................... 10,539,931
(Cost $8,132,579) ------------
FOREIGN CORPORATE BONDS AND NOTES - 7.5%
AUTOMOTIVE - 1.0%
1,300,000 Jaguar Land Rover PLC (b).................... 8.13% 05/15/21 1,365,000
------------
BASIC INDUSTRY - 5.7%
1,540,000 Cascades, Inc. (a)........................... 7.88% 01/15/20 1,513,050
850,000 FMG Resources (August 2006) Pty Ltd. (b)..... 6.88% 04/01/22 864,875
1,750,000 Ineos Group Holdings Ltd. (a) (b)............ 8.50% 02/15/16 1,719,375
1,750,000 Masonite International Corp. (a) (b)......... 8.25% 04/15/21 1,828,750
1,725,000 Tembec Industries, Inc. (a).................. 11.25% 12/15/18 1,854,375
------------
7,780,425
------------
ENERGY - 0.8%
375,000 Petroleum Geo-Services Asa (b)............... 7.38% 12/15/18 390,000
645,000 Precision Drilling Corp. .................... 6.63% 11/15/20 675,638
------------
1,065,638
------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES ................................. 10,211,063
(Cost $10,033,766) ------------
See Notes to Financial Statements Page 11
FIRST TRUST STRATEGIC HIGH INCOME FUND II
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2012 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
________________ _____________________________________________ _________ ____________ ____________
SENIOR FLOATING-RATE LOAN INTERESTS - 0.3%
UTILITY - 0.3%
$ 834,744 Texas Competitive Electric Holdings Co.,
LLC Tranche B2 (d)......................... 4.74% 10/10/17 $ 459,677
------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS ............................... 459,677
------------
(Cost $782,870)
STRUCTURED NOTES - 0.0%
5,750,000 Preferred Term Securities XXV, Ltd. (f)...... (i) 06 22/37 575
2,500,000 Preferred Term Securities XXVI, Ltd.
Subordinated Note (f)...................... (i) 09/22/37 250
------------
TOTAL STRUCTURED NOTES .................................................. 825
------------
(Cost $0)
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 0.0%
COMMERCIAL MORTGAGE-BACKED SECURITIES - 0.0%
FannieMae-ACES
130,139 Series 1998-M7, Class N, IO (d)............ 0.32% 05/25/36 1
------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES ................. 1
(Cost $0) ------------
SHARES DESCRIPTION VALUE
________________ _________________________________________________________________________ ____________
PREFERRED SECURITIES - 0.1%
3,500 Independence III CDO, Ltd., Series 3A, Class PS (f) (i)................... 3,500
4,000 Soloso CDO, Ltd., Series 2005-1 (f) (i)................................... 40,000
9,000 White Marlin CDO, Ltd., Series AI (f) (h) (i)............................. 45,000
------------
TOTAL PREFERRED SECURITIES............................................... 88,500
(Cost $0) ------------
TOTAL INVESTMENTS - 135.2% .............................................. 183,156,442
(Cost $176,943,376) (j)
OUTSTANDING LOAN - (40.2%) .............................................. (54,400,000)
NET OTHER ASSETS AND LIABILITIES - 4.9% ................................. 6,680,992
------------
NET ASSETS - 100.0% ..................................................... $135,437,434
------------
_________________________
(a) All or a portion of this security is available to serve as
collateral on the outstanding loan.
(b) This security, sold within the terms of a private placement
memorandum, is exempt from registration upon resale under Rule 144A
under the Securities Act of 1933, as amended (the "1933 Act"), and
may be resold in transactions exempt from registration, normally to
qualified institutional buyers. Pursuant to procedures adopted by
the Fund's Board of Trustees, this security has been determined to
be liquid by Brookfield Investment Management Inc., the Fund's
sub-advisor. Although market instability can result in periods of
increased overall market illiquidity, liquidity for each security is
determined based on security specific factors and assumptions, which
require subjective judgment. At April 30, 2012, securities noted as
such amounted to $35,631,179 or 26.31% of net assets.
(c) Multi-Step Coupon Bond - Coupon steps up or down based upon ratings
changes by Standard & Poor's Ratings Group or Moody's Investors
Service, Inc. The interest rate shown reflects the rate in effect at
April 30, 2012.
(d) Floating rate security. The interest rate shown reflects the rate in
effect at April 30, 2012.
Page 12 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2012 (UNAUDITED)
(e) Security missed one or more of its interest payments.
(f) This security, sold within the terms of a private placement
memorandum, is exempt from registration upon resale under Rule 144A
under the 1933 Act, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers (see Note
2C - Restricted Securities in the Notes to Financial Statements).
(g) Security is receiving less than the stated coupon. (h) The issuer is
in default. Income is not being accrued.
(i) Zero coupon security.
(j) Aggregate cost for financial reporting purposes, which approximates
the aggregate cost for federal income tax purposes. As of April 30,
2012, the aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $10,184,980
and the aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value was $3,971,914.
ACES Alternative Credit Enhancement Securities
CBO Collateralized Bond Obligation
CDO Collateralized Debt Obligation
IO Interest-Only Security - Principal amount shown represents par value on
which interest payments are based.
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2012 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2012 PRICES INPUTS INPUTS
_____________ ___________ _____________ ___________
Corporate Bonds and Notes*......................... $ 145,181,685 $ -- $ 145,181,685 $ --
Mortgage-Backed Securities:
Collateralized Mortgage Obligations............ 13,413,766 -- 13,413,766 --
Commercial Mortgage-Backed Securities.......... 3,260,994 -- 3,260,994 --
Asset-Backed Securities............................ 10,539,931 -- 10,539,931 --
Foreign Corporate Bonds and Notes*................. 10,211,063 -- 10,211,063 --
Senior Floating-Rate Loan Interests*............... 459,677 -- 459,677 --
Structured Notes................................... 825 -- 825 --
U.S. Government Agency Mortgage-Backed
Securities..................................... 1 -- 1 --
Preferred Securities .............................. 88,500 -- -- 88,500
------------- ----------- ------------- -----------
TOTAL INVESTMENTS.................................. $ 183,156,442 $ -- $ 183,067,942 $ 88,500
============= =========== ============= ===========
* See the Portfolio of Investments for industry breakout.
The following table presents the activity of the Fund's investments measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the period presented.
CHANGE IN BALANCE
BALANCE AS OF TRANSFERS NET NET UNREALIZED NET AS OF
INVESTMENTS AT FAIR VALUE USING OCTOBER 31, IN (OUT) REALIZED APPRECIATION PURCHASES APRIL 30,
SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) 2011 OF LEVEL 3 GAINS (LOSSES) (DEPRECIATION) (SALES) 2012
____________________________________________________________________________________________________________________________________
Preferred Securities.................... $ 88,500 $ -- $ -- $ -- $ -- $ 88,500
There was no net change in unrealized appreciation (depreciation) from Level 3
investments held as of April 30, 2012.
See Notes to Financial Statements Page 13
FIRST TRUST STRATEGIC HIGH INCOME FUND II
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2012 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $176,943,376)......................................................................... $183,156,442
Cash........................................................................................... 2,816,091
Prepaid expenses............................................................................... 21,523
Receivables:
Interest.................................................................................... 3,480,451
Investment securities sold.................................................................. 565,636
Other assets................................................................................... 10,112
------------
Total Assets............................................................................. 190,050,255
------------
LIABILITIES:
Outstanding loan............................................................................... 54,400,000
Payables:
Investment advisory fees.................................................................... 138,958
Audit and tax fees.......................................................................... 25,528
Custodian fees.............................................................................. 14,755
Administrative fees......................................................................... 13,834
Interest and fees on loan................................................................... 8,682
Transfer agent fees......................................................................... 5,697
Legal fees.................................................................................. 2,395
Trustees' fees and expenses................................................................. 2,201
Financial reporting fees.................................................................... 771
------------
Total Liabilities........................................................................ 54,612,821
------------
NET ASSETS..................................................................................... $135,437,434
============
NET ASSETS consist of:
Paid-in capital................................................................................ $206,594,007
Par value...................................................................................... 81,140
Accumulated net investment income (loss)....................................................... 2,412,479
Accumulated net realized gain (loss) on investments............................................ (79,863,258)
Net unrealized appreciation (depreciation) on investments...................................... 6,213,066
------------
NET ASSETS..................................................................................... $135,437,434
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)........................... $ 16.69
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 8,113,968
============
Page 14 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2012 (UNAUDITED)
INVESTMENT INCOME:
Interest...................................................................................... $ 8,354,631
------------
Total investment income..................................................................... 8,354,631
------------
EXPENSES:
Investment advisory fees....................................................................... 832,263
Interest and fees on loan...................................................................... 406,542
Legal fees..................................................................................... 115,382
Administrative fees............................................................................ 82,850
Audit and tax fees............................................................................. 34,311
Reorganization fees............................................................................ 31,983
Printing fees.................................................................................. 29,519
Transfer agent fees............................................................................ 23,414
Trustees' fees and expenses.................................................................... 14,163
Custodian fees................................................................................. 10,256
Financial reporting fees....................................................................... 4,625
Other.......................................................................................... 85,022
------------
Total expenses.............................................................................. 1,670,330
------------
NET INVESTMENT INCOME (LOSS)................................................................... 6,684,301
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain/loss on investments....................................................... (295,503)
Net change in unrealized appreciation (depreciation) on investments......................... 3,984,322
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 3,688,819
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 10,373,120
============
See Notes to Financial Statements Page 15
FIRST TRUST STRATEGIC HIGH INCOME FUND II
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2012 ENDED
(UNAUDITED) 10/31/2011
______________ ______________
OPERATIONS:
Net investment income (loss)....................................................... $ 6,684,301 $ 5,613,623
Net realized gain (loss)........................................................... (295,503) 2,082,983
Net change in unrealized appreciation (depreciation)............................... 3,984,322 4,136,138
-------------- --------------
Net increase (decrease) in net assets resulting from operations.................... 10,373,120 11,832,744
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (6,162,152) (4,945,284)
Net realized gain.................................................................. -- --
Return of capital.................................................................. -- (651,423)
-------------- -------------
Total distributions to shareholders................................................ (6,162,152) (5,596,707)
-------------- -------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares acquired through reorganization........................ -- 74,405,197
Proceeds from Common Shares reinvested............................................. 117,020 --
-------------- -------------
Net increase (decrease) in net assets resulting from capital transactions.......... 117,020 74,405,197
-------------- -------------
Total increase (decrease) in net assets............................................ 4,327,988 80,641,234
NET ASSETS:
Beginning of period................................................................ 131,109,446 50,468,212
-------------- --------------
End of period...................................................................... $ 135,437,434 $ 131,109,446
-------------- --------------
Accumulated net investment income (loss) at end of period.......................... $ 2,412,479 $ 1,890,330
============== =============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................... 8,106,875 3,177,925
Common Shares issued through reorganization........................................ 7,093 4,928,950
Common Shares issued as reinvestment under the Dividend Reinvestment Plan.......... -- --
-------------- -------------
Common Shares at end of period..................................................... 8,113,968 8,106,875
============== =============
Page 16 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2012 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations................. $ 10,373,120
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments.................................................. (38,223,424)
Sales, maturities and paydowns of investments............................. 37,464,737
Net amortization/accretion of premiums/discounts on investments........... (426,690)
Net realized gain/loss on investments..................................... 295,503
Net change in unrealized appreciation/depreciation on investments......... (3,984,322)
CHANGES IN ASSETS AND LIABILITIES:
Increase in interest receivable........................................... (66,173)
Increase in prepaid expenses.............................................. (10,473)
Increase in other assets.................................................. (10,112)
Decrease in interest and fees on loan payable............................. (55,668)
Increase in investment advisory fees payable.............................. 2,476
Decrease in reorganization fees payable................................... (48,407)
Decrease in audit and tax fees payable.................................... (29,972)
Increase in legal fees payable............................................ 1,380
Decrease in printing fees payable......................................... (16,293)
Increase in administrative fees payable................................... 261
Increase in custodian fees payable........................................ 6,736
Increase in transfer agent fees payable................................... 246
Decrease in Trustees' fees and expenses payable........................... (1,311)
Decrease in other liabilities............................................. (3,112)
--------------
CASH PROVIDED BY OPERATING ACTIVITIES........................................... $ 5,268,502
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of Common Shares reinvested...................................... 117,020
Distributions to Common Shareholders from net investment income........... (6,162,152)
--------------
CASH USED IN FINANCING ACTIVITIES............................................... (6,045,132)
-----------
Decrease in cash................................................................ (776,630)
Cash at beginning of period..................................................... 3,592,721
-----------
CASH AT END OF PERIOD........................................................... $ 2,816,091
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees............................... $ 462,210
===========
See Notes to Financial Statements Page 17
FIRST TRUST STRATEGIC HIGH INCOME FUND II
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
ALL SHARE AMOUNTS, NET ASSET VALUES AND MARKET VALUES HAVE BEEN ADJUSTED AS A
RESULT OF THE 1-FOR-3 REVERSE SHARE SPLIT ON SEPTEMBER 30, 2011.
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR YEAR
4/30/2012 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 10/31/2011 10/31/2010 (a) 10/31/2009 (b) 10/31/2008 10/31/2007
__________ __________ ____________ ____________ __________ __________
Net asset value, beginning of period ....... $ 16.17 $ 15.87 $ 14.22 $ 25.56 $ 48.93 $ 60.54
--------- --------- --------- ----------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ............... 0.82 0.59 1.86 3.87 6.12 7.26
Net realized and unrealized gain (loss)..... 0.46 0.32 1.17 (11.31) (23.49) (12.87)
--------- --------- --------- ----------- ---------- ---------
Total from investment operations ........... 1.28 0.91 3.03 (7.44) (17.37) (5.61)
--------- --------- --------- ----------- ---------- ---------
Distributions paid to shareholders from:
Net investment income ...................... (0.76) (0.54) -- (0.27) (5.13) (5.85)
Net realized gain .......................... -- -- -- -- -- (0.15)
Return of capital .......................... -- (0.07) (1.38) (3.63) (0.87) --
--------- --------- --------- ----------- ---------- ---------
Total from distributions ................... (0.76) (0.61) (1.38) (3.90) (6.00) (6.00)
--------- --------- --------- ----------- ---------- ---------
Net asset value, end of period ............. $ 16.69 $ 16.17 $ 15.87 $ 14.22 $ 25.56 $ 48.93
========= ========= ========= =========== ========== =========
Market value, end of period ................ $ 17.34 $ 14.51 $ 14.49 $ 13.17 $ 21.45 $ 45.33
========= ========= ========= =========== ========== =========
Total return based on net asset value (c)... 8.34% 13.60% 23.46% (28.92)% (37.09)% (9.92)%
========= ========= ========= =========== ========== =========
Total return based on market value (c)...... 25.44% 11.64% 21.71% (22.00)% (42.84)% (19.21)%
========= ========= ========= =========== ========== =========
----------------------------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ....... $ 135,437 $ 131,109 $ 50,468 $ 45,159 $ 80,740 $ 154,131
Ratio of net expenses to average net assets 2.55% (d) 2.35% 2.29% 1.77% 4.09% 4.19%
Ratio of total expenses to average net assets
excluding interest expense ............... 1.93% (d) 1.93% 2.21% 1.77% 2.45% 1.74%
Ratio of net investment income (loss) to
average net assets ....................... 10.10% (d) 9.65% 12.54% 22.79% 16.48% 12.64%
Portfolio turnover rate ..................... 21% 49% 332% (e) 147% (e) 4% 21%
INDEBTEDNESS:
Total loan outstanding (in 000's) ........... $ 54,400 $ 54,400 N/A N/A N/A $ 67,000
Asset coverage per $1,000 of indebtedness (f) $ 3,490 $ 3,410 N/A N/A N/A $ 3,300
----------------------------------------------
(a) On September 20, 2010, the Fund's Board of Trustees approved an interim
investment management agreement with First Trust Advisors L.P. and an
interim investment sub-advisory agreement with Brookfield Investment
Management Inc. (formerly known as Hyperion Brookfield Asset Management,
Inc.) ("Brookfield"), and on December 20, 2010, the Shareholders voted to
approve new such agreements.
(b) On June 29, 2009, the Fund's Board of Trustees approved an interim
sub-advisory agreement with Brookfield, and on October 14, 2009, the
Shareholders voted to approve a new sub-advisory agreement with
Brookfield.
(c) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(d) Annualized.
(e) For the fiscal years ended October 31, 2010 and 2009, the Fund's portfolio
turnover rate reflected mortgage pool forward commitments as purchases and
sales. This caused the reported portfolio turnover rate to be higher than
in previous and subsequent fiscal years. The turnover rate may vary
greatly from year to year as well as within a year.
(f) Calculated by subtracting the Fund's total liabilities (not including the
loan outstanding) from the Fund's total assets, and dividing by the
outstanding loan balance in 000's.
N/A Not applicable.
Page 18 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II
APRIL 30, 2012 (UNAUDITED)
1. FUND DESCRIPTION
First Trust Strategic High Income Fund II (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on January 18, 2006, and is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund trades under the ticker symbol FHY on the New York Stock
Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. The Fund seeks capital growth as a secondary objective. The Fund seeks
to achieve its investment objectives by investing in a diversified portfolio of
below-investment grade and investment grade debt securities, and equity
securities that Brookfield Investment Management Inc. ("Brookfield" or the
"Sub-Advisor") believes offer attractive yield and/or capital appreciation
potential. The Fund may invest up to 100% of its Managed Assets in
below-investment grade debt securities (commonly referred to as "high-yield" or
"junk" bonds). Managed Assets means the average daily total asset value of the
Fund minus the sum of the Fund's liabilities other than the principal amount of
borrowings or reverse repurchase agreements, if any. There can be no assurance
that the Fund will achieve its investment objectives. The Fund may not be
appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements ("U.S.
GAAP"). The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The NAV per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily in accordance with valuation procedures
adopted by the Fund's Board of Trustees and in accordance with provisions of the
1940 Act. The Fund's securities will be valued as follows:
Corporate bonds, notes, U.S. Government Securities, Mortgage-backed Securities
("MBS"), Asset-backed Securities ("ABS") and other debt securities are valued
on the basis of valuations provided by dealers who make markets in such
securities or by an independent pricing service approved by the Fund's Board
of Trustees, which may use the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
A ready market does not exist for some of these investments. As such, these
values may differ from the values that would have been used had a ready market
for these investments existed, and the differences could be material.
Common stocks and other securities listed on any national or foreign exchange
(excluding the NASDAQ National Market ("NASDAQ") and the London Stock Exchange
Alternative Investment Market ("AIM")) are valued at the last sale price on
the exchange on which they are principally traded. If there are no
transactions on the valuation day, the securities are valued at the mean
between the most recent bid and asked prices.
Securities listed on the NASDAQ or the AIM are valued at the official closing
price. If there is no official closing price on the valuation day, the
securities are valued at the mean between the most recent bid and asked
prices.
Securities traded in the over-the-counter market are valued at their closing
bid prices.
Credit default swaps, if any, are valued using a pricing service or, if the
pricing service does not provide a value, by quotes provided by the selling
dealer or financial institution.
Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II
APRIL 30, 2012 (UNAUDITED)
Debt securities having a remaining maturity of sixty days or less when
purchased are valued at cost adjusted for amortization of premiums and
accretion of discounts.
In the event the pricing service or dealer does not provide a valuation, or the
valuations received are deemed unreliable, the Fund's Board of Trustees has
designated First Trust Advisors L.P. ("First Trust") to use a fair value method
to value the Fund's securities. Additionally, if events occur after the close of
the principal markets for certain securities (e.g., domestic debt and foreign
securities) that could materially affect the Fund's NAV, First Trust may use a
fair value method to value the Fund's securities. The use of fair value pricing
is governed by valuation procedures adopted by the Fund's Board of Trustees, and
in accordance with the provisions of the 1940 Act. As a general principle, the
fair value of a security is the amount which the Fund might reasonably expect to
receive for the security upon its current sale. However, in light of the
judgment involved in fair valuations, there can be no assurance that a fair
value assigned to a particular security will be the amount which the Fund might
be able to receive upon its current sale. Fair valuation of a security is based
on the consideration of all available information, including, but not limited
to, the following:
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which these
securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the security;
7) the price and extent of public trading in similar securities (or equity
securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing the
security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an assessment
of the issuer's management;
11) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that industry;
and
12) other relevant factors.
The Fund invests a significant portion of its assets in below-investment grade
debt securities, including structured finance securities and corporate bonds.
Structured finance securities include: asset-backed securities, including home
equity, auto, equipment lease, credit card, aircraft, franchise, manufactured
housing, etc.; commercial mortgage-backed securities; residential
mortgage-backed or private-label collateralized mortgage obligations;
collateralized debt obligations and collateralized loan obligations. The value
and related income of these securities is sensitive to changes in economic
conditions, including delinquencies and/or defaults. Instability in the markets
for fixed-income securities, particularly mortgage-backed and asset-backed
securities, has resulted in increased volatility and periods of illiquidity that
have adversely impacted the valuation of certain securities held by the Fund.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which transactions
for the investment occur with sufficient frequency and volume to provide
pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs may
reflect the reporting entity's own assumptions about the assumptions that
market participants would use in pricing the investments.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2012, is
included with the Fund's Portfolio of Investments.
Page 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II
APRIL 30, 2012 (UNAUDITED)
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and accretion of discounts are recorded using the effective interest method.
The Fund invests in certain lower credit quality securitized assets (for
example, asset-backed securities, collateralized mortgage obligations and
commercial mortgage-backed securities), as well as interest-only securities,
that have contractual cash flows. For these securities, if there is a change in
the estimated cash flows, based on an evaluation of current information, then
the estimated yield is adjusted. Additionally, if the evaluation of current
information indicates a permanent impairment of the security, the cost basis of
the security is written down and a loss is recognized. Debt obligations may be
placed on non-accrual status, and related interest income may be reduced by
ceasing current accruals and amortization/accretion and writing off interest
receivables when the collection of all or a portion of interest has become
doubtful based on consistently applied procedures. A debt obligation is removed
from non-accrual status when the issuer resumes interest payments or when
collectability of interest is reasonably assured.
Securities purchased on a when-issued, delayed-delivery or forward purchase
commitment basis may have extended settlement periods. The value of the security
so purchased is subject to market fluctuations during this period. The Fund
maintains liquid assets with a current value at least equal to the amount of its
when-issued, delayed-delivery or forward purchase commitments until payment is
made. At April 30, 2012, the Fund had no when-issued, delayed-delivery or
forward purchase commitments.
C. RESTRICTED SECURITIES:
The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the 1933 Act. Prior
to registration, restricted securities may only be resold in transactions exempt
from registration under Rule 144A under the 1933 Act, normally to qualified
institutional buyers. As of April 30, 2012, the Fund held restricted securities
as shown in the following table that the Sub-Advisor has deemed illiquid
pursuant to procedures adopted by the Fund's Board of Trustees. Although market
instability can result in periods of increased overall market illiquidity,
liquidity for each security is determined based on security-specific factors and
assumptions, which require subjective judgment. The Fund does not have the right
to demand that such securities be registered. These securities are valued
according to the valuation procedures as stated in the Portfolio Valuation note
(Note 2A) and are not expressed as a discount to the carrying value of a
comparable unrestricted security. There are no unrestricted securities with the
same maturity dates and yields for these issuers.
% OF
ACQUISITION PRINCIPAL CARRYING NET
SECURITY DATE VALUE/SHARES PRICE COST VALUE ASSETS
---------------------------------------------------------------------------------------------------------------------------
Banc of America Large Loan, Inc.
Series 2005-MIB1, Class L, 3.24%, 03/15/22 06/26/06 $ 3,000,000 $ 32.50 $ 1,424,615 $ 975,321 0.72%
Independence III CDO, Ltd.
Series 3A, Class C1, 2.97%, 10/03/37 12/27/06 $ 7,000,000 0.00* -- 26,950 0.02
Series 3A, Class PS 04/11/06 3,500 1.00 -- 3,500 0.00**
Park Place Securities, Inc.
Series 2004-WCW2, Class M10, 2.99%, 10/25/34 03/24/06 $ 1,268,721 2.26 82,025 28,441 0.02
Preferred Term Securities XXV, Ltd.
Zero Coupon, 06/22/37 03/27/07 $ 5,750,000 0.00* -- 575 0.00**
Preferred Term Securities XXVI, Ltd.
Subordinated Note, Zero Coupon, 09/22/37 06/06/07 $ 2,500,000 0.00* -- 250 0.00**
Soloso CDO, Ltd., Series 2005-1 04/24/06 4,000 10.00 -- 40,000 0.03
Summit CBO I, Ltd
Series 1A, Class B, 1.71%, 05/23/12 08/03/05 $ 4,093,795 0.00* -- 41 0.00**
White Marlin CDO, Ltd., Series AI 06/01/07 9,000 5.00 -- 45,000 0.04
----------- ----------- ------
$ 1,506,640 $ 1,120,078 0.83%
=========== =========== ======
* Amount is less than $0.01.
** Amount is less than 0.01%.
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II
APRIL 30, 2012 (UNAUDITED)
D. INTEREST-ONLY SECURITIES:
An interest-only security ("IO Security") is the interest-only portion of a MBS
that receives some or all of the interest portion of the underlying MBS and
little or no principal. A reference principal value called a notional value is
used to calculate the amount of interest due to the IO Security. IO securities
are sold at a deep discount to their notional principal amount. Generally
speaking, when interest rates are falling and prepayment rates are increasing,
the value of an IO Security will fall. Conversely, when interest rates are
rising and prepayment rates are decreasing, generally the value of an IO
Security will rise. These securities are identified on the Portfolio of
Investments.
E. COLLATERALIZED DEBT OBLIGATIONS:
A collateralized debt obligation ("CDO") is an asset-backed security whose
underlying collateral is typically a portfolio of bonds or bank loans. Where the
underlying collateral is a portfolio of bonds, a CDO is referred to as a
collateralized bond obligation ("CBO"). Where the underlying collateral is a
portfolio of bank loans, a CDO is referred to as a collateralized loan
obligation ("CLO"). Investors in CDOs bear the credit risk of the underlying
collateral. Multiple tranches of securities are issued by the CDO, offering
investors various maturity and credit risk characteristics. Tranches are
categorized as senior, mezzanine, and subordinated/equity, according to their
degree of risk. If there are defaults or the CDO's collateral otherwise
underperforms, scheduled payments to senior tranches take precedence over those
of mezzanine tranches, and scheduled payments to mezzanine tranches take
precedence over those to subordinated/equity tranches. CDOs, similar to other
asset-backed securities, are subject to prepayment risk.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage, if any. Distributions will automatically be
reinvested into additional Common Shares pursuant to the Fund's Dividend
Reinvestment Plan unless cash distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. Certain capital accounts in the
financial statements are periodically adjusted for permanent differences in
order to reflect their tax character. These permanent differences are primarily
due to the varying treatment of income and gain/loss on portfolio securities
held by the Fund and have no impact on net assets or net asset value per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future.
The tax character of distributions paid during the fiscal year ended October 31,
2011 was as follows:
Distributions paid from:
Ordinary income................................. $ 4,945,284
Capital gain.................................... --
Return of capital............................... 651,423
As of October 31, 2011, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income..................... $ --
Undistributed capital gains....................... --
--------------
Total undistributed earnings...................... --
Accumulated capital and other losses.............. (30,919,828)
Net unrealized appreciation (depreciation)........ (44,055,241)
--------------
Total accumulated earnings (losses)............... (74,975,069)
Other............................................. (473,612)
Paid-in capital................................... 206,558,127
--------------
Net assets........................................ $ 131,109,446
==============
G. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98.2% of the Fund's taxable income
exceeds the distributions from such taxable income for the calendar year.
Page 22
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II
APRIL 30, 2012 (UNAUDITED)
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry realized capital losses forward for up to eight years
following the year of the loss and offset such loss against any future realized
capital gains. At October 31, 2011, the Fund had an available capital loss
carryforward for federal income tax purposes of $30,919,828, expiring as
follows:
EXPIRATION DATE AMOUNT
October 31, 2016 $ 859,121
October 31, 2017 7,674,875
October 31, 2018 15,630,938
October 31, 2019 6,754,894
Of these losses, $30,896,207 are subject to loss limitation resulting from
reorganization activity. These limitations generally reduce the utilization of
these losses to a maximum of $4,318,194 per year.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ending 2008, 2009,
2010 and 2011 remain open to federal and state audit. As of April 30, 2012,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
H. EXPENSES:
The Fund will pay all expenses directly related to its operations.
I. ACCOUNTING PRONOUNCEMENT:
In May 2011, the Financial Accounting Standards Board ("FASB") issued ASU
2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRSs," modifying Topic 820, "Fair Value
Measurements and Disclosures." At the same time, the International Accounting
Standards Board ("IASB") issued International Financial Reporting Standard
("IFRS") 13, "Fair Value Measurement." The objective of the FASB and IASB is
convergence of their guidance on fair value measurements and disclosures.
Specifically, the ASU requires reporting entities to disclose (i) the amounts of
any transfers between Level 1 and Level 2, and the reasons for the transfers,
(ii) for Level 3 fair value measurements, quantitative information about
significant unobservable inputs used, (iii) a description of the valuation
processes used by the reporting entity, and (iv) a narrative description of the
sensitivity of the fair value measurement to changes in unobservable inputs if a
change in those inputs might result in a significantly higher or lower fair
value measurement. The effective date of the ASU is for interim and annual
periods beginning after December 15, 2011, and it is therefore not effective for
the current fiscal year. Management is in the process of assessing the impact of
the updated standards on the Fund's financial statements, if any.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. First Trust is responsible for the ongoing monitoring of
the Fund's investment portfolio, managing the Fund's business affairs and
providing certain administrative services necessary for the management of the
Fund. For these investment management services, First Trust is entitled to a
monthly fee calculated at an annual rate of 0.90% of the Fund's Managed Assets.
First Trust also provides fund reporting services to the Fund for a flat annual
fee in the amount of $9,250.
Brookfield serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a portfolio
management fee at an annual rate of 0.45% of Managed Assets that is paid by
First Trust from its investment advisory fee.
BNY Mellon Investment Servicing (US) Inc. serves as the Fund's Administrator,
Fund Accountant and Transfer Agent in accordance with certain fee arrangements.
The Bank of New York Mellon serves as the Fund's Custodian in accordance with
certain fee arrangements.
Effective January 23, 2012, James A. Bowen resigned from his position as the
President and Chief Executive Officer of the Fund. He will continue as a
Trustee, the Chairman of the Board of Trustees and a member of the Executive
Committee. The Board elected Mark R. Bradley to serve as the President and Chief
Executive Officer of the Fund and James M. Dykas to serve as the Treasurer,
Chief Financial Officer and Chief Accounting Officer of the Fund.
Effective January 1, 2012, each Trustee who is not an officer or employee of
First Trust, any sub-advisor or any of their affiliates ("Independent Trustees")
is paid a fixed annual retainer of $125,000 per year and an annual per fund fee
of $4,000 for each closed-end fund or other actively managed fund and $1,000 for
each index fund in the First Trust Fund Complex. The fixed annual retainer is
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Prior to January 1, 2012, each Independent Trustee received an
Page 23
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II
APRIL 30, 2012 (UNAUDITED)
annual retainer of $10,000 per trust for the first 14 trusts of the First Trust
Fund Complex and an annual retainer of $7,500 per trust for each additional
trust in the First Trust Fund Complex. The annual retainer was allocated equally
among each of the trusts.
Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are also reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and each Committee
chairman will serve two-year terms before rotating to serve as chairman of
another committee or as Lead Independent Trustee. The officers and "Interested"
Trustee receive no compensation from the Fund for serving in such capacities.
4. REORGANIZATION AND REVERSE STOCK SPLIT
On April 18, 2011, the Board of Trustees of the Fund approved the reorganization
of each of the Fund ("FHY"), the First Trust Strategic High Income Fund ("FHI")
and the First Trust Strategic High Income Fund III ("FHO"). FHY was the
surviving fund.
Under the terms of the reorganizations, which were tax-free, the assets of FHI
and FHO were transferred to, and the liabilities of FHI and FHO were assumed by,
FHY in exchange for shares of FHY. The cost of the investments received from FHI
and FHO were carried forward to FHY for U.S. GAAP and tax purposes. The FHY
shares were then distributed to FHI and FHO shareholders and the separate
existence of FHI and FHO ceased. The reorganizations were subject to certain
conditions, including that each reorganization was approved on August 8, 2011,
by the shareholders of FHI and FHO, respectively, and that the shareholders of
FHY approved the issuance of additional FHY shares in connection with the
reorganizations. When the reorganizations occurred on September 30, 2011, each
transaction was based on the relative net asset values of FHI, FHO and FHY.
ACQUIRING (SURVIVING) FUND ACQUIRED FUNDS
-------------------------- --------------
FHY FHI
FHO
The following table summarizes the asset transfers and conversion ratios for
each fund.
ACCUMULATED SHARE ACQUIRING
ACQUIRED SHARES NET ASSETS UNREALIZED NET REALIZED CONVERSION (SURVIVING) SHARES NET ASSETS
FUND REDEEMED ON 9/30/11 APPR (DEPR) LOSSES RATIO FUND ISSUED ON 9/30/11*
---------- --------- ----------- ------------ ------------- ---------- ----------- ---------- -----------
FHI 9,150,594 $34,305,393 $(2,806,920) $(79,046,404) 0.745047 FHY 6,817,582 $47,972,682
FHO 9,156,182 40,099,804 (2,401,021) (35,818,175) 0.870347 FHY 7,969,118
*Amounts reflect net assets of FHY prior to reorganization.
The following table summarizes the operations of the Acquired Funds for the
period November 1, 2010 to September 30, 2011, the operations of FHY, the
Acquiring (Surviving) Fund for the year ended October 31, 2011, as presented in
the Statement of Operations and the combined Acquired and Acquiring (Surviving)
Funds' pro-forma results of operations for the year ended October 31, 2011
assuming the acquisition had been completed on November 1, 2010.
Because the combined investment portfolios have been managed as a single
integrated portfolio since the reorganizations were completed, it is not
practicable to separate the amounts of revenue and earnings of FHI and FHO that
have been included in FHY's Statement of Operations since September 30, 2011.
NET REALIZED
NET AND UNREALIZED NET INCREASE
INVESTMENT GAIN (LOSS) ON (DECREASE) FROM
INCOME INVESTMENTS OPERATIONS
---------- -------------- ---------------
Acquired Funds for the Period November 1, 2010 to September 30, 2011
FHI $ 3,564,808 $ 289,501 $ 3,854,309
FHO 3,429,563 (5,054,834) (1,625,271)
Acquiring Fund for the Year Ended October 31, 2011
FHY 5,613,623 6,219,121 11,832,744
---------------------------------------------------------
Combined Totals $12,607,994 $ 1,453,788 $ 14,061,782
=========================================================
The reorganizations concluded subsequent to the close of business on September
30, 2011.
Page 24
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II
APRIL 30, 2012 (UNAUDITED)
The Board of Trustees of FHY approved a 1-for-3 reverse stock split, which was
completed upon the consummation of the reorganizations. FHY's shares are trading
on a split-adjusted basis under a new CUSIP number. The reverse stock split
resulted in every three outstanding shares being converted into one share,
thereby reducing the number of FHY shares outstanding. Fractional shares were
issued in the reverse stock split.
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding short-term
investments, for the six months ended April 30, 2012 were $37,828,735 and
$38,030,373, respectively.
6. BORROWINGS
The Fund has a committed facility agreement (the "Agreement") with BNP Paribas
Prime Brokerage Inc. ("BNP") that has a maximum commitment amount of
$66,000,000. Absent certain events of default or failure to maintain certain
collateral requirements, BNP may not terminate the Agreement except upon 180
calendar days' prior notice. The borrowing rate under the Agreement is equal to
the 3-month LIBOR plus 80 basis points. In addition, under the Agreement, the
Fund pays a commitment fee of 0.80% on the undrawn amount of such facility.
The average amount outstanding for the six months ended April 30, 2012 was
$54,400,000, with a weighted average interest rate of 1.31%. As of April 30,
2012, the Fund had outstanding borrowings of $54,400,000 under the Agreement.
The high and low annual interest rates for the six months ended April 30, 2012
were 1.38% and 1.23%, respectively. The interest rate at April 30, 2012 was
1.27%.
7. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
8. LITIGATION
Lehman Brothers Special Finance, Inc. ("LBSF") is maintaining a certain class
action in the United States Bankruptcy Court for the Southern District of New
York (the "Class Litigation"), seeking to recover funds that it alleges were
inappropriately distributed to counter-parties upon the termination of credit
swap agreements based on Lehman Brothers' bankruptcy. The Class Litigation was
filed September 14, 2010. The Class Litigation names the issuers of certain
asset-backed securities (the "Issuer Defendants"), the trustees for such
securities (the "Trustee Defendants") and certain of the investors in the
securities (the "Named Noteholder Defendants"). Although the Fund is not
currently a Named Noteholder Defendant, by letters dated February 22, 2012, and
March 1, 2012 (the "Notices"), special counsel for LBSF provided a "notice of
intent" to add the Fund and two funds subsequently reorganized into the Fund,
(FHI and FHO) as Named Noteholder Defendants in the Class Litigation.
The Fund has been advised that it has received, in the aggregate, $6,750,000
from one Issuer Defendant. The Fund cannot predict whether it will ultimately be
a Named Noteholder Defendant in the Class Litigation, or what the outcome of any
litigation might be.
9. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur, including the risk that borrowers do not pay
their mortgages. When the Advisor or Sub-Advisor determines that it is
temporarily unable to follow the Fund's investment strategy or that it is
impractical to do so (such as when a market disruption event has occurred and
trading in the securities is extremely limited or absent), the Advisor or
Sub-Advisor may take temporary defensive positions.
Page 25
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II
APRIL 30, 2012 (UNAUDITED)
RESIDENTIAL MORTGAGE-BACKED SECURITIES RISK: MBS's may have less potential for
capital appreciation than comparable fixed-income securities due to the
likelihood of increased prepayments of mortgages as interest rates decline. If
the Fund buys MBS's at a premium, mortgage foreclosures and prepayments of
principal by mortgagors (which usually may be made at any time without penalty)
may result in some loss of the Fund's principal investment to the extent of the
premium paid. Alternatively, in a rising interest rate environment, the value of
MBS's may be adversely affected when payments on underlying mortgages do not
occur as anticipated, resulting in the extension of the security's effective
maturity and the related increase in interest rate sensitivity of a longer-term
instrument. The value of MBS's may also change due to shifts in the market's
perception of issuers and regulatory or tax changes adversely affecting the
markets as a whole. In addition, MBS's are subject to the credit risk associated
with the performance of the underlying mortgage properties. In certain
instances, third-party guarantees or other forms of credit support can reduce
the credit risk. The Fund may also invest in MBS's which are interest-only
securities ("IO") and principal-only ("PO") securities. Generally speaking, when
interest rates are falling and prepayment rates are increasing, the value of a
PO security will rise and the value of an IO security will fall. Conversely,
when interest rates are rising and prepayment rates are decreasing, generally
the value of a PO will fall and the value of an IO security will rise. In
addition to the foregoing, residential MBS's are subject to additional risks,
including, but not limited to: (i) the United States residential mortgage market
has recently encountered various difficulties and changed economic conditions.
In addition, recently, residential property values in various states have
declined or remained stable after extended periods of appreciation. A continued
decline or an extended flattening in those values may result in additional
increases in delinquencies and losses on residential mortgage loans generally;
(ii) if a residential mortgage obligation is secured by a junior lien it will be
subordinate to the rights of the mortgagees or beneficiaries under the related
senior mortgages or deeds of trust; and (iii) depending on the length of a
residential mortgage obligation underling a residential MBS, unscheduled or
early payments of principal and interest may shorten the security's effective
maturity and prevailing interest rates may be higher or lower than the current
yield of the Fund's portfolio at the time the Fund receives the payments for
reinvestment.
VALUE INVESTING RISK: The Sub-Advisor focuses the Fund's investments on
securities that they believe are undervalued or inexpensive relative to other
investments. Such securities are subject to the risk of misestimating certain
fundamental factors. Disciplined adherence to a "value" investment mandate
during periods in which that style is "out of favor" can result in significant
underperformance relative to overall market indices and other managed investment
vehicles that pursue growth style investments and/or flexible style mandates.
BELOW-INVESTMENT GRADE SECURITIES RISK: The Fund invests in below-investment
grade securities. The market values for high-yield securities tend to be very
volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, an investment in the Fund is subject to the
following specific risks: (a) increased price sensitivity to changing interest
rates and to a deteriorating economic environment; (b) greater risk of loss due
to default or declining credit quality; (c) adverse issuer specific events are
more likely to render the issuer unable to make interest and/or principal
payments; and (d) a negative perception of the high-yield market may depress the
price and liquidity of high-yield securities.
DISTRESSED SECURITIES RISK: The Fund may invest in securities issued by
companies in a bankruptcy reorganization proceeding, subject to some other form
of a public or private debt restructuring or otherwise in default or in
significant risk of default in the payment of interest or repayment of principal
or trading at prices substantially below other below-investment grade debt
securities of companies in similar industries. Distressed securities frequently
do not produce income while they are outstanding. The Fund may be required to
incur certain extraordinary expenses in order to protect and recover its
investment. Therefore, to the extent the Sub-Advisor seeks capital appreciation
through investment in distressed securities; the ability to achieve current
income may be diminished.
ECONOMIC CONDITIONS RISK: Adverse changes in economic conditions are more likely
to lead to a weakened capacity of a high-yield issuer to make principal payments
and interest payments than an investment grade issuer. An economic downturn
could severely affect the ability of highly leveraged issuers to service their
debt obligations or to repay their obligations upon maturity. Under adverse
market or economic conditions, the secondary market for high-yield securities
could contract further, independent of any specific adverse changes in the
condition of a particular issuer and these securities may become illiquid. As a
result, the Sub-Advisor could find it more difficult to sell these securities or
may be able to sell the securities only at prices lower than if such securities
were widely traded.
FIXED-INCOME SECURITIES RISK: Debt securities, including high yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the proceeds from matured, traded or called
bonds are reinvested at market interest rates that are below the portfolio's
current earnings rate; (iii) prepayment risk, which is the risk that during
periods of declining interest rates, the issuer of a security may exercise its
option to prepay principal earlier than scheduled, forcing the reinvestment in
lower yielding securities; and (iv) credit risk, which is the risk that a
security in the Fund's portfolio will decline in price or the issuer fails to
make interest payments when due because the issuer of the security experiences a
decline in its financial status.
Page 26
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II
APRIL 30, 2012 (UNAUDITED)
INTEREST RATE RISK: The Fund's portfolio is also subject to interest rate risk.
Interest rate risk is the risk that fixed-income securities will decline in
value because of changes in market interest rates. Investments in debt
securities with long-term maturities may experience significant price declines
if long-term interest rates increase.
LEVERAGE RISK: The Fund may borrow an amount up to 33-1/3% (or such other
percentage as permitted by law) of its assets (including the amount borrowed)
less liabilities other than borrowings. The Fund may use leverage for investment
purposes and to meet cash requirements. Its leveraged capital structure creates
special risks not associated with unleveraged funds having similar investment
objectives and policies. These include the possibility of higher volatility of
the NAV of the Fund. The Fund previously leveraged its assets through the use of
reverse repurchase agreements. Reverse repurchase agreements are subject to the
risks that the market value of the securities sold by the Fund may decline below
the price of the securities the Fund is obligated to repurchase, and that the
securities may not be returned to the Fund. The Fund may from time to time
consider changing the amount of the leverage in response to actual or
anticipated changes in interest rates or the value of the Fund's investment
portfolio. There can be no assurance that the leverage strategies will be
successful.
FOREIGN SECURITIES RISK: The Fund may invest in securities (equity or debt) of
foreign issuers. Investing in securities of foreign issuers, which are generally
denominated in foreign currencies, may involve certain risks not typically
associated with investing in securities of U.S. issuers. These risks include:
(i) there may be less publicly available information about foreign issuers or
markets due to less rigorous disclosure or accounting standards or regulatory
practices; (ii) foreign markets may be smaller, less liquid and more volatile
than the U.S. market; (iii) potential adverse effects of fluctuations in
currency exchange rates or controls on the value of the Fund's investments; (iv)
the economies of foreign countries may grow at slower rates than expected or may
experience a downturn or recession; (v) the impact of economic, political,
social or diplomatic events; (vi) certain foreign countries may impose
restrictions on the ability of foreign issuers to make payments of principal and
interest to investors located in the United States due to blockage of foreign
currency exchanges or otherwise; and (vii) withholding and other foreign taxes
may decrease the Fund's return. These risks may be more pronounced to the extent
that the Fund invests a significant amount of its assets in companies located in
one region and to the extent that the Fund invests in securities of issuers in
emerging markets.
10. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events:
On May 21, 2012, the Fund declared a dividend of $0.1325 per share to Common
Shareholders of record on June 5, 2012, payable June 15, 2012.
On June 20, 2012, the Fund declared a dividend of $0.1325 per share to Common
Shareholders of record on July 5, 2012, payable July 16, 2012.
On June 8, 2012, the Fund, Advisor and Sub-Advisor entered into a sales
agreement with JonesTrading whereby the Fund may offer and sell up to 1,000,000
Common Shares from time to time through JonesTrading as agent for the offer and
sale of the Common Shares. Sales of Common Shares pursuant to the sales
agreement may be made in negotiated transactions or transactions that are deemed
to be "at the market" as defined in Rule 415 under the Securities Act of 1933,
as amended, including sales made directly on the NYSE or sales made through a
market maker other than on an exchange, at an offering price equal to or in
excess of the net asset value per share of the Fund's Common Shares at the time
such Common Shares are initially sold. The Fund intends to use the net proceeds
from the sale of the Common Shares in accordance with its investment objectives
and policies.
Page 27
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II
APRIL 30, 2012 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV")
at the time of valuation, the Fund will issue new shares at a
price equal to the greater of (i) NAV per Common Share on that
date or (ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation,
the Plan Agent will receive the dividend or distribution in cash
and will purchase Common Shares in the open market, on the NYSE
or elsewhere, for the participants' accounts. It is possible
that the market price for the Common Shares may increase before
the Plan Agent has completed its purchases. Therefore, the
average purchase price per share paid by the Plan Agent may
exceed the market price at the time of valuation, resulting in
the purchase of fewer shares than if the dividend or
distribution had been paid in Common Shares issued by the Fund.
The Plan Agent will use all dividends and distributions received
in cash to purchase Common Shares in the open market within 30
days of the valuation date except where temporary curtailment or
suspension of purchases is necessary to comply with federal
securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 28
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ADDITIONAL INFORMATION - (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II
APRIL 30, 2012 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of First Trust
Energy Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Active Dividend Income Fund and First Trust High Income
Long/Short Fund was held on Monday, April 18, 2012 (the "Annual Meeting"). At
the Annual Meeting, Thomas R. Kadlec and Richard E. Erickson were elected by the
Common Shareholders of the First Trust Strategic High Income Fund II as Class I
Trustees for a three-year term expiring at the Fund's annual meeting of
shareholders in 2015. The number of votes cast in favor of Mr. Kadlec was
7,059,086, the number of votes against was 175,641 and the number of abstentions
was 872,148. The number of votes cast in favor of Mr. Erickson was 7,060,729,
the number of votes against was 173,998 and the number of abstentions was
872,148. James A. Bowen, Niel B. Nielson and Robert F. Keith are the other
current and continuing Trustees.
Page 29
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FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Brookfield Investment Management Inc.
3 World Financial Center
200 Vesey Street, 10th Floor
New York, NY 10281
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
1 Wall Street
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
There has been no change, as of the date of this filing, in any of the
portfolios managers identified in response to paragraph (a)(1) of this Item in
the Registrant's most recently filed annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the "1940
Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days
of the filing date of the report that includes the disclosure required by
this paragraph, based on their evaluation of these controls and
procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Strategic High Income Fund II
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By (Signature and Title)* /s/ Mark R. Bradley
-------------------------------------------------------
Mark R. Bradley, President and Chief Executive Officer
(principal executive officer)
Date June, 25, 2012
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
-------------------------------------------------------
Mark R. Bradley, President and Chief Executive Officer
(principal executive officer)
Date June, 25, 2012
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By (Signature and Title)* /s/ James M. Dykas
-------------------------------------------------------
James M. Dykas, Treasurer, Chief Financial Officer
and Chief Accounting Officer
(principal financial officer)
Date June, 25, 2012
---------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.