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 811-21539
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First Trust/Four Corners Senior Floating Rate 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: May 31
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Date of reporting period: November 30, 2008
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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.
[GRAPHIC OMITTED]
SEMI-ANNUAL
REPORT
For the Six Months Ended
November 30, 2008
FIRST TRUST/
FOUR CORNERS
SENIOR FLOATING
RATE INCOME FUND II
[LOGO OMITTED] FOUR CORNERS [LOGO OMITTED] FIRST TRUST
CAPITAL MANAGEMENT
Front Cover
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TABLE OF CONTENTS
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First Trust/Four Corners Senior Floating Rate Income Fund II (FCT)
Semi-Annual Report
November 30, 2008
Shareholder Letter 1
At A Glance 2
Portfolio Commentary 3
Portfolio of Investments 6
Statement of Assets and Liabilities 16
Statement of Operations 17
Statements of Changes in Net Assets 18
Statement of Cash Flows 19
Financial Highlights 20
Notes to Financial Statements 21
Additional Information 27
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 Four Corners Capital Management, LLC ("Four
Corners" 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/Four Corners Senior Floating Rate 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 Four Corners 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 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 Four
Corners 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/Four Corners Senior Floating Rate Income Fund II (FCT)
Semi-Annual Report
November 30, 2008
Dear Shareholders:
The six months ended November 30, 2008 have been challenging for the financial
markets and for many investors. Yet, regardless of the market, First Trust
Advisors L.P. ("First Trust") believes that in order to be successful in
reaching your financial goals, you should be invested for the long term. We also
believe that investors should seek professional help from a financial advisor
who has been through many types of markets, knows the range of investments
available, and is committed to bringing you investments suitable to your
particular situation.
Our goal at First Trust has always been to offer a wide range of investment
products, including our family of closed-end funds, to help financial advisors
give you the opportunity to meet your financial objectives. We have continued to
expand our product line to ensure that you have many choices to fit your
investment needs.
The report you hold contains detailed information about your investment in First
Trust/Four Corners Senior Floating Rate Income Fund II (the "Fund"). It contains
a portfolio commentary from the Fund's portfolio management team that provides a
market recap for the period, a performance analysis and a market and Fund
outlook. Additionally, the report provides the Fund's financial statements for
the period covered by the report. I encourage you to read this document and
discuss it with your financial advisor.
First Trust has been through many types of markets and remains committed to
bringing you quality investment solutions regardless of the inevitable ups and
downs experienced in the market. We offer a variety of products that may fit
many financial plans to help those investors seeking long-term investment
success. As well, we are committed to making available up-to-date reports about
your investments so you and your financial advisor have current information on
your portfolio.
We continue to value our relationship with you, and we thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust/Four Corners Senior Floating Rate Income Fund II
Page 1
First Trust/Four Corners Senior Floating Rate Income Fund II
"AT A GLANCE"
As of November 30, 2008 (Unaudited)
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Fund Statistics
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Symbol on New York Stock Exchange FCT
Common Share Price $6.96
Common Share Net Asset Value ("NAV") $8.88
Premium (Discount) to NAV (21.62)%
Net Assets Applicable to Common Shares $224,635,594
Current Monthly Distribution per Common Share (1) $0.0660
Current Annualized Distribution per Common Share $0.7920
Current Distribution Rate on Closing Common Share Price (2) 11.38%
Current Distribution Rate on NAV (2) 8.92%
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Common Share Price & NAV (weekly closing price)
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[CHART OMITTED]
[DATA POINTS REPRESENTED IN CHART]
Common Share Price NAV
11/30/2007 15.34 17.29
12/28/2007 14.89 17.15
1/25/2008 15.07 16.54
2/29/2008 13.85 15.50
3/28/2008 13.53 15.37
4/25/2008 14.96 16.19
5/30/2008 14.76 16.42
6/27/2008 14.21 16.38
7/25/2008 13.45 15.98
8/29/2008 13.34 15.82
9/26/2008 11.56 14.45
10/31/2008 8.45 10.32
11/30/2008 6.96 8.88
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Performance
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Average Annual Total Return
6 Months Ended 1 Year Ended Inception (5/25/2004)
11/30/2008 11/30/2008 to 11/30/2008
FUND PERFORMANCE
NAV (3) -43.70% -44.08% -9.15%
Market Value (4) -50.91% -50.60% -14.79%
INDEX PERFORMANCE
S&P/LSTA Leveraged Loan Index -25.96% -26.72% -3.25%
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% of Long-Term
Industry Classifications (5) Investments
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Media 16.2%
Health Care Providers & Services 9.9
Hotels, Restaurants & Leisure 8.8
Electric Utilities 5.2
Containers & Packaging 4.4
Aerospace & Defense 4.3
Chemicals 4.0
Diversified Consumer Services 3.3
Oil, Gas & Consumable Fuels 3.2
Food & Staples Retailing 3.1
IT Services 2.7
Commercial Services & Supplies 2.6
Diversified Financial Services 2.6
Paper & Forest Products 2.4
Capital Markets 2.3
Specialty Retail 2.3
Real Estate Investment Trusts (REITs) 1.8
Software 1.8
Independent Power Producers & Energy Traders 1.8
Food Products 1.6
Metals & Mining 1.6
Road & Rail 1.3
Pharmaceuticals 1.2
Semiconductors & Semiconductor Equipment 1.2
Energy Equipment & Services 1.2
Internet Software & Services 1.2
Automobiles 1.0
Diversified Telecommunication Services 1.0
Wireless Telecommunication Services 0.9
Electronic Equipment, Instruments & Components 0.9
Computers & Peripherals 0.9
Multi-Utilities 0.8
Insurance 0.7
Electrical Equipment 0.4
Leisure Equipment & Products 0.2
Machinery 0.2
Internet & Catalog Retail 0.2
Gas Utilities 0.2
Household Durables 0.2
Auto Components 0.2
Industrial Conglomerates 0.1
Airlines 0.1
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Total 100.0%
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% of Long-Term
Credit Quality (S&P Ratings) (6) Investments
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BBB 1.5%
BBB- 6.9
BB+ 13.1
BB 20.9
BB- 19.2
B+ 16.9
B 5.5
B- 3.2
CCC+ 1.9
CCC 0.8
CC 0.1
NR 2.7
NR (Privately rated securities) 6.5
WR 0.8
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Total 100.0%
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% of Long-Term
Top 10 Holdings Investments
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Georgia-Pacific Corporation 1.8%
Fresenius Medical Care AG 1.7
DaVita, Inc. 1.6
Covanta Energy Corporation 1.6
NRG Energy, Inc. 1.6
Brenntag Holding GmbH & Company KG 1.4
SUPERVALU, Inc. 1.4
Owens-Illinois Group, Inc. 1.4
UPC Distribution Holding B.V. 1.4
Royalty Pharma Finance Trust 1.4
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Total 15.3%
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(1) Most recent distribution paid or declared through 11/30/2008. Subject to
change in the future.
(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 11/30/2008.
(3) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gain distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per share and
does not reflect sales load. Past performance is not indicative of future
results.
(4) Total return based on market value is the combination of reinvested dividend
distributions and reinvested capital gains distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in Common Share
price. Past performance is not indicative of future results.
(5) Building Products and Real Estate Management & Development represent less
than 0.1% of Long-Term Investments.
(6) Ratings below BBB- by Standard & Poor's Ratings Group are considered to be
below investment grade.
Page 2
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PORTFOLIO COMMENTARY (Unaudited)
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Sub-Advisor
Four Corners Capital Management, LLC ("Four Corners") was founded in 2001 by a
team of investment professionals and an affiliate of Australia-based Macquarie
Group Limited ("Macquarie"). Four Corners manages approximately $3.2 billion of
assets (as of November 30, 2008), with an emphasis on senior secured
floating-rate corporate loans ("Senior Loans"). The experienced professionals at
Four Corners specialize in structuring and managing Senior Loan-based products
for a global client base. With multiple investment products, Four Corners'
clients include institutional investors, corporations, investment funds, and
high net worth and retail investors. Four Corners is an investment advisor
registered under the Investment Advisors Act of 1940, and is a wholly-owned
indirect subsidiary of Macquarie.
Portfolio Management Team
Michael P. McAdams, General Manager, Non-Investment Grade Products
Mr. McAdams is responsible for overseeing Four Corners' distribution activities.
He has more than 29 years of experience in investment management and banking,
all of which have been spent in leveraged finance. Prior to founding Four
Corners, Mr. McAdams was with ING Capital Advisors, LLC ("ICA") from 1995 to
2001. Mr. McAdams was a founder of ICA and held the titles of President, Chief
Executive Officer and Chief Investment Officer. Under his leadership, ICA
completed over one dozen structured transactions and had over $7 billion in
assets under management. Prior to working at ICA, Mr. McAdams was founding
portfolio manager of the first retail senior secured floating rate loan fund,
the Pilgrim Prime Rate Trust (NYSE: PPR), which he managed from its inception in
1988 through 1995. Mr. McAdams was previously employed by National Bank of
Canada, where he was a member of one of the first teams to manage a
non-originated U.S. corporate loan portfolio. Mr. McAdams began his banking
career at Manufacturers Hanover Trust Company in New York. He received an MBA in
Finance/Accounting from the University of California Los Angeles and dual BAs in
Finance/Accounting and Eastern European Studies from California State University
at Fullerton. Mr. McAdams has been an active member of the Loan Syndication and
Trading Association and was its Chairman in 2001, Vice Chairman in 2002 and has
been a Board Member and/or served on committees reporting to the Board since
1998. Mr. McAdams received the 2006 Credit Investment News Outstanding
Contribution award in the U.S. Loan Market.
Robert I. Bernstein, CFA, Chief Investment Officer, Non-Investment Grade Credit
Mr. Bernstein is responsible for managing Four Corners' investment activities.
He has over 17 years of experience in leveraged finance including senior secured
loans, high-yield bonds and private equity investments. Prior to joining Four
Corners, Mr. Bernstein was a partner of The Yucaipa Companies, a Los
Angeles-based private equity firm, where he completed M&A transactions and
leveraged financings valued in excess of $4 billion. Previously, Mr. Bernstein
was a Vice President in Bankers Trust's leveraged finance group, where he
arranged senior loan and high-yield bond financings for financial sponsors and
corporate issuers. Mr. Bernstein also worked in GE Capital's restructuring
group, where he focused primarily on asset-based loans to distressed borrowers.
Mr. Bernstein received an MBA in Finance from the University of Chicago and a
BBA in Finance magna cum laude from Hofstra University. He has earned the
Chartered Financial Analyst designation. Mr. Bernstein also served as an
infantry officer in the U.S. Marine Corps.
Commentary
First Trust/Four Corners Senior Floating Rate Income Fund II
The primary investment objective of First Trust/Four Corners Senior Floating
Rate Income Fund II ("FCT" or the "Fund") is to seek a high level of current
income. As a secondary objective, the Fund attempts to preserve capital. The
Fund pursues its objectives by investing in a portfolio of Senior Loans. There
can be no assurance that the Fund's investment objectives will be achieved. The
Fund may not be appropriate for all investors.
Market Recap
The six-month period ending November 30, 2008 was the worst and most volatile
period in Senior Loan market history. The S&P/LSTA Leveraged Loan Index (the
"Index") had a negative return of -25.96% during the period, and is down -26.95%
calendar year to November 30, 2008. Historically, the Index has never had a
negative year. The global financial crisis has obviously reduced asset prices
across almost every asset class, and the Senior Loan market has been no
exception. Additionally, the market-specific issues that have contributed to
Senior Loans' poor performance are discussed in more detail below.
Page 3
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PORTFOLIO COMMENTARY - (Continued) (Unaudited)
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As a result of the credit market dislocation that began in July 2007 and the
ensuing global financial crisis, loan prices have declined dramatically. In
2007, prices began to decline as a result of an imbalance in the supply/demand
relationship in the Senior Loan market. Demand for Senior Loans dramatically
decreased as the market for structured products fell apart following the credit
crisis. The swift and severe decline in demand for Senior Loans coincided with
an unprecedented amount of supply, as reduced prices caused broad-based forced
selling and a large inventory of unsold new-issue loans remained.
This supply/demand relationship only worsened in 2008 from a combination of weak
economic data and earnings, a spike in ratings downgrades, rising default rates
and a surge of supply from continued forced liquidations. Many investors in the
Senior Loan market leverage their assets by using proceeds from borrowed money
to purchase Senior Loans. As loan prices have declined, debt providers have
forced funds to sell loans in order to repay the borrowed money. This dynamic of
forced selling often begets more selling since it forces market prices lower.
This forced selling began in July 2007 and has been dramatic in the last three
months ended November 30, 2008. Index returns for the three months ended
November 30, 2008 were -25.48%, multiples of the prior lowest period returns.
While few things are certain in these turbulent times, we believe a reduction in
the volume of forced loan sales will be necessary for the loan market to achieve
some price stability. Likewise, the demand side remains weak, with
collateralized loan obligation creation virtually non-existent, and retail
loan-based funds experiencing outflows. While there has been activity among some
major institutional investors and distressed accounts stepping into the market
to take advantage of low loan prices and wide spreads, the incremental demand is
not broad based and is not nearly sufficient to offset the volume of forced
selling.
Finally, fundamental performance has also weakened and, in our opinion, this may
be keeping new investors at bay. The average year-over-year EBITDA growth among
publicly filed issuers in the S&P/LSTA Leveraged Loan Index dropped to a
five-year low of 0.1%, from 9.7% in the second quarter, according to CompuStat
(a unit of S&P). The loan default rate has climbed 3.5 percentage points through
the first 11 months of the calendar year, the steepest 11-month increase since
February 2001.1 There have been 41 defaults in the loan market through November,
2008, compared to three in the same period of 2007.2 Likewise, covenant
amendments among institutional loans soared to 44 so far in the fourth quarter
of 2008, versus 27 in the third quarter of 2008, and 14 during the last three
months of 2007. Year-to-date, LCD News has reported 131 amendments, up from 38
in all of 2007.1 The need for covenant amendments typically results from weak
performance.
Performance Analysis
FCT generated a total return of -50.91% including market price change and
dividends for the six-months ended November 30, 2008. The Fund's net asset value
("NAV") total return was -43.70% over the same period. The NAV return trailed
the Index return by -17.74%. The Fund's performance includes the negative impact
of leverage in a negative return environment as well as the negative impact of
fees, expenses, and un-invested cash balances which are not part of the
benchmark return. FCT's NAV return exceeded the "pure-play" peer group average
by 0.14% and the broad peer group average by 0.45%.3 The Fund's closing price on
November 28, 2008 was $6.96, which represented a -21.62% discount to its NAV,
compared to the Fund's discount to NAV of -10.11% six months earlier on May 31,
2008.
While credit spreads have widened significantly since July 2007, the underlying
FCT portfolio is still primarily comprised of Senior Loans purchased during the
last several years. The credit spreads on these Senior Loans are below the
current yields on Senior Loans, which are trading at significant discounts to
their issuance prices.
The price decline of Senior Loans has pressured the Fund's NAV, resulting in an
increase in the Fund's leverage percentage. In order to stay within the Fund's
investment guidelines and leverage covenants, the Fund has sold Senior Loans at
a discount, using the proceeds to reduce the Fund's leverage. This has generated
realized losses and has also impacted the Fund's ability to generate dividend
income.
While several Fund peers have been unable to maintain paying their dividends,
FCT's dividends have been uninterrupted. However, the Fund's income has declined
primarily as a result of lower LIBOR rates and a smaller asset base. The
dividend distribution totaled $0.45 per Common Share during the past six months
ended November 30, 2008, which represented a 29.81% decrease from the prior six
months ended May 31, 2008. Based on the Fund's current dividend, FCT's
distribution rate is 11.38% (calculated on the Fund's share price) and 8.92%
(based on the Fund's NAV) as of November 30, 2008. The last twelve months
dividends produced a Fund yield based on price of 15.82%, which was slightly
higher than the pure-play peer group average price yield of 15.18% and lower
than the broad peer group average price yield of 17.40%.
Page 4
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PORTFOLIO COMMENTARY - (Continued) (Unaudited)
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While we are disappointed with the Senior Loan market's heightened volatility
and poor market price performance, we have been pleased to maintain the Fund's
dividend in these difficult times. As discussed above, the Senior Loan market
witnessed an unprecedented period of volatility during the six-month period
covered by this report. The Fund was no exception as both its market price and
NAV experienced extraordinary declines and, at the end of the period, the Fund's
discount to its NAV had widened to near-record levels. During the period, the
Fund's NAV fluctuated from a high of $16.57 to a low of $8.87, a difference of
$7.70 per Common Share, whereas the market price of the Fund closed as high as
$14.78 and as low as $6.40, a difference of $8.38 per Common Share.
Market and Fund Outlook
We have seen a material increase in loan defaults and will likely see the
default rate continue to escalate as a result of a slowing economy and the
global financial crisis. We also anticipate continued loan volatility as the
supply/demand relationship is not expected to stabilize in the foreseeable
future. Despite this weak fundamental and technical outlook, we still find
Senior Loan investments attractive. Senior Loans often have the highest
collateral security in a company's capital structure, which has historically
allowed Senior Loan lenders to recover approximately 70% of their loan value in
the event of default.4 While historical recovery rates may not continue in the
future, we believe the outcome is significantly better than the outcome of
equity owners or unsecured corporate bond holders in default scenarios. With the
Index price below historical recovery rates, we believe that a lot of negative
performance is already being priced in at current levels.
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1 Standard & Poor's Leveraged Commentary & Data. Default Rates: How high
will they go? And what about recoveries? December 15, 2008.
2 Standard & Poor's Leveraged Commentary & Data. Year of Default Template,
December 15, 2008.
3 The "pure-play" peer group consists of a smaller subset (FCM, FCT, PPR,
TLI and VVR) of the broad peer group, which invests almost exclusively in
Senior Loans. We believe that these "pure-play" funds are generally more
comparable to the Fund than the broad peer group, as the non-senior loan
holdings are routinely less than 5% of such funds. Of the broad peer
group, eleven of the 16 total funds invest a material portion of their
assets in high-yield bonds, emerging markets debt or other types of
corporate debt securities.
4 Credit Suisse Leverage Finance Strategy Update. Third Quarter 2008
Institutional Leveraged Loan Default Review. October 9, 2008.
Page 5
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a)
November 30, 2008 (Unaudited)
Principal Ratings (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
---------- --------------------------------------------- ---------------- ------------ ------------- -----------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - 178.1%
AEROSPACE & DEFENSE - 7.7%
$ 498,750 BE Aerospace, Inc. Ba1 BBB- 5.75%-6.52% 07/28/14 $ 438,900
3,145,693 DAE Aviation Holdings, Inc. B1 BB- 5.80%-7.17% 07/31/14 1,793,045
2,271,812 GenCorp, Inc. Ba2 BB 3.69%-4.45% 04/30/13 1,703,860
1,554,665 Hexcel Corporation Ba1 BB+ 4.94%-6.19% 03/01/12 1,344,786
821,887 ILC Industries, Inc. NR(e) NR(e) 5.12% 02/24/12 760,246
2,000,000 L-1 Identity Solutions Operating Company Ba3 BB+ 7.50% 08/05/13 1,695,000
4,307,661 Robertson Aviation, LLC NR(e) NR(e) 4.19%-6.52% 04/19/13 2,498,443
989,975 Safenet, Inc. WR B+ 7.75% 04/12/14 514,787
2,822,661 Spirit Aerosystems, Inc. Ba3 BBB- 6.50% 09/30/13 2,356,922
1,489,104 Vought Aircraft Industries, Inc. Ba3 B- 3.94% 12/22/11 1,131,719
3,100,000 Vought Aircraft Industries, Inc. Ba3 B- 3.94%-6.43% 12/22/10 2,294,000
1,000,000 Wesco Aircraft Hardware Corp. B1 BB- 3.69% 09/29/13 766,667
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17,298,375
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AGRICULTURAL PRODUCTS - 2.1%
6,727,726 Dole Food Company, Inc. Ba3 B+ 3.50%-6.82% 04/12/13 4,728,630
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AIRLINES - 0.1%
495,000 Delta Air Lines, Inc. Ba2 BB- 4.58%-4.61% 04/30/12 327,319
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ALUMINUM - 1.8%
4,436,042 Novelis Corp. Ba2 BB 5.77% 07/06/14 2,741,474
2,016,383 Novelis, Inc. Ba2 BB 5.77% 07/06/14 1,246,125
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3,987,599
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APPAREL RETAIL - 0.5%
1,394,643 Hanesbrands, Inc. Ba2 BB+ 4.75%-5.27% 09/05/13 1,110,049
---------------
APPLICATION SOFTWARE - 0.7%
2,815,385 Verint Systems, Inc. NR B+ 4.66% 05/25/14 1,548,462
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ASSET MANAGEMENT & CUSTODY BANKS - 2.4%
451,454 Gartmore Investment Management Ba3 BB 5.58% 05/12/14 232,950
1,407,829 Grosvenor Capital Management Holdings, LLP NR(e) NR(e) 4.59%-4.88% 12/05/13 809,502
3,893,342 LPL Holdings, Inc. Ba3 B+ 5.51% 06/30/14 2,958,940
2,985,000 Nuveen Investments, Inc. Ba3 B+ 4.44%-6.77% 11/13/14 1,362,441
---------------
5,363,833
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AUTO PARTS & EQUIPMENT - 0.3%
1,006,377 TRW Automotive, Inc. Baa3 BBB 4.63%-5.81% 05/09/14 691,884
---------------
AUTOMOBILE MANUFACTURERS - 1.9%
2,885,829 Ford Motor Company B1 CCC+ 4.43% 12/15/13 1,154,331
7,887,008 General Motors Corp. B1 B 5.80% 11/29/13 3,036,498
---------------
4,190,829
---------------
AUTOMOTIVE RETAIL - 1.0%
3,835,657 KAR Holdings, Inc. Ba3 B+ 6.02% 10/18/13 2,275,822
---------------
Page 6 See Notes to Financial Statements
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) - (Continued)
November 30, 2008 (Unaudited)
Principal Ratings (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
---------- --------------------------------------------- ---------------- ------------ ------------- -----------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
BROADCASTING - 8.3%
$6,400,000 Citadel Broadcasting Corporation B3 B+ 4.34%-5.52% 06/12/14 $ 2,304,000
919,642 Cumulus Media, Inc. B3 B 3.19%-3.52% 06/07/14 413,839
5,321,813 Gray Television, Inc. B3 B 3.04%-5.65% 12/31/14 2,288,379
4,387,500 LBI Media, Inc. Ba2 B+ 4.62% 03/31/12 2,193,750
1,500,000 Paxson Communications Corp. B2 CCC+ 8.00% 01/15/12 600,000
3,500,000 Raycom Media, Inc. NR NR 3.88% 06/25/14 2,800,000
2,475,000 Sirius Satellite Radio, Inc. B1 B 3.69%-5.44% 12/20/12 1,460,250
1,155,750 Univision Communications, Inc. (f) Caa1 CCC 3.94% 03/29/09 924,600
9,000,000 Univision Communications, Inc. B1 B- 3.69% 09/29/14 4,000,500
2,977,059 Young Broadcasting, Inc. B2 B- 5.25%-6.31% 11/03/12 1,580,818
---------------
18,566,136
---------------
BUILDING PRODUCTS - 0.1%
1,000,000 South Edge, LLC (j) NR(e) NR(e) 6.25% 10/31/09 125,000
---------------
CABLE AND SATELLITE - 5.7%
5,356,263 Charter Communications Operating, LLC B1 B+ 3.63%-5.47% 03/06/14 3,599,853
3,740,267 CSC Holdings, Inc. Ba1 BBB- 4.57% 03/29/13 3,096,111
496,250 DIRECTV Holdings, LLC Baa3 BBB- 5.25% 04/13/13 433,805
8,000,000 UPC Distribution Holding B.V. Ba3 B+ 4.60% 12/31/14 5,648,000
---------------
12,777,769
---------------
CASINOS & GAMING - 13.1%
1,986,221 Cannery Casino Resorts, LLC B1 BB 3.70%-6.01% 05/18/13 1,842,219
3,273,536 CCM Merger, Inc. B1 BB- 4.17%-5.48% 04/25/12 1,473,091
2,270,892 Fontainebleau Resorts Las Vegas, LLC B3 B 6.07% 06/06/14 760,749
229,108 Fontainebleau Resorts Las Vegas, LLC (g) B3 B 2.00% (h) 06/06/14 76,751
1,573,091 Golden Nugget, Inc. B2 BB- 3.42%-3.44% 06/14/14 589,909
898,909 Golden Nugget, Inc. (g) B2 BB- 2.00% (h)-3.77% 06/30/14 337,091
1,473,750 Great Canadian Gaming Corp. Ba2 BBB- 3.68% 02/14/14 1,134,787
948,636 Green Valley Ranch Gaming, LLC B3 B 4.39%-4.75% 02/16/14 426,886
982,500 Greenwood Racing, Inc. B2 BB- 5.43% 11/28/11 589,500
988,382 Isle of Capri Casinos, Inc. Ba3 BB 5.51% 11/30/13 611,149
10,853,000 Las Vegas Sands, LLC B2 B+ 5.52% 05/23/14 5,239,589
5,460,371 Penn National Gaming, Inc. Ba2 BB+ 3.19%-5.29% 10/03/12 4,445,086
6,466,640 Seminole Tribe of Florida Baa3 BBB 4.81%-5.31% 03/05/14 5,108,645
6,000,000 VML US Finance, LLC B2 B 6.02% 05/25/13 3,360,000
2,142,857 WIMAR LANDCO, LLC (i) WR WR 5.25% 07/03/08 1,071,428
8,526,799 WIMAR OPCO, LLC (i) WR WR 7.25% 01/03/12 2,310,763
---------------
29,377,643
---------------
COMMODITY CHEMICALS - 0.6%
1,451,136 Ineos Group Limited B2 B 5.73%-5.95% 12/14/13 693,824
1,451,136 Ineos Group Limited B2 B 6.23%-6.45% 12/14/14 711,057
---------------
1,404,881
---------------
COMPUTER HARDWARE - 1.5%
5,565,079 Activant Solutions Holdings, Inc. B1 B+ 6.06%-6.25% 05/02/13 3,394,698
---------------
DATA PROCESSING & OUTSOURCED SERVICES - 1.7%
6,912,500 Clarke American Corp. B1 BB- 6.26%-6.38% 06/30/14 3,836,437
---------------
See Notes to Financial Statements Page 7
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) - (Continued)
November 30, 2008 (Unaudited)
Principal Ratings (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
---------- --------------------------------------------- ---------------- ------------ ------------- -----------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
DIVERSIFIED CHEMICALS - 4.4%
$3,000,000 Brenntag Holding GmbH & Company KG (f) Caa1 CCC+ 7.07% 06/18/15 $ 1,890,000
5,500,000 Brenntag Holding GmbH & Company KG B1 B+ 5.07% 01/17/14 3,905,000
4,222,102 Huntsman International, LLC Ba1 BB+ 3.19% 04/19/14 2,769,699
1,000,000 Lyondell Basell Industries (k) B1 B+ 7.00% 12/20/14 411,667
994,845 Rockwood Specialties Group, Inc. Ba2 BB+ 3.55% 07/30/12 796,705
---------------
9,773,071
---------------
DIVERSIFIED METALS & MINING - 1.0%
2,797,500 Alpha Natural Resources, LLC Ba3 BB 5.56% 10/26/12 2,335,912
---------------
DIVERSIFIED SUPPORT SERVICES - 1.1%
3,202,323 RSC Equipment Rental Ba2 BB 5.52%-5.96% 11/30/12 2,513,824
---------------
EDUCATION SERVICES - 1.3%
1,916,818 Education Management, LLC B2 B+ 5.56% 06/01/13 1,263,902
2,051,667 PRO-QUEST-CSA, LLC Ba3 BB- 3.94% 02/09/14 1,559,267
---------------
2,823,169
---------------
ELECTRIC UTILITIES - 9.2%
995,879 Astoria Generating Company Acquisitions, LLC B1 BB- 3.71%-4.96% 02/23/12 779,773
3,397,728 Calpine Corporation B2 B+ 6.65% 03/29/14 2,377,197
7,919,587 Covanta Energy Corporation Ba2 BB 3.75%-5.55% 02/09/14 6,388,470
2,588,138 Mirant North America, LLC Ba2 BB 3.16% 01/03/13 2,098,548
7,602,051 NRG Energy, Inc. Ba1 BB 4.30% 02/01/13 6,302,100
1,986,347 Riverside Energy Center, LLC Ba3 BB- 7.67% 06/24/11 1,728,122
1,163,786 Rocky Mountain Energy Center, LLC Ba3 BB- 7.67%-7.77% 06/24/11 1,012,494
---------------
20,686,704
---------------
ELECTRICAL COMPONENTS & EQUIPMENT - 0.6%
1,577,572 Itron, Inc. Ba3 B+ 3.19% 04/18/14 1,277,834
---------------
ENVIRONMENTAL & FACILITIES SERVICES - 1.6%
5,210,438 EnergySolutions, LLC Ba2 NR(e) 3.65%-5.47% 06/07/13 3,647,306
---------------
FOOD DISTRIBUTORS - 3.0%
847,826 B&G Foods, Inc. Ba2 BB- 4.20% 02/23/13 686,739
851,667 Birds Eye Foods, Inc. NR(e) NR(e) 5.52% 03/22/13 664,300
3,964,937 Dean Foods Company B1 BB 2.94%-5.27% 04/02/14 3,173,365
2,500,000 New Uno Acquisition Corporation NR(e) NR(e) 7.75% 10/06/14 2,322,442
---------------
6,846,846
---------------
FOOD RETAIL - 2.5%
7,330,297 SUPERVALU, Inc. Ba3 BB+ 2.38% 06/02/12 5,721,297
---------------
FOREST PRODUCTS - 3.2%
9,580,920 Georgia-Pacific Corporation Ba2 BB+ 2.76%-5.26% 12/20/12 7,350,693
---------------
GAS UTILITIES - 0.3%
1,000,000 Atlas Pipeline Partners, L.P. Ba2 BB- 3.94% 07/27/14 762,500
---------------
Page 8 See Notes to Financial Statements
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) - (Continued)
November 30, 2008 (Unaudited)
Principal Ratings (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
---------- --------------------------------------------- ---------------- ------------ ------------- -----------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
HEALTH CARE FACILITIES - 4.0%
$3,587,105 Health Management Associates, Inc. B1 BB- 5.51% 02/28/14 $ 2,400,372
511,777 Lifepoint Hospitals, Inc. Ba1 BB 3.82% 04/15/12 422,216
4,809,716 Select Medical Corporation Ba2 BB- 3.40%-5.00% 02/24/12 3,575,220
2,802,480 Sun Healthcare Group, Inc. Ba2 B+ 4.05%-5.76% 04/19/14 1,989,761
826,129 USP Domestic Holdings, Inc. Ba3 B 3.48%-5.55% 04/19/14 524,592
161,290 USP Domestic Holdings, Inc. (g) Ba3 B 1.75% (h)-3.49% 04/19/14 102,419
---------------
9,014,580
---------------
HEALTH CARE SERVICES - 10.9%
4,716,774 CHS/Community Health Systems, Inc. Ba3 BB 4.02%-4.45% 07/25/14 3,454,301
241,495 CHS/Community Health Systems, Inc. (g) Ba3 BB 1.00% (h) 07/25/14 176,857
7,611,970 DaVita, Inc. Ba1 BB+ 2.92%-6.32% 10/05/12 6,448,769
8,113,531 Fresenius Medical Care AG Baa3 BBB- 2.81%-6.13% 03/31/13 6,680,138
1,965,000 Healthways, Inc. Ba2 BB+ 5.26% 12/01/13 1,709,550
1,462,500 Quintiles Transnational Corp. B1 BB 5.77% 03/31/13 1,133,438
5,858,128 US Oncology Holdings, Inc. Ba2 BB- 6.18%-6.51% 08/20/11 4,832,956
---------------
24,436,009
---------------
HOMEBUILDING - 0.3%
982,368 Mattamy Funding Partnership NR(e) NR(e) 4.50% 04/11/13 736,776
---------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 3.2%
6,499,620 Dynegy Holdings, Inc. Ba1 BB- 2.94% 04/02/13 4,790,759
3,450,000 Texas Competitive Electric Holdings
Company, LLC Ba3 B+ 5.27%-7.26% 10/10/14 2,327,888
---------------
7,118,647
---------------
INDUSTRIAL CONGLOMERATES - 0.2%
559,354 Mueller Water Products, Inc. Ba3 BB+ 3.19%-5.51% 05/24/14 399,938
---------------
INDUSTRIAL MACHINERY - 0.4%
1,481,250 Edwards (Cayman Islands II) Ltd. B1 BB- 3.44% 05/31/14 962,813
---------------
INSURANCE BROKERS - 0.3%
793,107 HealthCare Partners, LLC Ba3 BBB- 5.51% 10/31/13 666,210
---------------
INTEGRATED TELECOMMUNICATION SERVICES - 1.8%
2,840,000 Intelsat Corp. B1 BB- 6.65% 07/03/13 2,178,814
2,479,896 Telesat Canada B1 BB- 5.20%-6.77% 10/31/14 1,785,082
---------------
3,963,896
---------------
INTERNET RETAIL - 0.4%
2,429,519 Sabre Holdings Corp. B1 B+ 5.00%-5.42% 09/30/14 954,262
---------------
INTERNET SOFTWARE & SERVICES - 2.1%
6,717,139 SunGard Data Systems, Inc. Ba3 BB 3.52%-4.14% 02/28/14 4,686,252
---------------
INVESTMENT BANKING & BROKERAGE - 1.7%
4,534,394 Ameritrade Holding Corporation Ba1 BB 3.27% 12/31/12 3,746,543
---------------
See Notes to Financial Statements Page 9
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) - (Continued)
November 30, 2008 (Unaudited)
Principal Ratings (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
---------- --------------------------------------------- ---------------- ------------ ------------- -----------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
IT CONSULTING & OTHER SERVICES - 3.2%
$2,058,188 Alion Science and Technology Corp. B1 B+ 9.50% 02/06/13 $ 1,193,749
600,798 Apptis (DE), Inc. B1 B+ 6.25%-7.02% 12/20/12 420,558
989,637 CACI International, Inc. Ba1 NR 2.91%-4.32% 05/03/11 870,881
962,961 iPayment, Inc. B1 B 3.42%-5.76% 05/10/13 688,517
1,047,609 Open Solutions, Inc. Ba3 BB- 5.96% 01/23/14 314,283
5,895,225 West Corporation B1 BB- 3.77%-4.73% 10/24/13 3,658,724
---------------
7,146,712
---------------
LEISURE FACILITIES - 2.4%
4,398,750 Cedar Fair, L.P. Ba3 BB- 3.44% 08/30/12 2,995,549
797,082 London Area and Waterfront Finance, LLC NR(e) NR(e) 5.31% 03/08/12 621,724
2,119,188 Six Flags, Inc. B2 B 3.65%-6.14% 04/30/15 1,300,651
985,000 Town Sports International, LLC Ba2 BB 4.00% 02/27/14 443,250
---------------
5,361,174
---------------
LEISURE PRODUCTS - 0.4%
1,947,870 LodgeNet Entertainment Corp. B3 B 5.77% 04/04/14 993,414
---------------
LIFE & HEALTH INSURANCE - 0.9%
831,151 Conseco, Inc. B1 B+ 3.77% 10/10/13 531,937
1,202,446 Multiplan Merger Corporation B1 B+ 4.00% 04/12/13 865,761
1,246,843 Viant Holdings, Inc. Ba3 B+ 6.02% 06/25/14 648,359
---------------
2,046,057
---------------
MANAGED HEALTH CARE - 2.7%
4,951,625 IASIS Healthcare Corporation Ba2 B+ 3.80%-5.12% 03/15/14 3,682,771
2,921,268 Vanguard Health Systems, Inc. Ba3 B+ 3.69%-6.01% 09/23/11 2,384,485
---------------
6,067,256
---------------
METAL & GLASS CONTAINERS - 2.5%
7,181,250 Owens-Illinois Group, Inc. Baa3 BBB- 2.91% 06/14/13 5,709,094
---------------
MORTGAGE REITs - 1.1%
1,870,000 LNR Property Corporation B2 BB 6.69% 07/12/09 900,717
3,080,000 LNR Property Corporation B2 BB 6.69% 07/12/11 1,493,800
---------------
2,394,517
---------------
MOVIES & ENTERTAINMENT - 7.7%
4,765,250 AMC Entertainment, Inc. Ba1 BB- 3.16% 01/26/13 3,619,207
1,222,933 Deluxe Entertainment Services Group, Inc. Ba3 B- 3.69%-6.01% 05/11/13 672,613
3,937,500 Discovery Communications Holding, LLC NR(e) NR(e) 5.76% 05/14/14 3,182,811
2,000,000 National CineMedia, LLC B1 B+ 4.57% 02/13/15 1,262,858
970,095 NEP II, Inc. NR(e) NR(e) 6.01% 02/16/14 630,562
2,992,366 Regal Cinemas Corporation Ba2 BB- 5.51% 10/27/13 2,228,481
1,500,000 TWCC Holding Corp. Ba2 BB 7.25% 09/14/15 1,286,250
5,516,968 WMG Acquisition Corp. Ba3 BB 3.44%-5.83% 03/01/11 4,312,432
---------------
17,195,214
---------------
MULTI-UTILITIES - 1.4%
4,984,306 KGEN, LLC Ba3 BB 5.56% 02/08/14 3,189,956
---------------
Page 10 See Notes to Financial Statements
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) - (Continued)
November 30, 2008 (Unaudited)
Principal Ratings (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
---------- --------------------------------------------- ---------------- ------------ ------------- -----------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
OFFICE REITs - 0.2%
$1,000,000 Tishman Speyer Real Estate D.C.
Area Portfolio, L.P. Ba2 B+ 3.23% 12/27/12 $ 350,000
---------------
OFFICE SERVICES & SUPPLIES - 1.9%
2,828,295 Emdeon Business Services, LLC B1 BB- 5.76% 11/16/13 2,022,231
1,193,791 Pike Electric, Inc. NR(e) NR(e) 2.94% 07/01/12 1,077,396
1,349,428 Pike Electric, Inc. NR(e) NR(e) 3.00% 12/10/12 1,217,859
---------------
4,317,486
---------------
OIL & GAS EQUIPMENT & SERVICES - 2.1%
1,984,925 Hercules Offshore, Inc. Ba3 BB 5.64% 07/11/13 1,275,314
3,727,162 Targa Resources, Inc. Ba3 B+ 5.76%-5.98% 10/31/12 2,658,707
997,175 Volnay Acquisition Co. I Ba1 BB+ 3.44%-5.43% 01/12/14 812,698
---------------
4,746,719
---------------
OIL & GAS EXPLORATION & PRODUCTION - 1.2%
2,221,705 ATP Oil & Gas Corporation NR NR 8.50% 07/15/14 1,477,434
1,272,727 ATP Oil & Gas Corporation NR NR 8.50% 01/15/11 846,364
992,087 SemCrude, L.P. (i) (j) WR NR 4.50% 03/16/11 396,835
---------------
2,720,633
---------------
OIL & GAS REFINING & MARKETING - 1.9%
972,911 Alon USA, Inc. B1 BB 3.69%-4.45% 06/22/13 632,392
979,420 Calumet Lubricants Co., L.P B1 B 6.04%-8.00% 01/03/15 538,681
5,501,786 Western Refining Company, L.P. B3 BB- 9.25% 05/30/14 3,108,509
---------------
4,279,582
---------------
OIL & GAS STORAGE & TRANSPORTATION - 2.5%
3,000,000 Energy Transfer Equity, L.P. Ba2 NR 4.14% 02/08/12 2,439,000
4,000,000 Enterprise GP Holdings, L.P. Ba2 BB- 4.02%-6.77% 11/08/14 3,240,000
---------------
5,679,000
---------------
OTHER DIVERSIFIED FINANCIAL SERVICES - 2.7%
970,000 First Data Corporation Ba3 BB- 4.15%-6.51% 09/24/14 655,963
6,372,500 Royalty Pharma Finance Trust Baa2 BBB- 6.01% 04/16/13 5,490,973
---------------
6,146,936
---------------
PACKAGED FOODS & MEATS - 0.7%
514,361 Michael Foods, Inc. Ba3 BB- 3.92%-4.94% 11/21/10 452,638
1,479,968 Weight Watchers International, Inc. Ba1 BB+ 5.69% 01/26/14 1,218,506
---------------
1,671,144
---------------
PAPER PACKAGING - 5.3%
1,982,468 Graham Packaging Holdings Co. B1 B+ 4.44%-6.31% 10/07/11 1,504,553
5,792,509 Graphic Packaging International, Inc. Ba3 BB- 3.41%-6.64% 05/16/14 4,282,836
1,940,000 Pregis Corporation Ba3 BB- 6.01% 10/12/12 1,707,200
4,767,631 Smurfit-Stone Container Enterprises, Inc. (k) Ba2 BB 4.81%-5.13% 11/01/11 3,531,108
1,227,977 Smurfit-Stone Container Enterprises, Inc. (k) Ba2 BB 6.03% 11/01/10 911,431
---------------
11,937,128
---------------
See Notes to Financial Statements Page 11
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) - (Continued)
November 30, 2008 (Unaudited)
Principal Ratings (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
---------- --------------------------------------------- ---------------- ------------ ------------- -----------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
PAPER PRODUCTS - 1.1%
$ 987,500 Appleton Papers, Inc. Ba2 BB+ 4.26%-6.07% 06/05/14 $ 723,344
2,302,500 Domtar Corporation Baa3 BBB- 3.55% 03/07/14 1,729,433
---------------
2,452,777
---------------
PHARMACEUTICALS - 2.2%
4,942,462 Cardinal Health 409, Inc. Ba3 BB- 6.01% 04/10/14 2,996,368
1,829,820 Graceway Pharmaceuticals, LLC Ba3 BB 6.51% 05/03/12 1,171,085
940,824 Stiefel Laboratories, Inc. B1 BB- 7.00% 12/28/13 724,434
---------------
4,891,887
---------------
PUBLISHING - 7.4%
5,483,980 Cenveo Corporation Ba2 BB+ 4.95% 06/21/13 3,509,747
5,500,000 GateHouse Media, Inc. Caa1 CCC+ 4.20%-5.00% 08/28/14 1,265,000
9,825,000 Idearc, Inc. B2 B- 3.44%-5.77% 11/17/14 3,186,110
1,445,748 Media News Group, Inc. B1 CCC+ 7.07% 08/02/13 628,900
2,880,212 Media News Group, Inc. B1 CCC+ 5.82% 12/30/10 1,296,095
985,000 Reader's Digest Association (The), Inc. B1 B 3.77%-4.81% 03/02/14 344,750
4,952,959 RH Donnelley, Inc. Ba2 BB 6.75%-7.52% 06/30/11 2,957,296
6,912,500 Tribune Company (k) Caa1 CCC 6.00% 05/19/14 1,941,258
731,429 Tribune Company (k) Caa1 CCC 7.08% 05/18/09 274,286
906,667 Wenner Media, LLC NR(e) NR(e) 5.51% 10/02/13 634,667
1,000,000 Yell Group, PLC Ba3 BB- 4.43% 10/27/12 552,500
---------------
16,590,609
---------------
REAL ESTATE DEVELOPMENT - 0.1%
240,476 Shea Capital I, LLC NR(e) NR(e) 4.68%-5.25% 10/27/11 120,238
---------------
RESIDENTIAL REITs - 0.0%
100,000 Apartment Investment Mgmt. Co. Ba1 BB+ 3.12% 03/22/11 75,000
---------------
RETAIL REITs - 2.0%
6,046,709 Capital Automotive, L.P. Ba1 BB+ 4.60% 12/16/10 2,533,571
1,394,737 General Growth Properties, Inc. Caa2 CC 2.92% 02/24/10 295,684
1,983,333 The Macerich Partnership, L.P. NR(e) NR(e) 2.94% 04/26/10 1,586,667
---------------
4,415,922
---------------
SEMICONDUCTORS - 2.1%
8,351,250 Freescale Semiconductors, Inc. Ba1 BB 4.60% 12/01/13 4,775,871
---------------
SPECIALIZED CONSUMER SERVICES - 4.6%
977,500 Acosta, Inc. NR(e) NR(e) 5.37% 07/28/13 650,037
971,693 Advantage Sales & Marketing, Inc. NR(e) NR(e) 4.59%-5.77% 03/29/13 621,884
2,303,018 Affinion Group, Inc. Ba2 BB 3.94%-4.67% 10/17/12 1,642,818
2,000,000 Asurion Corp. NR(e) NR(e) 4.77%-5.71% 07/03/14 1,340,000
981,955 N.E.W. Holdings I, LLC NR(e) NR(e) 4.70%-7.02% 05/22/14 687,368
2,969,715 Nielsen Finance, LLC Ba3 B+ 3.77%-4.39% 08/09/13 1,966,973
4,290,711 RMK Acquisition Corporation Ba3 BB 3.90%-5.64% 01/26/14 3,398,243
---------------
10,307,323
---------------
Page 12 See Notes to Financial Statements
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) - (Continued)
November 30, 2008 (Unaudited)
Principal Ratings (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
---------- --------------------------------------------- ---------------- ------------ ------------- -----------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
SPECIALIZED FINANCE - 1.9%
$3,000,000 J.G. Wentworth, LLC Caa1 CCC+ 6.01% 04/04/14 $ 975,000
5,225,000 Peach Holdings, Inc. B2 B 5.69%-8.02% 11/21/13 3,291,750
---------------
4,266,750
---------------
SPECIALTY CHEMICALS - 2.2%
6,439,943 Celanese Holdings, LLC Ba2 BB+ 4.35%-5.55% 04/02/14 4,875,958
---------------
SPECIALTY STORES - 2.7%
1,194,375 Dollarama Group, L.P. Ba1 BB- 5.17% 11/18/11 907,725
4,073,223 Harbor Freight Tools USA, Inc. NR(e) NR(e) 9.75% 02/12/13 2,342,103
1,969,849 Michaels Stores, Inc. B2 B 3.69%-4.50% 10/31/13 965,226
3,231,442 The Yankee Candle Company, Inc. Ba3 BB- 3.42%-5.77% 02/06/14 1,736,900
---------------
5,951,954
---------------
SYSTEMS SOFTWARE - 2.5%
4,416,731 Dealer Computer Services, Inc. Ba2 BB 3.44% 10/26/12 2,627,955
3,884,107 Intergraph Corporation Ba3 BB- 4.20% 05/29/14 2,981,052
---------------
5,609,007
---------------
TECHNOLOGY DISTRIBUTORS - 1.6%
1,976,333 H3C Holdings, Ltd. Ba2 BB 6.70% 09/28/12 1,581,066
3,496,500 Sensata Technologies Finance
Company, LLC B1 BB- 5.12%-5.26% 04/27/13 2,013,984
---------------
3,595,050
---------------
TRUCKING - 2.2%
4,340,429 The Hertz Corporation Ba1 BB+ 3.18%-4.70% 12/21/12 2,830,923
3,526,203 OshKosh Corporation Ba3 BB+ 2.93%-4.62% 12/06/13 2,213,951
---------------
5,044,874
---------------
WIRELESS TELECOMMUNICATION SERVICES - 1.7%
1,980,000 Clearwire Corporation NR NR 7.48%-9.26% 07/03/12 950,400
3,938,721 Crown Castle Operating Company Ba3 BB 5.38% 03/06/14 2,829,971
---------------
3,780,371
---------------
TOTAL SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) 400,136,061
(Cost $610,490,756) ---------------
SENIOR FLOATING-RATE NOTES - 0.4%
ELECTRICAL COMPONENTS & EQUIPMENT - 0.1%
650,000 NXP B.V. Caa1 CCC 7.50% 10/15/13 163,313
---------------
LEISURE FACILITIES - 0.3%
1,225,000 HRP Myrtle Beach (i) (j) (l) (n) WR NR 0.00% 04/01/12 637,000
---------------
TOTAL SENIOR FLOATING-RATE NOTES 800,313
(Cost $1,876,561) ---------------
See Notes to Financial Statements Page 13
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) - (Continued)
November 30, 2008 (Unaudited)
Principal Ratings (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
---------- --------------------------------------------- ---------------- ------------ ------------- -----------------
NOTES - 0.0%
HOMEBUILDING - 0.0%
$ 727,273 TOUSA, Inc. PIK (i) (l) (m) (n) NR NR 1.00% 07/01/15 $ 0
---------------
TOTAL NOTES 0
(Cost $436,364) ---------------
Shares Description Value
--------- --------------------------------------------------------------------------------------------- ---------------
PREFERRED STOCKS - 0.0%
HOMEBUILDING - 0.0%
4,273 TOUSA, Inc. (8.0%, Series A Convertible
Payment-In-Kind Preferred Stock) (i) (l) (n) 0
---------------
TOTAL PREFERRED STOCKS 0
(Cost $2,563,636) ---------------
COMMON STOCKS AND RIGHTS - 0.0%
OTHER DIVERSIFIED FINANCIAL SERVICES - 0.0%
690 Atkins Nutritionals Holdings - Common Stock (n) 0
690 Atkins Nutritionals Holdings - Rights (n) 0
---------------
TOTAL COMMON STOCKS AND RIGHTS 0
(Cost $36,260) ---------------
CLOSED END FUNDS - 0.1%
ASSET MANAGEMENT & CUSTODY BANKS - 0.1%
81,700 ING Prime Rate Trust 267,976
---------------
TOTAL CLOSED-END FUNDS 267,976
(Cost $508,540) ---------------
Principal
Amount Description Value
---------- --------------------------------------------------------------------------------------------- ---------------
SHORT-TERM INVESTMENTS - 3.4%
ASSET MANAGEMENT & CUSTODY BANKS - 3.4%
7,809,044 JPMorgan Federal Money Market Fund - 1.06% (o) 7,809,044
---------------
TOTAL SHORT-TERM INVESTMENTS 7,809,044
(Cost $7,809,044) ---------------
TOTAL INVESTMENTS - 182.0% 409,013,394
(Cost $623,721,161) (p)
NET OTHER ASSETS AND LIABILITIES - 3.1% 6,971,506
LOAN OUTSTANDING - (49.5)% (111,300,000)
AUCTION MARKET PREFERRED SHARES, AT LIQUIDATION VALUE
(INCLUDING ACCRUED DISTRIBUTIONS) - (35.6)% (80,049,306)
---------------
NET ASSETS (APPLICABLE TO COMMON SHAREHOLDERS) - 100.0% $ 224,635,594
===============
Page 14 See Notes to Financial Statements
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) - (Continued)
November 30, 2008 (Unaudited)
---------------------------
(a) All percentages shown in the Portfolio of Investments are based on net
assets applicable to Common Shareholders.
(b) Ratings below Baa3 by Moody's Investors Service, Inc. or BBB- by Standard
& Poor's Ratings Group are considered to be below investment grade.
(c) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior Loans may
be substantially less than the stated maturities shown.
(d) Senior Loans in which the Fund invests generally pay interest at rates
which are periodically predetermined by reference to a base lending rate
plus a premium. These base lending rates are generally (i) the lending
rate offered by one or more major European banks, such as the London
Interbank Offered Rate ("LIBOR"), (ii) the prime rate offered by one or
more United States banks or (iii) the certificate of deposit rate.
(e) This Senior Loan Interest was privately rated upon issuance. The rating
agency does not provide ongoing surveillance on the rating.
(f) This issue is secured by a second lien on the issuer's assets.
(g) Delayed Draw Loan (See Note 2E in the Notes to Financial Statements).
(h) Represents commitment fee rate on delayed draw loans.
(i) This borrower has filed for protection in federal bankruptcy court.
(j) Non-income producing security.
(k) This borrower has filed for protection in federal bankruptcy court
subsequent to the date of this report.
(l) This security is restricted and cannot be offered for public sale without
first being registered under the Securities Act of 1933, as amended.
Prior to registration, restricted securities may only be resold in
transactions exempt from registration (See Note 2F in the Notes
to Financial Statements).
(m) This security is a Senior Subordinated Payment-in-Kind Election Note
whereby 1.00% of interest per annum will be paid in cash and 13.75% of
interest per annum shall be paid by the issuer, at its option (i) entirely
in cash, (ii) entirely in Payment-in-Kind interest or (iii) in a
combination of (i) and (ii). Interest is to be paid semi-annually;
however, the issuer is in default and income is not being accrued.
(n) This security is fair valued in accordance with valuation procedures
adopted by the Fund's Board of Trustees.
(o) Represents the daily interest rate in effect at November 30, 2008.
(p) Aggregate cost for federal income tax and financial reporting purposes.
As of November 30, 2008, the aggregate gross unrealized appreciation for
all securities in which there was an excess of value over tax cost was
$0 and the aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value was $214,707,767.
NR Not rated.
WR Withdrawn rating.
----------------------------------------------------------------
SECURITY VALUATION INPUTS
A summary of the inputs used to value the Fund's total investments as of
November 30, 2008 is as follows (See Note 2A in the Notes to Financial
Statements):
Valuation of Inputs Investments
-------------------------------------------------------------------------
Level 1 - Quoted Prices $ --
Level 2 - Other Significant Observable Inputs 408,376,394
Level 3 - Significant Unobservable Inputs 637,000
-------------------
Total $ 409,013,394
===================
The following table presents the Fund's investments measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) at May 31, 2008
and at November 30, 2008.
Investments at Fair Value using significant unobservable inputs (Level 3)
-------------------------------------------------------------------------
Investments
-----------------
Balance as of May 31, 2008 $ 64,000
Transfers in (out) of Level 3 637,000
Net unrealized gains (losses) (64,000)
-----------------
Balance as of November 30, 2008 $ 637,000
=================
See Notes to Financial Statements Page 15
First Trust/Four Corners Senior Floating Rate Income Fund II
Statement of Assets and Liabilities
November 30, 2008 (Unaudited)
ASSETS:
Investments, at value
(Cost $623,721,161) $ 409,013,394
Prepaid expenses 51,191
Receivables:
Investment securities sold 14,769,927
Interest 4,296,189
-----------------
Total Assets 428,130,701
-----------------
LIABILITIES:
Payables:
Outstanding loan 111,300,000
Investment securities purchased 10,737,430
Interest and fees on loan 718,434
Investment advisory fees 278,769
Printing fees 94,872
Administrative fees 92,046
Custodian fees 83,654
Legal fees 66,183
Audit and tax fees 51,227
Trustees' fees and expenses 11,545
Transfer agent fees 8,744
Accrued expenses and other liabilities 2,897
-----------------
Total Liabilities 123,445,801
-----------------
NET ASSETS INCLUDING AUCTION MARKET PREFERRED SHARES: $ 304,684,900
=================
AUCTION MARKET PREFERRED SHARES:
($0.01 par value, 3,200 shares issued with liquidation preference of
$25,000 per share, unlimited number of Auction Market Preferred Shares
has been authorized) 80,049,306
-----------------
NET ASSETS (Applicable to Common Shareholders) $ 224,635,594
=================
NET ASSETS consist of:
Paid-in capital 480,451,257
Par value 252,919
Accumulated net investment income (loss) (1,091,260)
Accumulated net realized gain (loss) on investments and swap transactions (40,269,555)
Net unrealized appreciation (depreciation) on investments and swap transactions (214,707,767)
-----------------
NET ASSETS (Applicable to Common Shareholders) $ 224,635,594
=================
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) $ 8.88
=================
Number of Common Shares outstanding (unlimited number of Common Shares
has been authorized) 25,291,939
=================
Page 16 See Notes to Financial Statements
First Trust/Four Corners Senior Floating Rate Income Fund II
Statement of Operations
For the Six Months Ended November 30, 2008 (Unaudited)
INVESTMENT INCOME:
Interest $ 18,918,658
Dividends 15,850
---------------
Total investment income 18,934,508
---------------
EXPENSES:
Interest and fees on loan 3,611,514
Investment advisory fees 2,311,637
Administrative fees 133,053
Legal fees 106,836
Auction Market Preferred Shares commission fees 94,129
Printing fees 61,594
Custodian fees 42,404
Audit and tax fees 32,616
Trustees' fees and expenses 22,407
Transfer agent fees 21,679
Other 53,483
---------------
Total expenses 6,491,352
---------------
NET INVESTMENT INCOME 12,443,156
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (28,573,536)
Credit default swaps (214,978)
---------------
Net realized gain (loss) (28,788,514)
---------------
Net change in unrealized appreciation (depreciation) on:
Investments (161,346,774)
Credit default swaps 138,235
---------------
Net change in unrealized appreciation (depreciation) (161,208,539)
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) (189,997,053)
---------------
AUCTION MARKET PREFERRED SHARE DIVIDENDS (1,514,985)
---------------
NET INCREASE (DECREASE) IN NET ASSETS (APPLICABLE TO COMMON SHAREHOLDERS)
RESULTING FROM OPERATIONS $ (179,068,882)
===============
See Notes to Financial Statements Page 17
First Trust/Four Corners Senior Floating Rate Income Fund II
Statements of Changes in Net Assets
Six Months
Ended Year
11/30/2008 Ended
(Unaudited) 5/31/2008
---------------- ----------------
OPERATIONS:
Net investment income (loss) $ 12,443,156 $ 36,777,196
Net realized gain (loss) (28,788,514) (6,941,462)
Net change in unrealized appreciation (depreciation) (161,208,539) (53,061,253)
Distributions to Auction Market Preferred Shareholders from:
Net investment income (1,514,985) (5,116,317)
---------------- ----------------
Net increase (decrease) in net assets applicable to Common Shareholders resulting
from operations (179,068,882) (28,341,836)
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (11,482,541) (34,639,840)
---------------- ----------------
Total distributions to Common Shareholders (11,482,541) (34,639,840)
---------------- ----------------
Total increase (decrease) in net assets applicable to Common Shareholders (190,551,423) (62,981,676)
NET ASSETS (Applicable to Common Shareholders):
Beginning of period 415,187,017 478,168,693
---------------- ----------------
End of period $ 224,635,594 $ 415,187,017
================ ================
Accumulated net investment income (loss) at end of period $ (1,091,260) $ (536,890)
================ ================
Page 18 See Notes to Financial Statements
First Trust/Four Corners Senior Floating Rate Income Fund II
Statement of Cash Flows
For the Six Months Ended November 30, 2008 (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets applicable to Common Shareholders resulting from operations $ (179,068,882)
Adjustments to reconcile net increase (decrease) in net assets applicable to Common
Shareholders resulting from operations to net cash provided by operating activities:
Purchases of investments (1,256,640,735)
Sales and maturities of investments 1,344,822,822
Net amortization/accretion of premium/discount on investments (1,156,004)
Net realized loss on investments 28,573,536
Net realized loss on credit default swaps 214,978
Net change in unrealized appreciation/depreciation on investments 161,346,774
CHANGES IN ASSETS AND LIABILITIES:
Net change in net unrealized appreciation/depreciation on credit default swaps (138,235)
Decrease in cash segregated as collateral for open credit default swaps 261,000
Increase in interest receivable (80,404)
Decrease in dividends receivable 2,303
Increase in prepaid expenses (25,435)
Increase in receivable for investment securities sold (7,371,564)
Increase in payable for investment securities purchased 3,666,094
Increase in interest and fees due on loan 199,362
Decrease in accumulated unpaid dividends on Auction Market Preferred Shares (107,472)
Decrease in investment advisory fees payable (160,000)
Decrease in audit and tax fees payable (17,473)
Decrease in legal fees payable (96,065)
Increase in transfer agent fees payable 3,838
Increase in printing fees payable 17,141
Increase in administrative fees payable 62,292
Increase in custodian fees payable 65,509
Increase in Trustees' fees and expenses payable 9,843
Decrease in accrued expenses and other liabilities (13,553)
----------------
Cash provided by operating activities $ 94,369,670
----------------
Cash flows from financing activities:
Distributions to Common Shareholders (11,482,541)
Retirement of Auction Market Preferred Shares (20,000,000)
Proceeds from issuances of borrowings 28,000,000
Repayments of borrowings (91,700,000)
Cash used by financing activities (95,182,541)
----------------
Decrease in cash (812,871)
Cash at beginning of period 812,871
----------------
Cash at end of period $ 0
================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,412,152
See Notes to Financial Statements Page 19
First Trust/Four Corners Senior Floating Rate Income Fund II
Financial Highlights
For a Common Share outstanding throughout each period
Six Months
Ended Year Year Year Year Period
11/30/2008 Ended Ended Ended Ended Ended
(Unaudited) 5/31/2008 5/31/2007 5/31/2006 5/31/2005 5/31/2004(a)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, beginning of period $ 16.42 $ 18.91 $ 19.00 $ 18.94 $ 19.04 $ 19.10(b)
----------- ----------- ----------- ----------- ----------- -----------
Income from investment operations:
Net investment income (loss) 0.49 1.45 1.66 1.48 0.95 (0.00)(c)
Net realized and unrealized gain (loss) (7.52) (2.37) (0.04) 0.04 (0.02) (0.02)
Distributions paid to AMP(d) Shareholders from:
Net investment income (0.06) (0.20) (0.21) (0.16) (0.07) --
----------- ----------- ----------- ----------- ----------- -----------
Total from investment operations (7.09) (1.12) 1.41 1.36 0.86 (0.02)
----------- ----------- ----------- ----------- ----------- -----------
Distributions paid to Common Shareholders from:
Net investment income (0.45) (1.37) (1.50) (1.28) (0.91) --
Net realized gain -- -- -- (0.02) -- --
----------- ----------- ----------- ----------- ----------- -----------
Total distributions to Common Shareholders (0.45) (1.37) (1.50) (1.30) (0.91) --
----------- ----------- ----------- ----------- ----------- -----------
Dilutive impact from the offering of AMP Shares(e) -- -- -- -- (0.05) --
----------- ----------- ----------- ----------- ----------- -----------
Common Share offering costs charged to
paid-in capital -- -- -- -- -- (0.04)
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 8.88 $ 16.42 $ 18.91 $ 19.00 $ 18.94 $ 19.04
=========== =========== =========== =========== =========== ===========
Market value, end of period $ 6.96 $ 14.76 $ 18.81 $ 17.61 $ 17.89 $ 20.01
=========== =========== =========== =========== =========== ===========
Total return based on net asset value (f) (g) (43.70)% (5.19)% 8.04% 8.06% 4.38% (0.31)%
=========== =========== =========== =========== =========== ===========
Total return based on market value (g) (h) (50.91)% (14.32)% 15.95% 6.03% (6.20)% 0.05%
=========== =========== =========== =========== =========== ===========
----------------------------------
Ratios to average net assets available
to Common Shareholders:
Ratio of total expenses to average net assets 3.63%(i) 3.63% 3.55% 3.08% 2.02% 1.44%(i)
Ratio of total expenses to average net assets
excluding interest expense 1.61%(i) 1.54% 1.45% 1.45% 1.30% 1.44%(i)
Ratio of net investment income (loss) to
average net assets 6.95%(i) 8.52% 8.80% 7.77% 5.01% (0.76)%(i)
Ratio of net investment income (loss) to
average net assets net of AMP dividends (j) 6.10%(i) 7.34% 7.70% 6.93% 4.59% N/A
Supplemental Data:
Portfolio turnover rate 10% 31% 78% 81% 115% 0%
Net assets, end of period (in 000's) $ 224,636 $ 415,187 $ 478,169 $ 480,155 $ 478,785 $ 437,945
Ratio of total expenses to total average
Managed Assets (k) 2.10%(i) 2.22% 2.26% 1.97% 1.43% N/A
Ratio of total expenses to total average Managed
Assets excluding interest expense (k) 0.93%(i) 0.94% 0.92% 0.93% 0.92% 1.44%(i)
Preferred Shares:
Total AMP Shares outstanding 3,200 4,000 4,000 4,000 4,000 N/A
Liquidation and market value per AMP share (l) $ 25,015 $ 25,039 $ 25,045 $ 25,040 $ 25,031 N/A
Asset coverage per share $ 95,199(m) $ 128,797(m) $ 179,792(n) $ 189,289(n) $ 191,446(n) N/A
Loan outstanding (in 000's) $ 111,300 175,000 141,000 177,000 187,000 N/A
Asset coverage per $1,000 of loan outstanding (o) $ 3,737 3,944 5,100 4,278 4,095 N/A
----------------------------------
(a) Initial seed date of May 18, 2004. The Fund commenced operations on May 25,
2004.
(b) Net of sales load of $0.90 per Common Share on initial offering.
(c) Amount represents less than $0.01 per Common Share.
(d) Auction Market Preferred ("AMP") Shares.
(e) The expenses associated with the offering of AMP Shares had a $(0.05)
impact on the Common Share NAV.
(f) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in net
asset value per share and does not reflect sales load.
(g) Total return is not annualized for periods less than one year.
(h) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price.
(i) Annualized
(j) Ratio reflects the effect of distributions to AMP Shareholders.
(k) Managed Assets are calculated by taking the Fund's average daily gross
asset value (which includes assets attributable to the Fund's AMP Shares,
and the principal amount of borrowings), minus the sum of the Fund's
accrued and unpaid dividends on any outstanding AMP Shares and accrued
liabilities.
(l) Includes accumulated and unpaid distributions to AMP Shareholders
(m) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the AMP Shares liquidation value), and dividing
by the number of AMP Shares outstanding. If this methodology had been used
historically, fiscal years 2005, 2006 and 2007 would have been $144,696,
$145,039 and $144,542, respectively.
(n) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the AMP Shares liquidation value and the loan
outstanding), and dividing by the number of AMP Shares outstanding.
(o) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the AMP Shares liquidation value and the loan
outstanding), and dividing by the outstanding loan balance in 000's.
N/A Not applicable
Page 20 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
November 30, 2008 (Unaudited)
1. Fund Description
First Trust/Four Corners Senior Floating Rate Income Fund II (the "Fund") is a
diversified, closed-end management investment company organized as a
Massachusetts business trust on March 25, 2004, 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 FCT
on the New York Stock Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund attempts to preserve capital. The
Fund pursues these objectives by investing in a portfolio of senior secured
floating-rate corporate loans ("Senior Loans"). There can be no assurance that
the Fund will achieve its investment objectives. Investing in Senior Loans
involves credit risk and, during periods of generally declining credit quality,
it may be particularly difficult for the Fund to achieve its secondary
investment objective. 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. 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 4:00p.m. Eastern time,
on each day the NYSE is open for trading. 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), less all
liabilities (including accrued expenses, dividends declared but unpaid and any
borrowings of the Fund) and the liquidation value of any outstanding Preferred
Shares, by the total number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to valuation procedures adopted by the Fund's Board of Trustees. A majority of
the Fund's assets are valued using market information supplied by third parties.
In the event that market quotations are not readily available, the pricing
service does not provide a valuation for a particular asset, or the valuations
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 and other investments. Additionally, if events occur after the close
of the principal market for particular securities (e.g., domestic debt and
foreign securities), but before the Fund values its assets, that could
materially affect NAV, First Trust may use a fair value method to value the
Fund's securities and other investments. The use of fair value pricing by the
Fund is governed by valuation procedures adopted by the Fund's Board of
Trustees, and in accordance with the provisions of the 1940 Act.
The Senior Loans in which the Fund invests are not listed on any securities
exchange or board of trade. Senior Loans are typically bought and sold by
institutional investors in individually negotiated private transactions that
function in many respects like an over-the-counter secondary market, although
typically no formal market-makers exist. This market, while having grown
substantially in the past several years, generally has fewer trades and less
liquidity than the secondary market for other types of securities. Some Senior
Loans have few or no trades, or trade infrequently, and information regarding a
specific Senior Loan may not be widely available or may be incomplete.
Accordingly, determinations of the market value of Senior Loans may be based on
infrequent and dated information. Because there is less reliable, objective data
available, elements of judgment may play a greater role in valuation of Senior
Loans than for other types of securities. Typically, Senior Loans are valued
using information provided by a third party pricing service. If the pricing
service cannot or does not provide a valuation for a particular Senior Loan or
such valuation is deemed unreliable, First Trust may value such Senior Loan at a
fair value according to valuation procedures adopted by the Fund's Board of
Trustees, and in accordance with the provisions of the 1940 Act.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued at the last sale price on the business day as of
which such value is being determined. If there has been no sale on such day, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as
of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities traded on the
NASDAQ, are valued at the closing bid prices. Short-term investments that mature
in less than 60 days when purchased are valued at amortized cost.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements
("FAS 157"), effective for fiscal years beginning after November 15, 2007. This
standard clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value and requires additional
disclosures about the use of fair value measurements. FAS 157 became effective
for the Fund as of June 1, 2008, the beginning of its current fiscal year. The
three levels of the fair value hierarchy under FAS 157 are as follows:
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (Continued)
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
November 30, 2008 (Unaudited)
o Level 1 - quoted prices in active markets for identical securities
o Level 2 - other significant observable inputs (including quoted
prices for similar securities, interest rates, prepayment speeds,
credit risk, etc.)
o Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's investments as of November 30, 2008 is
included with the Fund's Portfolio of Investments.
B. Credit Default Swaps:
The Fund may enter into credit default swap contracts for hedging purposes or to
gain exposure to a credit in which the Fund may otherwise invest. A credit
default swap contract is an agreement between two parties to exchange the credit
risk of an issuer. The Fund may be either the buyer or seller in a credit
default swap transaction. The "buyer" in a credit default swap contract is
obligated to pay the "seller" a periodic stream of payments over the term of the
contract provided that no event of default on the underlying reference
obligation has occurred. If an event of default occurs, the seller must pay the
buyer the full notional value, or "par value," of the reference obligation. In
exchange, the seller receives the par value of securities of the reference
obligor. In the case of cash settlement, the seller will pay the difference
between par and the market value of the securities of the reference obligor. An
event of default may be a grace period extension, obligation acceleration,
repudiation/moratorium, or restructuring.
Buying a credit default swap contract involves the risk that the contract may
expire worthless and the credit risk that the seller may fail to satisfy its
payment obligations to the Fund in the event of default. Selling a credit
default swap contract involves greater risks than if the Fund had invested in
the reference obligation directly. The Fund will segregate cash or liquid assets
in an amount equal to the aggregate market value of the credit default swap
contracts of which it is a seller. Additionally, the Fund maintains cash or
liquid assets for the full notional amount of the credit default swap contracts
of which it is a seller. The Fund may only enter into such transactions with
counterparties rated A- or higher.
Credit default swap contracts are marked to market daily based upon quotations
from brokers or market makers and the change in value, if any, is recorded as
unrealized appreciation (depreciation). For a credit default swap contract sold
by the Fund, payment of the agreed-upon amount made by the Fund in the event of
default of the referenced debt obligation is recorded as the cost of the
referenced debt obligation purchased/received. As of November 30, 2008, the Fund
had no credit default swaps.
C. Repurchase Agreements:
The Fund engages in repurchase agreement transactions. Under the terms of a
typical repurchase agreement, the Fund takes possession of an underlying debt
obligation subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during the Fund's holding period. This arrangement results in a fixed rate
of return that is not subject to market fluctuations during the Fund's holding
period. The value of the collateral is at all times at least equal to the total
amount of the repurchase obligation, including interest. In the event of
counterparty default, the Fund has the right to use the collateral to offset
losses incurred. There is potential loss to the Fund in the event the Fund is
delayed or prevented from exercising its rights to dispose of the collateral
securities, including the risk of a possible decline in the value of the
underlying securities during the period while the Fund seeks to assert its
rights. The Fund reviews the value of the collateral and the creditworthiness of
those banks and dealers with which the Fund enters into repurchase agreements to
evaluate potential risks. As of November 30, 2008, the Fund had no open
repurchase agreements.
D. 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 on the accrual basis. Market premiums and discounts
are amortized over the expected life of each respective borrowing.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date; interest income on such securities
is not accrued until settlement date. The Fund maintains liquid assets with a
current value at least equal to the amount of its when-issued or
delayed-delivery purchase commitments. At November 30, 2008, the Fund had no
when-issued or delayed-delivery purchase commitments.
E. Unfunded Loan Commitments:
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund had unfunded delayed draw loan commitments of
approximately $1,075,521 as of November 30, 2008. The Fund is obligated to fund
these loan commitments at the borrower's discretion. Net unrealized depreciation
from the commitments is $393,270 at November 30, 2008.
F. Restricted Securities:
The Fund invests in restricted securities, which are securities that cannot be
offered for public sale without first being registered under the Securities Act
of 1933, as amended. Prior to registration, restricted securities may only be
resold in transactions exempt from registration. The Fund held restricted
securities at November 30, 2008 as shown in the following table. 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 footnote (Note 2A) and are not expressed as a discount to
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (Continued)
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
November 30, 2008 (Unaudited)
the carrying value of a comparable unrestricted security. There are no
unrestricted securities with the same maturity dates and yields for these
issuers.
% of
Net Assets
Applicable
Acquisition Principal Value Current to Common
Security Date Value/Shares Per Share Carrying Cost Value Shareholders
------------------------------------------------------------------------------------------------------------------------
HRP Myrtle Beach 3/23/06 $ 1,225,000 $ 52.00 $ 1,225,000 $ 637,000 0.28%
TOUSA, Inc.-Notes 7/31/07(1) 727,273 -- 436,364 -- 0.00
TOUSA, Inc.-Preferred Stocks 7/31/07(1) 4,273 -- 2,563,636 -- 0.00
------------------------------------
$ 4,225,000 $ 637,000 0.28%
====================================
(1) Security was acquired through a restructuring that was effective on
July 31, 2007.
G. 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 the financing associated with leverage. If the Fund
recognizes a long-term capital gain, it will be required to allocate such gain
between the Common Shares and Auction Market Preferred Shares ("AMP Shares")
issued by the Fund in proportion to the total dividends paid for the year.
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. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterizations of distributions
made by the Fund.
The tax character of distributions paid during the fiscal year ended May 31,
2008 is as follows:
Distributions paid from: 2008
----------------
Ordinary Income $ 39,756,157
As of May 31, 2008, the components of distributable earnings on a tax basis are
as follows:
Undistributed Ordinary Income $ 128,029
Net Unrealized Appreciation (Depreciation) $ (54,007,368)
Accumulated Capital and other losses $ (11,481,041)
H. 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.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward for eight years following the
year of loss and offset such loss against any future realized capital gains. At
May 31, 2008, the Fund had available realized capital losses of $3,984,460 and
$3,611,723 to offset future net capital gains through the fiscal years ended
2014 and 2016, respectively.
POST-OCTOBER LOSSES. Under current laws, certain capital losses realized after
October 31 may be deferred and treated as occurring on the first day of the
following fiscal year. For the fiscal year ended May 31, 2008, the Fund intends
to elect to defer net realized losses incurred from November 1, 2007 through May
31, 2008 of $3,884,858.
In June 2006, FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes." FIN 48 establishes 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, and is effective for the Fund's current
fiscal year. As of November 30, 2008, management has evaluated the application
of FIN 48 to the Fund, and has determined that no provision for income tax is
required in the Fund's financial statements.
I. Expenses:
The Fund pays all expenses directly related to its operations.
J. Accounting Pronouncement:
In March 2008, FASB released Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS
161"). FAS 161 requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of and
Page 23
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (Continued)
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
November 30, 2008 (Unaudited)
gains and losses on derivative instruments, and disclosures about credit-risk
related contingent features in derivative agreements. The application of FAS 161
is required for fiscal years beginning after November 15, 2008 and interim
periods within those fiscal years. Management is currently evaluating the impact
the adoption of FAS 161 will have on the Fund's financial statement disclosures,
if any.
3. Investment Advisory Fee and Other Affiliated Transactions
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage. L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 0.75% of the Fund's Managed Assets, the average daily gross asset value of
the Fund (which includes assets attributable to the Fund's AMP Shares, and the
principal amount of borrowings), minus the sum of the Fund's accrued and unpaid
dividends on any outstanding AMP Shares and accrued liabilities.
Four Corners Capital Management, LLC ("Four Corners" or the "Sub-Advisor")
serves as the Fund's investment sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. Four Corners receives an annual portfolio
management fee of 0.38% of Managed Assets that is paid monthly by First Trust
from its investment advisory fee.
In accordance with certain fee arrangements, JPMorgan Investor Services Co.
serves as the Fund's Administrator and Fund Accountant, JPMorgan Chase Bank,
National Association serves as the Fund's Custodian and American Stock Transfer
& Trust Company serves as the Fund's Transfer Agent.
PNC Global Investment Servicing (U.S.) Inc., formerly known as PFPC, Inc.,
provides certain administrative services to the Fund in connection with the
Fund's Board of Trustees meetings and other related matters.
Deutsche Bank Trust Company Americas, a wholly-owned subsidiary of Deutsche Bank
AG ("Auction Agent"), serves as the Fund's AMP Share transfer agent, registrar,
dividend disbursing agent and redemption agent.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid an 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 subsequent trust added to the
First Trust Fund Complex. The annual retainer is allocated equally among each of
the trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually and the
Audit Committee Chairman is paid $5,000 annually, with such compensation paid by
the trusts in the First Trust Fund Complex and divided among those trusts.
Trustees are also reimbursed by the trusts in the First Trust Fund Complex for
travel and out-of-pocket expenses in connection with all meetings. Effective
January 1, 2008, each of the chairmen of the Nominating and Governance Committee
and Valuation Committee is paid $2,500 annually to serve in such capacities,
with such compensation paid by the trusts in the First Trust Fund Complex and
divided among those trusts. Also effective January 1, 2008, the Lead Independent
Trustee and each Committee chairman will serve two-year terms. The officers and
interested trustee receive no compensation from the trusts for serving in such
capacities.
4. Purchases and Sales of Securities
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments, for the period ended November 30, 2008 were $60,107,183
and $150,597,209, respectively.
5. Auction Market Preferred Shares
The Fund's Declaration of Trust authorizes the issuance of an unlimited number
of preferred shares of beneficial interest, par value $0.01 per share, in one or
more classes or series, with rights as determined by the Board of Trustees
without the approval of Common Shareholders. As of November 30, 2008, the Fund
has 1,600 Series A AMP Shares and 1,600 Series B AMP Shares outstanding at a
liquidation value of $25,000 per share.
The Fund is required to meet certain asset coverage tests with respect to the
AMP Shares. If the Fund fails to maintain Eligible Assets having an aggregated
Discounted Value at least equal to the AMP Shares Basic Maintenance Amount as of
any Valuation Date and the failure is not cured on or before the related Asset
Coverage Cure Date, the Fund will be required in certain circumstances to redeem
certain AMP Shares.
An auction of the Series A AMP Shares is generally held every 7 days and an
auction of the Series B AMP Shares is generally held every 28 days. Existing
shareholders may submit an order to hold, bid or sell such shares at par value
on each auction date. The Fund pays commissions to the auction agent as
compensation for conducting the auctions. These fees are included in the
"Auction Market Preferred Shares commission fees" on the Statement of
Operations.
Page 24
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (Continued)
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
November 30, 2008 (Unaudited)
The markets for auction rate securities have continued to experience a number of
failed auctions, including auctions relating to the Series A AMP Shares and
Series B AMP Shares. A failed auction results when there are not enough bidders
in the auction at rates below the maximum rate as prescribed by the terms of the
security. When an auction fails, the rate is automatically set at the maximum
rate. A failed auction does not cause an acceleration of, or otherwise have any
impact on, outstanding principal amounts due. In the case of the Fund's
outstanding Series A AMP Shares and Series B AMP Shares, the maximum rate under
the terms of those securities has been 125 percent (and could be up to 300
percent, depending on the ratings of the Series A AMP Shares and Series B AMP
Shares) of the greater of: (1) the applicable AA composite commercial paper rate
(for a rate period of fewer than 184 days) or the applicable U.S. Treasury index
rate (for a rate period of 184 days or more), or (2) the applicable
London-InterBank Offered Rate.
On July 2, 2008, the Fund redeemed $20 million of its $100 million outstanding
AMP Shares, consisting of $10 million Series A AMP Shares and $10 million Series
B AMP Shares with proceeds from a Revolving Credit Facility ("Credit Facility" -
see Note 6 below) with Citicorp North America Inc., as agent. The Credit
Facility is to be used as leverage for the Fund. The Credit Facility has an
expiration date of May 15, 2009 and may be renewed annually. The total
commitment under the Credit Facility is $195,000,000. Loans under the Credit
Facility will bear interest at a per annum rate equal to either: (i) a
commercial paper note rate, (ii) Eurodollar Rate plus a margin or (iii) the
prime rate publicly announced by Citibank N.A. plus a margin. The annual
interest rate in effect at July 2, 2008 was 2.79%. The Fund also pays additional
borrowing costs, which include a program fee of 0.75% and a liquidity fee of
0.50% per year. Under the requirements of the 1940 Act, the Fund, immediately
after any such borrowings, must have an "asset coverage" of at least 300%
(33-1/3% of the Fund's total assets after borrowings).
For the six-months ended November 30, 2008, transactions in AMP Shares were as
follows:
Series A Series B
Shares Value Shares Value
----------------------------------------------------
Outstanding at 5/31/08 2,000 $ 50,000,000 2,000 $ 50,000,000
Amount Retired (400) (10,000,000) (400) (10,000,000)
----------------------------------------------------
Outstanding at 11/30/08 1,600 $ 40,000,000 1,600 $ 40,000,000
====================================================
First Trust is continuing to seek methods for refinancing the approximately $80
million of the Fund's AMP Shares that remain outstanding. The ability to obtain
this refinancing is contingent on finding third parties willing to provide such
financing on a cost effective basis. There is no assurance that First Trust will
be successful in finding such financing, and any such financing arrangements
would be subject to approval of the Fund's Board of Trustees.
The annual dividend rate in effect as of November 30, 2008 was 2.34% and 2.72%
for the Series A 7 day and Series B 28 day auctions, respectively. The dividend
rate, as set by the auction process, is generally expected to vary with
short-term interest rates. The high and low annual dividend rates during the
period ended November 30, 2008, for the Series A 7 day auction were 5.94% and
2.11%, respectively, and the average dividend rate was 3.71%. The high and low
annual dividend rates during the period ended November 30, 2008, for the Series
B 28 day auction were 5.00% and 2.72%, respectively, and the average dividend
rate was 3.93%. These rates may vary in a manner not related directly to the
income received on the Fund's assets, which could have either a beneficial or
detrimental impact on net investment income and gains available to Common
Shareholders.
Under Emerging Issues Task Force (EITF) promulgating Topic D-98, Classification
and Measurement of Redeemable Securities, which was issued on July 19, 2001,
preferred securities that are redeemable for cash or other assets are to be
classified outside of permanent equity to the extent that the redemption is at a
fixed or determinable price and at the option of the holder or upon the
occurrence of an event that is not solely within the control of the issuer.
Subject to guidance of the EITF, the Fund's AMP Shares are classified outside of
permanent equity (net assets attributable to Common Shares) in the accompanying
financial statements.
6. Revolving Credit Facility
The Fund has entered into a 364-Day Revolving Credit Facility ("Credit
Facility") with various lenders and Citicorp North America Inc., as agent, to be
used as leverage for the Fund. The Credit Facility has an expiration date of May
15, 2009 and may be renewed annually. The Credit Facility provides for a secured
line of credit for the Fund, where Fund assets are pledged against advances made
to the Fund. Under the requirements of the 1940 Act, the Fund, immediately after
any such borrowings, must have an "asset coverage" of at least 300% (33-1/3% of
the Fund's total assets after borrowings). The total commitment under the Credit
Facility is $195,000,000. For the period ended November 30, 2008, the average
amount outstanding was $175,488,525. The high and low annual interest rates
during the period ended November 30, 2008, were 3.74% and 2.66%, respectively,
with a weighted average interest rate of 3.01%. The annual interest rate in
effect at November 30, 2008 was 3.24%. The Fund also pays additional borrowing
costs, which include a program fee of 0.75% and a liquidity fee of 0.50% per
year. Such expenses are included in "Interest and fees on loan" on the Statement
of Operations.
Page 25
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (Continued)
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
November 30, 2008 (Unaudited)
7. 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 bond market, or when political or economic events
affecting the issuers occur. 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 Fund may take
temporary defensive positions.
In 2008, securities markets have been significantly negatively affected by the
financial crisis that initially resulted from the downturn in the subprime
mortgage market in the United States. The potential impact of the financial
crisis on securities markets may prove to be significant and long-lasting and
may have a substantial impact on the value of the Fund.
LOWER GRADE DEBT INSTRUMENTS: The Senior Loans in which the Fund invests are
generally lower grade. These lower grade debt instruments may become the subject
of bankruptcy proceedings or otherwise subsequently default as to the repayment
of principal and/or payment of interest or be downgraded to ratings in the lower
rating categories. Lower grade debt instruments tend to be less liquid than
higher grade debt instruments.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The Fund borrowed pursuant to a leverage borrowing
program and through the issuance of Preferred Shares, which constitutes a
substantial lien and burden by reason of their prior claim against the income of
the Fund and against the net assets of the Fund in liquidation. The rights of
lenders to receive payments of interest on and repayments of principal on any
borrowings made by the Fund under a leverage borrowing program are senior to the
rights of holders of Common Shares and the holders of Preferred Shares, with
respect to the payment of dividends or upon liquidation. If the Fund is not in
compliance with certain Credit Facility provisions, the Fund may not be
permitted to declare dividends or other distributions, including dividends and
distributions with respect to Common Shares or Preferred Shares or purchase
Common Shares or Preferred Shares.
SENIOR LOAN RISK: In the event a borrower fails to pay scheduled interest or
principal payments on a Senior Loan held by the Fund, the Fund will experience a
reduction in its income and a decline in the market value of the Senior Loan,
which will likely reduce dividends and lead to a decline in the net asset value
of the Fund's Common Shares. If the Fund acquires a Senior Loan from another
lender, for example, by acquiring a participation, the Fund may also be subject
to credit risks with respect to that lender. The value of the collateral may not
equal the Fund's investment when the Senior Loan is acquired or may decline
below the principal amount of the Senior Loan subsequent to the Fund's
investment. Also, to the extent that collateral consists of stock of the
borrower or its subsidiaries or affiliates, the Fund bears the risk that the
stock may decline in value, be relatively illiquid, and/or may lose all or
substantially all of its value, causing the Senior Loan to be under
collateralized. Therefore, the liquidation of the collateral underlying a Senior
Loan may not satisfy the issuer's obligation to the Fund in the event of
non-payment of scheduled interest or principal, and the collateral may not be
readily liquidated.
AUCTION RISK: Numerous closed-funds, including the Fund, have been experiencing
failed auctions involving their auction-rate Preferred Shares. Based on current
market conditions, we expect that auctions may continue to fail. If an auction
fails you may not be able to sell some or all of your Preferred Shares. No third
parties related to the auction nor the Fund itself are obligated to purchase
Preferred Shares in an auction or otherwise, nor is the Fund required to redeem
Preferred Shares in the event of a failed auction.
8. 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.
9. Subsequent Events
On November 20, 2008, the Fund declared a dividend of $0.0660 per share to
Common Shareholders of record December 3, 2008, payable December 12, 2008.
On December 22, 2008, the Fund declared a dividend of $0.0660 per share to
Common Shareholders of record January 6, 2009, payable January 15, 2009.
On January 20, 2009, the Fund declared a dividend of $0.0510 per share to Common
Shareholders of record February 4, 2009, payable February 17, 2009.
Page 26
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
November 30, 2008 (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
American Stock Transfer & Trust Company (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) 659-2649, 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 and a transaction fee of $15.00.
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 American Stock Transfer &
Trust Company, 6201 15th Avenue, Brooklyn, New York, 11219 or through their
website located at www.amstock.com (you will need to know your 10-digit
participant number and social security number to gain access to your account
online).
--------------------------------------------------------------------------------
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 votes proxies relating to
portfolio securities 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 27
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION - (Continued)
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
November 30, 2008 (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 First Trust/Four Corners Senior
Floating Rate Income Fund and First Trust/Four Corners Senior Floating Rate
Income Fund II was held on September 15, 2008. At the Annual Meeting, holders of
Common and Preferred Shares of First Trust/Four Corners Senior Floating Rate
Income Fund II voting together elected Trustee Richard E. Erickson for a
three-year term. Holders of Preferred Shares elected Trustee Thomas R. Kadlec
and Trustee Robert F. Keith each for one-year terms. The number of votes cast in
favor of Richard E. Erickson was 22,585,701 the number of votes against was
584,592 and the number of abstentions was 2,125,646. The number of votes cast in
favor of Thomas R. Kadlec was 3,291, the number of votes against was 55 and the
number of abstentions was 654. The number of votes cast in favor of Robert F.
Keith was 3,291, the number of votes against was 55 and the number of
abstentions was 654. James A. Bowen and Niel B. Nielson are the current and
continuing Trustees.
Page 28
[BLANK INSIDE BACK COVER]
[LOGO OMITTED] FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Four Corners Capital Management, LLC
555 South Flower Street, Suite 3300
Los Angeles, CA 90071
CUSTODIAN
JPMorgan Chase Bank, National Association
3 Chase Metrotech Center, 6th Floor
Brooklyn, NY 11245
FUND ADMINISTRATOR & FUND ACCOUNTANT
JPMorgan Investor Services Co.
73 Tremont Street
Boston, MA 02108
TRANSFER AGENT
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
BOARD ADMINISTRATOR
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
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
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.
(a) Not applicable.
(b) Drew R. Sweeney was designated co-portfolio manager of the registrant upon
the announcement of resignation of Michael P. McAdams from Four Corners
Capital Management, LLC ("Four Corners") on February 6, 2009. Four Corners
Capital Management, LLC manages multiple portfolios comprised principally
of U.S. dollar denominated, floating-rate, senior secured, commercial and
industrial loans and notes, loan-based swaps, and other debt instruments,
and may manage portfolios that include high yield bonds and/or credit
derivatives. Robert I. Bernstein, Managing Director and Chief Investment
Officer of Four Corners, and Drew R. Sweeney, Senior Vice President of Four
Corners, are co-portfolio managers. The co-portfolio managers are supported
in their portfolio management activities by the Four Corners investment
staff. Four Corners' investment analysts are assigned loans within specific
industries and report to the Chief Investment Officer. Mr. Bernstein has
been Managing Director and Chief Investment Officer of Four Corners since
2001. Mr. Sweeney has been Senior Vice President of Four Corners since
2005. Prior to that, Mr. Sweeney was a Vice President and Analyst at
American Express Asset Management Group.
Other Accounts Managed by Portfolio Manager(s) or Management Team Member
--------------------------- --------------------------------------- -------------- -------------- ---------------- -----------------
Total Assets
# of Accounts for which
Total Managed for Advisory Fee is
Name of Portfolio Manager # of which Advisory Based on
or Accounts Total Assets Fee is Based Performance
Team Member Type of Accounts Managed ($millions) on Performance ($millions)
--------------------------- --------------------------------------- -------------- -------------- ---------------- -----------------
Registered Investment Companies: 2 $106.99M 0 $0
Other Pooled Investment Vehicles: 4 $1,134.97M 4 $1,134.97M
1. Robert I. Bernstein Other Accounts: 8 $1,395.45M 0 $0
--------------------------- --------------------------------------- -------------- -------------- ---------------- -----------------
Registered Investment Companies: 2 $106.99M 0 $0
Other Pooled Investment Vehicles: 0 $0 0 $0
2. Drew R. Sweeney Other Accounts: 1 $83.84M 0 $0
--------------------------- --------------------------------------- -------------- -------------- ---------------- -----------------
Information provided as of November 30, 2008
Potential Conflicts of Interests
In general, Four Corners seeks to allocate the purchase and sale of corporate
loans to clients in a fair and equitable manner to quickly and prudently create
a well-constructed, fully invested portfolio of corporate loans. Since Four
Corners' clients have varying investment restrictions, and because of the
constraining mechanics of the corporate loan market, allocation of trades
through methods such as pro-rata allocation are not feasible. Therefore, the
allocation of corporate loan purchases and sales to various accounts is
generally based on factors such as the client's investment restrictions and
objectives, including expected liquidity and/or third party credit ratings, the
client's acceptance or rejection of prospective investments, if applicable, and
the relative percentage of invested assets of a client's portfolio, among
others. Assets may be disproportionately allocated to accounts during their
initial investment (ramp up) period, notwithstanding that other accounts may
also have assets available for investment. Such disproportionate allocation to
accounts during the ramp-up process may have a detrimental effect on other
accounts. Subject to the foregoing, whenever Four Corners' clients have
available funds for investment, investments suitable and appropriate for each
will be allocated in a manner Four Corners believes to be equitable to each,
although such allocation may result in a delay in one or more client accounts
being fully invested that would not occur if an allocation to other client
accounts were not made. Moreover, it is possible that due to differing
investment objectives or for other reasons, Four Corners and its affiliates may
purchase securities or loans of an issuer for one client and at approximately
the same time recommend selling or sell the same or similar types of securities
or loans for another client. For these and other reasons, not all portfolios
will participate in the gains or losses experienced by other portfolios with
similar investment objectives.
Compensation Structure of Portfolio Manager(s) or Management Team Members
Portfolio Manager and Management Team compensation is typically comprised of a
base salary and a bonus. There are no pre-determined formulas to determine base
salaries or bonus amounts. Bonuses for all employees, including the Portfolio
Managers, are discretionary. In addition, the Portfolio Managers have stock
options of Macquarie Group Limited. These options are in varying amounts and are
subject to certain vesting and other provisions of the Macquarie option plan.
Finally, the Portfolio Managers are Members of the entity recently purchased by
Macquarie Group Limited, and there are certain payments associated with that
purchase which will be paid over time. A portion of those payments is based on
achieving certain revenue targets.
The Portfolio Managers' salaries are set at certain levels and may be raised at
the discretion of Macquarie Group Limited. Bonuses are entirely discretionary,
and are likely to be related to, among other things, business unit profitability
and personal performance. Compensation is determined without regard to the
performance of any one particular fund. The Portfolio Managers have no direct
incentive to take undue risks when individual fund performance is lagging.
Disclosure of Securities Ownership
The information below is as of November 30, 2008:
---------------------------------------- ---- --------------------------
Name of Portfolio Manager or Dollar ($) Range of Fund
TEAM MEMBER Shares BENEFICIALLY OWNED
---------------------------------------- ---- --------------------------
Robert I. Bernstein $0
---------------------------------------- ---- --------------------------
Drew R. Sweeney $0
---------------------------------------- ---- --------------------------
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 trustees, 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/Four Corners Senior Floating Rate Income Fund II
By (Signature and Title)* /s/ James A. Bowen
---------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date January 26, 2009
--------------------
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/ James A. Bowen
---------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date January 26, 2009
--------------------
By (Signature and Title)* /s/ Mark R. Bradley
---------------------------------------------
Mark R. Bradley, Treasurer, Controller, Chief
Financial Officer and Chief Accounting Officer
(principal financial officer)
Date January 26, 2009
--------------------
* Print the name and title of each signing officer under his or her signature.