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: May 31, 2009
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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
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("OMB") control number. Please direct comments concerning the accuracy of the
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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]
ANNUAL REPORT
For the Year Ended
May 31, 2009
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)
Annual Report
May 31, 2009
Shareholder Letter 1
At A Glance 2
Portfolio Commentary 3
Portfolio of Investments 6
Statement of Assets and Liabilities 18
Statement of Operations 19
Statements of Changes in Net Assets 20
Statement of Cash Flows 21
Financial Highlights 22
Notes to Financial Statements 23
Report of Independent Registered Public Accounting Firm 30
Additional Information 31
Board of Trustees and Officers 34
Privacy Policy 36
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 certain other risks of investing in the
Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
How to Read This Report
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of 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)
Annual Report
May 31, 2009
Dear Shareholders:
2008 brought all sorts of challenges to investors. Throughout the year, the
financial sector was plagued with failures in banking, insurance and brokerage
firms. By year's end, after a meltdown in the credit markets, historically high
levels of volatility in the stock market, and the resulting turmoil to the
overall economy, the Dow Jones Industrial Average's total return was -31.92% (as
of 12/31/08). In fact, 2008 was the Dow's third worst calendar year since its
inception in 1896. For the year, the negative total return performance of the
Dow was surpassed only by 1931 and 1907, two years in which the U.S. was also
enduring a major banking crisis. Of the thirty stocks in the Dow, only two were
up in 2008. However, many economists believe the recession that began in
December, 2007 ended in March, 2009. In fact, the Dow's total return from March
9 (the statistical end of the bear market) to May 31, 2009, was 30.83%. Of
course, no one can predict that this trend will continue.
Yet, regardless of the market, First Trust Advisors L.P. ("First Trust") has
always believed that in order to be successful in reaching your financial goals,
you should be invested for the long term. A long-term investor understands that
the market, from a historical perspective, has always experienced ups and downs.
But history has shown that the patient investor is typically rewarded over the
long term. While no one has the ability to predict when the markets will
recover, we believe that staying invested in quality products and having a
long-term perspective can help investors reach their financial goals.
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 information
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 May 31, 2009 (Unaudited)
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Fund Statistics
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Symbol on New York Stock Exchange) FCT
Common Share Price $10.04
Common Share Net Asset Value ("NAV") $11.79
Premium (Discount) to NAV (14.84)%
Net Assets Applicable to Common Shares $298,097,252
Current Monthly Distribution per Common Share (1) $0.0475
Current Annualized Distribution per Common Share $0.5700
Current Distribution Rate on Closing Common Share Price (2) 5.68%
Current Distribution Rate on NAV (2) 4.83%
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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
5/30/2008 $14.76 $16.42
6/6/2008 14.70 16.44
6/13/2008 14.64 16.52
6/20/2008 14.75 16.56
6/27/2008 14.21 16.38
7/3/2008 13.85 16.18
7/11/2008 13.55 16.01
7/18/2008 13.56 15.90
7/25/2008 13.45 15.98
8/1/2008 13.45 15.91
8/8/2008 13.32 15.81
8/15/2008 13.08 15.82
8/22/2008 13.21 15.83
8/29/2008 13.34 15.82
9/5/2008 13.21 15.74
9/12/2008 13.03 15.69
9/19/2008 12.78 14.99
9/26/2008 11.56 14.45
10/3/2008 10.40 13.28
10/10/2008 7.30 11.42
10/17/2008 8.33 10.24
10/24/2008 7.98 10.38
10/31/2008 8.45 10.32
11/7/2008 8.64 10.44
11/14/2008 7.96 10.16
11/21/2008 6.62 9.12
11/28/2008 6.96 8.88
12/5/2008 6.13 8.45
12/12/2008 5.60 8.12
12/19/2008 6.86 8.01
12/26/2008 6.95 8.17
1/2/2009 7.61 8.29
1/9/2009 8.11 8.88
1/16/2009 7.99 8.97
1/23/2009 8.06 8.98
1/30/2009 8.37 9.34
2/6/2009 8.43 9.50
2/13/2009 8.55 9.64
2/20/2009 7.72 9.63
2/27/2009 7.59 9.56
3/6/2009 6.88 9.29
3/13/2009 7.73 9.26
3/20/2009 7.55 9.35
3/27/2009 7.96 9.63
4/3/2009 8.20 9.85
4/9/2009 8.51 10.17
4/17/2009 9.04 10.71
4/24/2009 9.20 10.77
5/1/2009 9.54 11.02
5/8/2009 9.38 11.36
5/15/2009 9.34 11.50
5/22/2009 9.73 11.61
5/31/2009 10.04 11.78
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Performance
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Average Annual
Total Return
1 Year Ended 5 Years Ended Inception (5/25/2004)
5/31/2009 5/31/2009 to 5/31/2009
FUND PERFORMANCE
NAV (3) -22.07% -9.96% -2.13%
Market Value (4) -26.11% -26.98% -6.07%
INDEX PERFORMANCE
S&P/LSTA Leveraged Loan Index -9.01% 5.71% 1.14%
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% of Long-Term
Industry Classifications Investments
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Media 12.1%
Health Care Providers & Services 11.1
Hotels, Restaurants & Leisure 7.3
Electrical Equipment 5.5
Chemicals 4.7
Aerospace & Defense 4.5
Containers & Packaging 4.5
Oil, Gas & Consumable Fuels 3.8
IT Services 3.6
Diversified Consumer Services 3.4
Commercial Services & Supplies 3.1
Food & Staples Retailing 2.9
Paper & Forest Products 2.7
Specialty Retail 2.6
Capital Markets 2.5
Real Estate Investment Trusts (REITs) 2.3
Software 2.2
Metals & Mining 2.0
Pharmaceuticals 1.8
Independent Power Producers & Energy Traders 1.6
Diversified Financial Services 1.5
Food Products 1.5
Automobiles 1.4
Semiconductors & Semiconductor Equipment 1.3
Energy Equipment & Services 1.2
Road & Rail 1.2
Internet Software & Services 1.1
Computers & Peripherals 1.0
Diversified Telecommunication Services 1.0
Electronic Equipment, Instruments & Components 1.0
Multi-Utilities 1.0
Insurance 0.8
Internet & Catalog Retail 0.4
Leisure Equipment & Products 0.4
Wireless Telecommunication Services 0.4
Auto Components 0.2
Airlines 0.1
Gas Utilities 0.1
Household Durables 0.1
Industrial Conglomerates 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+ 0.8%
BBB 1.4
BBB- 7.1
BB+ 10.8
BB 13.6
BB- 18.1
B+ 20.2
B 4.4
B- 5.7
CCC+ 2.7
CCC 1.6
C 0.1
D 3.8
NR 3.1
NR (Privately rated securities) 6.5
WR 0.1
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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 2.0%
NRG Energy, Inc. 1.7
SUPERVALU, Inc. 1.7
Fresenius Medical Care AG 1.6
Owens-Illinois Group, Inc. 1.6
Brenntag Holding GmbH & Company KG 1.6
Covanta Energy Corporation 1.6
Royalty Pharma Finance Trust 1.5
Celanese Holdings, LLC 1.4
Seminole Tribe of Florida 1.4
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Total 16.1%
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(1) Most recent distribution paid or declared through 5/31/2009. 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 5/31/2009.
(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 Electric Utilities 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"), a part of the Macquarie
Funds Group, was founded in 2001 by a team of investment professionals and an
affiliate of Australia-based Macquarie Group Limited ("MGL") and became a
wholly-owned, indirect subsidiary of MGL in 2008. Macquarie Group, which
includes MGL, its worldwide affiliates and subsidiaries, and the funds they
manage, is a global provider of banking, financial, advisory, investment and
funds management services. Macquarie Funds Group, with over $54 billion in funds
under management (as of May 31, 2009) is the global asset management business of
Macquarie Group. Macquarie Funds Group offers a diverse range of products
including managed funds, funds-based structured products, hedge funds and fund
of funds. Four Corners managed approximately $2.5 billion of assets (as of May
31, 2009), 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
Advisers Act of 1940, as amended.
Portfolio Management Team
Robert I. Bernstein, CFA
Co-Portfolio Manager
Chief Investment Officer, Four Corners Capital Management, LLC
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.
Drew R. Sweeney
Co-Portfolio Manager
Senior Vice President, Four Corners Capital Management, LLC
Mr. Sweeney was designated Co-Portfolio Manager of the Fund upon the
announcement of resignation of Michael P. McAdams from Four Corners on February
6, 2009. In addition to portfolio management, Mr. Sweeney's responsibilities
include covering the media and entertainment, cable and satellite industries.
Mr. Sweeney has 14 years of experience in leveraged finance including
investments in senior secured loans and high-yield bonds. Mr. Sweeney joined
Four Corners in 2005 from American Express Asset Management Group, Inc. where he
was primarily responsible for managing investments of senior secured loans and
high-yield bonds in the gaming, lodging, leisure, homebuilding, and building
product sectors. Prior to joining American Express, Mr. Sweeney worked at Four
Corners and ING Capital Advisors LLC managing investments of senior secured
loans in the media sector. Previously, Mr. Sweeney was an Associate at First
Union Securities in the Financial Sponsors and Diversified Industries Groups.
Mr. Sweeney received an MBA from the Kenan-Flagler Business School at the
University of North Carolina at Chapel Hill and a BS from Rutgers University.
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 Fund's fiscal year ended May 31, 2009 included some of the most volatile
conditions in Senior Loan market history, including the Fund's worst and best
quarters since inception. The Fund's fiscal year can be divided into two
distinct and separate parts. In 2008, the Fund and the Senior Loan market were
under extreme stress. In the first five months of 2009, the Fund and the market
have rebounded significantly.
Page 3
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PORTFOLIO COMMENTARY - (Continued) (Unaudited)
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2008's performance was dominated by the events surrounding the global financial
crisis and the collapse of Lehman Brothers. While the loan market had posted
weak returns in the first half of 2008 as the supply/demand imbalance, which has
existed in the market since mid-2007, continued to drive prices lower, the
collapse of Lehman Brothers in September 2008 led to a global decline in many
asset prices, including loan prices. These price declines caused many loan
funds, which had invested in loans using leverage, to sell loans to satisfy
their leverage tests. This forced selling exacerbated the imbalance of an
already imbalanced market, and resulted in an S&P/LSTA Leveraged Loan Index
("Index") return of a staggering -27.69% for the fourth quarter of 2008.
The technical imbalance which dominated the market in late 2007 and 2008
reversed itself in the first half of 2009. This reversal was caused by a number
of factors, including: increased prepayments of loans, inflows into loan and
high-yield mutual funds, no/limited forced selling/deleveraging, and some
optimism amidst so-called "green shoots," defined as any sign of growth or
recovery. We believe that the market was oversold in late 2008 and represented
very good relative value, so the fact that there has been a meaningful rebound
is not surprising to us given the extremely low prices which loans went to in
late 2008. However, we are surprised by the speed and severity of the rebound,
particularly since the rebound is occurring at a time when default rates are
reaching their highest levels ever(1), recovery rates are at historically low
levels(2), and fundamental economic conditions remain uncertain at best. Through
May 31, 2009, the Index was up 26.63% year-to-date, erasing most of the fourth
quarter 2008 losses that occurred post-Lehman Brothers' collapse.
With improved conditions and inflows in the loan and bond market, we have seen a
resumption of select new issue activity. In particular, we have seen a
significant amount of new-issue high-yield bond issuance, the proceeds of which
are being used to repay upcoming Senior Loan maturities. We think this is a
positive development given the meaningful amount of debt that matures in
upcoming years. If there was a functioning structured finance/Collaterized Loan
Obligation ("CLO") market to provide a source of funds for Senior Loan
maturities, we would have been less concerned about debt maturities 3-4 years
out. Given the low likelihood that CLOs will become a meaningful source of
demand for Senior Loans at any point in the foreseeable future, it is
encouraging to us to see other capital sources entering the market to provide
funds for needed refinancings.
There has been very little new issuance in the Senior Loan market given the
still high cost of capital. That being said, the few Senior Loan financings we
have seen recently have been conservatively structured loans on favorable
economic terms to investors. We expect this trend of investor-friendly issuance
to continue, albeit at a moderate pace, which we think is very positive for the
market in general and the Fund in particular.
Performance Analysis
The Fund generated a market value total return(3) of -26.11% (including market
price change and dividends) for the twelve months ended May 31, 2009. The Fund's
net asset value ("NAV") total return(4) was -22.07% over the same period. The
Fund's NAV return underperformed the Index return by -13.06% for the twelve
months ended May 31, 2009. 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 typically positive in a
down market) which are not part of the benchmark Index return. FCT's NAV return
exceeded the "pure-play" peer group average by 3.15% and the broad peer group
average by 5.87% for the twelve months ended May 31, 2009.(5) The Fund's closing
price on May 29, 2009 was $10.04, which represented a -14.77% discount to its
NAV, compared to the Fund's discount to NAV of -10.11% twelve months earlier on
May 31, 2008. It is important to note that the Fund has benefited from a strong
market in the first 5 months of 2009 and the Fund's NAV is up 46.22% from
January 1, 2009 through May 31, 2009 after a very difficult 2008.
The volatility of Senior Loans has increased dramatically in the last two years.
As the profile of the typical loan buyer has changed from a dedicated
asset-class buyer to a relative-value investor, we believe the asset class will
remain volatile in the foreseeable future. As a result of this volatility and
increased borrowing costs, we have reduced the Fund's leverage. While this could
cause Fund returns to lag in market rallies, we believe it to be the more
prudent course of action in the near term.
The Fund's income has declined primarily as a result of lower London Inter-Bank
Offer Rate ("LIBOR") rates, increased financing costs and a smaller asset base.
Distributions totalled $0.78 per Common Share during the twelve months ended May
31, 2009, which represented a 43.07% decrease from the prior twelve months ended
May 31, 2008. Based on the Fund's current dividend, FCT's distribution rate is
5.68% (calculated on the Fund's share price) and 4.83% (based on the Fund's NAV)
as of May 31, 2009. The twelve months ended May 31, 2009 dividends produced a
Fund yield (based on price) of 7.76%, which was lower than the pure-play peer
group average price yield of 8.89% and lower than the broad peer group average
price yield of 11.14%. The lower yield is in part due to differing levels of
leverage between funds, different asset composition, and importantly, a lesser
erosion of NAV at FCT than at many of its peers.
Page 4
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PORTFOLIO COMMENTARY - (Continued) (Unaudited)
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Market and Fund Outlook
We have seen a material increase in loan defaults in the past year and will
likely see the default rate continue to escalate as a result of a slowing U.S.
economy and the global financial crisis. Furthermore, because there has been a
fundamental change in the profile of the typical loan investor, we expect to see
continued loan volatility for the foreseeable future.
Notwithstanding the significant rally in the first half of 2009, we still find
Senior Loan investments attractive. Senior Loans often have the highest
collateral security in a company's capital structure and (in many instances) the
market trading price is below our expected recovery on the loan. While recovery
rates have declined recently and may not continue at average historical levels,
we believe that, at current prices/spreads, investors are being compensated for
this risk and have adequate cushion to absorb credit losses and still earn high
risk-adjusted returns.
It is our view that the Fund offers a high quality non-investment grade
portfolio focused almost exclusively on first-lien Senior Loans. As a result, we
expect the Fund's relative performance to be driven by relative returns among
risk asset categories. Specifically, the first three months of 2009 were
dominated by a flight to quality in the loan market, where higher rated loans
meaningfully outperformed lower rated loans. This was occurring against a
backdrop of the equity market reaching new lows. Therefore, the Fund performed
well on a relative and absolute basis during the period as a result of its
holding higher-rated assets than some of its peers. Conversely, April and May of
2009 were months where riskier assets in the loan market rallied more than
higher-rated assets, and we would expect to see this result in relative
underperformance versus funds that invest in lower-rated loans on average.
_______________________
1 Standard & Poor's Leverage Lending Quarterly Q1 2009, page 204.
2 Credit Suisse Leveraged Finance Strategy Update, April 9, 2009, Page 65.
Average recovery rates decreased to 48.41% at 3/31/09, below the long-term
average recovery rate of 68.15%, and below the 51.17% low set in 1999.
3 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.
4 Total return based on NAV 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 NAV per share and
does not reflect sales load.
5 The "broad" peer group consists of 16 Senior Loan-based 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. 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.
Page 5
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) (r)
May 31, 2009
Ratings
Principal (Unaudited) (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
-------------- ----------------------------------------------- ---------------- ------------ ------------ --------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - 135.7%
AEROSPACE & DEFENSE - 6.2%
$ 496,250 BE Aerospace, Inc., Term Loan, Tranche B Ba1 BBB- 5.75% 07/28/14 $ 478,261
1,582,108 DAE Aviation Holdings, Inc., Term Loan B1 B3 B+ 4.26%-4.79% 07/31/14 1,107,475
1,555,687 DAE Aviation Holdings, Inc., Term Loan B2 B3 B+ 4.60%-4.79% 07/31/14 1,088,980
1,464,118 GenCorp, Inc., Synthetic Letter of Credit Ba3 B 2.57% 04/30/13 1,134,692
803,594 GenCorp, Inc., Term Loan Ba3 B 2.93% 04/30/13 622,786
1,219,465 Hexcel Corporation, Term Loan Ba1 BB+ 7.00% 05/21/14 1,207,270
821,877 ILC Industries, Inc., Term Loan, First Lien NR(e) NR(e) 2.32% 02/24/12 719,151
1,950,000 L-1 Identity Solutions Operating Company,
Term Loan Ba3 BB+ 6.75% 08/05/13 1,927,249
3,710,896 Robertson Aviation, LLC, Term Loan NR(e) NR(e) 3.07%-3.10% 04/19/13 2,374,974
984,962 Safenet, Inc., Term Loan, First Lien B1 B+ 2.85% 04/12/14 759,652
2,808,260 Spirit Aerosystems, Inc., Term Loan B Ba3 BBB- 2.89% 09/30/13 2,569,558
2,066,667 Vought Aircraft Industries, Inc., Synthetic
Letter of Credit, Tranche B Ba3 B- 3.00% 12/22/10 1,570,667
2,513,001 Vought Aircraft Industries, Inc., Term Loan B Ba3 B- 2.82% 12/22/11 2,010,401
1,000,000 Wesco Aircraft Hardware Corp., Term Loan,
First Lien B1 BB- 2.57% 09/29/13 818,000
------------
18,389,116
------------
AGRICULTURAL PRODUCTS - 1.6%
504,242 Dole Food Company, Inc., Prefunded Letter
of Credit Ba3 B+ 8.00% 04/12/13 500,303
883,738 Dole Food Company, Inc., Term Loan B Ba3 B+ 7.25%-8.00% 04/12/13 876,834
3,292,886 Dole Food Company, Inc., Term Loan C Ba3 B+ 7.25%-8.00% 04/12/13 3,267,162
------------
4,644,299
------------
AIRLINES - 0.1%
490,000 Delta Air Lines, Inc., Synthetic Revolving
Credit Facility Ba2 BB- 2.41%-2.56% 04/30/12 414,867
------------
ALUMINUM - 1.8%
4,413,623 Novelis Corp., Term Loan Ba3 BB 3.22% 07/06/14 3,632,964
2,006,173 Novelis, Inc., Canadian Term Loan Ba3 BB 2.32% 07/06/14 1,651,331
------------
5,284,295
------------
APPAREL RETAIL - 0.4%
1,216,071 Hanesbrands, Inc., Term Loan B, First Lien Ba2 BB+ 5.09%-5.84% 09/05/13 1,188,276
------------
APPLICATION SOFTWARE - 0.7%
2,796,517 Verint Systems, Inc., Term Loan, First Lien NR B+ 3.59% 05/25/14 2,125,353
------------
ASSET MANAGEMENT & CUSTODY BANKS - 2.3%
1,387,575 Grosvenor Capital Management Holdings, LLP,
Term Loan NR(e) NR(e) 2.41%-3.27% 12/05/13 1,082,308
3,873,579 LPL Holdings, Inc., Term Loan D Ba3 B+ 2.07%-2.97% 06/28/13 3,337,735
2,970,000 Nuveen Investments, Inc., Term Loan B3 B 3.31%-4.23% 11/13/14 2,121,076
449,216 Oxford US Acquisition, LLC, Term Loan,
Tranche B2 NR(e) NR(e) 3.10% 05/12/14 203,270
------------
6,744,389
------------
AUTO PARTS & EQUIPMENT - 0.3
1,001,281 TRW Automotive, Inc., Term Loan B B1 BB 1.94% 02/09/14 872,784
------------
Page 6 See Notes to Financial Statements
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) (r) (Continued)
May 31, 2009
Ratings
Principal (Unaudited) (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
-------------- ----------------------------------------------- ---------------- ------------ ------------ --------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
AUTOMOBILE MANUFACTURERS - 1.9%
$ 2,871,143 Ford Motor Company, Term Loan, First Lien Caa1 CCC+ 3.35%-4.14% 12/15/13 $ 2,032,232
3,846,871 General Motors Corp., Term Loan, First Lien Caa2 CCC 8.00% 11/29/13 3,603,237
------------
5,635,469
------------
AUTOMOTIVE RETAIL - 0.8%
2,835,657 KAR Holdings, Inc., Term Loan B Ba3 B+ 2.57%-3.47% 10/18/13 2,428,031
------------
BROADCASTING - 5.0%
6,400,000 Citadel Broadcasting Corporation, Term Loan,
First Lien Caa2 NR 2.93%-2.97% 06/12/14 2,922,669
865,813 Cumulus Media, Inc., Term Loan, First Lien Caa1 B 2.10% 06/07/14 497,842
5,178,541 Gray Television, Inc., Term Loan B Caa1 CCC+ 3.92% 12/31/14 2,780,229
4,365,000 LBI Media, Inc., Term Loan B B1 B+ 1.82% 03/31/12 2,924,550
3,500,000 Raycom Media, Inc., Term Loan, Tranche B NR NR 1.94% 06/25/14 2,450,000
2,462,500 Sirius Satellite Radio, Inc., Term Loan,
First Lien Caa1 B 2.63% 12/20/12 2,068,500
984,810 Young Broadcasting, Inc., Incremental
Term Loan (h) WR D 4.75% 11/03/12 426,282
1,984,576 Young Broadcasting, Inc., Term Loan (h) WR D 4.75% 11/03/12 859,038
------------
14,929,110
------------
BUILDING PRODUCTS - 0.0%
1,000,000 South Edge, LLC, Term Loan C (k) NR NR 5.50% 10/31/09 150,000
------------
CABLE AND SATELLITE - 3.3%
5,329,279 Charter Communications Operating, LLC,
Term Loan (h) WR D 6.25% 03/06/14 4,516,564
3,721,086 CSC Holdings, Inc., Incremental Term Loan Baa3 BBB- 2.09%-2.25% 03/29/13 3,487,357
2,000,000 UPC Distribution Holding B.V., Term Loan N Ba3 B+ 2.16% 12/31/14 1,851,251
------------
9,855,172
------------
CASINOS & GAMING - 7.9%
574,675 Cannery Casino Resorts, LLC, Delayed Draw
Term Loan B1 BB 2.65%-2.66% 05/18/13 475,543
695,128 Cannery Casino Resorts, LLC, Term Loan,
First Lien B1 BB 2.56% 05/18/13 575,219
3,073,096 CCM Merger, Inc., Term Loan B B3 B+ 8.50% 07/13/12 2,327,870
229,108 Fontainebleau Resorts Las Vegas, LLC, Delayed
Draw Term Loan, First Lien (l) Caa2 CCC 4.32% 06/06/14 29,211
2,270,892 Fontainebleau Resorts Las Vegas, LLC, Term Loan,
First Lien (l) Caa2 CCC 5.28% 06/06/14 289,539
1,986,502 Golden Nugget, Inc., Delayed Draw
Term Loan B3 B- 2.32%-2.66% 06/30/14 1,181,969
3,482,182 Golden Nugget, Inc., Term Loan, First Lien B3 B- 2.32% 06/14/14 2,071,898
943,636 Green Valley Ranch Gaming, LLC, Term
Loan, First Lien Caa3 CCC+ 3.15%-4.00% 02/16/14 511,923
167,177 Isle of Capri Casinos, Inc., Delayed Draw
Term Loan A B1 B+ 2.97% 11/30/13 141,265
221,770 Isle of Capri Casinos, Inc., Delayed Draw
Term Loan B B1 B+ 2.07% 11/30/13 187,396
554,426 Isle of Capri Casinos, Inc., Term Loan,
First Lien B1 B+ 2.97% 11/30/13 468,490
867,529 Las Vegas Sands, LLC, Delayed Draw
Term Loan 1 B3 B- 2.07% 05/23/14 620,555
See Notes to Financial Statements Page 7
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) (r) (Continued)
May 31, 2009
Ratings
Principal (Unaudited) (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
-------------- ----------------------------------------------- ---------------- ------------ ------------ --------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
CASINOS & GAMING - (Continued)
$ 1,542,941 Las Vegas Sands, LLC, Term Loan, Tranche B,
First Lien B3 B- 2.07% 05/23/14 $ 1,103,686
2,447,689 Penn National Gaming, Inc., Term Loan B Ba2 BB+ 2.06%-2.72% 10/03/12 2,301,701
812,794 Seminole Tribe of Florida, Delayed Draw
Term Loan B1 Baa3 BBB 2.75% 03/05/14 754,882
2,927,530 Seminole Tribe of Florida, Delayed Draw
Term Loan B2 Baa3 BBB 2.75% 03/05/14 2,718,944
2,508,097 Seminole Tribe of Florida, Delayed Draw
Term Loan B3 Baa3 BBB 2.75% 03/05/14 2,329,395
6,000,000 VML US Finance, LLC, Term Loan B3 B- 2.57% 05/25/13 5,004,000
2,142,857 WIMAR LANDCO, LLC, Term Loan (h) (i) WR WR 4.50% 07/03/08 450,000
------------
23,543,486
------------
COMMODITY CHEMICALS - 0.6%
1,436,329 Ineos Group Limited, Term Loan B2 Caa1 CCC+ 7.50% 12/14/13 910,632
1,436,328 Ineos Group Limited, Term Loan C2 Caa1 CCC+ 8.00% 12/14/14 910,632
------------
1,821,264
------------
COMPUTER HARDWARE - 1.4%
5,521,379 Activant Solutions Holdings, Inc., Term Loan B1 B+ 2.44%-3.25% 05/02/13 4,049,010
------------
DATA PROCESSING & OUTSOURCED SERVICES - 1.8%
6,877,500 Clarke American Corp., Term Loan B B1 B+ 2.82%-3.72% 06/30/14 5,301,404
------------
DIVERSIFIED CHEMICALS - 3.9%
1,062,141 Brenntag Holding GmbH & Company KG,
Acquisition Term Loan B1 B+ 2.30%-3.50% 01/17/14 908,131
3,000,000 Brenntag Holding GmbH & Company KG,
Term Loan, Second Lien Caa1 CCC+ 5.50% 06/18/15 1,785,000
4,397,040 Brenntag Holding GmbH & Company KG,
Term Loan B2 B1 B+ 2.30%-3.50% 01/17/14 3,759,469
4,179,454 Huntsman International, LLC, Term Loan Ba1 B+ 2.07% 04/19/14 3,546,008
12,091 LyondellBasell Industries AF S.C.A.,
Dutch Revolving Credit Facility (h) Caa2 C 5.75% 12/20/13 5,320
28,446 LyondellBasell Industries AF S.C.A.,
Dutch Term Loan A (h) Caa2 C 5.75% 12/20/13 11,805
34,713 LyondellBasell Industries AF S.C.A.,
German Term Loan B1 (h) Caa2 C 6.00% 12/20/14 14,059
34,713 LyondellBasell Industries AF S.C.A.,
German Term Loan B2 (h) Caa2 C 6.00% 12/20/14 14,059
34,713 LyondellBasell Industries AF S.C.A.,
German Term Loan B3 (h) Caa2 C 6.00% 12/20/14 14,059
268,821 LyondellBasell Industries AF S.C.A.,
Initial New Money Loan (DIP) (g) (h) Caa2 BB- 1.50%(f)-13.00% 12/15/09 275,407
150,630 LyondellBasell Industries AF S.C.A.,
Term Loan B1 (h) Caa2 C 7.00% 12/20/14 64,771
150,630 LyondellBasell Industries AF S.C.A.,
Term Loan B2 (h) Caa2 C 7.00% 12/20/14 64,771
150,630 LyondellBasell Industries AF S.C.A.,
Term Loan B3 (h) Caa2 C 7.00% 12/20/14 64,771
45,343 LyondellBasell Industries AF S.C.A., U.S.
Primary Revolving Credit Facility (h) Caa2 C 5.75% 12/20/13 18,817
86,391 LyondellBasell Industries AF S.C.A., U.S.
Term Loan A (h) Caa2 C 5.75% 12/20/13 35,852
Page 8 See Notes to Financial Statements
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) (r) (Continued)
May 31, 2009
Ratings
Principal (Unaudited) (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
-------------- ----------------------------------------------- ---------------- ------------ ------------ --------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
DIVERSIFIED CHEMICALS - (Continued)
$ 974,227 Rockwood Specialties Group, Inc.,
Term Loan E Ba2 BB 2.07% 07/30/12 $ 908,466
------------
11,490,765
------------
DIVERSIFIED METALS & MINING - 0.9%
2,797,500 Alpha Natural Resources, LLC, Term Loan B Ba3 BB+ 2.75% 10/26/12 2,741,550
------------
DIVERSIFIED SUPPORT SERVICES - 0.9%
3,185,985 Rental Service Corp., ABL First Lien
Term Loan Ba2 BB 2.07% 11/30/12 2,755,877
------------
EDUCATION SERVICES - 0.9%
1,906,818 Education Management, LLC, Term Loan C B2 B+ 3.00% 06/01/13 1,706,602
1,034,200 PRO-QUEST-CSA, LLC, Term Loan, First Lien Ba3 BB- 2.82% 02/09/14 884,241
------------
2,590,843
------------
ELECTRIC UTILITIES - 7.4%
914,704 Astoria Generating Company Acquisitions, LLC,
Term Loan B B1 BB- 2.06%-2.14% 02/23/12 839,241
3,380,611 Calpine Corporation, First Priority Term Loan B2 B+ 4.10% 03/29/14 2,917,363
2,305,929 Covanta Energy Corporation, Synthetic Letter
of Credit Ba1 BB 2.69% 02/09/14 2,126,066
4,590,239 Covanta Energy Corporation, Term Loan B Ba1 BB 1.88% 02/09/14 4,232,201
2,343,766 Mirant North America, LLC, Term Loan Ba2 BB 2.07% 01/03/13 2,176,354
7,602,051 NRG Energy, Inc., Synthetic Letter of Credit Ba1 BB+ 2.97% 02/01/13 7,031,107
1,942,076 Riverside Energy Center, LLC, Term Loan Ba3 BB- 5.29% 06/24/11 1,786,710
169,917 Rocky Mountain Energy Center, LLC,
Synthetic Letter of Credit Ba3 BB- 5.39% 06/24/11 156,324
889,529 Rocky Mountain Energy Center, LLC,
Term Loan Ba3 BB- 5.29% 06/24/11 818,366
------------
22,083,732
------------
ENVIRONMENTAL & FACILITIES SERVICES - 1.6%
220,126 EnergySolutions, LLC, Synthetic Letter
of Credit Ba2 NR(e) 2.57% 06/07/13 204,717
1,584,440 EnergySolutions, LLC, Term Loan (Duratek) Ba2 NR(e) 4.15% 06/07/13 1,473,529
3,302,464 EnergySolutions, LLC, Term Loan
(EnergySolutions) Ba2 NR(e) 4.15% 06/07/13 3,071,292
------------
4,749,538
------------
FOOD DISTRIBUTORS - 1.7%
847,826 B&G Foods, Inc., Term Loan C Ba2 BB- 3.26% 02/23/13 816,033
846,667 Birds Eye Foods, Inc., Term Loan, First Lien NR(e) NR(e) 2.97% 03/22/13 774,700
3,944,810 Dean Foods Company, Term Loan B B1 BB 1.70%-2.60% 04/02/14 3,606,420
------------
5,197,153
------------
FOOD RETAIL - 2.3%
7,302,920 SUPERVALU, Inc., Term Loan B Ba3 BB+ 1.57% 06/02/12 6,735,585
------------
FOREST PRODUCTS - 2.8%
5,869,220 Georgia-Pacific Corporation, Term Loan B1 Ba2 BB+ 2.32%-3.29% 12/20/12 5,438,564
3,000,443 Georgia-Pacific Corporation, Term Loan B2 Ba2 BB+ 2.32%-3.29% 12/20/12 2,780,285
------------
8,218,849
------------
See Notes to Financial Statements Page 9
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) (r) (Continued)
May 31, 2009
Ratings
Principal (Unaudited) (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
-------------- ----------------------------------------------- ---------------- ------------ ------------ --------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
GAS UTILITIES - 0.2%
$ 654,261 Atlas Pipeline Partners, L.P., Term Loan B1 B 5.07%-7.00% 07/27/14 $ 569,207
------------
HEALTH CARE FACILITIES - 4.0%
856,108 HCA, Inc., Term Loan A Ba3 BB 2.97% 11/17/12 765,925
3,542,465 Health Management Associates, Inc., Term
Loan B B1 BB- 2.97% 02/28/14 3,058,919
501,633 Lifepoint Hospitals, Inc., Term Loan B Ba1 BB 2.30% 04/15/12 473,147
4,784,795 Select Medical Corporation, Term Loan B Ba2 B+ 2.31%-4.25% 02/24/12 4,277,607
271,667 Sun Healthcare Group, Inc., Synthetic
Letter of Credit Ba2 B+ 3.22% 04/19/14 238,613
2,419,537 Sun Healthcare Group, Inc., Term Loan,
First Lien Ba2 B+ 2.79%-3.63% 04/19/14 2,125,158
155,256 United Surgical Partners International, Inc.,
Delayed Draw Term Loan Ba3 B 2.32% 04/19/14 138,954
821,935 United Surgical Partners International, Inc.,
Term Loan B Ba3 B 2.32%-3.10% 04/19/14 735,632
------------
11,813,955
------------
HEALTH CARE SERVICES - 8.7%
291,383 CHS/Community Health Systems, Inc.,
Delayed Draw Term Loan Ba3 BB 2.57% 07/25/14 258,536
5,706,603 CHS/Community Health Systems, Inc.,
Term Loan Ba3 BB 2.57%-2.92% 07/25/14 5,063,315
5,611,970 DaVita, Inc., Term Loan B-1 Ba1 BB+ 1.82%-2.74% 10/05/12 5,241,052
7,077,052 Fresenius Medical Care AG, Term Loan B Baa3 BBB- 2.51%-2.67% 03/31/13 6,637,262
1,955,000 Healthways, Inc., Term Loan B Ba2 BB 2.72% 12/01/13 1,739,950
1,451,375 Quintiles Transnational Corp., Term Loan B,
First Lien B1 BB 2.32%-3.22% 03/31/13 1,322,565
5,858,128 US Oncology Holdings, Inc., Term Loan B Ba2 BB- 3.07%-4.56% 08/20/11 5,555,456
------------
25,818,136
------------
HOMEBUILDING - 0.2%
977,330 Mattamy Funding Partnership, Term Loan NR(e) NR(e) 2.94% 04/11/13 537,531
------------
Independent Power Producers & Energy Traders - 2.1%
4,424,265 Dynegy Holdings, Inc., Synthetic Letter
of Credit Ba2 BB- 1.82% 04/02/13 3,970,778
3,432,576 Texas Competitive Electric Holdings
Company, LLC, Initial Term Loan B-3 B1 B+ 3.82%-3.88% 10/10/14 2,346,166
------------
6,316,944
------------
INDUSTRIAL CONGLOMERATES - 0.2%
556,521 Mueller Water Products, Inc., Term Loan B B1 BB- 2.07%-2.97% 05/24/14 468,869
------------
INSURANCE BROKERS - 0.2%
793,107 HealthCare Partners, LLC, Term Loan Ba2 BBB- 2.07% 10/31/13 711,814
------------
INTEGRATED TELECOMMUNICATION SERVICES - 1.3%
942,028 Intelsat Corp., Term Loan B-2-A B1 BB- 2.91% 07/03/13 859,306
941,741 Intelsat Corp., Term Loan B-2-B B1 BB- 2.91% 07/03/13 859,045
941,741 Intelsat Corp., Term Loan B-2-C B1 BB- 2.91% 07/03/13 859,045
116,463 Telesat Canada, U.S. Delayed Draw Term
Loan II B1 BB- 4.22% 10/31/14 107,922
1,355,981 Telesat Canada, U.S. Term Loan I B1 BB- 3.32% 10/31/14 1,256,543
------------
3,941,861
------------
Page 10 See Notes to Financial Statements
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) (r) (Continued)
May 31, 2009
Ratings
Principal (Unaudited) (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
-------------- ----------------------------------------------- ---------------- ------------ ------------ --------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
INTERNET RETAIL - 0.6%
$ 2,429,519 Sabre Holdings Corp., Term Loan B1 B 2.66%-3.29% 09/30/14 $ 1,673,766
------------
INTERNET SOFTWARE & SERVICES - 1.4%
4,693,133 SunGard Data Systems, Inc., Term Loan B Ba3 BB 2.13%-2.72% 02/28/14 4,255,498
------------
Investment Banking & Brokerage - 1.1%
3,534,394 Ameritrade Holding Corporation, Term
Loan B Baa2 BBB+ 1.84% 12/31/12 3,345,527
------------
IT CONSULTING & OTHER SERVICES - 3.1%
2,047,714 Alion Science and Technology Corp.,
Term Loan B1 B+ 9.50% 02/06/13 1,228,628
495,243 Apptis (DE), Inc., Term Loan B1 B+ 3.57%-4.47% 12/20/12 346,670
1,455,243 CACI International, Inc., Term Loan B Ba1 NR 1.84%-2.82% 05/03/11 1,397,034
921,626 iPayment, Inc., Term Loan B1 B 2.32%-3.23% 05/10/13 663,571
1,042,292 Open Solutions, Inc., Term Loan, First Lien B1 BB- 3.23% 01/23/14 635,798
5,865,300 West Corporation, Term Loan B-2 B1 BB- 2.68%-2.79% 10/24/13 5,068,599
------------
9,340,300
------------
LEISURE FACILITIES - 2.0%
3,320,154 Cedar Fair, L.P., U.S. Term Loan Ba3 BB- 2.32% 08/30/12 3,111,460
787,440 London Area and Waterfront Finance, LLC,
Term Loan A NR(e) NR(e) 3.78% 03/08/12 653,575
2,108,457 Six Flags, Inc., Term Loan B (l) Caa1 CCC+ 3.12%-3.42% 04/30/15 1,600,922
980,000 Town Sports International, LLC, Term Loan B Ba2 BB- 2.19% 02/27/14 656,600
------------
6,022,557
------------
LEISURE PRODUCTS - 0.5%
1,860,411 LodgeNet Entertainment Corp., Term Loan B3 B- 2.32%-3.22% 04/04/14 1,420,889
------------
LIFE & HEALTH INSURANCE - 0.8%
825,708 Conseco, Inc., Term Loan Caa1 CCC 6.50% 10/10/13 487,168
727,028 Multiplan Merger Corporation, Term Loan B1 B+ 2.88% 04/12/13 650,690
416,117 Multiplan Merger Corporation, Term Loan C B1 B+ 2.88% 04/12/13 372,425
1,215,550 Viant Holdings, Inc., Term Loan Ba3 B+ 3.47% 06/25/14 972,440
------------
2,482,723
------------
MANAGED HEALTH CARE - 2.4%
1,185,090 IASIS Healthcare Corporation, Delayed Draw
Term Loan Ba2 B+ 2.32% 03/15/14 1,061,840
318,412 IASIS Healthcare Corporation, Synthetic
Letter of Credit Ba2 B+ 2.22% 03/15/14 285,297
3,424,680 IASIS Healthcare Corporation, Term Loan Ba2 B+ 2.32% 03/15/14 3,068,513
2,906,680 Vanguard Health Systems, Inc., Term Loan B Ba3 B+ 2.57% 09/23/11 2,746,813
------------
7,162,463
------------
METAL & GLASS CONTAINERS - 2.2%
7,181,250 Owens-Illinois Group, Inc., Term Loan B Baa3 BBB- 1.84% 06/14/13 6,612,732
------------
MORTGAGE REITS - 0.8%
3,080,000 LNR Property Corporation, Initial Term Loan,
Tranche B B2 B- 3.91% 07/12/11 1,501,500
1,870,000 LNR Property Corporation, Term Loan,
Tranche A-1 B2 B- 3.91% 07/12/09 806,344
------------
2,307,844
------------
See Notes to Financial Statements Page 11
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) (r) (Continued)
May 31, 2009
Ratings
Principal (Unaudited) (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
-------------- ----------------------------------------------- ---------------- ------------ ------------ --------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
MOVIES & ENTERTAINMENT - 4.4%
$ 4,740,750 AMC Entertainment, Inc., Term Loan Ba2 BB- 1.81% 01/26/13 $ 4,333,045
55,118 Deluxe Entertainment Services Group, Inc.,
Credit Linked Term Loan A Ba3 B- 3.47% 05/11/13 41,339
1,001,446 Deluxe Entertainment Services Group, Inc.,
Term Loan, Tranche B Ba3 B- 2.57%-3.47% 05/11/13 751,085
98,191 Deluxe Entertainment Services Group, Inc.,
Term Loan, Tranche C Ba3 B- 3.47% 05/11/13 73,643
2,397,608 Discovery Communications Holding, LLC,
Term Loan B Baa3 NR(e) 3.22% 05/14/14 2,238,167
2,250,000 Discovery Communications Holding, LLC,
Term Loan C Baa3 NR(e) 5.25% 05/14/14 2,214,844
2,000,000 National CineMedia, LLC, Term Loan B Ba3 B+ 3.08% 02/13/15 1,821,250
1,982,201 Regal Cinemas Corporation, Term Loan B Ba2 B+ 4.97% 10/27/13 1,888,667
------------
13,362,040
------------
MULTI-UTILITIES - 1.4%
2,510,637 KGEN, LLC, Synthetic Letter of Credit B1 BB 3.00% 02/08/14 2,134,042
2,461,080 KGEN, LLC, Term Loan B B1 BB 2.13% 02/08/14 2,091,918
------------
4,225,960
------------
OFFICE REITS - 0.1%
1,000,000 Tishman Speyer Real Estate D.C.
Area Portfolio, L.P., Term Loan WR CCC 2.07% 12/27/12 330,000
------------
OFFICE SERVICES & SUPPLIES - 1.6%
2,749,719 Emdeon Business Services, LLC, Term Loan,
First Lien B1 BB- 2.32%-3.22% 11/16/13 2,564,113
1,193,791 Pike Electric, Inc., Term Loan B NR(e) NR(e) 1.88% 07/01/12 1,074,412
1,349,428 Pike Electric, Inc., Term Loan C NR(e) NR(e) 1.88% 12/10/12 1,214,486
------------
4,853,011
------------
OIL & GAS EQUIPMENT & SERVICES - 1.7%
1,974,874 Hercules Offshore, Inc., Term Loan Ba3 BB- 2.96% 07/11/13 1,583,192
1,354,839 Targa Resources, Inc., Synthetic Letter
of Credit Ba3 B+ 3.22% 10/31/12 1,252,258
2,344,097 Targa Resources, Inc., Term Loan Ba3 B+ 2.32%-3.22% 10/31/12 2,166,616
------------
5,002,066
------------
OIL & GAS EXPLORATION & PRODUCTION - 0.8%
2,210,568 ATP Oil & Gas Corporation, Term Loan,
Tranche B1 NR NR 8.50% 07/15/14 1,470,028
615,865 ATP Oil & Gas Corporation, Term Loan,
Tranche B2 NR NR 8.50% 01/15/11 409,550
992,087 SemCrude, L.P., Term Loan (h) (i) NR NR 5.75% 03/16/11 362,112
------------
2,241,690
------------
OIL & GAS REFINING & MARKETING - 2.1%
108,056 Alon USA, Inc., Term Loan
(Edgington Facility) B1 BB 2.57%-2.92% 06/22/13 56,189
864,444 Alon USA, Inc., Term Loan
(Paramount Facility) B1 BB 2.57%-2.92% 06/22/13 449,511
114,943 Calumet Lubricants Co., L.P., Synthetic
Letter of Credit B1 B 5.02% 01/03/15 94,253
860,052 Calumet Lubricants Co., L.P., Term Loan B1 B 4.85% 01/03/15 705,243
Page 12 See Notes to Financial Statements
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) (r) (Continued)
May 31, 2009
Ratings
Principal (Unaudited) (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
-------------- ----------------------------------------------- ---------------- ------------ ------------ --------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
OIL & GAS REFINING & MARKETING - (Continued)
$ 5,473,929 Western Refining Company, L.P., Term Loan B3 BB- 8.25% 05/30/14 $ 5,063,384
------------
6,368,580
------------
OIL & GAS STORAGE & TRANSPORTATION - 2.2%
3,000,000 Energy Transfer Equity, L.P., Term Loan B Ba2 NR 2.71% 11/01/12 2,837,499
3,960,000 Enterprise GP Holdings, L.P., Term Loan B Ba2 BB- 2.65%-3.40% 11/08/14 3,766,950
------------
6,604,449
------------
OTHER DIVERSIFIED FINANCIAL SERVICES - 2.0%
6,297,275 Royalty Pharma Finance Trust, Term Loan Baa2 BBB- 3.47% 04/16/13 5,940,427
------------
PACKAGED FOODS & MEATS - 0.5%
1,472,437 Weight Watchers International, Inc., Term
Loan B Ba1 BB+ 1.94%-2.75% 01/26/14 1,373,968
------------
PAPER PACKAGING - 3.9%
1,947,917 Graham Packaging Holdings Co., Term Loan B,
First Lien B1 B+ 2.63%-2.69% 10/07/11 1,831,738
3,792,509 Graphic Packaging International, Inc., Term
Loan B Ba3 BB- 2.35%-3.21% 05/16/14 3,491,479
1,887,648 Pregis Corporation, Term Loan B-1 Ba3 BB- 2.57% 10/12/12 1,415,736
852,751 Smurfit-Stone Container Enterprises, Inc.,
Canadian Revolving Credit Facility (h) WR D 2.50%-5.00% 11/01/09 712,047
516,062 Smurfit-Stone Container Enterprises, Inc.,
Synthetic Letter of Credit (h) WR D 4.50% 11/01/10 421,106
587,292 Smurfit-Stone Container Enterprises, Inc.,
Term Loan B (h) WR D 2.69% 11/01/11 479,230
1,106,950 Smurfit-Stone Container Enterprises, Inc.,
Term Loan C (h) WR D 2.69% 11/01/11 918,768
334,679 Smurfit-Stone Container Enterprises, Inc.,
Term Loan C1 (h) WR D 2.69% 11/01/11 277,784
2,571,085 Smurfit-Stone Container Enterprises, Inc.,
U.S. Revolving Credit Facility (h) WR D 2.50%-4.50% 11/01/09 2,146,856
------------
11,694,744
------------
PAPER PRODUCTS - 0.9%
982,500 Appleton Papers, Inc., Term Loan B,
First Lien Ba3 B+ 6.50% 06/05/13 711,084
2,287,500 Domtar Corporation, Term Loan B Baa3 BBB- 1.76% 03/07/14 2,105,317
------------
2,816,401
------------
PHARMACEUTICALS - 2.5%
4,917,437 Cardinal Health 409, Inc., Dollar Term Loan Ba3 BB- 2.57% 04/10/14 3,786,427
3,597,327 Graceway Pharmaceuticals, LLC, Term Loan,
First Lien Ba3 BB 3.07% 05/03/12 2,599,069
405,665 Stiefel Laboratories, Inc., Delayed Draw
Term Loan B1 BB- 3.39% 12/28/13 397,552
530,371 Stiefel Laboratories, Inc., Initial Term Loan B1 BB- 3.39% 12/28/13 519,763
------------
7,302,811
------------
PUBLISHING - 3.6%
151,398 Cenveo Corporation, Delayed Draw
Term Loan Ba3 BB- 5.73% 06/21/13 137,267
4,049,476 Cenveo Corporation, Term Loan C Ba3 BB- 5.73% 06/21/13 3,671,526
See Notes to Financial Statements Page 13
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) (r) (Continued)
May 31, 2009
Ratings
Principal (Unaudited) (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
-------------- ----------------------------------------------- ---------------- ------------ ------------ --------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
PUBLISHING - (Continued)
$ 1,494,565 GateHouse Media, Inc., Delayed Draw Term
Loan B Caa1 CCC 2.32%-2.39% 08/28/14 $ 307,453
4,005,435 GateHouse Media, Inc., Initial Term Loan Caa1 CCC 2.32% 08/28/14 823,974
4,513,596 Idearc, Inc., Term Loan B (h) (i) WR D 4.25% 11/17/14 1,773,198
2,872,769 Media News Group, Inc., Term Loan B (j) WR NR 4.82%-5.72% 12/30/10 474,007
1,442,050 Media News Group, Inc., Term Loan C (j) WR NR 4.82%-7.72% 08/02/13 249,955
980,000 The Reader's Digest Association, Inc., Term
Loan B Caa2 CCC 3.27%-3.33% 03/02/14 411,600
6,912,500 Tribune Company, Term Loan B (h) (i) WR D 5.25% 05/19/14 2,100,633
731,429 Tribune Company, Term Loan X (h) (i) WR D 5.00% 05/18/09 218,122
1,000,000 Yell Group, PLC, Term Loan B1 B1 B+ 3.32% 10/27/12 642,500
------------
10,810,235
------------
RESIDENTIAL REITS - 0.0%
87,500 Apartment Investment Management Co.,
Term Loan Ba1 BB+ 1.85% 03/22/11 77,875
------------
RETAIL REITS - 2.2%
6,046,709 Capital Automotive, L.P., Term Loan Ba1 B 2.17% 12/16/10 4,252,850
1,394,737 General Growth Properties, Inc., Term
Loan A-1 (h) (i) C D 5.25% 02/24/10 674,122
1,966,667 The Macerich Partnership, L.P., Term Loan NR(e) NR(e) 1.88% 04/26/10 1,730,667
------------
6,657,639
------------
SEMICONDUCTORS - 1.7%
8,251,679 Freescale Semiconductors, Inc., Term Loan,
First Lien B2 B- 2.17% 12/01/13 5,061,027
------------
SPECIALIZED CONSUMER SERVICES - 3.7%
972,500 Acosta, Inc., Term Loan NR(e) NR(e) 2.57% 07/28/13 875,250
903,116 Advantage Sales & Marketing, Inc.,
Term Loan NR(e) NR(e) 2.32%-2.42% 03/29/13 829,361
2,280,515 Affinion Group, Inc., Term Loan B Ba2 BB 2.81%-2.82% 10/17/12 2,098,074
256,221 ARAMARK Corporation, Prefunded Synthetic
Letter of Credit Ba3 BB 3.90% 01/26/14 232,905
4,034,490 ARAMARK Corporation, Term Loan Ba3 BB 3.10% 01/26/14 3,667,351
1,000,000 Asurion Corp., Term Loan, First Lien NR(e) NR(e) 3.38%-4.02% 07/03/14 900,000
944,361 N.E.W. Holdings I, LLC, Term Loan,
First Lien NR(e) NR(e) 2.82%-3.79% 05/22/14 774,376
1,959,671 Nielsen Finance, LLC, Dollar Term Loan Ba3 B+ 2.38% 08/09/13 1,725,430
------------
11,102,747
------------
SPECIALTY CHEMICALS - 1.9%
2,000,000 Celanese Holdings, LLC, Synthetic Letter
of Credit Ba2 BB+ 1.91% 04/02/14 1,808,636
4,417,405 Celanese Holdings, LLC, Term Loan,
First Lien Ba2 BB+ 2.94% 04/02/14 3,994,739
------------
5,803,375
------------
SPECIALTY STORES - 2.4%
1,188,250 Dollarama Group, L.P., Replacement Term
Loan B Ba1 BB- 2.79% 11/18/11 1,134,779
3,997,954 Harbor Freight Tools USA, Inc., Term
Loan C NR(e) NR(e) 9.75% 02/12/13 3,358,281
Page 14 See Notes to Financial Statements
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) (r) (Continued)
May 31, 2009
Ratings
Principal (Unaudited) (b) Stated
Value Description Moody's S&P Rate Maturity (c) Value
-------------- ----------------------------------------------- ---------------- ------------ ------------ --------------
SENIOR FLOATING-RATE TERM LOAN INTERESTS (d) - (Continued)
SPECIALTY STORES - (Continued)
$ 3,060,609 The Yankee Candle Company, Inc., Term Loan Ba3 BB- 2.32%-3.22% 02/06/14 $ 2,606,620
------------
7,099,680
------------
SYSTEMS SOFTWARE - 2.3%
4,390,509 Dealer Computer Services, Inc., Term Loan,
First Lien Ba2 BB 2.32% 10/26/12 3,177,631
3,884,107 Intergraph Corporation, Term Loan, First Lien Ba3 BB- 2.66% 05/29/14 3,553,958
------------
6,731,589
------------
TECHNOLOGY DISTRIBUTORS - 1.3%
1,764,000 H3C Holdings, Ltd., Term Loan B Ba2 BB 4.79% 09/28/12 1,420,020
3,478,615 Sensata Technologies Finance Company, LLC,
Term Loan, First Lien B3 B 2.60%-2.80% 04/27/13 2,446,625
------------
3,866,645
------------
TRUCKING - 1.7%
247,340 The Hertz Corporation, Prefunded Synthetic
Letter of Credit Ba1 BB- 2.98% 12/21/12 222,452
2,078,417 The Hertz Corporation, Term Loan Ba1 BB- 2.07%-2.17% 12/21/12 1,869,276
3,357,055 OshKosh Corporation, Term Loan B B2 B+ 7.15%-7.32% 12/06/13 2,874,478
------------
4,966,206
------------
WIRELESS TELECOMMUNICATION SERVICES - 0.5%
1,222,779 Clearwire Corporation, Delayed Draw Term
Loan, First Lien B3 B+ 8.75% 07/03/12 884,476
747,221 Clearwire Corporation, Term Loan, First Lien B3 B+ 8.75% 07/03/12 540,490
------------
1,424,966
------------
TOTAL SENIOR FLOATING-RATE TERM LOAN INTERESTS 404,460,964
(Cost $500,526,734) ------------
SENIOR FLOATING-RATE NOTES - 0.1%
ELECTRICAL COMPONENTS & EQUIPMENT - 0.1%
650,000 NXP B.V C CCC+ 3.88% 10/15/13 186,063
------------
LEISURE FACILITIES - 0.0%
1,225,000 HRP Myrtle Beach (h) (i) (m) (o) WR NR 7.37% 04/01/12 0
------------
TOTAL SENIOR FLOATING-RATE NOTES 186,063
(Cost $1,876,399) ------------
NOTES - 0.0%
HOMEBUILDING - 0.0%
$ 727,273 TOUSA, Inc. (Payment-In-Kind Election
Note) (h) (m) (n) (o) NR NR 14.75% 07/01/15 0
------------
TOTAL NOTES 0
(Cost $436,364) ------------
See Notes to Financial Statements Page 15
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) (r) (Continued)
May 31, 2009
Shares Description Value
---------- ----------------------------------------------------------------------------------------- --------------
PREFERRED STOCKS - 0.0%
HOMEBUILDING - 0.0%
4,273 TOUSA, Inc. (8.0%, Series A Convertible Payment-In-Kind Preferred Stock) (h) (i) (m) (o) $ 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 (o) 0
690 Atkins Nutritionals Holdings - Rights (o) 0
------------
TOTAL COMMON STOCKS AND RIGHTS 0
(Cost $36,260) ------------
Principal
Amount Description Value
-------------- ---------------------------------------------- --------------
SHORT-TERM INVESTMENTS - 2.6%
ASSET MANAGEMENT & CUSTODY BANKS - 2.6%
$ 7,717,118 JPMorgan Federal Money Market Fund - 0.0% (p) 7,717,118
------------
TOTAL SHORT-TERM INVESTMENTS 7,717,118
(Cost $7,717,118) ------------
TOTAL INVESTMENTS - 138.4% 412,364,145
(Cost $513,153,460) (q)
NET OTHER ASSETS AND LIABILITIES - 7.7% 22,839,696
LOAN OUTSTANDING - (19.2)% (57,050,000)
AUCTION MARKET PREFERRED SHARES, AT LIQUIDATION VALUE
(including accrued distributions) - (26.9)% (80,056,589)
------------
NET ASSETS (Applicable to Common Shareholders) - 100.0% $298,097,252
============
_________________________________
(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) Represents commitment fee rate on unfunded loan commitments.
(g) This DIP facility is partially drawn per Debtor-In-Possession Credit
Agreement dated March 3, 2009.
(h) This borrower has filed for protection in federal bankruptcy court.
(i) Non-income producing investment.
(j) This issuer is in default, but interest is still being accrued by the Fund
and paid by the issuer.
(k) This issuer is in default and interest is not being accrued by the Fund
nor paid by the issuer.
(l) This borrower has filed for protection in federal bankruptcy court
subsequent to the date of this report.
Page 16 See Notes to Financial Statements
First Trust/Four Corners Senior Floating Rate Income Fund II
Portfolio of Investments (a) (r) (Continued)
May 31, 2009
(m) This investment 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 investments may only be resold in transactions
exempt from registration (See Note 2F - Restricted Investments in the Notes
to Financial Statements).
(n) This investment is a Senior Subordinated Payment-in-Kind Election Note
whereby 1.00% of interest per annum is to be paid in cash and 13.75% of
interest per annum is to 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.
(o) This investment is fair valued in accordance with valuation procedures
adopted by the Fund's Board of Trustees.
(p) Represents the daily dividend rate in effect at May 31, 2009.
(q) Aggregate cost for federal income tax purposes is $513,435,612. As of May
31, 2009, the aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost was $625,109 and the
aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value was $101,696,576.
(r) All or a portion of the investments are available to serve as collateral on
the outstanding loan.
NR Not rated.
WR Withdrawn rating.
_________________________________
Valuation Inputs
A summary of the inputs used to value the Fund's investments as of May 31, 2009
is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
Investments
----------------------------------------------- -----------------
Level 1 - Quoted Prices $ 7,717,118
Level 2 - Other Significant Observable Inputs 404,647,027
Level 3 - Significant Unobservable Inputs --
--------------
Total $ 412,364,145
==============
See Notes to Financial Statements Page 17
First Trust/Four Corners Senior Floating Rate Income Fund II
Statement of Assets and Liabilities
May 31, 2009
ASSETS:
Investments, at value
(Cost $513,153,460) $ 412,364,145
Cash segregated as collateral for terminated credit default swaps 263,067
Prepaid expenses 1,119,748
Receivables:
Investment securities sold 22,654,562
Interest 1,610,643
-------------
Total Assets 438,012,165
-------------
LIABILITIES:
Outstanding loan 57,050,000
Payables:
Investment securities purchased 2,159,853
Investment advisory fees 272,883
Interest and fees on loan 159,954
Audit and tax fees 63,312
Printing fees 60,725
Legal fees 47,742
Administrative fees 15,436
Transfer agent fees 1,739
Custodian fees 1,500
Accrued expenses and other liabilities 25,180
-------------
Total Liabilities 59,858,324
-------------
NET ASSETS INCLUDING AUCTION MARKET PREFERRED SHARES: $ 378,153,841
=============
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) 80,056,589
-------------
NET ASSETS (Applicable to Common Shareholders) $ 298,097,252
=============
NET ASSETS consist of:
Paid-in capital 480,451,257
Par value 252,919
Accumulated net investment income (loss) (166,321)
Accumulated net realized gain (loss) on investments and swap transactions (81,651,288)
Net unrealized appreciation (depreciation) on investments (100,789,315)
-------------
NET ASSETS (Applicable to Common Shareholders) $ 298,097,252
=============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) $ 11.79
=============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) $ 25,291,939
=============
Page 18 See Notes to Financial Statements
First Trust/Four Corners Senior Floating Rate Income Fund II
Statement of Operations
For the Year Ended May 31, 2009
INVESTMENT INCOME:
Interest $ 31,531,992
Dividends 26,346
Other income 778,717
-------------
Total investment income 32,337,055
-------------
EXPENSES:
Interest and fees on loan 5,375,410
Investment advisory fees 3,802,752
Administrative fees 233,527
Legal fees 224,841
Auction Market Preferred Shares commission fees 197,254
Printing fees 105,785
Audit and tax fees 53,313
Custodian fees 40,874
Trustees' fees and expenses 37,382
Transfer agent fees 28,664
Other 143,725
-------------
Total expenses 10,243,527
-------------
NET INVESTMENT INCOME 22,093,528
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (69,736,877)
Credit default swaps (214,978)
-------------
Net realized gain (loss) (69,951,855)
-------------
Net change in unrealized appreciation (depreciation) on:
Investments (47,428,322)
Credit default swaps 138,235
-------------
Net change in unrealized appreciation (depreciation) (47,290,087)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS) (117,241,942)
-------------
AUCTION MARKET PREFERRED SHARE DIVIDENDS (2,226,284)
-------------
NET INCREASE (DECREASE) IN NET ASSETS (APPLICABLE TO COMMON SHAREHOLDERS)
RESULTING FROM OPERATIONS $ (97,374,698)
=============
See Notes to Financial Statements1 Page 19
First Trust/Four Corners Senior Floating Rate Income Fund II
Statements of Changes in Net Assets
Year Year
Ended Ended
5/31/2009 5/31/2008
---------------- ----------------
OPERATIONS:
Net investment income (loss) $ 22,093,528 $ 36,777,196
Net realized gain (loss) (69,951,855) (6,941,462)
Net change in unrealized appreciation (depreciation) (47,290,087) (53,061,253)
Distributions to Auction Market Preferred Shareholders from:
Net investment income (2,226,284) (5,116,317)
-------------- --------------
Net increase (decrease) in net assets applicable to Common Shareholders
resulting from operations (97,374,698) (28,341,836)
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (19,715,067) (34,639,840)
-------------- --------------
Total distributions to Common Shareholders (19,715,067) (34,639,840)
-------------- --------------
Total increase (decrease) in net assets applicable to Common Shareholders (117,089,765) (62,981,676)
NET ASSETS (Applicable to Common Shareholders):
Beginning of year 415,187,017 478,168,693
-------------- --------------
End of year $ 298,097,252 $ 415,187,017
============== ==============
Accumulated net investment income (loss) at end of year $ (166,321) $ (536,890)
============== ==============
Page 20 See Notes to Financial Statements
First Trust/Four Corners Senior Floating Rate Income Fund II
Statement of Cash Flows
For the Year Ended May 31, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets applicable to Common Shareholders resulting
from operations $ (97,374,698)
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 (1,373,979,536)
Sales and maturities of investments 1,533,034,616
Net amortization/accretion of premium/discount on investments (2,624,637)
Net realized loss on investments 69,736,877
Net realized loss on credit default swaps 214,978
Net change in unrealized appreciation/depreciation on investment 47,428,322
Net change in net unrealized appreciation/depreciation on credit default swaps (138,235)
CHANGES IN ASSETS AND LIABILITIES:
Increase in cash segregated as collateral for terminated credit default swaps (2,067)
Decrease in interest receivable 2,605,142
Decrease in dividends receivable 2,303
Increase in prepaid expenses (1,093,992)
Increase in receivable for investment securities sold (15,256,199)
Decrease in payable for investment securities purchased (4,911,483)
Decrease in interest and fees due on loan (359,118)
Decrease in accumulated unpaid dividends on Auction Market Preferred Shares (100,189)
Decrease in investment advisory fees payable (165,886)
Decrease in audit and tax fees payable (5,388)
Decrease in legal fees payable (114,506)
Decrease in transfer agent fees payable (3,167)
Decrease in printing fees payable (17,006)
Decrease in administrative fees payable (14,318)
Decrease in custodian fees payable (16,645)
Decrease in Trustees' fees and expenses payable (1,702)
Increase in accrued expenses and other liabilities 8,730
----------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 156,852,196
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders (19,715,067)
Redemption of Auction Market Preferred Shares (20,000,000)
Proceeds from borrowings 28,000,000
Repayment of borrowings (145,950,000)
----------------
CASH USED IN FINANCING ACTIVITIES (157,665,067)
-------------
Decrease in cash (812,871)
Cash at beginning of year 812,871
-------------
CASH AT END OF YEAR $ --
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 5,734,528
=============
See Notes to Financial Statements Page 21
First Trust/Four Corners Senior Floating Rate Income Fund II
Financial Highlights
For a Common Share outstanding throughout each year
Year Year Year Year Year
Ended Ended Ended Ended Ended
5/31/2009 5/31/2008 5/31/2007 5/31/2006 5/31/2005
----------- ----------- ----------- ----------- -----------
Net asset value, beginning of year $ 16.42 $ 18.91 $ 19.00 $ 18.94 $ 19.04
--------- --------- --------- --------- ---------
Income from investment operations:
Net investment income (loss) 0.87 1.45 1.66 1.48 0.95
Net realized and unrealized gain (loss) (4.63) (2.37) (0.04) 0.04 (0.02)
Distributions paid to AMP (a) Shareholders from:
Net investment income (0.09) (0.20) (0.21) (0.16) (0.07)
--------- --------- --------- --------- ---------
Total from investment operations (3.85) (1.12) 1.41 1.36 0.86
--------- --------- --------- --------- ---------
Distributions paid to Common Shareholders from:
Net investment income (0.78) (1.37) (1.50) (1.28) (0.91)
Net realized gain -- -- -- (0.02) --
--------- --------- --------- --------- ---------
Total distributions to Common Shareholders (0.78) (1.37) (1.50) (1.30) (0.91)
--------- --------- --------- --------- ---------
Dilutive impact from the offering of AMP Shares (b) -- -- -- -- (0.05)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 11.79 $ 16.42 $ 18.91 $ 19.00 $ 18.94
--------- --------- --------- --------- ---------
Market value, end of year $ 10.04 $ 14.76 $ 18.81 $ 17.61 $ 17.89
--------- --------- --------- --------- ---------
Total return based on net asset value (c) (d) (22.07)% (5.19)% 8.04% 8.06% 4.38%
========= ========= ========= ========= =========
Total return based on market value (d) (e) (26.11)% (14.32)% 15.95% 6.03% (6.20)%
========= ========= ========= ========= =========
--------------------------------
Ratios to average net assets available
to Common Shareholders:
Ratio of total expenses to average net assets 3.40% 3.63% 3.55% 3.08% 2.02%
Ratio of total expenses to average net assets
excluding interest expense 1.62% 1.54% 1.45% 1.45% 1.30%
Ratio of net investment income (loss) to average net
assets 7.34% 8.52% 8.80% 7.77% 5.01%
Ratio of net investment income (loss) to average net
assets net of AMP dividends (f) 6.60% 7.34% 7.70% 6.93% 4.59%
Supplemental Data:
Portfolio turnover rate 15% 31% 78% 81% 115%
Net assets, end of period (in 000's) $298,097 $415,187 $478,169 $480,155 $478,785
Ratio of total expenses to total average
Managed Assets (g) 2.02% 2.22% 2.26% 1.97% 1.43%
Ratio of total expenses to total average Managed
Assets excluding interest expense (g) 0.96% 0.94% 0.92% 0.93% 0.92%
Preferred Shares and Loan Outstanding:
Total AMP Shares outstanding 3,200 4,000 4,000 4,000 4,000
Liquidation and market value per AMP share (h) $25,018 $25,039 $25,045 $25,040 $25,031
Asset coverage per share $118,155(i) $128,797(i) $179,792(j) $189,289(j) $191,446(j)
Loan outstanding (in 000's) $57,050 $175,000 $141,000 $177,000 $187,000
Asset coverage per $1,000 of loan outstanding (k) $7,627 $3,944 $5,100 $4,278 $4,095
________________________________
(a) Auction Market Preferred ("AMP") Shares.
(b) The expenses associated with the offering of AMP Shares had a $(0.05)
impact on the Common Share NAV.
(c) 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.
(d) Total return is not annualized for periods less than one year.
(e) 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.
(f) Ratio reflects the effect of distributions to AMP Shareholders.
(g) 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.
(h) Includes accumulated and unpaid distributions to AMP Shareholders.
(i) 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.
(j) 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.
(k) 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 22 See Notes to Financial Statements
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NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
May 31, 2009
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 4:00 p.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 investments, 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
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 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 investments 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
investments are valued at the mean of the most recent bid and asked prices on
such day. Investments traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio investments 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 investments. Portfolio investments
traded in the over-the-counter market, but excluding investments 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 23
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (Continued)
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
May 31, 2009
o Level 1 - quoted prices in active markets for identical investments
o Level 2 - other significant observable inputs (including quoted
prices for similar investments, 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 investments are not necessarily an
indication of the risks associated with investing in those investments. A
summary of the inputs used to value the Fund's investments as of May 31, 2009 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.
Credit default swap transactions are either "physical delivery" settled or
"cash" settled. Physical delivery entails the actual delivery of the reference
asset to the seller in exchange for payment of the full par value of the
reference asset. Cash settled entails a net cash payment from the seller to the
buyer based on the difference of the par value of the reference asset and the
current value of the reference asset that may have, through default, lost some,
most or all of its value. 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 May 31, 2009, the Fund had
no outstanding 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 investments, including the risk of a possible decline
in the value of the underlying investments 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 May 31, 2009, the Fund
had no open repurchase agreements.
D. Investment Transactions and Investment Income:
Investment transactions are recorded as of the trade date. Realized gains and
losses from investment 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.
Investments 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
investments 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. As of May 31, 2009, 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 $89,580 as of May 31, 2009. The Fund is obligated to fund these
loan commitments at the borrower's discretion. Net unrealized appreciation from
the commitments is $3,644 at May 31, 2009.
Page 24
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (Continued)
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
May 31, 2009
F. Restricted Investments:
The Fund invests in restricted investments, which are investments that cannot be
offered for public sale without first being registered under the Securities Act
of 1933, as amended. Prior to registration, restricted investments may only be
resold in transactions exempt from registration. The Fund held restricted
investments at May 31, 2009 as shown in the following table. The Fund does not
have the right to demand that such investments be registered. These investments
are valued according to the valuation procedures as stated in the Portfolio
Valuation footnote (Note 2A) and are not expressed as a discount to the carrying
value of a comparable unrestricted investment. There are no unrestricted
investments with the same maturity dates and yields for these issuers.
% of
Net Assets
Applicable
Acquisition Principal Value Current to Common
Investment Date Value/Shares Per Share Carrying Cost Value Shareholders
----------------------------------------------------------------------------------------------------------------
HRP Myrtle Beach 3/23/06 $ 1,225,000 $ -- $ 1,225,000 $ -- 0.00%
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 $ -- 0.00%
=========================================
(1) Investment 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 investments held by the
Fund, timing differences and differing characterizations of distributions made
by the Fund. Permanent differences incurred during the tax year ended May 31,
2009, resulting in book and tax accounting differences, have been reclassified
at year end to reflect an increase in undistributed net investment income by
$218,392 and a decrease in accumulated net realized gain (loss) on investments
sold by $218,392. Net assets applicable to Common Shareholders were not affected
by this reclassification.
The tax character of distributions paid during the fiscal years ended May 31,
2009 and May 31, 2008 are as follows:
Distributions paid from: 2009 2008
---- ----
Ordinary Income $ 21,941,351 $ 39,756,157
As of May 31, 2009, the components of distributable earnings on a tax basis are
as follows:
Undistributed Ordinary Income $ 373,047
Net Unrealized Appreciation (Depreciation) $ (101,071,467)
Accumulated Capital and other losses $ (81,651,288)
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, 2009, the Fund had available realized capital losses of $3,984,460,
$3,611,723 and $25,697,677 to offset future net capital gains through the fiscal
years ended 2014, 2016 and 2017, respectively.
Post-October losses. Under current laws, certain 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, 2009, the Fund intends to elect
to defer net realized losses incurred from November 1, 2008 through May 31, 2009
of $48,357,428.
Page 25
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (Continued)
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
May 31, 2009
In June 2006, the 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 May 31, 2009, 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 April 2009, the FASB issued FASB Staff Position No. 157-4, "Determining Fair
Value when the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP
157-4"). FSP 157-4 is effective for fiscal years and interim periods ending
after June 15, 2009. FSP 157-4 provides additional guidance for estimating fair
value in accordance with FAS 157, when the volume and level of activity for the
asset or liability have significantly decreased. FSP 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. Management is currently evaluating the impact the implementation of FSP
157-4 will have on the Fund's financial statement disclosures, if any.
3. Investment Advisory Fee, Affiliated Transactions and Other Fee Arrangements
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, which are 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.
served as the Fund's Administrator and Fund Accountant, JPMorgan Chase Bank,
National Association served as the Fund's Custodian and American Stock Transfer
& Trust Company served as the Fund's Transfer Agent. Effective May 25, 2009, PNC
Global Investment Servicing (U.S.) Inc. ("PNC"), an indirect, majority-owned
subsidiary of The PNC Financial Services Group, Inc., serves as the Fund's
Transfer Agent in accordance with certain fee arrangements. Effective June 1,
2009, PNC also serves as the Fund's Administrator and Fund Accountant in
accordance with certain fee arrangements. PFPC Trust Company, also an indirect,
majority-owned subsidiary of The PNC Financial Services Group, Inc., serves as
the Fund's Custodian as of June 1, 2009 in accordance with certain fee
arrangements. PNC continues to provide certain administrative services to the
Fund in connection with the Board's 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 and 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 equally allocated 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. The Lead
Independent Trustee and each Committee chairman will serve two-year terms ending
December 31, 2009 before rotating to serve as a chairman of another committee or
as Lead Independent Trustee. The officers and "Interested" Trustee receive no
compensation from the trusts for serving in such capacities.
4. Purchases and Sales of Investments
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the year ended May 31, 2009 were $75,403,209 and $237,164,035,
respectively.
Page 26
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (Continued)
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
May 31, 2009
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 May 31, 2009, 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.
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 financial 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 Inter-Bank Offered Rate.
On July 2, 2008, the Fund redeemed $20 million of its $100 million outstanding
AMP Shares at par ($25,000 per share), 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).
For the year ended May 31, 2009, transactions in AMP shares were as follows:
Series A Series B
Liquidation Liquidation
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 5/31/09 1,600 $ 40,000,000 1,600 $ 40,000,000
=================================================
First Trust continues to seek methods for refinancing the approximately $80
million of the Fund's AMP Shares that remain outstanding. The ability to obtain
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 May 31, 2009 was 1.53% and 1.66% 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, however, when an auction fails, the rate is
automatically set at the maximum rate as prescribed by the terms of the
security. The high and low annual dividend rates during the year ended May 31,
2009, for the Series A 7 day auction were 5.94% and 1.49%, respectively, and the
average dividend rate was 2.69%. The high and low annual dividend rates during
the year ended May 31, 2009, for the Series B 28 day auction were 5.00% and
1.59%, respectively, and the average dividend rate was 2.91%. 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.
Page 27
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NOTES TO FINANCIAL STATEMENTS - (Continued)
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
May 31, 2009
6. Revolving Credit Facility
The Fund has entered into a 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 13,
2010 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 was reduced from $195,000,000 to $150,000,000 on May 15, 2009 in
connection with the annual extension of the expiration date of the Credit
Facility. For the year ended May 31, 2009, the average amount outstanding was
$124,091,781. The loans under the Credit Facility funded by the Conduit Lender
bear interest for each settlement period at a rate per annum based on the
commercial paper rate of the Conduit Lender. The loans under the Credit Facility
funded by the Secondary Lenders bear interest for each settlement period at a
per annum rate equal to (i) the Eurodollar rate for the settlement period plus
7.50% or (ii) the alternate base rate plus 5.00%. For the year ended May 31,
2009, the Fund had no loans under the Credit Facility funded by the Secondary
Lenders. The high and low annual interest rates for loans under the Credit
Facility funded by the Conduit Lender during the year ended May 31, 2009, were
3.74% and 0.60%, respectively, with a weighted average interest rate of 2.60%.
The annual interest rate in effect for such loans at May 31, 2009 was 0.82%. The
Fund also pays additional borrowing costs, which include a program fee of 1.50%
and a liquidity fee of 0.75% per year. On May 15, 2009 in connection with the
annual extension of the expiration date of the Credit Facility, the Fund paid
upfront fees of $1,125,000, which will be amortized over a one-year period. Such
expenses are included in "Interest and fees on loan" on the Statement of
Operations.
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 investments owned by the Fund. The value of these investments, 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. Investment 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 investments is extremely limited or absent), the Fund may take
temporary defensive positions.
The Fund's performance was adversely impacted by the weakness in the credit
markets and broad stock market that occurred beginning in late 2008, and may
continue to be adversely affected if the weakness in the credit and stock
markets continue. In response to the financial crises affecting the banking
system and financial markets, the U.S. and foreign governments have intervened
to an unprecedented degree in the financial and credit markets. Among other
things, U.S. government regulators have encouraged, and in some cases structured
and provided financial assistance for, banks, securities firms, insurers and
other financial companies. Additional intervention programs have been adopted
and proposed which will have a further impact on the securities markets. Many of
the recently enacted or proposed government measures are far-reaching and
without historical precedent. Furthermore, the U.S. government has stated its
willingness to implement additional measures as it may see fit to address
changes in market conditions. There can be no assurance that any or all of these
measures will succeed in stabilizing and providing liquidity to the U.S.
financial markets, including the extreme levels of volatility currently being
experienced. Such continued volatility could materially and adversely affect the
financial condition 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
Page 28
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (Continued)
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
May 31, 2009
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-end funds, including the Fund, have been
experiencing failed auctions involving their auction-rate Preferred Shares.
Based on current market conditions, the Fund expects that auctions may continue
to fail. If an auction fails a holder may not be able to sell some or all of its
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 May 20, 2009, the Fund declared a dividend of $0.0475 per share to Common
Shareholders of record June 3, 2009, payable June 15, 2009.
On June 22, 2009, the Fund declared a dividend of $0.0375 per share to Common
Shareholders of record July 6, 2009, payable July 15, 2009.
On July 20, 2009, the Fund declared a dividend of $0.0325 per share to Common
Shareholders of record August 5, 2009, payable August 17, 2009.
Page 29
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of First Trust/Four Corners Senior
Floating Rate Income Fund II:
We have audited the accompanying statement of assets and liabilities of First
Trust/Four Corners Senior Floating Rate Income Fund II (the "Fund"), including
the portfolio of investments, as of May 31, 2009, and the related statement of
operations and cash flows for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of investments owned as of May 31, 2009 by correspondence with the Fund's
custodian, agent banks, and brokers; where replies were not received, we
performed other auditing procedures. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust/Four Corners Senior Floating Rate Income Fund II as of May 31, 2009, the
results of its operations and its cash flows for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the financial highlights for each of the five years in the period then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
July 24, 2009
Page 30
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
May 31, 2009 (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 PNC
Global Investment Servicing (U.S.) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at the
time of valuation, the Fund will issue new shares at a price equal to
the greater of (i) NAV per Common Share on that date or (ii) 95% of the
market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and will
purchase Common Shares in the open market, on the NYSE or elsewhere, for
the participants' accounts. It is possible that the market price for the
Common Shares may increase before the Plan Agent has completed its
purchases. Therefore, the average purchase price per share paid by the
Plan Agent may exceed the market price at the time of valuation,
resulting in the purchase of fewer shares than if the dividend or
distribution had been paid in Common Shares issued by the Fund. The Plan
Agent will use all dividends and distributions received in cash to
purchase Common Shares in the open market within 30 days of the
valuation date except where temporary curtailment or suspension of
purchases is necessary to comply with federal securities laws. Interest
will not be paid on any uninvested cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 331-1710, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing PNC Global Investment
Servicing (U.S.) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund votes proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 31
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (Continued)
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
May 31, 2009 (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.
NYSE Certification Information
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of October 15, 2008, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR, N-CSRS and N-Q contain certifications by the Fund's
principal executive officer and principal financial officer that relate to the
Fund's public disclosure in such reports and are required by Rule 30a-2 under
the 1940 Act.
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.
Tax Information
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended May 31, 2009, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.
Investment Management and Sub-Advisory Agreements
Board Consideration Regarding Continuation of
Investment Management and Sub-Advisory Contracts
The Board of Trustees of First Trust/Four Corners Senior Floating Rate Income
Fund II (the "Fund"), including the Independent Trustees, unanimously approved
the continuation of the Investment Management Agreement (the "Advisory
Agreement") between the Fund and First Trust Advisors L.P. (the "Advisor") and
the Investment Sub-Advisory Agreement (the "Sub-Advisory Agreement" and together
with the Advisory Agreement, the "Agreements") among the Fund, the Advisor and
Four Corners Capital Management, LLC (the "Sub-Advisor"), at a meeting held on
March 1-2, 2009. The Board determined that the terms of the Agreements are fair
and reasonable and that the Agreements continue to be in the best interests of
the Fund.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services provided by the Advisor and the Sub-Advisor
(including the relevant personnel responsible for these services and their
experience); the advisory and sub-advisory fees for the Fund as compared to fees
charged to other clients of the Advisor and the Sub-Advisor and as compared to
fees charged by investment advisors and sub-advisors to comparable funds;
expenses of the Fund as compared to expense ratios of comparable funds; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall-out benefits to the Advisor and the Sub-Advisor; and
information on the Advisor's and the Sub-Advisor's compliance programs. The
Independent Trustees also met separately with their independent legal counsel to
discuss the information provided by the Advisor and the Sub-Advisor. The Board
applied its business judgment to determine whether the arrangements between the
Fund and the Advisor and among the Fund, the Advisor and the Sub-Advisor are
reasonable business arrangements from the Fund's perspective as well as from the
perspective of shareholders.
In reviewing the Agreements, the Board considered the nature, quality and extent
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund, including
the oversight of the Sub-Advisor. The Board noted the compliance program that
had been developed by the Advisor and considered that the compliance program
Page 32
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (Continued)
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
May 31, 2009 (Unaudited)
includes policies and procedures for monitoring the Sub-Advisor's compliance
with the 1940 Act and the Fund's investment objectives and policies. The Board
also noted the enhancements made by the Advisor to the compliance program in
2008. With respect to the Sub-Advisory Agreement, the Board received a
presentation from representatives of the Sub-Advisor discussing the services
that the Sub-Advisor provides to the Fund and how the Sub-Advisor manages the
Fund's investments. The Board noted that Macquarie Group Limited increased its
ownership stake in the Sub-Advisor to 100% in October 2008 and considered that
the Sub-Advisor's access to a greater breadth of resources should benefit the
Fund. In light of the information presented and the considerations made, the
Board concluded that the nature, quality and extent of services provided to the
Fund by the Advisor and the Sub-Advisor under the Agreements have been and are
expected to remain satisfactory and that the Sub-Advisor, under the oversight of
the Advisor, has managed the Fund consistent with its investment objectives and
policies.
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees paid to the Advisor by
similar funds, and noted that the Advisor does not provide advisory services to
clients with investment objectives and policies similar to the Fund's other than
to two other closed end funds to which different advisory fee rates are charged.
The Board also considered information provided by the Sub-Advisor as to the fees
it charges to other similar clients, noting that the Sub-Advisor sub-advises the
same two other closed-end funds with similar investment objectives and policies,
to which different sub-advisory fee rates are charged. In addition, the Board
received data prepared by Lipper Inc. ("Lipper"), an independent source, showing
the management fees and expense ratios of the Fund as compared to the management
fees and expense ratios of a combined peer group selected by Lipper and the
Advisor. The Board discussed with representatives of the Advisor the limitations
in creating a relevant peer group for the Fund, including that (i) the peer
funds may use different types of leverage which have different costs associated
with them; (ii) most peer funds do not employ an advisor/sub-advisor management
structure; (iii) the peer funds may not have the same fiscal year as the Fund,
which may cause the expense data used by Lipper to be measured over different
time periods; (iv) many of the peer funds are larger than the Fund; and (v) many
of the peer funds have an inception date prior to the Fund's inception date and
their fee and expense structures may not reflect newer pricing practices in the
market. The Board reviewed the Lipper materials, but based on its discussions
with the Advisor, the Board determined that the Lipper data was of limited value
for purposes of its consideration of the renewal of the Agreements.
The Board also considered performance information for the Fund, noting that,
similar to almost all other funds, the Fund's performance was impacted by the
severe market downturn in 2008. The Board noted that the performance information
included the Fund's quarterly performance report, which is part of the process
that the Board has established for monitoring the Fund's performance on an
ongoing basis. The Board determined that this process continues to be effective
for reviewing the Fund's performance. In addition to the Board's ongoing review
of performance, the Board also received data prepared by Lipper comparing the
Fund's performance to the combined peer group selected by Lipper and the
Advisor, as well as to a larger group and to a benchmark. The Board reviewed the
Lipper materials, but for similar reasons to those described above, the Board
determined that the performance data provided by Lipper was of limited value.
The Board considered changes made to the Fund's leverage arrangements in 2008 as
a result of market events and considered an analysis prepared by the Advisor on
the continued benefits provided by the Fund's leverage. In addition, the Board
considered the market price and net asset value performance of the Fund since
inception, and compared the Fund's premium/discount to the average and median
premium/discount of the combined peer group, noting that the Fund's
premium/discount was generally indicative of the asset class and market events.
Based on the information provided and the Board's ongoing review of the Fund's
performance, and taking into account the historic market events of 2008, the
Board concluded that the Fund's performance was reasonable.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, quality and extent
of services provided by the Advisor and Sub-Advisor under the Agreements.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and had noted that the advisory fee is not structured to pass the
benefits of any economies of scale on to the shareholders as the Fund's assets
grow. The Board concluded that the management fee reflects an appropriate level
of sharing of any economies of scale. The Board also considered the costs of the
services provided and profits realized by the Advisor from serving as investment
manager to closed-end funds for the twelve months ended December 31, 2008, as
set forth in the materials provided to the Board. The Board noted the inherent
limitations in the profitability analysis, and concluded that the Advisor's
profitability appeared to be not excessive in light of the services provided to
the Fund. In addition, the Board considered and discussed any ancillary benefits
derived by the Advisor from its relationship with the Fund and noted that the
typical fall-out benefits to the Advisor such as soft dollars are not present.
The Board concluded that any other fall-out benefits received by the Advisor or
its affiliates would appear to be limited.
The Board considered that the Sub-Advisor's investment services expenses are
primarily fixed, and that the Sub-Advisor had previously invested in personnel
and systems and anticipated continued maintenance of efficient personnel and
systems in support of the Fund. The Board considered that the sub-advisory fee
rate was negotiated at arm's length between the Advisor and the Sub-Advisor, an
unaffiliated third party. The Board also considered data provided by the
Sub-Advisor as to the profitability of the Sub-Advisory Agreement to the
Sub-Advisor, noting that the method used to allocate expenses was not a typical
practice of the Sub-Advisor. The Board noted the inherent limitations in this
profitability analysis and concluded that the profitability analysis for the
Advisor was more relevant, although the profitability of the Sub-Advisory
Agreement appeared to be not excessive in light of the services provided to the
Fund. The Board noted that the Sub-Advisor does not maintain any soft-dollar
arrangements and that the Sub-Advisor indicated that it does not receive any
material fall-out benefits from its relationship to the Fund.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, determined that the terms of the
Agreements continue to be fair and reasonable and that the continuation of the
Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 33
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
May 31, 2009 (Unaudited)
Number of
Portfolios
in the First Other
Trust Trusteeships or
Name, Address, Term of Office Fund Complex Directorships
Date of Birth and and Length of Principal Occupations Overseen by Held by
Position with the Fund Service(2) During Past 5 Years Trustee Trustee
-------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three Year Physician; President, Wheaton 61 None
c/o First Trust Advisors L.P. Term Orthopedics; Co-owner and
120 E. Liberty Drive, Co-Director (January 1996 to May
Suite 400 o Since Fund 2007), Sports Med Center for
Wheaton, IL 60187 Inception Fitness; Limited Partner, Gundersen
D.O.B.: 04/51 Real Estate Limited Partnership;
Member, Sportsmed LLC
Thomas R. Kadlec, Trustee o Three Year Senior Vice President and Chief 61 Director of ADM
c/o First Trust Advisors L.P. Term Financial Officer (May 2007 to Investor
120 E. Liberty Drive, Present), Vice President and Chief Services, Inc.
Suite 400 o Since Fund Financial Officer (1990 to May and Director of
Wheaton, IL 60187 Inception 2007), ADM Investor Services, Inc. Archer
D.O.B.: 11/57 (Futures Commission Merchant); Financial
President (May 2005 to Present), ADM Services, Inc.
Derivatives, Inc.; Registered
Representative (2000 to Present),
Segerdahl & Company, Inc., a FINRA
member (Broker-Dealer)
Robert F. Keith, Trustee o Three Year President (2003 to Present), 61 None
c/o First Trust Advisors L.P. Term Hibs Enterprises (Financial and
120 E. Liberty Drive, Management Consulting)
Suite 400 o Since Fund
Wheaton, IL 60187 Inception
D.O.B.: 03/64
Niel B. Nielson, Trustee o Three Year President (June 2002 61 Director of
c/o First Trust Advisors L.P. Term to Present), Covenant Covenant
120 E. Liberty Drive, College Transport Inc.
Suite 400 o Since Fund
Wheaton, IL 60187 Inception
D.O.B.: 03/54
-------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
-------------------------------------------------------------------------------------------------------------------------
James A. Bowen, Trustee, o Three Year President, First Trust Advisors L.P. 61 Trustee of
President, Chairman of the Trustee and First Trust Portfolios L.P.; Wheaton College
Board and CEO(1) Term and Chairman of the Board of Directors,
120 E. Liberty Drive, Indefinite BondWave LLC (Software Development
Suite 400 Officer Company/Investment Advisor) and
Wheaton, IL 60187 Term Stonebridge Advisors LLC (Investment
D.O.B.: 09/55 Advisor)
o Since Fund
Inception
__________________________
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his
position as President of First Trust Advisors L.P., investment advisor of
the Fund.
(2) Currently, Richard E. Erickson, as a Class I Trustee, is serving as a
trustee until the Fund's 2011 annual meeting of shareholders. Niel B.
Nielson, as a Class II Trustee, is serving as a trustee until the Fund's
2009 annual meeting of shareholders. James A. Bowen, as a Class III
Trustee, is serving as a trustee until the Fund's 2010 annual meeting.
Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 34
--------------------------------------------------------------------------------
Board of Trustees and Officers (Continued)
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund
May 31, 2009 (Unaudited)
Term of Office
Name, Address and Position and Offices and Length of Principal Occupations
Date of Birth with Fund Service(2) During Past 5 Years
----------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES (3)
----------------------------------------------------------------------------------------------------------
Mark R. Bradley Treasurer, o Indefinite Chief Financial Officer,
120 E. Liberty Drive, Controller, Chief term First Trust Advisors L.P.
Suite 400 Financial Officer and First Trust Portfolios
Wheaton, IL 60187 and Chief Accounting o Since Fund L.P.; Chief Financial
D.O.B.: 11/57 Officer Inception Officer, BondWave LLC
(Software Development
Company/Investment Advisor)
and Stonebridge Advisors LLC
(Investment Advisor)
Erin E. Chapman Assistant Secretary o Indefinite Assistant General Counsel
120 E. Liberty Drive, term (October 2007 to Present),
Suite 400 Associate Counsel (March
Wheaton, IL 60187 o Since June 2006 to October 2007), First
D.O.B.: 08/76 2009 Trust Advisors L.P. and
First Trust Portfolios
L.P.; Associate Attorney
(November 2003 to March
2006), Doyle & Bolotin, Ltd.
James M. Dykas Assistant Treasurer o Indefinite Senior Vice President (April
120 E. Liberty Drive, term 2007 to Present), Vice
Suite 400 President (January 2005 to
Wheaton, IL 60187 o Since Fund April 2007), First Trust
D.O.B.: 01/66 Inception Advisors L.P. and First
Trust Portfolios L.P.;
Executive Director (December
2002 to January 2005), Vice
President (December 2000 to
December 2002), Van Kampen
Asset Management and Morgan
Stanley Investment Management
Christopher R. Fallow Assistant Vice o Indefinite Assistant Vice President
120 E. Liberty Drive, President term (August 2006 to Present),
Suite 400 Associate (January 2005 to
Wheaton, IL 60187 o Since Fund August 2006), First Trust
D.O.B.: 04/79 Inception Advisors L.P. and First
Trust Portfolios L.P.;
Municipal Bond Trader (July
2001 to January 2005),
BondWave LLC (Software
Development
Company/Investment Advisor)
W. Scott Jardine Secretary and Chief o Indefinite General Counsel, First Trust
120 E. Liberty Drive, Compliance Officer term Advisors L.P. and First
Suite 400 Trust Portfolios L.P.;
Wheaton, IL 60187 o Since Fund Secretary, BondWave LLC
D.O.B.: 05/60 Inception (Software Development
Company/Investment Advisor)
and Stonebridge Advisors LLC
(Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Senior Vice President
120 E. Liberty Drive, term (September 2005 to Present),
Suite 400 Vice President (April 2004 to
Wheaton, IL 60187 o Since Fund September 2005), First Trust
D.O.B: 02/70 Inception Advisors L.P. and First Trust
Portfolios L.P.
Coleen D. Lynch Assistant Vice o Indefinite Assistant Vice President
120 E. Liberty Drive, President term (January 2008 to Present),
Suite 400 First Trust Advisors L.P. and
Wheaton, IL 60187 o Since July First Trust Portfolios L.P.;
DOB: 07/58 2008 Vice President (May 1998 to
January 2008), Van Kampen
Asset Management and Morgan
Stanley Investment Management
Kristi A. Maher Assistant Secretary o Indefinite Deputy General Counsel (May
120 E. Liberty Drive, term 2007 to Present), Assistant
Suite 400 General Counsel (March 2004
Wheaton, IL 60187 o Since Fund to May 2007), First Trust
D.O.B.: 12/66 Inception Advisors L.P. and First Trust
Portfolios L.P.
__________________________
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy
making function.
Page 35
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
First Trust/Four Corners Senior Floating Rate Income Fund II
May 31, 2009 (Unaudited)
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") consider your privacy an important priority in maintaining our
relationship. We are committed to protecting the security and confidentiality of
your personal information.
Sources of Information
We may collect nonpublic personal information about you from the following
sources:
o Information we receive from you or your broker-dealer, investment
adviser or financial representative through interviews, applications,
agreements or other forms;
o Information about your transactions with us, our affiliates or others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies."
For example, we may identify the pages on our website that your
browser requests or visits.
Information Collected
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
Disclosure of Information
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. The permitted uses
include the disclosure of such information to unaffiliated companies for the
following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians and
trustees, or that assist us in the distribution of investor materials
such as trustees, banks, financial representatives and printers.
o We may release information we have about you if you direct us to do so,
if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information to those individuals who need to know
that information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
Confidentiality and Security
With regard to our internal security procedures, the Fund restricts access to
your nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
Policy Updates and Inquiries
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time; however, if we do change
it, we will tell you promptly.
For questions about our policy, or for additional copies of this notice, please
contact us at (800) 621-1675.
Page 36
[LOGO OMITTED] FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. 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
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153
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
Inside Back Cover
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party.
(c) During the period covered by this report, the code of ethics that
applies to the registrant's principal executive officer, principal
financial officer, principal accounting officer or controller, or
persons performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, and that
relates to any element of the code of ethics description was amended to
name W. Scott Jardine as the Compliance Coordinator for the
implementation and administration of the aforementioned code. The
amended codes of ethics is provided as an exhibit pursuant to Item
12(a)(1).
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are employed
by the registrant or a third party, that relates to one or more of the
items set forth in paragraph (b) of this item's instructions.
(e) Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES (REGISTRANT) -- The aggregate fees billed for each of
the last two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements were $60,500 for 2008 and
$51,500 for 2009.
(b) AUDIT-RELATED FEES (REGISTRANT) -- The aggregate fees billed in
each of the last two fiscal years, for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
of the registrant's financial statements and are not reported under paragraph
(a) of this Item were $0.
AUDIT-RELATED FEES (INVESTMENT ADVISER) -- The aggregate fees
billed in each of the last two fiscal years of the registrant for assurance and
related services by the principal accountant that are reasonably related to the
performance of the audit of the Registrant's financial statements and are not
reported under paragraph (a) of this Item were $0 for 2008 and $0 for 2009.
(c) TAX FEES (REGISTRANT) -- The aggregate fees billed in each of the
last two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning to the registrant
were $5,000 in 2008 and $5,200 in 2009. These fees were for tax consultation and
tax preparation.
TAX FEES (INVESTMENT ADVISER) -- The aggregate fees billed in each
of the last two fiscal years of the registrant for professional services
rendered by the principal accountant for tax compliance, tax advice, and tax
planning to the registrant's adviser were $0 for 2008 and $0 for 2009.
(d) ALL OTHER FEES (REGISTRANT) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the principal
accountant to the registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 for 2008 and $0 for 2009.
ALL OTHER FEES (INVESTMENT ADVISER) -- The aggregate fees billed in
each of the last two fiscal years for products and services provided by the
principal accountant to the Registrant's investment adviser, other than services
reported in paragraphs (a) through (c) of this Item were $0 for 2008 and $0 for
2009.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services
Pre-Approval Policy, the Audit Committee (the "Committee") is responsible for
the pre-approval of all audit services and permitted non-audit services
(including the fees and terms thereof) to be performed for the Registrant by its
independent auditors. The Chairman of the Committee authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the
independent auditor's engagements for non-audit services with the Registrant's
adviser (not including a sub-adviser whose role is primarily portfolio
management and is sub-contracted or overseen by another investment adviser) and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the Registrant, if the
engagement relates directly to the operations and financial reporting of the
Registrant, subject to the de minimis exceptions for non-audit services
described in Rule 2-01 of Regulation S-X. If the independent auditor has
provided non-audit services to the Registrant's adviser (other than any
sub-adviser whose role is primarily portfolio management and is sub-contracted
with or overseen by another investment adviser) and any entity controlling,
controlled by or under common control with the investment adviser that provides
ongoing services to the Registrant that were not pre-approved pursuant to its
policies, the Committee will consider whether the provision of such non-audit
services is compatible with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b) through
(d) for the Registrant and the Registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the
pre-approval exceptions included in paragraph (c)(7)(i)(c) or paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees
was less than fifty percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by,
or under common control with the adviser that provides ongoing services
to the Registrant for 2008 were $5,000 and $14,500 for the Registrant
and the Registrant's investment adviser, respectively, and for 2009
were $5,200 and $6,000 for the Registrant and the Registrant's
investment adviser, respectively.
(h) The Registrant's audit committee of its Board of Trustees determined
that the provision of non-audit services that were rendered to the
Registrant's investment adviser (not including any sub-adviser whose
role is primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity controlling,
controlled by, or under common control with the investment adviser that
provides ongoing services to the Registrant that were not pre-approved
pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is
compatible with maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The registrant has a separately designated standing audit committee
consisting of all the independent trustees of the registrant. The
members of the audit committee are: Thomas R. Kadlec, Niel B. Nielson,
Richard E. Erickson and Robert F. Keith.
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.
The Proxy Voting Policies are attached herewith.
FIRST TRUST ADVISORS L.P.
FIRST TRUST FUNDS
PROXY VOTING GUIDELINES
First Trust Advisors L.P. (the "Adviser") serves as investment adviser
providing discretionary investment advisory services for open and closed-end
investment companies (the "Funds"). As part of these services, the Adviser has
full responsibility for proxy voting and related duties. In fulfilling these
duties, the Adviser and Funds have adopted the following policies and
procedures:
1. It is the Adviser's policy to seek to ensure that proxies for
securities held by a Fund are voted consistently and solely in the best economic
interests of the respective Fund.
2. The Adviser shall be responsible for the oversight of a Fund's
proxy voting process and shall assign a senior member of its staff to be
responsible for this oversight.
3. The Adviser has engaged the services of Institutional Shareholder
Services, Inc. ("ISS") to make recommendations to the Adviser on the voting of
proxies related to securities held by a Fund. ISS provides voting
recommendations based on established guidelines and practices. The Adviser has
adopted these ISS Proxy Voting Guidelines.
4. The Adviser shall review the ISS recommendations and generally will
vote the proxies in accordance with such recommendations. Notwithstanding the
foregoing, the Adviser may not vote in accordance with the ISS recommendations
if the Adviser believes that the specific ISS recommendation is not in the best
interests of the respective Fund.
5. If the Adviser manages the assets or pension fund of a company and
any of the Adviser's clients hold any securities in that company, the Adviser
will vote proxies relating to such company's securities in accordance with the
ISS recommendations to avoid any conflict of interest. In addition, if the
Adviser has actual knowledge of any other type of material conflict of interest
between itself and the respective Fund with respect to the voting of a proxy,
the Adviser shall vote the applicable proxy in accordance with the ISS
recommendations to avoid such conflict of interest.
6. If a Fund requests the Adviser to follow specific voting guidelines
or additional guidelines, the Adviser shall review the request and follow such
guidelines, unless the Adviser determines that it is unable to follow such
guidelines. In such case, the Adviser shall inform the Fund that it is not able
to follow the Fund's request.
7. The Adviser may have clients in addition to the Funds which have
provided the Adviser with discretionary authority to vote proxies on their
behalf. In such cases, the Adviser shall follow the same policies and
procedures.
U.S. Proxy Voting Guidelines Concise Summary
(Digest of Selected Key Guidelines)
January 15, 2009
--------------------------------------------------------------------------------
1. OPERATIONAL ITEMS:
Auditor Ratification
Vote FOR proposals to ratify auditors, unless any of the following apply:
o An auditor has a financial interest in or association with the company,
and is therefore not independent;
o There is reason to believe that the independent auditor has rendered an
opinion which is neither accurate nor indicative of the company's
financial position;
o Poor accounting practices are identified that rise to a serious level
of concern, such as: fraud; misapplication of GAAP; and material
weaknesses identified in Section 404 disclosures; or
o Fees for non-audit services ("Other" fees) are excessive.
Non-audit fees are excessive if:
o Non-audit ("other") fees exceed audit fees + audit-related fees + tax
compliance/preparation fees
Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit
their auditors from engaging in non-audit services.
Vote CASE-BY-CASE on shareholder proposals asking for audit firm rotation,
taking into account:
o The tenure of the audit firm;
o The length of rotation specified in the proposal;
o Any significant audit-related issues at the company;
o The number of Audit Committee meetings held each year;
o The number of financial experts serving on the committee; and
o Whether the company has a periodic renewal process where the auditor is
evaluated for both audit quality and competitive price.
2. BOARD OF DIRECTORS:
Voting on Director(1) Nominees in Uncontested Elections Vote on director
nominees should be determined on a CASE-BY-CASE basis.
Vote AGAINST or WITHHOLD(2) from individual directors who:
____________________
(1) RiskMetrics' classification of directors can be found in U.S. Proxy Voting
Guidelines Summary.
(2) In general, companies with a plurality vote standard use "Withhold" as the
valid opposition vote option in director elections; companies with a majority
vote standard use "Against". However, it will vary by company and the proxy must
be checked to determine the valid opposition vote for the particular company.
o Attend less than 75 percent of the board and committee meetings without
a valid excuse, such as illness, service to the nation, work on behalf
of the company, or funeral obligations. If the company provides
meaningful public or private disclosure explaining the director's
absences, evaluate the information on a CASE-BY-CASE basis taking into
account the following factors:
- Degree to which absences were due to an unavoidable conflict;
- Pattern of absenteeism; and
- Other extraordinary circumstances underlying the director's absence;
o Sit on more than six public company boards;
o Are CEOs of public companies who sit on the boards of more than two
public companies besides their own-- withhold only at their outside
boards.
Vote AGAINST or WITHHOLD from all nominees of the board of directors, (except
from new nominees, who should be considered on a CASE-BY-CASE basis) if:
o The company's proxy indicates that not all directors attended 75% of
the aggregate of their board and committee meetings, but fails to
provide the required disclosure of the names of the directors involved.
If this information cannot be obtained, vote against/withhold from all
incumbent directors;
o The company's poison pill has a dead-hand or modified dead-hand
feature. Vote against/withhold every year until this feature is
removed;
o The board adopts or renews a poison pill without shareholder approval,
does not commit to putting it to shareholder vote within 12 months of
adoption (or in the case of an newly public company, does not commit to
put the pill to a shareholder vote within 12 months following the IPO),
or reneges on a commitment to put the pill to a vote, and has not yet
received a withhold/against recommendation for this issue;
o The board failed to act on a shareholder proposal that received
approval by a majority of the shares outstanding the previous year (a
management proposal with other than a FOR recommendation by management
will not be considered as sufficient action taken);
o The board failed to act on a shareholder proposal that received
approval of the majority of shares cast for the previous two
consecutive years (a management proposal with other than a FOR
recommendation by management will not be considered as sufficient
action taken);
o The board failed to act on takeover offers where the majority of the
shareholders tendered their shares;
o At the previous board election, any director received more than 50
percent withhold/against votes of the shares cast and the company has
failed to address the underlying issue(s) that caused the high
withhold/against vote;
o The board is classified, and a continuing director responsible for a
problematic governance issue at the board/committee level that would
warrant a withhold/against vote recommendation is not up for election-
any or all appropriate nominees (except new) may be held accountable;
o The board lacks accountability and oversight, coupled with sustained
poor performance relative to peers. Sustained poor performance is
measured by one- and three-year total shareholder returns in the bottom
half of a company's four-digit GICS industry group (Russell 3000
companies only).
Vote AGAINST or WITHHOLD from Inside Directors and Affiliated Outside Directors
(per the Classification of Directors below) when:
o The inside or affiliated outside director serves on any of the three
key committees: audit, compensation, or nominating;
o The company lacks an audit, compensation, or nominating committee so
that the full board functions as that committee;
o The company lacks a formal nominating committee, even if board attests
that the independent directors fulfill the functions of such a
committee;
o The full board is less than majority independent.
Vote AGAINST or WITHHOLD from the members of the Audit Committee if:
o The non-audit fees paid to the auditor are excessive;
o The company receives an adverse opinion on the company's financial
statements from its auditor; or
o There is persuasive evidence that the audit committee entered into an
inappropriate indemnification agreement with its auditor that limits
the ability of the company, or its shareholders, to pursue legitimate
legal recourse against the audit firm.
Vote CASE-by-CASE on members of the Audit Committee and/or the full board if
poor accounting practices, which rise to a level of serious concern are
indentified, such as: fraud; misapplication of GAAP; and material weaknesses
identified in Section 404 disclosures.
Examine the severity, breadth, chronological sequence and duration, as well as
the company's efforts at remediation or corrective actions in determining
whether negative vote recommendations are warranted against the members of the
Audit Committee who are responsible for the poor accounting practices, or the
entire board.
Vote AGAINST or WITHHOLD from the members of the Compensation Committee if:
o There is a negative correlation between the chief executive's pay and
company performance (see discussion under Equity Compensation Plans);
o The company reprices underwater options for stock, cash or other
consideration without prior shareholder approval, even if allowed in
their equity plan;
o The company fails to submit one-time transfers of stock options to a
shareholder vote;
o The company fails to fulfill the terms of a burn rate commitment they
made to shareholders;
o The company has backdated options (see "Options Backdating" policy);
The company has poor compensation practices (see "Poor Pay Practices" policy).
Poor pay practices may warrant withholding votes from the CEO and potentially
the entire board as well.
Vote AGAINST or WITHHOLD from directors, individually or the entire board, for
egregious actions or failure to replace management as appropriate.
Independent Chair (Separate Chair/CEO)
Generally vote FOR shareholder proposals requiring that the chairman's position
be filled by an independent director, unless the company satisfies all of the
following criteria:
The company maintains the following counterbalancing features:
o Designated lead director, elected by and from the independent board
members with clearly delineated and comprehensive duties. (The role may
alternatively reside with a presiding director, vice chairman, or
rotating lead director; however the director must serve a minimum of
one year in order to qualify as a lead director.) The duties should
include, but are not limited to, the following:
- presides at all meetings of the board at which the chairman is not
present, including executive sessions of the independent directors;
- serves as liaison between the chairman and the independent
directors;
- approves information sent to the board;
- approves meeting agendas for the board;
- approves meeting schedules to assure that there is sufficient time
for discussion of all agenda items;
- has the authority to call meetings of the independent directors;
- if requested by major shareholders, ensures that he is available for
consultation and direct communication;
o Two-thirds independent board;
o All independent key committees;
o Established governance guidelines;
o A company in the Russell 3000 universe must not have exhibited
sustained poor total shareholder return (TSR) performance, defined as
one- and three-year TSR in the bottom half of the company's four-digit
GICS industry group within the Russell 3000 only), unless there has
been a change in the Chairman/CEO position within that time;
o The company does not have any problematic governance or management
issues, examples of which include, but are not limited to:
- Egregious compensation practices;
- Multiple related-party transactions or other issues putting director
independence at risk;
- Corporate and/or management scandals;
- Excessive problematic corporate governance provisions; or
- Flagrant board or management actions with potential or realized
negative impact on shareholders.
Majority Vote Shareholder Proposals
Generally vote FOR precatory and binding resolutions requesting that the board
change the company's bylaws to stipulate that directors need to be elected with
an affirmative majority of votes cast, provided it does not conflict with the
state law where the company is incorporated. Binding resolutions need to allow
for a carve-out for a plurality vote standard when there are more nominees than
board seats.
Companies are strongly encouraged to also adopt a post-election policy (also
know as a director resignation policy) that provides guidelines so that the
company will promptly address the situation of a holdover director.
Performance/Governance Evaluation for Directors
Vote WITHHOLD/AGAINST on all director nominees if the board lacks accountability
and oversight, coupled with sustained poor performance relative to peers,
measured by one- and three-year total shareholder returns in the bottom half of
a company's four-digit GICS industry group (Russell 3000 companies only).
Evaluate board accountability and oversight at companies that demonstrate
sustained poor performance. Problematic provisions include but are not limited
to:
o a classified board structure;
o a supermajority vote requirement;
o majority vote standard for director elections with no carve out for
contested elections;
o the inability of shareholders to call special meetings;
o the inability of shareholders to act by written consent;
o a dual-class structure; and/or
o a non-shareholder approved poison pill.
If a company exhibits sustained poor performance coupled with a lack of board
accountability and oversight, also take into consideration the company's
five-year total shareholder return and five-year operational metrics in the
evaluation.
3. PROXY CONTESTS
Voting for Director Nominees in Contested Elections
Vote CASE-BY-CASE on the election of directors in contested elections,
considering the following factors:
o Long-term financial performance of the target company relative to its
industry;
o Management's track record;
o Background to the proxy contest;
o Qualifications of director nominees (both slates);
o Strategic plan of dissident slate and quality of critique against
management;
o Likelihood that the proposed goals and objectives can be achieved (both
slates);
o Stock ownership positions.
Reimbursing Proxy Solicitation Expenses
Vote CASE-BY-CASE on proposals to reimburse proxy solicitation expenses. When
voting in conjunction with support of a dissident slate, vote FOR the
reimbursement of all appropriate proxy solicitation expenses associated with the
election.
Generally vote FOR shareholder proposals calling for the reimbursement of
reasonable costs incurred in connection with nominating one or more candidates
in a contested election where the following apply:
o The election of fewer than 50% of the directors to be elected is
contested in the election;
o One or more of the dissident's candidates is elected;
o Shareholders are not permitted to cumulate their votes for directors;
and
o The election occurred, and the expenses were incurred, after the
adoption of this bylaw.
4. ANTITAKEOVER DEFENSES AND VOTING RELATED ISSUES
Advance Notice Requirements for Shareholder Proposals/Nominations
Vote CASE-BY-CASE on advance notice proposals, giving support to proposals that
allow shareholders to submit proposals/nominations reasonably close to the
meeting date and within the broadest window possible, recognizing the need to
allow sufficient notice for company, regulatory and shareholder review.
To be reasonable, the company's deadline for shareholder notice of a proposal/
nominations must not be more than 60 days prior to the meeting, with a submittal
window of at least 30 days prior to the deadline.
In general, support additional efforts by companies to ensure full disclosure in
regard to a proponent's economic and voting position in the company so long as
the informational requirements are reasonable and aimed at providing
shareholders with the necessary information to review such proposal.
Poison Pills
Vote FOR shareholder proposals requesting that the company submit its poison
pill to a shareholder vote or redeem it UNLESS the company has: (1) A
shareholder approved poison pill in place; or (2) The company has adopted a
policy concerning the adoption of a pill in the future specifying that the board
will only adopt a shareholder rights plan if either:
o Shareholders have approved the adoption of the plan; or
o The board, in exercising its fiduciary responsibilities, determines
that it is in the best interest of shareholders under the circumstances
to adopt a pill without the delay that would result from seeking
stockholder approval (i.e., the "fiduciary out" provision). A poison
pill adopted under this "fiduciary out" will be put to a shareholder
ratification vote within 12 months of adoption or expire. If the pill
is not approved by a majority of the votes cast on this issue, the plan
will immediately terminate.
Vote FOR shareholder proposals calling for poison pills to be put to a vote
within a time period of less than one year after adoption. If the company has no
non-shareholder approved poison pill in place and has adopted a policy with the
provisions outlined above, vote AGAINST the proposal. If these conditions are
not met, vote FOR the proposal, but with the caveat that a vote within 12 months
would be considered sufficient.
Vote CASE-by-CASE on management proposals on poison pill ratification, focusing
on the features of the shareholder rights plan. Rights plans should contain the
following attributes:
o No lower than a 20% trigger, flip-in or flip-over;
o A term of no more than three years;
o No dead-hand, slow-hand, no-hand or similar feature that limits the
ability of a future board to redeem the pill;
o Shareholder redemption feature (qualifying offer clause); if the board
refuses to redeem the pill 90 days after a qualifying offer is
announced, 10 percent of the shares may call a special meeting or seek
a written consent to vote on rescinding the pill.
In addition, the rationale for adopting the pill should be thoroughly explained
by the company. In examining the request for the pill, take into consideration
the company's existing governance structure, including: board independence,
existing takeover defenses, and any problematic governance concerns.
For management proposals to adopt a poison pill for the stated purpose of
preserving a company's net operating losses ("NOL pills"), the following factors
should be considered:
o the trigger (NOL pills generally have a trigger slightly below 5%);
o the value of the NOLs;
o the term;
o shareholder protection mechanisms (sunset provision, causing expiration
of the pill upon exhaustion or expiration of NOLs); and
o other factors that may be applicable.
In addition, vote WITHHOLD/AGAINST the entire board of directors, (except new
nominees, who should be considered on a CASE-by-CASE basis) if the board adopts
or renews a poison pill without shareholder approval, does not commit to putting
it to a shareholder vote within 12 months of adoption (or in the case of a newly
public company, does not commit to put the pill to a shareholder vote within 12
months following the IPO), or reneges on a commitment to put the pill to a vote,
and has not yet received a withhold recommendation for this issue.
5. MERGERS AND CORPORATE RESTRUCTURINGS
Overall Approach
For mergers and acquisitions, review and evaluate the merits and drawbacks of
the proposed transaction, balancing various and sometimes countervailing factors
including:
o Valuation - Is the value to be received by the target shareholders (or
paid by the acquirer) reasonable? While the fairness opinion may
provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on the offer premium, market
reaction and strategic rationale.
o Market reaction - How has the market responded to the proposed deal? A
negative market reaction should cause closer scrutiny of a deal.
o Strategic rationale - Does the deal make sense strategically? From
where is the value derived? Cost and revenue synergies should not be
overly aggressive or optimistic, but reasonably achievable. Management
should also have a favorable track record of successful integration of
historical acquisitions.
o Negotiations and process - Were the terms of the transaction negotiated
at arm's-length? Was the process fair and equitable? A fair process
helps to ensure the best price for shareholders. Significant
negotiation "wins" can also signify the deal makers' competency. The
comprehensiveness of the sales process (e.g., full auction, partial
auction, no auction) can also affect shareholder value.
o Conflicts of interest - Are insiders benefiting from the transaction
disproportionately and inappropriately as compared to non-insider
shareholders? As the result of potential conflicts, the directors and
officers of the company may be more likely to vote to approve a merger
than if they did not hold these interests. Consider whether these
interests may have influenced these directors and officers to support
or recommend the merger. The change-in-control figure presented in the
"RMG Transaction Summary" section of this report is an aggregate figure
that can in certain cases be a misleading indicator of the true value
transfer from shareholders to insiders. Where such figure appears to be
excessive, analyze the underlying assumptions to determine whether a
potential conflict exists.
o Governance - Will the combined company have a better or worse
governance profile than the current governance profiles of the
respective parties to the transaction? If the governance profile is to
change for the worse, the burden is on the company to prove that other
issues (such as valuation) outweigh any deterioration in governance.
6. STATE OF INCORPORATION
Reincorporation Proposals
Evaluate management or shareholder proposals to change a company's state of
incorporation on a CASE-BY-CASE basis, giving consideration to both financial
and corporate governance concerns including the following:
o Reasons for reincorporation;
o Comparison of company's governance practices and provisions prior to
and following the reincorporation; and
o Comparison of corporation laws of original state and destination state
Vote FOR reincorporation when the economic factors outweigh any neutral or
negative governance changes.
7. CAPITAL STRUCTURE
Common Stock Authorization
Vote CASE-BY-CASE on proposals to increase the number of shares of common stock
authorized for issuance. Take into account company-specific factors which
include, at a minimum, the following:
o Specific reasons/ rationale for the proposed increase;
o The dilutive impact of the request as determined through an allowable
cap generated by RiskMetrics' quantitative model;
o The board's governance structure and practices; and
o Risks to shareholders of not approving the request.
Vote FOR proposals to approve increases beyond the allowable cap when a
company's shares are in danger of being delisted or if a company's ability to
continue to operate as a going concern is uncertain.
Preferred Stock
Vote CASE-BY-CASE on proposals to increase the number of shares of preferred
stock authorized for issuance. Take into account company-specific factors which
include, at a minimum, the following:
o Specific reasons/ rationale for the proposed increase;
o The dilutive impact of the request as determined through an allowable
cap generated by RiskMetrics' quantitative model;
o The board's governance structure and practices; and
o Risks to shareholders of not approving the request.
Vote AGAINST proposals authorizing the creation of new classes of preferred
stock with unspecified voting, conversion, dividend distribution, and other
rights ("blank check" preferred stock).
Vote FOR proposals to create "declawed" blank check preferred stock (stock that
cannot be used as a takeover defense).
Vote FOR proposals to authorize preferred stock in cases where the company
specifies the voting, dividend, conversion, and other rights of such stock and
the terms of the preferred stock appear reasonable.
Vote AGAINST proposals to increase the number of blank check preferred stock
authorized for issuance when no shares have been issued or reserved for a
specific purpose.
8. EXECUTIVE AND DIRECTOR COMPENSATION
Equity Compensation Plans
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the equity
plan if any of the following factors apply:
o The total cost of the company's equity plans is unreasonable;
o The plan expressly permits the repricing of stock options/stock
appreciation rights (SARs) without prior shareholder approval;
o The CEO is a participant in the proposed equity-based compensation plan
and there is a disconnect between CEO pay and the company's performance
where over 50 percent of the year-over-year increase is attributed to
equity awards;
o The company's three year burn rate exceeds the greater of 2% and the
mean plus one standard deviation of its industry group;
o The plan provides for the acceleration of vesting of equity awards even
though an actual change in control may not occur (e.g., upon
shareholder approval of a transaction or the announcement of a tender
offer); or
o The plan is a vehicle for poor pay practices.
Poor Pay Practices
Vote AGAINST or WITHHOLD from compensation committee members, CEO, and
potentially the entire board, if the company has poor compensation practices.
Vote AGAINST equity plans if the plan is a vehicle for poor compensation
practices.
The following practices, while not exhaustive, are examples of poor compensation
practices that may warrant withhold vote recommendations:
o Egregious employment contracts - Contracts containing multi-year
guarantees for salary increases, bonuses and equity compensation;
o Excessive perks/tax reimbursements:
- Overly generous perquisites, which may include, but are not limited
to the following: personal use of corporate aircraft, personal
security system maintenance and/or installation, car allowances;
- Reimbursement of income taxes on executive perquisites or other
payments;
- Perquisites for former executives, such as car allowances, personal
use of corporate aircraft or other inappropriate arrangements;
Abnormally large bonus payouts without justifiable performance linkage or
proper disclosure - Performance metrics that are changed, canceled or
replaced during the performance period without adequate explanation of the
action and the link to performance;
o Egregious pension/SERP (supplemental executive retirement plan)
payouts:
- Inclusion of additional years of service not worked that result in
significant payouts;
- Inclusion of performance-based equity awards in the pension
calculation;
o New CEO with overly generous new hire package:
- Excessive "make whole" provisions;
- Any of the poor pay practices listed in this policy;
o Excessive severance and/or change in control provisions:
- Inclusion of excessive change in control or severance payments,
especially those with a multiple in excess of 3X cash pay;
- Payments upon an executive's termination in connection with
performance failure;
- Change in control payouts without loss of job or substantial
diminution of job duties (single-triggered);
- New or materially amended employment or severance agreements that
provide for modified single triggers, under which an executive may
voluntarily leave for any reason and still receive the
change-in-control severance package;
- Liberal change in control definition in individual contracts or
equity plans which could result in payments to executives without an
actual change in control occurring;
- New or materially amended employment or severance agreements that
provide for an excise tax gross-up. Modified gross-ups would be
treated in the same manner as full gross-ups;
- Perquisites for former executives such as car allowances, personal
use of corporate aircraft or other inappropriate arrangements;
o Dividends or dividend equivalents paid on unvested performance shares
or units;
o Poor disclosure practices:
- Unclear explanation of how the CEO is involved in the pay setting
process;
- Retrospective performance targets and methodology not discussed;
- Methodology for benchmarking practices and/or peer group not
disclosed and explained;
o Internal Pay Disparity:
- Excessive differential between CEO total pay and that of next
highest paid named executive officer (NEO);
o Options backdating (covered in a separate policy);
o Other excessive compensation payouts or poor pay practices at the
company.
Other Compensation Proposals and Policies
Advisory Vote on Executive Compensation (Say-on-Pay) Management Proposals
Vote CASE-BY-CASE on management proposals for an advisory vote on executive
compensation. Vote AGAINST these resolutions in cases where boards have failed
to demonstrate good stewardship of investors' interests regarding executive
compensation practices.
For U.S. companies, consider the following factors in the context of each
company's specific circumstances and the board's disclosed rationale for its
practices:
Relative Considerations:
o Assessment of performance metrics relative to business strategy, as
discussed and explained in the CD&A ;
o Evaluation of peer groups used to set target pay or award
opportunities;
o Alignment of company performance and executive pay trends over time
(e.g., performance down: pay down);
o Assessment of disparity between total pay of the CEO and other Named
Executive Officers (NEOs).
Design Considerations:
o Balance of fixed versus performance-driven pay;
o Assessment of excessive practices with respect to perks, severance
packages, supplemental executive pension plans, and burn rates.
Communication Considerations:
o Evaluation of information and board rationale provided in CD&A about
how compensation is determined (e.g., why certain elements and pay
targets are used, and specific incentive plan goals, especially
retrospective goals);
o Assessment of board's responsiveness to investor input and engagement
on compensation issues (e.g., in responding to majority-supported
shareholder proposals on executive pay topics).
Employee Stock Purchase Plans-- Non-Qualified Plans
Vote CASE-by-CASE on nonqualified employee stock purchase plans. Vote FOR
nonqualified employee stock purchase plans with all the following features:
o Broad-based participation (i.e., all employees of the company with the
exclusion of individuals with 5 percent or more of beneficial ownership
of the company);
o Limits on employee contribution, which may be a fixed dollar amount or
expressed as a percent of base salary;
o Company matching contribution up to 25 percent of employee's
contribution, which is effectively a discount of 20 percent from market
value;
o No discount on the stock price on the date of purchase since there is a
company matching contribution.
Vote AGAINST nonqualified employee stock purchase plans when any of the plan
features do not meet the above criteria. If the company matching contribution
exceeds 25 percent of employee's contribution, evaluate the cost of the plan
against its allowable cap.
Option Exchange Programs/Repricing Options
Vote CASE-by-CASE on management proposals seeking approval to exchange/reprice
options, taking into consideration:
o Historic trading patterns--the stock price should not be so volatile
that the options are likely to be back "in-the-money" over the near
term;
o Rationale for the re-pricing--was the stock price decline beyond
management's control?
o Is this a value-for-value exchange?
o Are surrendered stock options added back to the plan reserve?
o Option vesting--does the new option vest immediately or is there a
black-out period?
o Term of the option--the term should remain the same as that of the
replaced option;
o Exercise price--should be set at fair market or a premium to market;
o Participants--executive officers and directors should be excluded.
If the surrendered options are added back to the equity plans for re-issuance,
then also take into consideration the company's total cost of equity plans and
its three-year average burn rate.
In addition to the above considerations, evaluate the intent, rationale, and
timing of the repricing proposal. The proposal should clearly articulate why the
board is choosing to conduct an exchange program at this point in time.
Repricing underwater options after a recent precipitous drop in the company's
stock price demonstrates poor timing. Repricing after a recent decline in stock
price triggers additional scrutiny and a potential AGAINST vote on the proposal.
At a minimum, the decline should not have happened within the past year. Also,
consider the terms of the surrendered options, such as the grant date, exercise
price and vesting schedule. Grant dates of surrendered options should be far
enough back (two to three years) so as not to suggest that repricings are being
done to take advantage of short-term downward price movements. Similarly, the
exercise price of surrendered options should be above the 52-week high for the
stock price.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
Other Shareholder Proposals on Compensation
Advisory Vote on Executive Compensation (Say-on-Pay)
Generally, vote FOR shareholder proposals that call for non-binding shareholder
ratification of the compensation of the Named Executive Officers and the
accompanying narrative disclosure of material factors provided to understand the
Summary Compensation Table.
Golden Coffins/Executive Death Benefits
Generally vote FOR proposals calling on companies to adopt a policy of obtaining
shareholder approval for any future agreements and corporate policies that could
oblige the company to make payments or awards following the death of a senior
executive in the form of unearned salary or bonuses, accelerated vesting or the
continuation in force of unvested equity grants, perquisites and other payments
or awards made in lieu of compensation. This would not apply to any benefit
programs or equity plan proposals for which the broad-based employee population
is eligible.
Share Buyback Holding Periods
Generally vote AGAINST shareholder proposals prohibiting executives from selling
shares of company stock during periods in which the company has announced that
it may or will be repurchasing shares of its stock. Vote FOR the proposal when
there is a pattern of abuse by executives exercising options or selling shares
during periods of share buybacks.
Stock Ownership or Holding Period Guidelines
Generally vote AGAINST shareholder proposals that mandate a minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board. While RMG favors stock ownership on the part of directors, the
company should determine the appropriate ownership requirement.
Vote on a CASE-BY-CASE on shareholder proposals asking companies to adopt
policies requiring Named Executive Officers to retain 75% of the shares acquired
through compensation plans while employed and/or for two years following the
termination of their employment, and to report to shareholders regarding this
policy. The following factors will be taken into account:
o Whether the company has any holding period, retention ratio, or officer
ownership requirements in place. These should consist of:
- Rigorous stock ownership guidelines, or
- A holding period requirement coupled with a significant long-term
ownership requirement, or
- A meaningful retention ratio,
o Actual officer stock ownership and the degree to which it meets or
exceeds the proponent's suggested holding period/retention ratio or the
company's own stock ownership or retention requirements.
o Problematic pay practices, current and past, which may promote a
short-term versus a long-term focus.
Tax Gross-Up Proposals
Generally vote FOR proposals asking companies to adopt a policy of not providing
tax gross-up payments to executives, except where gross-ups are provided
pursuant to a plan, policy, or arrangement applicable to management employees of
the company, such as a relocation or expatriate tax equalization policy.
9. CORPORATE SOCIAL RESPONSIBILITY (CSR) ISSUES
Overall Approach
When evaluating social and environmental shareholder proposals, RMG considers
the following factors:
o Whether adoption of the proposal is likely to enhance or protect
shareholder value;
o Whether the information requested concerns business issues that relate
to a meaningful percentage of the company's business as measured by
sales, assets, and earnings;
o The degree to which the company's stated position on the issues raised
in the proposal could affect its reputation or sales, or leave it
vulnerable to a boycott or selective purchasing;
o Whether the issues presented are more appropriately/effectively dealt
with through governmental or company-specific action;
o Whether the company has already responded in some appropriate manner to
the request embodied in the proposal;
o Whether the company's analysis and voting recommendation to
shareholders are persuasive;
o What other companies have done in response to the issue addressed in
the proposal;
o Whether the proposal itself is well framed and the cost of preparing
the report is reasonable;
o Whether implementation of the proposal's request would achieve the
proposal's objectives;
o Whether the subject of the proposal is best left to the discretion of
the board;
o Whether the requested information is available to shareholders either
from the company or from a publicly available source; and
o Whether providing this information would reveal proprietary or
confidential information that would place the company at a competitive
disadvantage.
Genetically Modified Ingredients
Generally vote AGAINST proposals asking suppliers, genetic research companies,
restaurants and food retail companies to voluntarily label genetically
engineered (GE) ingredients in their products and/or eliminate GE ingredients.
The cost of labeling and/or phasing out the use of GE ingredients may not be
commensurate with the benefits to shareholders and is an issue better left to
regulators.
Vote CASE-BY-CASE on proposals asking for a report on the feasibility of
labeling products containing GE ingredients taking into account:
o The company's business and the proportion of it affected by the
resolution;
o The quality of the company's disclosure on GE product labeling, related
voluntary initiatives, and how this disclosure compares with industry
peer disclosure; and
o Company's current disclosure on the feasibility of GE product labeling,
including information on the related costs.
Generally vote AGAINST proposals seeking a report on the social, health, and
environmental effects of genetically modified organisms (GMOs). Studies of this
sort are better undertaken by regulators and the scientific community.
Generally vote AGAINST proposals to completely phase out GE ingredients from the
company's products or proposals asking for reports outlining the steps necessary
to eliminate GE ingredients from the company's products. Such resolutions
presuppose that there are proven health risks to GE ingredients (an issue better
left to regulators) that may outweigh the economic benefits derived from
biotechnology.
Pharmaceutical Pricing, Access to Medicines, and Product Reimportation
Generally vote AGAINST proposals requesting that companies implement specific
price restraints on pharmaceutical products unless the company fails to adhere
to legislative guidelines or industry norms in its product pricing.
Vote CASE-BY-CASE on proposals requesting that the company report on their
product pricing policies or their access to medicine policies, considering:
o The nature of the company's business and the potential for reputational
and market risk exposure;
o The existing disclosure of relevant policies;
o Deviation from established industry norms;
o The company's existing, relevant initiatives to provide research and/or
products to disadvantaged consumers;
o Whether the proposal focuses on specific products or geographic
regions; and
o The potential cost and scope of the requested report.
Generally vote FOR proposals requesting that companies report on the financial
and legal impact of their prescription drug reimportation policies unless such
information is already publicly disclosed.
Generally vote AGAINST proposals requesting that companies adopt specific
policies to encourage or constrain prescription drug reimportation. Such matters
are more appropriately the province of legislative activity and may place the
company at a competitive disadvantage relative to its peers.
Gender Identity, Sexual Orientation, and Domestic Partner Benefits
Generally vote FOR proposals seeking to amend a company's EEO statement or
diversity policies to prohibit discrimination based on sexual orientation and/or
gender identity, unless the change would result in excessive costs for the
company.
Generally vote AGAINST proposals to extend company benefits to, or eliminate
benefits from domestic partners. Decisions regarding benefits should be left to
the discretion of the company.
Climate Change
Generally vote FOR resolutions requesting that a company disclose information on
the impact of climate change on the company's operations and investments
considering whether:
o The company already provides current, publicly-available information on
the impacts that climate change may have on the company as well as
associated company policies and procedures to address related risks
and/or opportunities;
o The company's level of disclosure is at least comparable to that of
industry peers; and
o There are no significant, controversies, fines, penalties, or
litigation associated with the company's environmental performance.
Lobbying Expenditures/Initiatives
Vote CASE-BY-CASE on proposals requesting information on a company's lobbying
initiatives, considering:
o Significant controversies, fines, or litigation surrounding a company's
public policy activities,
o The company's current level of disclosure on lobbying strategy, and
o The impact that the policy issue may have on the company's business
operations.
Political Contributions and Trade Association Spending
Generally vote AGAINST proposals asking the company to affirm political
nonpartisanship in the workplace so long as:
o There are no recent, significant controversies, fines or litigation
regarding the company's political contributions or trade association
spending; and
o The company has procedures in place to ensure that employee
contributions to company-sponsored political action committees (PACs)
are strictly voluntary and prohibits coercion.
Vote AGAINST proposals to publish in newspapers and public media the company's
political contributions. Such publications could present significant cost to the
company without providing commensurate value to shareholders.
Vote CASE-BY-CASE on proposals to improve the disclosure of a company's
political contributions and trade association spending, considering:
o Recent significant controversy or litigation related to the company's
political contributions or governmental affairs; and
o The public availability of a company policy on political contributions
and trade association spending including information on the types of
organizations supported, the business rationale for supporting these
organizations, and the oversight and compliance procedures related to
such expenditures of corporate assets.
Vote AGAINST proposals barring the company from making political contributions.
Businesses are affected by legislation at the federal, state, and local level
and barring political contributions can put the company at a competitive
disadvantage.
Vote AGAINST proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
Labor and Human Rights Standards
Generally vote FOR proposals requesting a report on company or company supplier
labor and/or human rights standards and policies unless such information is
already publicly disclosed.
Vote CASE-BY-CASE on proposals to implement company or company supplier labor
and/or human rights standards and policies, considering:
o The degree to which existing relevant policies and practices are
disclosed;
o Whether or not existing relevant policies are consistent with
internationally recognized standards;
o Whether company facilities and those of its suppliers are monitored and
how;
o Company participation in fair labor organizations or other
internationally recognized human rights initiatives;
o Scope and nature of business conducted in markets known to have higher
risk of workplace labor/human rights abuse;
o Recent, significant company controversies, fines, or litigation
regarding human rights at the company or its suppliers;
o The scope of the request; and
o Deviation from industry sector peer company standards and practices.
Sustainability Reporting
Generally vote FOR proposals requesting the company to report on its policies,
initiatives, and oversight mechanisms related to social, economic, and
environmental sustainability, unless:
o The company already discloses similar information through existing
reports or policies such as an Environment, Health, and Safety (EHS)
report; a comprehensive Code of Corporate Conduct; and/or a Diversity
Report; or
o The company has formally committed to the implementation of a reporting
program based on Global Reporting Initiative (GRI) guidelines or a
similar standard within a specified time frame
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1) Identification of Portfolio Manager(s) or Management Team Members and
Description of Role of Portfolio Manager(s) or Management Team Members
Four Corners Capital Management LLC, the registrant's investment
sub-advisor ("Four Corners"), manages multiple portfolios comprised principally
of U.S. dollar denominated, floating-rate, senior secured, commercial and
industrial loans and notes and other debt instruments and may manage portfolios
of high yield bonds. As of October 22, 2008, Four Corners became a wholly-owned
subsidiary of Macquarie Group Limited ("Macquarie"). Four Corners is part of the
Macquarie Funds Group, an operating unit of Macquarie. Drew R. Sweeney was
designated co-portfolio manager of the registrant upon the resignation of
Michael P. McAdams from Four Corners effective February 6, 2009. 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. Mr. Bernstein has been Managing Director and Chief Investment Officer
of Four Corners since 2001. Mr. Bernstein has primary responsibility for
investment decisions. Mr. Sweeney assists Mr. Bernstein and is also a credit
analyst assigned to certain industries. The co-portfolio managers are supported
in their portfolio management activities by the investment staff, including a
team of credit analysts.* The credit analysts are assigned loans within specific
industries and report to Mr. Bernstein. 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.
*Four Corners was previously 2/3 owned by Macquarie. On October 22, 2008,
Macquarie purchased the remaining 1/3 of Four Corners. Due to that transaction,
as of 01/01/09, all Four Corners employees with the exception of Robert
Bernstein and Andrew Cooney became employees of Macquarie and all former
employees have been seconded to provide services to Four Corners
(a)(2) Other Accounts Managed by Portfolio Manager(s) or Management Team
Member and Potential Conflicts of Interest as of May 31, 2009
----------------------------- ------------------------------------- -------------- ------------- -------------------- --------------
Total Assets
Total # of Accounts that
# of Managed that Advisory Fee
Name of Portfolio Manager Accounts Total Assets Advisory Fee Based Based on
or Team Member Type of Accounts Managed ($ millions) on Performance Performance
----------------------------- ------------------------------------- -------------- ------------- -------------------- --------------
1. Robert I. Bernstein Registered Investment Companies*: 2 $126.1 0 $0
------------------------------------- -------------- ------------- -------------------- --------------
Other Pooled Investment Vehicles: 3 $877.4 3 $877.4
------------------------------------- -------------- ------------- -------------------- --------------
Other Accounts: 7 $1,003.4 0 $0
----------------------------- ------------------------------------- -------------- ------------- -------------------- --------------
2. Drew R. Sweeney Registered Investment Companies*: 2 $126.1 0 $0
------------------------------------- -------------- ------------- -------------------- --------------
Other Pooled Investment Vehicles: 0 $0 0 $0
------------------------------------- -------------- ------------- -------------------- --------------
Other Accounts: 1 $53.6 0 $0
----------------------------- ------------------------------------- -------------- ------------- -------------------- --------------
* Information excludes the registrant.
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.
(a)(3) 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. 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 that Macquarie
recently purchased, 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. 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 and the Management Team have no
direct incentive to take undue risks when individual fund performance is
lagging.
(a)(4) Disclosure of Securities Ownership
----------------------------------- ---------------------------------
Name of Portfolio Manager or Dollar ($) Range of Fund Shares
Team Member Beneficially Owned
----------------------------------- ---------------------------------
Robert I. Bernstein $0 (0 shares)
----------------------------------- ---------------------------------
Drew R. Sweeney $0 (0 shares)
----------------------------------- ---------------------------------
Information Provided as of May 31, 2009.
(b) Not applicable.
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) The amended code of ethics, or any amendment thereto, that is the
subject of disclosure required by Item 2 is attached hereto.
(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 July 23, 2009
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James A. Bowen
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James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date July 23, 2009
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By (Signature and Title)* /s/ Mark R. Bradley
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Mark R. Bradley, Treasurer, Controller, Chief
Financial Officer and Chief Accounting Officer
(principal financial officer)
Date July 23, 2009
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* Print the name and title of each signing officer under his or her signature.