N-CSRS 1 strategiciincsrs.txt STRATEGIC II NCSRS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-21842 ---------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 1001 Warrenville Road, Suite 300 LISLE, IL 60532 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) W. Scott Jardine, Esq. First Trust Portfolios L.P. 1001 Warrenville Road, Suite 300 LISLE, IL 60532 -------------------------------------------------------------------------------- (Name and address of agent for service) registrant's telephone number, including area code: (630) 241-4141 --------------- Date of fiscal year end: OCTOBER 31 ----------- Date of reporting period: APRIL 30, 2007 --------------- Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. REPORTS TO STOCKHOLDERS. The Report to Shareholders is attached herewith. First Trust Strategic High Income Fund II For the Six Months Ended April 30, 2007 -------------------------------------------------------------------------------- Table of Contents -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) SEMI-ANNUAL REPORT APRIL 30, 2007 Shareholder Letter ........................................................ 1 Portfolio Commentary ...................................................... 2 Portfolio Components ...................................................... 4 Portfolio of Investments .................................................. 5 Statement of Assets and Liabilities ....................................... 11 Statement of Operations ................................................... 12 Statements of Changes in Net Assets ....................................... 13 Statement of Cash Flows ................................................... 14 Financial Highlights ...................................................... 15 Notes to Financial Statements ............................................. 16 Additional Information .................................................... 21 Dividend Reinvestment Plan Proxy Voting Policies and Procedures Portfolio Holdings NYSE Certification Information By-Law Amendments Submission of Matters to a Vote of Shareholders Change in Investment Policies Privacy Policy CAUTION REGARDING FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of First Trust Advisors L.P. (the "Advisor") and/or Valhalla Capital Partners, LLC ("Valhalla" or the "Sub-Advisor") and their respective representatives, taking into account the information currently available to them. Forward-looking statements include all statements that do not relate solely to current or historical fact. For example, forward-looking statements include the use of words such as "anticipate," "estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or other words that convey uncertainty of future events or outcomes. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of First Trust Strategic High Income Fund II (the "Fund") to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and/or Valhalla 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. 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 letter from the Fund's President, James A. Bowen, together with the portfolio commentary by the portfolio management team at the Fund's Sub-Advisor, 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 Mr. Bowen and personnel of Valhalla 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. Of course, the risks of investing in the Fund are spelled out in the prospectus. -------------------------------------------------------------------------------- Shareholder Letter -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) SEMI-ANNUAL REPORT APRIL 30, 2007 Dear Shareholders: We believe investment opportunities abound, both here and abroad, affording the potential for exceptional returns for investors. At First Trust Advisors L.P. ("First Trust"), we realize that we must be mindful of the complexities of the global economy and at the same time address the needs of our customers through the types of investments we bring to market. We are single-minded about providing a range of investment products, including our family of closed-end funds, to help First Trust meet the challenge of maximizing our customers' financial opportunities. Translating investment ideas into products which can deliver performance over the long term while continuing to support our current product line remains a focus for First Trust as we head into the future. The report you hold will give you detailed information about your investment in First Trust Strategic High Income Fund II over the past six-month period. I encourage you to read this report and discuss it with your financial advisor. First Trust is pleased to be a part of your financial portfolio and we will continue to offer you current information about your investment, as well as new opportunities in the financial marketplace, through your financial advisor. We value our relationship with you and appreciate the opportunity to assist you in achieving your financial goals. Sincerely, /S/ JAMES A. BOWEN James A. Bowen President of First Trust Strategic High Income Fund II June 11, 2007 Page 1 -------------------------------------------------------------------------------- Portfolio Commentary -------------------------------------------------------------------------------- SUB-ADVISOR Valhalla Capital Partners, LLC ("Valhalla" or the "Sub-Advisor"), the sub-advisor to First Trust Strategic High Income Fund II, is a boutique asset management firm focused on managing high-yield portfolios with an emphasis on structured finance securities. Valhalla was founded in 2005 and is currently managed by its Managing Partners, Ken L. Mathis, Ramond P. Mecherle, CFA and Justin L. Ventura. Valhalla is a Kentucky limited liability company located at 2527 Nelson Miller Parkway, Suite 207, Louisville, Kentucky 40223. As of April 30, 2007, Valhalla has approximately $650 million in assets under management. PORTFOLIO MANAGEMENT TEAM MR. RAMOND P. MECHERLE, CFA, PORTFOLIO MANAGER Mr. Ramond P. Mecherle, CFA, is a founding Managing Partner of Valhalla. He has nine years experience in the Financial Industry. Mr. Mecherle currently serves as Co-Manager of First Trust Strategic High Income Fund (New York Stock Exchange ("NYSE"): FHI), First Trust Strategic High Income Fund II (NYSE: FHY), and First Trust Strategic High Income Fund III (NYSE: FHO). Mr. Mecherle was a dual employee of Hilliard Lyons Asset Management and Valhalla Capital from Valhalla's inception in 2005 through April 2006. From October 2004 to April 2006, Mr. Mecherle was employed by Hilliard Lyons Asset Management as Director of Fixed Income and Co-Manager of FHI. Prior to that, Mr. Mecherle was employed by Morgan Asset Management for seven years. There, Mr. Mecherle was an Assistant Portfolio Manager for three high-yield funds including the Regions Morgan Keegan Select High Income Fund (MKHIX), an open-end fund; RMK High Income (NYSE: "RMH"), a closed-end fund; RMK Strategic Income Fund (NYSE: "RSF"), a closed-end fund; and separate accounts. Mr. Mecherle received a B.A. from the University of Virginia and a M.B.A. from the Johnson Graduate School of Management, Cornell University. MR. JUSTIN L. VENTURA, PORTFOLIO MANAGER Mr. Justin L. Ventura is a founding Managing Partner of Valhalla. He has fourteen years experience in the Financial Industry. Mr. Ventura currently serves as Co-Manager of First Trust Strategic High Income Fund (NYSE: FHI), First Trust Strategic High Income Fund II (NYSE: FHY), and First Trust Strategic High Income Fund III (NYSE: FHO). Mr. Ventura was a dual employee of Hilliard Lyons Asset Management and Valhalla from Valhalla's inception in 2005 through April 2006. From June 2005 to April 2006, Mr. Ventura was employed by Hilliard Lyons Asset Management as Co-Manager of FHI. Prior to that, Mr. Ventura was employed by State Street Bank for six years as Vice President, Capital Markets Portfolio/ABS-MBS-CDO Sectors. Mr. Ventura began his career with Fitch IBCA, Inc. where he worked for five years and was a Director of Structured Finance/Mortgage and Asset-Backed Securities. Mr. Ventura received a B.A. from the University of Massachusetts and a J.D. from George Mason School of Law. FIRST TRUST STRATEGIC HIGH INCOME FUND II First Trust Strategic High Income Fund II (the "Fund") commenced trading on March 31, 2006. The Fund's primary investment objective is to seek a high level of current income. The Fund seeks capital growth as a secondary objective. The Fund seeks to achieve its investment objectives by investing in a diversified portfolio of below-investment grade and investment grade debt securities and equity securities that the Sub-Advisor believes offer attractive yield and/or capital appreciation potential. Valhalla believes this combination of exposure to both consumer and commercial default risk provides investors with an investment vehicle more broadly diversified than a corporate-only "high-yield" strategy. FUND RECAP Over the six-month period ending April 30, 2007, the primary news affecting the Fund was the negative events surrounding sub-prime residential mortgage-backed securities. While the headlines generally made it appear that all sub-prime mortgages were in trouble, the primary problems in sub-prime mortgages were generally limited to those mortgages originated in late 2005 and throughout 2006. The Fund had minimal exposure to these vintages and less than 15% of its total holdings in the sub-prime mortgage market. However, the entire sub-prime mortgage market was negatively impacted in sympathy to the problems in those vintages. In the end, this sell-off should create a number of buying opportunities in oversold mortgage market segments that the Fund can take advantage of in the months to come. Page 2 -------------------------------------------------------------------------------- Portfolio Commentary (continued) -------------------------------------------------------------------------------- FUND PROFILE AT 4/30/07 FHY LEHMAN BA INDEX Wtd. Avg. Yield-to-Maturity 11.50% 6.63% Wtd. Avg. Maturity 5.38 yrs 8.41 yrs Wtd. Avg. Credit Quality B Ba1/Ba2 SUB-ADVISOR Q&A HOW DID THE FUND PERFORM OVER THE LAST SIX MONTHS? The Fund's diversification across both structured finance and corporate high-yield securities and its value strategy, which enabled it to purchase these securities at excellent values, has contributed to the Fund's performance since inception. FHY's allocation to high yielding, well-seasoned manufactured housing and franchise bonds helped boost its total return. The Fund's exposure to sub-prime residential mortgage-backed securities was the primary detractor from otherwise solid performance across the Fund's portfolio in 2007. Negative headlines, an increase in delinquency pressure due to slowdown in housing price appreciation and the failure of a number of specialty, sub-prime lenders drove down bids and sparked a panic that hurt these bonds. FUND PERFORMANCE FOR PERIOD ENDING 4/30/07 FHY FHY LEHMAN BA DATES NAV RETURN MARKET RETURN INDEX Six Months 5.33% 6.02% 5.01% One Year 15.88% 15.23% 10.69% Inception-to-Date 16.06% 15.23% 10.85% WILL THESE FACTORS CONTINUE TO HURT THE MARKET? This downdraft in the sub-prime mortgage market did not affect the Fund's entire mortgage allocation. Its prime mortgage holdings posted positive performance, as investors were quick to differentiate among the various segments of the residential mortgage sector. In addition, a number of other asset classes remained unaffected by the sub-prime wave. Collateralized debt obligations, corporate bonds, and commercial mortgage-backed securities all generally produced positive performance over the fiscal year-to-date period and continued to provide attractive yields and significant diversification to the Fund. WHAT IS YOUR OUTLOOK FOR THE MARKET AND THE FUND? The overall economic outlook remains solid. While the drag from housing could continue into the second half of the year, the potential impact on consumer spending is still the biggest cause for concern for 2007. The Federal Reserve (the "Fed") may allow the consumer to feel some pain relating to housing, but it is unlikely to allow a prolonged slump to occur in that sector. Even with inflation risk on the horizon, we believe the Fed may be likely to step in and lower rates if necessary to prevent a recession. The challenge the Fund now faces is navigating a fixed-income landscape of tight spreads, while safeguarding against highly susceptible credit positions should the economy pull back. Page 3 FIRST TRUST STRATEGIC HIGH INCOME FUND II PORTFOLIO COMPONENTS* APRIL 30, 2007 (UNAUDITED) [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS: Corporate Bonds 16.3% Collateralized Debt Obligations 11.2% Commercial Mortgage-Backed Securities 6.1% Manufactured Housing 15.4% Equipment Lease Receivables 1.5% Residential Mortgage 24.8% Franchise 14.6% Equity 10.1% * Percentages are based on total investments. Please note that the percentages shown on the Portfolio of Investments are based on net assets. Page 4 See Notes to Financial Statements. FIRST TRUST STRATEGIC HIGH INCOME FUND II PORTFOLIO OF INVESTMENTS APRIL 30, 2007 (UNAUDITED)
PRINCIPAL MARKET VALUE DESCRIPTION VALUE ---------- ----------------------------------------------------------------- ----------------- ASSET-BACKED SECURITIES - 85.1% $ 1,500,000 ABCLO Ltd., Series 2007-1A, Class D, 9.26%, 4/15/21 (a) (b) ........... $ 1,420,500 6,000,000 ACE Securities Corp., Home Equity Loan Trust, Series 2004-HE4, Class M11, 8.82%, 12/25/34 (a) ........... 5,864,344 3,000,000 ACE Securities Corp., Home Equity Loan Trust, Series 2007-HE4, Class M8, 7.82%, 5/25/37 (a) ............. 2,490,000 5,000,000 ACLC Business Loan Receivables Trust, Series 1998-2, Class B, 6.85%, 4/15/20 (b) ................ 4,788,006 2,499,845 ACLC Business Loan Receivables Trust, Series 1999-2, Class B, 8.75%, 1/15/21 (b) ................ 2,521,457 1,499,907 ACLC Business Loan Receivables Trust, Series 1999-2, Class D, 9.35%, 1/15/21 (b) ................ 1,516,039 3,510,996 Argent Securities Inc., Series 2004-PW1, Class M10, 8.09%, 6/25/34 (a) (b) ....... 2,656,330 2,000,000 Asset Backed Securities Corp. Home Equity Loan Trust, Series 2005-HE2, Class M8, 7.82%, 2/25/35 (a) (b) ......... 1,809,910 6,392,485 Atherton Franchisee Loan Funding, Series 1999-A, Class A2, 7.23%, 4/15/12 (b) ............... 6,524,115 2,300,000 BankAmerica Manufactured Housing Contract Trust II, Series 1997-1, Class B1, 6.94%, 6/10/21 ................... 989,000 5,103,000 Bear Stearns Asset Backed Security Trust, Series 2007-HE3, Class M9, 7.57%, 4/25/37 (a) ............. 4,127,051 2,404,000 Bear Stearns Second Lien Trust, Series 2007-1, Class 2B1, 8.32%, 8/25/37 (a) .............. 1,610,680 2,000,000 Bear Stearns Second Lien Trust, Series 2007-1, Class 2M6, 8.32%, 8/25/37 (a) .............. 1,620,000 728,674 Bombardier Capital Mortgage Securitization Corp., Series 1999-B, Class A3, 7.18%, 12/15/15 .................. 484,433 5,369,119 Captec Franchise Trust, Series 1999-1, Class D, 8.64%, 1/25/13 (a) (b) ............ 1,628,976 2,301,000 Citigroup Mortgage Loan Trust, Inc., Series 2003-HE3, Class M4, 8.32%, 12/25/33 (a) ........... 1,955,850 5,140,855 Conseco Finance Securitizations Corp., Series 1999-6, Class M1, 7.96%, 6/01/30 (b) ............... 455,270 1,700,000 Conseco Finance Securitizations Corp., Series 2001-3, Class M1, 7.15%, 5/01/33 ................... 867,000 3,000,000 Conseco Finance Securitizations Corp., Series 2002-2, Class M2, 9.16%, 3/01/33 ................... 2,209,065 4,644,129 EMAC Owner Trust, LLC, Series 1998-1, Class A3, 6.63%, 1/15/25 (b) ............... 4,565,602 3,981,797 EMAC Owner Trust, LLC, Series 2000-1, Class A1, 6.54%, 1/15/27 (a) (b) ........... 3,148,108 4,736,330 EMAC Owner Trust, LLC, Series 2000-1, Class A2, 6.54%, 1/15/27 (a) (b) ........... 3,744,661 3,000,000 Encore Credit Receivables Trust, Series 2005-4, Class M11, 7.82%, 1/25/36 (a) (b) .......... 1,434,162 1,591,804 FMAC Loan Receivables Trust, Series 1996-B, Class A2, 6.32%, 11/15/18 (a) (b) .......... 1,216,063 1,520,000 FMAC Loan Receivables Trust, Series 1997-A, Class B, 7.66%, 4/15/19 (b) ................ 1,535,139
See Notes to Financial Statements. Page 5 FIRST TRUST STRATEGIC HIGH INCOME FUND II PORTFOLIO OF INVESTMENTS - (CONTINUED) APRIL 30, 2007 (UNAUDITED)
PRINCIPAL MARKET VALUE DESCRIPTION VALUE ---------- ----------------------------------------------------------------- ----------------- ASSET-BACKED SECURITIES - (CONTINUED) $ 20,099,365 FMAC Loan Receivables Trust, Series 1997-C, Class AX, 2.97%, 12/15/19 (a) (b) .......... $ 1,432,080 6,000,000 FMAC Loan Receivables Trust, Series 1998-CA, Class A3, 6.99%, 6/15/12 (b) .............. 5,376,509 1,744,908 Green Tree Financial Corp., Series 1995-6, Class B1, 7.70%, 9/15/26 ................... 1,613,284 2,393,499 Green Tree Financial Corp., Series 1996-6, Class B1, 8.00%, 9/15/27 ................... 583,102 2,000,000 Green Tree Financial Corp., Series 1997-3, Class M1, 7.53%, 3/15/28 ................... 1,435,022 8,500,000 Green Tree Financial Corp., Series 1998-6, Class M1, 6.63%, 6/01/30 ................... 5,270,000 1,000,000 Green Tree Financial Corp., Series 1998-8, Class M1, 6.98%, 9/01/30 ................... 652,587 20,631,815 Green Tree Financial Corp., Series 1999-4, Class M1, 7.60%, 5/01/31 ................... 2,985,791 26,281,392 Green Tree Financial Corp., Series 1999-5, Class M1, 8.05%, 3/01/30 ................... 3,059,667 11,000,000 GreenPoint Manufactured Housing Contract Trust, Series 1999-5, Class M2, 9.23%, 12/15/29 .................. 6,406,468 4,000,000 Halyard Multi Asset CBO I, Ltd., Series 1A, Class B, 6.76%, 3/24/10 (a) (b) ................ 2,920,000 9,804,297 Helios Series I Multi Asset CBO, Ltd., Series 1A, Class C, 8.11%, 12/13/36 (a) (b) ............... 3,725,633 4,000,000 Home Equity Mortgage Trust, Series 2007-2, Class M4, 7.82%, 6/25/37 (a) ............... 2,080,000 3,086,972 IMC Home Equity Loan Trust, Series 1997-3, Class B, 7.87%, 8/20/28 .................... 1,457,792 4,542,493 IMC Home Equity Loan Trust, Series 1997-5, Class B, 7.59%, 11/20/28 ................... 3,144,894 2,000,000 Independence III CDO, Ltd., Series 3A, Class C1, 7.85%, 10/03/37 (a) (b) .............. 1,350,000 2,100,000 Liberty Square CDO, Ltd., Series 2001-1X, Class C, 7.47%, 4/15/13 (a) (b) ........... 1,816,500 1,628,608 Long Beach Mortgage Loan Trust, Series 2002-2, Class M3, 8.70%, 7/25/32 (a) ............... 1,218,567 1,873,379 Longhorn CDO Ltd., Series 1, Class C, 11.61%, 5/10/12 (a) (b) ................ 1,873,379 16,333,000 Madison Avenue Manufactured Housing Contract Trust, Series 2002-A, Class B2, 8.57%, 3/25/32 (a) ............... 5,382,210 8,506,000 Merit Securities Corp., Series 13, Class M2, 8.65%, 12/28/33 (c) .................. 3,232,280 2,500,000 Merrill Lynch Mortgage Investors Trust, Series 2006-SL1, Class B4, 7.50%, 9/25/36 (b) (c) ......... 2,031,250 2,309,909 Morgan Stanley ABS Capital I Inc., Series 2004-NC5, Class B4, 7.80%, 5/25/34 (a) (b) ......... 2,299,209 5,000,000 North Street Referenced Linked Notes, Series 2000-1A, Class B, 6.41%, 4/28/11 (a) (b) ........... 4,353,125 7,000,000 North Street Referenced Linked Notes, Series 2000-1A, Class D1, 7.96%, 4/28/11 (a) (b) .......... 4,204,375
Page 6 See Notes to Financial Statements. FIRST TRUST STRATEGIC HIGH INCOME FUND II PORTFOLIO OF INVESTMENTS - (CONTINUED) APRIL 30, 2007 (UNAUDITED)
PRINCIPAL MARKET VALUE DESCRIPTION VALUE ---------- ----------------------------------------------------------------- ----------------- ASSET-BACKED SECURITIES - (CONTINUED) $ 1,861,273 Oakwood Mortgage Investors, Inc., Series 1999-B, Class M1, 7.18%, 12/15/26 (d) .............. $ 438,149 2,651,629 Oakwood Mortgage Investors, Inc., Series 2001-C, Class A3, 6.61%, 2/15/21 (b) ............... 1,555,836 3,000,000 Oakwood Mortgage Investors, Inc., Series 2002-B, Class M1, 7.62%, 6/15/32 (d) ............... 1,011,776 4,000,000 Park Place Securities, Inc., Series 2004-WCW1, Class M9, 8.82%, 9/25/34 (a) (b) ........ 2,663,086 5,250,000 Park Place Securities, Inc., Series 2005-WCH1, Class M10, 7.82%, 1/25/36 (a) (b) (d) ... 4,415,027 1,500,000 Pebble Creek LCDO Ltd., Series 2007-2A, Class E, 8.60%, 6/22/14 (a) (b) ........... 1,335,000 4,388,102 Pegasus Aviation Lease Securitization III, Series 2001-1A, Class A3, 6.00%, 3/10/14 (a) (b) .......... 3,952,034 4,000,000 Rosedale CLO Ltd., Series I-A, Class II, 7/24/21 (b) ......................... 3,940,000 1,304,000 Soundview Home Equity Loan Trust, Series 2006-OPT1, Class M9, 7.82%, 3/25/36 (a) (b) ........ 991,651 3,000,000 Structured Asset Securities Corp., Series 2002-HF2, Class M3, 7.32%, 7/25/32 (a) ............. 2,418,281 1,203,286 Structured Asset Securities Corp., Series 2004-S3, Class M9, 6.00%, 11/25/34 (b) (c) ......... 1,106,987 5,032,000 Structured Asset Securities Corp., Series 2005-S6, Class B2, 7.82%, 11/25/35 (a) (b) ......... 3,467,239 913,000 UCFC Manufactured Housing Contract, Series 1996-1, Class M, 7.90%, 1/15/28 .................... 617,126 2,000,000 UCFC Manufactured Housing Contract, Series 1998-3, Class M1, 6.51%, 1/15/30 ................... 890,000 3,000,000 Wilbraham CBO Ltd., Series 1A, Class A2, 6.05%, 7/13/12 (a) (b) ............... 2,430,000 --------------- TOTAL ASSET-BACKED SECURITIES ................................ 162,317,677 --------------- (Cost $157,363,251) COLLATERALIZED MORTGAGE OBLIGATIONS - 7.3% 3,989,976 Countrywide Alternative Loan Trust, Series 2005-56, Class B4, 6.57%, 11/25/35 (a) (b) ......... 2,593,485 3,138,996 Countrywide Alternative Loan Trust, Series 2006-OA2, Class B2, 7.57%, 5/20/46 (a) ............. 1,895,169 1,500,137 Countrywide Home Loans, Inc., Pass-Through Certificates, Series 2004-23, Class B4, 6.57%, 11/25/34 (a) ............. 1,320,121 2,635,627 HarborView Mortgage Loan Trust, Series 2004-2, Class B5, 6.32%, 6/19/34 (a) ............... 2,345,708 1,688,699 HarborView Mortgage Loan Trust, Series 2004-8, Class B5, 6.57%, 11/19/34 (a) .............. 1,502,942 1,392,974 Washington Mutual, Series 2006-AR4, Class B13, 6.25%, 5/25/46 (a) (b) ........ 919,363 3,485,107 Washington Mutual, Series 2006-AR4, Class B14, 6.25%, 5/25/46 (a) (b) ........ 714,447
See Notes to Financial Statements. Page 7 FIRST TRUST STRATEGIC HIGH INCOME FUND II PORTFOLIO OF INVESTMENTS - (CONTINUED) APRIL 30, 2007 (UNAUDITED)
PRINCIPAL MARKET VALUE DESCRIPTION VALUE ---------- ----------------------------------------------------------------- ----------------- COLLATERALIZED MORTGAGE OBLIGATIONS - (CONTINUED) $ 4,151,141 Washington Mutual Mortgage Pass-Through Certificates, Series 2006-AR2, Class B13, 6.10%, 4/25/46 (b) (c) ........ $ 2,656,730 --------------- TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS .................... 13,947,965 --------------- (Cost $13,283,384) COMMERCIAL MORTGAGE-BACKED SECURITIES - 8.4% 1,000,000 Banc of America Large Loan, Inc., Series 2005-MIB1, Class L, 8.32%, 3/15/22 (a) (b) ......... 991,524 360,002 CS First Boston Mortgage Securities Corp., Series 1995-WF1, Class G, 8.57%, 12/21/27 (a) (b) ......... 362,762 18,993,589 FannieMae-ACES, Series 1998-M7, Class N, 0.80%, 5/25/36 (a) (e) (f) ....... 389,046 955,269 GE Capital Commercial Mortgage Corp., Series 2000-1, Class G, 6.13%, 1/15/33 (b) ................ 887,357 103,506,484 Government National Mortgage Association, Series 2001-44, Class IO, 0.65%, 7/16/41 (a) (f) .......... 2,683,509 42,697,375 Government National Mortgage Association, Series 2003-59, Class XA, 0.92%, 6/16/34 (a) (f) .......... 3,822,303 7,007,818 LB-UBS Commercial Mortgage Trust, Series 2001-C7, Class S, 5.87%, 11/15/33 (b) .............. 4,064,534 5,000,000 Morgan Stanley Capital I Inc., Series 2003-IQ5, Class O, 5.24%, 4/15/38 (b) .............. 2,843,587 --------------- TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES .................. 16,044,622 --------------- (Cost $16,618,244) CORPORATE BONDS AND NOTES - 22.3% 3,000,000 Americast Technologies, Company Guarantee, 11.00%, 12/01/14 (b) ................... 3,052,500 2,000,000 Blue Ridge Paper Product, Company Guarantee, 9.50%, 12/15/08 ........................ 2,010,000 1,500,000 Broadview Networks Holdings, Inc., Secured Senior Note, 11.38%, 9/01/12 (b) .................. 1,612,500 1,000,000 Coleman Cable Inc., Company Guarantee, 9.88%, 10/01/12 ........................ 1,052,500 2,500,000 Dayton Superior Corp., Company Guarantee, 13.00%, 6/15/09 ........................ 2,575,000 1,000,000 Edgen Acquisition Corp., Secured Senior Note, 9.88%, 2/01/11 ....................... 1,075,000 2,500,000 Elgin National Industries, Inc., Series B, Company Guarantee, 11.00%, 11/01/07 ............. 2,512,500 1,500,000 Eurofresh, Inc., Senior Notes, 11.50%, 1/15/13 (b) ......................... 1,500,000 3,000,000 GSI Group Inc., Company Guarantee, 12.00%, 5/15/13 ........................ 3,412,500 3,000,000 Interdent Service Corp., Company Guarantee, 10.75%, 12/15/11 ....................... 2,812,500
Page 8 See Notes to Financial Statements. FIRST TRUST STRATEGIC HIGH INCOME FUND II PORTFOLIO OF INVESTMENTS - (CONTINUED) APRIL 30, 2007 (UNAUDITED)
PRINCIPAL MARKET VALUE DESCRIPTION VALUE ---------- ----------------------------------------------------------------- ----------------- CORPORATE BONDS AND NOTES - (CONTINUED) $ 3,000,000 Key Plastics LLC, Secured Senior Note, 11.75%, 3/15/13 (b) .................. $ 3,045,000 1,500,000 Lexington Precision Corp., Units, 12.00%, 8/01/09 .................................... 1,200,000 2,500,000 MSX International UK, MXS International Business Service FR/ MXS International GmBH, Company Guarantee, 12.50%, 4/01/12 (b) .................... 2,531,250 1,000,000 PCA Finance Corp., LLC, Secured Senior Note, 14.00%, 6/01/09 (b) (g) .............. 400,000 1,000,000 PNA Intermediate Holding Corp., Senior Notes, 12.36%, 2/15/13 (a) (b) ..................... 1,032,500 4,833,000 Rafealla Apparel Group, Inc., Secured Senior Note, 11.25%, 6/15/11 ...................... 4,953,825 2,603,000 Sheridan Group, Inc., Company Guarantee, 10.25%, 8/15/11 ........................ 2,723,389 2,500,000 The Restaurant Company, Company Guarantee, 10.00%, 10/01/13 ....................... 2,468,750 2,500,000 Ziff Davis Media, Inc., Secured Senior Note, 11.36%, 5/01/12 (a) .................. 2,512,500 --------------- TOTAL CORPORATE BONDS AND NOTES .............................. 42,482,214 --------------- (Cost $42,203,656) SHARES -------------- PREFERRED SECURITIES - 13.8% 3,000,000 AMMC CLO V Ltd. (a) (b) ...................................... 2,295,000 5,000,000 Babson CLO Ltd, Series 2005-1A, Subordinated Note (b) ..................... 4,850,000 2,000,000 Babson CLO Ltd., (a) (b) ..................................... 1,560,000 1,000,000 Flagship CLO, Series 2005-4I, Subordinated Note (b) ..................... 880,000 350,000 Independence III CDO, Ltd., Series 3A, Class PS (a) (b) ............................... 542,500 10,000,000 Kenmore Street Synthetic CDO, Series 2006-1A, Note (a) (b) .............................. 4,700,000 6,500,000 MM Community Funding III, Series 3A, Subordinated Notes (b) ......................... 3,770,000 2,000,000 Preferred Term Securities XXV, Ltd. (b) ....................... 1,980,000 4,775,000 Pro Rata Funding Ltd., Inc., (a) (b) .......................... 3,915,500 2,000,000 Soloso CDO Ltd., Series 2005-1 (a) (b) ..................................... 1,758,125 --------------- TOTAL PREFERRED SECURITIES ................................... 26,251,125 --------------- (Cost $26,942,125)
See Notes to Financial Statements. Page 9 FIRST TRUST STRATEGIC HIGH INCOME FUND II PORTFOLIO OF INVESTMENTS - (CONTINUED) APRIL 30, 2007 (UNAUDITED)
MARKET DESCRIPTION VALUE ----------------------------------------------------------------- ----------------- TOTAL INVESTMENTS - 136.9% ................................... $ 261,043,603 (Cost $256,410,660) (h) LOAN OUTSTANDING - (40.4)% ................................... (77,000,000) NET OTHER ASSETS AND LIABILITIES - 3.5% ...................... 6,651,928 --------------- NET ASSETS - 100.0% .......................................... $ 190,695,531 =============== --------------------------------------------------- (a) Variable rate security. The interest rate shown reflects the rate in effect at April 30, 2007. (b) Securities sold within the terms of a private placement memorandum, exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and may be resold in transactions exempt from registration normally to qualified institutional buyers. Pursuant to procedures adopted by the Fund's Board of Trustees, these securities have been determined to be liquid by the Fund's sub-advisor. At April 30, 2007, these securities amounted to $151,661,922 or 79.53% of net assets. (c) Step-up security. A security where the coupon increases or steps up at a predetermined date. Interest rate shown reflects the rate in effect at April 30, 2007. (d) Securities sold within the terms of a private placement memorandum, exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and may be resold in transactions exempt from registration normally to qualified institutional buyers (See Note 2C - Restricted Securities). (e) Alternative Credit Enhancement Securities. (f) Interest only. (g) This borrower has filed for protection in a federal bankruptcy court. (h) Aggregate cost for federal income tax and financial reporting purposes.
Page 10 See Notes to Financial Statements. FIRST TRUST STRATEGIC HIGH INCOME FUND II STATEMENT OF ASSETS AND LIABILITIES APRIL 30, 2007 (UNAUDITED)
ASSETS: Investments, at value (Cost $256,410,660) ......................................................................... $261,043,603 Cash ........................................................................................... 6,043,383 Prepaid expenses ............................................................................... 85,145 Receivables: Interest ................................................................................... 3,141,049 Dividends .................................................................................. 49,544 Investment securities sold ................................................................. 511,931 ------------- Total Assets ............................................................................. 270,874,655 ------------- LIABILITIES: Payables: Outstanding loan ........................................................................... 77,000,000 Investment securities purchased ............................................................ 2,480,467 Interest and fees due on loan .............................................................. 367,539 Investment advisory fees ................................................................... 196,544 Printing fees .............................................................................. 38,801 Audit and legal fees ....................................................................... 37,085 Administrative fees ........................................................................ 20,758 Custodian fees ............................................................................. 6,824 Transfer agent fees ........................................................................ 3,456 Trustees' fees and expenses ................................................................ 3,170 Accrued expenses and other liabilities ......................................................... 24,480 ------------- Total Liabilities ........................................................................ 80,179,124 ------------- NET ASSETS ..................................................................................... $190,695,531 ============= NET ASSETS CONSIST OF: Undistributed net investment income ............................................................ $ 5,516,356 Accumulated net realized gain on investments sold .............................................. 534,777 Net unrealized appreciation of investments ..................................................... 4,632,943 Par value ...................................................................................... 94,428 Paid-in capital ................................................................................ 179,917,027 ------------- Net Assets ............................................................................... $190,695,531 ============= NET ASSET VALUE, applicable to Common Shares outstanding (par value $0.01 per Common Share) .... $ 20.19 ============= Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) .... 9,442,820 =============
See Notes to Financial Statements. Page 11 FIRST TRUST STRATEGIC HIGH INCOME FUND II STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 2007 (UNAUDITED)
INVESTMENT INCOME: Interest ............................................................................. $15,276,448 Dividends ............................................................................ 281,183 ----------- Total investment income ........................................................... 15,557,631 ----------- EXPENSES: Interest and fees on outstanding loan payable ........................................ 2,185,243 Investment advisory fees ............................................................. 1,179,384 Administration fees .................................................................. 124,670 Audit and legal fees ................................................................. 69,189 Printing fees ........................................................................ 30,659 Trustees' fees and expenses .......................................................... 20,229 Transfer agent fees .................................................................. 17,499 Custodian fees ....................................................................... 15,631 Other ................................................................................ 205,237 ----------- Total expenses .................................................................... 3,847,741 ----------- NET INVESTMENT INCOME ................................................................ 11,709,890 ----------- NET REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on investments .............................................. (70,748) Net change in unrealized appreciation (depreciation) on investments .................. (2,033,283) ----------- Net realized and unrealized gains (losses) ........................................... (2,104,031) ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ...................... $ 9,605,859 ===========
Page 12 See Notes to Financial Statements. FIRST TRUST STRATEGIC HIGH INCOME FUND II STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED PERIOD 4/30/2007 ENDED (UNAUDITED) 10/31/2006(A) ------------- ------------- OPERATIONS: Net investment income ................................................................ $ 11,709,890 $ 11,084,939 Net realized gain (loss) on investments .............................................. (70,748) 605,525 Net change in unrealized appreciation (depreciation) on investments .................. (2,033,283) 6,666,226 ------------- ------------- Net increase in net assets resulting from operations ................................. 9,605,859 18,356,690 DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income ................................................................ (9,434,055) (7,844,418) ------------- ------------- Total distributions to shareholders .................................................. (9,434,055) (7,844,418) CAPITAL TRANSACTIONS: Net proceeds from sale of 9,405,236 Common Shares .................................... -- 179,640,008 Proceeds from 20,481 and 17,103 Common Shares reinvested, respectively ............... 412,931 334,726 Offering costs ....................................................................... -- (376,210) ------------- ------------- Net increase from capital transactions ............................................... 412,931 179,598,524 ------------- ------------- Net increase in net assets ........................................................... 584,735 190,110,796 NET ASSETS: Beginning of period .................................................................. 190,110,796 -- ------------- ------------- End of period ........................................................................ $190,695,531 $190,110,796 ============= ============= Undistributed net investment income at end of period ................................. $ 5,516,356 $ 3,240,521 ============= ============= -------------------------------------------------- (a) The Fund commenced operations on March 21, 2006.
See Notes to Financial Statements. Page 13 FIRST TRUST STRATEGIC HIGH INCOME FUND II STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED APRIL 30, 2007 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES: Net increase in net assets resulting from operations .................................... $ 9,605,859 Adjustments to reconcile net increase in net assets resulting from operations to net cash used by operating activities: Changes in assets and liabilities: Increase in investments, at value* ................................................... (17,260,174) Decrease in interest receivable ...................................................... 65,698 Increase in prepaid expenses and other assets ........................................ (15,661) Decrease in receivable for investment securities sold ................................ 1,960,180 Increase in payable for investment securities purchased .............................. 947,238 Increase in interest expense and fees due on outstanding loan ........................ 55,995 Increase in investment advisory fees payable ......................................... 5,857 Decrease in audit and legal fees payable ............................................. (7,366) Increase in printing fees payable .................................................... 14,482 Increase in administrative fees payable .............................................. 411 Increase in custodian fees payable ................................................... 5,036 Increase in accrued expenses and other liabilities ................................... 19,625 ------------ CASH USED BY OPERATING ACTIVITIES ....................................................... $ (4,602,820) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from shares reinvested ...................................................... 412,931 Distributions to shareholders from net investment income ............................. (9,434,055) Issuance of loan ..................................................................... 15,000,000 ------------ CASH PROVIDED BY FINANCING ACTIVITIES ................................................... 5,978,876 ------------ Increase in cash ........................................................................ 1,376,056 Cash at beginning of period ............................................................. 4,667,327 ------------ Cash at end of period ................................................................... $ 6,043,383 ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for interest ................................................ $ 2,129,248 -------------------------------------------------- * Includes net change in unrealized appreciation (depreciation) on investments of ($2,033,283).
Page 14 See Notes to Financial Statements. FIRST TRUST STRATEGIC HIGH INCOME FUND II FINANCIAL HIGHLIGHTS FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS ENDED PERIOD 4/30/2007 ENDED (UNAUDITED) 10/31/2006(a) -------------- ------------- Net asset value, beginning of period ....................................... $ 20.18 $ 19.10(b) -------------- ------------- INCOME FROM INVESTMENT OPERATIONS: Net investment income ...................................................... 1.24 1.18 Net realized and unrealized gain (loss) on investments ..................... (0.23) 0.77 -------------- ------------- Total from investment operations ........................................... 1.01 1.95 -------------- ------------- DISTRIBUTIONS PAID TO SHAREHOLDERS FROM: Net investment income ...................................................... (1.00) (0.83) -------------- ------------- Total from distributions ................................................... (1.00) (0.83) -------------- ------------- Common Shares offering costs charged to paid-in capital .................... -- (0.04) -------------- ------------- Net asset value, end of period ............................................. $ 20.19 $ 20.18 ============== ============= Market value, end of period ................................................ $ 21.07 $ 20.88 ============== ============= TOTAL RETURN BASED ON NET ASSET VALUE (C)(D) ............................... 5.33% 10.13% ============== ============= TOTAL RETURN BASED ON MARKET VALUE (D)(E) .................................. 6.03% 8.93% ============== ============= -------------------------------------------------- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA: Net assets, end of period (in 000's) ....................................... $ 190,696 $ 190,111 Ratio of net expenses to average net assets excluding interest expense ..... 1.76%(f) 1.40%(f) Ratio of total expenses to average net assets .............................. 4.08%(f) 2.13%(f) Ratio of net investment income to average net assets ....................... 12.42%(f) 10.15%(f) Portfolio turnover rate .................................................... 14%(g) 24%(g) INDEBTEDNESS: Loan outstanding (in 000's) ................................................ $ 77,000 $ 62,000 Asset coverage per $1,000 of indebtedness (h) .............................. $ 3,477 $ 4,066 -------------------------------------------------- (a) The Fund commenced operations on March 21, 2006. (b) Net of sales load of $0.90 per share on initial shares issued. (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 market price per share, all based on Common Share market value. (f) Annualized. (g) Not Annualized. (h) Calculated by subtracting the Fund's total liabilities (not including the loan outstanding) from the Fund's total assets, and dividing by the outstanding loan balance.
See Notes to Financial Statements. Page 15 -------------------------------------------------------------------------------- Notes to Financial Statements -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II APRIL 30, 2007 (UNAUDITED) 1. FUND DESCRIPTION First Trust Strategic High Income Fund II (the "Fund") is a diversified, closed-end management investment company organized as a Massachusetts business trust on January 18, 2006 and is registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund trades under the ticker symbol FHY on the New York Stock Exchange ("NYSE"). The Fund's primary investment objective is to seek a high level of current income. The Fund seeks capital growth as a secondary objective. The Fund seeks to achieve its investment objectives by investing in a diversified portfolio of non-investment grade and investment grade debt securities, and equity securities that Valhalla Capital Partners LLC ("Valhalla" or the "Sub-Advisor") believes offers an attractive yield and/or capital appreciation potential. There can be no assurance that the Fund will achieve its investment objectives. The Fund may not be appropriate for all investors. 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 computed based upon the value of the Fund's portfolio securities and other assets less any accrued liabilities. The NAV is determined 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 Fund calculates NAV per Common Share by subtracting the Fund's liabilities (including accrued expenses, dividends payable and any borrowings of the Fund) from the Fund's Total Assets (the value of the securities and other investments the Fund holds plus cash or other assets, including interest accrued but not yet received) and dividing the result by the total number of Common Shares outstanding. The Fund's investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value according to 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, or if events occurring after the close of the principal markets for particular securities (e.g., domestic debt and foreign securities), but before the Fund values its assets, would materially affect NAV, First Trust Advisors L.P. ("First Trust") may use a fair value method to value the Fund's securities and 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. Portfolio securities listed on any exchange other than the NASDAQ National Market ("NASDAQ") are valued at the last sale price on the business day as of which such value is being determined. If there has been no sale on such day, the securities are valued at the mean of the most recent bid and asked prices on such day. Securities traded on the NASDAQ are valued at the NASDAQ Official Closing Price as determined by NASDAQ. Portfolio securities traded on more than one securities exchange are valued at the last sale price on the business day as of which such value is being determined at the close of the exchange representing the principal market for such securities. Portfolio securities traded in the over-the-counter market, but excluding securities traded on the NASDAQ, are valued at the closing bid prices. Short-term investments that mature within 60 days are valued at amortized cost. B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded on the accrual basis, including amortization of premiums and accretion of discounts. The Fund follows the provisions of EMERGING ISSUES TASK FORCE NO. 99 20 ("EITF 99 20"), "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" for certain lower credit quality securitized assets that have contractual cash flows (for example, asset-backed securities, collateralized mortgage obligations and commercial mortgage-backed securities). Under EITF 99 20, if there is a change in the estimated cash flows for any of these securities, based on an evaluation of current information, then the estimated yield is adjusted on a prospective basis over the remaining life of the security. Investment income is recorded net of foreign taxes withheld where recovery of such taxes is uncertain. Debt obligations may be placed on non-accrual status and related interest income may be reduced by ceasing current accruals and writing off interest receivables when the Page 16 -------------------------------------------------------------------------------- Notes to Financial Statements - (Continued) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II APRIL 30, 2007 (UNAUDITED) collection of all or a portion of interest has become doubtful based on consistently applied procedures. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectibility of interest is reasonably assured. Securities purchased or sold on a when-issued or delayed-delivery basis may be settled a month or more after the trade date; interest income on such securities is not accrued until settlement date. The Fund maintains liquid assets with a current value at least equal to the amount of its when-issued or delayed-delivery purchase commitments. C. RESTRICTED SECURITIES: The Fund invests in restricted securities, which are securities that may not be offered for public sale without first being registered under the Securities Act of 1933, as amended (the "Securities Act"). Prior to registration, restricted securities may only be resold in transactions exempt from registration under Rule 144A of the Securities Act, normally to qualified institutional buyers. As of April 30, 2007, the Fund held restricted securities as shown in the following table that the Sub-Advisor has deemed illiquid pursuant to procedures adopted by the Fund's Board of Trustees. The Fund does not have the right to demand that such securities be registered. These securities are valued according to the valuation procedures as stated in the Portfolio Valuation footnote (Note 2A) and are not expressed as a discount to the carrying value of a comparable unrestricted security.
CARRYING CURRENT 4/30/07 % OF ACQUISITION PRINCIPAL VALUE PER UNIT CARRYING MARKET NET SECURITY DATE VALUE AT 4/30/07 COST VALUE ASSETS Oakwood Mortgage Investors, Inc., Series 1999-B, Class M1, 7.18%, 12/15/26 4/27/06 $ 1,861,273 $11.62 $ 216,187 $ 438,149 0.23% Oakwood Mortgage Investors, Inc., Series 2002-B, Class M1, 7.62%, 6/15/32 7/17/06 3,000,000 20.89 626,761 1,011,776 0.53% Park Place Securities, Inc., Series 2005-WCH1, Class M10, 7.82%, 1/25/36 4/4/06 5,250,000 94.01 4,935,635 4,415,027 2.32% ------------ ------------ ------------ ------ $ 10,111,273 $ 5,778,583 $ 5,864,952 3.08% ============ ============ ============ ======
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund will distribute to holders of its Common Shares monthly dividends of all or a portion of its net income after the payment of interest and dividends in connection with leverage. Distributions will automatically be reinvested into additional Common Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash distributions are elected by the shareholder. Distributions from income and capital gains are determined in accordance with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatments of income and gains on various investment securities held by the Fund, timing differences and differing characterization of distributions made by the Fund. The tax character of distributions paid during the fiscal year ended October 31, 2006 was as follows: Distributions paid from: 2006 Ordinary Income..................................... $7,844,418 As of October 31, 2006, the components of distributable earnings on a tax basis were as follows: Undistributed Ordinary Income....................... $4,196,296 Undistributed Long-Term Capital Gains $ -- Net Unrealized Appreciation ........................ $6,315,977 E. 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, and by 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. F. EXPENSES: The Fund pays all expenses directly related to its operations. Page 17 -------------------------------------------------------------------------------- Notes to Financial Statements - (Continued) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II APRIL 30, 2007 (UNAUDITED) G. ORGANIZATION AND OFFERING COSTS: Organization costs consist of costs incurred to establish the Fund and enable it to legally do business. These costs include filing fees, listing fees, legal services pertaining to the organization of the business and audit fees relating to the initial registration and auditing the initial statement of assets and liabilities, among other fees. Offering costs consist of legal fees pertaining to the Fund's Common Shares offered for sale, registration fees, underwriting fees, and printing of the initial prospectus, among other fees. First Trust and Valhalla have paid all organization expenses and all offering costs of the Fund (other than sales load) that exceeded $0.04 per Common Share. The Fund's share of Common Share offering costs, $376,210, was recorded as a reduction of the proceeds from the sale of Common Shares during the period ended October 31, 2006. H. ACCOUNTING PRONOUNCEMENTS: In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes." This pronouncement provides guidance on the recognition, measurement, classification, and disclosures related to uncertain tax positions, along with any related interest and penalties. FIN 48 is effective for fiscal years beginning after December 15, 2006. At this time, management is evaluating the implications of FIN 48 and its impact on the financial statements has not yet been determined. In addition, in September 2006, Statement of Financial Accounting Standards No. 157 Fair Value Measurements ("SFAS 157") was issued and is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the impact the adoption of SFAS 157 will have on the Fund's financial statement disclosures. 3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS First Trust is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. First Trust serves as investment advisor to the Fund pursuant to an Investment Management Agreement. First Trust is responsible for the ongoing monitoring of the Fund's investment portfolio, managing the Fund's business affairs and certain administrative services necessary for the management of the Fund. For these investment management services, First Trust is entitled to a monthly fee calculated at an annual rate of 0.90% of the Fund's Managed Assets (the value of the securities and other investments the Fund holds plus cash or other assets, including interest accrued but not yet received minus accrued liabilities other than the principal amount of borrowings). Valhalla, a boutique asset management firm focused on managing high-yield portfolios with an emphasis on structured finance securities, serves as the Fund's Sub-Advisor and manages the Fund's portfolio subject to First Trust's supervision. The Sub-Advisor receives a portfolio management fee at an annual rate of 0.40% of Managed Assets that is paid monthly by First Trust from its investment advisory fee. PFPC Inc. ("PFPC"), an indirect, majority-owned subsidiary of The PNC Financial Services Group, Inc., serves as the Fund's Administrator and Transfer Agent in accordance with certain fee arrangements. PFPC Trust Company, an indirect, majority-owned subsidiary of The PNC Financial Services Group, Inc., serves as the Fund's Custodian in accordance with certain fee arrangements. Effective January 1, 2007, the Trustees approved a revised compensation plan. Under the revised plan, each Trustee who is not an officer or employee of First Trust Advisors, any sub-advisor or any of their affiliates, ("Independent Trustees") is paid an annual retainer of $10,000 per investment company for the first 14 investment companies of the First Trust Fund Complex and an annual retainer of $7,500 per investment company of each subsequent investment company added to the First Trust Fund Complex. The annual retainer is allocated equally among each of the investment companies. No additional meeting fees are paid in connection with board or committee meetings. Additionally, Thomas R. Kadlec is paid $10,000 annually to serve as the Lead Independent Trustee and Niel B. Nielson is paid $5,000 annually to serve as the chairman of the Audit Committee with such compensation paid by the funds in the First Trust Fund Complex and divided among those funds. Trustees are also reimbursed by the investment companies in the First Trust Fund Complex for travel and out-of-pocket expenses in connection with all meetings. The Trustees adopted the revised plan because the increase in the number of funds in the First Trust Fund Complex had the effect of rapidly increasing their compensation under the previous arrangements. Prior to January 1, 2007, the Funds paid each Trustee who is not an officer or employee of First Trust Advisors, any sub-advisor or any of their affiliates an annual retainer of $10,000, which included compensation for all board and committee meetings. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of investment securities, excluding U.S. government and short-term investments, for the six months ended April 30, 2007, aggregated amounts were $57,621,960 and $ 34,901,401, respectively. Page 18 -------------------------------------------------------------------------------- Notes to Financial Statements - (Continued) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II APRIL 30, 2007 (UNAUDITED) As of April 30, 2007, the aggregate gross unrealized appreciation for all securities in which there as an excess of value over tax cost was $12,706,066 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $8,073,123. 5. COMMON SHARES As of April 30, 2007, 9,442,820 of $0.01 par value Common Shares were issued. An unlimited number of Common Shares has been authorized under the Fund's Dividend Reinvestment Plan. COMMON SHARE TRANSACTIONS WERE AS FOLLOWS:
SIX MONTHS ENDED PERIOD ENDED APRIL 30, 2007 OCTOBER 31, 2006 SHARES AMOUNT SHARES AMOUNT Proceeds from Common Shares sold ............... -- $ -- 9,405,236 $179,640,008 Issued as reinvestment of dividends under the Dividend Reinvestment Plan .................. 20,481 412,931 17,103 334,726 Offering costs ................................. -- -- -- (376,210) ---------- -------- --------- ------------ 20,481 $412,931 9,422,339 $179,598,524 ========== ======== ========= ============
6. PREFERRED SHARES OF BENEFICIAL INTEREST 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 (the "Preferred Shares"), in one or more classes or series, with rights as determined by the Board of Trustees without the approval of Common Shareholders. As of April 30, 2007, no Preferred Shares had been issued. 7. REVOLVING LOAN AGREEMENT On May 31, 2006, the Fund entered into a Revolving Credit and Security Agreement between the Fund, Liberty Street Funding Corp., as conduit lender, and The Bank of Nova Scotia, as secondary lender, which provides for a revolving credit facility to be used as leverage for the Fund. 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 Revolving Credit and Security Agreement is $77,000,000. For the period ended April 30, 2007, the average amount outstanding was $74,265,193. The high and low annual interest rates during the period ended April 30, 2007 were 5.35% and 5.32%, respectively, and the weighted average interest rate was 5.33%. 8. CONCENTRATION OF RISK An investment in the Fund's Common Shares is subject to investment risk, including the possible loss of the entire principal invested. An investment in Common Shares represents an indirect investment in the securities owned by the Fund. The value of these securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. Common Shares at any point in time may be worth less than the original investment, even after taking into account the reinvestment of Fund dividends and distributions. Security prices can fluctuate for several reasons including the general condition of the bond market, or when political or economic events affecting the issuers occur. RESIDENTIAL MORTGAGE-BACKED SECURITIES CONCENTRATION RISK: The Fund will invest at least 25% of its total assets in residential mortgage-backed securities under normal market conditions. A fund concentrated in a single industry is likely to present more risks than a fund that is broadly diversified over several industries. Mortgage-backed securities may have less potential for capital appreciation than comparable fixed-income securities, due to the likelihood of increased prepayments of mortgages as interest rates decline. If the Fund buys mortgage-backed securities at a premium, mortgage foreclosures and prepayments of principal by mortgagors (which usually may be made at any time without penalty) may result in some loss of the Fund's principal investment to the extent of the premium paid. Alternatively, in a rising interest rate environment, the value of mortgage-backed securities may be adversely affected when payments on underlying mortgages do not occur as anticipated, resulting in the extension of the security's effective maturity and the related increase in interest rate sensitivity of a longer-term instrument. The value of mortgage-backed securities may also change due to shifts in the market's perception of issuers and regulatory or tax changes adversely affecting the markets as a whole. In addition, mortgage-backed securities are subject to the credit risk associated with the performance of the underlying mortgage properties. In certain instances, third-party guarantees or other forms of credit support can reduce the credit risk. Page 19 -------------------------------------------------------------------------------- Notes to Financial Statements - (Continued) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II APRIL 30, 2007 (UNAUDITED) NON-INVESTMENT GRADE SECURITIES RISK: The Fund may invest up to 100% of its Managed Assets in non-investment grade securities. Below-investment grade securities are rated below "Baa" by Moody's Investors Service, Inc., below "BBB" by Standard & Poor's Ratings Group, comparably rated by another nationally recognized statistical rating organization or, if unrated, determined to be of comparable credit quality by the Sub-Advisor. Below-investment grade debt instruments are commonly referred to as "high-yield" or "junk" bonds and are considered speculative with respect to the issuer's capacity to pay interest and repay principal and are susceptible to default or decline in market value due to adverse economic and business developments. The market values for high-yield securities tend to be volatile, and these securities are less liquid than investment grade debt securities. 9. SUBSEQUENT EVENTS On April 20, 2007, the Fund declared a dividend of $0.1667 per share, which represents a dividend from net investment income to Common Shareholders of record May 3, 2007, payable May 15, 2007. On May 21, 2007, the Fund declared a dividend of $0.1667 per share, which represents a dividend from net investment income to Common Shareholders of record June 5, 2007, payable June 15, 2007. Page 20 -------------------------------------------------------------------------------- Additional Information -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II APRIL 30, 2007 (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 PFPC 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 PFPC Inc., as 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) 334-1710, in accordance with such reasonable requirements as the Plan Agent and 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 PFPC Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809. -------------------------------------------------------------------------------- PROXY VOTING POLICIES AND PROCEDURES A description of the policies and procedures that the Fund uses to determine how to vote proxies and information on how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling (800) 988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; and (3) on the Securities and Exchange Commission's website at http://www.sec.gov. Page 21 -------------------------------------------------------------------------------- Additional Information - (Continued) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II APRIL 30, 2007 (UNAUDITED) PORTFOLIO HOLDINGS The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission ("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 May 10, 2007, 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. BY-LAW AMENDMENTS On June 12, 2006 and December 10, 2006, the Board of Trustees of the Fund approved certain changes to the By-Laws of the Fund that may have the effect of delaying or preventing a change of control of the Fund including the implementation of a staggered Board of Trustees. These changes were not required to be, and were not, approved by the Fund's shareholders. To receive a copy of the revised By-Laws, investors may call the Fund at (800) 988-5891. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income Fund, Energy Income and Growth Fund, First Trust/Fiduciary Asset Management Covered Call Fund, First Trust/Aberdeen Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income Fund, First Trust Strategic High Income Fund, First Trust Strategic High Income Fund II, First Trust Tax-Advantaged Preferred Income Fund and First Trust/Aberdeen Emerging Opportunity Fund was held on April 16, 2007. The Annual Meeting for the Fund was adjourned until May 29, 2007. At the Annual Meeting, Trustee Keith was elected for a one-year term; Trustees Erickson and Kadlec were elected for two-year terms; and Trustees Bowen and Nielson were elected for three-year terms. The number of votes cast in favor of James A. Bowen was 6,168,474, the number of votes withheld was 123,066 and the number of abstentions was 3,143,445. The number of votes cast in favor of Niel B. Nielson was 6,167,974, the number of votes withheld was 123,566 and the number of abstentions was 3,143,445. The number of votes cast in favor of Richard E. Erickson was 6,168,474, the number of votes withheld was 123,066 and the number of abstentions was 3,143,445. The number of votes cast in favor of Thomas R. Kadlec was 6,168,474 umber of votes withheld was 123,066 and the number of abstentions was 3,143,445. The number of votes cast in favor of Robert F. Keith was 6,168,474, the number of votes withheld was 123,066 and the number of abstentions was 3,143,445. Also at the Annual Meeting of Shareholders of the Fund, the Shareholders approved a change in the Fund's industry concentration policy to provide that the Fund will invest at least 25% of its total assets in residential mortgage-backed securities under normal market conditions. The number of votes cast in favor of the change in industry concentration policy was 4,096,601, the number of votes cast against was 202,311, the number of abstentions was 261,332, and the number of broker non-votes was 1,538,537. As a result of this change in industry concentration policy, please see the additional concentration of risk disclosure in footnote 8 in the Notes to Financial Statements. CHANGE IN INVESTMENT POLICIES First Trust Strategic High Income Fund II may invest up to 50% of its Managed Assets in foreign securities, provided, however, that the total of 30% (this percentage was incorrectly stated as 40% in the Fund's annual report for the period ended October 31, 2007) of the percentage of Managed Assets invested in obligations of foreign domiciled structured finance issuers plus the percentage of Managed Assets invested in other foreign domiciled issuers does not exceed 20% of the Fund's Managed Assets. PRIVACY POLICY 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. Page 22 -------------------------------------------------------------------------------- Additional Information - (Continued) -------------------------------------------------------------------------------- FIRST TRUST STRATEGIC HIGH INCOME FUND II APRIL 30, 2007 (UNAUDITED) 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 with affiliates of the Fund. Please note, however, that the California Financial Information Privacy Act contains an "opt out" mechanism that California consumers may use to prevent us from sharing nonpublic personal information with affiliates. 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 23 This Page Left Blank Intentionally. ITEM 2. CODE OF ETHICS. Not applicable. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. 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. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. (a) Not applicable. (b) There has been no change, as of the date of this filing, in any of the portfolios managers identified in response to paragraph (a)(1) of this Item in the Registrant's most recently filed annual report on Form N-CSR. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant's board of directors, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Not applicable. (a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. (a)(3) Not applicable. (b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (registrant) FIRST TRUST STRATEGIC HIGH INCOME FUND II By (Signature and Title)* /S/ JAMES A. BOWEN ------------------------------------------------------- James A. Bowen, Chairman of the Board, President and Chief Executive Officer (principal executive officer) Date JUNE 29, 2007 ---------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /S/ JAMES A. BOWEN ------------------------------------------------------- James A. Bowen, Chairman of the Board, President and Chief Executive Officer (principal executive officer) Date JUNE 29, 2007 ---------------------------------------------------------------------------- By (Signature and Title)* /S/ MARK R. BRADLEY ------------------------------------------------------- Mark R. Bradley, Treasurer, Controller, Chief Financial Officer and Chief Accounting Officer (principal financial officer) Date JUNE 29, 2007 ---------------------------------------------------------------------------- * Print the name and title of each signing officer under his or her signature.