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 811-21344
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
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(Exact name of registrant as specified in charter)
1001 Warrenville Road
Suite 300
LISLE, IL 60532
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(Address of principal executive offices) (Zip code)
W. Scott Jardine
First Trust Portfolios, LP
1001 Warrenville Road
Suite 300
LISLE, IL 60532
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(Name and address of agent for service)
Registrant's telephone number, including area code: 630-241-4141
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Date of fiscal year end: MAY 31, 2004
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Date of reporting period: MAY 31, 2004
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. 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.
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE
INCOME FUND
ANNUAL REPORT
FOR THE PERIOD SEPTEMBER 18, 2003 TO MAY 31, 2004
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TABLE OF CONTENTS
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2004
Shareholder Letter ........................................................ 1
Portfolio Commentary ...................................................... 2
Portfolio of Investments .................................................. 4
Statement of Assets and Liabilities ....................................... 8
Statement of Operations ................................................... 9
Statement of Changes in Net Assets ........................................ 10
Statement of Cash Flows ................................................... 11
Financial Highlights ...................................................... 12
Notes to Financial Statements ............................................. 13
Report of Independent Registered Public Accounting Firm ................... 17
Dividend Reinvestment Plan ................................................ 18
Proxy Voting Policies and Procedures ...................................... 18
Management ................................................................ 19
HOW TO READ THIS REPORT
This report contains information that can help you evaluate your investment. It
includes details about the First Trust/Four Corners Senior Floating Rate Income
Fund (the "Fund") and presents data and analysis that provide insight into the
Fund's portfolio's performance and investment approach.
By reading the letter from the Fund's President, James A. Bowen, together with
the portfolio commentary, you will obtain an understanding of how the market
environment affected its performance. The statistical information that follows
can help you understand how the Fund's performance and characteristics compared
to that of relevant benchmarks.
It is important to keep in mind that the opinions expressed by Mr. Bowen, First
Trust Advisors L.P., and Four Corners Capital Management, LLC personnel 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.
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SHAREHOLDER LETTER
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
ANNUAL REPORT
MAY 31, 2004
The First Trust/Four Corners Senior Floating Rate Income Fund (the "Fund")
commenced trading on the American Stock Exchange on September 26, 2003 under the
ticker symbol FCM. It is the first of two senior floating rate closed-end funds
launched by First Trust Advisors, L.P. ("First Trust") and Four Corners Capital
Management, LLC ("Four Corners"). The other fund trades under the ticker symbol
FCT. First Trust is the Fund's investment adviser. Four Corners is the
investment sub-adviser. Michael P. McAdams is the President and Chief Investment
Officer of Four Corners and is Co-Portfolio Manager of the Fund. He shares those
responsibilities with Robert I. Bernstein. Mike has been involved with the
management of senior loan portfolios since 1982. Bob was first exposed to the
asset class in 1986, and has been actively involved in the senior loan market
for the past 12 years.
In our first shareholder letter six months ago we offered some evidence to
support our contention that the economic recovery in the U.S. was for real. The
one caveat we cited was a lack of job creation. The Federal Reserve (the "Fed")
made it publicly known that it was comfortable with keeping the Fed funds target
rate at 1% (a level not seen since 1958) until it witnessed either a significant
threat of inflation or an improvement in labor conditions. We are pleased to
report that, as of mid-2004, labor market conditions in the U.S. have improved
markedly. As a result, the Federal Reserve raised its Fed funds target rate from
1% to 1.25% at the Federal Open Market Committee meeting on June 30, 2004. When
the Fed has tightened monetary policy in the past, it has often done so over a
12 to 15 month period.
Why is this rate hike so important for shareholders of FCM? It is important
because the floating rate component of senior loans is designed to track,
usually with a lag of 60 to 90 days, the movement of short-term interest rates,
which are influenced by the actions of the Federal Reserve. The trend for
short-term interest rates in an expanding economy tends to be up. In a rising
interest rate environment, there are good prospects for higher income with less
fluctuation of capital than would be experienced in a fixed-rate investment. In
fact, due to the strengthening economy, the S&P/LSTA Leveraged Loan Index
default rate declined from its recent peak of 7.26% at the end of 2000 to around
1% today.
The Fund has paid a consistent monthly dividend amount of $0.0883 per share over
the past seven calendar months through June 2004. The Fund has declared that the
dividend will remain at $0.0883 for July's distribution.
I encourage shareholders to read the commentary from the Four Corners' Portfolio
Managers.
Sincerely,
/S/JAMES A. BOWEN
James A. Bowen
President of the First Trust/Four Corners Senior Floating Rate Income Fund
July 14, 2004
Page 1
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A COMMENTARY ON THE FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
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ECONOMIC AND MARKET ENVIRONMENT
The 8-month period leading to this first Annual Report of the First Trust/Four
Corners Senior Floating Rate Income Fund ("FCM" or "the Fund"), has been a
particularly favorable environment for senior floating-rate loan investing.
Since the Fund's September 26, 2003 inception date, the Fund has benefited from
continuation of trends that are conducive to both floating-rate and
credit-focused investing. These trends include a recovery in U.S. economic
fundamentals, stabilizing capital markets and favorable senior loan market
technical factors. Specifically, monthly economic indicators have documented
improvements in key employment, productivity, retail sales and manufacturing.
Global equity and debt markets have reopened to good companies with credible
prospects. And, commensurate with improving economic data, there is a renewed
focus on inflation and the prospects for interest rate increases. This is
especially appropriate at a time when the absolute level of rates has been at or
near the lowest levels in over 45 years.
As a review, senior loan income has historically tracked short-term interest
rates, which, in an expanding economy, tend to rise as an offset to the threat
of inflation. In such a rising interest rate environment, we believe there are
good prospects for higher income with less NAV downside than would be expected
from a fixed-rate investment. Further, the floating-rate senior loan income
should track the floating cost of the Fund's leverage.
Since the Fund's inception, the performance of the benchmark for the senior loan
market, the Standard & Poors/LSTA Leveraged Loan Index, was strong at 4.19%. The
loan market as a whole also recorded growth through FCM's fiscal year as new
institutional loan issuance rose from the prior years' $46.6 billion to over
$89.1 billion. Similarly, secondary market depth also improved with secondary
trading volume increasing from $31 billion to $42 billion for the 3-month period
ending March 31, 2004 versus a year earlier.
As a result of an increased concern for the impact of rising rates and a decline
in default rates, demand for floating rate investments during the last year has
increased from both retail as well as institutional investors. Such positive
inflows into the asset class represent a strong technical factor that has
contributed to performance.
From the standpoint of quality, we remain confident that credit standards of
senior loans being underwritten today remain well above the levels that
contributed to the difficult default cycle of 2000-2002.
INVESTMENT STRATEGY AND PORTFOLIO COMPOSITION
Four Corner's investment strategy is designed to be an "all weather" strategy
focused on long-term performance. In that regard, our strategy focuses on
maintaining high analytical standards, portfolio diversity, and whenever
possible, a proactive sell discipline. Given the relatively strong growth
prospects of the economy anticipated at present, we have structured the
portfolio across industry groups that we expect to be most likely to benefit
from improving economic fundamentals while minimizing exposure to those
industries that, despite broad economic improvements, are exposed to
"crosscurrents" such as changing market demand, unmanageable costs or undue
revenue pressures. For example, the Fund has a lower level of exposure to
traditional early-cycle out-performers such as auto parts manufacturers.
As detailed in the adjacent chart, our larger industry concentrations are the
following: utilities, healthcare services, telecommunications (wireless),
construction materials and healthcare equipment & supplies. The chart below is
based on the Total Investments of Senior Loans.
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
Industry Diversification
Aerospace and Defense ................... 2%
Auto Components ......................... 3%
Broadcast Media ......................... 4%
Cable Television ........................ 4%
Casinos & Gaming ........................ 5%
Chemicals ............................... 1%
Commercial Services ..................... 5%
Construction Materials .................. 5%
Containers & Packaging (Metal & Glass) .. 4%
Electronic Equipment & Instruments ...... 2%
Entertainment ........................... 1%
Environmental Services .................. 5%
Food, Beverages & Tobacco ............... 5%
Healthcare (Equipment & Services) ....... 5%
Healthcare (Providers & Services) ....... 8%
Household Products ...................... 1%
Leisure ................................. 3%
Manufacturing ........................... 2%
Oil & Gas ............................... 5%
Personal Products ....................... 1%
Publishing & Printing ................... 3%
Real Estate ............................. 5%
Retail .................................. 1%
Telecommunications (Wireless) ........... 6%
Theatres ................................ 1%
Utility (Electric) ...................... 13%
Page 2
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A COMMENTARY ON THE FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME
FUND - (CONTINUED)
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Regarding issuer exposure (that are detailed in the accompanying Portfolio of
Investments), the Fund is also well diversified with over 80 positions in 27
industries. The five largest individual borrower exposures in total represent
$18.3 million, 12.0% of the loan portfolio and 19.4% of the net assets of the
fund and are: Saguaro Utility Group, (an Arizona regulated electric utility),
Centerpoint Energy, (a Texas regulated electric utility), CB Richard Ellis
Services, (a leading commercial real estate services provider), THL Food
Products Company (food products processor and distributor), and VWR
International, Inc. (a distributor of scientific equipment and supplies). Each
of these borrowers have uniquely strong market share and financial strength
that, taken in a broad risk-return context, we believe justifies our larger than
average level of investment. While the fund has become fully invested within the
time frame originally anticipated, our strategy is to reasonably increase
portfolio diversity.
As an integral part of the Fund's overall investment strategy, up to 10% of the
portfolio may be invested in Special Situation debt investments. In this regard,
at May 31, the portfolio includes 3 investments at average purchase prices of
96.8% of par, totaling $5.8 Million or approximately 3.7% of the loan portfolio.
To date, Special Situation investing has made a positive contribution to overall
Fund performance.
In December the Fund began to receive the benefit of a leverage facility
provided through adjustable rate Money Market Cumulative Preferred(R) Shares.
The terms and conditions of that facility provide the Fund with the ability to
borrow at a floating rate that has to date been between 1.12% and 1.15%. Such a
borrowing rate is well below the prevailing income generated by senior loans
thus enhancing overall fund returns. This benefit is received without exposing
the Fund to interest rate mismatch risk that can occur when floating rate debt
leverages a fixed, rather than a floating-rate portfolio.
PERFORMANCE REVIEW
The favorable market and focused investment strategy of Four Corners Capital
Management have combined to generate, since the inception date, a NAV total
return after sales commissions of 3.12% and a 6.40% total return based on market
value. We are also pleased to report that the Fund's last three-month NAV total
returns have placed it in the top 15% of 60 funds in the Loan Participation Fund
category as tracked by Lipper Analytical Services. Additionally, in comparison
to all 599 other closed-end funds, FCM's NAV total return was ranked in the top
10% by the data service, www.etfconnect.com, for the calendar year-to-date
period.
The market price of the Fund has similarly performed in concert with the
prospects for the overall senior loan asset class. As of period end, the Fund's
shares on the American Stock Exchange closed at $20.70 compared to the original
issue price of $20.00. Notably, on June 4, 2004 FCM closed at an all-time high
of $21.00; the Fund's trading range during the fiscal year was the period-end
close high of $20.70 and a low of $19.25 on January 28, 2004. Daily volume has
averaged approximately 13,600 shares.
Dividend distributions totaled 53(cent) per common share in fiscal 2004. The
last dividend paid in the fiscal year equaled $.0883 per share which represented
a 5.30% annualized yield at the initial offering price, 5.52% at the NAV and
5.08% at the market price as of the declaration date. Should the general level
of short term interest rates change over time, the fund is designed and the
asset class has historically delivered returns that have tracked those rate
moves on a 60 to 90 day lag.
We remain committed to long-term performance and appreciate the opportunity to
assist our investors in meeting their personal investment goals.
Page 3
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS
MAY 31, 2004
PRINCIPAL MARKET
VALUE DESCRIPTION** VALUE
--------- ------------------------------------------------ ------------
SENIOR FLOATING RATE INTERESTS - 162.3%
AEROSPACE AND DEFENSE - 2.6%
$ 444,535 DRS Technologies, Inc., Term Loan, 11/04/10 ............ $ 446,757
2,000,000 ILC Industries, Inc., Term Loan, 2/07/11 ............... 2,010,000
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2,456,757
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AUTO COMPONENTS - 4.2%
1,000,000 Federal-Mogul Corp., Term Loan B, 12/29/05 ............. 915,938
NFIL Holdings Corp.,
238,095 Term Loan A, 2/27/10 ................................ 240,476
761,905 Term Loan B, 2/27/10 ................................ 769,524
Tenneco Automotive, Inc.,
1,375,862 Term Loan B, 12/31/10 ............................... 1,395,354
620,690 Term Loan B, 12/12/10 ............................... 629,483
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3,950,775
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BROADCAST MEDIA - 6.4%
2,000,000 Gray Television, Inc., Term Loan C, 5/25/04 ............ 2,010,000
2,000,000 Paxson Communications Corp.,
Term Loan Floater, 1/15/10 .......................... 1,995,000
2,000,000 Salem Communications Holding Corp.,
Term Loan B, 3/31/10 ................................ 2,010,000
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6,015,000
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CABLE TELEVISION - 6.3%
3,000,000 Century Cable Holdings, LLC, Term Loan, 6/30/09 ........ 2,908,749
2,000,000 Charter Communications Operating, LLC,
Term Loan A, 4/27/10 ................................ 1,956,944
1,074,231 PanAmSat Corp., Term Loan B, 9/30/10 ................... 1,075,573
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5,941,266
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CASINOS & GAMING - 7.6%
1,000,000 Boyd Gaming Corp., Term Loan B, 6/24/08 ................ 1,005,000
2,246,854 Marina District Finance Company,
Term Loan A, 12/13/07 ............................... 2,269,322
1,860,450 Pinnacle Entertainment, Inc., Term Loan B, 12/17/09+ ... 1,879,830
2,000,000 Wynn Las Vegas, LLC, Term Loan B, 9/30/09+ ............. 2,012,500
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7,166,652
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CHEMICALS - 2.0%
1,925,769 NALCO Company, Term Loan B, 11/04/10 ................... 1,929,513
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COMMERCIAL SERVICES - 8.4%
1,968,698 Infrasource, Inc., Term Loan, 9/30/10 .................. 1,949,011
2,982,506 Monitronics International, Inc., Term Loan B, 8/26/09 .. 2,982,506
1,000,000 Quanta Services, Inc., Term Loan, 6/19/08 .............. 1,001,250
1,952,941 Sirva Worldwide, Inc., Term Loan, 12/01/10 ............. 1,963,927
--------------
7,896,694
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CONSTRUCTION MATERIALS - 8.9%
2,333,333 Associated Materials, Inc., Term Loan, 8/29/10 ......... 2,352,777
2,000,000 Builders FirstSource, Inc., Term Loan, 8/25/10 ......... 1,985,000
PGT Industries, Inc.,
997,500 Term Loan A, 2/07/10 ................................ 1,002,487
1,000,000 Term Loan B, 7/29/10 ................................ 1,000,000
See Notes to Financial Statements.
Page 4
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND - (CONTINUED)
PORTFOLIO OF INVESTMENTS
MAY 31, 2004
PRINCIPAL MARKET
VALUE DESCRIPTION** VALUE
- ------------ -------------------------------------------------------- ------------
SENIOR FLOATING RATE INTERESTS - CONTINUED
CONSTRUCTION MATERIALS - CONTINUED
$ 1,995,000 Saint Mary's Cement, Inc., Term Loan B, 12/04/09 ....... $ 2,018,691
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8,358,955
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CONTAINERS & PACKAGING (METAL & GLASS) - 7.4%
1,917,273 Berry Plastics Corp., Term Loan C, 7/22/10 ............. 1,938,842
1,985,000 Graphic Packaging International, Inc.,
Term Loan B, 8/08/10 ................................ 2,007,744
2,000,000 Owens-Illinois Group, Inc., Term Loan B, 4/01/08 ....... 2,007,142
997,500 Solo Cup Company, Term Loan, 2/27/11 ................... 1,009,719
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6,963,447
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ELECTRONIC EQUIPMENT & INSTRUMENTS - 2.7%
2,500,000 Global Cash Access, LLC, Term Loan B, 3/10/10 .......... 2,525,000
--------------
ENTERTAINMENT - 2.1%
1,000,000 Metro-Goldwyn-Mayer Studios, Inc., Term Loan B, 4/30/11 1,003,250
1,000,000 WMG Acquisition Corp., Term Loan, 2/28/11 .............. 1,009,792
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2,013,042
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ENVIRONMENTAL SERVICES - 7.6%
2,000,000 Duratek, Inc., Term Loan, 12/16/09 ..................... 1,997,500
2,000,000 Environmental Systems Products Holdings,
Term Loan, 12/12/10 ................................. 2,015,000
1,990,000 IESI Corp., Term Loan, 9/30/10 ......................... 2,008,656
1,125,000 Waste Connections, Inc., Term Loan, 10/22/10 ........... 1,129,922
--------------
7,151,078
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FOOD, BEVERAGES & TOBACCO - 7.5%
1,962,500 Nellson Nutraceutical, Inc., Term Loan, 10/04/09 ....... 1,952,688
2,000,000 Pinnacle Foods Holding Corp., Term Loan DD, 11/25/10 ... 2,018,750
THL Food Products Company,
995,000 Term Loan B, 11/21/10 ............................... 1,007,127
2,000,000 Term Loan Floater, 11/21/11 ......................... 2,047,500
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7,026,065
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HEALTHCARE (EQUIPMENT & SERVICES) - 8.5%
1,975,000 DJ Orthopedics, LLC, Term Loan, 5/15/09 ................ 1,999,687
1,934,394 Empi Corp., Term Loan, 11/24/09 ........................ 1,950,111
975,000 Orthofix International NV, Term Loan, 12/30/08 ......... 985,969
3,000,000 VWR International, Inc., Term Loan B, 4/07/11 .......... 3,036,750
--------------
7,972,517
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HEALTHCARE (PROVIDERS & SERVICES) - 13.0%
1,492,500 Beverly Enterprise, Inc., Term Loan, 10/22/08 .......... 1,508,358
1,838,291 Connecticare Capital LLC, Term Loan, 10/30/09 .......... 1,854,376
1,983,838 Davita, Inc., Term Loan B, 3/31/09 ..................... 2,000,578
Magellan Health Services, Inc.,
444,444 L of C, 8/15/08*** .................................. 450,000
534,722 Term Loan, 8/15/08 .................................. 541,406
1,926,606 Mueller Group, Inc., Term Loan, 4/23/11 ................ 1,936,239
2,000,000 Team Health, Inc., Term Loan B, 3/23/11 ................ 2,000,000
2,000,000 Vanguard Health Systems, Inc., Term Loan, 5/18/11 ...... 2,004,166
--------------
12,295,123
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See Notes to Financial Statements.
Page 5
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND - (CONTINUED)
PORTFOLIO OF INVESTMENTS
MAY 31, 2004
PRINCIPAL MARKET
VALUE DESCRIPTION** VALUE
- ------------ -------------------------------------------------------- ------------
SENIOR FLOATING RATE INTERESTS - CONTINUED
HOUSEHOLD PRODUCTS - 1.1%
$ 1,000,000 Prestige Brands, Inc., Term Loan B, 4/06/11 ............ $ 1,005,000
--------------
LEISURE - 5.3%
1,995,000 24 Hour Fitness Worldwide, Inc., Term Loan, 7/01/09 .... 1,999,987
2,000,000 New Jersey Basketball, LLC, Term Loan, 7/16/04 ......... 2,000,000
1,000,000 The Titan Corp., Term Loan B, 6/30/09 .................. 1,000,000
--------------
4,999,987
--------------
MANUFACTURING - 3.2%
988,593 Cinram International, Inc., Term Loan B, 9/30/09 ....... 998,066
2,000,000 Invensys PLC, Term Loan, 12/05/09 ...................... 2,030,000
--------------
3,028,066
--------------
OIL & GAS - 8.5%
3,000,000 Alon USA, Inc., Term Loan B, 12/16/08 .................. 3,000,000
1,971,428 Basic Energy Services, LP, Term Loan, 10/03/09 ......... 1,981,286
1,000,000 Coffeyville Resources, LLC, Term Loan, 5/07/10 ......... 995,000
1,000,000 La Grange Acquisition, LP, Term Loan, 1/01/08 .......... 1,005,000
1,000,000 Vulcan Energy Corp., Term Loan, 2/23/10 ................ 1,009,375
--------------
7,990,661
--------------
PERSONAL PRODUCTS - 2.1%
2,000,000 American Safety Razor Company, Term Loan B, 4/29/11 .... 2,020,000
--------------
PUBLISHING & PRINTING - 5.4%
2,024,929 Dex Media West, LLC, Term Loan B, 3/09/10 .............. 2,036,862
2,000,000 Freedom Communications, Inc., Term Loan B, 5/18/12 ..... 2,015,000
997,500 Media News Group, Inc., Term Loan B, 12/30/10 .......... 1,005,397
--------------
5,057,259
--------------
REAL ESTATE - 8.4%
CB Richard Ellis Services, Inc.,
1,966,667 Term Loan B, 7/18/08 ................................ 1,984,695
2,000,000 Term Loan C, 3/31/10 ................................ 2,013,750
2,000,000 Landsource Communities Development,
Term Loan B, 3/31/10 ................................ 2,022,500
1,886,769 Newkirk MLP, Term Loan, 11/24/06 ....................... 1,915,070
--------------
7,936,015
--------------
RETAIL - 1.1%
997,500 General Nutrition Centers, Inc., Term Loan B, 12/05/09 . 1,003,735
--------------
TELECOMMUNICATIONS (WIRELESS) - 9.3%
1,990,000 Crown Castle Operating Company, Term Loan B, 9/30/10 ... 2,021,343
712,753 GCI Holdings, Inc., Term Loan, 10/31/07 ................ 716,762
Nextel Communications, Inc.,
1,525,641 Term Loan A, 12/31/07 ............................... 1,518,148
997,500 Term Loan E, 12/15/10 ............................... 1,004,447
1,500,000 Nextel Partners, Inc., Term Loan C, 5/31/11 ............ 1,510,782
2,000,000 Western Wireless Corp., Term Loan B, 5/31/11 ........... 2,004,166
--------------
8,775,648
--------------
THEATRES - 1.1%
1,000,000 Regal Cinemas Corp., Term Loan B, 11/10/10 1,007,188
--------------
See Notes to Financial Statements.
Page 6
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND - (CONTINUED)
PORTFOLIO OF INVESTMENTS
MAY 31, 2004
PRINCIPAL MARKET
VALUE DESCRIPTION** VALUE
- ------------ -------------------------------------------------------- ------------
SENIOR FLOATING RATE INTERESTS - CONTINUED
UTILITY (ELECTRIC) - 21.6%
Allegheny Energy Supply Company, LLC,
$ 1,000,000 Term Loan B, 3/08/11 ................................ $ 1,000,536
2,000,000 Term Loan C, 6/08/11 ................................ 1,998,572
2,000,000 Astoria Energy LLC, Term Loan, 4/16/12 ................. 2,007,500
3,978,378 Centerpoint Energy, Inc., Term Loan, 10/07/06 .......... 4,033,793
3,000,000 Mission Energy Holdings International, LLC,
Term Loan, 12/11/06 ................................. 3,015,939
NRG Energy, Inc.,
567,271 Credit Link, 12/23/10 ............................... 582,445
1,009,195 Term Loan, 6/23/10 .................................. 1,036,191
2,500,000 Reliant Resources, Inc., Term Loan B, 3/15/07 .......... 2,465,105
4,250,000 Saguaro Utility Group I Corp. (Unisource),
Term Loan DD, 3/25/11+ .............................. 4,191,563
--------------
20,331,644
--------------
TOTAL SENIOR FLOATING RATE INTERESTS ................... 152,817,087
(Cost $145,680,962) --------------
REPURCHASE AGREEMENT - 9.3%
(Cost $8,820,000)
8,820,000 Agreement with PNC Capital Markets, 0.980%
dated 5/28/04, to be repurchased at $8,820,960
on 6/01/04, collateralized by $8,565,000
Federal Home Loan Bank Bond, 3.875% due 12/15/04
(Value $8,974,990) .................................. 8,820,000
--------------
UNFUNDED LOAN COMMITMENTS - (7.1)% ..................... (6,705,156)
--------------
TOTAL INVESTMENTS - 164.5% ............................. 154,931,931
(Cost $154,500,962)*
NET OTHER ASSETS AND LIABILITIES - (4.0)% .............. (3,762,064)
--------------
PREFERRED SHARES, AT LIQUIDATION VALUE - (60.5)% ....... (57,000,000)
--------------
NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS - 100.0% ........................... $ 94,169,867
==============
<FN>
- -------------------------------------------------------------------
+ Unfunded loan commitments. See footnote 2 for description.
* Aggregate cost for federal tax purposes is $154,562,308.
** All percentages shown in the Portfolio of Investments are based on
net assets applicable to Common Shares.
*** L of C - Line of Credit
</FN>
See Notes to Financial Statements.
Page 7
STATEMENT OF ASSETS AND LIABILITIES
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2004
ASSETS:
Investments, at value (See portfolio of investments) (a):
Securities ....................................................................................... $146,111,931
Repurchase Agreement ............................................................................. 8,820,000
-------------
Total Investments ................................................................................... 154,931,931
Cash ................................................................................................ 137,375
Receivable for investment secuturities sold ......................................................... 11,595,276
Interest receivable ................................................................................. 805,060
Prepaid expenses .................................................................................... 13,216
-------------
Total Assets ................................................................................... 167,482,858
-------------
LIABILITIES:
Payable for investment securities purchased ......................................................... 16,100,698
Investment advisory fee payable ..................................................................... 110,045
Accumulated unpaid dividends on Taxable Money Market Cumulative Preferred(R) Shares ................. 10,451
Payable to administrator ............................................................................ 7,671
Accrued expenses and other payables ................................................................. 84,126
-------------
Total Liabilities .............................................................................. 16,312,991
-------------
TAXABLE MONEY MARKET CUMULATIVE PREFERRED(R)SHARES:
($0.01 par value, 2,280, shares issued with liquidation preference of $25,000 per share) ............ 57,000,000
TOTAL NET ASSETS (APPLICABLE TO COMMON SHAREHOLDERS) ............................................... 94,169,867
=============
FUND TOTAL MANAGED ASSETS .......................................................................... $151,169,867
=============
- --------------------------------------------------------------------
(a) Investments, at cost ............................................................................ $154,500,962
=============
NET ASSETS CONSIST OF:
Undistributed net investment income ................................................................. $ 160,089
Accumulated net realized gain on investments sold ................................................... 738,579
Net unrealized appreciation of investments .......................................................... 430,969
Par value ........................................................................................... 49,141
Paid-in capital ..................................................................................... 92,791,089
-------------
Total Net Assets ............................................................................... $ 94,169,867
=============
NET ASSET VALUE, Applicable to Common Shares outstanding (par value $0.01 per Common Share) ......... $ 19.16
=============
Number of Common Shares outstanding ................................................................. 4,914,084
=============
See Notes to Financial Statements.
Page 8
STATEMENT OF OPERATIONS
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
FOR THE PERIOD ENDED MAY 31, 2004*
INVESTMENT INCOME:
Interest ............................................................................................ $ 4,069,742
Delayed compensation income ......................................................................... 47,685
Committment fee income .............................................................................. 12,696
Amendment fee income ................................................................................ 4,176
-------------
Total investment income ........................................................................ 4,134,299
-------------
EXPENSES:
Investment advisory fee ............................................................................. 904,123
Audit and legal fees ................................................................................ 87,499
Money Market Cumulative Preferred(R)Shares commission fees .......................................... 57,385
Administration fee .................................................................................. 55,492
Trustees' fees and expenses ......................................................................... 50,000
Transfer agent fees ................................................................................. 29,000
Custodian fees ...................................................................................... 28,887
Printing fees ....................................................................................... 20,000
Other ............................................................................................... 26,979
-------------
Total expenses ...................................................................................... 1,259,365
Expenses reimbursed by investment advisor ........................................................... (102,529)
-------------
Net expenses ................................................................................... 1,156,836
-------------
NET INVESTMENT INCOME ............................................................................... 2,977,463
-------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Realized gain from investments sold during the period ............................................ 846,814
Change in unrealized appreciation/(depreciation) of investments during the period ................ 430,969
-------------
Net realized and unrealized gain on investments ..................................................... 1,277,783
-------------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ........................................................................ 4,255,246
LESS: TAXABLE MONEY MARKET CUMULATIVE PREFERRED(R) SHARE DIVIDENDS .................................. (336,354)
-------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS APPLICABLE TO COMMON SHARES ....................... $ 3,918,892
=============
<FN>
- ----------------------------------------------------------------
* The Fund's inception date was September 18, 2003.
</FN>
See Notes to Financial Statements.
Page 9
STATEMENT OF CHANGES IN NET ASSETS
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
FOR THE PERIOD ENDED MAY 31, 2004*
PERIOD
ENDED
5/31/2004*
============
OPERATIONS:
Net investment income .............................................................................. $ 2,977,463
Net realized gain on investments sold during the period ............................................ 846,814
Net change in unrealized appreciation/(depreciation) of investments during the period .............. 430,969
-------------
Net increase in net assets resulting from operations ............................................... 4,255,246
DISTRIBUTIONS: PREFERRED SHARE DIVIDENDS
Dividends paid from net investment income .......................................................... (336,354)
-------------
DISTRIBUTIONS: COMMON SHARE DIVIDENDS
Dividends paid from net investment income .......................................................... (2,601,453)
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS APPLICABLE TO COMMON SHARES ................... 1,317,439
CAPITAL TRANSACTIONS:
Taxable Money Market Cumulative Preferred(R)Shares Issued .......................................... 57,000,000
Value of 6,584 shares reinvested ................................................................... 125,995
Net proceeds from sale of 4,907,500 shares of Common Shares ........................................ 92,726,433
-------------
Net increase in net assets ......................................................................... 151,169,867
NET ASSETS:
Beginning of period ................................................................................ --
-------------
End of period ...................................................................................... $151,169,867
=============
Undistributed net investment income end of period .................................................. $ 160,089
=============
<FN>
- --------------------------------------------------
* The Fund's inception date was September 18, 2003.
</FN>
See Notes to Financial Statements.
Page 10
STATEMENT OF CASH FLOWS
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
FOR THE PERIOD ENDED MAY 31, 2004*
Cash flows from operating activities:
Investment income received ............................................. $ 3,220,472
Fee income received .................................................... 64,557
Payment of operating expenses .......................................... (968,210)
Proceeds from sales of long-term securities ............................ 124,170,517
Purchases of long-term securities ...................................... (264,455,033)
Net purchases of short-term investments ................................ (8,820,000)
----------------
CASH USED BY OPERATING ACTIVITIES ......................................... $ (146,787,697)
Cash flows from financing activities:
Proceeds from shares sold .............................................. 149,726,433
Distributions paid ..................................................... (2,801,361)
----------------
CASH PROVIDED BY FINANCING ACTIVITIES ..................................... 146,925,072
----------------
Increase in cash ....................................................... 137,375
Cash at beginning of period ............................................ --
----------------
Cash at end of period .................................................. $ 137,375
================
RECONCILIATION OF NET INCREASE IN NET ASSETS FROM OPERATIONS
TO CASH USED BY OPERATING ACTIVITIES:
Net increase in net assets resulting from operations ...................... $ 4,255,246
Increase in investments** .............................................. $ (154,931,931)
Increase in interest and dividends receivable .......................... (805,060)
Increase in other assets ............................................... (13,216)
Increase in receivables for investments sold ........................... (11,595,276)
Increase in payable for investments purchased .......................... 16,100,698
Increase in accrued expenses ........................................... 201,842
----------------
CASH USED BY OPERATING ACTIVITIES ......................................... $ (146,787,697)
================
<FN>
- -----------
* The Fund's inception date was September 18, 2003.
** Includes unrealized appreciation of $430,969.
</FN>
See Notes to Financial Statements.
Page 11
FINANCIAL HIGHLIGHTS
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD
PERIOD
ENDED
5/31/2004*
-----------
Net asset value, beginning of period .......................................... $ 19.10
-----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ......................................................... 0.61
Net realized and unrealized gain on investments ............................... 0.25
-----------
Total from investment operations .............................................. 0.86
-----------
DISTRIBUTIONS: PREFERRED SHARES
Dividends paid from net investment income to MMP*** Shareholders .............. (0.07)
DISTRIBUTIONS: COMMON SHARES
Dividends paid from net investment income to Common Shareholders .............. (0.53)
-----------
Dilutive impact from the offering of MMP Shares++ ............................. (0.16)
-----------
Change in accumulated unpaid dividends on MMP Shares .......................... (0.00)#
-----------
Common share offering costs charged to paid-in-capital ........................ (0.04)
-----------
Net asset value, end of period ................................................ $ 19.16
===========
Market value, end of period ................................................... $ 20.70
===========
TOTAL RETURN BASED ON NET ASSET VALUE (A)+ .................................... 3.12%
===========
TOTAL RETURN BASED ON MARKET VALUE (B)+ ....................................... 6.40%
===========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON SHAREHOLDERS:
Ratio of operating expenses to average net assets ............................. 1.84% **
Ratio of operating expenses to average net assets without reimbursements ...... 2.00% **
Ratio of net investment income to average net assets .......................... 4.73% **
Ratio of net investment income to average net assets (e) ...................... 4.18%
SUPPLEMENTAL DATA:
Portfolio turnover rate ....................................................... 106.51%
Net assets, end of period (in 000's) .......................................... $ 94,170
- --------------------------------------------------
Ratio of operating expenses to Total Averaged Managed Assets .................. 1.24%**
Ratio of operating expenses to Total Managed Assets without reimbursements .... 1.35%**
PREFERRED SHARES:
Total Money Market Cumulative Preferred(R)Shares outstanding .................. 2,280
Liquidation and Market Value per MMP share (c) ................................ $ 25,004
Asset coverage per share (d) .................................................. $ 66,303
<FN>
- --------------------------------------------------
* The Fund's inception date was September 18, 2003.
** Annualized.
*** Money Market Cumulative Preferred(R) Shares.
(a) Total return on Common Share net asset value is the combination of
reinvested dividend income and reinvested capital gains distributions at
prices obtained by the Dividend Reinvestment Plan, if any, and changes in
Common Share net asset value per share.
(b) Total return on market value is the combination of reinvested dividend
income and reinvested capital gains distributions, at prices obtained by
the Dividend Reinvestment Plan, if any, and changes in stock price per
share, all based on market price per share.
(c) Plus accumulated and unpaid dividends.
(d) Calculated by subtracting the the Fund's total liabilities (not including
the Preferred Shares) from the Fund's total assets, and dividing this by
the number of MMP shares outstanding.
(e) The net investment income ratio reflects income net of operating expenses
and payments and changes in unpaid dividends to MMP Shareholders.
+ Total return is not annualized for periods less than one year and does not
reflect sales load.
++ The expenses associated with the offering of the MMP Shares had a $(0.16)
impact on the Common Share NAV.
# Amount represents less than $0.01 per Common Share.
</FN>
See Notes to Financial Statements.
Page 12
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2004
1. FUND DESCRIPTION
First Trust/Four Corners Senior Floating Rate Income Fund (the "Fund") is a
diversified closed-end management investment company initially organized as a
Delaware statutory trust on May 13, 2003. The Fund was reorganized as a
Massachusetts business trust on August 8, 2003 and is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended (the "1940 Act").
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund will attempt to preserve capital. The
Fund will pursue 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 objective. 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.
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 and other assets. The NAV is determined
as of the close of regular trading on the American Stock Exchange ("AMEX"),
normally 4:00 p.m. Eastern time, on each day the AMEX 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 and the
liquidation value of any outstanding Preferred Shares from the Fund's Managed
Assets 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 in
accordance with valuation procedures adopted by the 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 net
asset value, First Trust Advisors L.P. ("First Trust") may use a fair value
method in good faith to value the Fund's securities and investments. The use of
fair value pricing by the Fund is governed by valuation procedures approved by
the Fund's Board of Trustees, and in accordance with the provisions of the 1940
Act.
Securities for which the primary market is a national securities exchange or the
NASDAQ National Market System are valued at the last reported sale price (NASDAQ
Official Closing Price for NASDAQ National Market Securities) on the day of
valuation. Listed securities for which no sale was reported on that date are
valued at the mean between the most recent bid and asked prices. Securities
traded in the over-the-counter market are valued at their closing bid prices.
Valuation of short-term cash equivalent investments will be at amortized cost.
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 substantially
grown 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 an independent 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 as determined in good faith under procedures approved by
the Fund's Board of Trustees, and in accordance with the provisions of the 1940
Act.
REPURCHASE AGREEMENT:
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
Page 13
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2004
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 obligations, including interest. In the event of counterparty
default, the Fund has the right to use the collateral to offset losses incurred.
There is potential loss to the Fund in the event the Fund is delayed or
prevented from exercising its rights to dispose of the collateral securities,
including the risk of a possible decline in the value of the underlying
securities during the period while the Fund seeks to assert its rights. The Fund
reviews the value of the collateral and the creditworthiness of those banks and
dealers with which the Fund enters into repurchase agreements to evaluate
potential risks.
CASH FLOW INFORMATION:
The Fund issues its shares, invests in securities, and distributes dividends
from net investment income (which are either paid in cash or reinvested at the
discretion of shareholders). These activities are reported in the Statement of
Changes in Net Assets. Information on cash payments is presented in the
Statement of Cash Flows. Accounting practices that do not affect reporting
activities on a cash basis include unrealized gain or loss on investment
securities and accretion/amortization of discount/premium recognized on
investment securities.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded on the accrual basis. Market premiums and discounts
are amortized over the expected life of each respective borrowing.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date; interest income is not accrued
until settlement date. The Fund instructs the custodian to segregate assets of
the Fund with a current value at least equal to the amount of its when-issued
purchase commitments.
Amendment fees are compensation for evaluating and accepting changes to credit
agreements. Commitment fees are compensation received on undrawn amounts under a
revolving credit agreement. Facility fees are received on a facility's entire
committed amount, regardless of usage. Delayed compensation fees are received
for delays of settlement of interest income.
UNFUNDED LOAN COMMITMENTS:
The Fund may enter into certain credit agreements, all or a portion of which
may be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. These commitments are disclosed in the accompanying
Portfolio of Investments and Statement of Assets and Liabilities.
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 MMP. If the Fund recognizes a long-term capital gain, it
will be required to allocate such gain between the Common Shares and the Money
Market Cumulative Preferred(R) Shares ("MMP Shares") issued by the Fund in
proportion to the total dividends paid for the year. Distributions will
automatically be reinvested into additional Common Shares pursuant to the Fund's
Dividend Reinvestment Plan unless cash distributions are elected by the
shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund. Permanent differences incurred during the period ended May 31,
2004, resulting from differences in book and tax accounting have been
reclassified at year end to reflect an increase to undistributed net investment
income by $120,433, a decrease to accumulated net realized gain on investments
by $108,235 and a decrease to paid in capital by $12,198. Net assets were not
affected by this reclassification.
The tax character of distributions paid during 2004 were as follows:
Distributions paid from:
Ordinary Income................................ $2,937,807
As of May 31, 2004, the components of distributable earnings on a tax basis were
as follows:
Undistributed Ordinary Income.................. $ 960,014
Accumulated Net Capital Gains.................. --
Unrealized Appreciation........................ 369,623
Page 14
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2004
INCOME TAXES:
The Fund intends 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.
EXPENSES:
The Fund will pay all expenses directly related to its operations.
COMMON SHARE ORGANIZATIONAL AND OFFERING COSTS:
Organization costs consist of costs incurred to establish the Fund and enable it
to legally do business. These costs include incorporation 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 shares offered for sale, registration fees, underwriting fees, and
printing of initial prospectus, among other fees. First Trust and Four Corners
Capital Management, LLC ("Four Corners") have paid all organizational expenses
and all offering costs of the Fund (other than sales load) that exceed $0.04 per
Common Share. The Fund's share of Common Share offering costs, $196,300, were
recorded as a reduction of the proceeds from the sale of common shares.
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 its
investment advisery services, First Trust is entitled to a monthly fee
calculated at an annual rate of 0.97% of the Fund's Managed Assets, the average
daily gross asset value of the Fund minus the sum of the Fund's accrued and
unpaid dividends on any outstanding Preferred Shares and accrued liabilities.
Four Corners (the "Sub-Adviser") serves as the Fund's sub-adviser and manages
the Fund's portfolio subject to First Trust's supervision. The Sub-Adviser
receives a portfolio management fee of 0.56% of Managed Assets that is paid
monthly by First Trust out of the First Trust management fee.
First Trust has agreed to reimburse the Fund for fees and expenses in an amount
equal to 0.11% of the average daily Managed Assets of the Fund for the first two
years of the Fund's operations through October 1, 2005. From October 1, 2005
through Septmber 30, 2007, First Trust has agreed to reimburse the Fund for fees
and expenses in an amount equal to 0.05% of the average daily Managed Assets of
the Fund. The Sub-Adviser has agreed to bear a portion of this expense
reimbursement obligation by reducing the amount of its full sub-advisory fee by
0.045% in years one and two and 0.02% from October 1, 2005 through September 30,
2007. Reimbursements are reported as "expenses reimbursed by the investment
advisor" in the statement of assets and liabilities.
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.
Deutsche Bank Trust Company Americas, a wholly owned subsidiary of Deutsche Bank
AG ("Auction Agent"), serves as the Fund's Preferred Share transfer agent,
registrar, dividend disbursing agent and redemption agent.
No officer or employee of First Trust received any compensation from the Fund
for serving as an officer or Trustee of the Fund. The Fund pays each Trustee who
is not an officer or employee of First Trust or any of their affiliates $10,000
per annum plus $1,000 per regularly scheduled meeting attended, $500 per
committee meeting attended and reimbursement for travel and out-of-pocket
expenses.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments, for the period ended May 31, 2004, aggregated amounts
were $280,555,662 and $135,765,793, respectively.
As of May 31, 2004, the aggregate gross unrealized appreciation for all
securities, in which there was an excess of value over tax cost, was $749,528
and the aggregate gross unrealized depreciation for all securities, in which
there was an excess of tax cost over value, was $318,559.
Page 15
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2004
5. COMMON STOCK
As of May 31, 2004, 4,907,500 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 Stock transactions were as follows:
PERIOD ENDED
MAY 31, 2004
------------
SHARES AMOUNT
------ ------
Issued as reinvestment of dividends under
the Dividend Reinvestment Plan ............ 6,584 $125,995
===== ========
6. MONEY MARKET CUMULATIVE PREFERRED(R) 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. On May 31, 2004, 2,280 Money Market
Cummulative Preferred(R) Shares ("MMP Shares") were issued and outstanding.
[Offering Costs of $240,517 and commissions of $570,000, paid directly to Lehman
Brothers, were charged to capital of Common Shares upon issuance of Preferred
Shares.]
The Fund is required to meet certain asset coverage tests with respect to the
MMP Shares. If the Fund fails to maintain Eligible Assets having an aggregated
Discounted Value at least equal to the MMP 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 MMP Shares.
An auction of the MMP 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.
As of May 31, 2004, 2,280 of the MMP Shares were outstanding at an annual
dividend rate of 1.08%. The dividend rate, as set by the auction process, is
generally expected to vary with short-term interest rates. 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 MMP Shares are classified outside of
permanent equity (net assets to common stock) in the accompanying financial
statements.
7. CONCENTRATION OF CREDIT RISK
Senior Loans in the Fund's portfolio generally are subject to mandatory and/or
optional prepayment. Because of these mandatory prepayment conditions and
because there may be significant economic incentives for a Borrower to prepay,
prepayments of Senior Loans in the Fund's portfolio may occur. As a result, the
actual remaining maturity of Senior Loans held in the Fund's portfolio may be
substantially less than the stated maturities shown. Senior Loans generally have
maturities that range from five to eight years; however, the Fund estimates that
refinancings and prepayments result in an average maturity of the Senior Loans
held in its portfolio is generally between 18-36 months.
Senior Loans in which the Fund invests generally pay interest at rates, which
are periodically redetermined 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 Inter-Bank Offered Rate
("LIBOR"), (ii) the prime rate offered by one or more major United States banks
or (iii) the certificate of deposit rate. Senior Loans are generally considered
to be restricted in that the Fund ordinarily is contractually obligated to
receive approval from the Agent Bank and/or Borrower prior to the disposition of
a Senior Loan.
8. SUBSEQUENT EVENTS
On May 20, 2004, the Fund declared a dividend of $0.0883 per share which
represents a dividend from net investment income to Common Stock Shareholders of
record June 3, 2004, payable June 15, 2004.
On June 17, 2004, the Fund declared a dividend of $0.0833 per share which
represents a dividend from net investment income to Common Stock Shareholders of
record July 6, 2004, payable July 15, 2004.
Page 16
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- --------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST/FOUR CORNERS SENIOR
FLOATING RATE INCOME FUND:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of First Trust/Four Corners Senior Floating Rate
Income Fund (the "Fund"), as of May 31, 2004 and the related statements of
operations, changes in net assets, cash flows and the financial highlights for
the period September 18, 2003 (inception) through May 31, 2004. 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 audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of May 31, 2004, by correspondence with the
Funds' custodian, brokers and selling or agent banks; where replies were not
received, we performed other auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund at May 31, 2004, the results of its operations, the changes in its net
assets and cash flows, and the financial highlights for the period September 18,
2003 (inception) through May 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
/S/DEL0ITTE + TOUCHE LLP
Chicago, Illinois
July 22, 2004
Page 17
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ADDITIONAL INFORMATION (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 to receive cash distributions,
all dividends, including any capital gain distributions, on your Common Shares
will be automatically reinvested by PFPC (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, 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 the Common Shares are trading at or above net asset value at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) net asset value per Common Share on
that date or (ii) 95% of the market price on that date.
(2) If the Common Shares are trading below net asset value 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 AMEX 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 withdraw from the Plan at any time by giving written notice to the Plan
Agent, or by telephone 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 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.
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.
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PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities 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 located at http://www.sec.gov, when required to be filed
pursuant to applicable regulations.
- --------------------------------------------------------------------------------
Page 18
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MANAGEMENT
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2004
BOARD OF TRUSTEES AND OFFICERS
(UNAUDITED)
Information pertaining to the Trustees and officers* of the Trust is set forth
below. The Statement of Additional Information (SAI) includes additional
information about the Trustees and is available without charge, upon request, by
calling (800) 988-5891.
NUMBER OF OTHER
PORTFOLIOS TRUSTEESHIPS/
NAME, D.O.B., ADDRESS AND TERM OF OFFICE AND PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
POSITION(S) WITH THE FUND LENGTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
- --------------------------------------------------------------------------------------------------------------------------------
DISINTERESTED TRUSTEES
- --------------------------------------------------------------------------------------------------------------------------------
Richard Erickson, Trustee o One year Physician, 17 portfolios Trustee, First Trust
D.O.B. 04/51 o 9 months served Sportsmed/ Wheaton Closed-End Funds**
c/o First Trust Advisors L.P. Orthopedics and First Defined
1001 Warrenville Road Portfolio Fund, LLC
Suite 300
Lisle, IL 60532
Niel B. Nielson, Trustee o One year President, Covenant 17 portfolios Director of Good
D.O.B. 03/54 o 9 months served College (June 2002 News
c/o First Trust Advisors L.P. to present); Pastor, Publisher-Crossway
1001 Warrenville Road College Church in Books; Covenant
Suite 300 Wheaton (1997 to Transport Inc.;
Lisle, IL 60532 June 2002) Trustee, First Trust
Closed-End Funds**
and First Defined
Portfolio Fund, LLC
Thomas R. Kadlec o One year Vice President and 17 portfolios Trustee, First Trust
D.O.B. 11/57 o 9 months served Chief Financial Closed-End Funds**
c/o First Trust Advisors L.P. Officer (1990 to and First Defined
1001 Warrenville Road present); ADM Portfolio Fund, LLC
Suite 300 Investor Services,
Lisle, IL 60532 Inc. (Futures
Commission
Merchant);
Registered
Representative (2000
to present);
Segerdahl & Company,
Inc., a NASD member
(Broker-Dealer)
David M. Oster o One year Trader and Market 6 portfolios Trustee, First Trust
D.O.B. 03/64 o 9 months served Maker, Chicago Closed-End Funds**
c/o First Trust Advisors L.P. Options Exchange
1001 Warrenville Road (Self Employed-1987
Suite 300 to present; Options
Lisle, IL 60532 Trading and Market
Making)
Page 19
- --------------------------------------------------------------------------------
MANAGEMENT - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2004
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
(UNAUDITED)
NUMBER OF OTHER
PORTFOLIOS TRUSTEESHIPS/
NAME, D.O.B., ADDRESS AND TERM OF OFFICE AND PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
POSITION(S) WITH THE FUND LENGTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
- --------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
- --------------------------------------------------------------------------------------------------------------------------------
James A. Bowen, Trustee o One year trustee President, First 17 portfolios Chairman of the
President, Chairman of the term and indefinite Trust Advisors L.P. Board of Directors,
Board and CEO officer term and First Trust BondWave LLC
D.O.B. 09/55 o 9 months served Portfolios L.P.;
1001 Warrenville Road Chairman of the
Suite 300 Board, BondWave LLC
Lisle, IL 60532
- --------------------------------------------------------------------------------------------------------------------------------
OFFICER(S) WHO ARE NOT TRUSTEES
- --------------------------------------------------------------------------------------------------------------------------------
Robert F. Carey, Vice o Indefinite term Senior Vice N/A N/A
President o 9 months served President, First
D.O.B. 07/63 Trust Advisors L.P.
1001 Warrenville Road and First Trust
Suite 300 Portfolios L.P.
Lisle, IL 60532
Mark R. Bradley, o Indefinite term Chief Financial N/A N/A
Treasurer, o 9 months served Officer, Managing
Controller, Chief Director, First
Financial Officer, Trust Advisors L.P.
Chief Accounting and First Trust
Officer D.O.B. 11/57 Portfolios L.P.;
1001 Warrenville Road Chief Financial
Suite 300 Officer, BondWave
Lisle, IL 60532 LLC
W. Scott Jardine, Secretary o Indefinite term General Counsel, N/A N/A
D.O.B. 05/60 o 9 months served First Trust Advisors
1001 Warrenville Road L.P. and First Trust
Suite 300 Portfolios L.P.;
Lisle, IL 60532 Secretary, BondWave
LLC
Page 20
- --------------------------------------------------------------------------------
MANAGEMENT - (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2004
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
(UNAUDITED)
NUMBER OF OTHER
PORTFOLIOS TRUSTEESHIPS/
NAME, D.O.B., ADDRESS AND TERM OF OFFICE AND PRINCIPAL OCCUPATION(S) IN FUND COMPLEX DIRECTORSHIPS
POSITION(S) WITH THE FUND LENGTH OF TIME SERVED DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
- --------------------------------------------------------------------------------------------------------------------------------
OFFICER(S) WHO ARE NOT TRUSTEES - (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
Roger Testin o Indefinite term Senior Vice N/A N/A
Vice President o 9 months served President, First
D.O.B. 06/66 Trust Advisors L.P.
1001 Warrenville Road (August 2001 to
Suite 300 present); Analyst,
Lisle, IL 60532 Dolan Capital
Management
(1998-2001)
Susan M. Brix o Indefinite term Representative, N/A N/A
Assistant Vice President o 9 months served First Trust
D.O.B. 01/60 Portfolios L.P.;
1001 Warrenville Road Assistant Portfolio
Suite 300 Manager, First Trust
Lisle, IL 60532 Advisors L.P.
<FN>
- --------------
* The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
** First Trust Closed-End Funds include: First Trust/Four Corners Senior
Floating Rate Income Fund, First Trust/Four Corners Senior Floating Rate
Income Fund II, First Trust Value Line(R) & Ibbotson Equity Allocation
Fund, Macquarie/First Trust Global Infrastructure/Utilities Dividend &
Income Fund, First Trust Value Line(R) Dividend Fund and First Trust Value
Line(R) 100 Fund.
</FN>
Page 21
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) There have been no amendments, during the period covered by this
report, to 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, and that relates to any element of
the code of ethics description.
(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.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's board of
directors has determined that Thomas R. Kadlec is qualified to serve as an audit
committee financial expert serving on its audit committee and that he 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 the Fund's
last two fiscal years (from inception on September 25, 2003 to May 31, 2004) 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 for such two fiscal years are $47,000.
(b) AUDIT-RELATED FEES (REGISTRANT) -- The aggregate fees billed in the
Fund's last two fiscal years (from inception on September 25, 2003 to May 31,
2004) 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 are $2,500.
These fees were for agreed upon procedures with respect to rating on the
preferred shares.
AUDIT-RELATED FEES (INVESTMENT ADVISER) -- The aggregate fees
billed in 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 adviser's registration statements and are not
reported under paragraph (a) of this Item are $0.
(c) TAX FEES (REGISTRANT) -- The aggregate fees billed in the last two
fiscal years (from inception on September 25, 2003 to May 31, 2004) for
professional services rendered by the principal accountant for tax compliance,
tax advice, and tax planning to the registrant are $0.
TAX FEES (INVESTMENT ADVISER) -- The aggregate fees billed in
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 Fund's adviser are $6,000. The fees are for tax return preparation.
(d) ALL OTHER FEES (REGISTRANT) -- The aggregate fees billed in the
last two fiscal years (from inception on September 25, 2003 to May 31, 2004) 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, are
$0.
ALL OTHER FEES (INVESTMENT ADVISER) -- The aggregate fees billed
in the last two fiscal years (of the Registrant) 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, are $0.
(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, 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 Fund by
its independent auditors. The Chairman of the Committee is authorized to give
such pre-approvals on behalf of the Committee and shall report any such
pre-approval to the full Committee.
The Committee is also responsible for the approval of the independent
auditor's engagements for non-audit services with the Fund's management (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 Fund, if the engagement relates directly
to the operations and financial reporting of the Fund, 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 Fund's management
(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 Fund that were not pre-approved pursuant
to the DE MINIMIS exception, 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) of this Item that were approved by the audit committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows:
(b) 0%
(c) Not Applicable.
(d) Not applicable.
The percentage of services described in each of paragraphs (b) through (d) of
this Item that were approved by the audit committee pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X are as follows:
(b) Not Applicable.
(c) 100%.
(d) Not applicable.
(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 (from inception on September 25, 2003 to May 31, 2004) 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 the last
two fiscal years (from inception on September 25, 2003 to May 31, 2004) of the
registrant was $8,500.
(h) Not applicable. The audit committee pre-approved all non-audit
services rendered to the Registrant's investment adviser and any entity
controlling, controlled by or under common control with the adviser that
provides ongoing services to the registrant.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not yet applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
Not yet applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Registrant has adopted proxy voting policies and procedures of First Trust
Advisors L.P. ("First Trust"), investment adviser to the Fund. Pursuant to an
investment advisory agreement, First Trust is responsible for voting the Fund's
proxies. First Trust has engaged the services of Institutional Shareholder
Services ("ISS"), a third-party proxy service, to make recommendations on the
voting of proxies related to securities held by the Fund. The proxy procedures
of First Trust and the ISS guidelines are attached hereto as appendices.
PROXY VOTER SERVICES (PVS)
U.S. PROXY VOTING POLICY
STATEMENT & GUIDELINES
[GRAPHIC OMITTED] U.S. PROXY VOTING POLICY
PVS LOGO STATEMENT AND GUIDELINES
Fifth Edition, January 2003
- --------------------------------------------------------------------------------
ACKNOWLEDGEMENTS
Robert Kellogg, Director
John Keenan, Senior Policy Analyst
Jennifer Galmeijer, Program Administrator and Policy Analyst
Edward Kamonjoh, Research Analyst
- --------------------------------------------------------------------------------
COPYRIGHT (C) 2003 BY PROXY VOTER SERVICES (PVS), A DIVISION OF INSTITUTIONAL
SHAREHOLDER SERVICES (ISS INC)
All right reserved. No part of this publication may be reproduced or transmitted
in any form or by any means, electronic or mechanical, including photocopy,
recording, or any information storage and retrieval system, without permission
in writing from the publisher.
Requests for permission to make copies of any part of this work should be sent
to:
Proxy Voter Services/ISS
2099 Gaither Road, Suite 501
Rockville, MD 20850-4045
301-556-0439
issuewatch@issproxy.com
U.S. Policy and Guidelines
Page 2
~ TABLE OF CONTENTS ~
POLICY STATEMENT AND GUIDELINES 4
BOARD OF DIRECTORS 5
PROXY CONTEST DEFENSES 12
AUDITORS 14
ACQUISITIONS AND MERGERS 15
SHAREHOLDER RIGHTS 17
CAPITAL STRUCTURE 20
EXECUTIVE AND DIRECTOR COMPENSATION 23
STATE OF INCORPORATION 27
SOCIAL AND ENVIRONMENTAL ISSUES 28
CORPORATE RESPONSIBILITY AND ACCOUNTABILITY 28
U.S. Policy and Guidelines
Page 3
PROXY VOTER SERVICES
PROXY VOTING POLICY STATEMENT AND GUIDELINES
- --------------------------------------------------------------------------------
This statement sets forth the proxy voting policy of Proxy Voter Services (PVS).
The U.S. Department of Labor (DOL) has stated that the fiduciary act of managing
plan assets that are shares of corporate stock includes the voting of proxies
appurtenant to those shares of stock and that trustees may delegate this duty to
an investment manager. ERISA section 3(38) defines an investment manager as any
fiduciary who is registered as an investment adviser under the Investment
Advisor Act of 1940. PVS is a registered investment adviser under the Investment
Advisor Act of 1940.
PVS shall vote the proxies of its clients solely in the interest of their
participants and beneficiaries and for the exclusive purpose of providing
benefits to them. PVS shall not subordinate the interests of participants and
beneficiaries to unrelated objectives. PVS shall act with the care, skill,
prudence, and diligence under the circumstances then prevailing that a prudent
man acting in a like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like aims. When proxies
due to PVS's clients have not been received, PVS will make reasonable efforts to
obtain missing proxies. PVS is not responsible for voting proxies it does not
receive.
PVS shall analyze each proxy on a CASE-BY-CASE basis, informed by the guidelines
elaborated below, subject to the requirement that all votes shall be cast solely
in the long-term interest of the participants and beneficiaries of the plans.
PVS does not intend for these guidelines to be exhaustive. Hundreds of issues
appear on proxy ballots every year, and it is neither practical nor productive
to fashion voting guidelines and policies which attempt to address every
eventuality. Rather, PVS's guidelines are intended to cover the most significant
and frequent proxy issues that arise. Issues not covered by the guidelines shall
be voted in the interest of the participants and beneficiaries of the plan. PVS
shall revise its guidelines as events warrant.
PVS shall report annually to its clients on proxy votes cast on their behalf.
These proxy voting reports will demonstrate PVS's compliance with its
responsibilities and will facilitate clients' monitoring of PVS. A copy of this
PROXY VOTING POLICY STATEMENT AND GUIDELINES is provided to each client at the
time PVS is retained. PVS shall provide its clients with revised copies of this
proxy voting policy statement and guidelines whenever significant revisions have
been made.
U.S. Policy and Guidelines
Page 4
BOARD OF DIRECTORS
Electing directors is the single most important stock ownership right that
shareholders can exercise. By electing directors who share their views,
shareholders can help to define performance standards against which management
can be held accountable.
According to the REPORT OF THE NATIONAL ASSOCIATION OF CORPORATE DIRECTORS' BLUE
RIBBON COMMISSION ON DIRECTOR PROFESSIONALISM (1996): "The accepted governance
paradigm is simple: management is accountable to the board and the board is
accountable to shareholders... In the view of the Commission, the board does
more than mechanically link those who manage the corporation and those who own
it... Rather, as a surrogate for dispersed ownership, the board is at the very
center of corporate governance itself."
PVS holds directors to a high standard when voting on their election,
qualifications, and compensation. PVS will evaluate directors fairly and
objectively, rewarding them for significant contributions and holding them
ultimately accountable to shareholders for corporate performance. Institutional
investors should use their voting rights in uncontested elections to influence
financial performance and corporate strategies for achieving long term
shareholder value.
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Votes concerning the entire board of directors are examined using the following
five factors:
o Poor long-term corporate performance record relative to its peer index and S&P
500;
o Lack of majority of independent directors or independence of the full board
and key board committees (fully independent audit, compensation, and nominating
committees);
o Diversity of board;
o Executive compensation related (excessive salaries/bonuses/pensions, history
of repricing underwater stock options, imprudent use of company resources,
misallocation of corporate assets, etc.); and
o Failure of the board to properly respond to majority votes on shareholder
proposals.
Votes on individual director nominees are made on a CASE-BY-CASE basis. Votes on
individual directors are examined using the following eight factors:
o Attendance of director nominees at board meetings of less than 75 percent in
one year without valid reason or explanation;
o Lack of independence on key board committees (i.e. audit, compensation, and
nominating committees);
o Failure to establish any key board committees (i.e. audit, compensation, or
nominating);
U.S. Policy and Guidelines
Page 5
o Directors serving on an excessive number of other boards which could
compromise their duties of care and loyalty;
o Chapter 7 bankruptcy, SEC violations, and criminal investigations;
o Interlocking directorships;
o Performance of compensation committee members related to egregious executive
compensation; and
o Performance of audit committee members concerning excessive non-audit fees and
the presence of auditor ratification upon the proxy ballot.
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Contested elections of directors frequently occur when a board candidate or
"dissident slate" seeks election for the purpose of achieving a significant
change in corporate policy or control of seats on the board. Competing slates
will be evaluated on a CASE-BY-CASE basis with a number of considerations in
mind. These include, but are not limited to, the following: personal
qualifications of each candidate; the economic impact of the policies advanced
by the dissident slate of nominees; and their expressed and demonstrated
commitment to the interests of the shareholders of the company.
Votes in a contested election of directors are evaluated on a CASE-BY-CASE basis
with the following seven factors in consideration:
o Long-term financial performance of the target company relative to its
industry;
o Management's historical track record;
o Background to the proxy contest;
o Qualifications of director nominees (both slates);
o Evaluation of what each side is offering shareholders as well as the
likelihood that the proposed objectives and goals in these proposals are
realistic, achievable, demonstrable and viable under the current conditions by
which the company operates;
o Equity ownership positions; and
o Total impact on all stakeholders.
CEO SERVING AS CHAIRMAN
Arguments have been made that a smaller company and its shareholders can benefit
from the full-time attention of a joint chairman and CEO. This may be so in
select cases (and indeed, using a case-by-case review of circumstances, there
may be worthy exceptions). But, even in these cases, it is our general view that
a person should only serve in the position of joint CEO and chairman on a
temporary basis. Once a company reaches a point of maturity, these positions
should be separated. Clearly, the prevalence of joint CEO/chairman positions in
boardrooms has stretched well beyond the small-cap universe of companies. Today,
roughly 60 percent of companies in both the S&P 500 and Russell 3000 fall into
this category.
U.S.Policy and Guidelines
Page 6
We strongly believe that the potential for conflicts of interest in the board's
supervisory and oversight duties trumps any possible corollary benefits that
could ensue from a dual CEO/chairman scenario. Instead of having an ingrained
quid pro quo situation whereby a company has a single leader overseeing both
management and the boardroom, we believe that it is the board's implicit duty to
assume an impartial and objective role in overseeing the executive team's
overall performance. Shareholder interests are placed in jeopardy if the CEO of
a company is required to report to a board that she/he also chairs. Inherent in
the chairman's job description is the duty to assess the CEO's performance. This
objectivity is obviously compromised when a chairman is in charge of evaluating
her/his own performance. Moreover, the unification of chairman and CEO poses a
direct threat to the smooth functioning of the entire board process since it is
the ultimate responsibility of the chairman to set the agenda, facilitate
discussion, and make sure that directors are given complete access to
information in order to make informed decisions.
Two major components at the top of every public company are the running of the
board and the executive responsibility for the running of the company's
business. Without doubt, there should be a clear division of responsibilities at
the head of the company that will ensure a balance of power and authority, such
that no one individual has unfettered powers of decision. When there is no clear
division between the executive and board branches of a company, poor executive
and/or board actions often go unchecked to the ultimate detriment of
shareholders.1
In the past, we have supported shareholder proposals calling to separate the
positions of CEO and chairman. Our revised policy2 is based upon this very
principle and is merely an extension of this tenet of sound corporate
governance.
o Generally WITHHOLD votes from a CEO who is also serving in the role of
chairman at the same company.
o Generally support shareholder proposals calling for the separation of the CEO
and chairman positions.
o Generally support shareholder proposals calling for a non-executive director
to serve as chairman who is not a former CEO or senior-level executive of the
company.
INDEPENDENT DIRECTORS
PVS believes that a board independent from management is of vital importance to
a company and its shareholders. Accordingly, PVS will cast votes in a manner
that shall encourage the independence of boards. Independence will be evaluated
based upon a number of factors, including: employment by the company or an
affiliate in an executive capacity; past or current employment by a firm that is
one of the company's paid advisors
- ----------------------------
1 Recent notable bankruptcies with joint chairman/CEOs include: John Rigas at
Adelphia, Ken Lay at Enron, Dennis Kozlowski at Tyco, and Linda Wachner at
Warnaco. U.S. Policy and Guidelines Page 7
2 New PVS policy implemented October 1, 2002.
U.S.Policy and Guidelines
Page 7
or consultants; personal services contract with the company; family
relationships of an executive or director of the company; interlocks with other
companies on which the company's chairman or chief executive officer is also a
board member; and service with a non-profit that receives significant
contributions from the company.
o Generally support shareholder proposals that request that the board be
comprised of a majority of independent directors.
o Vote FOR shareholder proposals requesting that the key board committees (i.e.
audit, compensation and/or nominating) include independent directors
exclusively.
o Vote AGAINST boards with a majority insider board composition.
DIRECTOR DIVERSITY
We support gender and ethnic diversity as an important component of a company's
board. Diversity brings different perspectives to a board that in turn leads to
a more varied approach to board issues. We believe that increasing diversity in
the boardroom to better reflect a company's workforce, customers, and community
enhances shareholder value.
o Support proposals asking the board to make greater efforts to search for
qualified female and minority candidates for nomination to the board of
directors.
o Support endorsement of a policy of board inclusiveness.
o Support reporting to shareholders on a company's efforts to increase diversity
on their boards.
STOCK OWNERSHIP REQUIREMENTS
Corporate directors should own some amount of stock of the companies on which
they serve as board members. Stock ownership is a simple method to align the
interests of directors with company shareholders. Nevertheless, many highly
qualified individuals such as academics and clergy who can offer valuable
perspectives in board rooms may be unable to purchase individual shares of
stock. In such a circumstance, the preferred solution is to look at the board
nominees individually and take stock ownership into consideration when voting on
the merits of each candidate.
o Vote AGAINST shareholder proposals requiring directors to own a minimum amount
of company stock in order to qualify as a director nominee or to remain on the
board.
BOARD STRUCTURE
The ability to elect directors is the single most important use of the
shareholder franchise, and all directors should be accountable on an annual
basis. Annually elected boards provide the best governance system for
accountability to shareholders. A classified board
U.S. Policy and Guidelines
Page 8
is a board that is divided into separate classes, with directors serving
overlapping terms. A company with a classified board usually divides the board
into three classes. Under this system, only one class of nominees comes up to
shareholder vote at the AGM each year.
As a consequence of these staggered terms, shareholders only have the
opportunity to vote on a single director approximately once every three years. A
classified board makes it difficult to change control of the board through a
proxy contest since it would normally take two years to gain control of a
majority of board seats. Under a classified board, the possibility of management
entrenchment greatly increases.
Many in management believe that staggered boards provide continuity. Some
shareholders believe that in certain cases a staggered board can provide
consistency and continuity in regard to decision-making and commitment that may
be important to the long-term financial future of the company.
Nevertheless, empirical evidence suggests that staggered boards may not in all
cases be in the shareholders best interests. A classified board can entrench
management and effectively preclude most takeover bids or proxy contests.
o Vote AGAINST classified boards when the issue comes up for vote.
LIMIT TERM OF OFFICE
Those who support term limits argue that this requirement would bring new ideas
and approaches on to a board. Here again we prefer to look at directors as
individuals rather than impose a strict rule.
o Generally vote AGAINST shareholder proposals to limit the tenure of outside
directors.
CUMULATIVE VOTING
Most corporations provide that shareholders are entitled to cast one vote for
each share owned. Under a cumulative voting scheme the shareholder is permitted
to have one vote per share for each director to be elected. Shareholders are
permitted to apportion those votes in any manner they wish among the director
candidates. Shareholders have the opportunity to elect a minority representative
to a board through cumulative voting, thereby ensuring representation for all
sizes of shareholders.
For example, if there is a company with a ten-member board and 500 shares
outstanding--the total number of votes that may be cast is 5,000. In this case a
shareholder with 51 shares (10.2 percent of the outstanding shares) would be
guaranteed one board seat because all votes may be cast for one candidate.
Without cumulative voting, anyone controlling 51 percent of shares would control
the election of all ten directors.
U.S. Policy and Guidelines
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Shareholders need to have flexibility in supporting candidates for a company's
board of directors. This is the only mechanism that minority shareholders can
use to be represented on a company's board.
o Vote AGAINST proposals to eliminate cumulative voting.
o Vote FOR proposals to permit cumulative voting.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION
Management proposals typically seek shareholder approval to adopt an amendment
to the company's charter to eliminate or limit the personal liability of
directors to the company and its shareholders for monetary damages for any
breach of fiduciary duty to the fullest extent permitted by state law. In
contrast, shareholder proposals seek to provide for personal monetary liability
for fiduciary breaches arising from gross negligence. While PVS recognizes that
a company may have a more difficult time attracting and retaining directors if
they are subject to personal monetary liability, PVS believes the great
responsibility and authority of directors justifies holding them accountable for
their actions.
Each proposal addressing director liability will be evaluated consistent with
this philosophy. PVS may support these proposals when the company persuasively
argues that such action is necessary to attract and retain directors, but PVS
may often oppose management proposals and support shareholder proposals in light
of our philosophy of promoting director accountability.
o Vote AGAINST proposals to limit or eliminate entirely director and officer
liability in regards to: (i) breach of the director's fiduciary "duty of
loyalty" to shareholders; (ii) acts or omissions not made in "good faith" or
involving intentional misconduct or knowledge of violations under the law; (iii)
acts involving the unlawful purchases or redemptions of stock; (iv) payment of
unlawful dividends; or (v) use of the position as director for receipt of
improper personal benefits.
INDEMNIFICATION
Indemnification is the payment by a company of the expenses of directors who
become involved in litigation as a result of their service to a company.
Proposals to indemnify a company's directors differ from those to eliminate or
reduce their liability because with indemnification directors may still be
liable for an act or omission, but the company will bear the expense. PVS may
support these proposals when the company persuasively argues that such action is
necessary to attract and retain directors, but will generally oppose
indemnification when it is being proposed to insulate directors from actions
they have already taken.
U.S. Policy and Guidelines
Page 10
o Vote AGAINST indemnification proposals that would expand individual coverage
beyond ordinary legal expenses to also cover specific acts of negligence which
exceed the standard of mere carelessness that is regularly covered in board
fiduciary indemnification.
o Vote FOR only those proposals which provide expanded coverage in cases when a
director's or officer's legal defense was unsuccessful if: (1) the director was
found to have acted in good faith and in a manner that he reasonably believed
was in the best interests of the company; and (2) only if the director's legal
expenses would be covered.
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PROXY CONTEST DEFENSES
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POISON PILLS
Shareholder rights plans, typically known as poison pills, take the form of
rights or warrants issued to shareholders and are triggered when a potential
acquiring stockholder reaches a certain threshold of ownership. When triggered,
poison pills generally allow shareholders to purchase shares from, or sell
shares back to, the target company ("flip-in pill") and/or the potential
acquirer ("flip-out pill") at a price far out of line with fair market value.
Depending on the type of pill, the triggering event can either transfer wealth
from the target company or dilute the equity holdings of current shareholders.
Poison pills insulate management from the threat of a change in control and
provide the target board with veto power over takeover bids. Because poison
pills greatly alter the balance of power between shareholders and management,
shareholders should be allowed to make their own evaluation of such plans.
o Vote FOR shareholder proposals that ask a company to submit its poison pill
for shareholder ratification.
o Review on a CASE-BY-CASE basis shareholder proposals to redeem a company's
poison pill.
o Review on a CASE-BY-CASE basis management proposals to ratify a poison pill.
o Votes should be WITHHELD from any board where a dead-hand poison pill
provision is in place. From a shareholder perspective, there is no justification
for a dead-hand provision. Directors of companies with these lethal protective
devices should be held accountable.
GREENMAIL
Greenmail payments are targeted share repurchases by management of company stock
from individuals or groups seeking control of the company. Since only the
hostile party receives payment, usually at a substantial premium over the market
value of shares, the practice discriminates against most shareholders. This
transferred cash, absent the greenmail payment, could be put to much better use
for reinvestment in the company, payment of dividends, or to fund a public share
repurchase program.
o Vote FOR proposals to adopt an anti-greenmail provision in their charter or
bylaws that would thereby restrict a company's ability to make greenmail
payments to certain shareholders.
o Review on a CASE-BY-CASE basis all anti-greenmail proposals when they are
presented as bundled items with other charter or bylaw amendments.
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SHAREHOLDER ABILITY TO REMOVE DIRECTORS
Shareholder ability to remove directors, with or without cause, is either
prescribed by a state's business corporation law, individual company's articles
of incorporation, or its corporate bylaws. Many companies have sought
shareholder approval for charter or bylaw amendments that would prohibit the
removal of directors except for cause, thus ensuring that directors would retain
their directorship for their full-term unless found guilty of self-dealing. By
requiring cause to be demonstrated through due process, management insulates the
directors from removal even if a director has been performing poorly, not
attending meetings, or not acting in the best interests of shareholders.
o Vote AGAINST proposals that provide that directors may be removed only for
cause.
o Vote FOR proposals which seek to restore the authority of shareholders to
remove directors with or without cause.
o Vote AGAINST proposals that provide only continuing directors may elect
replacements to fill board vacancies.
o Vote FOR proposals that permit shareholders to elect directors to fill board
vacancies.
SHAREHOLDER ABILITY TO ALTER THE SIZE OF THE BOARD
Proposals which would allow management to increase or decrease the size of the
board at its own discretion are often used by companies as a takeover defense.
PVS supports management proposals to fix the size of the board at a specific
number, thus preventing management when facing a proxy context from increasing
the board size without shareholder approval. By increasing the size of the
board, management can make it more difficult for dissidents to gain control of
the board. Fixing the size of the board also prevents a reduction in the size of
the board as a strategy to oust independent directors. Fixing board size also
prevents management from increasing the number of directors in order to dilute
the effects of cumulative voting.
o Vote FOR proposals that seek to fix the size of the board.
o Vote AGAINST proposals that give management the ability to alter the size of
the board without shareholder approval.
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AUDITORS
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AUDITOR RATIFICATION
The ratification of auditors is an important component of good governance. The
wave of recent accounting scandals at companies illuminate the need to ensure
auditor independence in the face of selling consulting services to audit
clients. At the Big Five (now Final Four) accounting firms, revenues from
non-audit services grew from 13% of total revenues in 1981 to half of total
revenue in 2000. A recent study of over 1,200 US companies in the S&P 500, Mid
Cap, and Small Cap indices found that 72% of fees paid to auditors in 2002 were
for non-audit services, exactly the same level as 2001. We believe that the
ratio should be reversed, and that non-audit fees should make up no more
one-quarter of all fees paid to the auditor so as to properly discourage even
the appearance of any undue influence upon an auditor's objectivity.
As auditors are the backbone upon which a company's financial health is
measured, auditor independence is absolutely essential for rendering objective
opinions upon which investors then rely. When an auditor is paid excessive
consulting fees in addition to fees paid for auditing, the company/auditor
relationship is left open to conflicts of interest. Because accounting scandals
evaporate shareholder value, any proposal to ratify auditors is examined for
potential conflicts of interest, with particular attention to the fees paid to
the auditor.
o Vote FOR proposals to ratify auditors when the amount of audit fees is equal
to or greater than three times the amount paid for consulting, unless: i) an
auditor has a financial interest in or association with the company, and is
therefore not independent; or ii) 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 Vote AGAINST proposals to ratify auditors when the amount of audit fees is
less than three times greater than that for consulting fees.
o WITHHOLD votes from Audit Committee members in cases where consulting fees
exceed audit fees.
o Generally support shareholder proposals to ensure auditor independence through
measures such as mandatory auditor rotation (no less than every five years) or
prohibiting companies from buying consulting services from their auditor.
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MERGERS AND ACQUISITIONS
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Votes on mergers and acquisitions are considered on a CASE-BY-CASE basis, taking
into account at least the following:
o Impact of the merger on shareholder value;
o Anticipated financial and operating benefits realizable through combined
synergies;
o Offer price (cost vs. premium).
o Financial viability of the combined companies as a single entity;
o Was the deal put together in good faith? Were negotiations carried out at
arm's length? Was any portion of the process tainted by possible conflicts of
interest?;
o Fairness opinion (or lack thereof);
o Changes in corporate governance and their impact on shareholder rights; and
o Impact on community stakeholders and employees in both workforces.
FAIR PRICE PROVISIONS
Fair price provisions were originally designed to specifically defend against
the most coercive of takeover devises-- the two-tiered, front-end loaded tender
offer. In such a hostile takeover, the bidder offers cash for enough shares to
gain control of the target. At the same time, the acquirer states that once
control has been obtained, the target's remaining shares will be purchased with
cash, cash and securities, or only securities. Since the payment offered for the
remaining stock is, by design, less valuable than the original offer for the
controlling shares, shareholders are forced to sell out early to maximize the
value of their shares. Standard fair price provisions require that-- absent of
board or shareholder approval of the acquisition-- the bidder must pay the
remaining shareholders the same price for their shares that brought control.
o Vote FOR fair price proposals as long as the shareholder vote requirement
embedded in the provision is no more than a majority of disinterested shares.
o Vote FOR shareholder proposals to lower the shareholder vote requirement in
existing fair price provisions.
CORPORATE RESTRUCTURING
Votes concerning corporate restructuring proposals, including minority
squeezeouts, leveraged buyouts, spin-offs, liquidations, and asset sales, are
considered on a CASE-BY-CASE basis.
APPRAISAL RIGHTS
Rights of appraisal provide shareholders who do not approve of the terms of
certain corporate transactions the right to demand a judicial review in order to
determine the fair
U.S. Policy and Guidelines
Page 15
value for their shares. The right of appraisal applies to mergers, sale of
corporate assets, and charter amendments that may have a materially adverse
effect on the rights of dissenting shareholders.
o Vote FOR proposals to restore or provide shareholders with the right of
appraisal.
SPIN-OFFS
Votes on spin-offs are considered on a CASE-BY-CASE basis depending on the tax
and regulatory advantages, planned use of sale proceeds, market focus, and
managerial incentives.
ASSET SALES
Votes on asset sales are made on a CASE-BY-CASE basis after considering the
impact on the balance sheet/working capital, value received for the asset, and
potential elimination of diseconomies.
LIQUIDATIONS
Votes on liquidations are made on a CASE-BY-CASE basis after reviewing
management's efforts to pursue other alternatives, appraisal value of assets,
and the compensation plan for executives managing the liquidation.
CHANGING CORPORATE NAME
Vote FOR changing the corporate name in all instances if proposed and supported
by management.
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SHAREHOLDER RIGHTS
- --------------------------------------------------------------------------------
CONFIDENTIAL VOTING
The confidential ballot ensures that voters are not subject to real or perceived
coercion. In an open voting system, management can determine who has voted
against its nominees or proposals before a final vote count. As a result,
shareholders can be pressured to vote with management at companies with which
they maintain or would like to establish a business relationship.
o Vote FOR shareholder proposals that request corporations to adopt confidential
voting, use independent tabulators, and use independent inspectors of election
as long as the proposals include clauses for proxy contests as follows: in the
case of a contested election, management is permitted to request that the
dissident group honor its confidential voting policy. If the dissidents agree,
the policy remains in place. If the dissidents do not agree, the confidential
voting policy is waived.
o Vote FOR management proposals to adopt confidential voting procedures.
SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS
Most state corporation statutes allow shareholders to call a
special meeting when they want to take action on certain matters that arise
between regularly scheduled annual meetings. Sometimes this right applies only
if a shareholder or a group of shareholders own a specified percentage of
shares, with ten percent being the most common. Shareholders may lose the
ability to remove directors, initiate a shareholder resolution, or respond to a
beneficial offer without having to wait for the next scheduled meeting if they
are unable to act at a special meeting of their own calling.
o Vote AGAINST proposals to restrict or prohibit shareholder ability to call
special meetings.
o Vote FOR proposals that remove restrictions on the right of shareholders to
act independently of management.
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Consent solicitations allow shareholders to vote on and respond to shareholder
and management proposals by mail without having to act at a physical meeting. A
consent card is sent by mail for shareholder approval and only requires a
signature for action. Some corporate bylaws require supermajority votes for
consents, while at others standard annual meeting rules apply. Shareholders may
lose the ability to remove directors, initiate a shareholder resolution, or
respond to a beneficial offer without having to wait for the next scheduled
meeting if they are unable to act at a special meeting of their own calling.
U.S. Policy and Guidelines
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o Vote AGAINST proposals to restrict or prohibit shareholder ability to take
action by written consent.
o Vote FOR proposals to allow or make easier shareholder action by written
consent.
EQUAL ACCESS
The process for electing directors can be improved since a company currently
nominates for election only one candidate for each board seat, leaving
shareholders with no practical choice in most director elections. Shareholders
who oppose a candidate have no easy way to do so unless they are willing to
undertake the considerable expense of running an independent candidate for the
board. The current system is that of a truly limited democracy, whereby voters
are not given a choice of multiple candidates for each directorship, but are
only allowed to register their approval or disapproval of one candidate for each
director's seat. The only way to register dissent about a given candidate is to
withhold support from that nominee. Truly democratic director elections should
offer a choice, thereby allowing a far healthier and more rigorous shareholder
evaluation and debate about which specific nominees are best qualified. A more
open and rigorous election process would give shareholders an actual choice and
give them far greater say in choosing the directors most able to represent their
interests.
o Vote FOR shareholder proposals that would allow significant company
shareholders equal access to management's proxy material in order to evaluate
and propose voting recommendations on proxy proposals and director nominees, and
in order to nominate their own candidates to the board.
UNEQUAL VOTING RIGHTS
Incumbent managers are able to use unequal voting rights through the creation of
a separate class of shares which have superior voting rights to the common
shares of regular shareholders. This separate class of shares with
disproportionate voting power allows management to concentrate its power and
insulate itself from the wishes of the majority of shareholders. Dual class
exchange offers involve a transfer of voting rights from one group of
shareholders to another group of shareholders typically through the payment of a
preferential dividend. A dual class recapitalization plan also establishes two
classes of common stock with unequal voting rights, but initially involves an
equal distribution of preferential and inferior voting shares to current
shareholders.
o Vote FOR resolutions that seek to maintain or convert to a one share, one vote
capital structure.
o Vote AGAINST requests for the creation or continuation of dual class capital
structures or the creation of new or additional super-voting shares.
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SUPERMAJORITY SHAREHOLDER VOTE REQUIREMENT TO AMEND THE CHARTER OR BYLAWS
Supermajority shareholder vote requirements for charter or bylaw amendments are
often the result of "lock-in" votes, which are the votes required to repeal new
provisions to the corporate charter. Supermajority provisions violate the
principle that a simple majority of voting shares should be all that is
necessary to effect change regarding a company and its corporate governance
provisions. Requiring more than this may entrench managers by blocking actions
that are in the best interests of shareholders.
o Vote AGAINST management proposals to require a supermajority shareholder vote
to approve charter and bylaw amendments.
o Vote AGAINST management proposals seeking to lower supermajority shareholder
vote requirements when they accompany management sponsored proposals to also
change certain charter or bylaw amendments.
o Vote FOR shareholder proposals to lower supermajority shareholder vote
requirements for charter and bylaw amendments.
SUPERMAJORITY SHAREHOLDER VOTE REQUIREMENT TO APPROVE MERGERS
Supermajority provisions violate the principle that a simple majority of voting
shares should be all that is necessary to effect change regarding a company and
its corporate governance provisions. Requiring more than this may entrench
managers by blocking actions that are in the best interests of shareholders.
o Vote AGAINST management proposals to require a supermajority shareholder vote
to approve mergers and other significant business combinations.
o Vote FOR shareholder proposals to lower supermajority shareholder vote
requirements for mergers and other significant business combinations.
REIMBURSE PROXY SOLICITATION EXPENSES
Decisions to provide full reimbursement for dissidents waging a proxy contest
are made on a CASE-BY-CASE basis.
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CAPITAL STRUCTURE
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The management of a corporation's capital structure involves a number of
important issues including dividend policy, types of assets, opportunities for
growth, ability to finance new projects internally, and the cost of obtaining
additional capital. Many financing decisions have a significant impact on
shareholder value, particularly when they involve the issuance of additional
common stock, preferred stock, or debt.
COMMON STOCK AUTHORIZATION
State statutes and stock exchanges require shareholder approval for increases in
the number of common shares. Corporations increase their supply of common stock
for a variety of ordinary business purposes: raising new capital, funding stock
compensation programs, business acquisitions, implementation of stock splits, or
payment of stock dividends.
PVS supports management proposals requesting shareholder approval to increase
authorized common stock when management provides persuasive justification for
the increase. For example, PVS will support increases in authorized common stock
to fund stock splits that are in shareholders' interests. PVS will evaluate on a
CASE-BY-CASE basis on proposals when the company intends to use the additional
stock to implement a poison pill or other takeover defense. PVS will evaluate
the amount of additional stock requested in comparison to the requests of the
company's peers as well as the company's articulated reason for the increase.
o Review on a CASE-BY-CASE basis proposals to increase the number of shares of
common stock authorized for issue.
o Vote AGAINST proposed common stock authorizations that increase the existing
authorization by more than 50 percent unless a clear need for the excess shares
is presented by the company.
REVERSE STOCK SPLITS
Reverse splits exchange multiple shares for a lesser amount to increase share
price. Increasing share price is sometimes necessary to restore a company's
share price to a level that will allow it to be traded on the national stock
exchanges. In addition, some brokerage houses have a policy of not monitoring or
investing in very low priced shares. Reverse stock splits can help maintain
stock liquidity.
We will review management proposals to implement a reverse stock split on a
CASE-BY-CASE basis, taking into account whether there is a corresponding
proportional decrease in authorized shares. We will generally support a reverse
stock split if management provides a reasonable justification for the split and
reduces authorized shares accordingly. Without a corresponding decrease, a
reverse stock split is effectively
U.S. Policy and Guidelines
Page 20
an increase in authorized shares by reducing the number of shares outstanding
while leaving the number of authorized shares to be issued at the pre-split
level.
BLANK CHECK PREFERRED AUTHORIZATION
Preferred stock is an equity security which has certain features similar to debt
instruments-- such as fixed dividend payments and seniority of claims to common
stock-- and usually carries little to no voting rights. The terms of blank check
preferred stock give the board of directors the power to issue shares of
preferred stock at their discretion with voting, conversion, distribution, and
other rights to be determined by the board at time of issue. Blank check
preferred stock can be used for sound corporate purposes but can also be used as
a device to thwart hostile takeovers without shareholder approval.
o Vote FOR proposals to create blank check preferred stock in cases when the
company expressly states that the stock will not be used as a takeover defense
or carry superior voting rights.
o Review on a CASE-BY-CASE basis proposals that would authorize the creation of
new classes of preferred stock with unspecified voting, conversion, dividend,
distribution, and other rights.
o Review on a CASE-BY-CASE basis proposals to increase the number of authorized
blank check preferred shares. If the company does not have any preferred shares
outstanding, we will vote AGAINST the requested increase.
o Vote FOR shareholder proposals to have blank check preferred stock placements,
other than those shares issued for the purpose of raising capital or making
acquisitions in the normal course of business, submitted for shareholder
ratification.
ADJUST PAR VALUE OF COMMON STOCK
Stock that has a fixed per share value that is on its certificate is called par
value stock. The purpose of par value stock is to establish the maximum
responsibility of a stockholder in the event that a corporation becomes
insolvent. Proposals to reduce par value come from certain state level
requirements for regulatory industries such as banks and other legal
requirements relating to the payment of dividends.
o Vote FOR management proposals to reduce the par value of common stock.
PREEMPTIVE RIGHTS
Preemptive rights permit shareholders to share proportionately in any new issues
of stock of the same class. These rights guarantee existing shareholders the
first opportunity to purchase shares of new issues of stock in the same class as
their own and in the same proportion. The absence of these rights could cause
stockholders' interest in a company
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to be reduced by the sale of additional shares without their knowledge and at
prices unfavorable to them. Preemptive rights, however, can make it difficult
for corporations to issue large blocks of stock for general corporate purposes.
Both corporations and shareholders benefit when corporations are able to arrange
issues without preemptive rights that do not result in a substantial transfer of
control.
o Review on a CASE-BY-CASE basis proposals to create or abolish preemptive
rights. In evaluating proposals on preemptive rights, we look at the size of a
company and the characteristics of its shareholder base.
DEBT RESTRUCTURING
We review on a CASE-BY-CASE basis proposals to increase common and/or preferred
shares and to issue shares as part of a debt restructuring plan. We consider the
following issues:
o DILUTION: How much will ownership interests of existing shareholders be
reduced and how extreme will dilution to any future earnings be?
o CHANGE IN CONTROL: Will the transaction result in a change-in-control of the
company?
o BANKRUPTCY: How real is the threat of bankruptcy? Is bankruptcy the main
factor driving the debt restructuring? Would the restructuring result in severe
loss to shareholder value?
o POSSIBLE SELF-DEALINGS: Generally approve proposals that facilitate debt
restructuring unless there are clear signs of self-dealing or other abuses.
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COMPENSATION
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STOCK OPTION PLANS
PVS supports compensating executives at a reasonable rate and believes that
executive compensation should be strongly correlated to performance. PVS
supports stock options as a significant component of compensation. Stock option
and other forms of compensation should be performance-based with an eye toward
improving shareholder value. Well-designed stock option plans align the
interests of executives and shareholders by providing that executives benefit
when stock prices rise as the company-- and shareholders-- prosper together.
Many plans sponsored by management provide goals so easily attained that
executives can realize massive rewards even though shareholder value is not
necessarily created. PVS will support option plans that provide legitimately
challenging performance targets that serve to truly motivate executives in the
pursuit of excellent performance. Likewise, we will oppose plans that offer
unreasonable benefits to executives that are not available to any other
shareholders.
PVS will consider whether the proposed plan is being offered at fair market
value or at a discount; whether the plan excessively dilutes the earnings per
share of the outstanding shares; and whether the plan gives management the
ability to replace or reprice "underwater" options. Repricing is an amendment to
a previously granted stock option contract that reduces the option exercise
price. Options are "underwater" when their current price is below the current
option contract price. Options can also be repriced through cancellations and
re-grants. The typical new grant would have a ten-year term, new vesting
restrictions, and a lower exercise price reflecting the current lower market
price. PVS will also consider any other features of the plan that may not be in
shareholders' best interest.
In general, we consider executive and director compensation plans on a
CASE-BY-CASE basis. When evaluating executive and director compensation matters,
we review the following three elements:
o DILUTION: Vote AGAINST plans in which the potential voting power dilution
(VPD) of all shares outstanding exceeds 12 percent.
o FULL MARKET VALUE: Awards must be granted at 100 percent of fair market value
on the date of grant. However, in instances when a plan is open to broad-based
employee participation and excludes the five most highly compensated employees,
we accept a 15 percent discount.
o REPRICING: Vote AGAINST plans if the company's policy permits repricing of
"underwater" options or if the company has a history of repricing past options.
However, in instances when repricing is put up for a shareholder vote, we will
vote FOR the repricing of shares under the following four conditions:
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o The repricing is value for value;
o If the five most highly compensated employees are excluded from the repricing;
o If the plan is broad based; and
o If the current vesting schedule is maintained.
STOCK OPTION EXPENSING
The theory that stock options are beneficial to shareholders because they
motivate management and align the interests of investors with those of
executives is no longer held sacrosanct. The fact that companies reprice
underwater options exposes the initial fallacy of this theory. A recent
long-term study of stock option awards from the Indiana University School of
Business found that there was no correlation whatsoever between executive stock
ownership and company performance. Given their accounting treatment of not being
charged as an expense against earnings, stock options have been the ultimate tax
dodge for companies wishing to lavishly compensate employees.
Misused stock options can give executives an incentive to inflate their
company's earnings or make irresponsibly optimistic forecasts in order to keep
stock prices high and their paychecks gargantuan. Alan Greenspan cautioned that
the failure to expense stock option grants has "introduced a significant
distortion in reported earnings, one that has grown with the increasing
prevalence of this form of compensation." Some companies have chosen to
acknowledge the distortion caused by the non-expensing of options and have
committed to expense options going forward. And beginning in 2003, the SEC will
no longer exclude stock option expensing proposals from the proxy ballot using
the ordinary business exception rules.
o Support shareholder resolutions calling for stock option grants to be treated
as an expense for accounting and earnings calculation purposes.
OBRA-RELATED COMPENSATION PROPOSALS
o Vote FOR amendments that place a cap on annual grants or amend administrative
features.
o Vote FOR plans that simply amend shareholder-approved plans to include
administrative features or place a cap on the annual grants that any one
participant may receive in order to comply with the provisions of Section 162(m)
of OBRA.
AMENDMENTS TO ADD PERFORMANCE-BASED GOALS
Section 162(m) of the IRS Code Section limits the deductibility of compensation
in excess of $1 million to a named executive officer unless certain prescribed
actions are taken including shareholder approval and the establishment of
performance goals.
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o Vote FOR amendments to add performance goals to existing compensation plans to
comply with the provisions of Section 162(m) of OBRA.
AMENDMENTS TO INCREASE SHARES AND RETAIN TAX DEDUCTIONS UNDER OBRA
Amendments to existing plans to increase shares reserved and to qualify the plan
for favorable tax treatment under the provisions of Section 162(m) should be
evaluated on a CASE-BY-CASE basis.
APPROVAL OF CASH OR CASH-AND-STOCK BONUS PLANS
o Generally vote AGAINST cash or cash-and-stock bonus plans to exempt the
compensation from taxes under the provisions of Section 162(m) of OBRA if the
plan provides for awards to individual participants in excess of $2 million a
year.
o Vote AGAINST plans that are deemed to be "excessive" because they are not
justified by performance measures.
PERFORMANCE BASED OPTIONS
Stock options are intended to align the interests of management with those of
shareholders. However, stock option grants without performance-based elements
can excessively compensate executives for stock increases due solely to a
general stock market rise, rather than improved or superior company stock
performance. When option grants reach the hundreds of thousands, a relatively
small increase in the share price may permit executives to reap millions of
dollars without providing material benefits to shareholders.
PVS advocates performance based options, such as premium-priced or indexed,
which encourage executives to outperform rivals and the market as a whole rather
than being rewarded for any rise in the share price, which can occur if there
are not empirical performance measures incorporated into the structure of the
options. Additionally, it should be noted that performance-accelerated vesting
and premium priced options allow fixed plan accounting, whereas
performance-vested and indexed options entail certain expensing requirements.
o Generally vote FOR shareholder proposals that seek to provide for performance
based options such as indexed and/or premium priced options.
SHAREHOLDER PROPOSALS TO LIMIT EXECUTIVE AND DIRECTOR PAY
o Generally vote FOR shareholder proposals that seek additional disclosure of
executive and director pay information. Current SEC requirements only call for
the disclosure of
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the top 5 most highly compensated executives and only if they earn more than
$100,000 in salary and benefits.
o Generally vote FOR shareholder proposals that seek to eliminate outside
directors' retirement benefits.
o Review on a CASE-BY-CASE basis all other shareholder proposals that seek to
limit executive and director pay. This includes shareholder proposals that seek
to link executive compensation to customer, employee, or stakeholder
satisfaction.
GOLDEN AND TIN PARACHUTES
Golden parachutes are designed to protect the employees of a corporation in the
event of a change-in-control. Under most golden parachute agreements, senior
level management employees receive a lump sum pay-out triggered by a
change-in-control at usually two to three times base salary. Increasingly,
companies that have golden parachute agreements for senior level executives are
extending coverage for all their employees via "tin" parachutes. The SEC
requires disclosure of all golden parachute arrangements in the proxy statement,
while disclosure of tin parachutes in company filings is not required at this
time.
o Vote FOR shareholder proposals to all have golden and tin Parachute agreements
submitted for shareholder ratification.
o Generally vote AGAINST all proposals to ratify golden parachutes.
o Vote on tin parachutes on a CASE-BY-CASE basis.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS)
An Employee Stock Ownership Plan (ESOP) is an employee benefit plan that makes
the employees of a company also owners of stock in that company. Recently, a
large Rutgers University study of the performance of ESOPs in closely held
companies found that ESOPs appear to increase overall sales, employment, and
sales per employee over what would have been expected absent an ESOP. The study
also found that ESOP companies are also more likely to still be in business
several years later, and are more likely to have other retirement-oriented
benefit plans than comparable non-ESOP companies.
o Vote FOR proposals that request shareholder approval in order to implement an
ESOP or to increase authorized shares for existing ESOPs except in cases when
the number of shares allocated to the ESOP is deemed "excessive" (i.e. generally
greater than five percent of outstanding shares).
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STATE OF INCORPORATION
- --------------------------------------------------------------------------------
VOTING ON STATE TAKEOVER STATUTES
We review on a CASE-BY-CASE basis proposals to opt in or out of state takeover
statutes (including control share acquisition statutes, control share cash-out
statutes, freezeout provisions, fair price provisions, stakeholder laws, poison
pill endorsements, severance pay and labor contract provisions, anti-greenmail
provisions, and disgorgement provisions). We generally support opting into
stakeholder protection statutes if they provide comprehensive protections for
employees and community stakeholders. We would be less supportive of takeover
statutes that only serve to protect incumbent management from accountability to
shareholders and which negatively influence shareholder value.
OFFSHORE REINCORPORATIONS & TAX HAVENS
For a company that seeks to reincorporate, we evaluate the merits of the move on
a CASE-BY-CASE basis, taking into consideration the company's strategic
rationale for the move, the potential economic ramifications, potential tax
benefits, and any corporate governance changes that may impact shareholders. We
believe there are a number of concerns associated with a company looking to
reincorporate from the United States to exotic locales such as Bermuda, the
Cayman Islands or Panama. The trend of U.S. companies seeking to move offshore
appears to be on the rise, and shareholders are just beginning to understand the
web of complexities surrounding the legal, tax, and governance implications
involved in such a transaction.
When reviewing a proposed offshore move, we will consider the following factors:
o Legal recourse for U.S. stockholders of the new company and the enforcement of
legal judgments against the company under the U.S. securities laws;
o The transparency (or lack thereof) of the new locale's legal system;
o Adoption of any shareholder-unfriendly corporate law provisions;
o Actual, qualified tax benefits;
o Potential for accounting manipulations and/or discrepancies;
o Any pending U.S. legislation concerning offshore companies; and
o Prospects of reputational harm and potential damage to brand name via
increased media coverage concerning corporate expatriation.
Furthermore, PVS will generally support shareholder requests calling for
"expatriate" companies that are domiciled abroad yet predominantly owned and
operated in America to re-domesticate back to a U.S. state jurisdiction.
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CORPORATE RESPONSIBILITY & ACCOUNTABILITY
SOCIAL, ENVIRONMENTAL AND SUSTAINABILITY ISSUES
- --------------------------------------------------------------------------------
In general, we support social, workforce, and environmental
shareholder-sponsored resolutions if they seek to create responsible corporate
citizens while at the same time attempting to enhance long-term shareholder
value.
In most cases, we will support proposals that ask for disclosure reporting of
additional information that is not available outside the company and that is not
proprietary in nature. Such reporting is particularly most vital when it appears
that a company has not adequately addressed shareholder concerns regarding
social, workplace, environmental and/or other issues.
In determining our vote on social, workplace, environmental, and other related
proposals, we specifically analyze the following factors:
o Whether adoption of the proposal would have either a positive or negative
impact on the company's short-term or long-term share value;
o Percentage of sales, assets, and earnings affected;
o Degree to which the company's stated position on the issues could affect its
reputation or sales, or leave it vulnerable to boycott or selective
purchasing;
o Whether the issues presented should be dealt with through government or
company-specific action;
o Whether the company has already responded in some appropriate manner to the
request embodied in a proposal;
o Whether the company's analysis and voting recommendation to shareholders is
persuasive;
o What its industry peers have done in response to the issue;
o Whether the proposal itself is well framed and reasonable;
o Whether implementation of the proposal would achieve the objectives sought in
the proposal; and
o Whether the subject of the proposal is best left to the
discretion of the board.
In general, we support proposals that request the company to furnish information
helpful to shareholders in evaluating the company's operations. In order to be
able to intelligently monitor their investments, shareholders often need
information best provided by the company in which they have invested. Requests
to report such information merits support.
We will evaluate proposals requesting the company to cease taking certain
actions that the proponent believes is harmful to society or some segment of
society with special attention to the company's legal and ethical obligations,
its ability to remain profitable, and potential negative publicity if the
company fails to honor the request.
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SPECIAL POLICY REVIEW AND SHAREHOLDER ADVISORY COMMITTEES
These resolutions propose the establishment of special committees of the board
to address broad corporate policy and provide forums for ongoing dialogue on
issues including, but not limited to: shareholder relations, the environment,
occupational health and safety, and executive compensation.
o Support these proposals when they appear to offer a potentially effective
method for enhancing shareholder value.
MILITARY SALES
Shareholder proposals from church groups ask companies for detailed reports on
foreign military sales. These proposals often can be created at reasonable cost
to the company and contain no proprietary data. Large companies can supply this
information without undue burden and provide shareholders with information
affecting corporate performance and decision making.
o Generally support reports on foreign military sales and economic conversion of
facilities.
o Generally vote AGAINST proposals asking a company to develop specific military
contracting criteria.
POLITICAL CONTRIBUTIONS REPORTING
We believe employees should not be put in position where professional standing
and goodwill within the corporation could be jeopardized as a result of
political beliefs. Responsible employment practices should protect workers from
an environment characterized by political indoctrination or intimidation.
Corporations should not devote resources to partisan political activities, nor
should they compel their employees to contribute to or support particular
causes. Moreover, we believe it is wise for a corporation to maintain a
politically neutral stance as to avoid potentially embarrassing conflicts of
interests that could negatively impact the company's brand name with consumers.
Shareholders have the right to know about corporate political activities, and
management's knowledge that such information can be made publicly available
should encourage a company's lawful and responsible use of political
contributions.
o Support proposals affirming political non-partisanship.
o Support reporting of political and political action committee (PAC)
contributions.
o Support establishment of corporate political contributions guidelines and
reporting provisions.
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EQUAL EMPLOYMENT OPPORTUNITY AND OTHER WORK PLACE PRACTICE REPORTING ISSUES
These proposals generally request that a company establish a policy of reporting
to shareholders its progress with equal opportunity and affirmative action
programs. The costs of violating federal laws that prohibit discrimination by
corporations are high and can affect corporate earnings.
The Equal Opportunities Employment Commission (EEOC) does not release the
company's filings to the public unless it is involved in litigation, and it is
difficult to obtain from other sources. Companies need to be very sensitive to
minority employment issues as the new evolving work force becomes increasingly
diverse. This information can be provided with little cost to the company and
does not create an unreasonable burden on management.
o Vote FOR proposals calling for action on equal employment opportunity and
anti-discrimination.
o Vote FOR legal and regulatory compliance and public reporting related to
non-discrimination, affirmative action, workplace health and safety,
environmental issues, and labor policies and practices that affect long-term
corporate performance.
o Vote FOR non-discrimination in salary, wages, and all benefits.
HIGH-PERFORMANCE WORKPLACE
High-performance workplace practices emphasize employee training, participation,
and feedback. The concept of a high-performance workplace has been endorsed by
the U.S. Department of Labor and refers to a workplace that is designed to
provide workers with the information, skills, incentives, and responsibility to
make decisions essential for innovation, quality improvement and rapid response
to changes in the marketplace. These standards embrace a "what's good for the
worker is good for the company" philosophy. Studies have shown that improvement
in human resources practices is associated with increases in total return to
shareholders. High-performance workplace standards proposals can include linking
compensation to social measures such as employee training, morale and safety,
environmental performance and workplace lawsuits.
o Generally support proposals that incorporate high-performance workplace
standards.
NON-DISCRIMINATION IN RETIREMENT BENEFITS
A cash balance plan is a defined benefit plan that treats an earned retirement
benefit as if it were a credit from a defined contribution plan, but which
provides a stated benefit at the end of its term. Because employer contributions
to these plans are credited evenly over the life of a plan and not based on a
seniority formula, they may reduce pay-outs to long term employees who are
currently vested in plans.
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Cash-balance pension conversions are undergoing congressional and federal agency
scrutiny in the wake of high-profile EEOC complaints on age discrimination and
employee anger at companies like IBM. While significant policy reform is
unlikely in the short-term, business interests are worried enough that the
NATIONAL ASSOCIATION OF MANUFACTURERS and other pro-business lobbies are forming
a coalition on Capitol Hill to preserve the essential features of the plans and
to overturn a recent IRS ruling.
Driving the push behind conversions from traditional pension plans to
cash-balance plans are the substantial savings that companies generate in the
process. Critics point out that this savings is gained at the expense of the
most senior employees. Resolutions call on corporate boards to establish a
committee of outside directors to prepare a report to shareholders on the
potential impact of pension-related proposals now being considered by national
policymakers in reaction to the controversy spawned by the plans.
o Support non-discrimination in retirement benefits.
FAIR LENDING
These resolutions call for financial institutions to comply with fair lending
laws and statutes while avoiding predatory practices in their subprime lending.
These predatory practices include: lending to borrowers with inadequate income,
who will then default; not reporting on payment performances of borrowers to
credit agencies; implying that credit life insurance is necessary to obtain the
loan (packing); unnecessarily high fees; refinancing with high additional fees
rather than working out a loan that is in arrears (flipping); and high
pre-payment fees.
o Support compliance with fair-lending laws.
o Support reporting on overall lending policies and data.
CERES PRINCIPLES
These resolutions call for the adoption of principles that encourage the company
to protect the environment and the safety and health of its employees.
The CERES Principles, formulated by the Coalition of Environmentally Responsible
Economies, require signing companies to address environmental issues, including
protection of the biosphere, sustainable use of natural resources, reduction and
disposal of wastes, energy conservation, and employee and community risk
reduction. A signee to the CERES Principles would disclose its efforts in such
areas through a standardized report submitted to CERES and made available to the
public.
Evidence suggests that environmentally conscious companies may realize long-term
savings by implementing programs to pollute less and conserve resources. In
addition,
U.S. Policy and Guidelines
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environmentally responsible companies stand to benefit from good public
relations and new marketing opportunities. Moreover, the reports that are
required of signing companies provide shareholders with more information
concerning topics they may deem relevant to their company's financial well
being.
Many companies have voluntarily adopted these principles. PVS supports proposals
that improve a company's public image, reduce exposure to liabilities, and
establish standards so that environmentally responsible companies and markets
are not at a competitive financial disadvantage.
o Vote FOR the adoption of the CERES Principles.
o Vote FOR adoption of reports to shareholders on environmental issues.
MACBRIDE PRINCIPLES
These resolutions call for the adoption of the MacBride Principles for
operations located in Northern Ireland. They request companies operating abroad
to support the equal employment opportunity policies that apply in facilities
they operate domestically. The principles were established to address the
sectarian hiring problems between Protestants and Catholics in Northern Ireland.
It is well documented that Northern Ireland's Catholic community faces much
higher unemployment figures than the Protestant community. In response to this
problem, the U.K. government instituted the New Fair Employment Act of 1989 (and
subsequent amendments) to address the sectarian hiring problems.
Many companies believe that the Act adequately addresses the problems and that
further action, including adoption of the MacBride Principles, only duplicates
the efforts already underway. In evaluating a proposal to adopt the MacBride
Principles, shareholders must decide whether the principles will cause companies
to divest, and therefore worsen the unemployment problem, or whether the
principles will promote equal hiring practices. Proponents believe that the Fair
Employment Act does not sufficiently address the sectarian hiring problems. They
argue that the MacBride Principles will stabilize the situation and promote
further investment.
o Support the MacBride Principles for operations in Northern Ireland that
request companies to abide by equal employment opportunity policies.
CONTRACT SUPPLIER STANDARDS
These resolutions call for compliance with governmental mandates and corporate
policies regarding nondiscrimination, affirmative action, work place safety and
health, and other basic labor protections.
PVS will generally support proposals that:
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o Seek publication of a "Worker Code of Conduct" to the company's foreign
suppliers and licensees, requiring they satisfy all applicable labor standards
and laws protecting employees' wages, benefits, working conditions, freedom of
association, right to collectively bargain, and other rights.
o Request a report summarizing the company's current practices for enforcement
of its Worker Code of Conduct.
o Establishes independent monitoring programs in conjunction with local and
respected religious and human rights groups to monitor supplier and licensee
compliance with the Worker Code of Conduct.
o Create incentives to encourage suppliers to raise standards rather than
terminate contracts.
o Implement policies for ongoing wage adjustments, ensuring adequate purchasing
power and a sustainable living wage for employees of foreign suppliers and
licensees.
o Request public disclosure of contract supplier reviews on a regular basis.
o Adopt labor standards for foreign and domestic suppliers to ensure that the
company will not do business with foreign suppliers that manufacture products
for sale in the U.S. using forced or child labor, or that fail to comply with
applicable laws protecting employees' wages and working conditions.
CORPORATE CONDUCT, HUMAN RIGHTS, AND LABOR CODES
PVS generally supports proposals that call for the adoption and/or enforcement
of clear principles or codes of conduct relating to countries in which there are
systematic violations of human rights. These conditions include the use of
slave, child, or prison labor, undemocratically elected governments, widespread
reports by human rights advocates, fervent pro-democracy protests, or economic
sanctions and boycotts.
Many proposals refer to the seven core conventions, commonly referred to as the
"Declaration on Fundamental Principles and Rights At Work," ratified by the
International Labor Organization (ILO). The seven conventions fall under four
broad categories: i) right to organize and bargain collectively; ii)
non-discrimination in employment; iii) abolition of forced labor; and iv) end of
child labor. Each of the 180 member nations of the ILO body are bound to respect
and promote these rights to the best of their abilities.
o Support the principles and codes of conduct relating to company investment
and/or operations in countries with patterns of human rights abuses or
pertaining to geographic regions experiencing political turmoil (Northern
Ireland, Columbia, Burma, former Soviet Union, and China).
o Support the implementation and reporting on ILO codes of conduct.
o Support independent monitoring programs in conjunction with local and
respected religious and human rights groups to monitor supplier and licensee
compliance with Codes.
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INTERNATIONAL FINANCIAL RELATED
The rise of globalization has put increasing importance on the need for US
companies to periodically monitor their business operations abroad. As a means
to preserve brand integrity and protect against potentially costly litigation
and negative public relations, PVS generally supports shareholder proposals
which call for a report on the company's core business policies and procedures
of its operations outside the United States. Many of the resolutions which
address a company's international policies can include: impact of Foreign Direct
Investment (FDI) in emerging market economies; corporate safeguards against
money laundering; economic de-stabilization concerns; relationships with
international financial institutions (IFIs); and product sales/marketing abroad
(i.e., tobacco, pharmaceutical drug pricing).
o Generally support proposals asking for policy clarification and reporting on
foreign-related matters that can materially impact the company's short and
long-term bottom-line.
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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 several open or
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.
Dated: September 15, 2003
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On February 19, 2004 the Registrant's Board of Trustees adopted a
Nominating and Governance Committee Charter. In the event a vacancy on the Board
occurs, the Nominating and Governance Committee may seek recommendations for
candidates from those sources it deems appropriate in its discretion, including
shareholders of the Fund. The Committee may retain a search firm to identify
candidates. Shareholders of the Fund who wish to recommend a person for
nomination as a candidate for a position on the Fund's Board should mail such
recommendation to the Fund, attention W. Scott Jardine, 1001 Warrenville Road,
Suite 300, Lisle, Illinois 60532. Recommendations must include (a) evidence of
Fund ownership of the person or entity recommending the candidate (if a Fund
shareholder); (b) a full description of the proposed candidate's background,
including their education, experience, current employment and date of birth; (c)
names and addresses of at least three professional references for the candidate;
(d) information as to whether the candidate is an "interested person" (as such
term is defined in the 1940 Act) and such other information that may be
considered to impair the candidate's independence; and (e) any other information
that may be helpful to the Committee in evaluating the candidate. If a
recommendation is received with satisfactorily completed information regarding a
candidate during a time when a vacancy exists on the Board or during such other
time as the Committee is accepting recommendations, the recommendation will be
forwarded to the Chairperson of the Committee and outside counsel to the
Independent Trustees. Recommendations received at any other time will be kept on
file until such time as the Committee is accepting recommendations at which
point they may be considered for nomination.
ITEM 10. 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 last fiscal
half-year (the registrant's second fiscal half-year in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting.
ITEM 11. EXHIBITS.
(a)(1) 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(a) 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
---------------------------------------------------------
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chief Executive Officer
(principal executive officer)
Date AUGUST 5, 2004
----------------------------------------------------------------------------
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, Chief Executive Officer
(principal executive officer)
Date AUGUST 5, 2004
----------------------------------------------------------------------------
By (Signature and Title)* /S/ MARK R. BRADLEY
-------------------------------------------------------
Mark R. Bradley, Chief Financial Officer
(principal financial officer)
Date AUGUST 5, 2004
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.