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 L.P.
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
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Date of reporting period: MAY 31, 2005
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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 YEAR ENDED MAY 31, 2005
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TABLE OF CONTENTS
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2005
Shareholder Letter ........................................................ 1
Portfolio Commentary ...................................................... 2
Portfolio Components ...................................................... 4
Portfolio of Investments .................................................. 5
Statement of Assets and Liabilities ....................................... 12
Statement of Operations ................................................... 13
Statements of Changes in Net Assets ....................................... 14
Statement of Cash Flows ................................................... 15
Financial Highlights ...................................................... 16
Notes to Financial Statements ............................................. 17
Report of Independent Registered Public Accounting Firm ................... 21
Additional Information .................................................... 22
Dividend Reinvestment Plan
Proxy Voting Policies and Procedures
Portfolio Holdings
Submission of Matters to a Vote of Shareholders
Management ................................................................ 24
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 performance and investment approach.
By reading the letter from the Fund's President, James A. Bowen, together with
the portfolio commentary by Michael P. McAdams and Robert I. Bernstein of Four
Corners Capital Management, LLC, the Fund's sub-advisor, you will obtain an
understanding of how the market environment affected its performance. The
statistical information that follows can help you understand the Fund's
performance 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. personnel, Mr. McAdams and Mr. Bernstein 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 (FCM)
ANNUAL REPORT
MAY 31, 2005
Dear Shareholders:
The market price performance of the First Trust/Four Corners Senior Floating
Rate Income Fund (the "Fund"), as well as its peers, has confounded investors
and investment professionals alike over the past year. Based on market price,
the Fund's total return was -7.8% for the 12-month period ended May 31, 2005,
yet its net asset value ("NAV") total return was 5.5%. In comparison, the
benchmark Standard & Poor's/LSTA Leveraged Loan Index return over the same
period was 4.4%. The Fund traded at a 5.6% discount to its NAV on May 31, 2005.
Its current market price distribution rate closed out the fiscal year at 6.3%.
In theory, senior loans should garner greater attention from the investing
public whenever the U.S. economy is in an expansion mode. Demand tends to pick
up even more when short-term interest rates are on the rise. Senior loans are
more speculative in nature than investment-grade securities, and as a result
investors recognize a more favorable risk/reward tradeoff when short-term rates
are rising, not only because of the floating rate component, which can boost
income as the loans reset, but because such a trend is usually fueled by strong
economic growth. The concern over credit quality also tends to lessen when the
economy is expanding at a solid and sustainable pace.
What has many perplexed is the disparity in the performance of the market prices
of senior loan closed-end funds, which have declined sharply from their highs
posted in the first half of 2004, and the performance of the senior loans
themselves, which have traded in a much narrower range. We believe that investor
psychology in the closed-end fund marketplace has been influenced significantly
by the relationship between short-term interest rates and intermediate-term
interest rates. Normally, when short-term interest rates rise to the extent that
they have since last June, it is common for intermediate-term rates to follow -
at least to some degree. In the current economic expansion, that has simply not
been the case. In fact, the yield on the 10-year T-Note actually declined since
the Fed began tightening last June. Short-term rates have risen from 1.0% to
3.0%, yet the yield on the 10-year has declined from 4.6% to 4.0% from June 30,
2004, through May 31, 2005. Federal Reserve Chairman Alan Greenspan has come to
characterize the flattening of the yield curve as a "conundrum."
Since the beginning of 2004, we have noticed that interest in FCM has picked up
markedly whenever the yield on the 10-year T-Note has risen. The problem has
been that these interest rate increases, which occurred in the first half of
2004 and the first quarter of 2005, were not sustained. In both cases the
10-year T-Note subsequently rallied, resulting in the selling of FCM shares.
It is our contention that the demand for shares of FCM is influenced by the
slope of the yield curve. In May, the National Association for Business
Economics announced that its panel of 50 forecasters sees the yield on the
10-year T-Note rising to 4.9% by the end of 2005. If correct, a move of that
magnitude (about 90 basis points) has been more than enough to attract serious
buying power in the past.
We continue to appreciate your interest in the Fund and encourage you to read
the commentary section from Michael P. McAdams and Robert I. Bernstein,
Co-Portfolio Managers.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of the First Trust/Four Corners Senior Floating Rate Income Fund
July 8, 2005
Page 1
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A COMMENTARY ON THE FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
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OVERVIEW
The First Trust/Four Corners Senior Floating Rate Income Fund ("FCM" or the
"Fund") posted a market share price total return of -7.8% for the year ended May
31, 2005 ("Fiscal 2005"). The Fund's NAV total return was 5.5% over the same
period. During Fiscal 2005, the Fund declared dividends totaling $1.1089 per
share. Based on its most recent dividend, FCM paid a yield of 6.3% based on the
Fund's share price, and 6.0% based on the Fund's NAV, as of May 31, 2005.
The following commentary reviews the economic and market environment in which
the Fund invests, the Fund's investment strategy, portfolio composition and
performance for the year ended May 31, 2005.
ECONOMIC AND MARKET ENVIRONMENT
Fiscal 2005 was generally marked by a favorable environment for senior
floating-rate corporate loans ("Senior Loans"). The Fund benefited from trends
that are favorable to both floating-rate and credit-focused investing. These
trends include a growing U.S. economy, rising short-term interest rates, strict
credit underwriting standards and low rates of corporate defaults. Gross
Domestic Product ("GDP") growth averaged 3.7% during the last four quarters.
Short-term interest rates were increased eight times by a total of 2.0% during
the Fund's Fiscal 2005. Credit underwriting remains conservative as leverage and
interest coverage multiples remain near historically tight levels. Senior Loan
default rates are well below long-term moving averages at 1.5% as of the end of
Fiscal 2005.
Reflecting strong economic fundamentals, the loan market as a whole recorded
strong growth through Fiscal 2005. New Senior Loan issuance rose significantly,
from $159 billion for the calendar year 2003 to $248 billion for calendar year
2004. Similarly, Senior Loan market liquidity, as measured by trading volume,
grew nearly 10% year-over-year. Likewise, demand for Senior Loans was strong
during the year. Investors perceived reduced levels of credit risk resulting
from an improving economic environment with low levels of defaults and credit
losses, and sought to benefit from the floating-rate nature of Senior Loans.
In rising interest rate environments such as we have seen during the last year,
Senior Loans' income typically rises with a several month lag to actual Fed rate
increases. However, credit spreads declined during the year, reflecting the
strong demand for Senior Loans. This decline in credit spreads offset much of
the increase in short-term rates. Notwithstanding the decline in credit spreads,
the Fund still increased its dividend during the year and had low NAV
volatility.
We remain comfortable that the credit standards of Senior Loans being
underwritten today are well above the levels that contributed to the difficult
default cycle of 2001-2003, and believe that the risk-adjusted returns of Senior
Loans are still very favorable on an absolute basis and when compared with other
asset classes.
INVESTMENT STRATEGY AND PORTFOLIO COMPOSITION
The investment strategy employed in managing the Fund is designed to be an "all
weather" strategy focused on delivering long-term performance through risk
minimization. Many managers of Senior Loan-based closed-end funds invest up to
20% or more of their portfolios in high yield bonds in order to boost yields.
FCM is a "pure play" strategy that is generally prohibited from investing in
high yield bonds, and focuses instead on Senior Loans. In some market
environments, the Fund's pure play strategy will result in lower yields/returns
than some other Senior Loan-based closed-end funds, but in the long run we
believe it should result in lower NAV volatility and higher total NAV returns.
Our investment strategy focuses on thorough fundamental credit analysis, broad
issuer and industry diversification, and a proactive sell discipline in order to
minimize risk. The Fund's portfolio is generally more heavily weighted towards
industry groups that we expect to exhibit lower earnings volatility, and which
we expect to provide high recoveries to senior lenders in circumstances where
earnings volatility does occur. We also tend to minimize exposure to those
industries that are exposed to "crosscurrents" such as changing market demand,
unmanageable costs, undue revenue pressures, or other technical factors. For
example, the Fund has always had very little exposure to the automotive
industry, which has performed poorly based on weak industry fundamentals as
evidenced by the recent downgrades of General Motors and Ford debt.
The Fund is broadly diversified with over 100 positions across 33 industries. At
May 31, 2005, the five largest individual borrower exposures in total
represented 11.5% of the Fund's portfolio. The Fund also has the flexibility to
invest up to 10% of the portfolio in Special Situation debt investments, which
are typically investments in companies that are either in default or are
experiencing financial difficulties. We view our ability to make these
investments as opportunistic rather than obligatory, and given the growth and
improvement in the economy during the year, we saw few value opportunities in
this segment of the portfolio. On May 31, the portfolio included 2 Special
Situation investments representing 2.3% of the Fund's portfolio.
As mentioned in prior reports, the Fund is leveraged using adjustable-rate Money
Market Cumulative Preferred(R) Shares. The terms and conditions of the leverage
program provide the Fund with the ability to borrow on a floating-rate basis.
Since the income generated by the Fund's Senior Loan investment portfolio is
also floating-rate, the Fund is less exposed to interest rate mismatch risk than
a closed-end fund with a fixed rate investment portfolio, and investors will
generally benefit from portfolio leverage regardless of the direction of
short-term interest rates. At May 31, 2005, the portfolio leverage accounted for
37.8% of the Fund's total managed assets.
Page 2
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A COMMENTARY ON THE FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND -
(CONTINUED)
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PERFORMANCE REVIEW
For Fiscal 2005, the Fund's total return on an NAV basis was 5.5%. This exceeded
the benchmark (Standard & Poor's/LSTA Leveraged Loan Index) return of 4.4%. The
Fund's performance includes the beneficial impact of leverage, and the negative
impact of fees and expenses and uninvested cash balances are not part of the
benchmark return. As mentioned above, dividend distributions totaled
approximately $1.11 per common share in Fiscal 2005. The Fund raised its
dividend twice during the fiscal year - in September by approximately 4.8% from
a monthly distribution of $0.0883 per common share to $0.0925 per month and by
approximately 2.5% in January to $0.0948. Additionally, the Fund's NAV was
relatively stable during the year, ranging from a high of $19.39 to a low of
$18.99, a range of approximately 2.1%.
The Fund's strong performance during the year was influenced by a number of
factors. We actively sold investments during the year generating substantial
trading gains. We also benefited from favorable sector allocations. In addition
to the above-mentioned underweighting of the poor performing Automotive
industry, we were overweight in the Building and Development and Lodging
industries, both of which performed well during the year. Perhaps most
importantly, we had no defaults and very limited distressed sales during the
year, which helped keep NAV volatility low.
Despite the Fund's strong NAV performance/total return and high dividend yield
during Fiscal 2005, the Fund's market price performance was disappointing.
During the year, the market price of the Fund closed as high as $21.00 (June 4,
2004) and as low as $17.57 (May 25, 2005). On June 1, 2004, the Fund's closing
market price on the American Stock Exchange was $20.58. The Fund's closing price
on May 31, 2005 was $18.00, for a total return at market price of -7.8% for the
year. The Fund closed the year at a 5.6% discount to its NAV.
While we feel strongly that the market price performance of the Fund during the
year is not in concert with the prospects for the overall Senior Loan asset
class or the Fund, we do note that 16 of the 17 Senior Loan closed-end funds
traded at discounts to NAV on May 31, 2005, the average of the narrower pure
play group being 5.5%. FCM's market and NAV yield on May 31, 2005 (6.3% and
6.0%, respectively) compare favorably to the pure play peer group averages of
6.1% and 5.7%, respectively.
We remain committed to long-term performance and superior client support, and we
appreciate the opportunity to assist investors in meeting their investment
goals.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933. Forward-looking statements
include statements regarding the goals, beliefs, plans or current expectations
of First Trust Advisors L.P. and/or Four Corners Capital Management, LLC and
their respective representatives, taking into account the information currently
available to them. Forward-looking statements include all statements that do not
relate solely to current or historical fact. For example, forward-looking
statements include the use of words such as "anticipate," "estimate," "intend,"
"expect," "believe," "plan," "may," "should," "would," or other words that
convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the Fund's actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by the forward-looking statements. When
evaluating the information included in this Annual Report, you are cautioned not
to place undue reliance on these forward-looking statements, which reflect the
judgment of First Trust Advisors L.P. and/or Four Corners Capital Management,
LLC and their respective representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
Page 3
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO COMPONENTS+
MAY 31, 2005
S&P RATING BREAKDOWN
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
B+ 26.13%
BB- 15.97%
B 15.44%
NR 23.34%
BB 8.79%
B- 4.66%
BB+ 3.85%
Cash/Cash Equivalents 1.14%
CCC+ 0.68%
ECONOMIC SECTOR BREAKDOWN
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
Consumer Discretionary 31.26%
Consumer Staples 5.34%
Energy 8.65%
Financials 11.83%
Health Care 7.58%
Industrials 12.14%
Information Technology 6.03%
Materials 6.84%
Telecommunication Services 3.96%
Utilities 5.23%
Cash/Cash Equivalents 1.14%
+ Percentages are based on total investments. Please note that the
percentages shown on the Portfolio of Investments are based on net assets.
Page 4 See Notes to Financial Statements.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS
MAY 31, 2005
BANK LOAN
PRINCIPAL RATINGS+ STATED MARKET
VALUE DESCRIPTION o MOODY'S S&P COUPON MATURITY* VALUE
- ----------- --------------------------------- ---------------- ----------- -------------- --------------
SENIOR FLOATING RATE TERM LOAN INTERESTS** - 153.4%
AEROSPACE & DEFENSE - 3.3%
AEROSPACE & DEFENSE - 3.3%
$2,220,588 ILC Industries, Inc. (c) ........ NR(a) NR(a) 8.85% 2/07/11 $ 2,242,794
830,769 Standard Aero Holdings, Inc. .... B2 B+ 5.34%-5.36% 8/24/12 842,712
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TOTAL AEROSPACE & DEFENSE 3,085,506
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AUTO COMPONENTS - 1.1%
AUTO PARTS & EQUIPMENT - 1.1%
1,000,000 MetoKote Corp. .................. B2 B+ 8.00% 9/30/11 1,000,000
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TOTAL AUTO COMPONENTS 1,000,000
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AUTOMOBILES - 0.8%
AUTOMOBILE MANUFACTURERS - 0.8%
708,595 NFIL Holdings Corp. ............. B1 B+ 4.37%-5.38% 2/27/10 714,795
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TOTAL AUTOMOBILES 714,795
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BEVERAGES - 1.1%
SOFT DRINKS - 1.1%
1,000,000 Culligan Corp. .................. B1 B+ 5.59% 9/30/11 1,006,667
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TOTAL BEVERAGES 1,006,667
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BUILDING PRODUCTS - 5.0%
BUILDING PRODUCTS - 5.0%
1,000,000 Custom Building Products (c) .... NR(a) NR(a) 8.19% 4/29/12 992,500
691,676 Headwaters Inc. ................. B1 B+ 5.40%-7.25% 4/30/11 700,322
2,000,000 Landsource Communities
Development LLC .............. NR(a) NR(a) 5.63% 3/31/10 2,002,500
1,000,000 Stile U.S. Acquisition Corp. .... B2 BB- 5.14%-5.21% 4/06/13 997,655
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TOTAL BUILDING PRODUCTS 4,692,977
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CHEMICALS - 0.9%
DIVERSIFIED CHEMICALS - 0.9%
807,735 BCP Crystal US Holdings Corp. ... B1 B+ 5.63% 5/17/11 818,841
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TOTAL CHEMICALS 818,841
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COMMERCIAL SERVICES & SUPPLIES - 7.9%
Diversified Commercial Services - 3.2%
1,000,000 IAP Worldwide Services, Inc. .... NR B+ 5.94% 3/30/11 998,750
1,000,000 IAP Worldwide Services, Inc. (c). NR B- 8.94% 3/30/12 980,000
1,000,000 Western Inventory Service, Ltd. . B2 B 6.06%-6.07% 3/31/11 1,003,750
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2,982,500
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ENVIRONMENTAL SERVICES - 2.6%
1,474,528 Duratek, Inc. ................... B1 BB- 6.00%-6.55% 12/16/09 1,473,606
977,273 Envirocare of Utah, LLC ......... NR(a) NR(a) 6.11% 4/13/10 974,422
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2,448,028
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OFFICE SERVICES & SUPPLIES - 2.1%
1,949,011 Infrasource Inc. ................ Ba3 BB- 5.85% 9/30/10 1,958,756
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TOTAL COMMERCIAL SERVICES & SUPPLIES 7,389,284
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See Notes to Financial Statements. Page 5
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2005
BANK LOAN
PRINCIPAL RATINGS+ STATED MARKET
VALUE DESCRIPTION o MOODY'S S&P COUPON MATURITY* VALUE
- ----------- --------------------------------- ---------------- ----------- -------------- --------------
SENIOR FLOATING RATE TERM LOAN INTERESTS** - CONTINUED
CONTAINERS & PACKAGING - 6.9%
METAL & GLASS CONTAINERS - 2.4%
$1,726,152 Berry Plastics Corp. ........... B1 B+ 5.09% 6/30/10 $ 1,730,467
525,619 Owens-Illinois Group, Inc. ..... B1 BB- 5.87% 4/01/08 533,109
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2,263,576
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PAPER PACKAGING - 4.5%
328,767 Boise Cascade, LLC ............. Ba3 BB 4.97% 10/28/11 331,553
997,500 Graham Packaging Holdings
Company ..................... B2 B 5.50%-5.69% 10/07/11 1,005,231
1,000,000 Graham Packaging Holdings
Company (c) ................. B3 CCC+ 7.31% 4/07/12 1,012,083
1,820,511 Graphic Packaging
International, Inc. ......... B1 B+ 5.29%-5.91% 8/08/10 1,836,441
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4,185,308
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TOTAL CONTAINERS & PACKAGING 6,448,884
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DIVERSIFIED FINANCIAL SERVICES - 1.3%
SPECIALIZED FINANCE - 1.3%
1,207,500 Refco Finance Holdings LLC ..... B1 BB- 5.09% 8/05/11 1,206,292
--------------
TOTAL DIVERSIFIED FINANCIAL SERVICES 1,206,292
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 3.9%
INTEGRATED TELECOMMUNICATION SERVICES - 3.9%
712,753 GCI Holdings, Inc. ............. Ba2 BB+ 5.35% 10/31/07 717,208
2,000,000 NTL Investment Holdings Ltd. ... B1 BB- 6.41% 5/10/12 2,005,000
1,000,000 Telcordia Technologies, Inc. ... B1 B+ 5.97%-6.07% 9/15/12 976,563
--------------
TOTAL DIVERSIFIED TELECOMMUNICATION SERVICES 3,698,771
--------------
ELECTRIC UTILITIES - 6.3%
ELECTRIC UTILITIES - 6.3%
1,133,930 Allegheny Energy Supply Inc. ... Ba2 BB- 5.62%-5.95% 3/08/11 1,143,616
1,543,008 NRG Energy, Inc. ............... Ba3 BB 4.97%-5.26% 12/24/11 1,551,880
1,203,125 NRG Energy, Inc.,
(Letter of Credit) .......... Ba3 BB 4.97% 12/24/11 1,210,043
1,088,538 Riverside Energy Center, LLC ... Ba3 B 7.44% 6/24/11 1,110,309
773,303 Rocky Mountain Energy
Center, LLC ................. Ba3 B 7.44% 6/24/11 788,768
84,958 Rocky Mountain Energy Center,
LLC, (Letter of Credit) ..... Ba3 B 7.44% 6/24/11 86,658
--------------
TOTAL ELECTRIC UTILITIES 5,891,274
--------------
ENERGY EQUIPMENT & SERVICES - 3.2%
OIL & GAS EQUIPMENT & SERVICES - 3.2%
1,000,000 Complete Energy Services, Inc. . NR NR 6.38%-6.69% 2/08/12 1,000,000
1,995,000 Ferrell Companies, Inc. ........ NR NR 6.54%-8.50% 12/17/11 2,034,900
--------------
TOTAL ENERGY EQUIPMENT & SERVICES 3,034,900
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Page 6 See Notes to Financial Statements.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2005
BANK LOAN
PRINCIPAL RATINGS+ STATED MARKET
VALUE DESCRIPTION o MOODY'S S&P COUPON MATURITY* VALUE
- ----------- --------------------------------- ---------------- ----------- -------------- --------------
SENIOR FLOATING RATE TERM LOAN INTERESTS** - CONTINUED
FOOD & STAPLES RETAILING - 2.1%
DRUG RETAIL - 2.1%
$1,985,000 The Jean Coutu Group (PJC) Inc. B1 BB- 5.50% 7/30/11 $ 1,999,532
--------------
TOTAL FOOD & STAPLES RETAILING 1,999,532
--------------
FOOD PRODUCTS - 3.1%
PACKAGED FOODS & MEATS - 3.1%
2,000,000 THL Food Products
Company (d) ................. B2 B- 6.59% 11/21/11 2,035,000
912,752 THL Food Products Company ...... B1 B+ 5.09%-5.34% 11/21/10 923,020
--------------
TOTAL FOOD PRODUCTS 2,958,020
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 0.8%
HEALTH CARE SUPPLIES - 0.8%
773,990 Advanced Medical Optics, Inc. .. B1 BB- 5.09%-5.21% 6/25/09 782,698
--------------
TOTAL HEALTH CARE EQUIPMENT & SUPPLIES 782,698
--------------
HEALTH CARE PROVIDERS & SERVICES - 8.8%
HEALTH CARE FACILITIES - 1.0%
1,000,000 Select Medical Corp. ........... B1 BB- 4.84%-5.04% 2/24/12 996,750
--------------
HEALTH CARE SERVICES - 6.7%
1,243,750 Ardent Health Services, Inc. ... B1 B+ 5.35% 8/12/11 1,242,195
995,000 CHS/Community
Health Systems, Inc. ........ Ba3 BB- 4.85%-5.07% 8/19/11 1,003,085
767,461 Team Health, Inc. .............. B1 B+ 5.85%-5.87% 3/23/11 770,339
1,436,579 US Oncology Holdings, Inc. ..... B1 B+ 5.51%-6.13% 8/20/11 1,450,945
1,830,667 VWR International, Inc. ........ B2 B+ 5.65% 4/07/11 1,837,989
--------------
6,304,553
--------------
MANAGED HEALTH CARE - 1.1%
995,000 Vanguard Health Systems, Inc. .. B2 B 6.34% 9/23/11 1,005,779
--------------
TOTAL HEALTH CARE PROVIDERS & SERVICES 8,307,082
--------------
HOTELS, RESTAURANTS & LEISURE - 12.7%
CASINOS & GAMING - 10.5%
992,500 Boyd Gaming Corp. .............. Ba2 BB 4.53%-5.13% 6/30/11 999,117
2,036,058 Global Cash Access, Inc. ....... B2 B+ 5.35% 3/10/10 2,061,508
1,995,000 Marina District Finance
Company, Inc. ............... NR NR 4.84-5.13% 10/20/11 2,005,807
1,000,000 Penn National Gaming ........... Ba3 BB- 5.59% 5/15/12 1,004,688
1,000,000 Pinnacle Entertainment, Inc. ... B1 BB- 6.11% 8/27/10 1,013,750
1,000,000 Seminole Tribe of Florida ...... NR(a) NR(a) 5.38% 9/30/11 1,000,000
829,060 Venetian Casino Resort, LLC .... B1 BB- 4.81% 6/15/11 832,860
1,000,000 Wynn Las Vegas, LLC ............ B2 B+ 5.25% 12/14/11 1,001,563
--------------
9,919,293
--------------
HOTELS, RESORTS & CRUISE LINES - 1.1%
1,000,000 OpBiz, LLC ..................... B3 B- 6.10% 8/31/10 1,001,667
--------------
LEISURE FACILITIES - 1.1%
995,000 American Skiing Company ........ NR NR 7.69%-7.99% 11/24/10 999,353
--------------
TOTAL HOTELS, RESTAURANTS & LEISURE 11,920,313
--------------
See Notes to Financial Statements. Page 7
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2005
BANK LOAN
PRINCIPAL RATINGS+ STATED MARKET
VALUE DESCRIPTION o MOODY'S S&P COUPON MATURITY* VALUE
- ----------- --------------------------------- ---------------- ----------- -------------- --------------
SENIOR FLOATING RATE TERM LOAN INTERESTS** - CONTINUED
HOUSEHOLD DURABLES - 2.1%
HOMEBUILDING - 2.1%
$2,000,000 Lake at Las Vegas Joint Venture .. B1 B+ 5.91%-6.16% 11/01/09 $ 2,006,000
--------------
TOTAL HOUSEHOLD DURABLES 2,006,000
--------------
INDUSTRIAL CONGLOMERATES - 1.1%
INDUSTRIAL CONGLOMERATES - 1.1%
1,000,000 Rexnord Corp. .................... B1 B+ 5.34%-7.00% 12/30/11 1,002,500
--------------
TOTAL INDUSTRIAL CONGLOMERATES 1,002,500
--------------
INSURANCE - 1.0%
LIFE & HEALTH INSURANCE - 1.0%
958,901 Conseco, Inc. .................... B2 BB- 6.60% 6/22/10 964,894
--------------
TOTAL INSURANCE 964,894
--------------
IT SERVICES - 8.5%
DATA PROCESSING & OUTSOURCED SERVICES - 2.1%
1,000,000 Fidelity National Information
Solutions, Inc. ............... Ba3 BB 4.84% 3/09/13 992,375
1,000,000 Fidelity National Information
Solutions, Inc. ............... Ba3 BB 4.84% 3/09/11 989,000
--------------
1,981,375
--------------
IT CONSULTING & OTHER SERVICES - 6.4%
1,000,000 Alion Science and Technology Corp. B1 B+ 5.34%-5.64% 8/02/09 1,005,000
3,000,000 DynCorp International LLC ........ B2 B+ 6.06% 2/11/11 3,020,001
1,979,644 The Titan Corp. .................. Ba3 BB- 5.59%-7.25% 6/30/09 1,986,242
--------------
6,011,243
--------------
TOTAL IT SERVICES 7,992,618
--------------
LEISURE EQUIPMENT & PRODUCTS - 1.1%
LEISURE PRODUCTS - 1.1%
1,000,000 Brooklyn Basketball, LLC (d) ..... NR NR 6.63% 6/16/08 997,500
--------------
TOTAL LEISURE EQUIPMENT & PRODUCTS 997,500
--------------
MEDIA - 28.8%
BROADCASTING & CABLE TV - 16.2%
3,000,000 Century Cable Holdings, LLC ...... NR NR 8.00% 6/30/09 2,954,463
2,000,000 Charter Communications
Operating, LLC ................ B2 B 6.19% 9/18/07 1,972,500
1,995,000 Gray Television Inc. ............. Ba2 B+ 4.84% 12/31/10 2,014,118
290,908 Mediacom Illinois LLC,
(Revolving Credit) ............ Ba3 BB- 0.63%-4.35% 9/30/11 278,302
992,470 PanAmSat Corp. ................... B1 BB+ 5.31% 8/20/11 1,002,204
2,000,000 Raycom Media, Inc. ............... NR NR 5.13% 4/06/12 2,005,000
1,990,000 Salem Communications
Holding Corp. ................. B1 B+ 5.19% 3/31/10 1,990,000
1,000,000 UPC Distribution Holding B.V. ... B1 B 5.75% 9/30/12 995,625
1,000,000 UPC Distribution Holding B.V. ... B1 B 6.60% 12/31/11 1,003,281
1,000,000 Young Broadcasting Inc. .......... B1 B 5.44%-5.69% 11/03/12 1,004,583
--------------
15,220,076
--------------
Page 8 See Notes to Financial Statements.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2005
BANK LOAN
PRINCIPAL RATINGS+ STATED MARKET
VALUE DESCRIPTION o MOODY'S S&P COUPON MATURITY* VALUE
- ----------- --------------------------------- ---------------- ----------- -------------- --------------
SENIOR FLOATING RATE TERM LOAN INTERESTS** - CONTINUED
MEDIA - (CONTINUED)
MOVIES & ENTERTAINMENT - 5.3%
$2,000,000 Metro-Goldwyn-Mayer
Holdings II, Inc. ............ NR(a) NR(a) 5.38% 4/08/12 $ 2,000,312
959,925 Regal Cinemas Corp. ............. Ba3 BB- 4.84% 11/10/10 963,867
1,984,160 WMG Acquisition Corp. ........... B1 B+ 5.15%-5.52% 3/01/11 1,984,573
--------------
4,948,752
--------------
PUBLISHING - 7.3%
1,832,629 CBD Media, LLC .................. B1 B 5.63% 12/31/09 1,852,101
1,724,911 Dex Media West, Inc. ............ Ba2 BB- 4.62%-5.05% 3/09/10 1,734,494
815,140 Freedom Communications, Inc. .... Ba3 BB 4.57% 5/18/12 814,937
575,650 Media News Group, Inc. .......... Ba3 BB 4.59% 12/30/10 576,130
1,000,000 Newspaper Holdings, Inc. ........ NR NR 5.13%-5.19% 8/24/11 998,750
871,812 RH Donnelley Inc. ............... Ba3 BB 4.70%-4.88% 6/30/11 876,666
--------------
6,853,078
--------------
TOTAL MEDIA 27,021,906
--------------
METALS & MINING - 2.1%
ALUMINUM - 1.0%
934,615 Novelis Corp. ................... Ba2 BB- 4.96% 1/07/12 940,976
--------------
DIVERSIFIED METALS & MINING - 1.1%
1,000,000 FRC-WPP NRP Investment L.P. ..... NR NR 6.86% 5/11/10 997,500
--------------
TOTAL METALS & MINING 1,938,476
--------------
MULTI-UTILITIES & UNREGULATED POWER - 2.0%
MULTI-UTILITIES & UNREGULATED POWER - 2.0%
1,000,000 KGEN, LLC ....................... B2 B 5.64% 8/05/11 970,000
1,000,000 KGEN, LLC (c) ................... B3 B- 12.01% 8/05/11 930,000
--------------
TOTAL MULTI-UTILITIES & UNREGULATED POWER 1,900,000
--------------
OIL & GAS - 10.5%
OIL & GAS EXPLORATION & PRODUCTION - 3.1%
1,000,000 ATP Oil & Gas Corp. ............. NR NR 8.58%-8.76% 4/14/10 1,005,000
1,000,000 Kerr-McGee Corp. ................ Ba3 BB+ 5.34% 5/18/10 1,005,500
898,343 Plains Resources Inc. ........... B1 BB 5.10% 7/23/10 908,449
--------------
2,918,949
--------------
OIL & GAS REFINING, MARKETING & TRANSPORTATION - 7.4%
3,000,000 Alon USA, Inc. .................. B2 B 10.00% 12/16/08 3,075,000
2,003,445 El Paso Corp.,
(Letter of Credit) ........... B3 B- 5.62% 11/23/09 2,006,228
2,000,000 Hawkeye Renewables, LLC ......... B2 B 6.01% 1/31/12 1,860,000
--------------
6,941,228
--------------
TOTAL OIL & GAS 9,860,177
--------------
PAPER & FOREST PRODUCTS - 1.1%
PAPER PRODUCTS - 1.1%
992,500 Appleton Papers Inc. ............ Ba3 BB 5.44%-5.73% 6/09/10 998,083
--------------
TOTAL PAPER & FOREST PRODUCTS 998,083
--------------
See Notes to Financial Statements. Page 9
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2005
BANK LOAN
PRINCIPAL RATINGS+ STATED MARKET
VALUE DESCRIPTION o MOODY'S S&P COUPON MATURITY* VALUE
- ----------- --------------------------------- ---------------- ----------- -------------- --------------
SENIOR FLOATING RATE TERM LOAN INTERESTS** - CONTINUED
PERSONAL PRODUCTS - 2.1%
PERSONAL PRODUCTS - 2.1%
$1,995,000 American Safety Razor Company ... B2 B 5.88%-6.07% 2/28/12 $ 2,004,975
--------------
TOTAL PERSONAL PRODUCTS 2,004,975
--------------
PHARMACEUTICALS - 1.9%
PHARMACEUTICALS - 1.9%
925,833 Accredo Health, Inc. ............ Ba2 BB 4.86% 6/30/11 925,833
867,507 Warner Chilcott Corp. ........... B2 B 5.84%-5.96% 1/18/12 868,375
--------------
TOTAL PHARMACEUTICALS 1,794,208
--------------
REAL ESTATE - 16.5%
REAL ESTATE INVESTMENT TRUSTS - 4.3%
2,000,000 The Macerich Partnership, L.P. .. NR NR(a) 4.58% 4/26/10 1,997,500
2,000,000 The Macerich Partnership, L.P. .. NR NR(a) 4.89% 4/26/06 2,000,000
--------------
3,997,500
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT - 12.2%
1,836,056 CB Richard Ellis Services, Inc. . Ba3 B+ 4.69%-7.00% 3/31/10 1,842,942
1,995,515 General Growth Properties, Inc. . Ba2 BB+ 5.34% 11/12/08 2,006,532
1,000,000 General Growth Properties, Inc. . Ba2 BB+ 5.34% 11/12/07 1,003,750
979,970 LNR Property Corp. .............. B2 B+ 6.21% 2/03/08 981,439
3,000,000 LNR Property Corp.,
(Mezzanine Debt) (d)(e) ...... NR NR 7.71% 2/03/08 2,994,375
1,000,000 Palmdale Hills Property, LLC .... B1 B+ 6.09% 5/19/10 1,000,000
1,634,467 The Newkirk Master Limited
Partnership .................. NR(a) NR(a) 7.60% 11/24/06 1,640,596
--------------
11,469,634
--------------
TOTAL REAL ESTATE 15,467,134
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 1.1%
SEMICONDUCTORS - 1.1%
1,000,000 Memec Group Holdings Ltd. (c) ... B2 B 11.06% 5/05/10 1,005,000
--------------
TOTAL SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 1,005,000
--------------
TRANSPORTATION INFRASTRUCTURE - 2.0%
MARINE PORTS & SERVICES - 2.0%
2,000,000 Sirva Worldwide, Inc. ........... Ba3 BB 5.59%-5.62% 12/08/10 1,926,250
--------------
TOTAL TRANSPORTATION INFRASTRUCTURE 1,926,250
--------------
WIRELESS TELECOMMUNICATION SERVICES - 2.3%
WIRELESS TELECOMMUNICATION SERVICES - 2.3%
1,000,000 MetroPCS Wireless, Inc. ......... NR NR 7.69% 5/27/11 1,005,000
1,200,000 Nextel Partners, Inc. ........... Ba3 B+ 4.44% 5/31/12 1,200,000
--------------
TOTAL WIRELESS TELECOMMUNICATION SERVICES 2,205,000
--------------
TOTAL SENIOR FLOATING RATE TERM LOAN INTERESTS 144,040,557
(Cost $144,007,524) --------------
Page 10 See Notes to Financial Statements.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
MAY 31, 2005
BANK LOAN
PRINCIPAL RATINGS+ STATED MARKET
VALUE DESCRIPTION o MOODY'S S&P COUPON MATURITY* VALUE
- ----------- --------------------------------- ---------------- ----------- -------------- --------------
SENIOR FLOATING RATE NOTES - 3.6%
HOUSEHOLD DURABLES - 1.0%
HOMEBUILDING - 1.0%
$1,000,000 Builders Firstsource, Inc. (c) (f) NR(a) NR(a) 7.52% 2/15/12 $ 955,000
--------------
TOTAL HOUSEHOLD DURABLES 955,000
--------------
MEDIA - 2.1%
BROADCASTING & CABLE TV - 2.1%
2,000,000 Paxson Communications Corp. (f) B1 B 5.89% 1/15/10 1,997,500
--------------
TOTAL MEDIA 1,997,500
--------------
PHARMACEUTICALS - 0.5%
PHARMACEUTICALS - 0.5%
500,000 Elan Finance PLC (d) (f) B3 B 7.27% 11/15/11 420,000
--------------
TOTAL PHARMACEUTICALS 420,000
--------------
TOTAL SENIOR FLOATING RATE NOTES ................................................ 3,372,500
(Cost $3,437,797) --------------
REPURCHASE AGREEMENT - 1.8%
(Cost $1,700,000)
1,700,000 Agreement with Wachovia Capital Markets, LLC, 3.00% dated 5/31/05, to be
repurchased at $1,700,142 on 6/01/05, collateralized by $1,735,000 Federal
Home Loan Bank, 6.00%, due 11/15/24 (Value $1,738,627) ....................... 1,700,000
--------------
TOTAL INVESTMENTS - 158.8% ...................................................... 149,113,057
(Cost $149,145,321) (b)
NET OTHER ASSETS AND LIABILITIES - 1.9% ......................................... 1,806,324
--------------
PREFERRED SHARES, AT LIQUIDATION VALUE - (60.7)% ................................ (57,000,000)
--------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS - 100.0% ........................... $ 93,919,381
==============
- --------------------------------------------------
o All percentages shown in the Portfolio of Investments are based on net
assets applicable to Common Shares.
(a) This Senior Loan interest was privately rated upon issuance. The rating
agency does not provide ongoing surveillance on the rating.
(b) Aggregate cost for federal income tax purposes is $149,256,150.
(c) This issue is secured by a second lien on the issuer's assets.
(d) This issue is unsecured.
(e) This issue's security interest is subordinated to that of other debt
holders.
(f) 144A securities are those which are exempt from registration under Rule
144A of the Securities Act of 1933, as amended. These securities may only
be resold in transactions exempt from registration which are normally
those transactions with qualified institutional buyers.
+ Ratings rated below Baa3 by Moody's Investors Service, Inc. or BBB- by
Standard & Poor's Rating Group are considered to be below investment
grade. (Bank loan ratings are unaudited.)
NR Not Rated
* Senior Loans generally are subject to mandatory and/or optional
prepayment. Because of the mandatory prepayment conditions and because
there may be significant economic incentives for a borrower to prepay,
prepayments of Senior Loans may occur. As a result, the actual remaining
maturity of Senior Loans 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 refinancing and
prepayments result in an average maturity of the Senior Loans held in its
portfolio to be approximately 18-30 months.
** Senior Loans in which the Fund invests generally pay interest at rates
which are periodically predetermined by reference to a base lending rate
plus a premium. These base lending rates are generally (i) the lending
rate offered by one or more major European banks, such as the London
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.
See Notes to Financial Statements. Page 11
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2005
ASSETS:
Investments, at value
(Cost $149,145,321) ................................................................ $ 149,113,057
Cash .................................................................................. 2,338,316
Receivable for investment securities sold ............................................. 5,006,853
Interest receivable ................................................................... 897,863
Prepaid expenses ...................................................................... 13,590
-------------
Total Assets ..................................................................... 157,369,679
-------------
LIABILITIES:
Payable for investment securities purchased ........................................... 6,215,405
Investment advisory fee payable ....................................................... 110,218
Audit and legal fees payable .......................................................... 58,396
Accumulated unpaid dividends on Money Market Cumulative Preferred(R) Shares ........... 29,345
Payable to administrator .............................................................. 7,690
Trustees' fees payable ................................................................ 6,963
Custodian fees payable ................................................................ 4,482
Other liabilities ..................................................................... 17,799
-------------
Total Liabilities ................................................................ 6,450,298
-------------
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
NET ASSETS (APPLICABLE TO COMMON SHAREHOLDERS) ....................................... 93,919,381
-------------
NET ASSETS INCLUDING MONEY MARKET CUMULATIVE PREFERRED(R) SHARES ...................... $ 150,919,381
=============
NET ASSETS CONSIST OF:
Undistributed net investment income ................................................... $ 584,441
Accumulated net realized gain on investments sold ..................................... 347,930
Net unrealized depreciation of investments ............................................ (32,264)
Par value ............................................................................. 49,243
Paid-in capital ....................................................................... 92,970,031
-------------
Net Assets (Applicable to Common Shareholders) ................................... $ 93,919,381
=============
NET ASSET VALUE, applicable to Common Shares outstanding
(par value $0.01 per Common Share) ................................................. $ 19.07
=============
Number of Common Shares outstanding ................................................... 4,924,349
=============
Page 12 See Notes to Financial Statements.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 2005
INVESTMENT INCOME:
Interest ............................................................................ $ 7,824,897
Other ............................................................................... 173,413
-----------
Total investment income ......................................................... 7,998,310
-----------
EXPENSES:
Investment advisory fee ............................................................. 1,471,423
Money Market Cumulative Preferred(R) Shares commission fees ......................... 144,445
Administration fee .................................................................. 91,026
Audit and legal fees ................................................................ 55,423
Custodian fees ...................................................................... 48,282
Trustees' fees and expenses ......................................................... 45,281
Printing fees ....................................................................... 32,522
Transfer agent fees ................................................................. 30,000
Other ............................................................................... 63,724
-----------
Total Expenses ...................................................................... 1,982,126
Expenses reimbursed by the investment advisor ....................................... (166,820)
-----------
Net expenses .................................................................... 1,815,306
-----------
NET INVESTMENT INCOME ............................................................... 6,183,004
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments sold during the period ............................. 567,829
Net change in unrealized appreciation/(depreciation) of investments during the period (463,233)
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS ..................................... 104,596
-----------
MONEY MARKET CUMULATIVE PREFERRED(R) SHARE DIVIDENDS ................................ (1,278,845)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................................ $ 5,008,755
===========
See Notes to Financial Statements. Page 13
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR PERIOD
ENDED ENDED
5/31/2005 5/31/2004*
------------- -------------
OPERATIONS:
Net investment income ............................................................... $ 6,183,004 $ 2,977,463
Net realized gain on investments sold during the period ............................. 567,829 846,814
Net change in unrealized appreciation/(depreciation) of investments during the period (463,233) 430,969
Distributions to Preferred Shareholders:
Dividends paid from net investment income ........................................ (1,278,845) (336,354)
------------- -------------
Net increase in net assets resulting from operations ................................ 5,008,755 3,918,892
Distributions to Common Shareholders:
Dividends paid from net investment income ........................................ (4,657,498) (2,601,453)
Dividends paid from net realized short-term gains ................................ (799,925) --
------------- -------------
Total distributions to Common Shareholders .......................................... (5,457,423) (2,601,453)
------------- -------------
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS APPLICABLE TO
COMMON SHARES .................................................................... (448,668) 1,317,439
------------- -------------
CAPITAL TRANSACTIONS:
Money Market Cumulative Preferred(R) Shares issued ................................. -- 57,000,000
Value of 10,265 and 6,584 shares reinvested ......................................... 198,182 125,995
Net proceeds from sale of 4,907,500 shares of Common Shares ......................... -- 92,726,433
------------- -------------
Net increase/(decrease) in net assets ............................................... (250,486) 151,169,867
NET ASSETS:
Beginning of period ................................................................. 151,169,867 --
------------- -------------
End of period ....................................................................... $ 150,919,381 $ 151,169,867
============= =============
Undistributed net investment income at end of period ................................ $ 584,441 $ 160,089
============= =============
- --------------------------------------------------
* The Fund commenced operations on September 18, 2003.
Page 14 See Notes to Financial Statements.
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, 2005
Cash flows from operating activities:
Investment income received .............................. $ 7,969,495
Payment of operating expenses ........................... (1,811,974)
Proceeds from sales of long-term securities ............. 175,449,164
Purchases of long-term securities ....................... (180,006,552)
Net proceeds from short-term investments ................ 7,120,000
Distributions paid to Preferred Shareholders ............ (1,259,951)
-------------
CASH PROVIDED BY OPERATING ACTIVITIES ...................... $ 7,460,182
Cash flows from financing activities:
Distributions paid to Common Shareholders ............... (5,259,241)
-------------
CASH USED BY FINANCING ACTIVITIES .......................... (5,259,241)
-------------
Increase in cash ........................................ 2,200,941
Cash at beginning of year ............................... 137,375
-------------
Cash at end of year ..................................... $ 2,338,316
=============
RECONCILIATION OF NET INCREASE IN NET ASSETS FROM OPERATIONS
TO CASH PROVIDED BY OPERATING ACTIVITIES:
Net increase in net assets resulting from operations ....... $ 5,008,755
Decrease in investments* ................................ $ 5,818,874
Increase in interest and dividends receivable ........... (92,803)
Increase in other assets ................................ (374)
Decrease in receivable for investments sold ............. 6,588,423
Decrease in payable for investments purchased ........... (9,885,293)
Increase in accrued expenses ............................ 22,600
-------------
CASH PROVIDED BY OPERATING ACTIVITIES ...................... $ 7,460,182
=============
- -----------------------------------------------------------------------
* Includes net change in unrealized depreciation of $(463,233).
Non-cash financing activities include dividend reinvestments of $198,182.
See Notes to Financial Statements. Page 15
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR PERIOD
ENDED ENDED
5/31/2005 5/31/2004*
---------- ----------
Net asset value, beginning of period ....................................... $ 19.16 $ 19.10
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ...................................................... 1.26 0.61
Net realized and unrealized gain on investments ............................ 0.02 0.25
Distributions paid to MMP*** Shareholders:
Dividends paid from net investment income ................................ (0.26) (0.07)
---------- ----------
Total from investment operations ........................................... 1.02 0.79
---------- ----------
Distributions paid to Common Shareholders:
Dividends paid from net investment income .................................. (0.95) (0.53)
Dividends paid from net realized short-term gains .......................... (0.16) --
---------- ----------
Total distributions to Common Shareholders ................................. (1.11) (0.53)
---------- ----------
Dilutive impact from the offering of MMP Shares++ .......................... -- (0.16)
---------- ----------
Change in accumulated unpaid dividends on MMP Shares ....................... (0.00)# (0.00)#
---------- ----------
Common Share offering costs charged to paid-in capital ..................... -- (0.04)
---------- ----------
Net asset value, end of period ............................................. $ 19.07 $ 19.16
---------- ----------
Market value, end of period ................................................ $ 18.00 $ 20.70
========== ==========
TOTAL RETURN BASED ON NET ASSET VALUE (A)+ ................................. 5.49% 3.12%
========== ==========
TOTAL RETURN BASED ON MARKET VALUE (B)+ ................................... (7.84)% 6.40%
========== ==========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON SHAREHOLDERS:
Ratio of net expenses to average net assets ................................ 1.92% 1.84%**
Ratio of total expenses to average net assets .............................. 2.09% 2.00%**
Ratio of net investment income to average net assets ....................... 6.53% 4.73%**
Ratio of net investment income to average net assets net of MMP dividends (e) 5.16% 4.18%**
SUPPLEMENTAL DATA:
Portfolio turnover rate .................................................... 112.64% 106.51%
Net assets, end of period (in 000's) ....................................... $ 93,919 $ 94,170
- ---------------------------------------
Ratio of net expenses to total average managed assets ...................... 1.20% 1.24%**
Ratio of total expenses to total average managed assets .................... 1.31% 1.35%**
PREFERRED SHARES:
Total MMP Shares outstanding ............................................... 2,280 2,280
Liquidation and market value per MMP Share (c) ............................. $ 25,013 $ 25,004
Asset coverage per share (d) ............................................... $ 66,193 $ 66,303
- ---------------------------------------
* The Fund commenced operations on September 18, 2003.
** Annualized.
*** Money Market Cumulative Preferred(R) Shares.
(a) Total return based on 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 net
asset value per share and does not reflect sales load.
(b) Total return based 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 Common
Share price per share, all based on market price per share.
(c) Includes accumulated and unpaid dividends.
(d) Calculated by subtracting the Fund's total liabilities (not including the
MMP 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.
++ 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.
Page 16 See Notes to Financial Statements.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2005
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 ("SEC") under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund trades under the ticker symbol FCM
on the American Stock Exchange.
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 objectives. Investing in Senior Loans
involves credit risk and, during periods of generally declining credit quality,
it may be particularly difficult for the Fund to achieve its secondary
investment objective. The Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
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 New York Stock Exchange ("NYSE"),
normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading.
Domestic debt securities and foreign securities are priced using data reflecting
the earlier closing of the principal markets for those securities. The Fund
calculates NAV per Common Share by subtracting the Fund's liabilities 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 according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. In the
event that market quotations are not readily available, the pricing service does
not provide a valuation for a particular asset, or the valuations are deemed
unreliable, or if events occurring after the close of the principal markets for
particular securities (e.g., domestic debt and foreign securities), but before
the Fund values its assets, would materially affect NAV, First Trust Advisors
L.P. ("First Trust") may use a fair value method to value the Fund's securities
and investments. The use of fair value pricing by the Fund is governed by
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with the provisions of the 1940 Act.
The Senior Loans in which the Fund invests are not listed on any securities
exchange or board of trade. Senior Loans are typically bought and sold by
institutional investors in individually negotiated private transactions that
function in many respects like an over-the-counter secondary market, although
typically no formal market-makers exist. This market, while having grown
substantially in the past several years, generally has fewer trades and less
liquidity than the secondary market for other types of securities. Some Senior
Loans have few or no trades, or trade infrequently, and information regarding a
specific Senior Loan may not be widely available or may be incomplete.
Accordingly, determinations of the market value of Senior Loans may be based on
infrequent and dated information. Because there is less reliable, objective data
available, elements of judgment may play a greater role in valuation of Senior
Loans than for other types of securities. Typically, Senior Loans are valued
using information provided by 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 according to procedures adopted by the Fund's Board of
Trustees, and in accordance with the provisions of the 1940 Act.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued at the last sale price on the business day as of
which such value is being determined. If there has been no sale on such day, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as
of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities traded on the
NASDAQ, are valued at the closing bid prices. Short-term investments that mature
in 60 days or less are valued at amortized cost.
Page 17
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2005
REPURCHASE AGREEMENTS:
The Fund engages in repurchase agreement transactions. Under the terms of a
typical repurchase agreement, the Fund takes possession of an underlying debt
obligation subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during the Fund's holding period. This arrangement results in a fixed rate
of return that is not subject to market fluctuations during the Fund's holding
period. The value of the collateral is at all times at least equal to the total
amount of the repurchase obligation, including interest. In the event of
counterparty default, the Fund has the right to use the collateral to offset
losses incurred. There is potential loss to the Fund in the event the Fund is
delayed or prevented from exercising its rights to dispose of the collateral
securities, including the risk of a possible decline in the value of the
underlying securities during the period while the Fund seeks to assert its
rights. The Fund reviews the value of the collateral and the creditworthiness of
those banks and dealers with which the Fund enters into repurchase agreements to
evaluate potential risks.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded on the accrual basis. Market premiums and discounts
are amortized over the expected life of each respective borrowing.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date; interest income on such securities
is not accrued until settlement date. The Fund 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.
UNFUNDED LOAN COMMITMENTS:
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund had unfunded loan commitments of approximately $1,042,831
as of May 31, 2005. The Fund is obligated to fund these loan commitments at the
borrower's discretion. Net unrealized depreciation of $13,297 from these
commitments is included in Other liabilities on the 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 Money Market Cumulative Preferred(R) Shares ("MMP
Shares"). If the Fund recognizes a long-term capital gain, it will be required
to allocate such gain between the Common Shares and 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 year ended May 31,
2005, resulting in book and tax accounting differences, have been reclassified
at year end to reflect an increase in undistributed net investment income by
$177,691, a decrease in accumulated net realized gains on investments sold by
$158,553 and a decrease in paid-in capital by $19,138. Net assets were not
affected by this reclassification.
The tax character of distributions paid during the fiscal year ended May 31,
2005 and the period ended May 31, 2004 is as follows:
2005 2004
---- ----
Distributions paid from:
Ordinary Income................................ $ 6,736,268 $2,937,807
As of May 31, 2005, the components of distributable earnings on a tax basis are
as follows:
Undistributed Ordinary Income.................. $ 1,452,098
Net Unrealized Depreciation.................... $ (143,093)
INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, and by distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal or state income taxes.
Page 18
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2005
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 filing fees, listing fees, legal
services pertaining to the organization of the business and audit fees relating
to the initial registration and auditing the initial statement of assets and
liabilities, among other fees. Offering costs consist of legal fees pertaining
to the Fund's shares offered for sale, registration fees, underwriting fees, and
printing of the 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
exceeded $0.04 per Common Share. The Fund's estimated share of Common Share
offering costs, $196,300, was recorded as a reduction of the proceeds from the
sale of Common Shares during the period ended May 31, 2004.
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage, L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 0.97% 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 MMP 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 investment advisory 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 September 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 Operations.
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 MMP Share transfer agent, registrar,
dividend disbursing agent and redemption agent.
Effective June 7, 2004, the Trustees of the Fund approved a revised compensation
plan. Under the revised plan, the Fund pays each Trustee who is not an officer
or employee of First Trust or any of its affiliates an annual retainer of
$10,000 which includes compensation for all regular quarterly board meetings and
regular committee meetings. No additional meeting fees are paid in connection
with regular quarterly board meetings or regular committee meetings. Additional
fees of $1,000 and $500 are paid to non-interested Trustees for special board
meetings and non-regular committee meetings, respectively. These additional fees
are shared by the funds in the First Trust fund complex that participate in the
particular meeting and are not per fund fees. Trustees are also reimbursed for
travel and out-of-pocket expenses in connection with all meetings. The Trustees
adopted the revised plan because the increase in the number of funds in the
First Trust complex had the effect of rapidly increasing their compensation
under the previous arrangements. Prior to June 7, 2004, the Fund paid each
Trustee who was not an officer or employee of First Trust or any of its
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 year ended May 31, 2005, aggregated amounts were
$164,458,934 and $168,860,741, respectively.
As of May 31, 2005, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $653,866 and
the aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $796,959.
Page 19
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NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2005
5. COMMON SHARES
As of May 31, 2005, 4,924,349 of $0.01 par value Common Shares were issued. An
unlimited number of Common Shares has been authorized under the Fund's Dividend
Reinvestment Plan.
COMMON SHARE TRANSACTIONS WERE AS FOLLOWS:
YEAR ENDED PERIOD ENDED
MAY 31, 2005 MAY 31, 2004
------------ ------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Proceeds from shares sold ......................................... -- $ -- 4,907,500 $ 93,733,250
Issued as reinvestment of dividends under
the Dividend Reinvestment Plan ................................. 10,265 198,182 6,584 125,995
Offering Cost Common Shares ....................................... -- -- -- (196,300)
Offering Cost MMP Shares .......................................... -- -- -- (810,517)
-------- ---------- ------------ ------------
10,265 $ 198,182 4,914,084 $ 92,852,428
======== ========== ============ ============
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. As of May 31, 2005, the Fund has
2,280 Money Market Cumulative Preferred(R) Shares ("MMP Shares") outstanding at
a liquidation value of $25,000 per share. The MMP Shares offering costs of
$240,517 and commissions of $570,000, paid directly to Lehman Brothers, were
charged to capital of Common Shares for the period ended May 31, 2004.
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.
The annual dividend rate in effect as of May 31, 2005 was 3.089%. 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 attributable to Common Shares) in the accompanying
financial statements.
7. POST OCTOBER LOSS
Certain losses incurred after October 31 within the Fund's fiscal year are
deemed to arise on the first business day of the Fund's following fiscal year.
For the fiscal year ended May 31, 2005, the Fund incurred and elected to defer
$379,553 in capital losses.
8. SUBSEQUENT EVENTS
On May 20, 2005, the Fund declared a dividend of $0.0948 per share, which
represents a dividend from net investment income to Common Shareholders of
record June 3, 2005, payable June 15, 2005.
On June 20, 2005, the Fund declared a dividend of $0.0948 per share, which
represents a dividend from net investment income to Common Shareholders of
record July 6, 2005, payable July 15, 2005.
Page 20
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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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 of First
Trust/Four Corners Senior Floating Rate Income Fund (the "Fund"), including the
portfolio of investments, as of May 31, 2005, the related statement of
operations and cash flows for the year then ended, and the statements of changes
in net assets and the financial highlights for the year then ended and 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of May 31, 2005, by correspondence with the Fund's
custodian, brokers and selling or agent banks. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust/Four Corners Senior Floating Rate Income Fund as of May 31, 2005, the
results of its operations and its cash flows, the changes in its net assets, and
the financial highlights for the respective stated periods, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
July 8, 2005
Page 21
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ADDITIONAL INFORMATION - (UNAUDITED)
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2005
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 American Stock Exchange 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.
Capital gains and income are realized although cash is not received by you.
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 and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website located at http://www.sec.gov.
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2005
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling 1-800-SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of First Trust Value Line(R) Dividend
Fund, First Trust/Four Corners Senior Floating Rate Income Fund, Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust/Value
Line(R) & Ibbotson Equity Allocation Fund, and First Trust/Four Corners Senior
Floating Rate Income Fund II was held on September 13, 2004. At the Annual
Meeting three of the Fund's Trustees, consisting of James A. Bowen, Niel B.
Nielson and Richard E. Erickson, were elected by holders of Common and Preferred
Shares voting together as a single class, to serve an additional one year term.
The number of votes cast for James A. Bowen was 4,802,084, the number of votes
withheld was 33,265 and the number of abstentions was 82,944. The number of
votes cast for Niel B.Nielson was 4,793,384, the number of votes withheld was
41,965 and the number of abstentions was 82,944. The number of votes cast for
Richard E. Erickson was 4,796,584, the number of votes withheld was 38,765 and
the number of abstentions was 82,944.
Also at the Annual Meeting of Shareholders of the Fund, two of the Fund's
Trustees, Thomas R. Kadlec and David M. Oster, were elected by the holders of
MMP Shares to serve an additional one year term. The number of votes cast for
each Trustee was 2,280, and there were no abstentions or votes withheld.
Page 23
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MANAGEMENT (UNAUDITED)
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2005
BOARD OF TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers* of the Fund 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 E. Erickson, Trustee o One year Physician; President, 22 portfolios None
D.O.B. 04/51 o 21 months served Wheaton Orthopedics;
c/o First Trust Advisors L.P. Co-owner and Co-
1001 Warrenville Road Director, Sports Med
Suite 300 Center for Fitness;
Lisle, IL 60532 Limited Partner,
Gundersen Real Estate
Partnership
Niel B. Nielson, Trustee o One year President, Covenant 22 portfolios Director of Good News
D.O.B. 03/54 o 21 months served College (June 2002 to Publishers-Crossway
c/o First Trust Advisors L.P. Present); Pastor, College Books; Covenant
1001 Warrenville Road Church in Wheaton Transport, Inc.
Suite 300 (1997 to June 2002)
Lisle, IL 60532
Thomas R. Kadlec, Trustee o One year Vice President and Chief 22 portfolios None
D.O.B. 11/57 o 21 months served Financial Officer (1990
c/o First Trust Advisors L.P. to present), ADM
1001 Warrenville Road Investor Services, Inc.
Suite 300 (Futures Commission
Lisle, IL 60532 Merchant); Registered
Representative (2000 to
present), Segerdahl &
Company, Inc., an
NASD member (Broker-
Dealer)
David M. Oster, Trustee o One year Trader and Market 10 portfolios None
D.O.B. 03/64 o 21 months served Maker, Chicago Board
c/o First Trust Advisors L.P. Options Exchange (Self
1001 Warrenville Road Employed-1987 to
Suite 300 present in options
Lisle, IL 60532 trading and market
making)
Page 24
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MANAGEMENT (CONTINUED)
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FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2005
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
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 Trust 22 portfolios None
President, Chairman of the term and indefinite Advisors L.P. and First
Board and CEO officer term Trust Portfolios L.P;
D.O.B. 09/55 o 21 months served Chairman of the Board,
1001 Warrenville Road BondWave LLC and
Suite 300 Stonebridge Advisors
Lisle, IL 60532 LLC
- ---------------------------------------------------------------------------------------------------------------------------
OFFICER(S) WHO ARE NOT TRUSTEES
- ---------------------------------------------------------------------------------------------------------------------------
Robert F. Carey, Vice o Indefinite term Senior Vice President, N/A N/A
President o 21 months served First Trust Advisors L.P.
D.O.B. 07/63 and First Trust
1001 Warrenville Road Portfolios L.P
Suite 300
Lisle, IL 60532
Mark R. Bradley, Treasurer, o Indefinite term Chief Financial Officer, N/A N/A
Controller, Chief Financial o 21 months served Managing Director,
Officer, Chief Accounting First Trust Advisors L.P.
Officer and First Trust
D.O.B. 11/57 Portfolios L.P.; Chief
1001 Warrenville Road Financial Officer,
Suite 300 BondWave LLC and
Lisle, IL 60532 Stonebridge Advisors
LLC
W. Scott Jardine, Secretary o Indefinite term General Counsel, N/A N/A
and Chief Compliance o 21 months served First Trust Advisors L.P.
Officer and First Trust
D.O.B. 05/60 Portfolios L.P.;
1001 Warrenville Road Secretary, BondWave
Suite 300 LLC and Stonebridge
Lisle, IL 60532 Advisors LLC
Page 25
- --------------------------------------------------------------------------------
MANAGEMENT (CONTINUED)
- --------------------------------------------------------------------------------
FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
MAY 31, 2005
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
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 F. Testin o Indefinite term Senior Vice President, N/A N/A
Vice President o 21 months served First Trust Advisors L.P.
D.O.B. 06/66 (August 2001 to
1001 Warrenville Road present); Analyst, Dolan
Suite 300 Capital Management
Lisle, IL 60532 (1998-2001)
Susan M. Brix o Indefinite term Representative, First N/A N/A
Assistant Vice President o 21 months served Trust Portfolios L.P.;
D.O.B. 01/60 Assistant Portfolio
1001 Warrenville Road Manager, First
Suite 300 Trust Advisors L.P.
Lisle, IL 60532
Kristi A. Maher o Indefinite term Assistant General N/A N/A
Assistant Secretary o 1 year served Counsel, First Trust
D.O.B. 12/66 Portfolios L.P. (March
1001 Warrenville Road 2004 to present);
Suite 300 Associate, Chapman and
Lisle, IL 60532 Cutler LLP (1995-2004)
- ---------------
* The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 26
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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
trustees 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 each of
the last two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for such fiscal years were
$47,000 from inception on September 25, 2003 to May 31, 2004 and $27,350 for the
fiscal year ended May 31, 2005.
(b) AUDIT-RELATED FEES (REGISTRANT) -- The aggregate fees billed in the
Fund's last two fiscal years for assurance and related services by the principal
accountant that are reasonably related to the performance of the audit of the
registrant's financial statements and are not reported under paragraph (a) of
this Item were $2,500 from inception on September 25, 2003 to May 31, 2004 and
$0 for the fiscal
year ended May 31, 2005. These fees were for agreed upon procedures relating
to coverage requirements.
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 were $20,400 from inception on
September 25, 2003 to May 31, 2004 and $20,000 for the fiscal year ended May 31,
2005. These fees were for AIMR-PPS verification services.
(c) TAX FEES (REGISTRANT) -- The aggregate fees billed in the last two
fiscal years for professional services rendered by the principal accountant for
tax compliance, tax advice, and tax planning to the registrant were $0 from
inception on September 25, 2003 to May 31, 2004 and $4,500 for the fiscal year
ended May 31, 2005. These fees were for review and signing of tax returns.
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 were $6,000 from inception on September 25, 2003 to May 31,
2004 and $6,000 for the fiscal year ended May 31, 2005. These fees were for tax
return preparation.
(d) ALL OTHER FEES (REGISTRANT) -- The aggregate fees billed in the
last two fiscal years for products and services provided by the principal
accountant to the registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 from inception on September 25, 2003 to May 31,
2004 and $0 for the fiscal year ended May 31, 2005.
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 were $0
from inception on September 25, 2003 to May 31, 2004 and $35,000 for the fiscal
year ended May 31, 2005. These fees were for tax services in connection with the
development of a new fund.
(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) for the registrant and the registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the pre-approval
exceptions included in paragraph (c)(7)(i)(C) or paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X are as follows:
(b) 0%.
(c) 0%.
(d) 0%.
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant
for services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the adviser that provides ongoing services to the registrant for the last
two fiscal years of the registrant were $2,500 for the registrant and $26,400
for the registrant's investment advisor from inception on September 25, 2003 to
May 31, 2004 and $4,500 for the registrant and $61,000 for the registrant's
investment adviser for the fiscal year ended May 31, 2005.
(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.
(a) The registrant has a separately designated audit committee consisting
of all the independent directors of the registrant. The members of the
audit committee are: Thomas R. Kadlec, Niel B. Nielson, David M. Oster
and Richard E. Erickson.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments in securities of unaffiliated issuers as of the close of
the reporting period is included as part of the report to shareholders filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
FIRST TRUST ADVISORS, L.P.
FIRST TRUST FUNDS
PROXY VOTING GUIDELINES
First Trust Advisors, L.P. (the "ADVISER") serves as investment adviser
providing discretionary investment advisory services for 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
EXHIBIT B
ISS 2005 PROXY VOTING
GUIDELINES SUMMARY
The following is a condensed version of all proxy voting recommendations
contained in the ISS Proxy Voting Manual.
1. OPERATIONAL ITEMS
ADJOURN MEETING
Generally vote AGAINST proposals to provide management with the authority to
adjourn an annual or special meeting absent compelling reasons to support the
proposal.
Vote FOR proposals that relate specifically to soliciting votes for a merger or
transaction for which ISS has recommended a FOR vote. Vote AGAINST proposals if
the wording is too vague or if the proposal includes "other business."
AMEND QUORUM REQUIREMENTS
Vote AGAINST proposals to reduce quorum requirements for shareholder meetings
below a majority of the shares outstanding unless there are compelling reasons
to support the proposal.
AMEND MINOR BYLAWS
Vote FOR bylaw or charter changes that are of a housekeeping nature (updates or
corrections).
CHANGE COMPANY NAME
Vote FOR proposals to change the corporate name.
CHANGE DATE, TIME, OR LOCATION OF ANNUAL MEETING
Vote FOR management proposals to change the date/time/location of the annual
meeting unless the proposed change is unreasonable.
Vote AGAINST shareholder proposals to change the date/time/location of the
annual meeting unless the current scheduling or location is unreasonable.
RATIFYING AUDITORS
Vote FOR proposals to ratify auditors, unless any of the following apply:
o An auditor has a financial interest in or association with the company,
and is therefore not independent
o Fees for non-audit services are excessive, or
o There is reason to believe that the independent auditor has rendered an
opinion which is neither accurate nor indicative of the company's
financial position.
Vote CASE-BY-CASE on shareholder proposals asking companies to prohibit or limit
their auditors from engaging in non-audit services.
Vote CASE-BY-CASE on shareholder proposals asking for audit firm rotation,
taking into account the tenure of the audit firm, the length of rotation
specified in the proposal, any significant audit-related issues at the company,
the number of Audit Committee meetings held each year, the number of financial
experts serving on the
committee, and whether the company has a periodic renewal process where the
auditor is evaluated for both audit quality and competitive price.
TRANSACT OTHER BUSINESS
Vote AGAINST proposals to approve other business when it appears as voting item.
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Votes on director nominees should be made on a CASE-BY-CASE basis, examining the
following factors: composition of the board and key board committees, attendance
at board meetings, corporate governance provisions and takeover activity,
long-term company performance relative to a market index, directors' investment
in the company, whether the chairman is also serving as CEO, and whether a
retired CEO sits on the board. However, there are some actions by directors that
should result in votes being withheld. These instances include directors who:
o Attend less than 75 percent of the board and committee meetings without a
valid excuse
o Implement or renew a dead-hand or modified dead-hand poison pill
o Adopt a poison pill without shareholder approval since the company's last
annual meeting and there is no requirement to put the pill to shareholder
vote within 12 months of its adoption
o Ignore a shareholder proposal that is approved by a majority of the shares
outstanding
o Ignore a shareholder proposal that is approved by a majority of the votes
cast for two consecutive years
o Failed to act on takeover offers where the majority of the shareholders
tendered their shares
o Are inside directors or affiliated outsiders and sit on the audit,
compensation, or nominating committees
o Are inside directors or affiliated outsiders and the full board serves as
the audit, compensation, or nominating committee or the company does not
have one of these committees
o Are audit committee members and the non -audit fees paid to the auditor
are excessive.
In addition, directors who enacted egregious corporate governance policies or
failed to replace management as appropriate would be subject to recommendations
to withhold votes.
o Are inside directors or affiliated outside directors and the full board is
less than majority independent
o Sit on more than six public company boards, or on more than two public
boards in addition to their own if they are CEOs of public companies.
o Are on the compensation committee when there is a negative correlation
between chief executive pay and company performance
o Have failed to address the issue(s) that resulted in any of the directors
receiving more than 50% withhold votes out of those cast at the previous
board election
AGE LIMITS
Vote AGAINST shareholder or management proposals to limit the tenure of outside
directors either through term limits or mandatory retirement ages.
BOARD SIZE
Vote FOR proposals seeking to fix the board size or designate a range for the
board size.
Vote AGAINST proposals that give management the ability to alter the size of the
board outside of a specified range without shareholder approval.
CLASSIFICATION/DECLASSIFICATION OF THE BOARD
Vote AGAINST proposals to classify the board.
Vote FOR proposals to repeal classified boards and to elect all directors
annually.
CUMULATIVE VOTING
Vote AGAINST proposals to eliminate cumulative voting.
Vote proposals to restore or permit cumulative voting on a CASE-BY-CASE basis
based on the extent that shareholders have access to the board through their own
nominations.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION
Proposals on director and officer indemnification and liability protection
should be evaluated on a CASE-BYCASE basis, using Delaware law as the standard.
Vote AGAINST proposals to eliminate entirely directors' and officers' liability
for monetary damages for violating the duty of care.
Vote AGAINST indemnification proposals that would expand coverage beyond just
legal expenses to acts, such as negligence, that are more serious violations of
fiduciary obligation than mere carelessness.
Vote FOR only those proposals providing such expanded coverage in cases when a
director's or officer's legal defense was unsuccessful if both of the following
apply:
o 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
o Only if the director's legal expenses would be covered.
ESTABLISH/AMEND NOMINEE QUALIFICATIONS
Vote CASE-BY-CASE on proposals that establish or amend director qualifications.
Votes should be based on how reasonable the criteria are and to what degree they
may preclude dissident nominees from joining the board. Vote AGAINST shareholder
proposals requiring two candidates per board seat.
FILLING VACANCIES/REMOVAL OF DIRECTORS
Vote AGAINST proposals that provide that directors may be removed only for
cause.
Vote FOR proposals to restore shareholder ability to remove directors with or
without cause.
Vote AGAINST proposals that provide that only continuing directors may elect
replacements to fill board vacancies.
Vote FOR proposals that permit shareholders to elect directors to fill board
vacancies.
INDEPENDENT CHAIRMAN (SEPARATE CHAIRMAN/CEO)
Generally vote FOR shareholder proposals requiring the position of chairman be
filled by an independent director unless there are compelling reasons to
recommend against the proposal, such as a counterbalancing governance structure.
This should include all of the following:
o Designated lead director, elected by and from the independent board
members with clearly delineated and comprehensive duties. (The role may
alternatively reside with a presiding director, vice chairman, or rotating
lead director).
o Two-thirds independent board
o All-independent key committees
o Established governance guidelines
Additionally, the company should not have under-performed its peers.
MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF COMMITTEES
Vote FOR shareholder proposals asking that a majority or more of directors be
independent unless the board composition already meets the proposed threshold by
ISS's definition of independence.
Vote FOR shareholder proposals asking that board audit, compensation, and/or
nominating committees be composed exclusively of independent directors if they
currently do not meet that standard.
OPEN ACCESS
Vote CASE-BY-CASE on shareholder proposals asking for open access taking into
account the ownership threshold specified in the proposal and the proponent's
rationale for targeting the company in terms of board and director conduct.
STOCK OWNERSHIP REQUIREMENTS
Generally vote AGAINST shareholder proposals that mandate a minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board. While ISS favors stock ownership on the part of directors, the
company should determine the appropriate ownership requirement.
Vote CASE-BY-CASE shareholder proposals asking that the company adopt a holding
or retention period for its executives (for holding stock after the vesting or
exercise of equity awards), taking into account any stock ownership requirements
or holding period/retention ratio already in place and the actual ownership
level of executives.
TERM LIMITS
Vote AGAINST shareholder or management proposals to limit the tenure of outside
directors either through term limits or mandatory retirement ages.
3. PROXY CONTESTS
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Votes in a contested election of directors must be evaluated on a CASE-BY-CASE
basis, considering the following factors:
o Long-term financial performance of the target company relative to its
industry; management's 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 can be met; and stock
ownership positions.
REIMBURSING PROXY SOLICITATION EXPENSES
Voting to reimburse proxy solicitation expenses should be analyzed on a
CASE-BY-CASE basis. In cases where ISS recommends in favor of the dissidents, we
also recommend voting for reimbursing proxy solicitation expenses.
CONFIDENTIAL VOTING
Vote FOR shareholder proposals requesting that corporations adopt confidential
voting, use independent vote tabulators and use independent inspectors of
election, as long as the proposal includes a provision for proxy contests as
follows: In the case of a contested election, management should be permitted to
request that the dissident group honor its confidential voting policy. If the
dissidents agree, the policy remains in place. If the dissidents will not agree,
the confidential voting policy is waived.
Vote FOR management proposals to adopt confidential voting.
4. ANTITAKEOVER DEFENSES AND VOTING RELATED ISSUES
Advance Notice Requirements for Shareholder Proposals/Nominations
Votes on advance notice proposals are determined on a CASE-BY-CASE basis, giving
support to those proposals which allow shareholders to submit proposals as close
to the meeting date as reasonably possible and within the broadest window
possible.
AMEND BYLAWS WITHOUT SHAREHOLDER CONSENT
Vote AGAINST proposals giving the board exclusive authority to amend the bylaws.
Vote FOR proposals giving the board the ability to amend the bylaws in addition
to shareholders.
POISON PILLS
Vote FOR shareholder proposals requesting that the company submit its poison
pill to a shareholder vote or redeem it.
Vote FOR shareholder proposals asking that any future pill be put to a
shareholder vote.
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Vote AGAINST proposals to restrict or prohibit shareholder ability to take
action by written consent.
Vote FOR proposals to allow or make easier shareholder action by written
consent.
SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS
Vote AGAINST proposals to restrict or prohibit shareholder ability to call
special meetings.
Vote FOR proposals that remove restrictions on the right of shareholders to act
independently of management.
SUPERMAJORITY VOTE REQUIREMENTS
Vote AGAINST proposals to require a supermajority shareholder vote.
Vote FOR proposals to lower supermajority vote requirements.
5. MERGERS AND CORPORATE RESTRUCTURINGS
APPRAISAL RIGHTS
Vote FOR proposals to restore, or provide shareholders with, rights of
appraisal.
ASSET PURCHASES
Vote CASE-BY-CASE on asset purchase proposals, considering the following
factors:
o Purchase price
o Fairness opinion
o Financial and strategic benefits
o How the deal was negotiated
o Conflicts of interest
o Other alternatives for the business
o Noncompletion risk.
ASSET SALES
Votes on asset sales should be determined on a CASE-BY-CASE basis, considering
the following factors:
o Impact on the balance sheet/working capital
o Potential elimination of diseconomies
o Anticipated financial and operating benefits
o Anticipated use of funds
o Value received for the asset
o Fairness opinion
o How the deal was negotiated
o Conflicts of interest.
BUNDLED PROPOSALS
Review on a CASE-BY-CASE basis bundled or "conditioned" proxy proposals.
In the case of items that are conditioned upon each other, examine the benefits
and costs of the packaged items.
In instances when the joint effect of the conditioned items is not in
shareholders' best interests, vote against the proposals. If the combined effect
is positive, support such proposals.
CONVERSION OF SECURITIES
Votes on proposals regarding conversion of securities are determined on a
CASE-BY-CASE basis. When evaluating these proposals the investor should review
the dilution to existing shareholders, the conversion price relative to market
value, financial issues, control issues, termination penalties, and conflicts of
interest.
Vote FOR the conversion if it is expected that the company will be subject to
onerous penalties or will be forced to file for bankruptcy if the transaction is
not approved.
CORPORATE REORGANIZATION/DEBT RESTRUCTURING/PREPACKAGED BANKRUPTCY PLANS/REVERSE
LEVERAGED BUYOUTS/WRAP PLANS
Votes on proposals to increase common and/or preferred shares and to issue
shares as part of a debt restructuring plan are determined on a CASE-BY-CASE
basis, taking into consideration the following:
o Dilution to existing shareholders' position
o Terms of the offer
o Financial issues
o Management's efforts to pursue other alternatives
o Control issues
o Conflicts of interest.
Vote FOR the debt restructuring if it is expected that the company will file for
bankruptcy if the transaction is not approved.
FORMATION OF HOLDING COMPANY
Votes on proposals regarding the formation of a holding company should be
determined on a CASE-BY-CASE basis, taking into consideration the following:
o The reasons for the change
o Any financial or tax benefits
o Regulatory benefits
o Increases in capital structure
o Changes to the articles of incorporation or bylaws of the company.
o Absent compelling financial reasons to recommend the transaction, vote
AGAINST the formation of a holding company if the transaction would
include either of the following:
o Increases in common or preferred stock in excess of the allowable maximum
as calculated by the ISS Capital Structure model
o Adverse changes in shareholder rights
GOING PRIVATE TRANSACTIONS (LBOS AND MINORITY SQUEEZEOUTS)
Vote going private transactions on a CASE-BY-CASE basis, taking into account the
following: offer price/premium, fairness opinion, how the deal was negotiated,
conflicts of interest, other alternatives/offers considered, and noncompletion
risk.
JOINT VENTURES
Votes CASE-BY-CASE on proposals to form joint ventures, taking into account the
following: percentage of assets/business contributed, percentage ownership,
financial and strategic benefits, governance structure, conflicts of interest,
other alternatives, and noncompletion risk.
LIQUIDATIONS
Votes on liquidations should be 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.
Vote FOR the liquidation if the company will file for bankruptcy if the proposal
is not approved.
MERGERS AND ACQUISITIONS/ ISSUANCE OF SHARES TO FACILITATE MERGER OR ACQUISITION
Votes on mergers and acquisitions should be considered on a CASE-BY-CASE basis,
determining whether the transaction enhances shareholder value by giving
consideration to the following:
o Prospects of the combined company, anticipated financial and operating
benefits
o Offer price
o Fairness opinion
o How the deal was negotiated
o Changes in corporate governance
o Change in the capital structure
o Conflicts of interest.
PRIVATE PLACEMENTS/WARRANTS/CONVERTIBLE DEBENTURES
Votes on proposals regarding private placements should be determined on a
CASE-BY-CASE basis. When evaluating these proposals the investor should review:
dilution to existing shareholders' position, terms of the offer, financial
issues, management's efforts to pursue other alternatives, control issues, and
conflicts of interest.
Vote FOR the private placement if it is expected that the company will file for
bankruptcy if the transaction is not approved.
SPINOFFS
Votes on spinoffs should be considered on a CASE-BY-CASE basis depending on:
o Tax and regulatory advantages
o Planned use of the sale proceeds
o Valuation of spinoff
o Fairness opinion
o Benefits to the parent company
o Conflicts of interest
o Managerial incentives
o Corporate governance changes
o Changes in the capital structure.
VALUE MAXIMIZATION PROPOSALS
Vote CASE-BY-CASE on shareholder proposals seeking to maximize shareholder value
by hiring a financial advisor to explore strategic alternatives, selling the
company or liquidating the company and distributing the proceeds to
shareholders. These proposals should be evaluated based on the following
factors: prolonged poor performance with no turnaround in sight, signs of
entrenched board and management, strategic plan in place for improving value,
likelihood of receiving reasonable value in a sale or dissolution, and whether
company is actively exploring its strategic options, including retaining a
financial advisor.
6. STATE OF INCORPORATION
CONTROL SHARE ACQUISITION PROVISIONS
Vote FOR proposals to opt out of control share acquisition statutes unless doing
so would enable the completion of a takeover that would be detrimental to
shareholders.
Vote AGAINST proposals to amend the charter to include control share acquisition
provisions.
Vote FOR proposals to restore voting rights to the control shares.
CONTROL SHARE CASHOUT PROVISIONS
Vote FOR proposals to opt out of control share cashout statutes.
DISGORGEMENT PROVISIONS
Vote FOR proposals to opt out of state disgorgement provisions.
FAIR PRICE PROVISIONS
Vote proposals to adopt fair price provisions on a CASE-BY-CASE basis,
evaluating factors such as the vote required to approve the proposed
acquisition, the vote required to repeal the fair price provision, and the
mechanism for determining the fair price.
Generally, vote AGAINST fair price provisions with shareholder vote requirements
greater than a majority of disinterested shares.
FREEZEOUT PROVISIONS
Vote FOR proposals to opt out of state freezeout provisions.
GREENMAIL
Vote FOR proposals to adopt antigreenmail charter of bylaw amendments or
otherwise restrict a company's ability to make greenmail payments.
Review on a CASE-BY-CASE basis antigreenmail proposals when they are bundled
with other charter or bylaw amendments.
REINCORPORATION PROPOSALS
Proposals to change a company's state of incorporation should be evaluated on a
CASE-BY-CASE basis, giving consideration to both financial and corporate
governance concerns, including the reasons for reincorporating, a comparison of
the governance provisions, and a comparison of the jurisdictional laws.
Vote FOR reincorporation when the economic factors outweigh any neutral or
negative governance changes.
STAKEHOLDER PROVISIONS
Vote AGAINST proposals that ask the board to consider nonshareholder
constituencies or other nonfinancial effects when evaluating a merger or
business combination.
STATE ANTITAKEOVER STATUTES
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, antigreenmail
provisions, and disgorgement provisions).
7. CAPITAL STRUCTURE
ADJUSTMENTS TO PAR VALUE OF COMMON STOCK
Vote FOR management proposals to reduce the par value of common stock.
COMMON STOCK AUTHORIZATION
Votes on proposals to increase the number of shares of common stock authorized
for issuance are determined on a CASE-BY-CASE basis using a model developed by
ISS.
Vote AGAINST proposals at companies with dual-class capital structures to
increase the number of authorized shares of the class of stock that has superior
voting rights.
Vote FOR proposals to approve increases beyond the allowable increase when a
company's shares are in danger of being delisted or if a company's ability to
continue to operate as a going concern is uncertain.
DUAL-CLASS STOCK
Vote AGAINST proposals to create a new class of common stock with superior
voting rights.
Vote FOR proposals to create a new class of nonvoting or subvoting common stock
if:
o It is intended for financing purposes with minimal or no dilution to
current shareholders
o It is not designed to preserve the voting power of an insider or
significant shareholder
ISSUE STOCK FOR USE WITH RIGHTS PLAN
Vote AGAINST proposals that increase authorized common stock for the explicit
purpose of implementing a shareholder rights plan (poison pill).
PREEMPTIVE RIGHTS
Review on a CASE-BY-CASE basis shareholder proposals that seek preemptive
rights. In evaluating proposals on preemptive rights, consider the size of a
company, the characteristics of its shareholder base, and the liquidity of the
stock.
PREFERRED STOCK
Vote AGAINST proposals authorizing the creation of new classes of preferred
stock with unspecified voting, conversion, dividend distribution, and other
rights ("blank check" preferred stock).
Vote FOR proposals to create "declawed" blank check preferred stock (stock that
cannot be used as a takeover defense).
Vote FOR proposals to authorize preferred stock in cases where the company
specifies the voting, dividend, conversion, and other rights of such stock and
the terms of the preferred stock appear reasonable.
Vote AGAINST proposals to increase the number of blank check preferred stock
authorized for issuance when no shares have been issued or reserved for a
specific purpose.
Vote CASE-BY-CASE on proposals to increase the number of blank check preferred
shares after analyzing the number of preferred shares available for issue given
a company's industry and performance in terms of shareholder returns.
RECAPITALIZATION
Votes CASE-BY-CASE on recapitalizations (reclassifications of securities),
taking into account the following: more simplified capital structure, enhanced
liquidity, fairness of conversion terms, impact on voting power and dividends,
reasons for the reclassification, conflicts of interest, and other alternatives
considered.
REVERSE STOCK SPLITS
Vote FOR management proposals to implement a reverse stock split when the number
of authorized shares will be proportionately reduced.
Vote FOR management proposals to implement a reverse stock split to avoid
delisting.
Votes on proposals to implement a reverse stock split that do not
proportionately reduce the number of shares authorized for issue should be
determined on a CASE-BY-CASE basis using a model developed by ISS.
SHARE REPURCHASE PROGRAMS
Vote FOR management proposals to institute open-market share repurchase plans in
which all shareholders may participate on equal terms.
STOCK DISTRIBUTIONS: SPLITS AND DIVIDENDS
Vote FOR management proposals to increase the common share authorization for a
stock split or share dividend, provided that the increase in authorized shares
would not result in an excessive number of shares available for issuance as
determined using a model developed by ISS.
TRACKING STOCK
Votes on the creation of tracking stock are determined on a CASE-BY-CASE basis,
weighing the strategic value of the transaction against such factors as: adverse
governance changes, excessive increases in authorized capital stock, unfair
method of distribution, diminution of voting rights, adverse conversion
features, negative impact on stock option plans, and other alternatives such as
spinoff.
8. EXECUTIVE AND DIRECTOR COMPENSATION
Votes with respect to equity-based compensation plans should be determined on a
CASE-BY-CASE basis. Our methodology for reviewing compensation plans primarily
focuses on the transfer of shareholder wealth (the dollar cost of pay plans to
shareholders instead of simply focusing on voting power dilution). Using the
expanded compensation data disclosed under the SEC's rules, ISS will value every
award type. ISS will include in its analyses an estimated dollar cost for the
proposed plan and all continuing plans. This cost, dilution to shareholders'
equity, will also be expressed as a percentage figure for the transfer of
shareholder wealth, and will be considered along with dilution to voting power.
Once ISS determines the estimated cost of the plan, we compare it to a
company-specific dilution cap.
Our model determines a company-specific allowable pool of shareholder wealth
that may be transferred from the company to plan participants, adjusted for:
o Long-term corporate performance (on an absolute basis and relative to a
standard industry peer group and an appropriate market index),
o Cash compensation, and
o Categorization of the company as emerging, growth, or mature.
These adjustments are pegged to market capitalization.
Vote AGAINST plans that expressly permit the repricing of underwater stock
options without shareholder approval.
Generally vote AGAINST plans in which (1) there is a disconnect between the
CEO's pay and company performance (an increase in pay and a decrease in
performance) and the main source of the pay increase (over half) is equity-based
and (2) the CEO is the participant of the equity proposal. A decrease in
performance is based on negative one- and three-year total shareholder returns.
An increase in pay is based on the CEO's total direct compensation (salary, cash
bonus, present value of stock options, face value of restricted stock, face
value of long-term incentive plan payouts, and all other compensation)
increasing over the previous year. Also may WITHHOLD votes from the Compensation
Committee members.
Generally vote AGAINST plans if the company's most recent three-year burn rate
exceeds one standard deviation in excess of the industry mean and is over two
percent of common shares outstanding. See Table 1 for details.
TABLE 1 : PROXY SEASON 2005 BURN RATE THRESHOLDS
RUSSELL 3000 NON-RUSSELL 3000
- ------------------------------------------------------------------------------------------------------------------------------
Standard Mean + Std Standard Mean + Std
GICS GICS Dsec Mean Deviation Dev Mean Deviation Dev
- ------------------------------------------------------------------------------------------------------------------------------
1010 Energy 1.60% 1.02% 2.61% 2.59% 2.19% 4.78%
- ------------------------------------------------------------------------------------------------------------------------------
1510 Materials 1.55% 0.81% 2.36% 2.54% 1.92% 4.46%
- ------------------------------------------------------------------------------------------------------------------------------
2010 Capital Goods 1.86% 1.19% 3.05% 3.23% 2.93% 6.17%
- ------------------------------------------------------------------------------------------------------------------------------
2020 Commercial Services & Supplies 2.87% 1.53% 4.40% 4.39% 3.68% 8.07%
- ------------------------------------------------------------------------------------------------------------------------------
2030 Transportation 2.10% 1.50% 3.60% 2.44% 2.22% 4.66%
- ------------------------------------------------------------------------------------------------------------------------------
2510 Automobiles & Components 2.10% 1.37% 3.48% 2.90% 2.28% 5.18%
- ------------------------------------------------------------------------------------------------------------------------------
2520 Consumer Durables & Apparel 2.40% 1.51% 3.90% 3.42% 2.79% 6.21%
- ------------------------------------------------------------------------------------------------------------------------------
2530 Hotels Restaurants & Leisure 2.39% 1.08% 3.48% 3.30% 2.87% 6.17%
- ------------------------------------------------------------------------------------------------------------------------------
2540 Media 2.34% 1.50% 3.84% 4.12% 2.89% 7.01%
- ------------------------------------------------------------------------------------------------------------------------------
2550 Retailing 2.89% 1.95% 4.84% 4.26% 3.50% 7.75%
- ------------------------------------------------------------------------------------------------------------------------------
3010 to 3030 Food & Staples Retailing 1.98% 1.50% 3.48% 3.37% 3.32% 6.68%
- ------------------------------------------------------------------------------------------------------------------------------
3510 Health Care Equipment & Services 3.24% 1.96% 5.20% 4.55% 3.24% 7.79%
- ------------------------------------------------------------------------------------------------------------------------------
3520 Pharmaceuticals & Biotechnology 3.60% 1.72% 5.32% 5.77% 4.15% 9.92%
- ------------------------------------------------------------------------------------------------------------------------------
4010 Banks 1.44% 1.17% 2.61% 1.65% 1.60% 3.25%
- ------------------------------------------------------------------------------------------------------------------------------
4020 Diversified Financials 3.12% 2.54% 5.66% 5.03% 3.53% 8.55%
- ------------------------------------------------------------------------------------------------------------------------------
4030 Insurance 1.45% 0.88% 2.32% 2.47% 1.77% 4.24%
- ------------------------------------------------------------------------------------------------------------------------------
4040 Real Estate 1.01% 0.89% 1.90% 1.51% 1.50% 3.01%
- ------------------------------------------------------------------------------------------------------------------------------
4510 Software & Services 5.44% 3.05% 8.49% 8.08% 6.01% 14.10%
- ------------------------------------------------------------------------------------------------------------------------------
4520 Technology Hardware & Equipment 4.00% 2.69% 6.68% 5.87% 4.25% 10.12%
- ------------------------------------------------------------------------------------------------------------------------------
4530 Semiconductors & Semiconductor Equipmen 5.12% 2.86% 7.97% 6.79% 3.95% 10.74%
- ------------------------------------------------------------------------------------------------------------------------------
5010 Telecommunication Services 2.56% 2.39% 4.95% 4.66% 3.90% 8.56%
- ------------------------------------------------------------------------------------------------------------------------------
5510 Utilities 0.90% 0.65% 1.55% 3.74% 4.63% 8.38%
- ------------------------------------------------------------------------------------------------------------------------------
A company with high three-year average burn rates may avoid triggering the burn
rate policy by committing to the industry average over the next years.
However, the above general voting guidelines for pay for performance may change
if the compensation committee members can demonstrate that they have improved
committee performance based on additional public filing such as an DEFA 14A or
8K. The additional filing needs to present strong and compelling evidence of
improved performance with new information that has not been disclosed in the
original proxy statement. The reiteration of the compensation committee report
will not be sufficient evidence of improved committee performance.
Evidence of improved compensation committee performance includes all of the
following:
o The compensation committee has reviewed all components of the CEO's
compensation, including the following:
- - Base salary, bonus, long-term incentives
- - Accumulative realized and unrealized stock option and restricted stock
gains
- - Dollar value of perquisites and other personal benefits to the CEO and the
cost to the company
- - Earnings and accumulated payment obligations under the company's
nonqualified deferred compensation program
- - Actual projected payment obligations under the company's supplemental
executive retirement plan (SERPs)
A tally sheet setting forth all the above components was prepared and reviewed
affixing dollar amounts under the various payout scenarios.
o A tally sheet with all the above components should be disclosed for the
following termination scenarios:
- - Payment if termination occurs within 12 months: $_____
- - Payment if "not for cause" termination occurs within 12 months: $_____
- - Payment if "change of control" termination occurs within 12 months: $_____
o The compensation committee is committed to provide additional information
on the named executives' annual cash bonus program and/or long-term
incentive cash plan for the current fiscal year. The compensation
committee will provide full disclosure of the qualitative and quantitative
performance criteria and hurdle rates used to determine the payouts of the
cash program. From this disclosure, shareholders will know the minimum
level of performance required for any cash bonus to be delivered as well
as the maximum cash bonus payable for superior performance.
The repetition of the compensation committee report does not meet ISS'
requirement of compelling and strong evidence of improved disclosure. The level
of transparency and disclosure is at the highest level where shareholders can
understand the mechanics of the annual cash bonus and/or long-term incentive
cash plan based on the additional disclosure.
o The compensation committee is committed to grant a substantial portion of
performance-based equity awards to the named executive officers. A
substantial portion of performance-based awards would be at least 50
percent of the shares awarded to each of the named executive officers.
Performance-based equity awards are earned or paid out based on the
achievement of company performance targets. The company will disclose the
details of the performance criteria (e.g., return on equity) and the
hurdle rates (e.g., 15 percent) associated with the performance targets.
From this disclosure, shareholders will know the minimum level of
performance required for any equity grants to be made. The
performance-based equity awards do not refer to non-qualified stock
options(1) or performance-accelerated grants(2). Instead,
performance-based equity awards are performancecontingent grants where the
individual will not receive the equity grant by not meeting the target
performance and vice versa.
The level of transparency and disclosure is at the highest level where
shareholders can understand the mechanics of the performance-based equity awards
based on the additional disclosure.
o The compensation committee has the sole authority to hire and fire outside
compensation consultants. The role of the outside compensation consultant
is to assist the compensation committee to analyze executive pay packages
or contracts and understand the company's financial measures.
BASED ON THE ADDITIONAL DISCLOSURE OF IMPROVED PERFORMANCE OF THE COMPENSATION
COMMITTEE, ISS WILL GENERALLY VOTE FOR THE COMPENSATION COMMITTEE MEMBERS UP FOR
ANNUAL ELECTION AND VOTE FOR THE EMPLOYEE-BASED STOCK PLAN IF THERE IS ONE ON
THE BALLOT. HOWEVER, ISS IS NOT LIKELY TO VOTE FOR THE COMPENSATION COMMITTEE
MEMBERS AND/OR THE EMPLOYEE-BASED STOCK PLAN IF ISS BELIEVES THE COMPANY HAS NOT
PROVIDED COMPELLING AND SUFFICIENT EVIDENCE OF TRANSPARENT ADDITIONAL DISCLOSURE
OF EXECUTIVE COMPENSATION BASED ON THE ABOVE REQUIREMENTS.
DIRECTOR COMPENSATION
Votes on compensation plans for directors are determined on a CASE-BY-CASE
basis, using a proprietary, quantitative model developed by ISS.
On occasion, director stock plans that set aside a relatively small of shares
when combined with employee or executive stock compensation plans exceed the
allowable cap. In such cases, starting proxy season 2005, ISS will supplement
the analytical approach with a qualitative review of board compensation for
companies, taking into consideration:
o Director stock ownership guidelines
- - A minimum of three times the annual cash retainer.
o Vesting schedule or mandatory holding/deferral period
- - A minimum vesting of three years for stock options or restricted stock, or
- - Deferred stock payable at the end of a three-year deferral period.
o Mix between cash and equity
- - A balanced mix of cash and equity, for example 40% cash/60% equity or 50%
cash/50% equity.
- - If the mix is heavier on the equity component, the vesting schedule or
deferral period should be more stringent, with the lesser of five years or
the term of directorship.
- ----------
(1) Non-qualified stock options are not performance-based awards unless the
grant or the vesting of the stock options is tied to the achievement of a
pre-determined and disclosed performance measure. A rising stock market
will generally increase share prices of all companies, despite of the
company's underlying performance.
(2) Performance-accelerated grants are awards that vest earlier based on the
achievement of a specified measure. However, these grants will ultimately
vest over time even without the attainment of the goal(s).
o Retirement/Benefit and Perquisites programs
- - No retirement/benefits and perquisites provided to non-employee directors.
o Quality of disclosure
- - Provide detailed disclosure on cash and equity compensation delivered to
each non-employee director for the most recent fiscal year in a table. The
column headers for the table may include the following: name of each
non-employee director, annual retainer, board meeting fees, committee
retainer, committee-meeting fees, and equity grants.
For ISS to recommend a vote FOR director equity plans based on the above
qualitative features, a company needs to demonstrate that it meets all the above
qualitative features in its proxy statement.
STOCK PLANS IN LIEU OF CASH
Votes for plans which provide participants with the option of taking all or a
portion of their cash compensation in the form of stock are determined on a
CASE-BY-CASE basis.
Vote FOR plans which provide a dollar-for-dollar cash for stock exchange.
Votes for plans which do not provide a dollar-for-dollar cash for stock exchange
should be determined on a CASE-BY-CASE basis using a proprietary, quantitative
model developed by ISS. In cases where the exchange is not dollar-for-dollar,
the request for new or additional shares for such equity program will be
considered in the quantitative model. However, the cost would be lower than
full-value awards since part of the deferral compensation is in-lieu-of cash
compensation.
DIRECTOR RETIREMENT PLANS
Vote AGAINST retirement plans for nonemployee directors.
Vote FOR shareholder proposals to eliminate retirement plans for nonemployee
directors.
MANAGEMENT PROPOSALS SEEKING APPROVAL TO REPRICE OPTIONS
Votes on management proposals seeking approval to reprice options are evaluated
on a CASE-BY-CASE basis giving consideration to the following:
o Historic trading patterns
o Rationale for the repricing
o Value-for-value exchange
o Treatment of surrendered options
o Option vesting
o Term of the option
o Exercise price
o Participation.
QUALIFIED EMPLOYEE STOCK PURCHASE PLANS
Votes on qualified employee stock purchase plans should be determined on a
CASE-BY-CASE basis.
Vote FOR employee stock purchase plans where all of the following apply:
o Purchase price is at least 85 percent of fair market value
o Offering period is 27 months or less, and
o The number of shares allocated to the plan is ten percent or less of the
outstanding shares
Vote AGAINST qualified employee stock purchase plans where any of the following
apply:
o Purchase price is less than 85 percent of fair market value, or
o Offering period is greater than 27 months, or
o The number of shares allocated to the plan is more than ten percent of the
outstanding shares
NONQUALIFIED EMPLOYEE STOCK PURCHASE PLANS
Votes on nonqualified employee stock purchase plans should be determined on a
CASE-BY-CASE basis.
Vote FOR nonqualified employee stock purchase plans with all the following
features:
o Broad-based participation (i.e., all employees of the company with the
exclusion of individuals with 5 percent or more of beneficial ownership of
the company).
o Limits on employee contribution, which may be a fixed dollar amount or
expressed as a percent of base salary.
o Company matching contribution up to 25 percent of employee's contribution,
which is effectively a discount of 20 percent from market value.
o No discount on the stock price on the date of purchase since there is a
company matching contribution.
Vote AGAINST nonqualified employee stock purchase plans when any of the plan
features do not meet the above criteria.
INCENTIVE BONUS PLANS AND TAX DEDUCTIBILITY PROPOSALS (OBRA-RELATED COMPENSATION
PROPOSALS)
Vote FOR proposals that simply amend shareholder-approved compensation plans to
include administrative features or place a cap on the annual grants any one
participant may receive to comply with the provisions of Section 162(m).
Vote FOR proposals to add performance goals to existing compensation plans to
comply with the provisions of Section 162(m) unless they are clearly
inappropriate.
Votes to amend existing plans to increase shares reserved and to qualify for
favorable tax treatment under the provisions of Section 162(m) should be
considered on a CASE-BY-CASE basis using a proprietary, quantitative model
developed by ISS.
Generally vote FOR cash or cash and stock bonus plans that are submitted to
shareholders for the purpose of exempting compensation from taxes under the
provisions of Section 162(m) if no increase in shares is requested.
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS)
Vote FOR proposals to implement an ESOP or increase authorized shares for
existing ESOPs, unless the number of shares allocated to the ESOP is excessive
(more than five percent of outstanding shares.)
401(K) EMPLOYEE BENEFIT PLANS
Vote FOR proposals to implement a 401(k) savings plan for employees.
SHAREHOLDER PROPOSALS REGARDING EXECUTIVE AND DIRECTOR PAY
Generally, vote FOR shareholder proposals seeking additional disclosure of
executive and director pay information, provided the information requested is
relevant to shareholders' needs, would not put the company at a competitive
disadvantage relative to its industry, and is not unduly burdensome to the
company.
Vote AGAINST shareholder proposals seeking to set absolute levels on
compensation or otherwise dictate the amount or form of compensation.
Vote AGAINST shareholder proposals requiring director fees be paid in stock
only.
Vote FOR shareholder proposals to put option repricings to a shareholder vote.
Vote on a CASE-BY-CASE basis for all other shareholder proposals regarding
executive and director pay, taking into account company performance, pay level
versus peers, pay level versus industry, and long term corporate outlook.
OPTION EXPENSING
Generally vote FOR shareholder proposals asking the company to expense stock
options, unless the company has already publicly committed to expensing options
by a specific date.
PERFORMANCE-BASED AWARDS
Generally vote FOR shareholder proposals advocating the use of performance-based
awards like indexed, premium-priced, and performance-vested options or
performance-based shares, unless:
o The proposal is overly restrictive (e.g., it mandates that awards to all
employees must be performance-based or all awards to top executives must
be a particular type, such as indexed options)
o The company demonstrates that it is using a substantial portion of
performance-based awards for its top executives
GOLDEN PARACHUTES AND EXECUTIVE SEVERANCE AGREEMENTS
Vote FOR shareholder proposals to require golden parachutes or executive
severance agreements to be submitted for shareholder ratification, unless the
proposal requires shareholder approval prior to entering into employment
contracts.
Vote on a CASE-BY-CASE basis on proposals to ratify or cancel golden parachutes.
An acceptable parachute should include the following:
o The triggering mechanism should be beyond the control of management
o The amount should not exceed three times base amount (defined as the
average annual taxable W-2 compensation during the five years prior to the
year in which the change of control occurs
o Change-in-control payments should be double-triggered, i.e., (1) after a
change in control has taken place, and (2) termination of the executive as
a result of the change in control. ISS defines change in control as a
change in the company ownership structure.
PENSION PLAN INCOME ACCOUNTING
Generally vote FOR shareholder proposals to exclude pension plan income in the
calculation of earnings used in determining executive bonuses/compensation.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS (SERPS)
Generally vote FOR shareholder proposals requesting to put extraordinary
benefits contained in SERP agreements to a shareholder vote unless the company's
executive pension plans do not contain excessive benefits beyond what is offered
under employee-wide plans.
9. SOCIAL AND ENVIRONMENTAL ISSUES
CONSUMER ISSUES AND PUBLIC SAFETY
ANIMAL RIGHTS
Vote CASE-BY-CASE on proposals to phase out the use of animals in product
testing, taking into account:
o The nature of the product and the degree that animal testing is necessary
or federally mandated (such as medical products),
o The availability and feasibility of alternatives to animal testing to
ensure product safety, and
o The degree that competitors are using animal-free testing.
o Generally vote FOR proposals seeking a report on the company's animal
welfare standards unless:
o The company has already published a set of animal welfare standards and
monitors compliance
o The company's standards are comparable to or better than those of peer
firms, and
o There are no serious controversies surrounding the company's treatment of
animals
DRUG PRICING
Vote CASE-BY-CASE on proposals asking the company to implement price restraints
on pharmaceutical products, taking into account:
o Whether the proposal focuses on a specific drug and region
o Whether the economic benefits of providing subsidized drugs (e.g., public
goodwill) outweigh the costs in terms of reduced profits, lower R&D
spending, and harm to competitiveness
o The extent that reduced prices can be offset through the company's
marketing budget without affecting R&D spending
o Whether the company already limits price increases of its products
o Whether the company already contributes life -saving pharmaceuticals to
the needy and Third World countries
o The extent that peer companies implement price restraints
GENETICALLY MODIFIED FOODS
Vote AGAINST proposals asking companies to voluntarily label genetically
engineered (GE) ingredients in their products or alternatively to provide
interim labeling and eventually eliminate GE ingredients due to the costs and
feasibility of labeling and/or phasing out the use of GE ingredients.
Vote CASE-BY-CASE on proposals asking for a report on the feasibility of
labeling products containing GE ingredients taking into account:
o The relevance of the proposal in terms of the company's business and the
proportion of it affected by the resolution
o The quality of the company's disclosure on GE product labeling and related
voluntary initiatives and how this disclosure compares with peer company
disclosure
o Company's current disclosure on the feasibility of GE product labeling,
including information on the related costs
o Any voluntary labeling initiatives undertaken or considered by the
company.
Vote CASE-BY-CASE on proposals asking for the preparation of a report on the
financial, legal, and environmental impact of continued use of GE
ingredients/seeds.
o The relevance of the proposal in terms of the company's business and the
proportion of it affected by the resolution
o The quality of the company's disclosure on risks related to GE product use
and how this disclosure compares with peer company disclosure
o The percentage of revenue derived from international operations,
particularly in Europe, where GE products are more regulated and consumer
backlash is more pronounced.
Vote AGAINST proposals seeking a report on the health and environmental effects
of genetically modified organisms (GMOs). Health studies of this sort are better
undertaken by regulators and the scientific community.
Vote AGAINST proposals to completely phase out GE ingredients from the company's
products or proposals asking for reports outlining the steps necessary to
eliminate GE ingredients from the company's products. Such resolutions
presuppose that there are proven health risks to GE ingredients (an issue better
left to federal regulators) that outweigh the economic benefits derived from
biotechnology.
HANDGUNS
Generally vote AGAINST requests for reports on a company's policies aimed at
curtailing gun violence in the United States unless the report is confined to
product safety information. Criminal misuse of firearms is beyond company
control and instead falls within the purview of law enforcement agencies.
HIV/AIDS
Vote CASE-BY-CASE on requests for reports outlining the impact of the health
pandemic (HIV/AIDS, malaria and tuberculosis) on the company's Sub-Saharan
operations and how the company is responding to it, taking into account:
o The nature and size of the company's operations in Sub-Saharan Africa and
the number of local employees
o The company's existing healthcare policies, including benefits and
healthcare access for local workers
o Company donations to healthcare providers operating in the region
Vote AGAINST proposals asking companies to establish, implement, and report on a
standard of response to the HIV/AIDS, TB, and Malaria health pandemic in Africa
and other developing countries, unless the company has significant operations in
these markets and has failed to adopt policies and/or procedures to address
these issues comparable to those of industry peers.
PREDATORY LENDING
Vote CASE-BY CASE on requests for reports on the company's procedures for
preventing predatory lending, including the establishment of a board committee
for oversight, taking into account:
o Whether the company has adequately disclosed mechanisms in place to
prevent abusive lending practices
o Whether the company has adequately disclosed the financial risks of its
subprime business
o Whether the company has been subject to violations of lending laws or
serious lending controversies
o Peer companies' policies to prevent abusive lending practices.
TOBACCO
Most tobacco-related proposals should be evaluated on a CASE-BY-CASE basis,
taking into account the following factors:
Second-hand smoke:
o Whether the company complies with all local ordinances and regulations
o The degree that voluntary restrictions beyond those mandated by law might
hurt the company's competitiveness
o The risk of any health-related liabilities. Advertising to youth:
o Whether the company complies with federal, state, and local laws on the
marketing of tobacco or if it has been fined for violations
o Whether the company has gone as far as p eers in restricting advertising
o Whether the company entered into the Master Settlement Agreement, which
restricts marketing of tobacco to youth
o Whether restrictions on marketing to youth extend to foreign countries
Cease production of tobacco-related products or avoid selling products to
tobacco companies:
o The percentage of the company's business affected
o The economic loss of eliminating the business versus any potential
tobacco-related liabilities.
o Spinoff tobacco-related businesses:
o The percentage of the company's business affected
o The feasibility of a spinoff
o Potential future liabilities related to the company's tobacco business.
Stronger product warnings:
Vote AGAINST proposals seeking stronger product warnings. Such decisions are
better left to public health authorities.
Investment in tobacco stocks:
Vote AGAINST proposals prohibiting investment in tobacco equities. Such
decisions are better left to portfolio managers.
ENVIRONMENT AND ENERGY
ARCTIC NATIONAL WILDLIFE REFUGE
Generally vote AGAINST request for reports outlining potential environmental
damage from drilling in the Arctic National Wildlife Refuge (ANWR) unless:
o New legislation is adopted allowing development and drilling in the ANWR
region;
o The company intends to pursue operations in the ANWR; and
o The company does not currently disclose an environmental risk report for
their operations in the ANWR.
CERES PRINCIPLES
Vote CASE-BY-CASE on proposals to adopt the CERES Principles, taking into
account:
o The company's current environmental disclosure beyond legal requirements,
including environmental health and safety (EHS) audits and reports that
may duplicate CERES
o The company's environmental performance record, including violations of
federal and state regulations, level of toxic emissions, and accidental
spills
o Environmentally conscious practices of peer companies, including
endorsement of CERES
o Costs of membership and implementation.
ENVIRONMENTAL-ECONOMIC RISK REPORT
Vote CASE BY CASE on proposals requesting an economic risk assessment of
environmental performance considering:
o The feasibility of financially quantifying environmental risk factors,
o The company's compliance with applicable legislation and/or regulations
regarding environmental performance,
o The costs associated with implementing improved standards,
o The potential costs associated with remediation resulting from poor
environmental performance, and
o The current level of disclosure on environmental policies and initiatives.
ENVIRONMENTAL REPORTS
Generally vote FOR requests for reports disclosing the company's environmental
policies unless it already has well-documented environmental management systems
that are available to the public.
GLOBAL WARMING
Generally vote FOR proposals requesting a report on greenhouse gas emissions
from company operations and/or products unless this information is already
publicly disclosed or such factors are not integral to the company's line of
business.
Generally vote AGAINST proposals that call for reduction in greenhouse gas
emissions by specified amounts or within a restrictive time frame unless the
company lags industry standards and has been the subject of recent, significant
fines or litigation resulting from greenhouse gas emissions.
RECYCLING
Vote CASE-BY-CASE on proposals to adopt a comprehensive recycling strategy,
taking into account:
o The nature of the company's business and the percentage affected
o The extent that peer companies are recycling
o The timetable prescribed by the proposal
o The costs and methods of implementation
o Whether the company has a poor environmental track record, such as
violations of federal and state regulations.
RENEWABLE ENERGY
In general, vote FOR requests for reports on the feasibility of developing
renewable energy sources unless the report is duplicative of existing disclosure
or irrelevant to the company's line of business.
Generally vote AGAINST proposals requesting that the company invest in renewable
energy sources. Such decisions are best left to management's evaluation of the
feasibility and financial impact that such programs may have on the company.
SUSTAINABILITY REPORT
Generally vote FOR proposals requesting the company to report on policies and
initiatives related to social, economic, and environmental sustainability,
unless:
o The company already discloses similar information through existing
reports or policies such as an Environment, Health, and Safety (EHS)
report; comprehensive Code of Corporate Conduct; and/or Diversity
Report; or
o The company has formally committed to the implementation of a
reporting program based on Global Reporting Initiative (GRI)
guidelines or a similar standard within a specified time frame.
GENERAL CORPORATE ISSUES
OUTSOURCING/ OFFSHORING
Vote CASE BY CASE on proposals calling for companies to report on the risks
associated with outsourcing, considering:
o Risks associated with certain international markets
o The utility of such a report to shareholders
o The existence of a publicly available code of corporate conduct that
applies to international operations
LINK EXECUTIVE COMPENSATION TO SOCIAL PERFORMANCE
Vote CASE-BY-CASE on proposals to review ways of linking executive compensation
to social factors, such as corporate downsizings, customer or employee
satisfaction, community involvement, human rights, environmental performance,
predatory lending, and executive/employee pay disparities. Such resolutions
should be evaluated in the context of:
o The relevance of the issue to be linked to pay
o The degree that social performance is already included in the company's
pay structure and disclosed
o The degree that social performance is used by peer companies in setting
pay
o Violations or complaints filed against the company relating to the
particular social performance measure
o Artificial limits sought by the proposal, such as freezing or capping
executive pay
o Independence of the compensation committee
o Current company pay levels.
CHARITABLE/POLITICAL CONTRIBUTIONS
Generally vote AGAINST proposals asking the company to affirm political
nonpartisanship in the workplace so long as:
o The company is in compliance with laws governing corporate political
activities, and
o The company has procedures in place to ensure that employee contributions
to company-sponsored political action committees (PACs) are strictly
voluntary and not coercive.
Vote AGAINST proposals to report or publish in newspapers the company's
political contributions. Federal and state laws restrict the amount of corporate
contributions and include reporting requirements.
Vote AGAINST proposals disallowing the company from making political
contributions. Businesses are affected by legislation at the federal, state, and
local level and barring contributions can put the company at a competitive
disadvantage.
Vote AGAINST proposals restricting the company from making charitable
contributions. Charitable contributions are generally useful for assisting
worthwhile causes and for creating goodwill in the community. In the absence of
bad faith, self-dealing, or gross negligence, management should determine which
contributions are in the best interests of the company.
Vote AGAINST proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
LABOR STANDARDS AND HUMAN RIGHTS
CHINA PRINCIPLES
Vote AGAINST proposals to implement the China Principles unless:
o There are serious controversies surrounding the company's China
operations, and
o The company does not have a code of conduct with standards similar to
those promulgated by the International Labor Organization (ILO).
COUNTRY-SPECIFIC HUMAN RIGHTS REPORTS
Vote CASE-BY-CASE on requests for reports detailing the company's operations in
a particular country and steps to protect human rights, based on:
o The nature and amount of company business in that country
o The company's workplace code of conduct
o Proprietary and confidential information involved
o Company compliance with U.S. regulations on investing in the country
o Level of peer company involvement in the country.
INTERNATIONAL CODES OF CONDUCT/VENDOR STANDARDS
Vote CASE-BY-CASE on proposals to implement certain human rights standards at
company facilities or those of its suppliers and to commit to outside,
independent monitoring. In evaluating these proposals, the following should be
considered:
o The company's current workplace code of conduct or adherence to other
global standards and the degree they meet the standards promulgated by the
proponent
o Agreements with foreign suppliers to meet certain workplace standards
o Whether company and vendor facilities are monitored and how
o Company participation in fair labor organizations
o Type of business
o Proportion of business conducted overseas
o Countries of operation with known human rights abuses
o Whether the company has been recently involved in significant labor and
human rights controversies or violations
o Peer company standards and practices
o Union presence in company's international factories
o Generally vote FOR reports outlining vendor standards compliance unless
any of the following apply:
o The company does not operate in countries with significant human rights
violations
o The company has no recent human rights controversies or violations, or
o The company already publicly discloses information on its vendor standards
compliance.
MACBRIDE PRINCIPLES
Vote CASE-BY-CASE on proposals to endorse or increase activity on the MacBride
Principles, taking into account:
o Company compliance with or violations of the Fair Employment Act of 1989
o Company antidiscrimination policies that already exceed the legal
requirements
o The cost and feasibility of adopting all nine principles
o The cost of duplicating efforts to follow two sets of standards (Fair
Employment and the MacBride Principles)
o The potential for charges of reverse discrimination
o The potential that any company sales or contracts in the rest of the
United Kingdom could be negatively impacted
o The level of the company's investment in Northern Ireland
o The number of company employees in Northern Ireland
o The degree that industry peers have adopted the MacBride Principles
o Applicable state and municipal laws that limit contracts with companies
that have not adopted the MacBride Principles.
MILITARY BUSINESS
FOREIGN MILITARY SALES/OFFSETS
Vote AGAINST reports on foreign military sales or offsets. Such disclosures may
involve sensitive and confidential information. Moreover, companies must comply
with government controls and reporting on foreign military sales.
LANDMINES AND CLUSTER BOMBS
Vote CASE-BY-CASE on proposals asking a company to renounce future involvement
in antipersonnel landmine production, taking into account:
o Whether the company has in the past manufactured landmine components
o Whether the company's peers have renounced future production
o Vote CASE-BY-CASE on proposals asking a company to renounce future
involvement in cluster bomb production, taking into account:
o What weapons classifications the proponent views as cluster bombs
o Whether the company currently or in the past has manufactured cluster
bombs or their components
o The percentage of revenue derived from cluster bomb manufacture
o Whether the company's peers have renounced future production
NUCLEAR WEAPONS
Vote AGAINST proposals asking a company to cease production of nuclear weapons
components and delivery systems, including disengaging from current and proposed
contracts. Components and delivery systems serve multiple military and
non-military uses, and withdrawal from these contracts could have a negative
impact on the company's business.
OPERATIONS IN NATIONS SPONSORING TERRORISM (IRAN)
Vote CASE-BY-CASE on requests for a board committee review and report outlining
the company's financial and reputational risks from its operations in Iran,
taking into account current disclosure on:
o The nature and purpose of the Iranian operations and the amount of
business involved (direct and indirect revenues and expenses) that could
be affected by political disruption
o Compliance with U.S. sanctions and laws
SPACED-BASED WEAPONIZATION
Generally vote FOR reports on a company's involvement in spaced-based
weaponization unless:
o The information is already publicly available or
o The disclosures sought could compromise proprietary information.
WORKPLACE DIVERSITY
BOARD DIVERSITY
Generally vote FOR reports on the company's efforts to diversify the board,
unless:
o The board composition is reasonably inclusive in relation to companies of
similar size and business or
o The board already reports on its nominating procedures and diversity
initiatives.
Generally vote AGAINST proposals that would call for the adoption of specific
committee charter language regarding diversity initiatives unless the company
fails to publicly disclose existing equal opportunity or nondiscrimination
policies.
Vote CASE-BY-CASE on proposals asking the company to increase the representation
of women and minorities on the board, taking into account:
o The degree of board diversity
o Comparison with peer companies
o Established process for improving board diversity
o Existence of independent nominating committee
o Use of outside search firm
o History of EEO violations.
EQUAL EMPLOYMENT OPPORTUNITY (EEO)
Generally vote FOR reports outlining the company's affirmative action
initiatives unless all of the following apply:
o The company has well-documented equal opportunity programs
o The company already publicly reports on its company-wide affirmative
initiatives and provides data on its workforce diversity, and
o The company has no recent EEO-related violations or litigation.
Vote AGAINST proposals seeking information on the diversity efforts of suppliers
and service providers, which can pose a significant cost and administration
burden on the company.
GLASS CEILING
Generally vote FOR reports outlining the company's progress towards the Glass
Ceiling Commission's business recommendations, unless:
o The composition of senior management and the board is fairly inclusive
o The company has well-documented programs addressing diversity initiatives
and leadership development
o The company already issues public reports on its company-wide affirmative
initiatives and provides data on its workforce diversity, and
o The company has had no recent, significant EEO-related violations or
litigation
SEXUAL ORIENTATION
Vote FOR proposals seeking to amend a company's EEO statement in order to
prohibit discrimination based on sexual orientation, unless the change would
result in excessive costs for the company.
Vote AGAINST proposals to ext end company benefits to or eliminate benefits from
domestic partners. Benefits decisions should be left to the discretion of the
company.
10. MUTUAL FUND PROXIES
ELECTION OF DIRECTORS
Vote the election of directors on a CASE-BY-CASE basis, considering the
following factors: board structure; director independence and qualifications;
and compensation of directors within the fund and the family of funds attendance
at board and committee meetings.
Votes should be withheld from directors who:
o attend less than 75 percent of the board and committee meetings
o without a valid excuse for the absences. Valid reasons include illness or
o absence due to company business. Participation via telephone is
acceptable.
o In addition, if the director missed only one meeting or one day's
o meetings, votes should not be withheld even if such absence dropped the
o director's attendance below 75 percent.
o ignore a shareholder proposal that is approved by a majority of shares
o outstanding;
o ignore a shareholder proposal that is approved by a majority of the
o votes cast for two consecutive years;
o are interested directors and sit on the audit or nominating committee; or
o are interested directors and the full board serves as the audit or
o nominating committee or the company does not have one of these
o committees.
CONVERTING CLOSED-END FUND TO OPEN-END FUND
Vote conversion proposals on a CASE-BY-CASE basis, considering the following
factors: past performance as a closed-end fund; market in which the fund
invests; measures taken by the board to address the discount; and past
shareholder activism, board activity, and votes on related proposals.
Proxy Contests
Votes on proxy contests should be determined on a CASE-BY-CASE basis,
considering the following factors:
o Past performance relative to its peers
o Market in which fund invests
o Measures taken by the board to address the issues
o Past shareholder activism, board activity, and votes on related proposals
o Strategy of the incumbents versus the dissidents
o Independence of directors
o Experience and skills of director candidates
o Governance profile of the company
o Evidence of management entrenchment
INVESTMENT ADVISORY AGREEMENTS
Votes on investment advisory agreements should be determined on a CASE-BY-CASE
basis, considering the following factors:
o Proposed and current fee schedules
o Fund category/investment objective
o Performance benchmarks
o Share price performance as compared with peers
o Resulting fees relative to peers
o Assignments (where the advisor undergoes a change of control)
APPROVING NEW CLASSES OR SERIES OF SHARES
Vote FOR the establishment of new classes or series of shares.
PREFERRED STOCK PROPOSALS
Votes on the authorization for or increase in preferred shares should be
determined on a CASE-BY-CASE basis, considering the following factors: stated
specific financing purpose, possible dilution for common shares, and whether the
shares can be used for antitakeover purposes
1940 ACT POLICIES
Votes on 1940 Act policies should be determined on a CASE-BY-CASE basis,
considering the following factors: potential competitiveness; regulatory
developments; current and potential returns; and current and potential risk.
Generally vote FOR these amendments as long as the proposed changes do not
fundamentally alter the investment focus of the fund and do comply with t he
current SEC interpretation.
CHANGING A FUNDAMENTAL RESTRICTION TO A NONFUNDAMENTAL RESTRICTION
Proposals to change a fundamental restriction to a nonfundamental restriction
should be evaluated on a CASE-BY- CASE basis, considering the following factors:
the fund's target investments, the reasons given by the fund for the change, and
the projected impact of the change on the portfolio.
CHANGE FUNDAMENTAL INVESTMENT OBJECTIVE TO NONFUNDAMENTAL
Vote AGAINST proposals to change a fund's fundamental investment objective to
nonfundamental.
NAME CHANGE PROPOSALS
Votes on name change proposals should be determined on a CASE-BY-CASE basis,
considering the following factors: political/economic changes in the target
market, consolidation in the target market, and current asset composition
CHANGE IN FUND'S SUBCLASSIFICATION
Votes on changes in a fund's subclassification should be determined on a
CASE-BY-CASE basis, considering the following factors: potential
competitiveness, current and potential returns, risk of concentration, and
consolidation in target industry
DISPOSITION OF ASSETS/TERMINATION/LIQUIDATION
Vote these proposals on a CASE-BY-CASE basis, considering the following factors:
strategies employed to salvage the company; the fund's past performance; and
terms of the liquidation.
CHANGES TO THE CHARTER DOCUMENT
Votes on changes to the charter document should be determined on a CASE-BY-CASE
basis, considering the following factors:
o The degree of change implied by the proposal
o The efficiencies that could result
o The state of incorporation
o Regulatory standards and implications
Vote AGAINST any of the following changes:
o Removal of shareholder approval requirement to reorganize or terminate the
trust or any of its series
o Removal of shareholder approval requirement for amendments to the new
declaration of trust
o Removal of shareholder approval requirement to amend the fund's management
contract, allowing the contract to be modified by the investment manager
and the trust management, as permitted by the 1940 Act
o Allow the trustees to impose other fees in addition to sales charges on
investment in a fund, such as deferred sales charges and redemption fees
that may be imposed upon redemption of a fund's shares
o Removal of shareholder approval requirement to engage in and terminate
subadvisory arrangements
o Removal of shareholder approval requirement to change the domicile of the
fund
CHANGING THE DOMICILE OF A FUND
Vote reincorporations on a CASE-BY-CASE basis, considering the following
factors: regulations of both states; required fundamental policies of both
states; and the increased flexibility available.
AUTHORIZING THE BOARD TO HIRE AND TERMINATE SUBADVISORS WITHOUT SHAREHOLDER
APPROVAL
Vote AGAINST proposals authorizing the board to hire/terminate subadvisors
without shareholder approval.
DISTRIBUTION AGREEMENTS
Vote these proposals on a CASE-BY-CASE basis, considering the following factors:
fees charged to comparably sized funds with similar objectives, the proposed
distributor's reputation and past performance, the competitiveness of the fund
in the industry, and terms of the agreement.
MASTER-FEEDER STRUCTURE
Vote FOR the establishment of a master-feeder structure.
MERGERS
Vote merger proposals on a CASE-BY-CASE basis, considering the following
factors: resulting fee structure, performance of both funds, continuity of
management personnel, and changes in corporate governance and their impact on
shareholder rights.
SHAREHOLDER PROPOSALS TO ESTABLISH DIRECTOR OWNERSHIP REQUIREMENT
Generally vote AGAINST shareholder proposals that mandate a specific minimum
amount of stock that directors must own in order to qualify as a director or to
remain on the board. While ISS favors stock ownership on the part of directors,
the company should determine the appropriate ownership requirement.
SHAREHOLDER PROPOSALS TO REIMBURSE SHAREHOLDER FOR EXPENSES INCURRED
Voting to reimburse proxy solicitation expenses should be analyzed on a
CASE-BY-CASE basis. In cases where ISS recommends in favor of the dissidents, we
also recommend voting for reimbursing proxy solicitation expenses.
SHAREHOLDER PROPOSALS TO TERMINATE THE INVESTMENT ADVISOR
Vote to terminate the investment advisor on a CASE-BY-CASE basis, considering
the following factors: performance of the fund's NAV, the fund's history of
shareholder relations, and the performance of other funds under the advisor's
management.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not yet applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
No applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR
240.14a-101), or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these controls
and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d)) that occurred during the registrant's
second fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) FIRST TRUST/FOUR CORNERS SENIOR FLOATING RATE INCOME FUND
--------------------------------------------------------------------
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
Date JULY 28, 2005
----------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President
and Chief Executive Officer
(principal executive officer)
Date JULY 28, 2005
----------------------------------------------------------------------------
By (Signature and Title)* /S/ MARK R. BRADLEY
-------------------------------------------------------
Mark R. Bradley, Treasurer, Controller, Chief Financial
Officer and Chief Accounting Officer
(principal financial officer)
Date JULY 28, 2005
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.